| (For further details of our scenario analysis, see pages 14 to 16 of our TCFD Update 2020.) | | Supporting our customers | | | | Support our customers in the transition to a sustainable future with $750bn to $1tn of sustainable finance and investment by 2030 | Sustainable finance and investment provided ($bn) | | | (For further details of our progress, see pages 48 to 50.) | | | Ranking in Dealogic green, social and sustainable bond league tables2 | | | | | | Unlocking new climate solutions | | | | Help transform sustainable infrastructure into a global asset class, and create a pipeline of bankable projects | Established HSBC Pollination Climate Asset Management with the aim to launch the first fund in mid-2021 | Cleantech investment within our technology venture debt fund | | (For further details, see page 50.) | Philanthropic programme to provide scale to climate innovation ventures, renewable energy, and nature-based solutions | 1 Our reported CO2 emissions in 2020 related to energy and business travel. For further details on scopes 1, 2 and 3, and our progress on carbon emissions and renewable energy targets, see pages 45 and 46. 2 Dealogic ranking based on apportioned bookrunner value, excluding self-issuances.
Remuneration
Supporting our customers through transition Our remunerationability to finance the transformation of businesses and infrastructure is key to building a sustainable future for our customers and society. The most significant contribution we can make to this is supporting our portfolio of customers to decarbonise within the transition to a net zero global economy. A leader in sustainable finance We are a recognised leader in sustainable finance, helping to pioneer the market for green, social and sustainable bonds and attaching ambitious environmental targets to business loans. We maintained leadership in green, social and sustainable bonds, ranking third globally in 2020, according to Dealogic on an excluding self-mandated basis. We also set up HSBC Pollination Climate Asset Management, the first large-scale venture to invest in natural capital as an asset class (see page 50). We have been recognised as the World’s Best Bank for Sustainable Finance by Euromoney in 2019 and 2020. In 2020, we continued to expand the horizons of sustainable finance. We helped the Egyptian government launch the first sovereign green bond in the Middle East and supported Henkel, a German household goods company, to issue the world’s first plastics reduction bond (see page 76). We also issued the first transition Islamic bond to enable Etihad, a Middle Eastern airline, to become more sustainable (see page 310). As we set out below, we are intensifying our support to customers as they transition to lower carbon emissions. Our vision is to help create a vibrant, thriving and resilient future that opens up opportunities for new skills, ideas and jobs to thrive. Providing transition finance solutions, particularly in emerging markets where the opportunity is greatest, is core to our climate strategy. Transition solutions In 2017, we committed to providing and facilitating $100bn of sustainable finance and investment by 2025. At the end of 2020, we had fulfilled $93.0bn of this commitment, comprising $66.9bn through facilitating the flow of capital and providing customers access to capital markets, and $20.0bn in financing and $6.1bn in investments to support environmental and social goals. Our sustainable finance commitment has enabled sustainable infrastructure and energy systems, financed the transition towards net zero emissions by promoting decarbonisation efforts across the real economy, and enhanced investor capital through sustainable investments. We recognise that more and faster action is needed to achieve the Paris Agreement goal of net zero by 2050 or sooner. That is why in October 2020 we announced our ambition to provide between $750bn and $1tn of sustainable finance and investment over the next 10 years. This new commitment builds on our 2017 target. Our new commitment incorporates sustainable finance and investment of $40.6bn in 2020, which also contributed to our initial 2017 target, as well as additional products of $3.5bn. Our sustainable finance and investment in 2020 for our updated target comprises 23% green and sustainability-linked lending to companies, 9% investments we manage and distribute on behalf of investors, and 68% facilitating the flow of capital and providing access to capital markets. We have developed and evolved our existing data dictionary, taking into consideration the principles we developed with UK Finance in the white paper ‘Sustainable finance: Establishing a principles-based framework for the measurement and reporting of multi-year commitments’. Our progress will be published each year and will seek to continue to be independently assured. Our revised data dictionary, which includes a detailed definition of contributing activities, and our ESG Data Pack, which includes our third-party assurance letter and the breakdown of our sustainable finance and investment, can be found at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-and-policies. For further details of our net zero ambition, see www.hsbc.com/who-we-are/our-climate-strategy/becoming-a-net-zero-bank.
Sustainable finance We define sustainable finance as: •any form of financial service that integrates ESG criteria into business or investment decisions; and •financing, investing and advisory activities that support the UN Sustainable Development Goals (‘SDGs’), in particular taking action to combat climate change. The SDGs, also known as the Global Goals, were adopted by all UN member states in 2015 as a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030. We have reviewed and updated these definitions to reflect our updated climate ambition, which is available at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-and-policies.
Our approach to climate risk We continue to improve the identification, oversight and management of climate risk. In 2020, we enhanced our climate risk appetite statement with quantitative metrics to articulate the risks from climate change, and we plan to develop our risk appetite and key indicators iteratively through 2021. We also formalised our overall approach to climate risk management to integrate climate risk into the Group-wide risk management framework. For further details on climate risk, see our TCFD Update 2020 at www.hsbc.com/esg.
$93.0bn Cumulative progress since 2017 on our commitment to provide and facilitate sustainable finance and investment. (Target: $100bn by 2025)
3rd Dealogic ranking for green, social and sustainability bonds globally in 2020. (2019: 2nd)
Sustainable infrastructure Good infrastructure is the backbone of any successful society and economy. However, addressing climate change requires the world – particularly emerging markets – to develop a new generation of sustainable infrastructure quickly. The OECD estimates that up to $6.9tn each year is needed through to 2030 to achieve this. While many institutions have been engaged in mobilising finance for this purpose, there remains a significant investment gap and lack of adequate, bankable projects. Stronger standards are also needed to bring investors to the table. To help solve for this, we are leading the Finance to Accelerate the Sustainable Transition-Infrastructure (‘FAST-Infra’) initiative. This was established in partnership with the International Finance Corporation (‘IFC’), the OECD, the World Bank’s Global Infrastructure Facility and Climate Policy Initiative under the auspices of the One Planet Lab to develop a consistent, globally applicable labelling system for sustainable infrastructure investment. This will aim to ensure that governments and project developers embed high ESG standards into new infrastructure to access this label. We also co-chair the Coalition for Climate Resilient Investment, launched at the UN General Assembly’s Climate Action Summit in 2019, bringing together institutional investors, banks, insurers, rating agencies and governments to develop risk-informed frameworks and tools to integrate and price physical climate risks in decision making. Responsible and sustainable investment We offer a broad suite of ESG capabilities across asset management, global markets, research, wealth, private banking and securities services, enabling institutional and individual investors to manage risk and pursue ESG-related opportunities. Our endeavour is to influence the market through active engagement on ESG issues. We have a dedicated Responsible Investment team across developed and emerging markets. The team’s activities, along with portfolio managers and other investment analysts, led to ESG issues being raised in engagements with over 2,300 corporate and non-corporate issuers in 78 markets in 2020. We voted on more than 86,000 resolutions at over 8,200 company meetings in 70 markets. At HSBC Global Asset Management, nearly 89% of total assets under management were invested according to at least one of the seven strategies defined by the Global Sustainable Investment Alliance, as at December 2020. We define sustainable investing as: inclusion, which involves strategies that enhance portfolio exposure to better ESG performers; thematic, where strategies provide exposure to transformative environmental or social trends; and impact, which are strategies linked to tangible societal or environmental outcomes/impact. We launched the Real Economy Green Investment Opportunity (‘REGIO’) fund with the IFC, and at December 2020 had raised $475m to fund green projects in developing economies that reduce emissions and meet the UN SDG Goals. Through our HGIF Lower Carbon Equity and Bond Funds, which are available in nine Wealth and Personal Banking markets and seven Global Private Banking markets, we aim to help investors generate long-term total return with a lower carbon footprint than reference benchmark indices. We expanded our investment offering for private banking and wealth clients, including: TPG Rise, an impact fund linked to the UN SDGs; structured products and certificates of deposit where proceeds were used to fund green and sustainable development projects; and various thematic solutions such as gender equality and energy transition. As a signatory of the United Nations Environment Programme Finance Initiative’s Principles of Sustainable Insurance, our insurance business has continued to implement its sustainability policy. The policy includes restricting investments that may have adverse impacts on people and the environment, and incorporating ESG principles into our investment governance. We continued to build our sustainable investment portfolios to support the UN SDGs and the Paris Agreement. During 2020, we expanded the assets in scope of the policy with full compliance due in early 2021. Embedding ESG into our engagement Our vision is to support our customers’ aspirations to make a positive change in the world through wealth value creation. We are embedding ESG across client engagement and investment solutions in our wealth management and private banking businesses. We offer a comprehensive range of sustainable investment products to help clients marry their sustainability and financial goals. These include green, social and sustainability bonds, investment funds, ETFs, discretionary mandates, private market investments, structured products and green certificates of deposit. Our advisory offering also covers securities with substantial exposure to environmental themes. To help customers understand the topic and the benefits of investing sustainably, a range of educational materials, thought leadership publications, and articles on sustainability themes are distributed regularly. We partnered with the Principles for Responsible Investment to develop a training programme for our advisers, covering ESG fundamentals, investing strategies and client engagement. We provide our customers with ESG insights and foster industry development. HSBC Global Research published over 200 climate and ESG-related reports in 2020, accompanied by approximately 500 client meetings and 15 client webcasts. Our ESG team works in close collaboration with analysts from other asset classes and across markets, embedding sustainability into research and offering a deeper integration approach to a global investor client base. The team released four episodes of the ESG Brief podcast. ESG Insights from HSBC Global Research are also repackaged for retail investors as a series known as #WhyESGMatters.
Laying the foundations for a sustainable future
Cement is one of the world’s most socially and economically important materials – and also among the most highly carbon intensive. Long-term change is needed to help cement producers reduce their environmental impact. Switzerland-based LafargeHolcim, one of the largest global cement producers, aims to lead its industry in becoming greener. We helped LafargeHolcim towards its goals by playing a major role in the world’s first building materials sustainability-linked bond. We acted as joint bookrunner on the €850m sustainability-linked bond, whose terms mean LafargeHolcim must pay a premium if it does not meet its target to reduce the carbon intensity of the cement it produces by 17.5% – from 2018 levels – by 2030.
Unlocking climate solutions and innovations We understand the need to find new solutions to increase the pace of change if the world is to achieve the Paris Agreement’s goal of being net zero by 2050. We are working closely with a range of partners to accelerate investment in natural resources, technology and innovations, and sustainable infrastructure to reduce emissions and address climate change. Working with our partners We know that many investors want to invest in companies that can demonstrate their ESG credentials. Through philanthropy, partnerships and new initiatives our aim is to help them invest in protecting the planet, with HSBC Global Asset Management offering a range of funds for clients to invest in businesses and projects that have strong ESG track records and ambitions. HSBC Global Asset Management also created a joint venture in 2020 with Pollination, a specialist climate change advisory and investment firm. The joint venture, HSBC Pollination Climate Asset Management, aims to be the world’s largest manager of capital invested in natural resources (see box below). To encourage more investment in building sustainable infrastructure, we are at the forefront of an initiative that gives investors greater confidence about where their money is going. Working with the IFC, OECD, the World Bank’s Global Infrastructure Facility and the Climate Policy Initiative, under the auspices of the One Planet Lab, we helped conceive the FAST-Infra initiative. Our collective aim is to turn sustainable infrastructure into a mainstream asset class. We will aim to achieve this by establishing a global labelling system that clearly shows investors the infrastructure in which they are investing is sustainable and contributes to achieving the UN’s SDGs. Backing new technology and innovations Addressing climate change requires innovative ideas. By connecting financing with fresh thinking, we can help climate solutions to scale to support sustainable growth. Formed in 2020, our $100m philanthropic climate programme aims to do this and truly transform the way we protect our planet, overcoming barriers to addressing climate change. We provided $7.1m to our non-governmental organisation partners during the year to get the programme underway. We intend to expand our technology venture debt capabilities to provide $100m of financing to companies developing clean technologies that can be deployed at scale to support businesses and households to transition to a low-carbon economy. We will provide further updates on cleantech investment and the philanthropic programme in 2021. Skills for a sustainable future We have a responsibility to invest in the long-term prosperity of the communities where we operate. We recognise that technology is developing at a rapid pace and that a range of new and different skills are now needed to succeed. For this reason, much of our focus is on programmes that develop employability and financial capability. We also back climate solutions and innovation, and contribute to disaster relief efforts based on need (see panel on the right). We also continue to increase knowledge on sustainability issues with our people. We developed a seven-part online course exclusively for our employees in partnership with the University of Cambridge Institute for Sustainability Leadership. In 2020, our colleagues completed more than 36,700 modules.
Investing in nature-based projects with Pollination A key part of our strategy is to unlock new climate solutions, helping to transform sustainable infrastructure into a global asset class. As part of this ambition, we launched HSBC Pollination Climate Asset Management in August 2020, with the vision to create the world’s largest dedicated natural capital investment manager. The joint venture with Pollination, a specialist climate change advisory and investment firm, intends to set up funds that will invest in a range of nature-based projects that protect and enhance nature over the long term, and reduce greenhouse emissions. The intention is to launch a series of natural capital and carbon credit funds for institutional investors, with the aim to launch the first fund in mid-2021.
Our charitable contributions In 2020, our charitable giving totalled $112.7m, including our $25m Covid-19 donation fund. We also encourage our people to volunteer time and share their skills, offering paid volunteer days. In 2020, our colleagues gave over 82,000 hours to community activities during work time.
In 2018, we set out a three-year goal to help two million people in our communities be more employable and financially capable through providing more than $100m in charitable donations. Current projections from our charity partners indicate our support reached more than four million people through donations of over $115m. This funding helped marginalised young people prepare for and secure their first jobs,
supported indigenous people to complete their education and gain employment, and helped migrant workers avoid financial fraud. The increased reach from our initial projection is due in part to increased reach from programmes moving online.
Our approach to sustainability policies We recognise that businesses can have an impact on the environment, individuals and communities around them. We have developed, implemented and refined our approach to working with our business customers to understand and manage these issues. Our sustainability risk policies seek to ensure that the financial services that we provide to customers do not contribute to unacceptable impacts on people or the environment. We seek to analyse the impact of ESG issues and follow international good practice in these areas. We believe that the key to managing sustainability risk is creating partnerships with our customers, assisting them on their transition path to a more sustainable and low-carbon economy.
Our policies Our sustainability risk policies cover agricultural commodities, chemicals, defence, energy, forestry, mining and metals, UNESCO World Heritage Sites and Ramsar-designated wetlands. These policies define our appetite for business in these sectors and seek to encourage customers to meet good international standards of practice. Where we identify activities that could cause material negative impacts, we will only provide finance if we can confirm customers are managing these risks responsibly. Such customers are subject to greater due diligence and generally require additional approval by sustainability risk specialists. We will not provide finance if the business activities are not aligned to our aims and values. Our sustainability policies are being aligned with our approach to climate risk as well as our net zero commitments, and will be enhanced during 2021. For further details on how we manage sustainability risk as well as our full policies, see www.hsbc.com/our-approach/risk-and-responsibility/sustainability-risk.
Supporting the transition At the heart of our net zero plan is an aim to align our financed emissions – emissions produced by our portfolio of customers – to the Paris Agreement goal of net zero by 2050 or sooner. The most significant contribution we can make is to support our customers’ transition to lowering carbon through transition financing, which is financial support that helps heavy-emitting companies take action to become more environmentally sustainable over time. To accelerate the global transition to net zero, we also want to unlock climate solutions, such as cleantech innovation, sustainable infrastructure and nature-based solutions. These will help smooth a transition and shift to a more sustainable economy in the long term. As we move closer to 2050, we expect our portfolio of financed emissions to reflect this and our customers’ business activities to be less carbon intensive. In that light, we are undertaking a review of our sustainability risk policies to ensure that they will reflect this need to transition and the phased reduction of carbon-intensive business activities.
Governance Within our Global Risk function, we have reputational and sustainability risk specialists who are responsible for reviewing, implementing and managing our sustainability risk policies as well as our application of the Equator Principles. Our global network of more than 75 sustainability risk managers supports the achievementimplementation of these policies. In 2020, these local sustainability risk managers were further supported by regional reputational risk managers across the Group who have taken on additional oversight responsibilities for sustainability risk. We have also established a Sustainability Risk Oversight Forum, made up of senior members of the Global Risk function and global businesses across the Group.
Equator Principles The Equator Principles provide a risk management framework for determining, assessing and managing environmental and social risk in projects. We were an early adopter of the principles in 2003. In October 2020, the revised Equator Principles framework came into effect, after consultation with member banks and external stakeholders. In response to the launch of the revised framework, we are rolling out updated training for staff in 2021 to ensure that Equator Principles transactions are properly identified and managed.
We report annually on the transactions completed under the principles. Our latest Equator Principles report is available at: www.hsbc.com/who-we-are/our-climate-strategy/sustainability-risk/equator-principles. For further details of our approach to human rights, see page 71. For further details of our approach to risk management, see page 37.
Our energy policy When we last updated our energy policy in 2018, we stated that we would not finance any new coal-fired power plants, with the potential targeted and time-limited exceptions in Bangladesh, Indonesia and Vietnam, recognising the need to balance local humanitarian needs with the need to transition to a low-carbon economy. We therefore agreed that any funding of new coal-fired power plants in those three countries would only be considered subject to certain strict criteria. It is important to note that we have not provided any project finance for any new coal-fired power plants anywhere in the world since then, including those countries. In April 2020, we removed these exceptions and will not finance any new coal-fired power plants anywhere globally. We continue to support the other needs of our customers in these countries and continue to support their governments. Within the power and utilities, and metals and mining sectors shown in our TCFD disclosures on page 19, our direct exposure to thermal coal is 0.2% of the wholesale loans and advances figures.
Customers We are bringing the benefits of connectivity and a global economy to more people around the world. At a glance Our relationship 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 report on our customers as three distinct groups: our wealth and personal banking customers; medium and large-sized corporate customers; and our global and institutional customers. These groups are served by our three global businesses respectively: Wealth and Personal Banking (‘WPB’), Commercial Banking (‘CMB’) and Global Banking and Markets (‘GBM’). Digital and technology Our retail and wholesale customers are using digital services more than ever before, with the Covid-19 outbreak accelerating the shift to digital banking. We have continued to invest in digital and technology to help make banking simpler and safer, and have launched new products and platforms to assist and support our customers. •Read more on digital and technology on page 53.
Customer satisfaction Through a series of surveys, we aim to listen to our customers to put them at the centre of our decision making. We continued to redesign how we receive feedback to create a consistent measure of the customer experience and act on customers’ feedback. While the roll-out of the full programme was slowed during the Covid-19 outbreak, we continue to embed the new ways of working. •Read more on customer satisfaction on page 54.
How we listen We aim to be open and consistent in how we track, record and manage complaints. In 2020, complaints fell across our WPB and GBM businesses and were up overall in CMB. Complaint resolution was impacted by staffing challenges from the Covid-19 pandemic, while corporate complaints were focused on account opening and operations due to increased demand for finance. •Read more on how we listen on page 56. Conduct We responded to the changing environment and sought to help our customers, particularly the most vulnerable, with payment relief measures, lending support and improvements to our products and services. The conduct of our people is linked to the way we work. We adapted our global training and support for our colleagues, updated how we design products and deliver fair value, and continued to help customers transition from interbank offered rates. •Read more on conduct on page 58.
Digital and technology The Covid-19 outbreak meant that many of our customers needed to increasingly use our services remotely. The significant technology investments we made in the years before the pandemic to make digital banking easier meant we could support the accelerated shift to mobile and online channels during 2020. In 2020, more than nine out of every 10, or 92.7%, of our global personal banking transactions were done digitally, an increase of four points year-on-year. At the same time, 54% of our retail customers were digitally active, an increase of five points from 2019. Our corporate customers also increased their use of our digital services, with mobile app downloads of our core business digital platform, HSBCnet, growing 146% in 2020. Throughout the Covid-19 outbreak, we continued to invest in technology to help our customers to do more of their everyday banking online, and we rolled out new functionality to support them through the pandemic and provide digital solutions for their growth ambitions. Making banking simpler and faster During 2020, we completed the initial roll-out of new online banking and mobile platforms for our retail customers, replacing legacy technology across 16 markets, which will let us innovate more quickly in the future. In 2020, the retail mobile banking app achieved an average Apple rating of 4.8 in the UK and 4.7 in Hong Kong, and an average Android rating of 3.8 in the UK and 3.5 in Hong Kong. We helped many customers in need of support during the economic slowdown. On average we deployed digital lending portals within six days for business customers to be able to apply for government lending schemes in the UK, the US and Hong Kong. As it has been more difficult to meet in person, we introduced customer video meetings for all business areas across 47 markets. We also continued to expand the use of chatbots to support customers with day-to-day queries. In WPB, we launched online and in-app chat services across eight new markets and there were more than 10.5 million chat conversations in 2020. For our clients with wealth management needs we launched a simplified version of Wealth View, an online platform enabling easier analysis of their holdings and transactions. It is available in Hong Kong, Singapore, Luxembourg, the UK, Channel Islands and the US. Our improved global online Business Banking Experience, used by more than 49,000 businesses across nine markets, helps customers to complete everyday banking tasks themselves and run their businesses remotely. It has an average customer satisfaction score of 9 out of 10. Helping businesses to grow We continue to transform our digital platform for Global Trade and Receivables Finance, HSBC Trade Solutions. We launched trade finance and risk mitigation solutions to 2,100 customers in Hong Kong in November 2020, making trade simpler, safer and faster. In the UK, HSBC Kinetic, a new mobile proposition for SMEs, had 2,899 customers onboarded by the end of 2020. Launched in June 2020, it enables customers who need a business current account or a Business Bounceback loan from the UK Government to apply online and do their day-to-day banking digitally. In GBM, we are investing heavily in digital and data capabilities to support our clients’ growth ambitions and accelerated digital needs. In Securities Services, we are developing solutions to provide clients with fast access to data, and more control of their assets and transactions. The monthly usage of our API suite, which gives on-demand access to data, grew 2,716% in the year to December 2020, with a significant increase in committed customers. To help make HSBC even more secure, we provide a front-end digital know-your-customer solution via our SmartServe platform, which has been launched in 20 countries and territories, including the UK, UAE, the US, Hong Kong and France. For further details of our digital satisfaction scores, see page 54. For further details of new features we introduced to give people more control over their financial lives during the Covid-19 outbreak, see page 58.
Harnessing the benefits of blockchain We are implementing distributed ledger technology, including blockchain, to improve efficiency, transparency and security for clients. In global trade, we are using the technology to replace the previously paper-driven letter of credit process, which are the documents guaranteeing the seller will be paid. It offers a fast and secure alternative, which is helping reduce letters of credit processing time from between five and 10 days to a matter of hours. 151% Year-on-year increase in wholesale customer mobile payments during 2020. 92.7% Retail banking transactions globally that were digital at the end of 2020.
119,782 Downloads of the HSBCnet mobile app in 2020, a 146% year-on-year increase.
Customer satisfaction We are continuing to redesign how we receive feedback from our customers to put them at the centre of decision making. In 2019, we said we wanted to measure the likelihood of customers to recommend HSBC across our global businesses, and we now have this consistent measure of our customer experience to help engage our people and improve how we benchmark our performance internally and against our competitors. Our transition to a new feedback system What we are trying to achieve goes beyond just a measure. It is a way of systematically collecting, analysing and acting on our customers’ feedback. Across our global businesses, it will help us get better insight from our customers, build stronger relationships with them, and identify and prioritise areas where we can improve the experience they have with us. Through a series of surveys, we ensure we are listening to our customers and creating insights at all levels of the relationship. We create more transparency of the customer experience by sharing feedback directly with our customer-facing teams and allowing them to respond directly to those customers to address specific feedback. The metric that underpins this new system is the net promoter score based on the question: ‘On a scale on 0 to 10, how likely is it that you would recommend HSBC to a friend or colleague?’ The score is calculated by subtracting the percentage of ‘detractors’, who provide a score of 0 to 6, from the percentage of ‘promoters’, who provide a score of 9 to 10. It can range as low as -100 to as high as 100. Although the roll-out of the full programme was slowed during the Covid-19 outbreak, as we redirected resources to ensure our front-line teams could focus on delivering for our customers, we continue to embed the new ways of working. In 2020, WPB launched more than 157 new surveys across 15 markets. In CMB, we launched elements of our programme in the UK, the US, Canada, Mexico and India, with more than 30 markets planned for 2021. Our GBM business is also continually working on ways to collect valuable feedback and improve customer experience. In 2020, we started conducting post-implementation assessments through questionnaires, which provide useful insights on our performance. How we fared In 2017, we set ourselves the strategic targets to improve customer satisfaction in our WPB and CMB global businesses by 2020. Both businesses achieved high levels of satisfaction in the majority of their respective ‘scale markets’, although were unable to fully achieve their 2020 ambitions to be either ranked as top three against relevant competitors in these markets, or to have improved by at least two ranks compared with their 2017 baselines. Our WPB business, which surveyed more than one million customers on their likelihood to recommend HSBC and their satisfaction with our services, achieved its target in seven of our eight scale markets in 2020. Overall, our ranking fell below ambition in Malaysia, despite our rank position improving during 2020. Our lower performance than target was largely due to ‘the ease of banking with us’ compared with our competitors. We are carrying out several initiatives to improve its performance, including the release of new digital features, staff training and a refresh of our customer propositions. In surveys that we largely conducted of customers’ views of our specific services and channels, increased market attention, geopolitical tensions and market volatility impacted scores in mainland China. This trend began to reverse due in part to enhanced customer communications and a greater emphasis on digital assistance. For our relationship manager scores, we noted performance below expectations in France, where we have ongoing action plans to improve communications and drive more proactive contact with customers. In our private bank, our global net promoter score fell to nine in 2020, compared with 24 in the previous year, largely due to a decline in Hong Kong and Switzerland. However, our scores improved in Singapore and in France. We achieved strong scores for our relationship management services, and our approach to coping with the Covid-19 outbreak was commended in many markets. Key areas where our clients would like us to improve were our digital and advisory offerings, on which we are focusing significant investment. In CMB, five out of eight tracked markets met targets by improving their rank position by two places from 2017 or being in the top three against competitors, which were Hong Kong, the UAE, the Pearl River Delta, Singapore and Saudi Arabia in 2020. We declined to fifth position in the UK, as we deployed staff to Covid-19-related lending schemes impacting customer experience in telephony and specialist availability in branches. Our rank in Mexico remained unchanged at fifth. Similarly, in Malaysia, our position remained unchanged at sixth, notwithstanding improvement in underlying satisfaction scores. In GBM, our aim is to outperform the average competitor score. To measure this, each year we partner with Greenwich Associates to conduct a relationship level satisfaction survey. In 2020, we achieved an overall net promoter score of 48, outperforming our competitors’ score of 39. We scored 49 in Asia-Pacific, compared with 32 for our competitors, and 44 in the Europe and Middle East region, compared with 41 for our competitors. However, we scored 54 in North America, below our competitors’ score of 73. Digital channels Our customers have increasingly turned to our digital services in recent years, a trend which was accelerated in 2020 due to the Covid-19 outbreak. We launched new capabilities and digital enhancements in each of our global businesses to be closer to our customers and support them during the pandemic. In WPB, we were able to maintain robust performance in our digital channels, with an improvement in scores in online banking in almost all markets compared with 2019. 7 out of 8 WPB markets sustained top-three rank and/or improved in customer satisfaction.
5 out of 8 CMB markets sustained top-three rank and/or improved in customer satisfaction.
48 GBM’s overall net promoter score, outperforming competitors’ score of 39.
This reflects the success of new mobile app functionality in the UK, including balance after bills forecasting, direct debits and standing orders cancellation and in-app overdraft limit management. Customers in the US, Canada and the UK gained a view of pending transactions, while in Hong Kong and UAE we added block and unblock cards capability. We introduced digital secure key access and pay by instalment in Singapore and Malaysia, and launched our HSBC Life Well+ in-app wellness and lifestyle programme in Hong Kong.
We faced a temporary technical issue related to Bill Pay, a service that allows our US customers to pay third-party bills online. This affected our digital banking scores, but they rebounded once this was resolved.
In CMB, customer satisfaction with our digital services improved in six of the seven markets assessed compared with 2019, which were Hong Kong, the UAE, Singapore, Malaysia, Mexico and the Pearl River Delta. However, it fell in the UK, as the significant increase in Covid-19-related lending schemes negatively impacted turnaround times and our customers’ perception of our digital services.
Despite the difficulties of operating during the Covid-19 outbreak, technology enhancements introduced during 2020 increased our interactions with our customers, helping us to provide solutions to their problems, and contributed to performing at industry best practice levels in our Global Liquidity and Capital Management and Global Trade and Receivables Finance businesses.
All of our relationship managers were enabled to work remotely to support customers from home. We introduced digital capabilities that were particularly relevant in key markets, including remote cheque deposits, a one-hour turnaround of shipping guarantees and a dedicated trade finance helpline in the UK, and electronic signing for key product onboarding in Hong Kong. Improvements to our digital tools contributed to a 146% year-on-year increase in customer downloads of HSBCnet mobile in 2020 compared with 2019. Active desktop users increased from 400,000 to more than 470,000.
In GBM, the overall satisfaction with our digital proposition was strong with 64% satisfaction globally, and well ahead of competition in the Asia-Pacific, and Europe, Middle East and Africa regions, according to our relationship level satisfaction survey. Our scores were only slightly above our competitors’ score in North America. Feedback from clients showed we needed to reduce the complexity associated with our systems and procedures. To address this, we are shifting towards the use of technology in our processes, helping to remove unnecessary layers while increasing efficiency. In 2020, we began the roll-out to a small set of customers of HSBC SmartServe, an automated centralised service that aims to help clients onboard digitally and use services with fewer manual transactions.
We also now offer customers the opportunity to sign documentation electronically for credit and lending, with this service live in 22 countries at December 2020. We have also begun rolling out new soft token security solutions.
Providing support in challenging times While we have invested in digital and technology, it has been important to provide effective access to support our vulnerable personal customers in our other channels during the Covid-19 outbreak.
Conditions have been challenging for in-person interactions at retail branches and with relationship managers, which hindered performance in some markets, such as in Mexico, where a portion of our branches remained closed until August 2020. This affected wait times and staffing at open branches.
Our WPB contact centres recorded strong scores during 2020.
In the UK, our WPB business issued new telephone security numbers to 1.6 million non-digitally active customers. We also created a customer line for key workers and vulnerable customers, supporting more than 1.67 million customers in 2020 through our contact centres.
WPB customer satisfaction by channel (Net promoter score1) | | | | | | | | | | | | | | | | | | | | | | | UK | | | Hong Kong | | | | 2020 | 2019 | | 2020 | 2019 | | Branch | → | 62 | 62 | ↑ | 57 | 42 | Contact centre2 | ↑ | 39 | 36 | → | 57 | 57 | | Online banking | ↑ | 48 | 41 | ↑ | 4 | 2 | | Relationship manager | ↑ | 58 | 45 | ↑ | 49 | 25 |
1 The net promoter score is measured by subtracting the percentage of ‘detractors’ from the percentage of ‘promoters’. ‘Detractors’ are customers who provide a score of 0 to 6, and ‘promoters’ are customers who provide a score of 9 to 10 to the question: ‘On a scale on 0 to 10, how likely is it that you would recommend HSBC to a friend or colleague’. 2 Hong Kong benchmark data for 2019 is unavailable as the survey methodology changed. The data reported for 2019 is based on January 2020.
How we listen To improve how we serve our customers, we must be open to feedback and acknowledge when things go wrong. This was especially true during periods of Covid-19-related lockdown restrictions when our customers encountered new challenges and we needed to adapt quickly. We aim to be open and consistent in how we track, record and manage complaints, although as we serve a wide range of customers – from personal banking and wealth customers to large corporates, institutions and governments – we tailor our approach in each of our global businesses. When things go wrong In 2020, our WPB business received just over one million complaints from customers. The ratio of complaints per 1,000 customers per month in our large markets reduced from 3.7 to 2.6. During the year, 73% of complaints were resolved on the same or next working day, a decline from 77% in 2019, and 80% were resolved within five working days, compared with 83% in 2019. Complaint resolution was impacted predominantly due to staffing challenges caused by the Covid-19 outbreak, and by our focus on ensuring our customers were served safely during this difficult time. The reduction in complaints in the UK was driven in part by the end of the payment protection insurance (‘PPI’) complaints programme in 2019. Our customers also demonstrated a high level of understanding of our Covid-19-related challenges. The increase in complaints in Hong Kong was related to operational stresses due to external events, such as the Covid-19 outbreak, economic relief measures, social-political sentiments and investment market activities. We are addressing these by equipping our colleagues with home working capabilities, offering flexible solutions and enhanced digital solutions to improve our customer servicing capabilities. In the fourth quarter of 2020, we succeeded in bringing down the number of complaints by 13% from its peak during June to September. In our private bank in 2020, we received 572 complaints, an 8% increase on 2019. Administration and servicing issues remained the largest contributor of complaint categories, at 79% in total. Complaints linked to product and performance as well as advice and suitability were higher than in the previous year. This was largely attributable to complaints indirectly linked to the Covid-19 outbreak. In 2020, the private bank resolved 557 complaints, which was a 14% increase from 2019. We upheld 270 complaints, which was a 3% increase on 2019. Our CMB business resolved 105,215 customer complaints in 2020, a 14% increase from 2019. Of the overall volumes, 78% came from the UK, 16% from Hong Kong and 1% from France. The highest sources of complaints involved operations and account opening. This was due to the unprecedented demand from customers for funding and finance during the Covid-19 outbreak through government lending schemes and other relief measures, which resulted in account opening delays and increased call handling times. Recognising the impact on our customers, we increased automation in our loan application process, extended repayment holidays and improved processes to escalate and prioritise vulnerable customers. We also redeployed resources to support increases in call volumes in key customer support functions. Complaints on operations fell compared with the previous year. However, based on customer feedback, we are continuing to implement changes to reduce payment processing errors and delays, most notably in the UK and in Hong Kong with several digital business banking enhancements, including payment notification services.
An overall increase in the number of complaints in Hong Kong was largely attributed to the adoption of a more prudent complaints definition. This resulted in a substantial increase in March 2020, although it stabilised from July 2020.
WPB complaint volumes1 (per 1,000 customers per month) | | | | | | | | | | | | | | 2020 | 2019 | | UK | ↓ | 2.1 | 4.5 | | Hong Kong | ↑ | 0.6 | 0.5 | | France | ↓ | 6.8 | 7.8 | | US | ↓ | 2.8 | 2.9 | | Canada | ↓ | 3.8 | 3.9 | | Mexico | ↓ | 4.9 | 5.7 | | Singapore | ↑ | 1.4 | 1.3 | | Malaysia | ↓ | 0.5 | 0.6 | | Mainland China | → | 0.6 | 0.6 | | UAE | ↓ | 4.5 | 5.1 |
1 A complaint is defined as any expression of dissatisfaction, whether upheld or not, from (or on behalf of) a former, existing or prospective customer relating to the provision of, or failure to provide, a specific product or service activity.
CMB complaint volumes2 (000s) | | | | | | | | | | | | | | 2020 | 2019 | UK2 | ↑ | 81.9 | 78.8 | | Hong Kong | ↑ | 16.4 | 5.4 | | Europe | ↓ | 2.4 | 2.7 | | Latin America | ↓ | 1 | 1.3 | | US | ↓ | 0.9 | 1.2 | | Middle East, North Africa and Turkey | ↓ | 1.2 | 1.5 | | Rest of Asia-Pacific (excluding Hong Kong) | ↑ | 0.9 | 0.8 | | Canada | ↓ | 0.5 | 0.8 |
2 Volumes for the UK are received complaints from eligible complaints aligned to the current FCA reporting requirements. Volume of complaints for all other markets, complaint reason breakdown and commentary are based on total volumes of resolved complaints.
Our GBM business received 1,432 customer complaints, which represented a 14% decline compared with 2019, despite the increased transaction volumes during the Covid-19 outbreak in 2020. Our Global Liquidity and Cash Management business received the most complaints of GBM businesses. This corresponds to the nature of the business and the high volume of transactions processed daily. Despite increased demands as a result of the Covid-19 pandemic, Global Liquidity and Cash Management demonstrated resilience to major shocks and had a reduced number of complaints compared with 2019.
Capturing feedback We listen to complaints to address customers’ concerns and understand where we can improve processes, procedures and systems. In 2020, we continued to focus on staff training in each of our global businesses and emphasise the importance of recording complaints. This is intended to improve our complaint handling expertise and help ensure our customers are provided with fair outcomes. Complaints are monitored and reported to governance forums to ensure they are handled quickly and thoroughly.
In our WPB business, we are using our new complaints management platform, which we set up in 2018, in seven markets, allowing us to deliver a more customer-focused experience when managing feedback. We have been able to streamline the complaints process by simplifying complaints forms and procedures, and integrating with our back-end systems. We introduced greater automation to track complaints from beginning to end and provide customers with regular updates. We also enhanced our reporting so we can spot trends and fix emerging issues more quickly. We have also continued our efforts to improve the way we capture and report on customer complaints in our wholesale businesses. We are now piloting a single, overarching tool to gather customer feedback for parts of our wholesale businesses. The tool enables customer complaints to be recorded by customer-facing employees across GBM in four sites and CMB in one site. This holistic approach helps ensure consistent handling of complaints and fair outcomes for customers. It also makes it easier to identify a clear root cause for each complaint, allowing detailed thematic analysis, faster resolution and more efficient reporting. In 2021, we plan to expand the scope of the tool and use it in the majority of countries and territories in which we operate. . GBM complaint volumes1 | | | | | | | | | | | | | | 2020 | 2019 | | Global Banking | ↓ | 309 | 340 | | Global Markets and Securities Services | ↓ | 363 | 409 | Global Liquidity and Cash Management2 | ↓ | 760 | 919 | | Total | ↓ | 1,432 | 1668 |
1 A complaint is defined as any expression of dissatisfaction, whether upheld/justified or not, from (or on behalf of) a client relating to the provision of, or failure to provide, a specific product or service activity. 2 Global Liquidity and Cash Management excludes 1,175 complaints relating to payment operations, which is part of Digital Business Services.
WPB top complaint categories (% of total) | | | | | | | | | | 2020 | 2019 | | Process and procedures | 43 | 33 | | Product features and policy | 7 | 5 | | Service | 25 | 24 | | Fees, rates and charges | 9 | 9 | Other1 | 16 | 29 |
CMB top complaint categories (% of total) | | | | | | | | | | 2020 | 2019 | | Processes and procedures (global standards) | 8 | 27 | | Operations | 25 | 26 | | Internet banking | 8 | 8 | | Contact centre | 11 | 6 | | Fees, rates and charges | 5 | 5 | | Credit risk decisions | 4 | 3 | | Account opening | 23 | 4 | Other1 | 16 | 22 |
GBM top complaint categories (% of total) | | | | | | | | | | 2020 | 2019 | | Process | 41% | 34% | | Systems and data | 21% | 29% | | People | 20% | 21% | Other1 | 18% | 16% |
1 ‘Other’ in WPB includes issues related to underwriting decisions, claims, personal data privacy, global standards; in CMB, it refers to a wide range of issues, including service closures and mobile banking; and in GBM it includes complaints in relation to third parties, as well as legislative and regulatory changes.
Conduct We are committed to providing customers with products that meet their needs. Good conduct at HSBC means that we deliver fair outcomes for customers, and maintain the orderly and transparent operation of financial markets In this section, we address how we endeavoured to help our customers in each of our global businesses during a difficult year, which included the global Covid-19 pandemic. Supporting our customers responsibly We responded rapidly to the changing environment caused by the Covid-19 outbreak and revised our internal policies and procedures to help our customers – especially the most vulnerable – fairly and safely. Many of our personal banking and wealth customers needed financial relief as a result of the economic slowdown caused by the Covid-19 outbreak, which we sought to address in a responsible way. At 31 December 2020, we had active payment relief measures impacting 87,000 accounts and $5.5bn in balances as part of market-wide schemes and our own payment holidays programmes. This consisted of $4.7bn of mortgage balances and $850m of other personal loans in repayment relief, compared with $21.1bn of mortgage balances and $5.2bn of other personal loans at the end of June 2020. To ensure customers were financially prepared, we followed local government guidelines. In the UK, we extended the payment relief scheme into March 2021 for customers who have not had a payment holiday, in line with local furlough timeframes. In select markets, we used our digital messaging capabilities to inform customers about available financial help to reach more people more quickly. We also made the payment relief applications available online and offered support to customers through our chat functions, to enable a quick turnaround of payment relief requests. We responded quickly and flexibly to change our products for customers, adding insurance coverage for people whose health had been affected by Covid-19 in Hong Kong, mainland China, Singapore and Mexico, and extended the grace period for premium payment deferral in these countries as well as in France, the UK and Argentina. While our digital services can support many of our customers, we were proactive in supporting the most vulnerable. In the UK, we identified customers who were at risk of being vulnerable during the Covid-19 outbreak, and conducted 565,780 outbound care calls to update them on safe options to access banking services, including access to emergency cash and the available payment relief options. Global and country operational teams transitioned resources to homeworking throughout the period to ensure customer service levels were maintained with minimal disruption. Flexible resourcing and training was undertaken to allow staff to move from branches to call centres to support customers.
Seeking solutions with our ‘Covid bundle’ We aimed to reach more of our personal and wealth customers in innovative ways during the Covid-19 outbreak, which contributed to higher demand for banking services due to its economic impact. Our ‘Covid bundle’ project aimed to support our customers in our most affected markets through new features, capabilities and initiatives. In addition to providing customers in financial need a variety of payment options, we upgraded our telephony services and conversational capabilities on mobile and web chat to improve how we routed queries on forbearance and collections to our relevant front-line colleagues. This helped support our customers more quickly and mitigate the increased demand on our other front-line operational colleagues.
17 Number of major markets where we introduced payment relief measures for our personal and wealth customers.
>237,000 Wholesale customers supported globally with $35.3bn of lending through both government schemes and our own initiatives at the end of 2020
21,000 GBM colleagues who completed virtual conduct training in 2020.
Prior to the Covid-19 outbreak, we increased our focus on identifying vulnerable customers in the UK, but this meant that our teams who service vulnerable customers in financial difficulty became much busier, resulting in a backlog of customer requests. In response, we added more staff to these teams, trained them and are working to resolve the backlog. We also focused on training and coaching our customer-facing colleagues to meet the needs of customers who were made vulnerable due to having difficulties making payments. Responding to business needs Our CMB and GBM businesses introduced several measures to support our customers, many of whom faced pressures in their finances as lockdown restrictions impacted their businesses. As at the end of 2020, the lending support we provided to more than 237,000 wholesale customers globally was valued at $35.3bn, both through government schemes and our own initiatives. We offered repayment holidays to help businesses respond to cash flow pressures and provided trade finance solutions to support customers with their supply chains. We launched online portals for customer applications to various government-initiated loan schemes, and set up a global team to help oversee the provision of the loans, expediting the turnaround of loan requests and getting funds to our customers quicker. In the UK, a dedicated Covid-19-related phone line supported our customers by conveying what financial guidance and support is available to them. In order to help identify and mitigate any potential fraud associated with the Bounce Bank Loan Scheme, our UK Commercial Banking business is also part of an industry-wide fraud collaboration working group, which has been set up by UK Finance and includes other lenders and government bodies. In our GBM business, we focused on making responsible lending decisions and extending credit to corporate and institutional customers. We also sought to protect the integrity and flow of both internal and customer data, while maintaining an operationally resilient infrastructure. Relationship managers were in regular contact with customers, helping to ensure they received the most suitable support for their business. Our Global Liquidity and Cash Management business, which helps our corporate clients access, manage and move their cash, provided urgent payment facilities to mobilise clients’ cash where it was needed most, and helped them move rapidly to digital solutions. This included fast-tracking payments for urgent medical supplies from China to hospitals in Italy and enabling cashless, socially distanced payments for drive-through testing sites in Malaysia. Global Liquidity and Cash Management also launched a green deposit proposition during 2020 in the UK, Singapore and India, which involved allowing treasurers to make deposits that we use to finance environmentally beneficial initiatives, such as renewable energy and energy efficient projects. Our Markets and Securities Services business provided additional guidance around pricing decisions in 2020, in light of heightened credit risk and remote working arrangements. We put in place measures and guidelines to help ensure information continues to be monitored effectively and controlled in the new working environment. While working remotely, our Global Research team enhanced its review processes to provide timely research on economics, currencies, fixed income and equities, helping our institutional, government, corporate and central bank clients, as well as colleagues, navigate the extremely complex and fast-moving situation. We also increased the number of research products made freely available to help those affected by the crisis on a wide variety of platforms.
Digital support We continued to invest in our digital services and tools to support our customers and colleagues, delivering initiatives to make banking with us simpler and more efficient, and we made greater use of online appointments and video calls to enable our workforce to work from home. We launched new features in each of our businesses so we could handle crucial everyday activities remotely, such as onboarding. In WPB, new digital features included allowing customers to activate cards and cancel regular payments through our mobile apps in select markets. Our CMB and GBM businesses each enabled key documents to be sent and received with paperless instructions, enabling digital sign-offs and eliminating the need for physical signatures. We also rolled out globally our digital platform ‘Vital Insights’ in CMB following a pilot in Asia-Pacific, which helped enable us to understand the impact of Covid-19 on our customers and to take relevant action to help them manage uncertainty.
Conduct of our colleagues The conduct of our people is inextricably linked to the way we work. In WPB, in response to the Covid-19 outbreak, we adapted and reprioritised global training, and rolled out well-being programmes and tools, such as coaching plans to support virtual working to ensure our teams had the resources they needed to work safely and productively. We also remodelled our incentive programme scorecards to allow for flexibility, to help our colleagues focus on our customer needs, ensuring they can provide the appropriate solutions as a result of the pandemic. In our CMB and GBM businesses, we issued guidance to our colleagues on remote working to help maintain high standards of conduct, adhere to competition law, and manage potential conflicts of interest. In GBM, classroom-based conduct training was adapted for virtual learning, with more than 21,000 colleagues completing the curriculum in 2020. Cultivating a positive working culture is central to the well-being of our colleagues and the performance of our business. We introduced culture ambassadors, set up new communication channels for interactions with senior management, and established various well-being programmes.
Delivering fair outcomes with our products We are committed to providing customers with products that meet their needs. We have policies and procedures to help deliver fair outcomes for our customers, and to maintain orderly and transparent financial markets. Conduct principles are embedded into the way we develop, distribute, structure and execute products and services. We are refreshing our approach to conduct arrangements across the Group with a view to ensuring that the arrangements remain appropriate for the nature of our business.
Product design and development Our approach to product design and development entails the following overarching principles: •We offer a carefully selected range of products that are continually reviewed to help ensure they remain relevant in each country they are offered and perform in line with expectations we have set. Where products do not meet our customers’ needs or no longer meet our high standards, improvements are made or they are withdrawn from sale. •Wherever possible, we act on feedback from our customers to provide better and more accessible products and services. •We complete regular assessments of our products to help ensure we continue to deliver fair value. Oversight of product design and sales governance for each of our global businesses is provided by governance committees chaired and attended by senior executives who are accountable for ensuring we manage our related non-financial risks appropriately, within appetite and in a manner designed to ensure fair customer outcomes. Our CMB business considers customer feedback and user groups in its product development and has invested in the development of a new global product inventory and lifecycle management system to help ensure optimal product governance. The system uses Cloud technology to provide an improved way of managing our products from approval through to demise, and has been successfully piloted in our Global Trade and Receivables Finance and Global Liquidity and Cash Management businesses. The system, which we plan to deploy to all CMB markets within 2021, will help us to bring appropriate products to market more quickly, as well as helping to ensure we can more easily demonstrate fair customer outcomes. In our GBM business, we made strides to further improve pricing transparency. We launched the first phase of our strategic objectives by aligning rewardforeign exchange margin management tool across 1.1 million wholesale customers in Singapore, the UAE, Australia and the UK. The tool provides customers who make or receive payments that require foreign exchange conversion with consistent pricing and improved transparency of information across our long-term sustainable performance.various banking channels.
Our remuneration principlesTransitioning away from Ibors
Our payAs a result of the planned cessation of the London interbank offered rates (‘Libor’), Euro Overnight Index Average (‘Eonia’) and performanceother benchmarks actively known as Ibors, we are ensuring that we have the product capability in place to support our customers on the transition to alternative rates. We aim to clearly outline the options available to our customers holding existing Libor-based products, and our commercial strategy is designed to minimise value transfer when transitioning their products from Libor to alternative rates.
In October 2020, we launched loans using the Sterling Overnight Index Average (‘Sonia’) benchmark administered by the Bank of England, which means that customers wanting to borrow on sterling Libor now have the option to borrow against Sonia instead. We began offering Secured Overnight Financing Rate (‘SOFR’) loans as an alternative to US dollar Libor in the US, Hong Kong and the UK in 2020. Further products, notably derivatives, and country roll-outs are scheduled in 2021. For further details on the transition from Ibors, see ‘Ibor transition’ in the Risk section on page 142.
Ensuring sales quality In our WPB business, to help ensure the quality of our sales process and our colleagues’ behaviour in each of our markets, we conduct a mystery shopping programme and/or a sales quality programme. Issues identified are treated seriously. We will take action to help achieve a fair outcome for our customers. Where concerns are found, we will contact the customer to apologise, explain and remediate. Depending on the severity of the issue, the relevant employee will be given enhanced training to improve their behaviour and they may become ineligible for an incentive reward competitivelypayment. Where a case of misconduct occurs, disciplinary action may be taken, which can lead to dismissal. In CMB, for our smaller business clients, we operate sales outcomes testing in 12 markets to ensure we correctly explain important product features, pricing, risks and benefits. In 2020, we identified 65 issues related to documentation, sales process and pricing, as well as some wrong customer outcomes. We ensured appropriate customer remediation took place along with the achievementnecessary internal action to resolve the situation. We plan to expand sales outcome testing to a further six sites in 2021.
Meeting our customers’ needs We have robust oversight of long-term sustainable performance. Itthe sales process, which aims to attractmeet our customers’ needs effectively. This involves reviewing the ongoing suitability of the products and motivateservices we offer and monitoring sales quality as well as examining how we incentivise our colleagues (see box below). In our WPB business, we consider our customers’ financial needs and personal circumstances to assist us in offering suitable product recommendations. This is achieved through: •a globally consistent methodology to rate the very best people, regardlessriskiness of investment products, which is customised for local regulatory requirements; •a thorough customer risk profiling methodology to help assess customers’ financial objectives, attitude towards risk, financial ability to bear investment risk, and their knowledge and experience; •robust testing during the design and development of a product to help ensure there is a clearly identifiable need in the market; and •consistent standards to follow when we provide advice to our customers, while taking into account local regulations. We realise that some circumstances can put customers in a vulnerable position, so we are training our colleagues to recognise and treat these individuals fairly. Given the varying levels of customer sophistication and associated exposure to vulnerability in our CMB business, in 2020 we developed a globally consistent approach to ensure we can more effectively identify and support customers who are deemed potentially vulnerable, with a particular focus on sole traders and small and medium-sized enterprises.
Lessons learned from the FX DPA In 2018, we entered into a three-year deferred prosecution agreement with the US Department of Justice arising from its investigation into HSBC’s historical foreign exchange activities (‘FX DPA’). Since then, we have significantly raised our standards of conduct and strengthened our controls. We have introduced systems and enhanced procedures to monitor how we execute client transactions, carried out extensive conduct-focused training and built a conduct-led culture. As a result, the FX DPA has now expired, although the process to formally dismiss the underlying criminal charges will continue for several months. Our corresponding 2017 Consent Order with the US Federal Reserve Board remains in force and going forward we seek to continue to implement further reforms and we aim to ensure that they are effective and sustainable in the long term.
Managing front-line employees and their incentives In our WPB business, we provide training to our employees through our Product Management Academy, with more than 2,000 of our colleagues completing over 5,200 courses since 2017, including on customer insight, customer-focused design, communications, product development and governance. We also use a discretionary approach to incentivising our front-line colleagues instead of a straight formula linked to sales. This global improvement has resulted in a more balanced performance assessment for our people. We have since reviewed the incentives approach during 2020 to establish opportunities to be even more customer-centric, have greater focus on employee development and simplify the framework. We have also strengthened our approach to third-party sales agents that distribute our products, such as insurance, to ensure that our principles on balanced reward are in place. While there is still more to do, this change is designed to improve oversight and alignment with third-party sales agents.
Employees We are opening up a world of opportunity for our colleagues by building an inclusive organisation that prioritises well-being, invests in learning and careers and prepares our colleagues for the future of work.
At a glance Our culture Our organisation has been shaped by the many cultures, communities and continents we serve, with over 226,000 full-time equivalent employees (‘FTEs’) in 64 countries with 168 nationalities. We were founded on the strength of different experience and we continue to value that difference. We strive to champion inclusivity to better reflect the worlds of our customers and communities. Our culture is underpinned by our values: we value difference; we succeed together; we take responsibility, and we get it done. For further details on region, age, ethnicity, tenure and employment type of our workforce, see the ESG Data Pack at www.hsbc.com/esg.
The future of work The Covid-19 outbreak taught us many roles can be undertaken effectively outside of our branches and offices, accelerating our focus on enabling greater flexibility in future working arrangements. Reskilling is also a key priority for us and we are investing in a programme to build future skills as we transform the structure of our business. •Read more on the future of work on page 63.
Inclusion While there have been many new challenges during the Covid-19 outbreak, we continued our emphasis on inclusion. We believe that diversity makes us stronger, and we are dedicated to building a diverse and connected workforce. We made good progress on gender diversity and increased our focus on ethnicity age, disabilityand supporting our Black colleagues. •Read more on inclusion on page 64.
Well-being We provided extra resources to help colleagues manage the mental and physical health challenges caused by the Covid-19 outbreak. We carried out two global well-being surveys of our colleagues in 2020, helping to shape our response and ensure we had the right assistance in place. •Read more on well-being on page 66.
Learning and skills development We have continued to find new ways to support colleagues’ learning and growth, transitioning to on-demand and digital platforms. We are also using video technologies to collaborate across boundaries more than ever before. •Read more on learning and skills development on page 67.
Listening to our colleagues We believe in the importance of listening to our colleagues and seeking innovative ways to encourage colleagues to speak up. We monitor how we perform on selected metrics and benchmark against our peers. •Read more on listening to our colleagues on page 68.
The future of work We expect the way our colleagues work to change as the workforce of the future meets new demands. Colleagues will be using new skills we have helped them to develop, and working more flexibly to support a better work-life balance. Adapting how we work The Covid-19 outbreak tested our colleagues in many ways and they adapted at pace in this fast-changing environment. In branches, we introduced social distancing measures, provided personal protective equipment, reduced operating hours and offered virtual appointments. For office workers, we made sure cybersecurity controls and software supported home working. In 2020, we delivered laptops, desktops or anyvirtual desktop infrastructure to over 78,000 colleagues and had at points up to 70% of our whole workforce working from home at the same time. For some of our colleagues, we changed their roles, asking them to undertake activities that were outside of their normal activities (see box). We took an early decision not to furlough colleagues in the UK or apply for government support packages for our employees throughout 2020. Our businesses are thinking about how we adapt to the future of work. As our offices reopen we expect to see a much greater degree of hybrid working, recognising that some roles and groups, such as regulated roles and new graduates, will need to spend more time in the office than others. We expect a change in the way we use our office space, recognising the work-life balance and environmental benefits of hybrid working arrangements. The Covid-19 outbreak also impacted turnover, with 2020 recording the lowest voluntary turnover in the last 10 years at 8%, down three percentage points on 2019. The rates gradually declined month on month from April as the pandemic became more of a global challenge. Historically, voluntary turnover has on average been closer to 11%, and has remained largely flat at this rate over recent years. Building the skills of the future We have developed a flagship Future Skills programme to prepare our colleagues for the changing skills required in the future workplace. We want our employees to take greater ownership of their development and invest time in learning new skills. We are creating an innovative internal talent marketplace through new technology that helps improve career development by matching the skills and aspirations of our colleagues with business needs and opportunities. Managing change Our three-year transformation programme, launched in February 2020, is accelerating the delivery of our strategy by creating a simpler, more customer-centric and future-focused bank. We work hard to ensure our colleagues understand the reasons for change and how they might be affected. We communicate through our managers, supported by our transformation programme website, which explains our plans and rationale in each of our global businesses and functions, and we are committed to engaging meaningfully with our employee representative bodies. We ask our businesses to apply global guidance when carrying out changes to how we work to ensure a fair and consistent experience for our colleagues. We also provide mental health support guidance to managers to ensure they are mindful of the psychological impact of change for our colleagues and know how to access help. During the height of the Covid-19 outbreak, we paused the vast majority of redundancy activity. We redeploy our colleagues impacted by change where possible. During 2020, we restricted external hiring and retained employees in preference to contractors so that internal talent came first wherever possible. We have made it easier for our colleagues affected by the transformation programme to find alternative roles with us by creating a dedicated platform on which their CVs are directly visible to internal recruiters. Of those whose roles became redundant in 2020, 14% were able to find new positions within HSBC. We provide skills development, career transition support and education for all our colleagues, including those who leave as a result of the transformation programme. We will aim to continue to retain and reskill our colleagues as much as possible over the next two years of the programme but where we cannot we provide severance payments in many locations that exceed statutory minimum levels.
Adapting to a changing environment Many of our colleagues have needed to adapt to the challenges brought about by the Covid-19 outbreak, and in some cases took on new responsibilities. In the UK, we asked colleagues to volunteer to undertake activities that were outside of their normal roles to meet the changing needs of our customers. This helped to keep many of our colleagues working during these extraordinary times. When we reduced branch opening times, over 1,000 UK branch staff worked in other factor unrelatedbusiness areas supporting activities such as processing Bounce Back loans to businesses, helping customers access loan repayment holidays and supporting with card disputes.
70% Workforce working from home at the same time during the Covid-19 outbreak.
8% Voluntary employee turnover. (2019: 11%)
Inclusion Our customers, suppliers and communities span many cultures and continents. We believe this diversity makes us stronger, and we are dedicated to building a diverse and connected workforce where everyone feels a sense of belonging. Women in senior leadership In 2018, we committed to reach 30% women in senior leadership roles by 2020, which are classified as 0 to 3 in our global career band structure. We achieved 30.3%. Appointments of external female candidates into senior leadership reduced from 33.0% in 2019 to 31.6% in 2020. We will continue efforts to build more gender-balanced leadership teams and have set ourselves a target to achieve 35% women in senior leadership roles by 2025. To diversify the talent pipeline, every member of our Group Executive Committee, as well as many members of their management teams, actively sponsor colleagues from under-represented groups, including women. We paid specific attention to how we select and promote candidates for roles and how colleagues can readily access opportunities. In 2020, we expanded the Accelerating into Leadership programme to all businesses and functions. The programme provides group coaching, networking and development for high-performing women at manager level, which are those at level 4 in our global career band structure. Our Accelerating Female Leaders programme, which focuses on developing high-performing women at level 3 in the global career band structure, was attended by four times as many women in 2020 than in the previous year. Focus on UK gender and ethnicity pay gaps In 2020, our median aggregate UK-wide gender pay gap, including all reported HSBC entities, was 48%, and our median bonus gap was 57.9%. Our overall UK gender pay gap is driven by the shape of our UK workforce. There are more men than women in senior and high-paid roles, and more women than men in junior roles, many of which are part-time. For the first time we also published our UK ethnicity pay gap. Our median aggregate UK-wide ethnicity pay gap across all reported HSBC entities was -5.6%. Our median bonus gap was 0.8%. However, the pay gaps differ depending on the underlying ethnic minority group. The businesses and roles which employees from different ethnic groups work in impact the gaps, with relatively lower representation of ethnic minority employees in senior, higher paid roles. While 79% of our UK employees have declared their ethnicity, fewer senior, higher paid employees have done so to date and were therefore not included in our ethnicity pay gap analysis. We intend to publish ethnicity representation and pay gap data annually to help ensure we continue making progress and help us identify further areas for action. We review our pay practices regularly and also work with independent third parties to review equal pay. The most recent exercise was undertaken in 2020. If pay differences are identified that are not due to objective, tangible reasons such as performance or skills and experience, we make adjustments. Our complete Gender and Ethnicity UK Pay Gap Report 2020, along with more information about our pay gaps and related actions, can be found at www.hsbc.com/who-we-are/our-people-and-communities/diversity-and-inclusion.
Percentage of our senior leadership who are women 30.3% (2019: 29.4%)
Gender balance
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.
Our approach to ethnicity and Black Lives Matter In May 2020, we launched a global ethnicity inclusion programme to help us respond to challenges that we identified through our data. This programme aims to improve the diversity of our workforce ethnicity profile across the organisation to reflect the customers and communities we serve. The tragic death of George Floyd in the US accelerated conversations around race and ethnicity across the Group. Listening to what our colleagues have told us in response to the Black Lives Matter movement has been so important in informing our actions. In July 2020, we also set out our race commitments to improve opportunities for Black and ethnic minority colleagues and boost the diversity of our senior leadership. As part of this, we set an aspirational target to at least double the number of Black employees in senior leadership roles from 0.7% at 31 December 2020 to 1.3% globally by 2025. To achieve our commitments, we are also strengthening our recruitment processes, partnering with specialist search firms, and enhancing talent development opportunities. In October 2020, we also published country-specific ethnicity data and action plans in the UK and US.
Delivering more inclusive outcomes for all Our diversity and inclusion strategy is designed to deliver more inclusive outcomes for our colleagues, customers and suppliers. Globally we have driven improvements in representation and sentiment across multiple diversity strands, grown our commercial focus, strengthened our employee networks, and improved our diversity data. Here are some examples of our key achievements in 2020: Beyond gender Our global approach to diversity goes beyond gender to include ethnicity, disability and LGBT+ inclusion: •Ethnicity: In 2020, we launched our global ethnicity inclusion programme, which is sponsored by Group Chief Risk Officer Pam Kaur and aims to diversify our workforce ethnicity profile (see box on page 64). •Disability: We continue to develop our global approach to workplace adjustments to improve consistency for employees with disabilities, as part of our global disability confidence programme, sponsored by Group Chief Financial Officer Ewen Stevenson. We used our global footprint and connectivity to raise awareness about disability inclusion through our sponsorship of #PurpleLightUp. •LGBT+: Our work, particularly around leadership and engaging colleagues, has again been recognised by Stonewall, which named HSBC as one of only 17 Top Global Employers for LGBT+ inclusion.
Beyond employees Across our businesses, we are taking opportunities to be more inclusive of diverse customer groups. In our private bank, we want to improve how we serve and gain insights into our female clients, and we are partnering with external networks AllBright and WealthiHer to address ways to improve women’s wealth. Our Global Banking and Markets business has a team that incorporates a gender perspective into our mainstream products and business lines to generate business revenue from transactions that drive gender equality. Our insurance business HSBC Life uses a diversity and inclusion framework to ensure product development and engagement opportunities are designed to address needs across different customer groups.
Employee networks By appointing global executive sponsors from our Group People Committee as well as global co-chairs across our employee networks we are helping them to deliver consistent and impactful outcomes aligned to our strategy. In 2020, we appointed our first global executive sponsors for our Embrace (ethnicity) and Generations (age) networks, and our first global co-chairs for Embrace, Ability (disability) and Nurture (caregivers) networks. Global sponsors and co-chairs are identifying issues and opportunities across their groups in different markets, and are collaborating with key business areas and across networks to implement changes that will help improve representation and engagement with diverse groups of colleagues. Enhancing data Collecting better diversity data is imperative to measure the success of our diversity and inclusion strategy, and to inform our inclusion priorities going forward. It will help us to gain a more accurate picture of our workforce diversity, pinpoint inclusion hotspots and be more transparent about our progress. We have updated ethnicity categories in markets where we can currently collect that data to better reflect how colleagues self-identify. In many locations we have also delivered local campaigns to promote self-identification. In 2021, we are enabling more colleagues to share their ethnicity data with us where it is legally permissible and culturally acceptable to do so. We will run similar self-identification campaigns to improve declaration rates throughout the year.
Making progress and next steps There is a clear commitment to achieve change from across our leadership. This commitment is reinforced by enhanced recruitment processes, targets, partnerships with like-minded organisations, programmes to accelerate diverse leadership and ongoing dialogue with employees from under-represented groups to understand what we can do better. The next phase of our strategy will take a broader approach to inclusion across the organisation. We will expand our focus to recognise the impact of belonging to multiple under-represented groups – for example, the barriers that might be faced by a Black women with disability. We will continue to integrate inclusion principles into how we do business, and will use our employee networks to help us address barriers or opportunities together. Following colleague feedback, we will also seek to improve the HSBC experience for those with disability, using the Business Disability Forum’s Disability Standard – for which we achieved Silver in 2020 – as well as for our ethnic minority colleagues. We are realistic that some progress will take time, and we will keep seeking to understand different perspectives and experiences to grow, learn and improve. For further details on how our colleagues self-identify, see the ESG Data Pack at www.hsbc.com/esg.
Well-being We are deeply committed to supporting the well-being of our people. Given the immense strain caused by the Covid-19 outbreak, including the new realities of working from home, home schooling and lack of physical contact with family members, friends and colleagues – it has never been more important. Our well-being priorities, driven by feedback from surveys of our people, remain mental health, work-life balance and financial security. Helping our colleagues be healthy and happy is the right thing to do, but by doing so, we also enable them to better support our customers and communities, which has been hugely important this year. Adapting to the challenges In 2020, we provided extra resources to help colleagues manage the mental and physical health challenges caused by the Covid-19 outbreak. We launched a microsite to provide them with up-to-date information to support well-being, including guidance on how to work safely from home. We also made medical services available via video-conferencing to more than 50,000 colleagues. At the start of the outbreak, we undertook additional surveys and virtual focus groups, helping us shape our response to the Covid-19 outbreak and to ensure we had the right assistance in place. From this, 86% told us they were confident in the approach our leadership team was taking to managing the crisis. In December 2020, we ran our annual global well-being survey, where 92,000 colleagues took part, helping us evaluate progress since 2019 and to shape future plans. Mental health Our global well-being survey revealed 81% of colleagues rated their mental health as positive, a decrease of two points compared with 2019. Given the extraordinary challenges caused by the Covid-19 outbreak, we are not surprised to see that decrease. However, we are very encouraged to see that 70% of colleagues feel confident talking to their line manager about mental health, an increase of 12 points compared with 2019. Just over three-quarters (78%) of colleagues know how to get support at work about their mental health, an increase of 17 points compared with 2019, and 63% of colleagues feel able to take time off work when they experience a mental health concern, an increase of 17 points compared with 2019. In 2020, we provided specialist support to colleagues who were particularly affected by the Covid-19 outbreak, including a mental health seminar to colleagues in Wuhan, China. Human resources advisers and business continuity teams were given mental health resource packs. Our employee network group, Ability, offered weekly mental health calls to those in need.
We conducted an independent review of all our employee assistance programmes to see if they met best-practice standards, and to identify ways to improve our counselling services. We continued to promote our global mental health education programme that we launched in 2019, which has been completed by more than 22,000 colleagues. We also redesigned our mental health classroom course to be delivered virtually. Throughout 2020, we partnered with mental health groups, the City Mental Health Alliance and United for Global Mental Health, to share ideas with other organisations on ways to raise awareness and alleviate stigma surrounding mental health. Flexible working Our colleagues have had to adapt how they work due to the Covid-19 outbreak, with 80% needing to work from home at the height of the outbreak. Our global well-being survey revealed 74% of colleagues feel they have a positive work-life balance, an increase of two points compared with 2019. We are encouraged to see 76% of colleagues feel confident talking to their line manager about work-life balance and flexible working, an increase of 12 points compared with 2019, and 71% of colleagues know how to get support at work about work-life balance and flexible working, an increase of 14 points since 2019. In 2020, we promoted new resources, videos and education to help colleagues working remotely. Topics included stress management, coping with isolation, remote collaboration, workstation support, and balancing care-giving responsibilities. We are also thinking about how we will adapt when our offices reopen, recognising a greater need for hybrid working arrangements and the work-life benefits these bring. Financial security Our global well-being survey revealed 68% of colleagues rated their financial well-being as positive, an increase of 14 points compared with 2019. We are encouraged to see that 50% of colleagues feel confident talking to their line manager about their financial well-being, an increase of 14 points compared with 2019. The survey also showed that 56% of colleagues know how to seek support at work about their financial well-being, an increase of 16 points since 2019, and 42% of colleagues feel they could handle an unexpected expense without significant hardship, an increase of 10 points since 2019. While these results are positive, we know there is more we can do. Conscious that the pandemic may put financial pressures on some of our colleagues, we worked with experts from our Wealth and Personal Banking business to create a financial well-being education programme to help colleagues develop healthy financial habits. The programme was launched globally as part of our Future Skills Resilience curriculum. We will continue to expand this programme, with a follow-up module on the theme of building up savings, later in 2021.
World Mental Health Day To celebrate World Mental Health Day, we ran a global awareness campaign and created a film of colleagues sharing personal stories. Our human resources teams and employee network groups held virtual events in all locations across the whole month of October 2020. These events featured colleagues and external experts providing advice on a range of mental health-related topics including resilience, sleep and management of stress. Following this activity, we saw a 29% increase in colleagues accessing well-being resources compared with the previous month. We believe this campaign activity contributed to the significant increases in levels of awareness, confidence and de-stigmatisation of mental health, and why 75% of colleagues said they believe HSBC cares about their well-being in our global well-being survey. In 2021, we will continue to work with our charity partner, United for Global Mental Health, to create campaigns that raise awareness and alleviate stigma.
Learning and skills development A workforce capable of meeting the challenges of today and tomorrow requires significant support to develop the right skills. Whatever our colleagues’ career paths, we have a range of tools and resources to help them. A rapid shift to virtual learning The Covid-19 outbreak resulted in a halt to classroom training and rapid expansion in virtual learning. We prioritised the transition to remote working and helping colleagues manage their well-being. The shift from physical classroom training to shorter virtual equivalents and online resources resulted in a total of 5.2 million hours and 2.9 days per FTE training in 2020.
We converted or rebuilt technical, professional and personal classroom programmes to deliver online. New joiners to HSBC experienced an immersive virtual induction programme and virtual internships. Our global graduate induction programme moved entirely online with more than 100 leaders and graduate alumni welcoming approximately 650 graduates. Supporting self-development We have a range of tools and resources to help colleagues take ownership of their development and career. •HSBC University is our one-stop shop for learning delivered via an online portal, network of global training centres and third-party providers. •Our My HSBC Career portal offers career development resources and information on managing change and on giving back to the organisation and the communities in which we operate. Over 100,000 of our colleagues made use of it in 2020. •We launched a global mentoring system in 2020 to enable colleagues to match with a mentor or mentee. At 31 December 2020, we had in excess of 6,800 mentors and mentees in 58 countries and territories.
Developing core skills Our managers are the critical link in supporting our colleagues. In 2020, we redesigned our suite of training and resources for managers so they can focus on the most important skills including leading and supporting teams through change. Risk management remains central to development and is part of our mandatory training. Those at higher risk of exposure to financial wrongdoing experience more in-depth training on financial risks, such as money laundering, sanctions, bribery and corruption. Other programmes and resources address specific areas of risk, like management of third-party suppliers.
Our Cyber Hub brings together training, insights, events and campaigns on how to combat cyber-crime. We are also supporting those who develop models and senior leaders with training to help them understand and apply our Principles for the Ethical Use of Big Data and AI.
A learning and feedback culture We want our colleagues to be well prepared for changing workplace requirements and so have developed a flagship Future Skills programme to support them. We identified nine key behaviours we believe are necessary future skills for colleagues and built a curriculum of resources to support learners to develop these.
More than 1,000 colleagues now act as Future Skills Influencers, supporting their businesses and teams to invest in learning. In November 2020, we ran a week-long MySkills festival, which helped colleagues explore future skills through virtual events, interactive workshops and online resources. Demand to join sessions surpassed our expectations with more than 45,000 registrations for the events.
Senior succession planning Developing future leaders is critical to our long-term success. The Group while performingExecutive Committee dedicates time to articulate the current and future capabilities required to deliver the business strategy, and identify successors for our most critical roles. Successors undergo robust assessment and participate in executive development. Potential successors for senior roles also benefit from coaching and mentoring and are moved into roles that build their roleskills and capabilities.
Training at HSBC 5.2 million Training hours carried out by our colleagues in 2020. (2019: 6.5 million)
2.9 days Training days per FTE. (2019: 3.5 days)
Inspiring future coders We know supporting the next generation provides a sense of fulfilment to our colleagues. We support the Technovation Girls programme, which inspires girls globally to design and code applications that solve problems in their community. The long-term goals of the programme are to build the capacity of girls as technology innovators, thereby reducing the gender gap in science, technology, engineering and mathematics (‘STEM’) professions. Through our support, over 1,400 girls across the globe were able to participate in the long-term interestsprogramme in 2020. In August 2020, we supported the virtual Technovation World Summit that had nearly 2,000 participants. Winning teams were awarded cash prizes to spend on furthering their education in STEM subjects or turning their ideas into commercial projects.
Listening to our colleagues We run a Snapshot survey every six months and report insights to our Group Executive Committee and the Board. Results are shared across the Group to provide managers in each region with a better understanding to plan and make decisions. As our colleagues faced considerable challenges in 2020, Snapshot was a critical tool to ensure we were responding to our colleagues’ needs. Listening to employee sentiment In our 2020 Snapshot surveys, we had a record response rate of 62% in July and 56% in December, up from 52% and 50% respectively in the same periods of 2019. We undertook additional surveys and virtual focus groups, focusing on our colleagues’ well-being, the changes that the Covid-19 outbreak brought to their working lives and their views on returning to the workplace. More than 50% of our colleagues participated in our Covid-19 well-being survey, with 86% telling us they were confident in the approach our leadership team was taking to managing the crisis. Finding new ways to listen We used new and innovative ways to gather feedback and ideas from our colleagues in 2020. In June, we conducted virtual focus groups for the first time. Approximately 850 employees in four markets discussed what it was like to work during the Covid-19 outbreak and considered how work will evolve in the future. In October, we organised our first ‘employee jam’ – a live online chat between employees in 49 countries. This online conversation ran over 72 hours and captured more than 9,500 online posts on topics including the future of work and our values, which we have refreshed to remain relevant and reflective of our organisation. In February 2021, we introduced to our colleagues our revised purpose and values, which were co-created through an extensive listening, talking and reflecting exercise with tens of thousands of colleagues, customers and other stakeholders. Our new purpose is ‘Opening up a world of opportunity’. Our new values are ‘we value difference’; ‘we succeed together’; ‘we take responsibility’; and 'we get it done’. It was the largest employee engagement programme in HSBC’s history – helping to ensure our plans were an accurate reflection of everything our colleagues told us about what is best about HSBC, and everything we want to become. During the consultation on our values, 90% of colleagues said they were clear on HSBC’s new values and how they could be embedded into their day-to-day work.
Encouraging our colleagues to speak up We believe that change only happens when people speak up. If our colleagues have concerns, we want them to speak up to help us do what’s right. In 2020, acting on findings from the November 2019 Snapshot survey, we ran a programme to raise awareness of how to speak up and what happens when we do. Our efforts focused on improving the process, demystifying how we investigate concerns and improving transparency about what action we should take as a result. Following the 2020 ‘Speak Up’ campaign, our speak-up index, which is formed by surveying our colleagues’ comfort on speaking up, rose six points in December 2020, compared with November 2019. The index outperformed peers by 10 points. We were pleased to see an improvement in employee sentiment, with 78% of respondents saying they felt able to speak up when they saw behaviour they considered to be wrong. However, a smaller proportion (66%) said they were confident that if they speak up, appropriate action will be taken. We recognise there is more to do to give our colleagues confidence that their concerns will be fully addressed. In 2021, we aim to continue the speak-up programme and will monitor sentiment through our Snapshot survey. Our whistleblowing channels At times individuals may not feel comfortable speaking up through the usual channels. Our global whistleblowing channel, HSBC Confidential, allows our colleagues and other stakeholders to raise concerns confidentially, and if preferred, anonymously (subject to local laws). Enhancements to the channel in December 2020 mean the majority of concerns are now raised through an independent third party offering 24/7 hotlines and a web portal in multiple languages. We also provide and monitor an external email address for concerns about accounting, internal financial controls or auditing matters (accountingdisclosures@hsbc.com). In 2020, while we continued to actively promote the channel, the volume of whistleblowing concerns fell by 11%, driven in part by the change in working environment during the Covid-19 outbreak. Of the whistleblowing cases closed in 2020, 81% related to behaviour and conduct, 15% to security and fraud risks, 4% to compliance risks and less than 1% to other categories. The key principles that underpinGroup Audit Committee has overall oversight of the Group’s whistleblowing arrangements. Concerns are investigated proportionately and independently, with action taken where appropriate. This can include disciplinary action, dismissal, and adjustments to variable 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.
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. |
Variable payratings.
Our variable pay pool was $3,341m, a decrease2020 Snapshot survey showed increasing confidence among our colleagues in raising whistleblowing concerns without fear of 3.8% compared with 2018.
reprisal, reflecting our policy of zero tolerance for acts of retaliation. This continues to be an area of focus.
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 223 of the Directors’ remuneration report.
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.
Executive Directors’ annual incentive
(% of maximum awarded)
| | | | Group Chief Executive | 66.4 | % | Group Chief Financial Officer | 77.5 | % | Group Chief Risk Officer | 66.3 | %Employee conduct and harassment We rely on our people to deliver fair outcomes for our customers and to make sure we act with integrity in financial markets. We foster a healthy working environment and expect our people to treat each other with dignity and respect, and take action where we find behaviour that falls short of our expectations. The types of cases, thematic links between them, and changes in volumes are reported on a regular basis to management committees. Where we see themes or adverse trends we take action, including training, communications and policy changes. In 2020, to ensure clarity over the standards of behaviour expected, we delivered mandatory training on bullying and workplace harassment. The training emphasised our commitment to creating an environment where our people feel comfortable to speak up and step in where they witness poor behaviour. We also took disciplinary action against 2% of our employees for poor conduct, examples of which include avoiding customer calls and not treating colleagues respectfully. Over 800 colleagues were dismissed for poor behaviour, including 41 for workplace harassment. We believe in transparency on these matters, and also know that we have room to improve. In 2021, we will enhance our conduct policies and procedures so that they remain current, clear and effective.
|
Measuring our progress against peers In 2020, we introduced six new Snapshot indices to measure key areas of focus and to enable comparison against a peer group of global financial institutions. The table sets out how we performed. | | | | | | | | | | | | | | | | Index | Score1 | vs 2019 | HSBC vs benchmark2 | Questions that make up the index | | Employee engagement | 72 | +5 | +2 | I am proud to say I work for this company.
I feel valued at this company.
I would recommend this company as a great place to work. | | Employee focus | 72 | New | +4 | I generally look forward to going to work.
My work gives me a feeling of personal accomplishment.
My work is challenging and interesting. | | Strategy | 68 | New | -1 | I have a clear understanding of this company's strategic objectives.
I am seeing the positive impact of our strategy.
I feel confident about this company's future. | | Change leadership | 74 | New | 0 | Leaders in my area set a positive example.
My line manager does a good job of communicating reasons behind important changes that are made.
Senior leaders in my area communicate openly and honestly about changes to the business. | | Speak-up | 75 | +6 | +10 | My company is genuine in its commitment to encourage colleagues to speak up.
I feel able to speak up when I see behaviour which I consider to be wrong.
Where I work, people can state their opinion without the fear of negative consequences. | | Trust | 75 | +6 | +5 | I trust my direct manager.
I trust senior leadership in my area.
Where I work, people are treated fairly. |
1 Each index comprises three constituent questions, with the average of these questions forming the index score. 2 We benchmark Snapshot results against a peer group of global financial services institutions, provided by our research partner, Karian and Box. Scores for each question are calculated as the percentage of employees who agree to each statement. For further details on the constituent questions and past results, see the ESG Data Pack at www.hsbc.com/esg.
Measuring employee engagement To understand how our colleagues perceive the organisation, we ask if they feel proud, valued and willing to recommend HSBC as a great place to work. These questions form our employee engagement index. Engagement rose significantly in 2020 and was two points above our peers. More colleagues said they ‘feel valued by HSBC’ compared with November 2019. Employee advocacy, which is defined as those who would recommend HSBC, improved five points in 2020 to 71%. We aim to continue improving our understanding and address why 20% of our colleagues report neutral levels of advocacy. Our research showed that key drivers of engagement are career opportunities, trust in leadership and our commitment to encourage speaking up. We expect our flagship programme to help build future skills and that this will in turn drive further improvements in engagement levels. Measuring employee focus Our employee focus index tells us about our colleagues’ perception of their work. The 2020 results were four points above our peers. This will be a key measure of progress for our transformation and our programme to build future skills. Measuring strategy and change leadership Our strategy index, which measures how employees feel about HSBC’s direction, was just below showsits benchmark. However, the amountindex included an improvement in scores for questions on whether colleagues see a positive impact of our executive Directors earnedstrategy and if they have confidence in 2019. the future. Our efforts to reshape the business and the uncertain business environment are affecting these results, and we recognise the challenge this creates for colleagues. Despite these challenges, our change leadership index, which measures how employees feel about change communication and leadership setting a positive example, performed in line with the benchmark. This will continue to be vital during our ongoing transformation. Measuring speak-up and trust Our speak-up index rose six points from November 2019, representing the biggest improvement in the indices we measure. Similarly, trust, particularly in senior leadership, improved significantly. These results are encouraging but need to be viewed in the context of the Covid-19 outbreak where research showed our colleagues were positive about HSBC’s handling of the crisis. Maintaining these gains through a period of ongoing change and uncertainty will require sustained effort.
Whistleblowing concerns raised (subject to investigation) in 2020 2,510 (2019: 2,808)
Substantiated and partially substantiated whistleblowing cases in 20201 42% (2019: 33%)
1 The 2020 substantiation rate excludes concerns redirected to other escalation routes.
Employee advocacy 71% Would recommend HSBC as a great place to work. (2019: 66%)
Governance We remain committed to high standards of governance. We work alongside our regulators and recognise our contribution to building healthy and sustainable societies.
At a glance Our relationship 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 being transparent in our approach to paying taxes. 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 of our corporate governance, see our corporate governance report on page 237.
Respecting human rights We respect human rights and have signed, or expressed support for, a number of international codes, as set out in our Statement on Human Rights. •Read more on respecting human rights on page 71. Supporting financial inclusion We aim to deliver products and services that address financial barriers. We invest in financial education to help customers, colleagues and people in our communities be confident users of financial services. •Read more on supporting financial inclusion on page 71. Protecting data We are committed to protecting the information we hold and process in accordance with local laws and regulations. We continue to strengthen our controls to prevent, detect and react to cyber threats. •Read more on protecting data on page 72. Safeguarding the financial system We remain committed in our efforts to combat financial crime by continuing to invest in new technology to protect our customers and organisation, while supporting key industry initiatives. •Read more on safeguarding the financial system on page 73. Our approach with our suppliers Our ethical code of conduct for suppliers of goods and services, which must be complied with by all suppliers, sets out minimum standards for economic, environmental and social impacts. •Read more on our approach with our suppliers on page 73. A responsible approach to tax We seek to pay our fair share of tax in the jurisdictions in which we operate and to minimise the likelihood of customers using our products to inappropriately avoid tax. •Read more on a responsible approach to tax on page 74. Restoring trust We have sought to learn from past mistakes and we are seeking to develop and implement specific measures designed to prevent recurrence of similar events in the future. •Read more on restoring trust on page 75.
Respecting human rights We recognise the duty of states to protect human rights and the role played by business in respecting them, in line with the UN Guiding Principles’ Protect, Respect and Remedy framework. We have signed, or expressed support for, a number of international codes as set out in our Statement on Human Rights. Our Human Rights Steering Committee, which was set up in 2018, continues to develop our approach to human rights. Our Statement on Human Rights is available at www.hsbc.com/our-approach/esg-information. Pioneering scheme Our pioneering scheme to help survivors of human trafficking is now used as a model for making financial services more accessible to vulnerable communities through the UN’s Finance Against Slavery and Trafficking (‘FAST’) Survivor Inclusion Initiative. Building on the success of our Survivor Bank programme in the UK, for which we received a Stop Slavery Award from the Thomson Reuters Foundation, we became the first bank in Hong Kong to offer a Hong Kong Dollar Statement Savings account for residents who do not have a fixed abode, or who are living in subdivided flats without access to postal services. Having a bank account can improve financial security for members of disadvantaged communities – including those under potential risk of forced labour or debt bondage – and potentially enable them to receive welfare allowances or find employment. Spotting the signs of human trafficking In many cases, transactions related to modern slavery and human trafficking will not be identified by automated systems alone. As a result, our analysts also use a range of secondary indicators that may not signify suspicious activity on their own, but which can be assessed as part of a case review. Examples where such transactions have successfully been identified and escalated are then shared internally, as case studies for others to learn from. For details of Directors’ payour approach to modern slavery, see: www.hsbc.com/our-approach/risk-and-responsibility/modern-slavery-act.
Identifying suspicious activity When two large cash deposits were made to the same account on two consecutive days, it raised suspicion with one of our analysts. Further investigation identified a number of cautionary flags for potential illegal activity, including the apparent findings that 17 people – all of whom banked with HSBC – lived in the same property. The case was escalated to an investigations team, who filed a suspicious activity report with the UK regulator. We also proceeded to close the account. With these actions, we not only disrupted the individual, but also alerted the authorities to take the case forward through appropriate law enforcement channels.
Supporting financial inclusion We believe that financial services, when accessible and performancefair, can reduce inequality and help more people access opportunities. Access to products and services We aim to deliver products and services that address the barriers people can face in accessing financial services. In 2020, we continued to offer innovative product offerings. In the UK, we are educating people about banking services and reducing barriers for those who do not have a fixed address as well as for survivors of human trafficking. We also introduced new products, such as banking services for refugees in Hong Kong, allowing individuals to have a safe, affordable way to receive support from overseas family, friends or local non-governmental organisations. We embedded diversity and inclusion standards into our new product approval framework for retail banking, wealth, insurance and digital products, such as in India, where we added a transgender option to the customer application and underwriting criteria for health insurance. Access to financial education We invest in financial education to help customers, colleagues and people in our communities be confident users of financial services. In 2020, we provided more of our own financial education content, such as articles and features on our digital channels. We had over 1.7 million unique visitors to our digital content in 2020, making progress towards our 2019 seegoal of reaching four million unique visitors by the Directors’ remuneration reportend of 2022. We also support charity programmes that deliver financial education. In 2020, HSBC UK partnered with Young Money, a UK-based charity focused on page 228.children’s financial education, to introduce Money Heroes, an innovative education programme that brings together teachers and parents or carers to develop a child’s financial capability from ages three to 11. Combining learning with real life activities, Money Heroes aims to reach one million children over three years, supporting the most vulnerable communities.
| | | | | | | | | | | | | | | | | | Single figure of remuneration | | | Noel Quinn1 | John Flint2 | Ewen Stevenson | Marc Moses3 | | (£000) | 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 | 2018 |
| | Base salary | 503 | — |
| 730 | 1,028 | 719 | — |
| 719 | 700 | | Fixed pay allowance | 695 | — |
| 1,005 | 1,459 | 950 | — |
| 950 | 950 | | Cash in lieu of pension | 50 | — |
| 134 | 308 | 107 | — |
| 107 | 210 | Taxable benefits4 | 41 | — |
| 91 | 40 | 16 | — |
| 40 | 13 | Non-taxable benefits4 | 23 | — |
| 31 | 28 | 28 | — |
| 33 | 38 | | Total fixed | 1,312 | — |
| 1,991 | 2,863 | 1,820 | — |
| 1,849 | 1,911 | Annual incentive5 | 665 | — |
| 891 | 1,665 | 1,082 | — |
| 926 | 1,324 | AML DPA award6 | — |
| — |
| — |
| — |
| — |
| — |
| 0 | 695 | LTI7 | — |
| — |
| — |
| — |
| — |
| — |
| 1,709 | — |
| Replacement award8 | — |
| — |
| — |
| — |
| 1,974 | — |
| 0 | — |
| Notional returns9 | — |
| — |
| 40 | 54 | — |
| — |
| 17 | 33 | | Total variable | 665 | — |
| 931 | 1,719 | 3,056 | — |
| 2,652 | 2,052 | | Total fixed and variable | 1,977 | — |
| 2,922 | 4,582 | 4,876 | — |
| 4,501 | 3,963 |
1 Noel Quinn succeeded John FlintCybersecurity
The threat of cyber-attacks remains a concern for our organisation, as interim Group Chief Executiveit does across the entire financial sector. Failure to protect our operations from internet crime or cyber-attacks may result in financial loss, disruption for customers or a loss of data. This could undermine our reputation and ability to attract and retain customers. 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 have strengthened our controls to reduce the likelihood and impact of advanced malware, data leakage, infiltration of payment systems and denial of service attacks. In 2020, we continued to strengthen our cyber defences to enhance our cybersecurity capabilities, including: Cloud security; identity and access management; metrics and data analytics; and third-party security reviews. These defences are grounded in mature controls that mitigate the current cyber-attacks and build upon a proactive data analytical approach to identify and mitigate future advanced targeted threats. In addition, an important part of our defence strategy is ensuring our people remain aware of cybersecurity issues and know how to report incidents. We continue to run regular cyber awareness campaigns and have dedicated training programmes in place. We operate a three lines of defence model, aligned to the operational risk management framework, to ensure robust oversight and challenge of our cybersecurity capabilities and priorities. In the first line of defence, we have risk owners within global businesses and functions who are accountable for identifying, owning and managing the cyber risk. They work with effectcontrol owners to help ensure controls are in place to mitigate issues, prevent risk events from 5 August 2019occurring and resolve them if they do. These controls are executed in line with policies produced by the information security risk teams, the second line of defence, which provide independent review and challenge. They are overseen by the third line of defence, which is the Global Internal Audit function. We regularly report and review cyber risk and control effectiveness at relevant governance forums and the remuneration includedBoard to ensure appropriate oversight. We also report across the global businesses, functions and regions to help ensure appropriate visibility and governance of risks and mitigating controls.
Cybersecurity Awareness Month Our cybersecurity teams endeavour to educate, support and equip every colleague with the tools to prevent, mitigate and report cyber incidents, and keep our organisation and customers’ data safe. Throughout October 2020, the cybersecurity team hosted a number of virtual awareness events for all colleagues as part of a dedicated annual Cybersecurity Awareness Month. The global and local events were hosted by our executive leaders, with the support of a number of internal subject matter experts and external guest speakers. The Cybersecurity Awareness Month established a new level of awareness, participation, and commitment to cybersecurity inside the Group.
Data privacy We are committed to protecting and respecting the data we hold and process, in accordance with the laws and regulations of the geographies in which we operate. Our approach rests on having the right talent, technology, systems, controls policies, and processes to help ensure appropriate management of privacy risk. Our Group-wide privacy policy and principles provide a consistent global approach to managing data privacy risk, and must be applied by all of our global businesses and global functions. We conduct regular training sessions on data privacy and security issues throughout the year, including global mandatory training for all our colleagues, along with additional training sessions, where required, to keep abreast of new developments in this space. We provide transparency to our customers and stakeholders on how we collect, use and manage their personal data, and their associated rights. Where relevant, we work closely with third parties to help ensure adequate protections are provided, in line with our data privacy policy and as required under data privacy law. We offer a broad range of channels in the single figure table abovemarkets we operate, through which customers and stakeholders can raise any concerns regarding the privacy of their data. We have established dedicated privacy teams reporting to the highest level of management on data privacy risks and issues, and overseeing our global data privacy programmes. We report data privacy regularly at multiple governance forums, including at Board level, to help ensure there is appropriate challenge and visibility among senior executives. In addition, we have established data privacy governance structures and continue to embed accountability across all businesses. We are committed to implementing industry practices for data security and our privacy teams work closely to drive the necessary design, implementation and monitoring of privacy solutions, including conducting regular reviews and data privacy risk assessments. We implemented procedures that articulate clearly the action to be taken when dealing with a data privacy breach. These include notifying regulators, customers or other data subjects, as required under applicable privacy laws and regulations, in respectthe event of services provided as an executive Director.a reportable incident occurring. 2 John Flint stepped down as an executive Director
Data Privacy Day In January 2020, we hosted a global data privacy event for all our colleagues to mark International Data Privacy Day. The event highlighted the importance of taking accountability for data privacy across the organisation and the continuing need to provide simple and clearer mechanisms for our customers to have more control and choice in managing their data. We invited internal and external speakers, including the UK’s former Deputy Information Commissioner, our Group Data Protection Officer and Group Chief ExecutiveData Officer, as well as representatives from the technology industry. The event was broadcast across 62 countries.
Safeguarding the financial system We have continued our efforts to combat financial crime risks and reduce their impact on 5 August 2019. His remunerationour organisation and the wider world. These financial crime risks include money laundering, terrorist and proliferation financing, tax evasion, bribery and corruption, sanctions and fraud. As part of this work, we have made progress on several key initiatives, enabling us to manage and mitigate these risks more effectively, and further our pioneering work in financial crime risk management across the financial services industry. Financial crime risk management We have embedded a strong financial crime risk management framework across all global businesses and all countries and territories in which we operate. For further details on our financial crime risk management framework, see page 229. We continue to invest in new technology to enable us to make an impact in the fight against financial crime. Our global social network analytics platform, which we launched in 2018 as an investigative tool, now helps us detect high-risk activity across our trade finance business. Using a contextual monitoring approach, we are able to improve the accuracy and efficiency of our operations, removing delays in approving genuine customer transactions while focusing attention on behaviour of concern. Building on this approach, we have made progress in applying machine learning techniques to improve the accuracy and timeliness of our financial crime detection capabilities. Working with industry leaders, we have sought to share what we have learned, contributing to the development of best practice in this emerging field, in line with our Principles for 2019the Ethical Use of Big Data and AI. We are confident our adoption of these new technologies will continue to enhance our ability to respond quickly to suspicious activity and be more granular in our risk assessments, helping to protect our customers and the integrity of the financial system.
The scale of our work Each month, we screen over 708 million transactions across 275 million accounts for signs of money laundering and financial crime. In addition, we screen approximately 114 million customer records and 45 million transactions monthly for sanctions exposures. During 2020, we filed almost 50,000 suspicious activity reports to law enforcement and regulatory authorities where we identified potential financial crime.
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 comply with our supplier ethical code of conduct. We consider on time payment to be of paramount importance, and our commitment to paying our suppliers is in line with all local requirements, including the Prompt Payment Code in the UK. Supplier ethical code of conduct We have an ethical 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. The ethical code of conduct, which we require suppliers to adopt, sets out minimum standards for economic, environmental and social impacts and outlines the requirement for a governance and management structure to help ensure compliance. Our supplier management conduct principles 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 and in line with our values. Our supplier management principles and our ethical code of conduct are available at: www.hsbc.com/our-approach/risk-and-responsibility/working-with-suppliers.
A responsible approach to tax We seek to pay our fair share of tax in the jurisdictions in which we operate and to minimise the likelihood of customers using our products and services to evade or inappropriately avoid tax. Our approach to tax and governance processes is designed to achieve these goals. Through adoption of the Group’s risk management framework, controls are in place that are designed to ensure that inappropriately tax-motivated transactions or products are not adopted by the Group and that any tax planning used must be supported by genuine commercial activity. HSBC has no appetite for using aggressive tax structures. Significant investment has been made to strengthen our risk processes and train staff to identify instances of potential tax evasion and we continue to enhance these processes. With respect to our own taxes, we are guided by the following principles: •We are committed to applying both the letter and spirit of the law in all jurisdictions in which we operate. This includes adherence to a variety of measures arising from the OECD Base Erosion and Profit Shifting initiative. •We seek to have open and transparent relationships with all tax authorities. As with any group of our size and complexity, a number of areas of differing interpretation or disputes with tax authorities exist at any point in time. We work with the local tax authorities to try to agree and resolve these in a timely manner. •We have applied the OECD/G20 Inclusive Framework Pillar 2 guidance to identify those jurisdictions in which we operate that have nil or low tax rates (12.5% or below). We have identified seven such jurisdictions in which we had active subsidiaries during 20201. We continually monitor the number of subsidiaries within the Group as part of the Group’s ongoing entity rationalisation programme. We intend to continue this process, with the aim of ensuring that the HSBC entities remaining in such jurisdictions are regulated entities essential for conducting business. With respect to our customers’ taxes, we are guided by the following principles: •We have made considerable investment implementing processes designed to enable us to support external tax transparency initiatives and reduce the risk of banking services being used to facilitate customer tax evasion. These initiatives include the US Foreign Account Tax Compliance Act, the OECD Standard for Automatic Exchange of Financial Account Information (the ‘Common Reporting Standard’), and the UK legislation on the corporate criminal offence of failing to prevent the facilitation of tax evasion. •We have processes in place to help ensure that inappropriately tax-motivated products and services are not provided as an executive Director. Detailsto our customers. For further details of John Flint's departure termsour approach to financial crime and action we have taken, see page 73.
Our tax contributions The effective tax rate for the year was 30.5%. Further details are provided on page 234. 344. 3 Marc Moses stepped down as an executive Director and Group Chief Risk OfficerAs highlighted below, in addition to paying $8.1bn of our own tax liabilities during 2020, we collected taxes of $9.5bn on 31 December 2019. Detailsbehalf of Marc Moses' departure terms are provided on page 234.
4 Taxable benefits includegovernments around 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%world. A more detailed geographical breakdown of the annual incentive award for John Flint and Marc Moses will be deferredtaxes paid in awards linked2020 is provided in the ESG Data Pack. The tax we paid during 2020 was higher than in 2019 due to HSBC's shares and will vestdifferences in five equal instalments between the third and seventh anniversarytiming of payments, particularly in Hong Kong.
1The Bahamas, Bermuda, 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 2018Cayman Islands, Guernsey, Ireland, Jersey 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.British Virgin Islands.
| | | | | | 7$3,873m
Tax on profits
2019: $1,988m | 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.
$386m
Withholding taxes
2019: $282m | $1,121m
Employer taxes
2019: $1,041m | $1,011m
Bank levy
2019: $889m | $1,389m
Irrecoverable VAT
2019: $1,164m | $278m
Other duties and levies
2019: $227m |
8 As set out
| | | | | | $3,022m
Europe
2019: $3,077m | $3,911m
Asia-Pacific
2019: $1,487m | $299m
Middle East and North Africa
2019: $313m | $382m
North America
2019: $314m | $444m
Latin America
2019: $400m | |
| | | | | | $3,462m
Europe
2019: $3,636m | $3,595m
Asia-Pacific
2019: $3,288m | $90m
Middle East and North Africa
2019: $127m | $1,089m
North America
2019: $876m | $1,302m
Latin America
2019: $1,379m | |
Restoring trust
Restoration of trust in our industry remains a significant challenge as past misdeeds continue to remain in the 2018 Directors' remuneration report,spotlight. But it is a challenge we must meet successfully. We owe this not just to our customers and to society at large, but to our employees to ensure they can rightly be proud of the organisation where they work. We aim to act with courageous integrity in 2019 Ewen Stevenson was granted replacement awardsall we do. This guiding principle means having the courage to replace unvested awards, which were forfeited as a resultmake decisions based on doing the right thing for customers and never compromising our ethical standards. The chart below sets out fines and penalties arising out of him joining HSBC. The awards, in general, match the performance, vestingmajor investigations involving criminal, regulatory, competition or other law enforcement authorities, and retention periods attachedcosts relating to the awards forfeited,PPI remediation. We have sought to learn from these past mistakes and will be subjectare seeking to any performance adjustments that would otherwise have been applied. The values includeddevelop and implement specific measures designed to prevent recurrence of similar events in the table relatefuture. Further information regarding the measures that we have taken to Ewen Stevenson's 2015prevent the recurrence of some of these matters can be found at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-and-policies.
Major criminal and 2016 LTI awards granted byregulatory fines and penalties and PPI remediation1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pre- | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | | AML-related investigations | | | | | | | | 1,921 | | | | | | | | | | Global Private Banking tax-related investigations | | | | | | | | | | 13 | 43 | 13 | 360 | | 521 | | | | RMBS-related investigations | | | | | | | | | | | | | | 765 | | | | Libor/Euribor | | | | | | | | | | | | 36 | | | | 2 | | FX-related investigations | | | | | | | | | | 618 | | 6 | 175 | 102 | | | | PPI | | | | | | | 333 | 870 | 1,138 | 700 | 553 | 448 | 502 | 741 | 750 | | 572 | |
Key nDuration of conduct period n$m Fines/penalties/other costs
1 This chart only includes fines and penalties arising out of major investigations involving criminal, regulatory, competition or other law enforcement authorities,
and costs relating to PPI remediation. 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 inchart reflects 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.a fine, penalty or remediation cost was paid, which may
be different from when a loss or provision was recognised under IFRSs. Settlements or other costs arising out of private litigation or arbitration proceedings
are not included.
Financial review
4777 Financial summary
6899 Global businesses and geographical regions
85119 Reconciliation of alternative performance measures
121 Other information 95 Risk
188 Capital
SupportingWorld’s first corporate bonds to tackle plastic waste
Our green expertise and global connectivity helped Henkel, a leading consumer goods and industrial company, to issue the transitionfirst ever corporate bonds aimed at tackling plastic waste. The firm behind well-known brands and products such as Persil detergent, Schwarzkopf shampoo and Loctite adhesives will use the equivalent of $100m raised for projects and expenditures related to its activities to foster a low-carboncircular economy, which include the development of reusable and recyclable packaging. We acted as a mandatedwere sole green structuring adviser and sole lead arrangermanager on the five-year fixed-rate bonds, which were issued 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.
two tranches. The bonds generated interest from international investors from Japanese insurers to German banks.
| | | | | | | Financial summary | | Page | Use of non-GAAP financialalternative performance measures | | Changes from 1 January 2019
2020 | | | Critical accounting estimates and judgements | | | Consolidated income statement | | | Income statement commentary | | | Consolidated balance sheet | | Average balance sheet | | Average balance sheet and net interest income | | Analysis of changes in net interest income and net interest expense | | Short-term borrowings | | Contractual obligations | 64 | Loan maturity and interest sensitivity analysis | 64 | Deposits | 65 | Certificates of deposit and other time deposits | 67 | | |
| | | Use of non-GAAP financialalternative performance measures |
Our reported results are prepared in accordance with IFRSs as detailed in the financial statements starting on page 260.314. To measure our performance, we also usesupplement our IFRS figures with non-IFRS measures that constitute alternative performance measures under European Securities and Markets Authority guidance and non-GAAP financial measures includingdefined in and presented in accordance with US Securities and Exchange Commission rules and regulations. These measures include 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,below. Definitions and where otherscalculations of other alternative performance measures are used they are described.included in our ‘Reconciliation of alternative performance measures’ on page 119. All non-GAAP financialalternative performance measures are reconciled to the closest reported financialperformance measure. TheA change in reportable segments was made in 2020 by combining Global Private Banking and Retail Banking and Wealth Management to form Wealth and Personal Banking. We also reallocated our reporting of Markets Treasury, hyperinflation accounting in Argentina and HSBC Holdings net interest expense from Corporate Centre to the global business segmental results are presentedbusinesses. Comparative data have been re-presented on an adjusted basis in accordance with IFRS 8 ‘Operating Segments’, as detailed with the change in reportable segments explained in more detail in Note 10: Segmental analysis on page 294.347.
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 6899 to 71102 and pages 75110 to 80115 detail the effects of significant items on each of our global business segments, and geographical regions and selected countries/territories in 2020, 2019 2018 and 2017.2018. Foreign currency translation differences Foreign currency translation differences reflect the movements of the US dollar against most major currencies during 2019.2020. 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 20192020 are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates: • the income statements for 20182019 and 20172018 at the average rates of exchange for 2019;2020; and• the balance sheets at 31 December 20182019 and 31 December 20172018 at the prevailing rates of exchange on 31 December 2019.2020. |
| | | | 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 20192020 |
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:reform – Phase 2 Interest Rate Benchmark Reform Phase 2: Amendments to IFRS 9, and IAS 39, ‘Financial Instruments’ Amendments to IFRS 97, IFRS 4 and IAS 39IFRS 16 issued in September 2019 modify specificAugust 2020 represents the second phase of the IASB’s project on the effects of interest rate benchmark reform, addressing issues affecting financial statements when changes are made to contractual cash flows and hedging relationships as a result of the reform.
Under these amendments, changes made to a financial instrument that are economically equivalent and required by interest rate benchmark reform do not result in the derecognition or a change in the carrying amount of the financial instrument, but instead require the effective interest rate to be updated to reflect the change in the interest rate benchmark. In addition, hedge accounting requirements so that entities apply those hedge accounting requirements assuming thatwill not be discontinued solely because of the replacement of the interest rate benchmark on whichif the hedged cash flows and cash flows of the hedging instrument are based is not altered as a result of interest rate benchmark reform. hedge meets other hedge accounting criteria. These amendments apply from 1 January 20202021 with early adoption permitted. HSBC has adopted the amendments that apply to IAS 39 from 1 January 20192020 and has made the additional disclosures as required by the amendments.amendments, see pages 142 to 143. | | | | 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 277. 329.•Deferred tax assets: The most significant judgements relate to judgements made in respect of expected future profitability. See Note 1.2(l) on page 281. 334.•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 275.
Report of the Directors | Financial summary
•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 273.326.
•Impairment of goodwill and non-financial assets: 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 273. 326.•Provisions: Significant judgement may be required due to the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. See Note 1.2(m) on page 281. 334.•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 280.333. 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 | | | 2020 | 2019 | 2018 | 2017 | 2016 | | Footnotes | $m | $m | $m | $m | $m | | Net interest income | | 27,578 | | 30,462 | | 30,489 | | 28,176 | | 29,813 | | | Net fee income | | 11,874 | | 12,023 | | 12,620 | | 12,811 | | 12,777 | | | Net income from financial instruments held for trading or managed on a fair value basis | | 9,582 | | 10,231 | | 9,531 | | 8,426 | | 7,521 | | | Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss | | 2,081 | | 3,478 | | (1,488) | | 2,836 | | 1,262 | | | Change in fair value of designated debt and related derivatives | 1 | 231 | | 90 | | (97) | | 155 | | (1,997) | | | Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss | | 455 | | 812 | | 695 | | N/A | N/A | | Gains less losses from financial investments | | 653 | | 335 | | 218 | | 1,150 | | 1,385 | | | | | | | | | | Net insurance premium income | | 10,093 | | 10,636 | | 10,659 | | 9,779 | | 9,951 | | | Other operating income/(expense) | | 527 | | 2,957 | | 960 | | 443 | | (876) | | | Total operating income | | 63,074 | | 71,024 | | 63,587 | | 63,776 | | 59,836 | | | Net insurance claims and benefits paid and movement in liabilities to policyholders | | (12,645) | | (14,926) | | (9,807) | | (12,331) | | (11,870) | | Net operating income before change in expected credit losses and other
credit impairment charges/Loan impairment charges and other credit risk provisions | 2 | 50,429 | | 56,098 | | 53,780 | | 51,445 | | 47,966 | | | Change in expected credit losses and other credit impairment charges | | (8,817) | | (2,756) | | (1,767) | | N/A | N/A | | Loan impairment charges and other credit risk provisions | | N/A | N/A | N/A | (1,769) | | (3,400) | | | Net operating income | | 41,612 | | 53,342 | | 52,013 | | 49,676 | | 44,566 | | | Total operating expenses excluding impairment of goodwill and other intangible assets | | (33,044) | | (34,955) | | (34,622) | | (34,849) | | (36,416) | | | Impairment of goodwill and other intangible assets | | (1,388) | | (7,394) | | (37) | | (35) | | (3,392) | | | Operating profit | | 7,180 | | 10,993 | | 17,354 | | 14,792 | | 4,758 | | | Share of profit in associates and joint ventures | | 1,597 | | 2,354 | | 2,536 | | 2,375 | | 2,354 | | | Profit before tax | | 8,777 | | 13,347 | | 19,890 | | 17,167 | | 7,112 | | | Tax expense | | (2,678) | | (4,639) | | (4,865) | | (5,288) | | (3,666) | | | Profit for the year | | 6,099 | | 8,708 | | 15,025 | | 11,879 | | 3,446 | | | Attributable to: | | | | | | | | – ordinary shareholders of the parent company | | 3,898 | | 5,969 | | 12,608 | | 9,683 | | 1,299 | | | – preference shareholders of the parent company | | 90 | | 90 | | 90 | | 90 | | 90 | | | – other equity holders | | 1,241 | | 1,324 | | 1,029 | | 1,025 | | 1,090 | | | – non-controlling interests | | 870 | | 1,325 | | 1,298 | | 1,081 | | 967 | | | Profit for the year | | 6,099 | | 8,708 | | 15,025 | | 11,879 | | 3,446 | |
| | | | | | | | | | | | | | Summary consolidated income statement | | | | 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| | Net interest income | | 30,462 |
| 30,489 |
| 28,176 |
| 29,813 |
| 32,531 |
| | Net fee income | | 12,023 |
| 12,620 |
| 12,811 |
| 12,777 |
| 14,705 |
| | Net income from financial instruments held for trading or managed on a fair value basis | | 10,231 |
| 9,531 |
| 8,426 |
| 7,521 |
| 8,717 |
| | Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss | | 3,478 |
| (1,488 | ) | 2,836 |
| 1,262 |
| 565 |
| | Change in fair value of designated debt and related derivatives | 1 | 90 |
| (97 | ) | 155 |
| (1,997 | ) | 973 |
| | Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss | | 812 |
| 695 |
| N/A |
| N/A |
| N/A |
| | Gains less losses from financial investments | | 335 |
| 218 |
| 1,150 |
| 1,385 |
| 2,068 |
| | Net insurance premium income | | 10,636 |
| 10,659 |
| 9,779 |
| 9,951 |
| 10,355 |
| | Other operating income/(expense) | | 2,957 |
| 960 |
| 443 |
| (876 | ) | 1,178 |
| | Total operating income | | 71,024 |
| 63,587 |
| 63,776 |
| 59,836 |
| 71,092 |
| | Net insurance claims and benefits paid and movement in liabilities to policyholders | | (14,926 | ) | (9,807 | ) | (12,331 | ) | (11,870 | ) | (11,292 | ) | Net operating income before change in expected credit losses and other
credit impairment charges/Loan impairment charges and other credit risk provisions | 2 | 56,098 |
| 53,780 |
| 51,445 |
| 47,966 |
| 59,800 |
| Change in expected credit losses and other credit impairment charges
| | (2,756 | ) | (1,767 | ) | N/A |
| N/A |
| N/A |
| | Loan impairment charges and other credit risk provisions | | N/A |
| N/A |
| (1,769 | ) | (3,400 | ) | (3,721 | ) | | Net operating income | | 53,342 |
| 52,013 |
| 49,676 |
| 44,566 |
| 56,079 |
| | Total operating expenses excluding goodwill impairment | | (35,000 | ) | (34,659 | ) | (34,884 | ) | (36,568 | ) | (39,768 | ) | | Goodwill impairment | | (7,349 | ) | — |
| — |
| (3,240 | ) | — |
| | Operating profit | | 10,993 |
| 17,354 |
| 14,792 |
| 4,758 |
| 16,311 |
| | Share of profit in associates and joint ventures | | 2,354 |
| 2,536 |
| 2,375 |
| 2,354 |
| 2,556 |
| | Profit before tax | | 13,347 |
| 19,890 |
| 17,167 |
| 7,112 |
| 18,867 |
| | Tax expense | | (4,639 | ) | (4,865 | ) | (5,288 | ) | (3,666 | ) | (3,771 | ) | | Profit for the year | | 8,708 |
| 15,025 |
| 11,879 |
| 3,446 |
| 15,096 |
| | Attributable to: | |
|
|
|
|
|
| | – ordinary shareholders of the parent company | | 5,969 |
| 12,608 |
| 9,683 |
| 1,299 |
| 12,572 |
| | – preference shareholders of the parent company | | 90 |
| 90 |
| 90 |
| 90 |
| 90 |
| | – other equity holders | | 1,324 |
| 1,029 |
| 1,025 |
| 1,090 |
| 860 |
| | – non-controlling interests | | 1,325 |
| 1,298 |
| 1,081 |
| 967 |
| 1,574 |
| | Profit for the year | | 8,708 |
| 15,025 |
| 11,879 |
| 3,446 |
| 15,096 |
|
| | | | | | | | | | | | | | | | | | | | | | Five-year financial information | | | 2020 | 2019 | 2018 | 2017 | 2016 | | Footnotes | $ | $ | $ | $ | $ | | Basic earnings per share | | 0.19 | | 0.30 | | 0.63 | | 0.48 | | 0.07 | | | Diluted earnings per share | | 0.19 | | 0.30 | | 0.63 | | 0.48 | | 0.07 | | | Dividends per ordinary share | 3 | — | | 0.51 | | 0.51 | | 0.51 | | 0.51 | | | | % | % | % | % | % | | Dividend payout ratio | 4 | — | | 172.2 | | 81.0 | | 106.3 | | 728.6 | | | Post-tax return on average total assets | | 0.2 | | 0.3 | | 0.6 | | 0.5 | | 0.1 | | | | | | | | | | Return on average ordinary shareholders’ equity | | 2.3 | | 3.6 | | 7.7 | | 5.9 | | 0.8 | | | Return on average tangible equity | | 3.1 | | 8.4 | | 8.6 | | 6.8 | | 2.6 | | | Effective tax rate | | 30.5 | | 34.8 | | 24.5 | | 30.8 | | 51.5 | | | | | | | | | | | | | | | | | | | | | | |
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. | | | | | | | | | | | | | | Five-year financial information | | | | 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| | | Footnotes | $ |
| $ |
| $ |
| $ |
| $ |
| | Basic earnings per share | | 0.30 |
| 0.63 |
| 0.48 |
| 0.07 |
| 0.65 |
| | Diluted earnings per share | | 0.30 |
| 0.63 |
| 0.48 |
| 0.07 |
| 0.64 |
| | Dividends per ordinary share | 3 | 0.51 |
| 0.51 |
| 0.51 |
| 0.51 |
| 0.50 |
| | | | % |
| % |
| % |
| % |
| % |
| | Dividend payout ratio | 4 | 172.2 |
| 81.0 |
| 106.3 |
| 728.6 |
| 76.5 |
| | Post-tax return on average total assets | | 0.3 |
| 0.6 |
| 0.5 |
| 0.1 |
| 0.6 |
| | Return on average ordinary shareholders’ equity | | 3.6 |
| 7.7 |
| 5.9 |
| 0.8 |
| 7.2 |
| | Return on average tangible equity | | 8.4 |
| 8.6 |
| 6.8 |
| 2.6 |
| 8.1 |
| | Effective tax rate | | 34.8 |
| 24.5 |
| 30.8 |
| 51.5 |
| 19.99 |
|
For footnotes, see page 67.
4 Dividends per ordinary share expressed as a percentage of basic earnings per share.
Unless stated otherwise, all tables in the Annual Report and Accounts 20192020 are presented on a reported basis. For a summary of our financial performance in 2019,2020, see page 27. For further financial performance data for each global business and geographical region, see pages 6899 to 71102 and 73108 to 81,118 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 294.
347.
Report of the Directors | Financial summary
| | | | Income statement commentary |
The following commentary compares Group financial performance for the yearsyear ended 20192020 with 2018.2019. For commentary on Group financialthe performance for the year ended 2018 compared with 2017, please see pages 37 to 44 of HSBC Holding plc Form 20-Four global businesses for the year ended 31 December 2018. 2020, see pages 30 to 36. For commentary on the performance of our global businesses for the year ended 31 December 2019, see pages 30 to 37. For commentary on the performance of our global businesses for the year ended 31 December 2018, see pages 18 to 21 of HSBC Holdings plc 20-F for the year ended 31 December 2018.102 to103. Net interest income | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended | Quarter ended | | | 31 Dec | 31 Dec | 31 Dec | 31 Dec | 30 Sep | 31 Dec | | | 2020 | 2019 | 2018 | 2020 | 2020 | 2019 | | Footnotes | $m | $m | $m | $m | $m | $m | | Interest income | | 41,756 | | 54,695 | | 49,609 | | 9,301 | | 9,455 | | 13,229 | | | Interest expense | | (14,178) | | (24,233) | | (19,120) | | (2,682) | | (3,005) | | (5,575) | | | Net interest income | | 27,578 | | 30,462 | | 30,489 | | 6,619 | | 6,450 | | 7,654 | | | Average interest-earning assets | | 2,092,900 | | 1,922,822 | | 1,839,346 | | 2,159,003 | | 2,141,454 | | 1,945,596 | | | | % | % | % | % | % | % | | Gross interest yield | 1 | 2.00 | | 2.84 | | 2.70 | | 1.71 | | 1.76 | | 2.70 | | | Less: gross interest payable | 1 | (0.81) | | (1.48) | | (1.21) | | (0.60) | | (0.68) | | (1.34) | | | Net interest spread | 2 | 1.19 | | 1.36 | | 1.49 | | 1.11 | | 1.08 | | 1.36 | | | Net interest margin | 3 | 1.32 | | 1.58 | | 1.66 | | 1.22 | | 1.20 | | 1.56 | | | | | | | | | |
1 Gross interest yield is the average annualised interest rate earned on average interest-earning assets (‘AIEA’). Gross interest payable is the average annualised interest cost as a percentage on average interest-bearing liabilities. 2 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. 3 Net interest margin is net interest income expressed as an annualised percentage of AIEA. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary of interest income by type of asset | | | 2020 | 2019 | 2018 | | | Average
balance | Interest
income | Yield | Average
balance | Interest
income | Yield | Average
balance | Interest
income | Yield | | | $m | $m | % | $m | $m | % | $m | $m | % | | Short-term funds and loans and advances to banks | | 298,255 | | 1,264 | | 0.42 | | 212,920 | | 2,411 | | 1.13 | | 233,637 | | 2,475 | | 1.06 | | | Loans and advances to customers | | 1,046,795 | | 29,391 | | 2.81 | | 1,021,554 | | 35,578 | | 3.48 | | 972,963 | | 33,285 | | 3.42 | | | Reverse repurchase agreements – non-trading | | 221,901 | | 1,819 | | 0.82 | | 224,942 | | 4,690 | | 2.08 | | 205,427 | | 3,739 | | 1.82 | | | Financial investments | | 463,542 | | 8,143 | | 1.76 | | 417,939 | | 10,705 | | 2.56 | | 386,230 | | 9,166 | | 2.37 | | | Other interest-earning assets | | 62,407 | | 1,139 | | 1.83 | | 45,467 | | 1,311 | | 2.88 | | 41,089 | | 944 | | 2.30 | | | Total interest-earning assets | | 2,092,900 | | 41,756 | | 2.00 | | 1,922,822 | | 54,695 | | 2.84 | | 1,839,346 | | 49,609 | | 2.70 | |
| | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
|
| Footnotes | $m |
| $m |
| $m |
| | Interest income |
| 54,695 |
| 49,609 |
| 40,995 |
| | Interest expense |
| (24,233 | ) | (19,120 | ) | (12,819 | ) | | Net interest income |
| 30,462 |
| 30,489 |
| 28,176 |
| | Average interest-earning assets |
| 1,922,822 |
| 1,839,346 |
| 1,726,120 |
|
|
| % |
| % |
| % |
| | Gross interest yield | 5 | 2.84 |
| 2.70 |
| 2.37 |
| | Less: cost of funds | 5 | (1.48 | ) | (1.21 | ) | (0.88 | ) | | Net interest spread | 6 | 1.36 |
| 1.49 |
| 1.49 |
| | Net interest margin | 7 | 1.58 |
| 1.66 |
| 1.63 |
|
For footnotes, see page 67.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary of interest expense by type of liability | | | 2020 | 2019 | 2018 | | | Average
balance | Interest
expense | Cost | Average
balance | Interest
expense | Cost | Average
balance | Interest
expense | Cost | | Footnotes | $m | $m | % | $m | $m | % | $m | $m | % | | Deposits by banks | 1 | 65,536 | | 330 | | 0.50 | | 52,515 | | 702 | | 1.34 | | 44,530 | | 506 | | 1.14 | | | | | | | | | | | | | | Customer accounts | 2 | 1,254,249 | | 6,478 | | 0.52 | | 1,149,483 | | 11,238 | | 0.98 | | 1,138,620 | | 8,287 | | 0.73 | | | Repurchase agreements – non-trading | | 125,376 | | 963 | | 0.77 | | 160,850 | | 4,023 | | 2.50 | | 161,204 | | 3,409 | | 2.11 | | | Debt securities in issue – non-trading | | 219,610 | | 4,944 | | 2.25 | | 211,229 | | 6,522 | | 3.09 | | 183,434 | | 5,675 | | 3.09 | | | Other interest-bearing liabilities | | 76,395 | | 1,463 | | 1.92 | | 59,980 | | 1,748 | | 2.91 | | 53,731 | | 1,243 | | 2.31 | | | Total interest-bearing liabilities | | 1,741,166 | | 14,178 | | 0.81 | | 1,634,057 | | 24,233 | | 1.48 | | 1,581,519 | | 19,120 | | 1.21 | |
1 Including interest-bearing bank deposits only. | | | | | | | | | | | | | | | | | | | Summary of interest income by type of asset |
|
| 2019 | 2018 | 2017 |
|
| Average
balance |
| Interest
income |
| Yield | Average
balance |
| Interest
income |
| Yield | Average
balance |
| Interest
income |
| Yield |
|
| $m |
| $m |
| % | $m |
| $m |
| % | $m |
| $m |
| % | | Short-term funds and loans and advances to banks |
| 212,920 |
| 2,411 |
| 1.13 | 233,637 |
| 2,475 |
| 1.06 | 236,126 |
| 2,030 |
| 0.86 | | Loans and advances to customers |
| 1,021,554 |
| 35,578 |
| 3.48 | 972,963 |
| 33,285 |
| 3.42 | 902,214 |
| 28,751 |
| 3.19 | | Reverse repurchase agreements – non-trading |
| 224,942 |
| 4,690 |
| 2.08 | 205,427 |
| 3,739 |
| 1.82 | 173,760 |
| 2,191 |
| 1.26 | | Financial investments |
| 417,939 |
| 10,705 |
| 2.56 | 386,230 |
| 9,166 |
| 2.37 | 389,807 |
| 7,440 |
| 1.91 | | Other interest-earning assets |
| 45,467 |
| 1,311 |
| 2.88 | 41,089 |
| 944 |
| 2.30 | 24,213 |
| 583 |
| 2.41 | | Total interest-earning assets |
| 1,922,822 |
| 54,695 |
| 2.84 | 1,839,346 |
| 49,609 |
| 2.70 | 1,726,120 |
| 40,995 |
| 2.37 |
| | | | | | | | | | | | | | | | | | | Summary of interest expense by type of liability and equity |
|
| 2019 | 2018 | 2017 |
|
| Average
balance |
| Interest
expense |
| Cost | Average
balance |
| Interest
expense |
| Cost | Average
balance |
| Interest
expense |
| Cost |
| Footnotes | $m |
| $m |
| % | $m |
| $m |
| % | $m |
| $m |
| % | | Deposits by banks | 8 | 52,515 |
| 702 |
| 1.34 | 44,530 |
| 506 |
| 1.14 | 47,337 |
| 451 |
| 0.95 | | Customer accounts | 9 | 1,149,483 |
| 11,238 |
| 0.98 | 1,138,620 |
| 8,287 |
| 0.73 | 1,094,920 |
| 5,405 |
| 0.49 | | Repurchase agreements – non-trading |
| 160,850 |
| 4,023 |
| 2.50 | 161,204 |
| 3,409 |
| 2.11 | 136,561 |
| 1,665 |
| 1.22 | | Debt securities in issue – non-trading | 10 | 211,229 |
| 6,522 |
| 3.09 | 183,434 |
| 5,675 |
| 3.09 | 169,243 |
| 4,391 |
| 2.59 | | Other interest-bearing liabilities |
| 59,980 |
| 1,748 |
| 2.91 | 53,731 |
| 1,243 |
| 2.31 | 7,009 |
| 907 |
| 12.94 | | Total interest-bearing liabilities |
| 1,634,057 |
| 24,233 |
| 1.48 | 1,581,519 |
| 19,120 |
| 1.21 | 1,455,070 |
| 12,819 |
| 0.88 |
For footnotes, see page 67.
Net interest income (‘NII’) for 2020 was $27.6bn, a decrease of $2.9bn or 9.5% compared with 2019. This reflected lower average market interest rates across the major currencies compared with 2019. This was partly offset by interest income associated with the increase in average interest-earning assets (‘AIEA’) of $170.1bn or 8.8%. Excluding the favourable impact of significant items and the adverse effects of foreign currency translation differences, net interest income decreased by $2.7bn or 9%. NII for the fourth quarter of 2020 was $6.6bn, down 13.5% year-on-year, and up 2.6% compared with the previous quarter. The year-on-year decrease was driven by the impact of lower market interest rates predominantly in Asia and North America. This was partly offset by higher NII from growth in AIEA, notably short-term funds and financial investments and predominantly in Asia and Europe. The increase compared with the previous quarter was mainly driven by lower rates on customer deposits and issued debt securities, which were partly offset by lower rates on AIEA.
Net interest margin (‘NIM’) for 2020 of 1.32% was 26 basis points (‘bps’) lower compared with 2019 as the reduction in the yield on AIEA of 84bps was partly offset by the fall in funding costs of average interest-bearing liabilities of 67bps. The decrease in NIM in 2020 included the favourable impacts of significant items and the adverse effects of foreign currency translation differences. Excluding this, NIM fell by 25bps.
NIM for the fourth quarter of 2020 was 1.22%, down 34bps year-on-year, and up 2bps compared with the previous quarter. The year-on-year decrease was mainly driven by Asia and caused by the impact of lower market interest rates. The increase compared with the previous quarter was driven by a reduction in funding costs of average interest-bearing liabilities of 8bps, which was partly offset by a reduction in the yield on AIEA of 5bps. Interest income for 2020 of $41.8bn decreased by $12.9bn or 24%, primarily due to the lower average interest rates compared with 2019 as the yield on AIEA fell by 84bps. This was partly offset by income from balance sheet growth, predominantly in Asia and
Europe. The balance sheet growth was driven by higher balances in short-term funds and loans and advances to banks and financial investments, which increased by $85.3bn and $45.6bn, respectively. The decrease in interest income included $0.2bn in relation to the favourable impact of significant items and $0.8bn from the adverse effects of foreign currency translation differences. Excluding these, interest income decreased by $12.3bn. Interest income of $9.3bn in the fourth quarter of 2020 was down $3.9bn year-on-year, and down $0.2bn compared with the previous quarter. The year-on-year decrease was predominantly driven by the impact of lower market interest rates, predominantly in Asia and in North America, although partly offset by growth in AIEA, notably short-term funds and loans and advances to banks and financial investments. The small decrease compared with the previous quarter was mainly driven by reduced rates on financial investments and loans and advances to customers. Interest expense for 2020 of $14.2bn decreased by $10.1bn or 41% compared with 2019. This reflected the decrease in funding costs of 67bps, mainly arising from lower interest rates paid on interest-bearing liabilities. This was partly offset by higher interest expense from growth in interest-bearing customer accounts, which increased by $104.8bn. The decrease in interest expense included the favourable effects of foreign currency translation differences of $0.5bn. Excluding this, interest expense decreased by $9.6bn. Interest expense of $2.7bn in the fourth quarter of 2020 was down $2.9bn year-on-year, and down $0.3bn compared with the previous quarter. The year-on-year decrease was predominantly driven by the impact of lower market interest rates, partly offset by growth in interest-bearing customer accounts, which increased by $142.9bn. The small decrease compared with the previous quarter was mainly due to reduced funding costs on customer deposits and debt issuances. 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.2018. Excluding the adverse effects of significant items and foreign currency translation differences between 2019 and 2018, NII increased by $1.0bn.$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.27 basis points ('bps'). The decrease in NIM in 2019 included the adverse effects of foreign currency translation differences between 2019 and 2018 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,2018, 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,2019, 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,$1.5bn, reflecting higher average interest rates compared with the previous year.2018. The increase in interest income included $1.6bn in relation to the adverse effects of significant items and foreign currency translation.translation between 2019 and 2018. 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 year2018 together with an increase in customer accounts, primarily towards term deposits.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 between 2019 and 2018 of $0.6bn. Excluding these impacts, interest expense was $5.7bn higher. Net fee income of $11.9bn was $0.1bn lower, reflecting reductions in WPB and CMB, partly offset by an increase in GBM. In WPB, lower fee income reflected a reduction in account services, notably in the UK, due to lower customer activity. Income from credit cards also reduced, as customer spending activity fell across most markets, mainly in Hong Kong, the UK, MENA and the US. Fee income on unit trusts fell, mainly in Hong Kong. These decreases were partly offset by higher income from broking, primarily in Hong Kong, as volatility in the equity markets resulted in increased customer activity. Fee expenses fell as a result of reduced customer activity levels, mainly in cards. In CMB, trade-related fee income fell, reflecting the reduction in global trade activity, notably in Hong Kong and the UK. Income also fell in remittances due to lower client activity. In GBM, net fee income was higher, mainly from growth in underwriting fees in the US and the UK. Global custody and broking fees also rose as client activity and turnover of securities increased due to market volatility. These increases were partly offset by a reduction in fee income from credit facilities, notably in the UK, Hong Kong and the US. Net income from financial instruments held for trading or managed on a fair value basis of $9.6bn was $0.6bn lower and included a loss of $0.3bn from asset disposals relating to our restructuring programme. This was partly offset by favourable fair value movements on non-qualifying hedges of $0.1bn and favourable debit value adjustments of $0.1bn. The remaining reduction was primarily due to lower trading interest income, reflecting lower market rates. However, other trading income increased in GBM as elevated market volatility and wider spreads supported a strong performance in FICC. Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss was a net income of $2.1bn, compared with a net income of $3.5bn in 2019. This decrease primarily reflected less favourable equity market performance, compared with 2019 in France and Hong Kong, due to the impact of the Covid-19 outbreak on the equity and unit trust assets supporting insurance and investment contracts. After large losses in the first quarter of 2020, there was a partial recovery in the remainder of the year, resulting in higher revenue in these subsequent quarters during 2020 compared with the equivalent quarters in 2019. This adverse movement resulted in a corresponding movement in liabilities to policyholders and the present value of in-force long-term insurance business (‘PVIF’) (see ‘Other operating income’ below). This reflected 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 of $0.2bn was $0.1bn favourable compared with 2019. The movements were driven by the fall 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 85.
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss of $0.5bn was $0.4bn lower compared with 2019. This primarily reflected adverse movements in equity markets due to the impact of the Covid-19 outbreak. Gains less losses from financial investments of $0.7bn increased by $0.3bn, reflecting higher gains from the disposal of debt securities in Markets Treasury. Net insurance premium income of $10.1bn was $0.5bn lower than in 2019, reflecting lower new business volumes, particularly in France and Hong Kong, partly offset by lower reinsurance arrangements in Hong Kong. Other operating income of $0.5bn decreased by $2.4bn compared with 2019, primarily due to lower favourable changes in PVIF compared with 2019 (down $1.4bn) and also the non-recurrence of a $0.8bn dilution gain in 2019 following the merger of The Saudi British Bank (‘SABB’) with Alawwal bank in Saudi Arabia. The change in PVIF included a reduction of $0.8bn due to assumption changes and experience variances, mainly in Hong Kong and France due to the effect of interest rate changes on the valuation of liabilities under insurance contracts. In addition, the value of new business written fell by $0.4bn, primarily in Hong Kong, as sales volumes decreased. The reduction also reflected the non-recurrence of 2019 gains recognised in Argentina and Mexico. Net insurance claims and benefits paid and movement in liabilities to policyholders was $2.3bn lower, primarily due to lower returns on financial assets supporting contracts where the policyholder is subject to part or all of the investment risk. New business volumes were also lower, particularly in Hong Kong and France, partly offset by lower reinsurance arrangements in Hong Kong. Changes in expected credit losses and other credit impairment charges (‘ECL’) of $8.8bn were $6.1bn higher compared with 2019 with increases in all global businesses. The ECL charge in 2020 reflected a significant increase in stage 1 and stage 2 allowances, notably in the first half of the year, to reflect the deterioration in the forward economic outlook globally as a result of the Covid-19 outbreak. The economic outlook stabilised in the second half of 2020 and as a result stage 1 and stage 2 allowances were broadly unchanged at 31 December 2020, compared with 30 June 2020. Stage 3 charges also increased compared with 2019, largely against wholesale exposures, including a significant charge related to a CMB client in Singapore in the first quarter of 2020. Excluding currency translation differences, ECL as a percentage of average gross loans and advances to customers was 0.81%, compared with 0.25% in 2019. The estimated impact of the Covid-19 outbreak was incorporated in the ECL through additional scenario analysis, which considered differing severity and duration assumptions relating to the global pandemic. These included probability-weighted shocks to annual GDP and consequential impacts on unemployment and other economic variables, with differing economic recovery assumptions. Given the severity of the macroeconomic projections, and the complexities of the government measures, which have never been modelled, additional judgemental adjustments have been made to our provisions. While we expect the full year ECL charge for 2021 to be materially lower than in 2020, the outlook is highly uncertain and remains dependent on the future path of the Covid-19 outbreak, including the successful deployment of mass vaccination programmes, and the credit quality of our loan portfolio as government support packages are gradually withdrawn. For further details on the calculation of ECL, including the measurement uncertainties and significant judgements applied to such calculations, the impact of alternative/additional scenarios and management judgemental adjustments, see pages 169 to 177. Net fee income of $12.0bn was $0.6bn lower compared with 2018, including adverse foreign currency translation differences between 2019 and 2018 of $0.3bn. The remaining reduction primarily reflected lower net fee income in RBWMWPB and GB&M.GBM. In RBWM,WPB, 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. In GB&M,GBM, 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 basisincreased 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.$0.5bn between 2019 and 2018. 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’)Markets Treasury on funding swaps due to favourable movements on yield curves. In Latin America, income in BSMMarkets Treasury increased, primarily from gains on debt securities in Argentina and a favourable impact of hyperinflation, as well as increased client activity in GB&MGBM 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.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 54. 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.differences between 2019 and 2018. Excluding these, the increase of $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 BankSABB with Alawwal bank in Saudi Arabia. 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.statements of the HSBC Holdings plc 20-F for the year ended
31 December 2019. 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 policyholderswere $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, RBWMWPB and GB&M. GBM. 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 pagepage 131of the HSBC Holdings plc 20-F for the year ended 31 December 2019 for more information on the impact of alternative/additional scenarios. The effects of foreign currency translation differences between the periods2019 and 2018 were minimal. •In CMB, ECL charges of $1.2bn$1.2bn were $0.5bn$0.5bn higher reflecting increases in Europe and Hong Kong, while the previous year2018 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,WPB, ECL charges of $1.4bn$1.4bn were $0.3bn$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,GBM, net ECL charges of $0.2bn$0.2bn compared with a net release of $31m$31m in 2018. Releases in the previous period2018 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 alsowe recorded lower net releases recorded in 2019of ECL related to our legacy portfolios in the UK, compared with 2018. 2018.On a constant currency basis, ECL as a percentage of average gross loans and advances to customers was 0.27%, in 2019, compared with 0.17% in 2018.
Report of the Directors | Financial summary
| | | | | | | Operating expenses – currency translation and significant items |
| 2019 |
| 2018 |
|
| $m |
| $m |
| | Significant items | 9,554 |
| 1,644 |
| | – costs of structural reform | 158 |
| 361 |
| | – customer redress programmes | 1,281 |
| 146 |
| | – disposals, acquisitions and investment in new businesses | — |
| 52 |
| – goodwill impairment
| 7,349 |
| — |
| | – past service costs of guaranteed minimum pension benefits equalisation | — |
| 228 |
| | – restructuring and other related costs | 827 |
| 66 |
| | – settlements and provisions in connection with legal and regulatory matters | (61 | ) | 816 |
| | – currency translation on significant items |
|
| (25 | ) | | Currency translation |
|
| 1,109 |
| | Year ended 31 Dec | 9,554 |
| 2,753 |
|
| | | | | | | | | Staff numbers (full-time equivalents) |
| 2019 |
| 2018 |
| 2017 |
| | Global businesses |
|
|
|
|
|
| | Retail Banking and Wealth Management | 134,296 |
| 133,644 |
| 129,402 |
| | Commercial Banking | 44,503 |
| 44,805 |
| 44,871 |
| | Global Banking and Markets | 48,459 |
| 48,500 |
| 45,725 |
| | Global Private Banking | 6,767 |
| 6,819 |
| 7,250 |
| | Corporate Centre | 1,326 |
| 1,449 |
| 1,439 |
| | At 31 Dec | 235,351 |
| 235,217 |
| 228,687 |
|
Operating expenses of $42.3bn were $7.7bn or 22% higher than in 2018 and included favourable foreign currency translation differences of $1.1bn,$1.1bn between 2019 and 2018, which were more than offset by net adverse movements in significant items of $7.9bn. Significant items included: •a $7.3bn$7.3bn impairment of goodwill, which included $4.0bn related to our global GB&MGBM 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.Europe. For further details, see Note 21 on the financial statements;statements of the HSBC Holdings plc 20-F for the year ended 31 December 2019; •customer redress programme costs of $1.3bn$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 2019.2019. This compared with $0.1bn$0.1bn in 2018. For further details, see Note 10 on the financial statements;statements of the HSBC Holdings plc 20-F for the year ended 31 December 2019; and •restructuring and other related costs of $0.8bn$0.8bn in 2019, which included $753m$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$0.8bn in 2018; •lower costs of structural reform of $0.2bn,$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. $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 remaining increase primarily reflected investments to grow the business (up $0.4bn), notably in RBWMWPB 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$988m was $24m higher than in 2018. The impact of our cost-saving efficiencies broadly offset inflation. 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.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 ventureswas $2.4bn, a decrease of $0.2bn or 7% compared with 2018, and included the adverse effects of foreign currency translation differences of $90m.$90m between 2019 and 2018. Excluding the effects of foreign currency translation differences, our share of profit in associates and joint ventures decreased by $92m compared with 2018. ThisThe remaining decrease reflected lower income from The Saudi British BankSABB due to higher ECL charges and other expenses relating to the merger with Alawwal bank, partly offset by higher income fromBoCom.
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.statements of the HSBC Holdings plc 20-F for the year ended 31 December 2019. 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 20182019 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.statements of the HSBC Holdings plc 20-F for the year ended
31 December 2019.
| | | | | | | | | | Operating expenses – currency translation and significant items | | 2020 | 2019 | | $m | $m | | Significant items | 2,973 | | 9,607 | | – costs of structural reform1 | — | | 158 | | | – customer redress programmes | (54) | | 1,281 | | | | | | – impairment of goodwill and other intangibles | 1,090 | | 7,349 | | | – past service costs of guaranteed minimum pension benefits equalisation | 17 | | — | | – restructuring and other related costs2 | 1,908 | | 827 | | | – settlements and provisions in connection with legal and regulatory matters | 12 | | (61) | | | – currency translation on significant items | | 53 | | | Currency translation | | 223 | | | Year ended 31 Dec | 2,973 | | 9,830 | |
1 Comprises costs associated with preparations for the UK’s exit from the European Union. 2 Includes impairment of software intangible assets of $189m (of the total software intangible asset impairment of $1,347m) and impairment of tangible assets of $197m. | | | | | | | | | | | | | Staff numbers (full-time equivalents) | | 2020 | 20191 | 20181 | | Global businesses | | | | | Wealth and Personal Banking | 135,727 | | 141,341 | | 140,666 | | | Commercial Banking | 43,221 | | 44,706 | | 45,046 | | | Global Banking and Markets | 46,729 | | 48,859 | | 48,970 | | | Corporate Centre | 382 | | 445 | | 535 | | | At 31 Dec | 226,059 | | 235,351 | | 235,217 | |
1 A change in reportable segments was made in 2020. Comparative data have been re-presented accordingly. For further guidance, see Note 10: Segmental analysis on page 347. Operating expenses of $34.4bn were $7.9bn lower than in 2019, primarily reflecting the net favourable movements in significant items of $6.6bn, which included: •the non-recurrence of a $7.3bn impairment of goodwill in 2019, primarily related to lower long-term economic growth assumptions in GBM and CMB, and the planned reshaping of GBM. This compared with a $1.1bn impairment of goodwill and other intangibles in 2020, primarily capitalised software related to the businesses within HSBC Bank plc, and to a lesser extent our businesses in the US. These impairments reflected underperformance and a deterioration in the future forecasts of these businesses, and in the case of HSBC Bank plc substantially relating to prior periods; and •customer redress programme costs, which were a net release of $0.1bn in 2020, compared with charges of $1.3bn in 2019. This was partly offset by: •restructuring and other related costs of $1.9bn in 2020, of which $0.9bn related to severance, $0.2bn related to an impairment of software intangibles and $0.2bn related to the impairment of tangible assets in France and the US. This compared with restructuring and other related costs of $0.8bn in 2019. The reduction also included favourable currency translation differences of $0.2bn. The remaining reduction of $1.1bn reflected a $0.5bn decrease in performance-related pay and lower discretionary expenditure, including marketing (down $0.3bn) and travel costs (down $0.3bn). In addition, our cost-saving initiatives resulted in a reduction of $1.4bn, of which $1.0bn related to our costs to achieve programme, and the UK bank levy was $0.2bn lower than in 2019. These decreases were partly offset by an increase in investments in technology to enhance our digital and automation capabilities to improve how we serve our customers, as well as inflation and volume-related increases. In addition, the 2020 period included impairments of certain real estate assets. During 2020, we reduced the number of employees expressed in full-time equivalent staff (‘FTE’) and contractors by 11,011. This included a 9,292 reduction in FTE to 226,059 at 31 December 2020, while the number of contractors reduced by 1,719 to 5,692 at 31 December 2020. Share of profit in associates and joint ventures of $1.6bn was $0.8bn or 32% lower than in 2019, primarily reflecting our share of an impairment of goodwill by SABB of $0.5bn. This goodwill was recognised by SABB on the completion of its merger with Alawwal bank in 2019. The remaining reduction reflected a lower share of profit recognised from our associates in Asia and MENA due to the impact of the Covid-19 outbreak and the lower interest-rate environment. At 31 December 2020, we performed an impairment review of our investment in BoCom and concluded that it was not impaired, based on our value-in-use (‘VIU’) calculations. However, the excess of the VIU of BoCom and its carrying value has reduced over the period, increasing the risk of impairment in the future. For more information, see Note 18: Interests in associates and joint ventures on page 367.
Tax expense The effective tax rate for 2020 of 30.5% was lower than the 34.8% effective tax rate for 2019. An impairment of goodwill and non-deductible customer redress charges increased the 2019 effective tax rate. These were not repeated in 2020. Additionally, the non-taxable dilution gain arising on the merger of SABB with Alawwal bank decreased the effective tax rate in 2019. Higher charges in respect of the non-recognition of deferred tax assets, particularly in the UK ($0.4bn) and France ($0.4bn), increased the 2020 effective tax rate.
| | | | Consolidated balance sheet |
| | | | | | | | | | | | | | | | | | | | | | Five-year summary consolidated balance sheet | | | 2020 | 2019 | 2018 | 2017 | 2016 | | Footnotes | $m | $m | $m | $m | $m | | Assets | | | | | | | | Cash and balances at central banks | | 304,481 | | 154,099 | | 162,843 | | 180,624 | | 128,009 | | | Trading assets | | 231,990 | | 254,271 | | 238,130 | | 287,995 | | 235,125 | | | Financial assets designated and otherwise mandatorily measured at fair value through profit or loss | | 45,553 | | 43,627 | | 41,111 | | N/A | N/A | | Financial assets designated at fair value | | N/A | N/A | N/A | 29,464 | | 24,756 | | | Derivatives | | 307,726 | | 242,995 | | 207,825 | | 219,818 | | 290,872 | | | Loans and advances to banks | | 81,616 | | 69,203 | | 72,167 | | 90,393 | | 88,126 | | | Loans and advances to customers | 1 | 1,037,987 | | 1,036,743 | | 981,696 | | 962,964 | | 861,504 | | | Reverse repurchase agreements – non-trading | | 230,628 | | 240,862 | | 242,804 | | 201,553 | | 160,974 | | | Financial investments | | 490,693 | | 443,312 | | 407,433 | | 389,076 | | 436,797 | | | Other assets | | 253,490 | | 230,040 | | 204,115 | | 159,884 | | 148,823 | | | Total assets at 31 Dec | | 2,984,164 | | 2,715,152 | | 2,558,124 | | 2,521,771 | | 2,374,986 | | | Liabilities and equity | | | | | | | | Liabilities | | | | | | | | Deposits by banks | | 82,080 | | 59,022 | | 56,331 | | 69,922 | | 59,939 | | | Customer accounts | | 1,642,780 | | 1,439,115 | | 1,362,643 | | 1,364,462 | | 1,272,386 | | | Repurchase agreements – non-trading | | 111,901 | | 140,344 | | 165,884 | | 130,002 | | 88,958 | | | Trading liabilities | | 75,266 | | 83,170 | | 84,431 | | 184,361 | | 153,691 | | | Financial liabilities designated at fair value | | 157,439 | | 164,466 | | 148,505 | | 94,429 | | 86,832 | | | Derivatives | | 303,001 | | 239,497 | | 205,835 | | 216,821 | | 279,819 | | | Debt securities in issue | | 95,492 | | 104,555 | | 85,342 | | 64,546 | | 65,915 | | | Liabilities under insurance contracts | | 107,191 | | 97,439 | | 87,330 | | 85,667 | | 75,273 | | | Other liabilities | | 204,019 | | 194,876 | | 167,574 | | 113,690 | | 109,595 | | | Total liabilities at 31 Dec | | 2,779,169 | | 2,522,484 | | 2,363,875 | | 2,323,900 | | 2,192,408 | | | Equity | | | | | | | | Total shareholders’ equity | | 196,443 | | 183,955 | | 186,253 | | 190,250 | | 175,386 | | | Non-controlling interests | | 8,552 | | 8,713 | | 7,996 | | 7,621 | | 7,192 | | | Total equity at 31 Dec | | 204,995 | | 192,668 | | 194,249 | | 197,871 | | 182,578 | | | Total liabilities and equity at 31 Dec | | 2,984,164 | | 2,715,152 | | 2,558,124 | | 2,521,771 | | 2,374,986 | |
1 Net of impairment allowances. | | | | | | | | | | | | | | Five-year summary consolidated balance sheet | | | | 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| | Assets | |
|
| | | | | | Cash and balances at central banks | | 154,099 |
| 162,843 |
| 180,624 |
| 128,009 |
| 98,934 |
| | Trading assets | | 254,271 |
| 238,130 |
| 287,995 |
| 235,125 |
| 224,837 |
| | Financial assets designated and otherwise mandatorily measured at fair value through profit or loss | | 43,627 |
| 41,111 |
| N/A |
| N/A |
| N/A |
| | Financial assets designated at fair value | | N/A |
| N/A |
| 29,464 |
| 24,756 |
| 23,852 |
| | Derivatives | | 242,995 |
| 207,825 |
| 219,818 |
| 290,872 |
| 288,476 |
| | Loans and advances to banks | | 69,203 |
| 72,167 |
| 90,393 |
| 88,126 |
| 90,401 |
| | Loans and advances to customers | 11 | 1,036,743 |
| 981,696 |
| 962,964 |
| 861,504 |
| 924,454 |
| | Reverse repurchase agreements – non-trading | | 240,862 |
| 242,804 |
| 201,553 |
| 160,974 |
| 146,255 |
| | Financial investments | | 443,312 |
| 407,433 |
| 389,076 |
| 436,797 |
| 428,955 |
| | Other assets | | 230,040 |
| 204,115 |
| 159,884 |
| 148,823 |
| 183,492 |
| | Total assets at 31 Dec | | 2,715,152 |
| 2,558,124 |
| 2,521,771 |
| 2,374,986 |
| 2,409,656 |
| | Liabilities and equity | |
|
| | | | | | Liabilities | |
|
| | | | | | Deposits by banks | | 59,022 |
| 56,331 |
| 69,922 |
| 59,939 |
| 54,371 |
| | Customer accounts | | 1,439,115 |
| 1,362,643 |
| 1,364,462 |
| 1,272,386 |
| 1,289,586 |
| | Repurchase agreements – non-trading | | 140,344 |
| 165,884 |
| 130,002 |
| 88,958 |
| 80,400 |
| | Trading liabilities | | 83,170 |
| 84,431 |
| 184,361 |
| 153,691 |
| 141,614 |
| | Financial liabilities designated at fair value | | 164,466 |
| 148,505 |
| 94,429 |
| 86,832 |
| 66,408 |
| | Derivatives | | 239,497 |
| 205,835 |
| 216,821 |
| 279,819 |
| 281,071 |
| | Debt securities in issue | | 104,555 |
| 85,342 |
| 64,546 |
| 65,915 |
| 88,949 |
| | Liabilities under insurance contracts | | 97,439 |
| 87,330 |
| 85,667 |
| 75,273 |
| 69,938 |
| | Other liabilities | | 194,876 |
| 167,574 |
| 113,690 |
| 109,595 |
| 139,801 |
| | Total liabilities at 31 Dec | | 2,522,484 |
| 2,363,875 |
| 2,323,900 |
| 2,192,408 |
| 2,212,138 |
| | Equity | |
|
| | | | | | Total shareholders’ equity | | 183,955 |
| 186,253 |
| 190,250 |
| 175,386 |
| 188,460 |
| | Non-controlling interests | | 8,713 |
| 7,996 |
| 7,621 |
| 7,192 |
| 9,058 |
| | Total equity at 31 Dec | | 192,668 |
| 194,249 |
| 197,871 |
| 182,578 |
| 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 67.
A more detailed consolidated balance sheet is contained in the financial statements on page 262.316. | | | | | | | | | | | | | | | | | | | | | | Five-year selected financial information | | | 2020 | 2019 | 2018 | 2017 | 2016 | | Footnotes | $m | $m | $m | $m | $m | | Called up share capital | | 10,347 | | 10,319 | | 10,180 | | 10,160 | | 10,096 | | | Capital resources | 1 | 184,423 | | 172,150 | | 173,238 | | 182,383 | | 172,358 | | | Undated subordinated loan capital | | 1,970 | | 1,968 | | 1,969 | | 1,969 | | 1,967 | | | Preferred securities and dated subordinated loan capital | 2 | 30,721 | | 33,063 | | 35,014 | | 42,147 | | 42,600 | | | Risk-weighted assets | | 857,520 | | 843,395 | | 865,318 | | 871,337 | | 857,181 | | | | | | | | | | Total shareholders’ equity | | 196,443 | | 183,955 | | 186,253 | | 190,250 | | 175,386 | | | Less: preference shares and other equity instruments | | (22,414) | | (22,276) | | (23,772) | | (23,655) | | (18,515) | | | Total ordinary shareholders’ equity | | 174,029 | | 161,679 | | 162,481 | | 166,595 | | 156,871 | | | Less: goodwill and intangible assets (net of tax) | | (17,606) | | (17,535) | | (22,425) | | (21,680) | | (19,649) | | | Tangible ordinary shareholders’ equity | | 156,423 | | 144,144 | | 140,056 | | 144,915 | | 137,222 | | | | | | | | | | Financial statistics | | | | | | | | Loans and advances to customers as a percentage of customer accounts | | 63.2% | 72.0% | 72.0% | 70.6% | 67.7% | | Average total shareholders’ equity to average total assets | | 6.46% | 6.97% | 7.16% | 7.33% | 7.37% | | Net asset value per ordinary share at year-end ($) | 3 | 8.62 | | 8.00 | | 8.13 | | 8.35 | | 7.91 | | | Tangible net asset value per ordinary share at year-end ($) | | 7.75 | | 7.13 | | 7.01 | | 7.26 | | 6.92 | | | Tangible net asset value per fully diluted share at year-end ($) | | 7.72 | | 7.11 | | 6.98 | | 7.22 | | 6.88 | | | Number of $0.50 ordinary shares in issue (millions) | | 20,694 | | 20,639 | | 20,361 | | 20,321 | | 20,192 | | | Basic number of $0.50 ordinary shares outstanding (millions) | | 20,184 | | 20,206 | | 19,981 | | 19,960 | | 19,838 | | | Basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares (millions) | | 20,272 | | 20,280 | | 20,059 | | 20,065 | | 19,933 | | | Closing foreign exchange translation rates to $: | | | | | | | | $1: £ | | 0.732 | | 0.756 | | 0.783 | | 0.740 | | 0.811 | | | $1: € | | 0.816 | | 0.890 | | 0.873 | | 0.834 | | 0.949 | |
| | | | | | | | | | | | | | Five-year selected financial information |
|
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
|
| Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| | Called up share capital |
| 10,319 |
| 10,180 |
| 10,160 |
| 10,096 |
| 9,842 |
| | Capital resources | 12 | 172,150 |
| 173,238 |
| 182,383 |
| 172,358 |
| 189,833 |
| | Undated subordinated loan capital |
| 1,968 |
| 1,969 |
| 1,969 |
| 1,967 |
| 2,368 |
| | Preferred securities and dated subordinated loan capital | 13 | 33,063 |
| 35,014 |
| 42,147 |
| 42,600 |
| 42,844 |
| | Risk-weighted assets | | 843,395 |
| 865,318 |
| 871,337 |
| 857,181 |
| 1,102,995 |
| | Total shareholders’ equity | | 183,955 |
| 186,253 |
| 190,250 |
| 175,386 |
| 188,460 |
| | Less: preference shares and other equity instruments | | (22,276 | ) | (23,772 | ) | (23,655 | ) | (18,515 | ) | (16,517 | ) | | Total ordinary shareholders’ equity | | 161,679 |
| 162,481 |
| 166,595 |
| 156,871 |
| 171,943 |
| | Less: goodwill and intangible assets (net of tax) | | (17,535 | ) | (22,425 | ) | (21,680 | ) | (19,649 | ) | (24,626 | ) | | Tangible ordinary shareholders’ equity | | 144,144 |
| 140,056 |
| 144,915 |
| 137,222 |
| 147,317 |
| | Financial statistics |
|
|
| | | | | | Loans and advances to customers as a percentage of customer accounts |
| 72.0% |
| 72.0% |
| 70.6% |
| 67.7% |
| 71.7% |
| | Average total shareholders’ equity to average total assets |
| 6.97% |
| 7.16% |
| 7.33% |
| 7.37% |
| 7.31% |
| | Net asset value per ordinary share at year-end ($) | 14 | 8.00 |
| 8.13 |
| 8.35 |
| 7.91 |
| 8.77 |
| | Tangible net asset value per ordinary share at year-end ($) | | 7.13 |
| 7.01 |
| 7.26 |
| 6.92 |
| 7.51 |
| Tangible net asset value per fully diluted share at year-end ($)
| | 7.11 |
| 6.98 |
| 7.22 |
| 6.88 |
| 7.46 |
| | Number of $0.50 ordinary shares in issue (millions) |
| 20,639 |
| 20,361 |
| 20,321 |
| 20,192 |
| 19,685 |
| | Basic number of $0.50 ordinary shares outstanding (millions) | | 20,206 |
| 19,981 |
| 19,960 |
| 19,838 |
| 19,604 |
| | Basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares (millions) | | 20,280 |
| 20,059 |
| 20,065 |
| 19,933 |
| 19,744 |
| | Closing foreign exchange translation rates to $: |
|
|
| | | | | | $1: £ |
| 0.756 |
| 0.783 |
| 0.740 |
| 0.811 |
| 0.675 |
| | $1: € |
| 0.890 |
| 0.873 |
| 0.834 |
| 0.949 |
| 0.919 |
|
For footnotes, see2 Including perpetual preferred securities, details of which can be found in Note 28: Subordinated liabilities on page 67.380.
3 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.
Report of the Directors | Financial summary
Balance sheet commentary compared with
31 December 20182019 At 31 December 2019,2020, our total assets were $2.7tn,$3.0tn, an increase of $157bn$269bn or 6%10% on a reported basis and $126bn$200bn or 5%7% on a constant currency basis. OurThe increase in total assets primarily reflected growth in cash balances, derivative assets and financial investments.
On a reported basis, our ratio of customer advances to customer accounts ofwas 63.2%, compared with 72.0% was unchanged fromat 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 was2019, mainly due to continued growth in Asia and Europe, notably in Hong Kong and the UK.customer accounts.
Customer lending in Asia increased by $25bn, with growth in all global businesses. The increase in RBWM (up $13bn) reflected growthin 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.Assets
Cash and balances at central banks decreasedincreased by $9bn$150bn 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,98%, mainly in the US, reflecting the redeploymentUK, France, Hong Kong and North America, as a result 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 todeposit inflows and an increase in equity security holdings,the commercial surplus.
Trading assets decreased by $22bn or 9%, notably in Hong Kong, the US and the UK, in part due an increase in client activity compared with 2018. This was partly offset byfrom a decreasereduction in debt securities held, along with a reduction in bond positions previously used for hedging purposes. Derivative assets increased by $65bn or 27%, primarily in the US. Derivative assets increased by $35bn or 17%UK, France and included aHong Kong, reflecting favourable effect ofrevaluation movements on interest rate contracts as interest rates fell in most major markets. There was also an increase in foreign currency translation differences of $5bn. Excluding this, derivative assets increased by $31bn, primarily from mark-to-market gains in the UK.exchange contracts linked to valuation movements attributable to market conditions. The increasegrowth in derivative assets was consistent with the increase in derivative liabilities, as the underlying risk is broadly matched.
Financial investmentsLoans and advances to customers of $1.0tn increased by $36bn or 9%, which$1bn on a reported basis. This included a favourable effectforeign currency translation differences of $26bn. Excluding the effects of foreign currency translation differences, loans and advances to customers decreased by $25bn or 2%.
The commentary below is on a constant currency basis. In GBM, customer lending was down $28bn or 11%, while in CMB customer lending was down $11bn or 3%. Despite significant growth in these businesses in the first quarter of $3bn. Excluding this, financial investments2020 from customers drawing down on credit facilities, balances subsequently reduced as customers made repayments in part due to the uncertain economic outlook. In GBM, lower lending was mainly from decreases in term lending in Asia, Europe and the US, and also from a decrease in overdrafts in Europe. In CMB, the decrease in customer lending reflected a reduction in other lending and overdrafts in Asia and North America. In Europe, lending remained relatively flat as lower other lending and overdrafts were almost entirely offset by a rise in term lending. In WPB, lending increased by $33bn, mainly due to an increase in debt securities,$14bn or 3%, notably from mortgage growth in the UK (up $12bn) and to a lesser extent in Singapore and the US.Hong Kong (up $5bn). This was partly offset by a decrease$6bn reduction in credit card balances and overdrafts as customer activity fell as a result of government measures to contain the outbreak of Covid-19. Financial investments increased by $47bn or 11%, mainly as we redeployed our commercial surplus. We increased our holdings of debt securities and treasury bills and benefited from valuation gains resulting from interest rate reductions. The increases in financial investments in government bondswere notably observed in Hong Kong,. as we increased our holdings of government-issued bonds and bills. These increases were partly offset by lower holdings of debt securities in Canada. Other assets increased by $23bn due to a $10bn increase in cash collateral balances, mainly in France and Hong Kong as underlying derivative balances grew. Additionally, there were increases in precious metals balances, mainly in the US as we grew our depository.
Liabilities Customer accounts of $1.4tn$1.6tn increased by $76bn$204bn or 6%14% on a reported basis includingand included the favourable effect of foreign currency translation differences of $17bn. On$31bn. Excluding this, customer accounts increased by $173bn or 12%. The commentary below is on a constant currency basis, current accounts increased by $59bn or 4%, with growth across all regions, mainly in Asia, Europe and North America.basis. 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 Europeall our global businesses and regions. In CMB, balances grew by $13bn. This was driven$73bn, and in GBM, customer accounts increased bygrowth $33bn. These increases included the impact of corporate clients consolidating their funds and depositing these into their customer accounts to maintain liquidity, notably in RBWM (up $11bn), mainly due to higher savingsthe UK, Hong Kong and the US. In WPB, customer account balances increased by $67bn, notably in the UK and Hong Kong, reflecting reduced customer spending resulting in CMB (up $10bn), reflecting larger balances held in current and savings accounts.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$28bn or 15%20%, primarily in the US, from a decreased use of repurchase agreements forin line with our actions to manage our funding in our Global Markets business.requirements across the Group. 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$64bn or 16%27%, 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, including non-controlling interests, increased by $12bn or 6% compared with 31 December 2019, reflecting the effects of $184bn decreased by $2bn or 1%. The reduction was mainly due to dividends paid to shareholdersprofits generated of $12bn and adverse movements$6.1bn combined with other comprehensive income (‘OCI’) of $8bn. OCI included fair value gains on debt instruments of $2bn, related to fair value attributable to changes in own credit risk.favourable remeasurement of defined benefit pension obligations of $1bn and foreign exchange differences of $5bn. These reductionsincreases were partly offset by profits generated in the period$2bn of $7bn, shares issued in lieu ofcoupon distributions on securities classified as equity and dividends of $3bn and a $1bn decrease in accumulated foreign exchange losses.paid by non-controlling interests. Risk-weighted assets Risk-weighted assets (‘RWAs’) totalled $843.4bn$857.5bn at 31 December 2019,2020, a $21.9bn decrease.$14.1bn increase since 2019. Excluding foreign currency translation differences, RWAs decreasedincreased by $26.9bn$1.0bn in 2019.2020, and included the following movements: A $32.2bn•a $9.7bn asset size decrease, in RWAs as a result of methodology and policy changes was mostly due to management initiativeslargely driven by RWA reductions in CMB and GB&M, includingGBM under our transformation programme. This was partly offset by lending growth and increases in counterparty credit risk parameter refinements, a change to our best estimate of expected loss on corporate exposures, and securitisation transactions. A $7.7bn decreaseRWAs 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 $9.0bnmark-to-market movements;
•a $24.5bn increase in RWAs due to changes in asset size movements predominantly reflected RWA increasesquality, mostly in CMB and GBM. This was largely due to lending growth of $26.2bn, whichcredit migration in Asia, North America and Europe, partly offset by decreases due to portfolio mix changes; and •a $14.2bn fall in RWAs due to changes in methodology and policy, mostly in GBM and CMB. This included reductions under management initiatives involving risk parameter refinements, improved collateral linkage, and data enhancement, and changes under the CRR ‘Quick Fix’ relief package. These reductions were partly offset by changes in approach to credit risk exposures. From a global business perspective, primarily in GBM and CMB, increases from credit migration, lending growth, and market risk volatility were mitigated by reductions due to active portfolio management of $17.2bn. Changes in asset quality caused$51.5bn as a $3.7bn rise in RWAs.result of our transformation programme.
| | | | | | | | | | Customer accounts by country/territory | | 2020 | 2019 | | $m | $m | | Europe | 629,647 | | 528,718 | | | – UK | 504,275 | | 419,642 | | | – France | 55,111 | | 47,699 | | | – Germany | 21,605 | | 19,361 | | | – Switzerland | 10,102 | | 6,558 | | | – other | 38,554 | | 35,458 | | | Asia | 762,406 | | 697,358 | | | – Hong Kong | 531,489 | | 499,955 | | | – Singapore | 55,140 | | 48,569 | | | – mainland China | 56,826 | | 48,323 | | | – Australia | 29,286 | | 23,191 | | | – India | 20,199 | | 14,935 | | | – Malaysia | 15,997 | | 14,624 | | | – Taiwan | 16,041 | | 14,668 | | | – Indonesia | 5,198 | | 4,732 | | | – other | 32,230 | | 28,361 | | | Middle East and North Africa (excluding Saudi Arabia) | 41,221 | | 38,126 | | | – United Arab Emirates | 20,974 | | 17,949 | | | – Turkey | 3,987 | | 3,870 | | | – Egypt | 5,659 | | 5,186 | | | – other | 10,601 | | 11,121 | | | North America | 182,028 | | 146,676 | | | – US | 117,485 | | 90,834 | | | – Canada | 56,520 | | 48,425 | | | – other | 8,023 | | 7,417 | | | Latin America | 27,478 | | 28,237 | | | – Mexico | 22,220 | | 23,051 | | | – other | 5,258 | | 5,186 | | | At 31 Dec | 1,642,780 | | 1,439,115 | |
| | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances, deposits by currency | | At | | 31 Dec 2020 | | $m | USD | GBP | HKD | EUR | CNY | Others1 | Total | | Loans and advances to banks | 17,959 | | 3,495 | | 7,155 | | 4,601 | | 6,063 | | 42,343 | | 81,616 | | | Loans and advances to customers | 173,117 | | 280,803 | | 222,138 | | 89,851 | | 37,671 | | 234,407 | | 1,037,987 | | | Total loans and advances | 191,076 | | 284,298 | | 229,293 | | 94,452 | | 43,734 | | 276,750 | | 1,119,603 | | | | | | | | | | | Deposits by banks | 30,239 | | 7,856 | | 2,884 | | 25,291 | | 4,904 | | 10,906 | | 82,080 | | | Customer accounts | 433,647 | | 431,143 | | 310,197 | | 135,851 | | 60,971 | | 270,971 | | 1,642,780 | | | Total deposits | 463,886 | | 438,999 | | 313,081 | | 161,142 | | 65,875 | | 281,877 | | 1,724,860 | | | | | | | | | | | At | | 31 Dec 2019 | | $m | USD | GBP | HKD | EUR | CNY | Others | Total | | Loans and advances to banks | 19,386 | | 3,245 | | 6,242 | | 4,266 | | 5,772 | | 30,292 | | 69,203 | | | Loans and advances to customers | 177,696 | | 264,029 | | 234,945 | | 84,919 | | 34,338 | | 240,816 | | 1,036,743 | | | Total loans and advances | 197,082 | | 267,274 | | 241,187 | | 89,185 | | 40,110 | | 271,108 | | 1,105,946 | | | | | | | | | | | Deposits by banks | 23,508 | | 7,537 | | 1,865 | | 11,154 | | 4,265 | | 10,693 | | 59,022 | | | Customer accounts | 360,462 | | 358,764 | | 299,049 | | 122,988 | | 52,216 | | 245,636 | | 1,439,115 | | | Total deposits | 383,970 | | 366,301 | | 300,914 | | 134,142 | | 56,481 | | 256,329 | | 1,498,137 | |
| | | | | | | Customer accounts by country/territory | | | 2019 |
| 2018 |
| | | $m |
| $m |
| | Europe | 528,718 |
| 503,154 |
| | – UK | 419,642 |
| 399,487 |
| | – France | 47,699 |
| 45,169 |
| | – Germany | 19,361 |
| 16,713 |
| | – Switzerland | 6,558 |
| 6,315 |
| | – other | 35,458 |
| 35,470 |
| | Asia | 697,358 |
| 664,824 |
| | – Hong Kong | 499,955 |
| 484,897 |
| | – Singapore | 48,569 |
| 42,323 |
| | – mainland China | 48,323 |
| 45,712 |
| | – Australia | 23,191 |
| 20,649 |
| | – India | 14,935 |
| 14,210 |
| | – Malaysia | 14,624 |
| 13,904 |
| | – Taiwan | 14,668 |
| 13,602 |
| | – Indonesia | 4,732 |
| 3,810 |
| | – other | 28,361 |
| 25,717 |
| | Middle East and North Africa (excluding Saudi Arabia) | 38,126 |
| 35,408 |
| | – United Arab Emirates | 17,949 |
| 16,583 |
| | – Turkey | 3,870 |
| 4,169 |
| | – Egypt | 5,186 |
| 4,493 |
| | – other | 11,121 |
| 10,163 |
| | North America | 146,676 |
| 133,291 |
| | – US | 90,834 |
| 82,523 |
| | – Canada | 48,425 |
| 43,898 |
| | – other | 7,417 |
| 6,870 |
| | Latin America | 28,237 |
| 25,966 |
| | – Mexico | 23,051 |
| 19,936 |
| | – other | 5,186 |
| 6,030 |
| | At 31 Dec | 1,439,115 |
| 1,362,643 |
|
| | | | | | | | | | | | | | | | | Loans and advances, deposits by currency | | | At | | | 31 Dec 2019 | | $m | USD |
| GBP |
| HKD |
| EUR |
| CNY |
| Others15 |
| Total |
| | Loans and advances to banks | 19,386 |
| 3,245 |
| 6,242 |
| 4,266 |
| 5,772 |
| 30,292 |
| 69,203 |
| | Loans and advances to customers | 177,696 |
| 264,029 |
| 234,945 |
| 84,919 |
| 34,338 |
| 240,816 |
| 1,036,743 |
| | Total loans and advances | 197,082 |
| 267,274 |
| 241,187 |
| 89,185 |
| 40,110 |
| 271,108 |
| 1,105,946 |
| | | | | | | | | | | Deposits by banks | 23,508 |
| 7,537 |
| 1,865 |
| 11,154 |
| 4,265 |
| 10,693 |
| 59,022 |
| | Customer accounts | 360,462 |
| 358,764 |
| 299,049 |
| 122,988 |
| 52,216 |
| 245,636 |
| 1,439,115 |
| | Total deposits | 383,970 |
| 366,301 |
| 300,914 |
| 134,142 |
| 56,481 |
| 256,329 |
| 1,498,137 |
| | | | | | | | | | | | At | | | 31 Dec 2018 | | $m | USD |
| GBP |
| HKD |
| EUR |
| CNY |
| Others15 |
| Total |
| | Loans and advances to banks | 23,469 |
| 4,351 |
| 3,241 |
| 3,462 |
| 7,418 |
| 30,226 |
| 72,167 |
| | Loans and advances to customers | 176,907 |
| 243,541 |
| 220,458 |
| 86,583 |
| 29,973 |
| 224,234 |
| 981,696 |
| | Total loans and advances | 200,376 |
| 247,892 |
| 223,699 |
| 90,045 |
| 37,391 |
| 254,460 |
| 1,053,863 |
| | | | | | | | | | | Deposits by banks | 17,802 |
| 5,777 |
| 3,748 |
| 15,923 |
| 4,065 |
| 9,016 |
| 56,331 |
| | Customer accounts | 348,741 |
| 340,244 |
| 290,748 |
| 116,095 |
| 49,596 |
| 217,219 |
| 1,362,643 |
| | Total deposits | 366,543 |
| 346,021 |
| 294,496 |
| 132,018 |
| 53,661 |
| 226,235 |
| 1,418,974 |
|
For footnotes, see page 67.
1 ‘Others’ includes items with no currency information available ($8,671m for loans to banks, $56,729m for loans to customers, $4m for deposits by banks and $5m for customer accounts).
Report of the Directors | Financial summary
Average balance sheet and net interest income Average balances and related interest are shown for the domestic operations of our principal commercial banks by geographical region. ‘Other operations’ comprise the operations of our principal commercial banking and consumer finance entities outside their domestic markets and all other banking operations, including investment banking balances and transactions. Average balances are based on daily averages for the principal areas of our banking activities with monthly or less frequent averages used elsewhere. Balances and transactions with fellow subsidiaries are reported gross in the principal commercial banking and consumer finance entities, and the elimination entries are included within ‘Other operations’. Net interest margin numbers are calculated by dividing net interest income as reported in the income statement by the average interest-earning assets from which interest income is reported within the ‘Net interest income’ line of the income statement. Total interest-earning assets include credit-impaired loans where the carrying amount has been adjusted as a result of impairment allowances. In accordance with IFRSs, we recognise interest income on credit-impaired assets after the carrying amount has been adjusted as a result of impairment. Fee income that forms an integral part of the effective interest rate of a financial instrument is recognised as an adjustment to the effective interest rate and recorded in ‘Interest income’.
| | | Assets | Assets | Assets | | | | | 2019 | 2018 | 2017 | | | 2020 | 2019 | 2018 | | | | | Average balance |
| Interest income |
| Yield | Average balance |
| Interest income |
| Yield | Average balance |
| Interest income |
| Yield |
| | | Average
balance | Interest
income | Yield | Average
balance | Interest
income | Yield | Average
balance | Interest
income | Yield | | | | Footnotes | $m |
| $m |
| % | $m |
| $m |
| % | $m |
| $m |
| % |
| | Footnotes | $m | % | $m | % | $m | % | | Summary | Summary | | | | | | | Summary | | | | | Interest-earning assets measured at amortised cost (itemised below) | Interest-earning assets measured at amortised cost (itemised below) | | 1,922,822 |
| 54,695 |
| 2.84 | 1,839,346 |
| 49,609 |
| 2.70 | 1,726,120 |
| 40,995 |
| 2.37 |
| Interest-earning assets measured at amortised cost (itemised below) | | 2,092,900 | | 41,756 | | 2.00 | | 1,922,822 | | 54,695 | | 2.84 | | 1,839,346 | | 49,609 | | 2.70 | | | Trading assets and financial assets designated and otherwise mandatorily measured at fair value through profit or loss | Trading assets and financial assets designated and otherwise mandatorily measured at fair value through profit or loss | | 211,561 |
| 5,457 |
| 2.58 | 195,922 |
| 5,215 |
| 2.66 | 186,673 |
| 4,245 |
| 2.27 |
| Trading assets and financial assets designated and otherwise mandatorily measured at fair value through profit or loss | | 188,648 | | 3,328 | | 1.76 | | 211,561 | | 5,457 | | 2.58 | | 195,922 | | 5,215 | | 2.66 | | | Expected credit losses provision | Expected credit losses provision | | (8,524 | ) | N/A |
| N/A | (7,816 | ) | N/A |
| N/A | N/A |
| N/A |
| N/A |
| Expected credit losses provision | | (11,709) | | N/A | N/A
| (8,524) | | N/A | (7,816) | | N/A | | Impairment allowances | | N/A |
| N/A |
| N/A | N/A |
| N/A |
| N/A | (7,841 | ) | N/A |
| N/A |
| | | | Non-interest-earning assets | Non-interest-earning assets | | 586,517 |
| N/A |
| N/A | 584,524 |
| N/A |
| N/A | 616,688 |
| N/A |
| N/A |
| Non-interest-earning assets | | 667,100 | | N/A | 586,517 | | N/A | 584,524 | | N/A | | Total assets and interest income | Total assets and interest income | | 2,712,376 |
| 60,152 |
| 2.22 | 2,611,976 |
| 54,824 |
| 2.10 | 2,521,640 |
| 45,240 |
| 1.79 |
| Total assets and interest income | | 2,936,939 | | 45,084 | | 1.54 | | 2,712,376 | | 60,152 | | 2.22 | | 2,611,976 | | 54,824 | | 2.10 | | | Average yield on all interest-earning assets | Average yield on all interest-earning assets | | | 2.82 | | 2.69 | | 2.37 |
| Average yield on all interest-earning assets | | | 1.98 | | | 2.82 | | | 2.69 | | | | | | | | | | | | | Short-term funds and loans and advances to banks | Short-term funds and loans and advances to banks | | | | | | | Short-term funds and loans and advances to banks | | | | | Europe | HSBC Bank plc | 1 | 84,254 |
| 376 |
| 0.45 | 113,605 |
| 471 |
| 0.41 | 97,645 |
| 299 |
| 0.31 |
| Europe | HSBC Bank plc | 1 | 116,521 | | 182 | | 0.16 | | 84,254 | | 376 | | 0.45 | | 113,605 | | 471 | | 0.41 | | | | HSBC UK Bank plc | 1 | 38,830 |
| 277 |
| 0.71 | 22,457 |
| 147 |
| 0.65 | — |
| — |
| — |
| | HSBC UK Bank plc | 1 | 63,190 | | 111 | | 0.18 | | 38,830 | | 277 | | 0.71 | | 22,457 | | 147 | | 0.65 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 66,430 |
| 1,147 |
| 1.73 | 71,631 |
| 1,169 |
| 1.63 | 67,264 |
| 898 |
| 1.34 |
| Asia | The Hongkong and Shanghai Banking Corporation Limited | | 76,521 | | 683 | | 0.89 | | 66,430 | | 1,147 | | 1.73 | | 71,631 | | 1,169 | | 1.63 | | | MENA | HSBC Bank Middle East Limited | | 3,247 |
| 71 |
| 2.19 | 3,419 |
| 52 |
| 1.52 | 2,556 |
| 39 |
| 1.53 |
| MENA | HSBC Bank Middle East Limited | | 4,837 | | 54 | | 1.12 | | 3,247 | | 71 | | 2.19 | | 3,419 | | 52 | | 1.52 | | | North America | HSBC North America Holdings Inc. | | 15,820 |
| 307 |
| 1.94 | 23,949 |
| 643 |
| 2.68 | 41,516 |
| 461 |
| 1.11 |
| North America | HSBC North America Holdings Inc. | | 24,429 | | 89 | | 0.36 | | 15,820 | | 307 | | 1.94 | | 23,949 | | 643 | | 2.68 | | | | HSBC Bank Canada | | 689 |
| 4 |
| 0.58 | 620 |
| 12 |
| 1.94 | 366 |
| 3 |
| 0.82 |
| | HSBC Bank Canada | | 8,953 | | 22 | | 0.25 | | 689 | | 4 | | 0.58 | | 620 | | 12 | | 1.94 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 2,509 |
| 180 |
| 7.17 | 2,435 |
| 178 |
| 7.31 | 2,165 |
| 150 |
| 6.93 |
| Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 2,084 | | 104 | | 4.99 | | 2,509 | | 180 | | 7.17 | | 2,435 | | 178 | | 7.31 | | | | HSBC Argentina Holdings S.A. | | 45 |
| — |
| — | 37 |
| 1 |
| 2.70 | 1,083 |
| 1 |
| 0.09 |
| | HSBC Argentina Holdings S.A. | | 43 | | — | | — | | 45 | | — | | — | | 37 | | 1 | | 2.70 | | | | Other operations and intra-region eliminations | Other operations and intra-region eliminations | | 1,096 |
| 49 |
| 4.47 | (4,516 | ) | (198 | ) | 4.38 | 23,531 |
| 179 |
| 0.76 |
| Other operations and intra-region eliminations | | 1,677 | | 19 | | 1.13 | | 1,096 | | 49 | | 4.47 | | (4,516) | | (198) | | 4.38 | | | At 31 Dec | At 31 Dec | | 212,920 |
| 2,411 |
| 1.13 | 233,637 |
| 2,475 |
| 1.06 | 236,126 |
| 2,030 |
| 0.86 |
| At 31 Dec | | 298,255 | | 1,264 | | 0.42 | | 212,920 | | 2,411 | | 1.13 | | 233,637 | | 2,475 | | 1.06 | |
| | | | | | | | | | | | | | | | | | | | | Assets (continued) | | | | 2019 | 2018 | 2017 | | | | Average balance |
| Interest income |
| Yield | Average balance |
| Interest income |
| Yield | Average balance |
| Interest income |
| Yield |
| | | Footnotes
| $m |
| $m |
| % | $m |
| $m |
| % | $m |
| $m |
| % |
| | Loans and advances to customers | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 150,080 |
| 3,198 |
| 2.13 | 251,992 |
| 6,599 |
| 2.62 | 342,354 |
| 9,180 |
| 2.68 |
| | | HSBC UK Bank plc | 1 | 231,031 |
| 6,650 |
| 2.88 | 116,144 |
| 3,370 |
| 2.90 | — |
| — |
| — |
| | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 468,359 |
| 16,263 |
| 3.47 | 440,143 |
| 14,466 |
| 3.29 | 395,062 |
| 11,716 |
| 2.97 |
| | MENA | HSBC Bank Middle East Limited | | 20,557 |
| 1,000 |
| 4.86 | 20,832 |
| 983 |
| 4.72 | 20,498 |
| 861 |
| 4.20 |
| | North America | HSBC North America Holdings Inc. | | 66,074 |
| 2,713 |
| 4.11 | 63,036 |
| 2,479 |
| 3.93 | 69,281 |
| 2,390 |
| 3.45 |
| | | HSBC Bank Canada | | 42,942 |
| 1,585 |
| 3.69 | 40,587 |
| 1,425 |
| 3.51 | 36,557 |
| 1,205 |
| 3.30 |
| | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 20,379 |
| 2,348 |
| 11.52 | 17,486 |
| 2,038 |
| 11.66 | 14,932 |
| 1,767 |
| 11.83 |
| | | HSBC Argentina Holdings S.A. | | 2,081 |
| 652 |
| 31.33 | 2,903 |
| 741 |
| 25.53 | 3,306 |
| 712 |
| 21.54 |
| | Other operations and intra-region eliminations | | 20,051 |
| 1,169 |
| 5.83 | 19,840 |
| 1,184 |
| 5.97 | 20,224 |
| 920 |
| 4.55 |
| | At 31 Dec | | 1,021,554 |
| 35,578 |
| 3.48 | 972,963 |
| 33,285 |
| 3.42 | 902,214 |
| 28,751 |
| 3.19 |
| | | | | | | | | | | | | | Reverse repurchase agreements – non-trading | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 98,391 |
| 1,191 |
| 1.21 | 85,967 |
| 905 |
| 1.05 | 58,419 |
| 503 |
| 0.86 |
| | | HSBC UK Bank plc | 1 | 4,345 |
| 36 |
| 0.83 | 854 |
| 8 |
| 0.94 | — |
| — |
| — |
| | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 56,093 |
| 1,030 |
| 1.84 | 50,730 |
| 902 |
| 1.78 | 45,772 |
| 612 |
| 1.34 |
| | MENA | HSBC Bank Middle East Limited | | 857 |
| 32 |
| 3.73 | 1,131 |
| 16 |
| 1.41 | 1,101 |
| 14 |
| 1.27 |
| | North America | HSBC North America Holdings Inc. | | 75,215 |
| 2,560 |
| 3.40 | 77,111 |
| 1,871 |
| 2.43 | 77,921 |
| 928 |
| 1.19 |
| | | HSBC Bank Canada | | 5,895 |
| 121 |
| 2.05 | 5,233 |
| 79 |
| 1.51 | 5,775 |
| 44 |
| 0.76 |
| | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 1,100 |
| 75 |
| 6.82 | 1,134 |
| 90 |
| 7.94 | 882 |
| 61 |
| 6.92 |
| | | HSBC Argentina Holdings S.A. | | 35 |
| 16 |
| 45.71 | 40 |
| 15 |
| 37.50 | 70 |
| 15 |
| 21.43 |
| | Other operations and intra-region eliminations | | (16,989 | ) | (371 | ) | 2.18 | (16,773 | ) | (147 | ) | 0.88 | (16,180 | ) | 14 |
| (0.09 | ) | | At 31 Dec | | 224,942 |
| 4,690 |
| 2.08 | 205,427 |
| 3,739 |
| 1.82 | 173,760 |
| 2,191 |
| 1.26 |
| | | | | | | | | | | | | | Financial investments | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 64,021 |
| 1,195 |
| 1.87 | 69,552 |
| 1,205 |
| 1.73 | 83,213 |
| 1,219 |
| 1.46 |
| | | HSBC UK Bank plc | 1 | 20,865 |
| 302 |
| 1.45 | 7,830 |
| 104 |
| 1.33 | — |
| — |
| — |
| | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 228,733 |
| 5,831 |
| 2.55 | 218,439 |
| 5,074 |
| 2.32 | 216,233 |
| 4,094 |
| 1.89 |
| | MENA | HSBC Bank Middle East Limited | | 7,723 |
| 173 |
| 2.24 | 6,317 |
| 134 |
| 2.12 | 6,406 |
| 83 |
| 1.30 |
| | North America | HSBC North America Holdings Inc. | | 50,321 |
| 1,202 |
| 2.39 | 45,668 |
| 1,134 |
| 2.48 | 47,021 |
| 945 |
| 2.01 |
| | | HSBC Bank Canada | | 19,115 |
| 371 |
| 1.94 | 18,424 |
| 341 |
| 1.85 | 17,304 |
| 214 |
| 1.24 |
| | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 7,082 |
| 466 |
| 6.58 | 7,154 |
| 494 |
| 6.91 | 6,296 |
| 366 |
| 5.81 |
| | | HSBC Argentina Holdings S.A. | | 961 |
| 526 |
| 54.73 | 750 |
| 217 |
| 28.93 | 600 |
| 98 |
| 16.33 |
| | Other operations and intra-region eliminations | | 19,118 |
| 639 |
| 3.34 | 12,096 |
| 463 |
| 3.83 | 12,734 |
| 421 |
| 3.31 |
| | At 31 Dec | | 417,939 |
| 10,705 |
| 2.56 | 386,230 |
| 9,166 |
| 2.37 | 389,807 |
| 7,440 |
| 1.91 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets (continued) | | | 2020 | 2019 | 2018 | | | Average
balance | Interest
income | Yield | Average
balance | Interest
income | Yield | Average
balance | Interest
income | Yield | | Footnotes | $m | $m | % | $m | $m | % | $m | $m | % | | Loans and advances to customers | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 149,457 | | 2,685 | | 1.80 | | 150,080 | | 3,198 | | 2.13 | | 251,992 | | 6,599 | | 2.62 | | | HSBC UK Bank plc | 1 | 242,013 | | 6,307 | | 2.61 | | 231,031 | | 6,650 | | 2.88 | | 116,144 | | 3,370 | | 2.90 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 479,165 | | 12,984 | | 2.71 | | 468,359 | | 16,263 | | 3.47 | | 440,143 | | 14,466 | | 3.29 | | | MENA | HSBC Bank Middle East Limited | | 21,244 | | 786 | | 3.70 | | 20,557 | | 1,000 | | 4.86 | | 20,832 | | 983 | | 4.72 | | | North America | HSBC North America Holdings Inc. | | 66,642 | | 2,090 | | 3.14 | | 66,074 | | 2,713 | | 4.11 | | 63,036 | | 2,479 | | 3.93 | | | HSBC Bank Canada | | 46,432 | | 1,306 | | 2.81 | | 42,942 | | 1,585 | | 3.69 | | 40,587 | | 1,425 | | 3.51 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 18,796 | | 1,898 | | 10.10 | | 20,379 | | 2,348 | | 11.52 | | 17,486 | | 2,038 | | 11.66 | | | HSBC Argentina Holdings S.A. | | 1,619 | | 462 | | 28.54 | | 2,081 | | 652 | | 31.33 | | 2,903 | | 741 | | 25.53 | | | | | | | | | | | | | | | Other operations and intra-region eliminations | | 21,427 | | 873 | | 4.07 | | 20,051 | | 1,169 | | 5.83 | | 19,840 | | 1,184 | | 5.97 | | | At 31 Dec | | 1,046,795 | | 29,391 | | 2.81 | | 1,021,554 | | 35,578 | | 3.48 | | 972,963 | | 33,285 | | 3.42 | | | | | | | | | | | | | | Reverse repurchase agreements – non-trading | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 87,959 | | 535 | | 0.61 | | 98,391 | | 1,191 | | 1.21 | | 85,967 | | 905 | | 1.05 | | | HSBC UK Bank plc | 1 | 3,089 | | 11 | | 0.36 | | 4,345 | | 36 | | 0.83 | | 854 | | 8 | | 0.94 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 71,325 | | 585 | | 0.82 | | 56,093 | | 1,030 | | 1.84 | | 50,730 | | 902 | | 1.78 | | | MENA | HSBC Bank Middle East Limited | | 1,576 | | 22 | | 1.40 | | 857 | | 32 | | 3.73 | | 1,131 | | 16 | | 1.41 | | | North America | HSBC North America Holdings Inc. | | 65,534 | | 522 | | 0.80 | | 75,215 | | 2,560 | | 3.40 | | 77,111 | | 1,871 | | 2.43 | | | HSBC Bank Canada | | 5,647 | | 99 | | 1.75 | | 5,895 | | 121 | | 2.05 | | 5,233 | | 79 | | 1.51 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 2,065 | | 103 | | 4.99 | | 1,100 | | 75 | | 6.82 | | 1,134 | | 90 | | 7.94 | | | HSBC Argentina Holdings S.A. | | 292 | | 69 | | 23.63 | | 35 | | 16 | | 45.71 | | 40 | | 15 | | 37.50 | | | | | | | | | | | | | | | Other operations and intra-region eliminations | | (15,586) | | (127) | | 0.81 | | (16,989) | | (371) | | 2.18 | | (16,773) | | (147) | | 0.88 | | | At 31 Dec | | 221,901 | | 1,819 | | 0.82 | | 224,942 | | 4,690 | | 2.08 | | 205,427 | | 3,739 | | 1.82 | | | | | | | | | | | | | | Financial investments | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 65,848 | | 842 | | 1.28 | | 64,021 | | 1,195 | | 1.87 | | 69,552 | | 1,205 | | 1.73 | | | HSBC UK Bank plc | 1 | 32,450 | | 232 | | 0.71 | | 20,865 | | 302 | | 1.45 | | 7,830 | | 104 | | 1.33 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 251,760 | | 4,653 | | 1.85 | | 228,733 | | 5,831 | | 2.55 | | 218,439 | | 5,074 | | 2.32 | | | MENA | HSBC Bank Middle East Limited | | 9,918 | | 99 | | 1.00 | | 7,723 | | 173 | | 2.24 | | 6,317 | | 134 | | 2.12 | | | North America | HSBC North America Holdings Inc. | | 52,611 | | 888 | | 1.69 | | 50,321 | | 1,202 | | 2.39 | | 45,668 | | 1,134 | | 2.48 | | | HSBC Bank Canada | | 16,522 | | 183 | | 1.11 | | 19,115 | | 371 | | 1.94 | | 18,424 | | 341 | | 1.85 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 4,791 | | 246 | | 5.13 | | 7,082 | | 466 | | 6.58 | | 7,154 | | 494 | | 6.91 | | | HSBC Argentina Holdings S.A. | | 903 | | 312 | | 34.55 | | 961 | | 526 | | 54.73 | | 750 | | 217 | | 28.93 | | | | | | | | | | | | | | | Other operations and intra-region eliminations | | 28,739 | | 688 | | 2.39 | | 19,118 | | 639 | | 3.34 | | 12,096 | | 463 | | 3.83 | | | At 31 Dec | | 463,542 | | 8,143 | | 1.76 | | 417,939 | | 10,705 | | 2.56 | | 386,230 | | 9,166 | | 2.37 | |
Report of the Directors | Financial summary
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets (continued) | | | 2020 | 2019 | 2018 | | | Average
balance | Interest
income | Yield | Average
balance | Interest
income | Yield | Average
balance | Interest
income | Yield | | Footnotes | $m | $m | % | $m | $m | % | $m | $m | % | | Other interest-earning assets | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 54,323 | | 994 | | 1.83 | | 41,949 | | 1,060 | | 2.53 | | 35,757 | | 808 | | 2.26 | | | HSBC UK Bank plc | 1 | 317 | | 4 | | 1.26 | | 461 | | 8 | | 1.74 | | 226 | | 2 | | 0.88 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 8,661 | | 94 | | 1.09 | | 5,417 | | 146 | | 2.69 | | 3,987 | | 87 | | 2.18 | | | MENA | HSBC Bank Middle East Limited | | 29 | | 2 | | 6.90 | | (205) | | 2 | | (0.98) | | (67) | | 25 | | (37.31) | | | North America | HSBC North America Holdings Inc. | | 8,001 | | 46 | | 0.57 | | 5,407 | | 132 | | 2.44 | | 5,522 | | 122 | | 2.21 | | | HSBC Bank Canada | | 746 | | 3 | | 0.40 | | 573 | | 19 | | 3.32 | | 262 | | 10 | | 3.82 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 1,062 | | 3 | | 0.28 | | 1,154 | | 14 | | 1.22 | | 763 | | 8 | | 1.05 | | | HSBC Argentina Holdings S.A. | | 20 | | 135 | | 675.00 | | (146) | | 258 | | (176.70) | | 330 | | 154 | | 46.67 | | | | | | | | | | | | | | | Other operations and intra-region eliminations | | (10,752) | | (142) | | | (9,143) | | (328) | | | (5,691) | | (272) | | | | At 31 Dec | | 62,407 | | 1,139 | | 1.83 | | 45,467 | | 1,311 | | 2.89 | | 41,089 | | 944 | | 2.30 | | | | | | | | | | | | | | Total interest-earning assets | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 474,108 | | 5,238 | | 1.10 | | 438,696 | | 7,019 | | 1.60 | | 556,873 | | 9,988 | | 1.79 | | | HSBC UK Bank plc | 1 | 341,059 | | 6,665 | | 1.95 | | 295,532 | | 7,273 | | 2.46 | | 147,511 | | 3,631 | | 2.46 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 887,432 | | 18,999 | | 2.14 | | 825,033 | | 24,417 | | 2.96 | | 784,930 | | 21,698 | | 2.76 | | | MENA | HSBC Bank Middle East Limited | | 37,604 | | 963 | | 2.56 | | 32,179 | | 1,278 | | 3.97 | | 31,632 | | 1,210 | | 3.83 | | | North America | HSBC North America Holdings Inc. | | 217,217 | | 3,635 | | 1.67 | | 212,838 | | 6,914 | | 3.25 | | 215,286 | | 6,249 | | 2.90 | | | HSBC Bank Canada | | 78,300 | | 1,613 | | 2.06 | | 69,215 | | 2,099 | | 3.03 | | 65,126 | | 1,867 | | 2.87 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 28,798 | | 2,354 | | 8.17 | | 32,224 | | 3,082 | | 9.56 | | 28,972 | | 2,808 | | 9.69 | | | HSBC Argentina Holdings S.A. | | 2,877 | | 978 | | 33.99 | | 2,976 | | 1,453 | | 48.82 | | 4,060 | | 1,128 | | 27.78 | | | | | | | | | | | | | | | Other operations and intra-region eliminations | | 25,505 | | 1,311 | | | 14,129 | | 1,160 | | | 4,956 | | 1,030 | | | | At 31 Dec | | 2,092,900 | | 41,756 | | 2.00 | | 1,922,822 | | 54,695 | | 2.84 | | 1,839,346 | | 49,609 | | 2.70 | |
1 Impacted by transfers from HSBC Bank plc to HSBC UK Bank plc on 1 July 2018 following the completion of ring-fencing activities in the UK under the Financial Services (Banking Reform) Act 2013. | | | | | | | | | | | | | | | | | | | | | | Assets (continued) | | | | 2019 | 2018 | 2017 | | | | Average balance |
| Interest income |
| Yield |
| Average balance |
| Interest income |
| Yield |
| Average balance |
| Interest income |
| Yield | | | Footnotes
| $m |
| $m |
| % |
| $m |
| $m |
| % |
| $m |
| $m |
| % | | Other interest-earning assets | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 41,949 |
| 1,060 |
| 2.53 |
| 35,757 |
| 808 |
| 2.26 |
| 6,540 |
| 444 |
| 6.79 | | | HSBC UK Bank plc | 1 | 461 |
| 8 |
| 1.74 |
| 226 |
| 2 |
| 0.88 |
| — |
| — |
| — | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 5,417 |
| 146 |
| 2.69 |
| 3,987 |
| 87 |
| 2.18 |
| 26,363 |
| 396 |
| 1.50 | | MENA | HSBC Bank Middle East Limited | | (205 | ) | 2 |
| (0.98 | ) | (67 | ) | 25 |
| (37.31 | ) | 4,044 |
| 66 |
| 1.63 | | North America | HSBC North America Holdings Inc. | | 5,407 |
| 132 |
| 2.44 |
| 5,522 |
| 122 |
| 2.21 |
| 3,375 |
| 225 |
| 6.67 | | | HSBC Bank Canada | | 573 |
| 19 |
| 3.32 |
| 262 |
| 10 |
| 3.82 |
| 510 |
| 10 |
| 1.96 | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 1,154 |
| 14 |
| 1.22 |
| 763 |
| 8 |
| 1.05 |
| 843 |
| 8 |
| 0.95 | | | HSBC Argentina Holdings S.A. | | (146 | ) | 258 |
| (176.70 | ) | 330 |
| 154 |
| 46.67 |
| 59 |
| 1 |
| 1.69 | | Other operations and intra-region eliminations | | (9,143 | ) | (326 | ) |
|
| (5,691 | ) | (272 | ) |
|
| (17,521 | ) | (567 | ) |
| | At 31 Dec | | 45,467 |
| 1,313 |
| 2.89 |
| 41,089 |
| 944 |
| 2.30 |
| 24,213 |
| 583 |
| 2.41 | | | | | | | | | | | | | | Total interest-earning assets | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 438,696 |
| 7,019 |
| 1.60 |
| 556,873 |
| 9,988 |
| 1.79 |
| 588,171 |
| 11,645 |
| 1.98 | | | HSBC UK Bank plc | 1 | 295,532 |
| 7,273 |
| 2.46 |
| 147,511 |
| 3,631 |
| 2.46 |
| — |
| — |
| — | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 825,033 |
| 24,417 |
| 2.96 |
| 784,930 |
| 21,698 |
| 2.76 |
| 750,694 |
| 17,716 |
| 2.36 | | MENA | HSBC Bank Middle East Limited | | 32,179 |
| 1,278 |
| 3.97 |
| 31,632 |
| 1,210 |
| 3.83 |
| 34,605 |
| 1,063 |
| 3.07 | | North America | HSBC North America Holdings Inc. | | 212,838 |
| 6,914 |
| 3.25 |
| 215,286 |
| 6,249 |
| 2.90 |
| 239,114 |
| 4,949 |
| 2.07 | | | HSBC Bank Canada | | 69,215 |
| 2,099 |
| 3.03 |
| 65,126 |
| 1,867 |
| 2.87 |
| 60,512 |
| 1,476 |
| 2.44 | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 32,224 |
| 3,082 |
| 9.56 |
| 28,972 |
| 2,808 |
| 9.69 |
| 25,118 |
| 2,352 |
| 9.36 | | | HSBC Argentina Holdings S.A. | | 2,976 |
| 1,453 |
| 48.82 |
| 4,060 |
| 1,128 |
| 27.78 |
| 5,118 |
| 827 |
| 16.16 | | Other operations and intra-region eliminations | | 14,129 |
| 1,160 |
|
|
| 4,956 |
| 1,030 |
|
|
| 22,788 |
| 967 |
|
| | At 31 Dec | | 1,922,822 |
| 54,695 |
| 2.84 |
| 1,839,346 |
| 49,609 |
| 2.70 |
| 1,726,120 |
| 40,995 |
| 2.37 |
| | 1 | Impacted by transfers from HSBC Bank plc to HSBC UK Bank plc on 1 July 2018 following the completion of ring-fencing activities in the UK under the Financial Services (Banking Reform) Act 2013. |
| | | Equity and liabilities | Equity and liabilities | Equity and liabilities | | | | 2019 | 2018 | 2017 | | 2020 | 2019 | 2018 | | | | Average balance |
| Interest expense |
| Cost | Average balance |
| Interest expense |
| Cost | Average balance |
| Interest expense |
| Cost | | Average
balance | Interest
expense | Cost | Average
balance | Interest
expense | Cost | Average
balance | Interest
expense | Cost | | | Footnotes | $m |
| $m |
| % | $m |
| $m |
| % | $m |
| $m |
| % | | $m | % | $m | % | $m | % | | Summary | | | | | | | | Summary | | | | Interest-bearing liabilities measured at amortised cost (itemised below) | | 1,634,057 |
| 24,233 |
| 1.48 | 1,581,519 |
| 19,120 |
| 1.21 | 1,455,070 |
| 12,819 |
| 0.88 | Interest-bearing liabilities measured at amortised cost (itemised below) | 1,741,166 | | 14,178 | | 0.81 | | 1,634,057 | | 24,233 | | 1.48 | | 1,581,519 | | 19,120 | | 1.21 | | | Trading liabilities and financial liabilities designated at fair value (excluding own debt issued) | | 151,224 |
| 3,639 |
| 2.41 | 142,184 |
| 3,524 |
| 2.48 | 153,776 |
| 2,325 |
| 1.51 | Trading liabilities and financial liabilities designated at fair value (excluding own debt issued) | 137,349 | | 2,356 | | 1.72 | | 151,224 | | 3,639 | | 2.41 | | 142,184 | | 3,524 | | 2.48 | | | Non-interest bearing current accounts | | 227,651 |
|
|
|
| 211,815 |
| | | 197,104 |
| | | Non-interest bearing current accounts | 267,944 | | | 227,651 | | | 211,815 | | | | Total equity and other non-interest bearing liabilities | | 699,442 |
|
|
|
| 676,458 |
| | | 715,690 |
| | | Total equity and other non-interest bearing liabilities | 790,480 | | | 699,442 | | | 676,458 | | | | Total equity and liabilities | | 2,712,374 |
| 27,872 |
| 1.03 | 2,611,976 |
| 22,644 |
| 0.87 | 2,521,640 |
| 15,144 |
| 0.60 | Total equity and liabilities | 2,936,939 | | 16,534 | | 0.56 | | 2,712,374 | | 27,872 | | 1.03 | | 2,611,976 | | 22,644 | | 0.87 | | | Average cost on all interest-bearing liabilities | | | 1.56 | | 1.31 | | 0.94 | Average cost on all interest-bearing liabilities | | 0.88 | | | 1.56 | | | 1.31 | |
| | | Equity and liabilities (continued) | Equity and liabilities (continued) | Equity and liabilities (continued) |
|
|
| 2019 | 2018 | 2017 | | | 2020 | 2019 | 2018 |
|
|
| Average
balance |
| Interest
expense |
| Cost | Average
balance |
| Interest
expense |
| Cost | Average
balance |
| Interest
expense |
| Cost |
| | | Average
balance | Interest
expense | Cost | Average
balance | Interest
expense | Cost | Average
balance | Interest
expense | Cost |
|
| Footnotes | $m |
| $m |
| % | $m |
| $m |
| % | $m |
| $m |
| % |
| | Footnotes | $m | % | $m | % | $m | % | | Deposits by banks | Deposits by banks | 2 |
|
|
|
|
| | | | Deposits by banks | 2 | | | | Europe | HSBC Bank plc | 1 | 29,717 |
| 246 |
| 0.83 | 28,960 |
| 207 |
| 0.71 | 20,624 |
| 83 |
| 0.40 |
| Europe | HSBC Bank plc | 1 | 36,958 | | 120 | | 0.32 | | 29,717 | | 246 | | 0.83 | | 28,960 | | 207 | | 0.71 | |
| HSBC UK Bank plc | 1 | 422 |
| 25 |
| 5.92 | 281 |
| 9 |
| 3.20 | — |
| — |
| — |
| | HSBC UK Bank plc | 1 | 91 | | — | | — | | 422 | | 25 | | 5.92 | | 281 | | 9 | | 3.20 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited |
| 25,216 |
| 290 |
| 1.15 | 22,687 |
| 202 |
| 0.89 | 20,052 |
| 177 |
| 0.88 |
| Asia | The Hongkong and Shanghai Banking Corporation Limited | | 30,929 | | 123 | | 0.40 | | 25,216 | | 290 | | 1.15 | | 22,687 | | 202 | | 0.89 | | | MENA | HSBC Bank Middle East Limited |
| 1,905 |
| 53 |
| 2.78 | 1,596 |
| 41 |
| 2.57 | 695 |
| 10 |
| 1.44 |
| MENA | HSBC Bank Middle East Limited | | 2,998 | | 39 | | 1.30 | | 1,905 | | 53 | | 2.78 | | 1,596 | | 41 | | 2.57 | | | North America | HSBC North America Holdings Inc. |
| 5,987 |
| 45 |
| 0.75 | 5,079 |
| 132 |
| 2.60 | 3,632 |
| 41 |
| 1.13 |
| North America | HSBC North America Holdings Inc. | | 7,174 | | 9 | | 0.13 | | 5,987 | | 45 | | 0.75 | | 5,079 | | 132 | | 2.60 | |
| HSBC Bank Canada |
| 726 |
| 2 |
| 0.28 | 716 |
| 17 |
| 2.37 | 231 |
| 1 |
| 0.43 |
| | HSBC Bank Canada | | 919 | | 1 | | 0.11 | | 726 | | 2 | | 0.28 | | 716 | | 17 | | 2.37 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. |
| 1,458 |
| 93 |
| 6.38 | 1,245 |
| 99 |
| 7.95 | 1,820 |
| 120 |
| 6.59 |
| Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 949 | | 63 | | 6.64 | | 1,458 | | 93 | | 6.38 | | 1,245 | | 99 | | 7.95 | |
| HSBC Argentina Holdings S.A. |
| 62 |
| 18 |
| 29.03 | 82 |
| 9 |
| 10.98 | 3 |
| 1 |
| 33.33 |
| | HSBC Argentina Holdings S.A. | | 24 | | 5 | | 20.83 | | 62 | | 18 | | 29.03 | | 82 | | 9 | | 10.98 | | | | Other operations and intra-region eliminations | Other operations and intra-region eliminations |
| (12,978 | ) | (70 | ) | 0.54 | (16,116 | ) | (210 | ) | 1.30 | 280 |
| 18 |
| 6.43 |
| Other operations and intra-region eliminations | | (14,506) | | (30) | | 0.21 | | (12,978) | | (70) | | 0.54 | | (16,116) | | (210) | | 1.30 | | | At 31 Dec | At 31 Dec |
| 52,515 |
| 702 |
| 1.34 | 44,530 |
| 506 |
| 1.14 | 47,337 |
| 451 |
| 0.95 |
| At 31 Dec | | 65,536 | | 330 | | 0.50 | | 52,515 | | 702 | | 1.34 | | 44,530 | | 506 | | 1.14 | | | | | | | | | | | | | | | | Debt Securities in issue – non trading | Debt Securities in issue – non trading | 3 | | | | | | Debt Securities in issue – non trading | | | | | Europe | HSBC Holdings plc | | 99,375 |
| 3,797 |
| 3.82 | 85,042 |
| 3,290 |
| 3.87 | 73,627 |
| 2,477 |
| 3.36 |
| Europe | HSBC Holdings plc | | 106,742 | | 3,101 | | 2.91 | | 99,375 | | 3,797 | | 3.82 | | 85,042 | | 3,290 | | 3.87 | | | | HSBC Bank plc | 1 | 69,328 |
| 1,138 |
| 1.64 | 68,211 |
| 1,063 |
| 1.56 | 43,958 |
| 632 |
| 1.44 |
| | HSBC Bank plc | 1 | 67,703 | | 719 | | 1.06 | | 69,328 | | 1,138 | | 1.64 | | 68,211 | | 1,063 | | 1.56 | | | | HSBC UK Bank plc | 1 | 12,679 |
| 354 |
| 2.79 | 2,471 |
| 69 |
| 2.79 | — |
| — |
| — |
| | HSBC UK Bank plc | 1 | 14,900 | | 423 | | 2.84 | | 12,679 | | 354 | | 2.79 | | 2,471 | | 69 | | 2.79 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 37,336 |
| 1,202 |
| 3.22 | 32,213 |
| 1,088 |
| 3.38 | 9,195 |
| 202 |
| 2.20 |
| Asia | The Hongkong and Shanghai Banking Corporation Limited | | 40,602 | | 841 | | 2.07 | | 37,336 | | 1,202 | | 3.22 | | 32,213 | | 1,088 | | 3.38 | | | MENA | HSBC Bank Middle East Limited | | 3,030 |
| 111 |
| 3.66 | 3,043 |
| 95 |
| 3.12 | 1,329 |
| 20 |
| 1.50 |
| MENA | HSBC Bank Middle East Limited | | 3,214 | | 57 | | 1.77 | | 3,030 | | 111 | | 3.66 | | 3,043 | | 95 | | 3.12 | | | North America | HSBC North America Holdings Inc. | | 32,991 |
| 1,256 |
| 3.81 | 26,643 |
| 958 |
| 3.60 | 32,325 |
| 909 |
| 2.81 |
| North America | HSBC North America Holdings Inc. | | 31,352 | | 730 | | 2.33 | | 32,991 | | 1,256 | | 3.81 | | 26,643 | | 958 | | 3.60 | | | | HSBC Bank Canada | | 11,525 |
| 311 |
| 2.70 | 10,134 |
| 254 |
| 2.51 | 7,550 |
| 164 |
| 2.17 |
| | HSBC Bank Canada | | 14,592 | | 287 | | 1.97 | | 11,525 | | 311 | | 2.70 | | 10,134 | | 254 | | 2.51 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 2,885 |
| 212 |
| 7.35 | 1,339 |
| 84 |
| 6.27 | 1,198 |
| 77 |
| 6.43 |
| Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 3,451 | | 212 | | 6.14 | | 2,885 | | 212 | | 7.35 | | 1,339 | | 84 | | 6.27 | | | | HSBC Argentina Holdings S.A. | | 280 |
| 94 |
| 33.57 | 421 |
| 113 |
| 26.84 | 55 |
| 15 |
| 27.27 |
| | HSBC Argentina Holdings S.A. | | 161 | | 28 | | 17.39 | | 280 | | 94 | | 33.57 | | 421 | | 113 | | 26.84 | | | | Other operations and intra-region eliminations | Other operations and intra-region eliminations | | (58,200 | ) | (1,953 | ) | 3.36 | (46,082 | ) | (1,339 | ) | 2.91 | 7 |
| (104 | ) | (1,485.71 | ) | Other operations and intra-region eliminations | | (63,107) | | (1,454) | | 2.30 | | (58,200) | | (1,953) | | 3.36 | | (46,082) | | (1,339) | | 2.91 | | | At 31 Dec | At 31 Dec | | 211,229 |
| 6,522 |
| 3.09 | 183,434 |
| 5,675 |
| 3.09 | 169,244 |
| 4,391 |
| 2.59 |
| At 31 Dec | | 219,610 | | 4,944 | | 2.25 | | 211,229 | | 6,522 | | 3.09 | | 183,434 | | 5,675 | | 3.09 | | | | | | | | | | | | | | Customer accounts | Customer accounts | 4 | | | | | | Customer accounts | 3 | | | | Europe | HSBC Bank plc | 1 | 174,160 |
| 1,428 |
| 0.82 | 297,353 |
| 1,862 |
| 0.63 | 377,353 |
| 1,303 |
| 0.35 |
| Europe | HSBC Bank plc | 1 | 184,462 | | 603 | | 0.33 | | 174,160 | | 1,428 | | 0.82 | | 297,353 | | 1,862 | | 0.63 | | | | HSBC UK Bank plc | 1 | 214,028 |
| 806 |
| 0.38 | 122,406 |
| 372 |
| 0.30 | — |
| — |
| — |
| | HSBC UK Bank plc | 1 | 237,077 | | 378 | | 0.16 | | 214,028 | | 806 | | 0.38 | | 122,406 | | 372 | | 0.30 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 612,698 |
| 5,520 |
| 0.90 | 585,575 |
| 3,742 |
| 0.64 | 566,309 |
| 2,430 |
| 0.43 |
| Asia | The Hongkong and Shanghai Banking Corporation Limited | | 651,288 | | 3,300 | | 0.51 | | 612,698 | | 5,520 | | 0.90 | | 585,575 | | 3,742 | | 0.64 | | | MENA | HSBC Bank Middle East Limited | | 9,308 |
| 134 |
| 1.44 | 9,213 |
| 86 |
| 0.93 | 9,807 |
| 40 |
| 0.41 |
| MENA | HSBC Bank Middle East Limited | | 10,678 | | 84 | | 0.79 | | 9,308 | | 134 | | 1.44 | | 9,213 | | 86 | | 0.93 | | | North America | HSBC North America Holdings Inc. | | 65,917 |
| 872 |
| 1.32 | 63,309 |
| 564 |
| 0.89 | 66,745 |
| 376 |
| 0.56 |
| North America | HSBC North America Holdings Inc. | | 86,470 | | 504 | | 0.58 | | 65,917 | | 872 | | 1.32 | | 63,309 | | 564 | | 0.89 | | | | HSBC Bank Canada | | 41,352 |
| 642 |
| 1.55 | 39,717 |
| 480 |
| 1.21 | 38,150 |
| 305 |
| 0.80 |
| | HSBC Bank Canada | | 47,175 | | 428 | | 0.91 | | 41,352 | | 642 | | 1.55 | | 39,717 | | 480 | | 1.21 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 16,687 |
| 832 |
| 4.99 | 13,929 |
| 640 |
| 4.59 | 11,662 |
| 406 |
| 3.48 |
| Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 16,325 | | 535 | | 3.28 | | 16,687 | | 832 | | 4.99 | | 13,929 | | 640 | | 4.59 | | | | | HSBC Argentina Holdings S.A. | | 2,596 | | 307 | | 11.83 | | 2,840 | | 554 | | 19.51 | | 3,316 | | 384 | | 11.58 | | | | HSBC Argentina Holdings S.A. | | 2,840 |
| 554 |
| 19.51 | 3,316 |
| 384 |
| 11.58 | 3,292 |
| 245 |
| 7.44 |
| | | Other operations and intra-region eliminations | Other operations and intra-region eliminations | | 12,493 |
| 450 |
| 3.60 | 3,802 |
| 157 |
| 4.13 | 21,602 |
| 300 |
| 1.39 |
| Other operations and intra-region eliminations | | 18,178 | | 339 | | 1.86 | | 12,493 | | 450 | | 3.60 | | 3,802 | | 157 | | 4.13 | | | At 31 Dec | At 31 Dec | | 1,149,483 |
| 11,238 |
| 0.98 | 1,138,620 |
| 8,287 |
| 0.73 | 1,094,920 |
| 5,405 |
| 0.49 |
| At 31 Dec | | 1,254,249 | | 6,478 | | 0.52 | | 1,149,483 | | 11,238 | | 0.98 | | 1,138,620 | | 8,287 | | 0.73 | | | | | | | | | | | | | | | | Repurchase agreements – non-trading | Repurchase agreements – non-trading | | | | | | | Repurchase agreements – non-trading | | | | | Europe | HSBC Bank plc | 1 | 63,521 |
| 936 |
| 1.47 | 66,045 |
| 826 |
| 1.25 | 50,844 |
| 340 |
| 0.67 |
| Europe | HSBC Bank plc | 1 | 49,806 | | 260 | | 0.52 | | 63,521 | | 936 | | 1.47 | | 66,045 | | 826 | | 1.25 | | | | HSBC UK Bank plc | 1 | 727 |
| 8 |
| 1.10 | 238 |
| 2 |
| 0.84 | — |
| — |
| — |
| | HSBC UK Bank plc | 1 | 4,110 | | 2 | | 0.05 | | 727 | | 8 | | 1.10 | | 238 | | 2 | | 0.84 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 23,330 |
| 471 |
| 2.02 | 18,723 |
| 356 |
| 1.90 | 16,620 |
| 141 |
| 0.85 |
| Asia | The Hongkong and Shanghai Banking Corporation Limited | | 23,465 | | 197 | | 0.84 | | 23,330 | | 471 | | 2.02 | | 18,723 | | 356 | | 1.90 | | | MENA | HSBC Bank Middle East Limited | | 66 |
| 2 |
| 3.03 | 47 |
| 1 |
| 2.13 | 32 |
| 1 |
| 3.13 |
| MENA | HSBC Bank Middle East Limited | | 332 | | 1 | | 0.30 | | 66 | | 2 | | 3.03 | | 47 | | 1 | | 2.13 | | | North America | HSBC North America Holdings Inc. | | 79,298 |
| 2,510 |
| 3.17 | 82,178 |
| 1,970 |
| 2.40 | 77,704 |
| 890 |
| 1.15 |
| North America | HSBC North America Holdings Inc. | | 58,247 | | 401 | | 0.69 | | 79,298 | | 2,510 | | 3.17 | | 82,178 | | 1,970 | | 2.40 | | | | HSBC Bank Canada | | 7,011 |
| 149 |
| 2.13 | 5,932 |
| 87 |
| 1.47 | 4,158 |
| 30 |
| 0.72 |
| | HSBC Bank Canada | | 4,188 | | 41 | | 0.98 | | 7,011 | | 149 | | 2.13 | | 5,932 | | 87 | | 1.47 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 5,499 |
| 458 |
| 8.33 | 5,297 |
| 458 |
| 8.65 | 3,845 |
| 259 |
| 6.74 |
| Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 2,374 | | 130 | | 5.48 | | 5,499 | | 458 | | 8.33 | | 5,297 | | 458 | | 8.65 | | | | HSBC Argentina Holdings S.A. | | 30 |
| 13 |
| 43.33 | 20 |
| 3 |
| 15.00 | 15 |
| 3 |
| 20.00 |
| | HSBC Argentina Holdings S.A. | | 24 | | 5 | | 20.83 | | 30 | | 13 | | 43.33 | | 20 | | 3 | | 15.00 | | | | Other operations and intra-region eliminations | Other operations and intra-region eliminations | | (18,632 | ) | (524 | ) | 2.81 | (17,276 | ) | (294 | ) | 1.70 | (16,657 | ) | 1 |
| (0.01 | ) | Other operations and intra-region eliminations | | (17,170) | | (74) | | 0.43 | | (18,632) | | (524) | | 2.81 | | (17,276) | | (294) | | 1.70 | | | At 31 Dec | At 31 Dec | | 160,850 |
| 4,023 |
| 2.50 | 161,204 |
| 3,409 |
| 2.11 | 136,561 |
| 1,665 |
| 1.22 |
| At 31 Dec | | 125,376 | | 963 | | 0.77 | | 160,850 | | 4,023 | | 2.50 | | 161,204 | | 3,409 | | 2.11 | |
Report of the Directors | Financial summary
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity and liabilities (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | 2019 | 2018 | | | Average balance | Interest expense | Cost | Average balance | Interest expense | Cost | Average balance | Interest expense | Cost | | Footnotes | $m | $m | % | $m | $m | % | $m | $m | % | | Other interest-bearing liabilities | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 60,780 | | 1,100 | | 1.81 | | 49,181 | | 1,384 | | 2.81 | | 43,648 | | 987 | | 2.26 | | | HSBC UK Bank plc | 1 | 406 | | 22 | | 5.42 | | 633 | | 11 | | 1.74 | | 104 | | 1 | | 0.96 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 12,950 | | 166 | | 1.28 | | 8,796 | | 228 | | 2.59 | | 7,574 | | 176 | | 2.32 | | | MENA | HSBC Bank Middle East Limited | | 40 | | 3 | | 7.50 | | 39 | | 3 | | 7.69 | | — | | — | | — | | | North America | HSBC North America Holdings Inc. | | 7,289 | | 71 | | 0.97 | | 6,116 | | 145 | | 2.37 | | 10,468 | | 300 | | 2.87 | | | HSBC Bank Canada | | 1,960 | | 44 | | 2.24 | | 1,631 | | 40 | | 2.45 | | 1,430 | | 31 | | 2.17 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 165 | | 27 | | 16.36 | | 155 | | 25 | | 16.13 | | — | | — | | — | | | HSBC Argentina Holdings S.A. | | 23 | | 56 | | 243.48 | | 23 | | 151 | | 656.52 | | 462 | | 72 | | 15.58 | | | | | | | | | | | | | | | Other operations and intra-region eliminations | | (7,218) | | (26) | | 0.36 | | (6,594) | | (239) | | | (9,955) | | (324) | | | | At 31 Dec | | 76,395 | | 1,463 | | 1.92 | | 59,980 | | 1,748 | | 2.91 | | 53,731 | | 1,243 | | 2.31 | | | | | | | | | | | | | | Total interest-bearing liabilities | | | | | | | | | | | | Europe | HSBC Holdings plc | | 108,612 | | 3,104 | | 2.86 | | 99,642 | | 3,803 | | 3.82 | | 85,042 | | 3,304 | | 3.89 | | | HSBC Bank plc | 1 | 399,709 | | 2,802 | | 0.70 | | 385,906 | | 5,131 | | 1.33 | | 504,217 | | 4,945 | | 0.98 | | | HSBC UK Bank plc | 1 | 256,584 | | 825 | | 0.32 | | 228,487 | | 1,204 | | 0.53 | | 125,500 | | 453 | | 0.36 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 759,234 | | 4,627 | | 0.61 | | 707,377 | | 7,711 | | 1.09 | | 666,772 | | 5,564 | | 0.83 | | | MENA | HSBC Bank Middle East Limited | | 17,262 | | 184 | | 1.07 | | 14,348 | | 303 | | 2.11 | | 13,899 | | 223 | | 1.60 | | | North America | HSBC North America Holdings Inc. | | 190,531 | | 1,715 | | 0.90 | | 190,309 | | 4,828 | | 2.54 | | 187,677 | | 3,924 | | 2.09 | | | HSBC Bank Canada | | 68,834 | | 801 | | 1.16 | | 62,245 | | 1,143 | | 1.84 | | 57,929 | | 869 | | 1.50 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 23,264 | | 967 | | 4.16 | | 26,683 | | 1,620 | | 6.07 | | 21,810 | | 1,281 | | 5.87 | | | HSBC Argentina Holdings S.A. | | 2,828 | | 401 | | 14.18 | | 3,235 | | 832 | | 25.72 | | 4,301 | | 581 | | 13.51 | | | | | | | | | | | | | | | Other operations and intra-region eliminations | | (85,692) | | (1,248) | | 1.46 | | (84,175) | | (2,342) | | | (85,628) | | (2,024) | | | | At 31 Dec | | 1,741,166 | | 14,178 | | 0.81 | | 1,634,057 | | 24,233 | | 1.48 | | 1,581,519 | | 19,120 | | 1.21 | |
1 Impacted by transfers from HSBC Bank plc to HSBC UK Bank plc on 1 July 2018 following the completion of ring-fencing activities in the UK under the Financial Services (Banking Reform) Act 2013. 2 This includes interest-bearing bank deposits only. See page 96 for an analysis of all bank deposits. 3 This includes interest-bearing customer accounts only. See page 97 for an analysis of all customer accounts. | | | | | | | | | | | | | | | Net interest margin1 | | | 2020 | 2019 | 2018 | | | % | % | % | | Europe | HSBC Bank plc2 | 0.51 | | 0.43 | | 0.89 | | | HSBC UK Bank plc2 | 1.71 | | 2.05 | | 2.16 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | 1.62 | | 2.02 | | 2.06 | | | MENA | HSBC Bank Middle East Limited | 2.07 | | 3.03 | | 3.12 | | | North America | HSBC North America Holdings Inc. | 0.88 | | 0.98 | | 1.08 | | | HSBC Bank Canada | 1.03 | | 1.38 | | 1.53 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 4.82 | | 4.54 | | 5.27 | | | HSBC Argentina Holdings S.A. | 19.99 | | 20.88 | | 13.44 | | | | | | | | At 31 Dec | 1.32 | | 1.58 | | 1.66 | |
| | | | | | | | | | | | | | | | | | | | Equity and liabilities (continued) | | | | 2019 | 2018 | 2017 | | | | Average
balance |
| Interest
expense |
| Cost | Average
balance |
| Interest
expense |
| Cost | Average
balance |
| Interest
expense |
| Cost | | | Footnotes | $m |
| $m |
| % | $m |
| $m |
| % | $m |
| $m |
| % | | Other interest-bearing liabilities | | | | | | | | | | | | Europe | HSBC Bank plc | 1 | 49,181 |
| 1,384 |
| 2.81 | 43,648 |
| 987 |
| 2.26 | 31,948 |
| 1,331 |
| 4.17 | | | HSBC UK Bank plc | 1 | 633 |
| 11 |
| 1.74 | 104 |
| 1 |
| 0.96 | — |
| — |
| — | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 8,796 |
| 228 |
| 2.59 | 7,574 |
| 176 |
| 2.32 | 20,529 |
| 623 |
| 3.03 | | MENA | HSBC Bank Middle East Limited | | 39 |
| 3 |
| 7.69 | — |
| — |
| — | 2,414 |
| 73 |
| 3.02 | | North America | HSBC North America Holdings Inc. | | 6,116 |
| 145 |
| 2.37 | 10,468 |
| 300 |
| 2.87 | 16,685 |
| 394 |
| 2.36 | | | HSBC Bank Canada | | 1,631 |
| 40 |
| 2.45 | 1,430 |
| 31 |
| 2.17 | 3,022 |
| 67 |
| 2.22 | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 155 |
| 25 |
| 16.13 | — |
| — |
| — | 61 |
| 22 |
| 36.07 | | | HSBC Argentina Holdings S.A. | | 23 |
| 151 |
| 656.52 | 462 |
| 72 |
| 15.58 | 97 |
| 4 |
| 4.12 | | Other operations and intra-region eliminations | | (6,594 | ) | (239 | ) |
| (9,955 | ) | (324 | ) |
| (67,747 | ) | (1,607 | ) |
| | At 31 Dec | | 59,980 |
| 1,748 |
| 2.91 | 53,731 |
| 1,243 |
| 2.31 | 7,009 |
| 907 |
| 12.94 | | | | | | | | | | | | | | Total interest-bearing liabilities | | | | | | | | | | | | Europe | HSBC Holdings plc | | 99,642 |
| 3,803 |
| 3.82 | 85,042 |
| 3,304 |
| 3.89 | 74,664 |
| 2,568 |
| 3.44 | | | HSBC Bank plc | 1 | 385,906 |
| 5,131 |
| 1.33 | 504,217 |
| 4,945 |
| 0.98 | 524,727 |
| 3,689 |
| 0.70 | | | HSBC UK Bank plc | 1 | 228,487 |
| 1,204 |
| 0.53 | 125,500 |
| 453 |
| 0.36 | — |
| — |
| — | | Asia | The Hongkong and Shanghai Banking Corporation Limited | | 707,377 |
| 7,711 |
| 1.09 | 666,772 |
| 5,564 |
| 0.83 | 632,705 |
| 3,573 |
| 0.56 | | MENA | HSBC Bank Middle East Limited | | 14,348 |
| 303 |
| 2.11 | 13,899 |
| 223 |
| 1.60 | 14,277 |
| 144 |
| 1.01 | | North America | HSBC North America Holdings Inc. | | 190,309 |
| 4,828 |
| 2.54 | 187,677 |
| 3,924 |
| 2.09 | 197,091 |
| 2,610 |
| 1.32 | | | HSBC Bank Canada | | 62,245 |
| 1,143 |
| 1.84 | 57,929 |
| 869 |
| 1.50 | 53,111 |
| 567 |
| 1.07 | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | | 26,683 |
| 1,620 |
| 6.07 | 21,810 |
| 1,281 |
| 5.87 | 18,586 |
| 884 |
| 4.76 | | | HSBC Argentina Holdings S.A. | | 3,235 |
| 832 |
| 25.72 | 4,301 |
| 581 |
| 13.51 | 3,462 |
| 268 |
| 7.74 | | Other operations and intra-region eliminations | | (84,175 | ) | (2,342 | ) |
| (85,628 | ) | (2,024 | ) |
| (63,553 | ) | (1,484 | ) |
| | At 31 Dec | | 1,634,057 |
| 24,233 |
| 1.48 | 1,581,519 |
| 19,120 |
| 1.21 | 1,455,070 |
| 12,819 |
| 0.88 |
| | 1 | Impacted by transfers from HSBC Bank plc to HSBC UK Bank plc on 1 July 2018 following the completion of ring-fencing activities in the UK under the Financial Services (Banking Reform) Act 2013. |
| | 2 | This includes interest-bearing bank deposits only. See page 65 for an analysis of all bank deposits. |
| | 3 | Financial liabilities designated at fair value – own debt issued’ and ‘Debt securities in issue’ 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’. |
| | 4 | This includes interest-bearing customer accounts only. See page 66 for an analysis of all customer accounts. |
| | | | | | Net interest margin1 |
|
| 2019 | 2018 | 2017 |
|
| % | % | % | | Europe | HSBC Bank plc2 | 0.43 | 0.89 | 1.35 |
| HSBC UK Bank plc2 | 2.05 | 2.16 | — | | Asia | The Hongkong and Shanghai Banking Corporation Limited | 2.02 | 2.06 | 1.88 | | MENA | HSBC Bank Middle East Limited | 3.03 | 3.12 | 2.62 | | North America | HSBC North America Holdings Inc. | 0.98 | 1.08 | 0.98 |
| HSBC Bank Canada | 1.38 | 1.53 | 1.50 | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 4.54 | 5.27 | 5.85 |
| HSBC Argentina Holdings S.A. | 20.88 | 13.44 | 10.94 | | At 31 Dec | 1.58 | 1.66 | 1.63 |
| | 1 | Net interest margin is calculated as net interest income divided by average interest-earning assets. |
2 Impacted by transfers from HSBC Bank plc to HSBC UK Bank plc on 1 July 2018 following the completion of ring-fencing activities in the UK under the Financial Services (Banking Reform) Act 2013.
| | | | | | | | | | | | | | | | Distribution of average total assets | | | 2020 | 2019 | 2018 | | | % | % | % | | Europe | HSBC Bank plc1 | 32.0 | | 32.0 | | 38.0 | | | HSBC UK Bank plc1 | 12.0 | | 12.0 | | 6.0 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | 40.0 | | 40.0 | | 40.0 | | | MENA | HSBC Bank Middle East Limited | 2.0 | | 1.0 | | 1.0 | | | North America | HSBC North America Holdings Inc. | 11.0 | | 12.0 | | 13.0 | | | HSBC Bank Canada | 3.0 | | 3.0 | | 3.0 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 2.0 | | 2.0 | | 2.0 | | | | | | | | | | | | | Other operations and intra-region eliminations | (2.0) | | (2.0) | | (3.0) | | | At 31 Dec | 100.0 | | 100.0 | | 100.0 | |
1 Impacted by transfers from HSBC Bank plc to HSBC UK Bank plc on 1 July 2018 following the completion of ring-fencing activities in the UK under the Financial Services (Banking Reform) Act 2013. | | | | | | | | | | Distribution of average total assets |
|
| 2019 |
| 2018 |
| 2017 |
|
|
| % |
| % |
| % |
| | Europe | HSBC Bank plc1 | 32.0 |
| 38.0 |
| 43.0 |
|
| HSBC UK Bank plc1 | 12.0 |
| 6.0 |
| — |
| | Asia | The Hongkong and Shanghai Banking Corporation Limited | 40.0 |
| 40.0 |
| 40.0 |
| | MENA | HSBC Bank Middle East Limited | 1.0 |
| 1.0 |
| 2.0 |
| | North America | HSBC North America Holdings Inc. | 12.0 |
| 13.0 |
| 14.0 |
|
| HSBC Bank Canada | 3.0 |
| 3.0 |
| 3.0 |
| | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 2.0 |
| 2.0 |
| 1.0 |
|
| HSBC Argentina Holdings S.A. | — |
| — |
| — |
| | Other operations and intra-region eliminations | (2.0 | ) | (3.0 | ) | (3.0 | ) | | At 31 Dec | 100.0 |
| 100.0 |
| 100.0 |
|
| | 1 | Impacted by transfers from HSBC Bank plc to HSBC UK Bank plc on 1 July 2018 following the completion of ring-fencing activities in the UK under the Financial Services (Banking Reform) Act 2013 |
Analysis of changes in net interest income and net interest expense The following tables allocate changes in net interest income and net interest expense between volume and rate for 20192020 compared with 2018,2019, and for 20182019 compared with 2017.2018. We isolate rate variances and allocate any change arising from both volume and rate/volume to volume. | | | Interest income | Interest income | Interest income | | | | | Increase/(decrease)
in 2019 compared
with 2018 | | Increase/(decrease)
in 2018 compared
with 2017 | | | | Increase/(decrease)
in 2020 compared
with 2019 | | Increase/(decrease)
in 2019 compared
with 2018 | | | | | 2019 |
| Volume |
| Rate |
| 2018 | Volume |
| Rate |
| 2017 |
| | 2020 | Volume | Rate | 2019 | Volume | Rate | 2018 | | | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | | $m | $m | | Short-term funds and loans and advances to banks | Short-term funds and loans and advances to banks | | | Short-term funds and loans and advances to banks | | | | Europe | HSBC Bank plc1 | 376 |
| (140 | ) | 45 |
| 471 |
| 74 |
| 98 |
| 299 |
| Europe | HSBC Bank plc1 | 182 | | 50 | | (244) | | 376 | | (140) | | 45 | | 471 | | | | HSBC UK Bank plc1 | 277 |
| 117 |
| 13 |
| 147 |
| 147 |
| — |
| — |
| | HSBC UK Bank plc1 | 111 | | 40 | | (206) | | 277 | | 117 | | 13 | | 147 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | 1,147 |
| (94 | ) | 72 |
| 1,169 |
| 76 |
| 195 |
| 898 |
| Asia | The Hongkong and Shanghai Banking Corporation Limited | 683 | | 94 | | (558) | | 1,147 | | (94) | | 72 | | 1,169 | | | MENA | HSBC Bank Middle East Limited | 71 |
| (4 | ) | 23 |
| 52 |
| 13 |
| — |
| 39 |
| MENA | HSBC Bank Middle East Limited | 54 | | 18 | | (35) | | 71 | | (4) | | 23 | | 52 | | | North America | HSBC North America Holdings Inc. | 307 |
| (159 | ) | (177 | ) | 643 |
| (470 | ) | 652 |
| 461 |
| North America | HSBC North America Holdings Inc. | 89 | | 32 | | (250) | | 307 | | (159) | | (177) | | 643 | | | | HSBC Bank Canada | 4 |
| — |
| (8 | ) | 12 |
| 5 |
| 4 |
| 3 |
| | HSBC Bank Canada | 22 | | 20 | | (2) | | 4 | | — | | (8) | | 12 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 180 |
| 5 |
| (3 | ) | 178 |
| 20 |
| 8 |
| 150 |
| Latin America | Grupo Financiero HSBC, S. A. de C. V. | 104 | | (21) | | (55) | | 180 | | 5 | | (3) | | 178 | | | | HSBC Argentina Holdings S.A. | — |
| — |
| (1 | ) | 1 |
| (28 | ) | 28 |
| 1 |
| | HSBC Argentina Holdings S.A. | — | | — | | — | | — | | — | | (1) | | 1 | | | | Other operations and intra-region eliminations | Other operations and intra-region eliminations | 49 |
| 251 |
| (4 | ) | (198 | ) | (1,229 | ) | 852 |
| 179 |
| Other operations and intra-region eliminations | 19 | | 7 | | (37) | | 49 | | 251 | | (4) | | (198) | | | At 31 Dec | At 31 Dec | 2,411 |
| (228 | ) | 164 |
| 2,475 |
| (27 | ) | 472 |
| 2,030 |
| At 31 Dec | 1,264 | | 365 | | (1,512) | | 2,411 | | (228) | | 164 | | 2,475 | | | | | | | | | | | Loans and advances to customers | Loans and advances to customers | | | Loans and advances to customers | | | | Europe | HSBC Bank plc1 | 3,198 |
| (2,166 | ) | (1,235 | ) | 6,599 |
| (2,376 | ) | (205 | ) | 9,180 |
| Europe | HSBC Bank plc1 | 2,685 | | (18) | | (495) | | 3,198 | | (2,166) | | (1,235) | | 6,599 | | | | HSBC UK Bank plc1 | 6,650 |
| 3,303 |
| (23 | ) | 3,370 |
| 3,370 |
| — |
| — |
| | HSBC UK Bank plc1 | 6,307 | | 281 | | (624) | | 6,650 | | 3,303 | | (23) | | 3,370 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | 16,263 |
| 1,005 |
| 792 |
| 14,466 |
| 1,486 |
| 1,264 |
| 11,716 |
| Asia | The Hongkong and Shanghai Banking Corporation Limited | 12,984 | | 281 | | (3,560) | | 16,263 | | 1,005 | | 792 | | 14,466 | | | MENA | HSBC Bank Middle East Limited | 1,000 |
| (12 | ) | 29 |
| 983 |
| 15 |
| 107 |
| 861 |
| MENA | HSBC Bank Middle East Limited | 786 | | 24 | | (238) | | 1,000 | | (12) | | 29 | | 983 | | | North America | HSBC North America Holdings Inc. | 2,713 |
| 121 |
| 113 |
| 2,479 |
| (244 | ) | 333 |
| 2,390 |
| North America | HSBC North America Holdings Inc. | 2,090 | | 18 | | (641) | | 2,713 | | 121 | | 113 | | 2,479 | | | | HSBC Bank Canada | 1,585 |
| 87 |
| 73 |
| 1,425 |
| 143 |
| 77 |
| 1,205 |
| | HSBC Bank Canada | 1,306 | | 99 | | (378) | | 1,585 | | 87 | | 73 | | 1,425 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 2,348 |
| 334 |
| (24 | ) | 2,038 |
| 296 |
| (25 | ) | 1,767 |
| Latin America | Grupo Financiero HSBC, S. A. de C. V. | 1,898 | | (161) | | (289) | | 2,348 | | 334 | | (24) | | 2,038 | | | | | HSBC Argentina Holdings S.A. | 462 | | (132) | | (58) | | 652 | | (257) | | 168 | | 741 | | | | HSBC Argentina Holdings S.A. | 652 |
| (257 | ) | 168 |
| 741 |
| (103 | ) | 132 |
| 712 |
| | | Other operations and intra-region eliminations | Other operations and intra-region eliminations | 1,169 |
| 13 |
| (28 | ) | 1,184 |
| (23 | ) | 287 |
| 920 |
| Other operations and intra-region eliminations | 873 | | 57 | | (353) | | 1,169 | | 13 | | (28) | | 1,184 | | | At 31 Dec | At 31 Dec | 35,578 |
| 1,709 |
| 584 |
| 33,285 |
| 2,459 |
| 2,075 |
| 28,751 |
| At 31 Dec | 29,391 | | 657 | | (6,844) | | 35,578 | | 1,709 | | 584 | | 33,285 | | | | | | | | | | | Reverse repurchase agreements – non-trading | Reverse repurchase agreements – non-trading | | | Reverse repurchase agreements – non-trading | | | | Europe | HSBC Bank plc1 | 1,191 |
| 148 |
| 138 |
| 905 |
| 291 |
| 111 |
| 503 |
| Europe | HSBC Bank plc1 | 535 | | (66) | | (590) | | 1,191 | | 148 | | 138 | | 905 | | | | HSBC UK Bank plc1 | 36 |
| 29 |
| (1 | ) | 8 |
| 8 |
| — |
| — |
| | HSBC UK Bank plc1 | 11 | | (5) | | (20) | | 36 | | 29 | | (1) | | 8 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | 1,030 |
| 98 |
| 30 |
| 902 |
| 89 |
| 201 |
| 612 |
| Asia | The Hongkong and Shanghai Banking Corporation Limited | 585 | | 127 | | (572) | | 1,030 | | 98 | | 30 | | 902 | | | MENA | HSBC Bank Middle East Limited | 32 |
| (10 | ) | 26 |
| 16 |
| — |
| 2 |
| 14 |
| MENA | HSBC Bank Middle East Limited | 22 | | 10 | | (20) | | 32 | | (10) | | 26 | | 16 | | | North America | HSBC North America Holdings Inc. | 2,560 |
| (59 | ) | 748 |
| 1,871 |
| (23 | ) | 966 |
| 928 |
| North America | HSBC North America Holdings Inc. | 522 | | (82) | | (1,956) | | 2,560 | | (59) | | 748 | | 1,871 | | | | HSBC Bank Canada | 121 |
| 14 |
| 28 |
| 79 |
| (8 | ) | 43 |
| 44 |
| | HSBC Bank Canada | 99 | | (4) | | (18) | | 121 | | 14 | | 28 | | 79 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 75 |
| (2 | ) | (13 | ) | 90 |
| 20 |
| 9 |
| 61 |
| Latin America | Grupo Financiero HSBC, S. A. de C. V. | 103 | | 48 | | (20) | | 75 | | (2) | | (13) | | 90 | | | | HSBC Argentina Holdings S.A. | 16 |
| (2 | ) | 3 |
| 15 |
| (11 | ) | 11 |
| 15 |
| | HSBC Argentina Holdings S.A. | 69 | | 61 | | (8) | | 16 | | (2) | | 3 | | 15 | | | | Other operations and intra-region eliminations | Other operations and intra-region eliminations | (371 | ) | (6 | ) | (218 | ) | (147 | ) | (4 | ) | (157 | ) | 14 |
| Other operations and intra-region eliminations | (127) | | 11 | | 233 | | (371) | | (6) | | (218) | | (147) | | | At 31 Dec | At 31 Dec | 4,690 |
| 417 |
| 534 |
| 3,739 |
| 575 |
| 973 |
| 2,191 |
| At 31 Dec | 1,819 | | (37) | | (2,834) | | 4,690 | | 417 | | 534 | | 3,739 | |
Report of the Directors | Financial summary
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest income (continued) | | | | Increase/(decrease)
in 2020 compared
with 2019 | | Increase/(decrease)
in 2019 compared
with 2018 | | | | 2020 | Volume | Rate | 2019 | Volume | Rate | 2018 | | | $m | $m | $m | $m | $m | $m | $m | | Financial investments | | | | | | | | | Europe | HSBC Bank plc1 | 842 | | 25 | | (378) | | 1,195 | | (107) | | 97 | | 1,205 | | | HSBC UK Bank plc1 | 232 | | 84 | | (154) | | 302 | | 189 | | 9 | | 104 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | 4,653 | | 423 | | (1,601) | | 5,831 | | 255 | | 502 | | 5,074 | | | MENA | HSBC Bank Middle East Limited | 99 | | 22 | | (96) | | 173 | | 31 | | 8 | | 134 | | | North America | HSBC North America Holdings Inc. | 888 | | 38 | | (352) | | 1,202 | | 109 | | (41) | | 1,134 | | | HSBC Bank Canada | 183 | | (29) | | (159) | | 371 | | 13 | | 17 | | 341 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 246 | | (117) | | (103) | | 466 | | (4) | | (24) | | 494 | | | HSBC Argentina Holdings S.A. | 312 | | (20) | | (194) | | 526 | | 115 | | 194 | | 217 | | | | | | | | | | | | Other operations and intra-region eliminations | 688 | | 231 | | (182) | | 639 | | 235 | | (59) | | 463 | | | At 31 Dec | 8,143 | | 782 | | (3,344) | | 10,705 | | 805 | | 734 | | 9,166 | |
1 Impacted by transfers from HSBC Bank plc to HSBC UK Bank plc on 1 July 2018 following the completion of ring-fencing activities in the UK under the Financial Services (Banking Reform) Act 2013. | | | | | | | | | | | | | | | | | | Interest income (continued) | | | | | Increase/(decrease)
in 2019 compared
with 2018 | | Increase/(decrease)
in 2018 compared
with 2017 | | | | | 2019 |
| Volume |
| Rate |
| 2018 | Volume |
| Rate |
| 2017 | | | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Financial investments | | | | | | | | | Europe | HSBC Bank plc1 | 1,195 |
| (107 | ) | 97 |
| 1,205 |
| (239 | ) | 225 |
| 1,219 |
| | | HSBC UK Bank plc1 | 302 |
| 189 |
| 9 |
| 104 |
| 104 |
| — |
| — |
| | Asia | The Hongkong and Shanghai Banking Corporation Limited | 5,831 |
| 255 |
| 502 |
| 5,074 |
| 50 |
| 930 |
| 4,094 |
| | MENA | HSBC Bank Middle East Limited | 173 |
| 31 |
| 8 |
| 134 |
| (2 | ) | 53 |
| 83 |
| | North America | HSBC North America Holdings Inc. | 1,202 |
| 109 |
| (41 | ) | 1,134 |
| (32 | ) | 221 |
| 945 |
| | | HSBC Bank Canada | 371 |
| 13 |
| 17 |
| 341 |
| 21 |
| 106 |
| 214 |
| | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 466 |
| (4 | ) | (24 | ) | 494 |
| 59 |
| 69 |
| 366 |
| | | HSBC Argentina Holdings S.A. | 526 |
| 115 |
| 194 |
| 217 |
| 43 |
| 76 |
| 98 |
| | Other operations and intra-region eliminations | 639 |
| 235 |
| (59 | ) | 463 |
| (24 | ) | 66 |
| 421 |
| | At 31 Dec | 10,705 |
| 805 |
| 734 |
| 9,166 |
| (67 | ) | 1,793 |
| 7,440 |
|
| | 1 | Impacted by transfers from HSBC Bank plc to HSBC UK Bank plc on 1 July 2018 following the completion of ring-fencing activities in the UK under the Financial Services (Banking Reform) Act 2013. |
| | | Interest expense | Interest expense | Interest expense |
|
|
| Increase/(decrease)
in 2019 compared
with 2018 | | Increase/(decrease)
in 2018 compared
with 2017 | | | | Increase/(decrease)
in 2020 compared
with 2019 | | Increase/(decrease)
in 2019 compared
with 2018 | |
|
| 2019 |
| Volume |
| Rate |
| 2018 |
| Volume |
| Rate |
| 2017 |
| | 2020 | Volume | Rate | 2019 | Volume | Rate | 2018 |
|
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | | $m | $m | | Deposits by banks | Deposits by banks | | | Deposits by banks | | | | Europe | HSBC Bank plc1 | 246 |
| 4 |
| 35 |
| 207 |
| 60 |
| 64 |
| 83 |
| Europe | HSBC Bank plc1 | 120 | | 26 | | (152) | | 246 | | 4 | | 35 | | 207 | |
| HSBC UK Bank plc1 | 25 |
| 8 |
| 8 |
| 9 |
| 9 |
| — |
| — |
| | HSBC UK Bank plc1 | — | | — | | (25) | | 25 | | 8 | | 8 | | 9 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | 290 |
| 29 |
| 59 |
| 202 |
| 23 |
| 2 |
| 177 |
| Asia | The Hongkong and Shanghai Banking Corporation Limited | 123 | | 22 | | (189) | | 290 | | 29 | | 59 | | 202 | | | MENA | HSBC Bank Middle East Limited | 53 |
| 9 |
| 3 |
| 41 |
| 23 |
| 8 |
| 10 |
| MENA | HSBC Bank Middle East Limited | 39 | | 14 | | (28) | | 53 | | 9 | | 3 | | 41 | | | North America | HSBC North America Holdings Inc. | 45 |
| 7 |
| (94 | ) | 132 |
| 38 |
| 53 |
| 41 |
| North America | HSBC North America Holdings Inc. | 9 | | 1 | | (37) | | 45 | | 7 | | (94) | | 132 | |
| HSBC Bank Canada | 2 |
| — |
| (15 | ) | 17 |
| 12 |
| 4 |
| 1 |
| | HSBC Bank Canada | 1 | | — | | (1) | | 2 | | — | | (15) | | 17 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 93 |
| 14 |
| (20 | ) | 99 |
| (46 | ) | 25 |
| 120 |
| Latin America | Grupo Financiero HSBC, S. A. de C. V. | 63 | | (34) | | 4 | | 93 | | 14 | | (20) | | 99 | |
| HSBC Argentina Holdings S.A. | 18 |
| (6 | ) | 15 |
| 9 |
| 9 |
| (1 | ) | 1 |
| | HSBC Argentina Holdings S.A. | 5 | | (8) | | (5) | | 18 | | (6) | | 15 | | 9 | | | | Other operations and intra-region eliminations | Other operations and intra-region eliminations | (70 | ) | 18 |
| 122 |
| (210 | ) | (214 | ) | (14 | ) | 18 |
| Other operations and intra-region eliminations | (30) | | (3) | | 43 | | (70) | | 18 | | 122 | | (210) | | | At 31 Dec | At 31 Dec | 702 |
| 107 |
| 89 |
| 506 |
| (35 | ) | 90 |
| 451 |
| At 31 Dec | 330 | | 69 | | (441) | | 702 | | 107 | | 89 | | 506 | | | | | | | | | | | Customer accounts | Customer accounts | | | Customer accounts | | | | Europe | HSBC Bank plc1 | 1,428 |
| (999 | ) | 565 |
| 1,862 |
| (498 | ) | 1,057 |
| 1,303 |
| Europe | HSBC Bank plc1 | 603 | | 28 | | (853) | | 1,428 | | (999) | | 565 | | 1,862 | |
| HSBC UK Bank plc1 | 806 |
| 336 |
| 98 |
| 372 |
| 372 |
| — |
| — |
| | HSBC UK Bank plc1 | 378 | | 43 | | (471) | | 806 | | 336 | | 98 | | 372 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | 5,520 |
| 256 |
| 1,522 |
| 3,742 |
| 123 |
| 1,189 |
| 2,430 |
| Asia | The Hongkong and Shanghai Banking Corporation Limited | 3,300 | | 170 | | (2,390) | | 5,520 | | 256 | | 1,522 | | 3,742 | | | MENA | HSBC Bank Middle East Limited | 134 |
| 1 |
| 47 |
| 86 |
| (5 | ) | 51 |
| 40 |
| MENA | HSBC Bank Middle East Limited | 84 | | 11 | | (61) | | 134 | | 1 | | 47 | | 86 | | | North America | HSBC North America Holdings Inc. | 872 |
| 36 |
| 272 |
| 564 |
| (32 | ) | 220 |
| 376 |
| North America | HSBC North America Holdings Inc. | 504 | | 120 | | (488) | | 872 | | 36 | | 272 | | 564 | |
| HSBC Bank Canada | 642 |
| 27 |
| 135 |
| 480 |
| 19 |
| 156 |
| 305 |
| | HSBC Bank Canada | 428 | | 51 | | (265) | | 642 | | 27 | | 135 | | 480 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 832 |
| 136 |
| 56 |
| 640 |
| 105 |
| 129 |
| 406 |
| Latin America | Grupo Financiero HSBC, S. A. de C. V. | 535 | | (12) | | (285) | | 832 | | 136 | | 56 | | 640 | |
| HSBC Argentina Holdings S.A. | 554 |
| (93 | ) | 263 |
| 384 |
| 3 |
| 136 |
| 245 |
| | HSBC Argentina Holdings S.A. | 307 | | (29) | | (218) | | 554 | | (93) | | 263 | | 384 | | | | Other operations and intra-region eliminations | Other operations and intra-region eliminations | 450 |
| 313 |
| (20 | ) | 157 |
| (735 | ) | 592 |
| 300 |
| Other operations and intra-region eliminations | 339 | | 106 | | (217) | | 450 | | 313 | | (20) | | 157 | | | At 31 Dec | At 31 Dec | 11,238 |
| 104 |
| 2,847 |
| 8,287 |
| 254 |
| 2,628 |
| 5,405 |
| At 31 Dec | 6,478 | | 528 | | (5,288) | | 11,238 | | 104 | | 2,847 | | 8,287 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense (continued) | | | | Increase/(decrease)
in 2020 compared
with 2019 | | Increase/(decrease)
in 2019 compared
with 2018 | | | | 2020 | Volume | Rate | 2019 | Volume | Rate | 2018 | | | $m | $m | $m | $m | $m | $m | $m | | Repurchase agreements – non-trading | | | | | | | | | Europe | HSBC Bank plc1 | 260 | | (73) | | (603) | | 936 | | (35) | | 145 | | 826 | | | HSBC UK Bank plc1 | 2 | | 2 | | (8) | | 8 | | 5 | | 1 | | 2 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | 197 | | 1 | | (275) | | 471 | | 93 | | 22 | | 356 | | | MENA | HSBC Bank Middle East Limited | 1 | | 1 | | (2) | | 2 | | 1 | | — | | 1 | | | North America | HSBC North America Holdings Inc. | 401 | | (142) | | (1,967) | | 2,510 | | (93) | | 633 | | 1,970 | | | HSBC Bank Canada | 41 | | (27) | | (81) | | 149 | | 23 | | 39 | | 87 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 130 | | (171) | | (157) | | 458 | | 17 | | (17) | | 458 | | | HSBC Argentina Holdings S.A. | 5 | | (1) | | (7) | | 13 | | 4 | | 6 | | 3 | | | | | | | | | | | | Other operations and intra-region eliminations | (74) | | 7 | | 443 | | (524) | | (38) | | (192) | | (294) | | | At 31 Dec | 963 | | (277) | | (2,783) | | 4,023 | | (15) | | 629 | | 3,409 | | | | | | | | | | | | Debt securities in issue – non trading | | | | | | | | | Europe | HSBC Holdings | 3,101 | | 208 | | (904) | | 3,797 | | 550 | | (43) | | 3,290 | | | HSBC Bank plc1 | 719 | | (17) | | (402) | | 1,138 | | 21 | | 55 | | 1,062 | | | HSBC UK Bank plc1 | 423 | | 63 | | 6 | | 354 | | 285 | | 2 | | 67 | | | Asia | The Hongkong and Shanghai Banking Corporation Limited | 841 | | 68 | | (429) | | 1,202 | | 166 | | (52) | | 1,088 | | | MENA | HSBC Bank Middle East Limited | 57 | | 3 | | (57) | | 111 | | — | | 16 | | 95 | | | North America | HSBC North America Holdings Inc. | 730 | | (38) | | (488) | | 1,256 | | 242 | | 56 | | 958 | | | HSBC Bank Canada | 287 | | 60 | | (84) | | 311 | | 38 | | 19 | | 254 | | | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 212 | | 35 | | (35) | | 212 | | 114 | | 14 | | 84 | | | HSBC Argentina Holdings S.A. | 28 | | (21) | | (45) | | 94 | | (47) | | 28 | | 113 | | | | | | | | | | | | Other operations and intra-region eliminations | (1,454) | | (118) | | 617 | | (1,953) | | (404) | | (212) | | (1,337) | | | At 31 Dec | 4,944 | | 196 | | (1,774) | | 6,522 | | 847 | | — | | 5,675 | |
1 Impacted by transfers from HSBC Bank plc to HSBC UK Bank plc on 1 July 2018 following the completion of ring-fencing activities in the UK under the Financial Services (Banking Reform) Act 2013. . | | | | | | | | | | | | | | | | | | Interest expense (continued) | | | | | Increase/(decrease)
in 2019 compared
with 2018 | | Increase/(decrease)
in 2018 compared
with 2017 | | | | | 2019 |
| Volume |
| Rate |
| 2018 |
| Volume |
| Rate |
| 2017 |
| | | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Repurchase agreements – non-trading | | | | | | | | | Europe | HSBC Bank plc1 | 936 |
| (35 | ) | 145 |
| 826 |
| 191 |
| 295 |
| 340 |
| | | HSBC UK Bank plc1 | 8 |
| 5 |
| 1 |
| 2 |
| 2 |
| — |
| — |
| | Asia | The Hongkong and Shanghai Banking Corporation Limited | 471 |
| 93 |
| 22 |
| 356 |
| 40 |
| 175 |
| 141 |
| | MENA | HSBC Bank Middle East Limited | 2 |
| 1 |
| — |
| 1 |
| — |
| — |
| 1 |
| | North America | HSBC North America Holdings Inc. | 2,510 |
| (93 | ) | 633 |
| 1,970 |
| 109 |
| 971 |
| 890 |
| | | HSBC Bank Canada | 149 |
| 23 |
| 39 |
| 87 |
| 26 |
| 31 |
| 30 |
| | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 458 |
| 17 |
| (17 | ) | 458 |
| 126 |
| 73 |
| 259 |
| | | HSBC Argentina Holdings S.A. | 13 |
| 4 |
| 6 |
| 3 |
| 1 |
| (1 | ) | 3 |
| | Other operations and intra-region eliminations | (524 | ) | (38 | ) | (192 | ) | (294 | ) | (10 | ) | (285 | ) | 1 |
| | At 31 Dec | 4,023 |
| (15 | ) | 629 |
| 3,409 |
| 529 |
| 1,215 |
| 1,665 |
| | | | | | | | | | | Debt securities in issue – non trading2 | | | | | | | | | Europe | HSBC Holdings | 3,797 |
| 550 |
| (43 | ) | 3,290 |
| 438 |
| 375 |
| 2,477 |
| | | HSBC Bank plc1 | 1,138 |
| 21 |
| 55 |
| 1,062 |
| 376 |
| 53 |
| 633 |
| | | HSBC UK Bank plc1 | 354 |
| 285 |
| 2 |
| 67 |
| 67 |
| — |
| — |
| | Asia | The Hongkong and Shanghai Banking Corporation Limited | 1,202 |
| 166 |
| (52 | ) | 1,088 |
| 777 |
| 109 |
| 202 |
| | MENA | HSBC Bank Middle East Limited | 111 |
| — |
| 16 |
| 95 |
| 38 |
| 26 |
| 31 |
| | North America | HSBC North America Holdings Inc. | 1,256 |
| 242 |
| 56 |
| 958 |
| (206 | ) | 255 |
| 909 |
| | | HSBC Bank Canada | 311 |
| 38 |
| 19 |
| 254 |
| 64 |
| 26 |
| 164 |
| | Latin America | Grupo Financiero HSBC, S. A. de C. V. | 212 |
| 114 |
| 14 |
| 84 |
| 9 |
| (2 | ) | 77 |
| | | HSBC Argentina Holdings S.A. | 94 |
| (47 | ) | 28 |
| 113 |
| 98 |
| — |
| 15 |
| | Other operations and intra-region eliminations | (1,954 | ) | (405 | ) | (212 | ) | (1,337 | ) | (1,323 | ) | 101 |
| (115 | ) | | At 31 Dec | 6,521 |
| 846 |
| — |
| 5,675 |
| 438 |
| 846 |
| 4,391 |
|
| | 1 | Impacted by transfers from HSBC Bank plc to HSBC UK Bank plc on 1 July 2018 following the completion of ring-fencing activities in the UK under the Financial Services (Banking Reform) Act 2013. |
| | 2 | 'Debt securities in issue and subordinated debts' have been merged with ‘Financial Liabilities designated at fair value – own debt issued’ to create a new table, 'Debt securities in issue – non trading'. Prior year comparatives have been re-stated. |
Short-term borrowings Short-term borrowings in the form of repurchase agreements – non-trading are shown separately on the face of the balance sheet. Other forms of short-term borrowings are included within customer accounts, deposits by banks, debt securities in issue and trading liabilities. Short-term borrowings are defined by the US Securities and Exchange Commission as Federal funds purchased and securities sold under agreements to repurchase, commercial paper and other short-term borrowings. Our only significant short-term borrowings are securities sold under agreements to repurchase and certain debt securities in issue. For securities sold under agreements to repurchase, we run matched repo and reverse repo trading books. We generally observe lower year-end demand in our reverse repo lending business, which results in lower repo balances at the balance sheet date. Additional information on these is provided in the table below. | | | Repos and short-term bonds | Repos and short-term bonds | Repos and short-term bonds |
| 2019 |
| 2018 |
| 2017 |
| | 2020 | 2019 | 2018 |
| $m |
| $m |
| $m |
| | $m | $m | | Securities sold under agreements to repurchase | | | Securities sold under agreements to repurchase | | | | Outstanding at 31 December | 140,902 |
| 167,379 |
| 132,257 |
| Outstanding at 31 December | 123,629 | | 140,902 | | 167,379 | | | Average amount outstanding during the year | 162,158 |
| 163,314 |
| 138,957 |
| Average amount outstanding during the year | 130,241 | | 162,158 | | 163,314 | | | Maximum quarter-end balance outstanding during the year | 185,432 |
| 172,150 |
| 148,259 |
| Maximum quarter-end balance outstanding during the year | 152,847 | | 185,432 | | 172,150 | | | Weighted average interest rate during the year | 2.5% |
| 2.1% |
| 1.2% |
| Weighted average interest rate during the year | 0.8% | 2.5% | 2.1% | | Weighted average interest rate at the year-end | 1.5% |
| 2.7% |
| 1.4% |
| Weighted average interest rate at the year-end | 0.3% | 1.5% | 2.7% | |
Report of the Directors | Financial summary
Contractual obligations The table below provides details of our material contractual obligations at 31 December 2019.2020. | | | | Payments due by period | | Payments due by period | | | Total |
| Less than 1 year |
| 1-3 years |
| 3-5 years |
| More than 5 years |
| | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | | $m |
| $m |
| $m |
| $m |
| $m |
| | $m | | Long-term debt obligations | 229,165 |
| 56,057 |
| 58,081 |
| 37,294 |
| 77,733 |
| Long-term debt obligations | 229,511 | | 68,391 | | 42,686 | | 33,441 | | 84,993 | | | Term deposits and certificates of deposit | 125,519 |
| 115,738 |
| 5,881 |
| 1,524 |
| 2,376 |
| Term deposits and certificates of deposit | 99,967 | | 77,241 | | 19,252 | | 1,452 | | 2,022 | | | Capital (finance) lease obligations | 4,602 |
| 887 |
| 1,388 |
| 1,204 |
| 1,123 |
| | | Capital lease obligations | | Capital lease obligations | 4,621 | | 922 | | 1,275 | | 1,243 | | 1,181 | | | | Purchase obligations | 954 |
| 161 |
| 512 |
| 217 |
| 64 |
| Purchase obligations | 1,102 | | 682 | | 127 | | 256 | | 37 | | | Short positions in debt securities and equity shares | 70,581 |
| 70,581 |
| — |
| — |
| — |
| Short positions in debt securities and equity shares | 56,314 | | 56,314 | | — | | — | | — | | | Current tax liability | 2,150 |
| 2,150 |
| — |
| — |
| — |
| Current tax liability | 690 | | 690 | | — | | — | | — | | | Pension/healthcare obligation | 17,218 |
| 1,556 |
| 3,313 |
| 3,366 |
| 8,983 |
| Pension/healthcare obligation | 19,524 | | 1,783 | | 3,696 | | 3,799 | | 10,246 | | | | 450,189 |
| 247,130 |
| 69,175 |
| 43,605 |
| 90,279 |
| | 411,729 | | 206,023 | | 67,036 | | 40,191 | | 98,479 | |
Loan maturity and interest sensitivity analysis At 31 December 2019,2020, the geographical analysis of loan maturity and interest sensitivity by loan type on a contractual repayment basis was as follows. | | | | | | | | | | | | | | | | | | | | | | Europe | Asia | MENA | North America | Latin America | Total | | $m | $m | $m | $m | $m | $m | | Maturity of 1 year or less | | | | | | | | Loans and advances to banks | 10,185 | | 48,885 | | 8,565 | | 3,277 | | 3,053 | | 73,965 | | | Corporate and commercial | 90,637 | | 141,848 | | 13,867 | | 22,296 | | 5,473 | | 274,121 | | | Non-bank financial institutions | 14,292 | | 19,664 | | 288 | | 5,390 | | 250 | | 39,884 | | | 115,114 | | 210,397 | | 22,720 | | 30,963 | | 8,776 | | 387,970 | | | Maturity after 1 year but within 5 years | | | | | | | | Loans and advances to banks | 3,221 | | 3,093 | | 1,060 | | 27 | | 20 | | 7,421 | | | Corporate and commercial | 60,030 | | 102,902 | | 8,359 | | 27,932 | | 5,308 | | 204,531 | | | Non-bank financial institutions | 6,668 | | 9,620 | | 91 | | 3,464 | | 811 | | 20,654 | | | 69,919 | | 115,615 | | 9,510 | | 31,423 | | 6,139 | | 232,606 | | | Interest rate sensitivity of loans and advances to banks and commercial loans to customers | | | | | | | | Fixed interest rate | 44,953 | | 4,404 | | 4,802 | | 5,261 | | 1,345 | | 60,765 | | | Variable interest rate | 24,966 | | 111,211 | | 4,708 | | 26,162 | | 4,794 | | 171,841 | | | 69,919 | | 115,615 | | 9,510 | | 31,423 | | 6,139 | | 232,606 | | | Maturity after 5 years | | | | | | | | Loans and advances to banks | 136 | | 135 | | — | | — | | — | | 271 | | | Corporate and commercial | 28,435 | | 13,191 | | 2,398 | | 3,160 | | 1,251 | | 48,435 | | | Non-bank financial institutions | 1,213 | | 2,354 | | — | | 438 | | 36 | | 4,041 | | | 29,784 | | 15,680 | | 2,398 | | 3,598 | | 1,287 | | 52,747 | | | Interest rate sensitivity of loans and advances to banks and commercial loans to customers | | | | | | | | Fixed interest rate | 17,157 | | 979 | | 1,064 | | 954 | | 242 | | 20,396 | | | Variable interest rate | 12,627 | | 14,701 | | 1,334 | | 2,644 | | 1,045 | | 32,351 | | | 29,784 | | 15,680 | | 2,398 | | 3,598 | | 1,287 | | 52,747 | |
| | | | | | | | | | | | | | | | Europe |
| Asia |
| MENA |
| North America |
| Latin America |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Maturity of 1 year or less | | | | | | | | Loans and advances to banks | 10,610 |
| 36,656 |
| 6,335 |
| 2,557 |
| 3,565 |
| 59,723 |
| | Corporate and commercial | 94,175 |
| 138,745 |
| 14,653 |
| 25,695 |
| 6,591 |
| 279,859 |
| | Non-bank financial institutions | 17,770 |
| 18,460 |
| 266 |
| 4,814 |
| 478 |
| 41,788 |
| | | 122,555 |
| 193,861 |
| 21,254 |
| 33,066 |
| 10,634 |
| 381,370 |
| | Maturity after 1 year but within 5 years | | | | | | | | Loans and advances to banks | 3,127 |
| 5,151 |
| 418 |
| 138 |
| 20 |
| 8,854 |
| | Corporate and commercial | 63,230 |
| 114,246 |
| 6,228 |
| 30,277 |
| 6,201 |
| 220,182 |
| | Non-bank financial institutions | 7,675 |
| 11,521 |
| 24 |
| 5,173 |
| 1,088 |
| 25,481 |
| | | 74,032 |
| 130,918 |
| 6,670 |
| 35,588 |
| 7,309 |
| 254,517 |
| | Interest rate sensitivity of loans and advances to banks and commercial loans to customers | | | | | | | | Fixed interest rate | 49,602 |
| 4,335 |
| 3,386 |
| 4,162 |
| 1,571 |
| 63,056 |
| | Variable interest rate | 24,430 |
| 126,583 |
| 3,284 |
| 31,426 |
| 5,738 |
| 191,461 |
| | | 74,032 |
| 130,918 |
| 6,670 |
| 35,588 |
| 7,309 |
| 254,517 |
| | Maturity after 5 years | | | | | | | | Loans and advances to banks | 156 |
| 486 |
| — |
| — |
| — |
| 642 |
| | Corporate and commercial | 17,812 |
| 14,718 |
| 2,564 |
| 3,709 |
| 1,655 |
| 40,458 |
| | Non-bank financial institutions | 1,049 |
| 2,176 |
| — |
| 91 |
| 120 |
| 3,436 |
| | | 19,017 |
| 17,380 |
| 2,564 |
| 3,800 |
| 1,775 |
| 44,536 |
| | Interest rate sensitivity of loans and advances to banks and commercial loans to customers | | | | | | | | Fixed interest rate | 8,191 |
| 1,055 |
| 801 |
| 827 |
| 342 |
| 11,216 |
| | Variable interest rate | 10,826 |
| 16,325 |
| 1,763 |
| 2,973 |
| 1,433 |
| 33,320 |
| | | 19,017 |
| 17,380 |
| 2,564 |
| 3,800 |
| 1,775 |
| 44,536 |
|
Deposits The following tables summarise the average amount of bank deposits, customer deposits and certificates of deposit (‘CDs’) and other money market instruments (that are included within ‘Debt securities in issue’ in the balance sheet), together with the average interest rates paid thereon for each of the past three years. The geographical analysis of average deposits is based on the location of the office in which the deposits are recorded and excludes balances with HSBC companies. | | | Deposits by banks |
|
| | | | | Deposits by banks | | | | | | |
| 2019 | 2018 | 2017 | | 2020 | 2019 | 2018 |
| Average
balance |
| Average
rate | Average balance |
| Average
rate | Average balance |
| Average rate | | Average
balance | Average
rate | Average balance | Average
rate | Average
balance | Average
rate |
| $m |
| % | $m |
| % | $m |
| % | | $m | % | $m | % | $m | % | | Europe | 31,243 |
|
| 28,609 |
|
| 33,483 |
|
| Europe | 38,299 | | | 31,243 | | | 28,609 | | | | – demand and other – non-interest bearing | 4,907 |
| — | 6,381 |
| — | 12,825 |
| — | – demand and other – non-interest bearing | 5,100 | | — | | 4,907 | | — | | 6,381 | | — | | | – demand – interest bearing | 11,350 |
| 0.6 | 7,704 |
| 0.7 | 6,780 |
| 0.4 | – demand – interest bearing | 14,492 | | 0.2 | | 11,350 | | 0.6 | | 7,704 | | 0.7 | | | – time | 14,981 |
| 1.2 | 14,503 |
| 0.9 | 11,747 |
| 0.3 | – time | 18,701 | | 0.5 | | 14,981 | | 1.2 | | 14,503 | | 0.9 | | | – other | 5 |
| — | 21 |
| — | 2,131 |
| 1.1 | – other | 6 | | — | | 5 | | — | | 21 | | — | | | Asia | 24,893 |
|
| 21,599 |
|
| 25,253 |
|
| Asia | 29,791 | | | 24,893 | | | 21,599 | | | | – demand and other – non-interest bearing | 3,876 |
| — | 3,305 |
| — | 5,201 |
| — | – demand and other – non-interest bearing | 3,787 | | — | | 3,876 | | — | | 3,305 | | — | | | – demand – interest bearing | 16,612 |
| 1.0 | 13,775 |
| 0.8 | 12,521 |
| 0.5 | – demand – interest bearing | 19,381 | | 0.3 | | 16,612 | | 1.0 | | 13,775 | | 0.8 | | | – time | 4,398 |
| 2.2 | 4,072 |
| 1.9 | 3,355 |
| 1.5 | – time | 6,623 | | 0.7 | | 4,398 | | 2.2 | | 4,072 | | 1.9 | | | – other | 7 |
| — | 447 |
| — | 4,176 |
| 1.6 | – other | — | | — | | 7 | | — | | 447 | | — | | | Middle East and North Africa | 1,108 |
|
| 981 |
|
| 1,311 |
|
| Middle East and North Africa | 1,528 | | | 1,108 | | | 981 | | | | – demand and other – non-interest bearing | 160 |
| — | 362 |
| — | 430 |
| — | – demand and other – non-interest bearing | 220 | | — | | 160 | | — | | 362 | | — | | | – demand – interest bearing | 236 |
| 0.3 | 28 |
| 3.6 | 2 |
| — | – demand – interest bearing | 280 | | 0.4 | | 236 | | 0.3 | | 28 | | 3.6 | | | – time | 696 |
| 3.1 | 475 |
| 5.5 | 871 |
| 3.0 | – time | 969 | | 1.7 | | 696 | | 3.1 | | 475 | | 5.5 | | | – other | 16 |
| — | 116 |
| — | 8 |
| — | – other | 59 | | — | | 16 | | — | | 116 | | — | | | North America | 4,454 |
|
| 3,818 |
|
| 5,721 |
|
| North America | 5,493 | | | 4,454 | | | 3,818 | | | | – demand and other – non-interest bearing | 1,292 |
| — | 1,702 |
| — | 1,853 |
| — | – demand and other – non-interest bearing | 1,471 | | — | | 1,292 | | — | | 1,702 | | — | | | – demand – interest bearing | 2,338 |
| 1.3 | 1,820 |
| 1.0 | 1,744 |
| 0.5 | – demand – interest bearing | 3,617 | | 0.2 | | 2,338 | | 1.3 | | 1,820 | | 1.0 | | | – time | 824 |
| 2.2 | 296 |
| 1.0 | 2,116 |
| 1.6 | – time | 405 | | 0.7 | | 824 | | 2.2 | | 296 | | 1.0 | | | – other | — |
| — | — |
| — | 8 |
| — | – other | — | | — | | — | | — | | — | | — | | | Latin America | 1,084 |
|
| 1,289 |
|
| 2,042 |
|
| Latin America | 1,005 | | | 1,084 | | | 1,289 | | | | – demand and other – non-interest bearing | 32 |
| — | 16 |
| — | 164 |
| — | – demand and other – non-interest bearing | 2 | | — | | 32 | | — | | 16 | | — | | | – demand – interest bearing | 67 |
| 22.4 | 80 |
| 10.0 | 376 |
| 6.9 | – demand – interest bearing | 71 | | 9.9 | | 67 | | 22.4 | | 80 | | 10.0 | | | – time | 985 |
| 9.8 | 1,193 |
| 6.6 | 1,502 |
| 6.5 | – time | 932 | | 6.7 | | 985 | | 9.8 | | 1,193 | | 6.6 | | | – other | — |
| — | — |
| — | — |
| — | – other | — | | — | | — | | — | | — | | — | | | Total | 62,782 |
|
| 56,296 |
|
| 67,810 |
|
| Total | 76,116 | | | 62,782 | | | 56,296 | | | | – demand and other – non-interest bearing | 10,267 |
| — | 11,766 |
| — | 20,473 |
| — | – demand and other – non-interest bearing | 10,580 | | — | | 10,267 | | — | | 11,766 | | — | | | – demand – interest bearing | 30,603 |
| 0.9 | 23,407 |
| 0.8 | 21,423 |
| 0.6 | – demand – interest bearing | 37,841 | | 0.3 | | 30,603 | | 0.9 | | 23,407 | | 0.8 | | | – time | 21,884 |
| 1.9 | 20,539 |
| 1.6 | 19,591 |
| 1.2 | – time | 27,630 | | 0.8 | | 21,884 | | 1.9 | | 20,539 | | 1.6 | | | – other | 28 |
| — | 584 |
| — | 6,323 |
| 0.4 | – other | 65 | | — | | 28 | | — | | 584 | | — | |
Report of the Directors | Financial summary
| | | | | | | | | | | | | | | | | | | | | | Customer accounts | | 2020 | 2019 | 2018 | | Average
balance | Average
rate | Average
balance | Average
rate | Average
balance | Average
rate | | $m | % | $m | % | $m | % | | Europe | 568,003 | | | 510,513 | | | 500,811 | | | | – demand and other – non-interest bearing | 145,363 | | — | | 119,466 | | — | | 91,866 | | — | | | – demand – interest bearing | 343,374 | | 0.2 | | 310,275 | | 0.5 | 332,031 | | 0.4 | | – savings | 52,584 | | 0.5 | | 49,256 | | 0.8 | 42,220 | | 0.6 | | – time | 25,755 | | 0.6 | | 30,498 | | 1.7 | 33,264 | | 1.3 | | – other | 927 | | 0.2 | | 1,018 | | 0.5 | 1,430 | | 8.5 | | Asia | 722,371 | | | 670,088 | | | 657,549 | | | | – demand and other – non-interest bearing | 71,629 | | — | | 64,871 | | — | | 73,024 | | — | | | – demand – interest bearing | 486,903 | | 0.2 | | 430,760 | | 0.3 | 455,443 | | 0.2 | | – savings | 138,508 | | 1.6 | | 147,959 | | 2.3 | 107,078 | | 2.1 | | – time | 25,324 | | 1.1 | | 26,493 | | 2.1 | 20,872 | | 1.7 | | – other | 7 | | 14 | | 5 | | 20.0 | 1,132 | | 0.9 | | Middle East and North Africa | 40,559 | | | 36,340 | | | 35,074 | | | | – demand and other – non-interest bearing | 21,238 | | — | | 17,920 | | — | | 17,716 | | — | | | – demand – interest bearing | 7,837 | | 0.4 | | 7,356 | | 0.9 | 5,944 | | 0.8 | | – savings | 11,478 | | 3.0 | | 11,047 | | 4.8 | 11,201 | | 3.8 | | – time | 6 | | — | | 17 | | — | 213 | | 2.3 | | – other | — | | — | | — | | — | | — | | — | | | North America | 169,636 | | | 137,126 | | | 134,486 | | | | – demand and other – non-interest bearing | 28,486 | | — | | 23,271 | | — | | 25,249 | | — | | | – demand – interest bearing | 49,422 | | 0.3 | | 37,090 | | 0.9 | 37,614 | | 0.7 | | – savings | 84,882 | | 0.8 | | 67,780 | | 1.4 | 64,538 | | 1.0 | | – time | 6,846 | | 1.3 | | 8,984 | | 2.3 | 7,079 | | 1.7 | | – other | — | | — | | 1 | | — | 6 | | 133.3 | | | Latin America | 25,681 | | | 25,847 | | | 24,193 | | | | – demand and other – non-interest bearing | 5,285 | | — | | 4,901 | | — | | 5,638 | | — | | | – demand – interest bearing | 10,739 | | 3.1 | | 9,996 | | 5.2 | 9,092 | | 3.8 | | – savings | 2,746 | | 8.9 | | 3,228 | | 12.9 | 3,464 | | 8.9 | | – time | 6,911 | | 4.0 | | 7,722 | | 6.2 | 5,906 | | 6.4 | | – other | — | | — | | — | | — | 93 | | 15.1 | | | Total | 1,526,250 | | | 1,379,914 | | | 1,352,113 | | | | – demand and other – non-interest bearing | 272,001 | | — | | 230,429 | | — | | 213,493 | | — | | | – demand – interest bearing | 898,275 | | 0.2 | | 795,477 | | 0.5 | 840,124 | | 0.3 | | – savings | 290,198 | | 1.3 | | 279,270 | | 2.0 | 228,501 | | 1.7 | | – time | 64,842 | | 1.2 | | 73,714 | | 2.4 | 67,334 | | 1.9 | | – other | 934 | | 0.3 | | 1,024 | | 0.8 | 2,661 | | 5.9 |
| | | | | | | | | | | | | | | | | | | | | | Certificates of deposit and other money market instruments | | 2020 | 2019 | 2018 | | Average
balance | Average
rate | Average
balance | Average
rate | Average
balance | Average
rate | | $m | % | $m | % | $m | % | | Europe | 24,992 | | 0.7 | | 24,894 | | 1.7 | | 19,034 | | 1.7 | | | Asia | 6,510 | | 2.1 | | 5,214 | | 2.4 | | 2,107 | | 2.3 | | | North America | 13,144 | | 1.2 | | 9,887 | | 2.4 | | 7,497 | | 2.4 | | | Latin America | 4,289 | | 5.9 | | 3,474 | | 6.4 | | 1,986 | | 4.7 | | | Total | 48,935 | | 1.5 | | 43,469 | | 2.3 | | 30,624 | | 2.1 | |
| | | | | | | | | | | | | | Customer accounts |
| 2019 | 2018 | 2017 |
| Average
balance |
| Average
rate | Average
balance |
| Average
rate |
| Average balance |
| Average rate |
|
| $m |
| % | $m |
| % |
| $m |
| % |
| | Europe | 510,513 |
|
| 500,811 |
|
|
| 458,710 |
|
| | – demand and other – non-interest bearing | 119,466 |
| — | 91,866 |
| — |
| 76,205 |
| — |
| | – demand – interest bearing | 310,275 |
| 0.5 | 332,031 |
| 0.4 |
| 310,887 |
| 0.3 |
| | – savings | 49,256 |
| 0.8 | 42,220 |
| 0.6 |
| 39,488 |
| 0.4 | | – time | 30,498 |
| 1.7 | 33,264 |
| 1.3 |
| 30,939 |
| 0.8 | | – other | 1,018 |
| 0.5 | 1,430 |
| 8.5 |
| 1,191 |
| 1.8 | | Asia | 670,088 |
|
| 657,549 |
|
|
| 639,925 |
|
| | – demand and other – non-interest bearing | 64,871 |
| — | 73,024 |
| — |
| 73,704 |
| — |
| | – demand – interest bearing | 430,760 |
| 0.3 | 455,443 |
| 0.2 |
| 459,067 |
| 0.1 |
| | – savings | 147,959 |
| 2.3 | 107,078 |
| 2.1 |
| 87,551 |
| 1.8 |
| | – time | 26,493 |
| 2.1 | 20,872 |
| 1.7 |
| 17,183 |
| 1.0 |
| | – other | 5 |
| 20 | 1,132 |
| 0.9 |
| 2,420 |
| 0.3 |
| | Middle East and North Africa | 36,340 |
|
| 35,074 |
|
|
| 35,105 |
|
|
| | – demand and other – non-interest bearing | 17,920 |
| — | 17,716 |
| — |
| 17,977 |
| — |
| | – demand – interest bearing | 7,356 |
| 0.9 | 5,944 |
| 0.8 |
| 6,586 |
| 0.5 | | – savings | 11,047 |
| 4.8 | 11,201 |
| 3.8 |
| 9,734 |
| 2.9 | | – time | 17 |
| — | 213 |
| 2.3 |
| 808 |
| 1.6 | | – other | — |
| — | — |
| — |
| — |
| — |
| | North America | 137,126 |
|
| 134,486 |
|
|
| 141,192 |
|
| | – demand and other – non-interest bearing | 23,271 |
| — | 25,249 |
| — |
| 28,542 |
| — |
| | – demand – interest bearing | 37,090 |
| 0.9 | 37,614 |
| 0.7 |
| 39,050 |
| 0.3 |
| | – savings | 67,780 |
| 1.4 | 64,538 |
| 1.0 |
| 63,786 |
| 0.7 |
| | – time | 8,984 |
| 2.3 | 7,079 |
| 1.7 |
| 9,769 |
| 1.1 |
| | – other | 1 |
| — | 6 |
| 133.3 |
| 45 |
| — |
| | Latin America | 25,847 |
|
| 24,193 |
|
|
| 21,865 |
|
|
| | – demand and other – non-interest bearing | 4,901 |
| — | 5,638 |
| — |
| 5,451 |
| — |
| | – demand – interest bearing | 9,996 |
| 5.2 | 9,092 |
| 3.8 |
| 7,217 |
| 2.1 |
| | – savings | 3,228 |
| 12.9 | 3,464 |
| 8.9 |
| 3,830 |
| 6.2 |
| | – time | 7,722 |
| 6.2 | 5,906 |
| 6.4 |
| 5,346 |
| 5.3 |
| | – other | — |
| — | 93 |
| 15.1 |
| 21 |
| — |
| | Total | 1,379,914 |
|
| 1,352,113 |
|
|
| 1,296,797 |
|
| | – demand and other – non-interest bearing | 230,429 |
| — | 213,493 |
| — |
| 201,879 |
| — |
| | – demand – interest bearing | 795,477 |
| 0.5 | 840,124 |
| 0.3 |
| 822,807 |
| 0.2 |
| | – savings | 279,270 |
| 2.0 | 228,501 |
| 1.7 |
| 204,389 |
| 1.3 |
| | – time | 73,714 |
| 2.4 | 67,334 |
| 1.9 |
| 64,045 |
| 1.3 |
| | – other | 1,024 |
| 0.8 | 2,661 |
| 5.9 |
| 3,677 |
| 1.0 |
|
| | | | | | | | | | | | Certificates of deposit and other money market instruments |
| 2019 | 2018 | 2017 |
| Average
balance |
| Average
rate | Average
balance |
| Average
rate | Average
balance |
| Average
rate |
| $m |
| % | $m |
| % | $m |
| % | | Europe | 24,894 |
| 1.7 | 19,034 |
| 1.7 | 12,506 |
| 0.6 | | Asia | 5,214 |
| 2.4 | 2,107 |
| 2.3 | 523 |
| 2.7 | | North America | 9,887 |
| 2.4 | 7,497 |
| 2.4 | 6,950 |
| 1.6 | | Latin America | 3,474 |
| 6.4 | 1,986 |
| 4.7 | 1,333 |
| 5.4 | | Total | 43,469 |
| 2.3 | 30,624 |
| 2.1 | 21,312 |
| 1.3 |
Certificates of deposit and other time deposits The maturity analysis of certificates of deposit (‘CDs’) and other wholesale time deposits is expressed by remaining maturity. The majority of CDs and time deposits are in amounts of $100,000 and over or the equivalent in other currencies.
| | | | | | | | | | | | | | | | | | | At 31 Dec 2020 | | 3 months
or less | After
3 months
but within
6 months | After
6 months
but within
12 months | After
12 months | Total | | $m | $m | $m | $m | $m | | Europe | 29,085 | | 1,947 | | 2,147 | | 19,213 | | 52,392 | | | – certificates of deposit | 860 | | 1,017 | | 1,956 | | 2,115 | | 5,948 | | | – time deposits: | | | | | | | banks | 2,269 | | 55 | | 42 | | 16,962 | | 19,328 | | | customers | 25,956 | | 875 | | 149 | | 136 | | 27,116 | | | Asia | 24,859 | | 2,342 | | 1,673 | | 357 | | 29,231 | | | – certificates of deposit | 2,112 | | 1,607 | | 1,182 | | 351 | | 5,252 | | | – time deposits: | | | | | | | banks | 4,972 | | 234 | | 10 | | 6 | | 5,222 | | | customers | 17,775 | | 501 | | 481 | | — | | 18,757 | | | Middle East and North Africa | 67 | | — | | 362 | | 972 | | 1,401 | | | – certificates of deposit | — | | — | | — | | — | | — | | | – time deposits: | | | | | | | banks | 67 | | — | | 362 | | 972 | | 1,401 | | | customers | — | | — | | — | | — | | — | | | North America | 4,151 | | 1,958 | | 811 | | 209 | | 7,129 | | | – certificates of deposit | 1,488 | | 1,683 | | 198 | | 125 | | 3,494 | | | – time deposits: | | | | | | | banks | — | | — | | — | | — | | — | | | customers | 2,663 | | 275 | | 613 | | 84 | | 3,635 | | | Latin America | 4,787 | | 2,259 | | 1,544 | | 1,974 | | 10,564 | | | – certificates of deposit | 881 | | 110 | | 826 | | 1,903 | | 3,720 | | | – time deposits: | | | | | | | banks | — | | — | | — | | 51 | | 51 | | | customers | 3,906 | | 2,149 | | 718 | | 20 | | 6,793 | | | Total | 62,949 | | 8,506 | | 6,537 | | 22,725 | | 100,717 | | | – certificates of deposit | 5,341 | | 4,417 | | 4,162 | | 4,494 | | 18,414 | | | – time deposits: | — | | — | | — | | — | | — | | | banks | 7,308 | | 289 | | 414 | | 17,991 | | 26,002 | | | customers | 50,300 | | 3,800 | | 1,961 | | 240 | | 56,301 | |
| | | | | | | | | | | |
| At 31 Dec 2019 |
| 3 months
or less |
| After
3 months
but within
6 months |
| After
6 months
but within
12 months |
| After
12 months |
| Total |
|
| $m |
| $m |
| $m |
| $m |
| $m |
| | Europe | 34,061 |
| 5,739 |
| 9,636 |
| 4,651 |
| 54,087 |
| | – certificates of deposit | 3,692 |
| 2,978 |
| 8,458 |
| 1,870 |
| 16,998 |
| | – time deposits: |
|
|
|
|
| | banks | 5,002 |
| 2,233 |
| 946 |
| 2,604 |
| 10,785 |
| | customers | 25,367 |
| 528 |
| 232 |
| 177 |
| 26,304 |
| | Asia | 33,317 |
| 2,902 |
| 1,996 |
| 780 |
| 38,995 |
| | – certificates of deposit | 4,261 |
| 2,059 |
| 1,658 |
| 761 |
| 8,739 |
| | – time deposits: |
|
|
|
|
| | banks | 3,421 |
| 91 |
| 1 |
| — |
| 3,513 |
| | customers | 25,635 |
| 752 |
| 337 |
| 19 |
| 26,743 |
| | Middle East and North Africa | 83 |
| 105 |
| 538 |
| 580 |
| 1,306 |
| | – certificates of deposit | — |
| — |
| — |
| — |
| — |
| | – time deposits: |
|
|
|
|
| | banks | 83 |
| 105 |
| 538 |
| 580 |
| 1,306 |
| | customers | — |
| — |
| — |
| — |
| — |
| | North America | 8,982 |
| 4,846 |
| 3,423 |
| 540 |
| 17,791 |
| | – certificates of deposit | 3,193 |
| 3,096 |
| 2,037 |
| — |
| 8,326 |
| | – time deposits: |
|
|
|
|
| | banks | 1 |
| — |
| — |
| — |
| 1 |
| | customers | 5,788 |
| 1,750 |
| 1,386 |
| 540 |
| 9,464 |
| | Latin America | 5,584 |
| 1,924 |
| 2,753 |
| 3,209 |
| 13,470 |
| | – certificates of deposit | 768 |
| 27 |
| 1,545 |
| 2,121 |
| 4,461 |
| | – time deposits: |
|
|
|
|
| | banks | — |
| — |
| 7 |
| 1,041 |
| 1,048 |
| | customers | 4,816 |
| 1,897 |
| 1,201 |
| 47 |
| 7,961 |
| | Total | 82,027 |
| 15,516 |
| 18,346 |
| 9,760 |
| 125,649 |
| | – certificates of deposit | 11,914 |
| 8,160 |
| 13,698 |
| 4,752 |
| 38,524 |
| | – time deposits: | — |
| — |
| — |
| — |
| — |
| | banks | 8,507 |
| 2,429 |
| 1,492 |
| 4,225 |
| 16,653 |
| | customers | 61,606 |
| 4,927 |
| 3,156 |
| 783 |
| 70,472 |
|
Report of the Directors | Financial summary
| | Footnotes to pages 49 to 55. |
| | 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.
|
| | 4 | Dividends per ordinary share expressed as a percentage of basic 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 | Including interest-bearing bank deposits only. |
| | 9 | Including interest-bearing customer accounts only. |
| | 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 188. |
| | 13
| Including perpetual preferred securities, details of which can be found in Note 28 on the financial statements. |
| | 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). |
| | | Global businesses and geographical regions | | Page | | Summary | | | Reconciliation of reported and adjusted items – global businesses
| | Supplementary global business disclosures
Reconciliation of reported and adjusted risk-weighted assets | | | Supplementary tables for WPB and GBM | | | Analysis of reported results by geographical regions | | | Reconciliation of reported and adjusted items – geographical regions | | | Analysis by country | | Return on equity and return on tangible equity | |
. The Group Chief Executive, andsupported by the rest of the Group Management BoardExecutive Committee (‘GMB’GEC') review(previously the Group Management Board), reviews 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 294.347. 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. | |
|
| 2019 | | 2020 |
|
| Retail Banking and Wealth
Management |
| Commercial
Banking |
| Global
Banking and
Markets |
| Global
Private
Banking |
| Corporate Centre |
| Total |
| | Wealth and Personal Banking | Commercial
Banking | Global
Banking and
Markets | Corporate Centre | Total |
| Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Footnotes | $m | | Revenue | 1 |
|
|
|
|
|
|
|
|
|
|
|
| Revenue | 1 | | | Reported |
| 23,192 |
| 15,285 |
| 14,840 |
| 1,848 |
| 933 |
| 56,098 |
| Reported | | 21,999 | | 13,294 | | 14,994 | | 142 | | 50,429 | | | Significant items |
| 208 |
| 7 |
| 76 |
| — |
| (980 | ) | (689 | ) | Significant items | | 14 | | 18 | | 309 | | (404) | | (63) | | | – customer redress programmes |
| 156 |
| 7 |
| — |
| — |
| — |
| 163 |
| – customer redress programmes | | 5 | | 16 | | — | | — | | 21 | | | – disposals, acquisitions and investment in new businesses |
| 52 |
| — |
| — |
| — |
| (820 | ) | (768 | ) | – disposals, acquisitions and investment in new businesses | | 9 | | — | | — | | 1 | | 10 | | – fair value movements on financial instruments
| 2 | — |
| — |
| 76 |
| — |
| (160 | ) | (84 | ) | – fair value movements on financial instruments | 2 | — | | 1 | | 2 | | (267) | | (264) | | | – restructuring and other related costs | | – restructuring and other related costs | 3 | — | | 1 | | 307 | | (138) | | 170 | | | Adjusted |
| 23,400 |
| 15,292 |
| 14,916 |
| 1,848 |
| (47 | ) | 55,409 |
| Adjusted | | 22,013 | | 13,312 | | 15,303 | | (262) | | 50,366 | | | ECL |
|
|
|
|
|
|
|
|
|
|
|
|
| ECL | | | | Reported |
| (1,390 | ) | (1,184 | ) | (153 | ) | (22 | ) | (7 | ) | (2,756 | ) | Reported | | (2,855) | | (4,754) | | (1,209) | | 1 | | (8,817) | | | Adjusted |
| (1,390 | ) | (1,184 | ) | (153 | ) | (22 | ) | (7 | ) | (2,756 | ) | Adjusted | | (2,855) | | (4,754) | | (1,209) | | 1 | | (8,817) | | | Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses | | | | Reported |
| (15,429 | ) | (9,829 | ) | (13,640 | ) | (1,817 | ) | (1,634 | ) | (42,349 | ) | Reported | | (15,446) | | (6,900) | | (10,169) | | (1,917) | | (34,432) | | | Significant items |
| 1,412 |
| 3,028 |
| 4,223 |
| 393 |
| 498 |
| 9,554 |
| Significant items | | 422 | | 211 | | 905 | | 1,435 | | 2,973 | | | – costs of structural reform | 3 | — |
| 4 |
| 42 |
| — |
| 112 |
| 158 |
| | | – customer redress programmes |
| 1,264 |
| 17 |
| — |
| — |
| — |
| 1,281 |
| – customer redress programmes | | (64) | | 1 | | — | | 9 | | (54) | | | – goodwill impairment | | — |
| 2,956 |
| 3,962 |
| 431 |
| — |
| 7,349 |
| | | | – impairment of goodwill and other intangibles | | – impairment of goodwill and other intangibles | | 294 | | 45 | | 577 | | 174 | | 1,090 | | | – past service costs of guaranteed minimum pension benefits equalisation | | – past service costs of guaranteed minimum pension benefits equalisation | | — | | — | | — | | 17 | | 17 | | | – restructuring and other related costs |
| 148 |
| 51 |
| 217 |
| 32 |
| 379 |
| 827 |
| – restructuring and other related costs | 4 | 192 | | 165 | | 326 | | 1,225 | | 1,908 | | | – settlements and provisions in connection with legal and regulatory matters |
| — |
| — |
| 2 |
| (70 | ) | 7 |
| (61 | ) | – settlements and provisions in connection with legal and regulatory matters | | — | | — | | 2 | | 10 | | 12 | | | Adjusted |
| (14,017 | ) | (6,801 | ) | (9,417 | ) | (1,424 | ) | (1,136 | ) | (32,795 | ) | Adjusted | | (15,024) | | (6,689) | | (9,264) | | (482) | | (31,459) | | | Share of profit in associates and joint ventures |
|
|
|
|
|
|
|
|
|
|
|
|
| Share of profit in associates and joint ventures | | | | Reported |
| 55 |
| — |
| — |
| — |
| 2,299 |
| 2,354 |
| Reported | | 6 | | (1) | | — | | 1,592 | | 1,597 | | | Significant items | | Significant items | | — | | — | | — | | 462 | | 462 | | | – impairment of goodwill | | – impairment of goodwill | 5 | — | | — | | — | | 462 | | 462 | | | Adjusted |
| 55 |
| — |
| — |
| — |
| 2,299 |
| 2,354 |
| Adjusted | | 6 | | (1) | | — | | 2,054 | | 2,059 | | | Profit before tax |
|
|
|
|
|
|
|
|
|
|
|
|
| | | Profit/(loss) before tax | | Profit/(loss) before tax | | | | Reported |
| 6,428 |
| 4,272 |
| 1,047 |
| 9 |
| 1,591 |
| 13,347 |
| Reported | | 3,704 | | 1,639 | | 3,616 | | (182) | | 8,777 | | | Significant items |
| 1,620 |
| 3,035 |
| 4,299 |
| 393 |
| (482 | ) | 8,865 |
| Significant items | | 436 | | 229 | | 1,214 | | 1,493 | | 3,372 | | | – revenue |
| 208 |
| 7 |
| 76 |
| — |
| (980 | ) | (689 | ) | – revenue | | 14 | | 18 | | 309 | | (404) | | (63) | | | | – operating expenses |
| 1,412 |
| 3,028 |
| 4,223 |
| 393 |
| 498 |
| 9,554 |
| – operating expenses | | 422 | | 211 | | 905 | | 1,435 | | 2,973 | | | – share of profit in associates and joint ventures | | – share of profit in associates and joint ventures | | — | | — | | — | | 462 | | 462 | | | | Adjusted |
| 8,048 |
| 7,307 |
| 5,346 |
| 402 |
| 1,109 |
| 22,212 |
| Adjusted | | 4,140 | | 1,868 | | 4,830 | | 1,311 | | 12,149 | | | Loans and advances to customers (net) |
|
|
|
|
|
|
|
|
|
|
|
|
| Loans and advances to customers (net) | | | | Reported |
| 395,393 |
| 346,060 |
| 246,266 |
| 47,593 |
| 1,431 |
| 1,036,743 |
| Reported | | 469,186 | | 343,182 | | 224,364 | | 1,255 | | 1,037,987 | | | Adjusted |
| 395,393 |
| 346,060 |
| 246,266 |
| 47,593 |
| 1,431 |
| 1,036,743 |
| Adjusted | | 469,186 | | 343,182 | | 224,364 | | 1,255 | | 1,037,987 | | | Customer accounts |
|
|
|
|
|
|
|
|
|
|
|
|
| Customer accounts | | | | Reported |
| 689,283 |
| 386,522 |
| 292,284 |
| 62,943 |
| 8,083 |
| 1,439,115 |
| Reported | | 834,759 | | 470,428 | | 336,983 | | 610 | | 1,642,780 | | | Adjusted |
| 689,283 |
| 386,522 |
| 292,284 |
| 62,943 |
| 8,083 |
| 1,439,115 |
| Adjusted | | 834,759 | | 470,428 | | 336,983 | | 610 | | 1,642,780 | |
For footnotes, see page 84.1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.
2 Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.
3 Comprises losses associated with the RWA reduction commitments and gains relating to the business update in February 2020. 4 Includes impairment of software intangible assets of $189m (of the total software intangible asset impairment of $1,347m) and impairment of tangible assets of $197m. 5 During the year, The Saudi British Bank ('SABB'), an associate of HSBC, impaired the goodwill that arose following the merger with Alawwal bank in 2019. HSBC's post-tax share of the goodwill impairment was $462m.
Report of the Directors | Global businesses
| | | | | | | | | | | | | | | | | | | | | | Reconciliation of reported and adjusted items (continued) | | | 20194 | | | Wealth and Personal Banking | Commercial
Banking | Global
Banking and
Markets | Corporate
Centre | Total | | Footnotes | $m | $m | $m | $m | $m | | Revenue | 1 | | | | | | | Reported | | 25,552 | | 15,256 | | 14,894 | | 396 | | 56,098 | | | Currency translation | | (208) | | (103) | | (107) | | (53) | | (471) | | | Significant items | | 221 | | 11 | | 82 | | (997) | | (683) | | | – customer redress programmes | | 155 | | 7 | | — | | 1 | | 163 | | | – disposals, acquisitions and investment in new businesses | | 52 | | — | | — | | (820) | | (768) | | | – fair value movements on financial instruments | 2 | 7 | | 4 | | 84 | | (179) | | (84) | | | – currency translation on significant items | | 7 | | — | | (2) | | 1 | | 6 | | | Adjusted | | 25,565 | | 15,164 | | 14,869 | | (654) | | 54,944 | | | ECL | | | | | | | | Reported | | (1,437) | | (1,192) | | (162) | | 35 | | (2,756) | | | Currency translation | | 89 | | 30 | | 9 | | 1 | | 129 | | | Adjusted | | (1,348) | | (1,162) | | (153) | | 36 | | (2,627) | | | Operating expenses | | | | | | | | Reported | | (17,351) | | (9,905) | | (13,790) | | (1,303) | | (42,349) | | | Currency translation | | 135 | | 18 | | 21 | | 49 | | 223 | | | Significant items | | 1,828 | | 3,055 | | 4,225 | | 499 | | 9,607 | | | – costs of structural reform | 3 | — | | 4 | | 42 | | 112 | | 158 | | | – customer redress programmes | | 1,264 | | 17 | | — | | — | | 1,281 | | | | | | | | | | – goodwill impairment | | 431 | | 2,956 | | 3,962 | | — | | 7,349 | | | | | | | | | | – restructuring and other related costs | | 180 | | 51 | | 217 | | 379 | | 827 | | | – settlements and provisions in connection with legal and regulatory matters | | (69) | | — | | 2 | | 6 | | (61) | | | – currency translation on significant items | | 22 | | 27 | | 2 | | 2 | | 53 | | | Adjusted | | (15,388) | | (6,832) | | (9,544) | | (755) | | (32,519) | | | Share of profit in associates and joint ventures | | | | | | | | Reported | | 55 | | — | | — | | 2,299 | | 2,354 | | | Currency translation | | (1) | | — | | — | | (2) | | (3) | | | Adjusted | | 54 | | — | | — | | 2,297 | | 2,351 | | | Profit before tax | | | | | | | | Reported | | 6,819 | | 4,159 | | 942 | | 1,427 | | 13,347 | | | Currency translation | | 15 | | (55) | | (77) | | (5) | | (122) | | | Significant items | | 2,049 | | 3,066 | | 4,307 | | (498) | | 8,924 | | | – revenue | | 221 | | 11 | | 82 | | (997) | | (683) | | | – operating expenses | | 1,828 | | 3,055 | | 4,225 | | 499 | | 9,607 | | | Adjusted | | 8,883 | | 7,170 | | 5,172 | | 924 | | 22,149 | | | Loans and advances to customers (net) | | | | | | | | Reported | | 443,025 | | 346,105 | | 246,492 | | 1,121 | | 1,036,743 | | | Currency translation | | 12,593 | | 7,676 | | 5,639 | | 45 | | 25,953 | | | Adjusted | | 455,618 | | 353,781 | | 252,131 | | 1,166 | | 1,062,696 | | | Customer accounts | | | | | | | | Reported | | 753,769 | | 388,723 | | 295,880 | | 743 | | 1,439,115 | | | Currency translation | | 14,382 | | 8,459 | | 8,214 | | 37 | | 31,092 | | | Adjusted | | 768,151 | | 397,182 | | 304,094 | | 780 | | 1,470,207 | |
1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. | | | | | | | | | | | | | | | | Reconciliation of reported and adjusted items (continued) |
|
| 2018 |
|
| Retail
Banking and
Wealth
Management |
| Commercial
Banking |
| Global
Banking and
Markets |
| Global
Private
Banking |
| Corporate Centre |
| Total |
|
| Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Revenue | 1 |
|
|
|
|
|
| | Reported |
| 21,928 |
| 14,938 |
| 15,634 |
| 1,790 |
| (510 | ) | 53,780 |
| | Currency translation |
| (562 | ) | (423 | ) | (489 | ) | (28 | ) | (115 | ) | (1,617 | ) | | Significant items |
| 8 |
| (50 | ) | (120 | ) | (5 | ) | 335 |
| 168 |
| | – customer redress programmes |
| — |
| (53 | ) | — |
| — |
| — |
| (53 | ) | | – disposals, acquisitions and investment in new businesses |
| 7 |
| — |
| — |
| (5 | ) | 111 |
| 113 |
| – fair value movements on financial instruments
| 2 | — |
| — |
| (122 | ) | — |
| 222 |
| 100 |
| | – currency translation on significant items |
| 1 |
| 3 |
| 2 |
| — |
| 2 |
| 8 |
| | Adjusted |
| 21,374 |
| 14,465 |
| 15,025 |
| 1,757 |
| (290 | ) | 52,331 |
| | ECL |
| | | | | | | | Reported |
| (1,177 | ) | (739 | ) | 26 |
| 8 |
| 115 |
| (1,767 | ) | | Currency translation |
| 43 |
| 27 |
| 5 |
| (1 | ) | 4 |
| 78 |
| | Adjusted |
| (1,134 | ) | (712 | ) | 31 |
| 7 |
| 119 |
| (1,689 | ) | | Operating expenses |
| | | | | | | | Reported |
| (13,902 | ) | (6,480 | ) | (9,348 | ) | (1,550 | ) | (3,379 | ) | (34,659 | ) | | Currency translation |
| 467 |
| 203 |
| 287 |
| 28 |
| 124 |
| 1,109 |
| | Significant items |
| 180 |
| 2 |
| (109 | ) | 97 |
| 1,474 |
| 1,644 |
| | – costs of structural reform | 3 | 2 |
| 8 |
| 41 |
| — |
| 310 |
| 361 |
| | – customer redress programmes |
| 173 |
| (5 | ) | (22 | ) | — |
| — |
| 146 |
| | – disposals, acquisitions and investment in new businesses |
| — |
| — |
| — |
| 52 |
| — |
| 52 |
| | – past service costs of guaranteed minimum pension benefits equalisation |
| — |
| — |
| — |
| — |
| 228 |
| 228 |
| | – restructuring and other related costs | | — |
| — |
| — |
| 7 |
| 59 |
| 66 |
| | – settlements and provisions in connection with legal and regulatory matters |
| 16 |
| — |
| (131 | ) | 42 |
| 889 |
| 816 |
| | – currency translation on significant items |
| (11 | ) | (1 | ) | 3 |
| (4 | ) | (12 | ) | (25 | ) | | Adjusted |
| (13,255 | ) | (6,275 | ) | (9,170 | ) | (1,425 | ) | (1,781 | ) | (31,906 | ) | | Share of profit in associates and joint ventures |
| | | | | | | | Reported |
| 33 |
| — |
| — |
| — |
| 2,503 |
| 2,536 |
| | Currency translation |
| — |
| — |
| — |
| — |
| (90 | ) | (90 | ) | | Adjusted |
| 33 |
| — |
| — |
| — |
| 2,413 |
| 2,446 |
| | Profit/(loss) before tax |
| | | | | | | | Reported |
| 6,882 |
| 7,719 |
| 6,312 |
| 248 |
| (1,271 | ) | 19,890 |
| | Currency translation |
| (52 | ) | (193 | ) | (197 | ) | (1 | ) | (77 | ) | (520 | ) | | Significant items |
| 188 |
| (48 | ) | (229 | ) | 92 |
| 1,809 |
| 1,812 |
| | – revenue |
| 8 |
| (50 | ) | (120 | ) | (5 | ) | 335 |
| 168 |
| | – operating expenses |
| 180 |
| 2 |
| (109 | ) | 97 |
| 1,474 |
| 1,644 |
| | Adjusted |
| 7,018 |
| 7,478 |
| 5,886 |
| 339 |
| 461 |
| 21,182 |
| | Loans and advances to customers (net) |
| | | | | | | | Reported |
| 361,872 |
| 333,162 |
| 244,978 |
| 39,217 |
| 2,467 |
| 981,696 |
| | Currency translation |
| 6,045 |
| 3,937 |
| 2,147 |
| 385 |
| 66 |
| 12,580 |
| | Adjusted |
| 367,917 |
| 337,099 |
| 247,125 |
| 39,602 |
| 2,533 |
| 994,276 |
| | Customer accounts |
| | | | | | | | Reported |
| 640,924 |
| 357,596 |
| 290,914 |
| 64,658 |
| 8,551 |
| 1,362,643 |
| | Currency translation |
| 8,248 |
| 4,678 |
| 3,670 |
| 395 |
| 104 |
| 17,095 |
| | Adjusted |
| 649,172 |
| 362,274 |
| 294,584 |
| 65,053 |
| 8,655 |
| 1,379,738 |
|
3 Comprises costs associated with preparations for the UK’s exit from the European Union. 4 A change in reportable segments was made in 2020. Comparative data have been re-presented accordingly. For footnotes,further guidance, see Note 10: Segmental analysis on page 84.
347.
| | Reconciliation of reported and adjusted items (continued) | | | | 2017 | | 20184 | | | | Retail Banking and Wealth Management |
| Commercial
Banking |
| Global
Banking and
Markets |
| Global
Private
Banking |
| Corporate Centre |
| Total |
| | Wealth and Personal Banking | Commercial
Banking | Global
Banking and
Markets | | Corporate
Centre | Total | | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Footnotes | $m | | $m | | Revenue | 1 | | Revenue | 1 | | | | | Reported | | 20,519 |
| 13,120 |
| 14,617 |
| 1,723 |
| 1,466 |
| 51,445 |
| Reported | | 24,232 | | 14,889 | | 15,754 | | | (1,095) | | 53,780 | | | Currency translation | | (578 | ) | (336 | ) | (264 | ) | (5 | ) | (161 | ) | (1,344 | ) | Currency translation | | (699) | | (475) | | (590) | | | (90) | | (1,854) | | | Significant items | | (233 | ) | 99 |
| 470 |
| (20 | ) | (244 | ) | 72 |
| Significant items | | 18 | | (40) | | (108) | | | 302 | | 172 | | | – customer redress programmes | | 3 |
| 103 |
| 2 |
| — |
| — |
| 108 |
| – customer redress programmes | | — | | (53) | | — | | | — | | (53) | | | – disposals, acquisitions and investment in new businesses | | (235 | ) | — |
| 99 |
| (20 | ) | (118 | ) | (274 | ) | – disposals, acquisitions and investment in new businesses | | 2 | | — | | — | | | 111 | | 113 | | – fair value movements on financial instruments
| 2 | — |
| — |
| 373 |
| — |
| (128 | ) | 245 |
| – fair value movements on financial instruments | 2 | 16 | | 9 | | (112) | | | 187 | | 100 | | | – currency translation on significant items | | (1 | ) | (4 | ) | (4 | ) | — |
| 2 |
| (7 | ) | – currency translation on significant items | | — | | 4 | | 4 | | | 4 | | 12 | | | Adjusted | | 19,708 |
| 12,883 |
| 14,823 |
| 1,698 |
| 1,061 |
| 50,173 |
| Adjusted | | 23,551 | | 14,374 | | 15,056 | | | (883) | | 52,098 | | | LICs | | | | | ECL | | ECL | | | | | Reported | | (980 | ) | (496 | ) | (459 | ) | (16 | ) | 182 |
| (1,769 | ) | Reported | | (1,163) | | (737) | | 26 | | | 107 | | (1,767) | | | Currency translation | | 39 |
| 28 |
| 20 |
| (1 | ) | (3 | ) | 83 |
| Currency translation | | 91 | | 54 | | 8 | | | (6) | | 147 | | | Adjusted | | (941 | ) | (468 | ) | (439 | ) | (17 | ) | 179 |
| (1,686 | ) | Adjusted | | (1,072) | | (683) | | 34 | | | 101 | | (1,620) | | | Operating expenses | | | Operating expenses | | | | | Reported | | (13,734 | ) | (6,001 | ) | (8,723 | ) | (1,586 | ) | (4,840 | ) | (34,884 | ) | Reported | | (15,522) | | (6,563) | | (9,512) | | | (3,062) | | (34,659) | | | Currency translation | | 471 |
| 178 |
| 133 |
| 9 |
| 124 |
| 915 |
| Currency translation | | 625 | | 255 | | 304 | | | 96 | | 1,280 | | | Significant items | | 877 |
| 53 |
| (119 | ) | 193 |
| 2,706 |
| 3,710 |
| Significant items | | 283 | | 1 | | (108) | | | 1,480 | | 1,656 | | | – costs of structural reform | 3 | 6 |
| 3 |
| 8 |
| — |
| 403 |
| 420 |
| – costs of structural reform | 3 | 2 | | 8 | | 41 | | | 310 | | 361 | | | – costs to achieve | | 270 |
| 44 |
| 240 |
| 3 |
| 2,445 |
| 3,002 |
| | | – customer redress programmes | | 637 |
| 16 |
| 2 |
| — |
| — |
| 655 |
| – customer redress programmes | | 172 | | (5) | | (21) | | | — | | 146 | | | – disposals, acquisitions and investment in new businesses | | — |
| — |
| — |
| 31 |
| 22 |
| 53 |
| – disposals, acquisitions and investment in new businesses | | 52 | | — | | — | | | — | | 52 | | | – gain on partial settlement of pension obligation | | (26 | ) | (9 | ) | (9 | ) | (3 | ) | (141 | ) | (188 | ) | | | – past service costs of guaranteed minimum pension benefits equalisation | | – past service costs of guaranteed minimum pension benefits equalisation | | — | | — | | — | | | 228 | | 228 | | | – restructuring and other related costs | | – restructuring and other related costs | | 7 | | — | | — | | | 59 | | 66 | | | – settlements and provisions in connection with legal and regulatory matters | | — |
| — |
| (376 | ) | 164 |
| 14 |
| (198 | ) | – settlements and provisions in connection with legal and regulatory matters | | 58 | | — | | (132) | | | 890 | | 816 | | | – currency translation on significant items | | (10 | ) | (1 | ) | 16 |
| (2 | ) | (37 | ) | (34 | ) | – currency translation on significant items | | (8) | | (2) | | 4 | | | (7) | | (13) | | | Adjusted | | (12,386 | ) | (5,770 | ) | (8,709 | ) | (1,384 | ) | (2,010 | ) | (30,259 | ) | Adjusted | | (14,614) | | (6,307) | | (9,316) | | | (1,486) | | (31,723) | | | Share of profit in associates and joint ventures | | | Share of profit in associates and joint ventures | | | | | Reported | | 18 |
| — |
| — |
| — |
| 2,357 |
| 2,375 |
| Reported | | 33 | | — | | — | | | 2,503 | | 2,536 | | | Currency translation | | (6 | ) | — |
| — |
| — |
| (41 | ) | (47 | ) | Currency translation | | (1) | | — | | — | | | (91) | | (92) | | | Adjusted | | 12 |
| — |
| — |
| — |
| 2,316 |
| 2,328 |
| Adjusted | | 32 | | — | | — | | | 2,412 | | 2,444 | | | Profit/(loss) before tax | |
|
|
|
|
|
|
|
|
|
|
|
| Profit/(loss) before tax | | | | | Reported | | 5,823 |
| 6,623 |
| 5,435 |
| 121 |
| (835 | ) | 17,167 |
| Reported | | 7,580 | | 7,589 | | 6,268 | | | (1,547) | | 19,890 | | | Currency translation | | (74 | ) | (130 | ) | (111 | ) | 3 |
| (81 | ) | (393 | ) | Currency translation | | 16 | | (166) | | (278) | | | (91) | | (519) | | | Significant items | | 644 |
| 152 |
| 351 |
| 173 |
| 2,462 |
| 3,782 |
| Significant items | | 301 | | (39) | | (216) | | | 1,782 | | 1,828 | | | – revenue | | (233 | ) | 99 |
| 470 |
| (20 | ) | (244 | ) | 72 |
| – revenue | | 18 | | (40) | | (108) | | | 302 | | 172 | | | – operating expenses | | 877 |
| 53 |
| (119 | ) | 193 |
| 2,706 |
| 3,710 |
| – operating expenses | | 283 | | 1 | | (108) | | | 1,480 | | 1,656 | | | Adjusted | | 6,393 |
| 6,645 |
| 5,675 |
| 297 |
| 1,546 |
| 20,556 |
| Adjusted | | 7,897 | | 7,384 | | 5,774 | | | 144 | | 21,199 | | | Loans and advances to customers (net) | | | Loans and advances to customers (net) | | | | | Reported | | 346,148 |
| 316,533 |
| 252,474 |
| 40,326 |
| 7,483 |
| 962,964 |
| Reported | | 401,268 | | 333,400 | | 245,525 | | | 1,503 | | 981,696 | | | Currency translation | | (8,380 | ) | (7,663 | ) | (5,584 | ) | (313 | ) | (101 | ) | (22,041 | ) | Currency translation | | 17,963 | | 11,455 | | 7,794 | | | 96 | | 37,308 | | | Adjusted | | 337,768 |
| 308,870 |
| 246,890 |
| 40,013 |
| 7,382 |
| 940,923 |
| Adjusted | | 419,231 | | 344,855 | | 253,319 | | | 1,599 | | 1,019,004 | | | Customer accounts | |
|
|
|
|
|
|
|
|
|
|
|
| Customer accounts | | | | | Reported | | 639,592 |
| 362,908 |
| 283,943 |
| 66,512 |
| 11,507 |
| 1,364,462 |
| Reported | | 707,773 | | 359,957 | | 294,130 | | | 783 | | 1,362,643 | | | Currency translation | | (10,150 | ) | (6,420 | ) | (7,309 | ) | (1,021 | ) | (490 | ) | (25,390 | ) | Currency translation | | 22,129 | | 12,594 | | 12,308 | | | 48 | | 47,079 | | | Adjusted | | 629,442 |
| 356,488 |
| 276,634 |
| 65,491 |
| 11,017 |
| 1,339,072 |
| Adjusted | | 729,902 | | 372,551 | | 306,438 | | | 831 | | 1,409,722 | |
1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. 2 Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives. 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 A change in reportable segments was made in 2020. Comparative data have been re-presented accordingly. For footnotes,further guidance, see Note 10: Segmental analysis on page 84.347.
Report of the Directors | Financial summary
| | | | | | | | | | | | | | | | 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 |
| Total |
| | | Footnotes | $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| | Risk-weighted assets | | | | | | | | | Reported | | 134.0 |
| 316.7 |
| 258.2 |
| 14.0 |
| 120.5 |
| 843.4 |
| | Adjusted | 4 | 134.0 |
| 316.7 |
| 258.2 |
| 14.0 |
| 120.5 |
| 843.4 |
| | | | | | | | | | | | | At 31 Dec 2018 | | Risk-weighted assets | | | | | | | | | Reported | | 126.9 |
| 321.2 |
| 281.0 |
| 16.8 |
| 119.4 |
| 865.3 |
| | Currency translation | | 0.7 |
| 3.4 |
| 1.1 |
| 0.1 |
| 0.4 |
| 5.7 |
| | Disposals | | — |
| — |
| — |
| — |
| (0.8 | ) | (0.8 | ) | | – operations in Brazil | | — |
| — |
| — |
| — |
| (0.8 | ) | (0.8 | ) | | Adjusted | 4 | 127.6 |
| 324.6 |
| 282.1 |
| 16.9 |
| 119.0 |
| 870.2 |
|
| | | | | | | | | | | | | | | | | | At 31 Dec 2017 | | Risk-weighted assets | | | | | | | | | Reported | | 121.5 |
| 301.0 |
| 299.3 |
| 16.0 |
| 133.5 |
| 871.3 |
| | Currency translation | | (2.5 | ) | (8.0 | ) | (4.6 | ) | (0.1 | ) | (1.4 | ) | (16.6 | ) | | Disposals | | — |
| — |
| — |
| — |
| (2.6 | ) | (2.6 | ) | | – operations in Brazil | | — |
| — |
| — |
| — |
| (2.6 | ) | (2.6 | ) | | Adjusted | 4 | 119.0 |
| 293.0 |
| 294.7 |
| 15.9 |
| 129.5 |
| 852.1 |
|
For footnotes, see page 84.
| | | | Reconciliation of reported and adjusted risk-weighted assets |
| | | | | | | | | | | | | | | | | | | | | | | | At 31 Dec 2020 | | | Wealth and Personal Banking | Commercial
Banking | Global
Banking and
Markets | Corporate Centre | Total | | Footnotes | $bn | $bn | $bn | $bn | $bn | | Risk-weighted assets | | | | | | | | Reported | | 172.8 | | 327.7 | | 265.1 | | 91.9 | | 857.5 | | | | | | | | | | | | | | | | | | | | | | | | Adjusted | 1 | 172.8 | | 327.7 | | 265.1 | | 91.9 | | 857.5 | | | | | | | | | | | At 31 Dec 2019 | | Risk-weighted assets | | | | | | | | Reported | | 162.6 | | 325.9 | | 273.4 | | 81.5 | | 843.4 | | | Currency translation | | 2.0 | | 6.6 | | 3.4 | | 0.5 | | 12.5 | | | | | | | | | | | | | | | | | | | | | | | | Adjusted | 1 | 164.6 | | 332.5 | | 276.8 | | 82.0 | | 855.9 | |
| | | | | | | | | | | | | | | | | | | | | | | At 31 Dec 2018 | | | | | | | | | | | | | | | | Risk-weighted assets | | | | | | | | Reported | | 161.8 | | 331.8 | | 297.9 | | 73.8 | | 865.3 | | | Currency translation | | 2.2 | | 10.3 | | 4.4 | | 0.6 | | 17.5 | | | Disposals | | — | | — | | — | | (0.8) | | (0.8) | | | – operations in Brazil | | — | | — | | — | | (0.8) | | (0.8) | | | | | | | | | | Adjusted | 1 | 164.0 | | 342.1 | | 302.3 | | 73.6 | | 882.0 | |
1 Adjusted risk-weighted assets are calculated using reported risk-weighted assets adjusted for the effects of currency translation differences and significant items. | | | | Wealth and Personal Banking |
2019 compared with 2018 Financial performance Adjusted profit before tax of $8.9bn was $1.0bn or 12% 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. WPB’s reported profit before tax of $6.8bn was $0.8bn or 10% lower than in 2018. 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 payment protection insurance (‘PPI’) in the UK. In addition, reported results also included a goodwill impairment of $0.4bn relating to our Private Banking business in North America, reflecting lower long-term economic growth rate assumptions. These costs are excluded from our adjusted performance. Adjusted revenue of $25.6bn 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 $0.9bn or 6%, driven by growth in Hong Kong, Latin America and the UK, partly offset by lower revenue in the US. The increase in revenue reflected higher net interest income driven by deposit balance growth of $38bn or 5%, particularly in Hong Kong, the UK and North America and lending balance growth of $36n or 9%, notably from mortgages in the UK and Hong Kong. Additionally, 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, margins remained stable compared with 2018. In Wealth Management, revenue of $8.6bn was up $0.9bn or 11%. This increase reflected higher life insurance manufacturing revenue (up $0.8bn or 52%), primarily in Hong Kong, France and mainland China. This was driven by favourable market impacts of $463m as 2019 recorded a favourable movement of $128m, compared with an adverse movement of $335m 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%). In addition, Global Private Banking revenue increased by $0.1bn or 5%, primarily reflecting growth in investment and lending revenue in Asia. These increases were 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 $1.3bn, up $0.3bn or 26% 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 remained in line with 2018, at 0.31%, while ECL related to unsecured lending remained low at 2.2%, compared with 2.1% in 2018. In addition, ECL in 2019 included $65m of charges in Argentina related to government bond exposures in our insurance business, as well as $52m of charges related to economic uncertainty in Hong Kong. The net write-off in 2020 remained stable compared with 2018. Adjusted operating expenses of $15.4bn were $0.8bn or 5% higher than in 2018, driven by inflation and higher staff costs as the business grew. Investment in strategic initiatives increased to grow Wealth Management in Asia, enhance our digital capabilities and drive growth in key markets through lending. IT system and infrastructure costs also rose. 2019 compared with 2018 Adjusted profit before tax of $7.2bn was $0.2bn or 3% 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 $15.2bn was $0.8bn or 5% higher, with growth in all regions, particularly in our largest market Hong Kong, and across all main products. In GLCM, revenue was $0.3bn or 5% 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 $20m 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. Revenue growth in ‘Markets products, Insurance and Investments and Other’ 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 2019, 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 applications, and provide clients with a faster, simpler and more secure payment experience through real-time payments. | | | | Global Banking and Markets |
2019 compared with 2018 Adjusted profit before tax of $5.2bn was $0.6bn or 10% 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 $0.2bn or 1% lower, and included a net favourable movement of $224m 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 3%, 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 6%, 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 5%, mainly from higher interest rates in Hong Kong and the UK, as well as increased fee income reflecting higher assets under custody (up 4%) and assets under management (up 6%), although this was partly offset by margin compression. GTRF revenue increased by 2% from growth in all regions except Europe, particularly from wider spreads and higher fees in Asia, while we continued to reduce risk-weighted assets (‘RWAs’) in all regions. Adjusted ECL charges were $0.2bn, compared with a net release of $34m 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 2% as we invested in GLCM and Securities Services to support business growth, in regulatory programmes, and from higher amortised investment costs, were more than offset by a lower performance-related pay accrual. 2019 compared with 2018 Adjusted profit before tax of $0.9bn was $0.8bn higher than in 2018. Adjusted revenue of negative $0.7bn in 2019 was $0.2bn favourable compared with 2018, largely reflecting higher revenue in Central Treasury. Central Treasury revenue of $0.2bn was $0.5bn 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 $0.1bn in 2019, compared with adverse movements of $0.3bn in 2018; and •the non-recurrence of a $0.2bn loss in 2018 arising from adverse swap mark-to-market movements following a bond reclassification under IFRS 9 ‘Financial Instruments’. Other income decreased by $0.2bn. In 2019, this included $0.2bn 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. Adjusted ECL releases of $36m in 2019 compared with releases of $101m in 2018, both related to our legacy credit portfolio. Adjusted operating expenses of $0.8bn were $0.7bn or 49% 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.
| | | Supplementary global business disclosurestables for WPB and GBM |
WPB adjusted performance by business unit A breakdown of WPB by business unit is presented below to reflect the basis of how the revenue performance of the business units is assessed and managed. | | | | | | | | | | | | | | | | | | | | | | WPB – summary (adjusted basis) | | | Total
WPB | Consists of1 | | | Banking
operations | Insurance manufacturing | Global Private Banking | Asset
management | | Footnotes | $m | $m | $m | $m | $m | | 2020 | | | | | | | | Net operating income before change in expected credit losses and other credit impairment charges | 2 | 22,013 | | 17,346 | | 1,874 | | 1,745 | | 1,048 | | | – net interest income | | 15,090 | | 12,181 | | 2,241 | | 670 | | (2) | | | – net fee income/(expense) | | 5,408 | | 4,094 | | (518) | | 828 | | 1,004 | | | – other income | | 1,515 | | 1,071 | | 151 | | 247 | | 46 | | | ECL | | (2,855) | | (2,707) | | (80) | | (67) | | (1) | | | Net operating income | | 19,158 | | 14,639 | | 1,794 | | 1,678 | | 1,047 | | | Total operating expenses | | (15,024) | | (12,422) | | (479) | | (1,390) | | (733) | | | Operating profit | | 4,134 | | 2,217 | | 1,315 | | 288 | | 314 | | | Share of profit in associates and joint ventures | | 6 | | 5 | | 1 | | — | | — | | | Profit before tax | | 4,140 | | 2,222 | | 1,316 | | 288 | | 314 | | | | | | | | | | 2019 | | | | | | | | Net operating income before change in expected credit losses and other credit impairment charges | 2 | 25,565 | | 20,024 | | 2,639 | | 1,878 | | 1,024 | | | – net interest income | | 17,423 | | 14,371 | | 2,167 | | 891 | | (6) | | | – net fee income/(expense) | | 5,621 | | 4,582 | | (717) | | 784 | | 972 | | | – other income | | 2,521 | | 1,071 | | 1,189 | | 203 | | 58 | | | ECL | | (1,348) | | (1,247) | | (80) | | (21) | | — | | | Net operating income | | 24,217 | | 18,777 | | 2,559 | | 1,857 | | 1,024 | | | Total operating expenses | | (15,388) | | (12,722) | | (471) | | (1,447) | | (748) | | | Operating profit | | 8,829 | | 6,055 | | 2,088 | | 410 | | 276 | | | Share of profit in associates and joint ventures | | 54 | | 11 | | 43 | | — | | — | | | Profit before tax | | 8,883 | | 6,066 | | 2,131 | | 410 | | 276 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | WPB – summary (adjusted basis) (continued) | | | Total
WPB | Consists of1 | | | Banking
operations | Insurance manufacturing | Global Private Banking | Asset
management | | Footnotes | $m | $m | $m | $m | $m | | 2018 | | | | | | | | Net operating income before change in expected credit losses and other credit impairment charges | 2 | 23,551 | | 18,860 | | 1,868 | | 1,783 | | 1,040 | | | – net interest income | | 16,418 | | 13,477 | | 2,060 | | 884 | | (3) | | | – net fee income/(expense) | | 5,774 | | 4,594 | | (593) | | 743 | | 1,030 | | | – other income | | 1,359 | | 789 | | 401 | | 156 | | 13 | | | ECL | | (1,072) | | (1,079) | | (1) | | 8 | | — | | | Net operating income | | 22,479 | | 17,781 | | 1,867 | | 1,791 | | 1,040 | | | Total operating expenses | | (14,614) | | (12,023) | | (437) | | (1,449) | | (705) | | | Operating profit | | 7,865 | | 5,758 | | 1,430 | | 342 | | 335 | | | Share of profit in associates and joint ventures | | 32 | | 1 | | 31 | | — | | — | | | Profit before tax | | 7,897 | | 5,759 | | 1,461 | | 342 | | 335 | |
1 The results presented for insurance manufacturing operations are shown before elimination of inter-company transactions with HSBC non-insurance operations. These eliminations are presented within Banking operations. 2 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. WPB insurance manufacturing adjusted revenue of $1,874m (2019: $2,639m, 2018: $1,868m) was disclosed within the management view of adjusted revenue on page 31, as follows: Wealth Management $1,816m (2019: $2,464m, 2018: $1,621m) and Other $58m (2019: $175m, 2018: $247m). WPB 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 RBWMWPB 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 | | | | 2019 | 2018 | 2017 | | | | RBWM |
| All global businesses |
| RBWM |
| All global businesses |
| RBWM |
| All global businesses |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Net interest income | | 2,131 |
| 2,306 |
| 2,026 |
| 2,196 |
| 1,977 |
| 2,174 |
| | Net fee income | | (690 | ) | (739 | ) | (569 | ) | (558 | ) | (489 | ) | (496 | ) | | – fee income | | 104 |
| 129 |
| 181 |
| 274 |
| 232 |
| 330 |
| | – fee expense | | (794 | ) | (868 | ) | (750 | ) | (832 | ) | (721 | ) | (826 | ) | | Net income from financial instruments held for trading or managed on a fair value basis | | (44 | ) | (29 | ) | (521 | ) | 167 |
| (51 | ) | 1 |
| | Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss | | 3,568 |
| 3,554 |
| (897 | ) | (1,559 | ) | 2,830 |
| 2,771 |
| | Gains less losses from financial investments | | 5 |
| 5 |
| 58 |
| 57 |
| 23 |
| 31 |
| | Net insurance premium income | | 10,054 |
| 10,718 |
| 10,054 |
| 10,541 |
| 9,312 |
| 9,938 |
| | Other operating income | | 1,765 |
| 1,787 |
| 709 |
| 767 |
| 62 |
| 96 |
| | of which: PVIF | | 1,696 |
| 1,749 |
| 637 |
| 679 |
| 12 |
| 22 |
| | Total operating income | | 16,789 |
| 17,602 |
| 10,860 |
| 11,611 |
| 13,664 |
| 14,515 |
| | Net insurance claims and benefits paid and movement in liabilities to policyholders | | (14,192 | ) | (14,891 | ) | (9,079 | ) | (9,596 | ) | (11,732 | ) | (12,323 | ) | | Net operating income before change in expected credit losses and other credit impairment charges | 1 | 2,597 |
| 2,711 |
| 1,781 |
| 2,015 |
| 1,932 |
| 2,192 |
| | ECL | | (104 | ) | (115 | ) | (2 | ) | (1 | ) | — |
| — |
| | Net operating income | | 2,493 |
| 2,596 |
| 1,779 |
| 2,014 |
| 1,932 |
| 2,192 |
| | Total operating expenses | | (520 | ) | (505 | ) | (455 | ) | (478 | ) | (388 | ) | (422 | ) | | Operating profit | | 1,973 |
| 2,091 |
| 1,324 |
| 1,536 |
| 1,544 |
| 1,770 |
| | Share of profit in associates and joint ventures | | 44 |
| 44 |
| 31 |
| 32 |
| 10 |
| 10 |
| | Profit before tax of insurance manufacturing operations | 6 | 2,017 |
| 2,135 |
| 1,355 |
| 1,568 |
| 1,554 |
| 1,780 |
| | Annualised new business premiums of insurance manufacturing operations | | 3,296 |
| 3,382 |
| 3,153 |
| 3,231 |
| 2,647 |
| 2,706 |
| | Insurance distribution income earned by HSBC bank channels |
| 913 |
| 1,039 |
| 923 |
| 1,039 |
| 889 |
| 1,012 |
|
For footnotes, see page 84.
| | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted results of insurance manufacturing operations and insurance distribution income earned by HSBC bank channels1, 2 | | | | | | | | | | 2020 | 2019 | 2018 | | | | | WPB | All global businesses | WPB | All global businesses | WPB | All global businesses | | | | Footnotes | $m | $m | $m | $m | $m | $m | | | | Net interest income | | 2,241 | | 2,408 | | 2,167 | | 2,308 | | 2,060 | | 2,217 | | | | | Net fee income/(expense) | | (518) | | (556) | | (717) | | (742) | | (593) | | (567) | | | | | – fee income | | 110 | | 131 | | 108 | | 130 | | 186 | | 277 | | | | | – fee expense | | (628) | | (687) | | (825) | | (872) | | (779) | | (844) | | | | | Net income from/(expenses) financial instruments held for trading or managed on a fair value basis | | 76 | | 95 | | (82) | | (82) | | 84 | | 27 | | | | | Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss | | 2,182 | | 2,137 | | 3,582 | | 3,565 | | (1,600) | | (1,627) | | | | | Gains less losses from financial investments | | 13 | | 13 | | 5 | | 5 | | 54 | | 56 | | | | | Net insurance premium income | | 9,717 | | 10,212 | | 10,398 | | 10,763 | | 10,280 | | 10,824 | | | | | Other operating income | | 336 | | 351 | | 1,789 | | 1,805 | | 796 | | 783 | | | | | Of which: PVIF | | 370 | | 382 | | 1,718 | | 1,763 | | 678 | | 685 | | | | | Total operating income | | 14,047 | | 14,660 | | 17,142 | | 17,622 | | 11,081 | | 11,713 | | | | | Net insurance claims and benefits paid and movement in liabilities to policyholders | | (12,173) | | (12,683) | | (14,503) | | (14,902) | | (9,213) | | (9,693) | | | | | Net operating income before change in expected credit losses and other credit impairment charges | 3 | 1,874 | | 1,977 | | 2,639 | | 2,720 | | 1,868 | | 2,020 | | | | | Change in expected credit losses and other credit impairment charges | | (80) | | (92) | | (80) | | (86) | | (1) | | (1) | | | | | Net operating income | | 1,794 | | 1,885 | | 2,559 | | 2,634 | | 1,867 | | 2,019 | | | | | Total operating expenses | | (479) | | (509) | | (471) | | (497) | | (437) | | (462) | | | | | Operating profit | | 1,315 | | 1,376 | | 2,088 | | 2,137 | | 1,430 | | 1,557 | | | | | Share of profit in associates and joint ventures | | 1 | | 1 | | 43 | | 43 | | 31 | | 31 | | | | | Profit before tax of insurance manufacturing operations | 4 | 1,316 | | 1,377 | | 2,131 | | 2,180 | | 1,461 | | 1,588 | | | | | | | | | | | | | | | Annualised new business premiums of insurance manufacturing operations | | 2,257 | | 2,307 | | 3,324 | | 3,403 | | 3,179 | | 3,255 | | | | | | | | | | | | | | | Insurance distribution income earned by HSBC bank channels | | 737 | | 801 | | 945 | | 1,041 | | 949 | | 1,040 | | | | | | | | | | | | | | | | | | | | | | | |
1 Adjusted results are derived by adjusting for year-on-year effects of foreign currency translation differences, and the effect of significant items that distort year-on-year comparisons. There are no significant items included within insurance manufacturing, and the impact of foreign currency translation on all global businesses’ profit before tax is 2019: $45m favourable (reported: $2,135m), 2018: $15m favourable (reported: $1,573m). 2 The results presented for insurance manufacturing operations are shown before elimination of inter-company transactions with HSBC non-insurance operations. 3 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. 4 The effect on the insurance manufacturing operations of applying hyperinflation accounting in Argentina resulted in an increase in adjusted revenue in 2020 of $9m (2019: reduction of $1m, 2018: reduction of $8m) and an increase in profit before tax in 2020 of $12m (2019: increase of $1m, 2018: reduction of $3m). These effects are recorded within ‘All global businesses’.
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$1.4bn decreased by $0.6bn$0.8bn 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,37% 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.2019. Net operating income before change in expected credit losses and other credit impairment chargeschanges was $0.7bn or 35% higher27% lower than 2018.in 2019. 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$2.1bn in 2020 compared with a net expense of $1.6bn$3.6bn in 2018, due to2019. This decrease primarily reflected less favourable equity market performance, compared with 2019 in France and Hong Kong, and France in 2019 compared with 2018, resulting in revaluation gainsdue to the impact of the Covid-19 outbreak on the equity and unit trust assets supporting insurance and investment contracts. While there was strong investment performance within the portfolio in light of volatile markets during the year, the overall fair value gains were lower compared with 2019. This positiveadverse movement resulted in a corresponding movement in liabilities to policyholders and PVIF (see ‘Other operating income’ below), reflecting. This reflected the extent to which the policyholders and shareholders respectively participate in the investment performance of the associated assets portfolio. assets.‘•Net insurance premium income’income of $10.7bn$10.2bn was $0.2bn higher. This was driven by higher$0.6bn lower than in 2019, primarily reflecting lower new business volumes across all entities, anddue to the Covid-19 outbreak, particularly in France and Hong Kong, Singapore and UK, partly offset by higherlower reinsurance premiums ceded in Hong Kong.
‘•Other operating income’income of $1.8bn increased$0.4bn decreased by $1.0bn.$1.5bn compared with 2019, mainly from adverse movements in PVIF. This increase in PVIF reflectedincluded a favourable movement in ‘assumptionreduction of $0.8bn due to assumption changes and experience variances’ of $1.1bn, primarilyvariances, mainly in Hong Kong and France due to the effect of interest rate changes on the valuation of the liabilities under insurance contracts.changes. In addition, the value of
new business written increasedfell by $0.1bn to $1.2bn. For further details, see Note 21 on the financial statements. $0.4bn, primarily in Hong Kong, as sales volumes decreased.‘•Net insurance claims and benefits paid and movement in liabilities to policyholders’ of $14.9bn were $5.3bn higher than 2018. This increasepolicyholders was $2.2bn lower, primarily due to higherlower returns on financial assets supporting contracts where the policyholder is subject to part or all of the investment risk and the impact of higher newrisk. New business volumes were lower, particularly in Hong Kong and Singapore. ThisFrance, partly offset by lower reinsurance arrangements in Hong Kong.
•Change in expected credit losses and other credit impairment charges (‘ECL’) of $92m was $6m higher compared with 2019, mainly from charges relating to the global impact of the Covid-19 outbreak on the forward economic outlook, partly offset by the impact of higher reinsurance cededECL release on Argentina sovereign exposure due to the debt restructure in Hong Kong. Adjusted ECL of $0.1bn in 2019 primarily related to government bond exposures in Argentina.2020.
Adjusted operating expenses of $0.5bn increased by $27m or 6%2% compared with 2018,2019, reflecting investmentinvestments in core insurance functions and capabilities including preparation forduring the implementation of IFRS 17 ‘Insurance Contracts’.period. 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 inLower ANP during the period reflected a reduction in new business growthvolumes, mainly in most entities, with the main contribution coming from Hong Kong mainland China and the UK.France. Insurance distribution income from HSBC channels included $665m (2018: $651m)$470m (2019: $658m; 2018: $644m) on HSBC manufactured products, for which a corresponding fee expense is recognised within insurance manufacturing, and $375m (2018: $389m)$331m (2019: $382m; 2018: $397m) on products manufactured by third-party providers. The RBWMWPB component of this distribution income was $589m (2018: $581m)$423m (2019: $583m; 2018: $575m) from HSBC manufactured products and $325m (2018: $343m)$314m (2019: $362m; 2018: $374m) from third-party products. Asset Management: FundsWPB: Client assets and funds under management
The following table shows the client assets and funds under management, ofincluding self-directed client investments and execution-only trades, across our Asset ManagementWPB global business. | | | | | | | | Asset Management – reported funds under management7 | | | 2019 |
| 2018 |
| 2017 |
| | | $bn |
| $bn |
| $bn |
| | Opening balance | 444 |
| 462 |
| 410 |
| | Net new money | 30 |
| 8 |
| 8 |
| | Value change | 30 |
| (14 | ) | 24 |
| | Exchange and other | 2 |
| (12 | ) | 20 |
| | Closing balance | 506 |
| 444 |
| 462 |
| | | | | | | | | | | | Asset Management – reported funds under management by geography | | | 2019 |
| 2018 |
| 2017 |
| | | $bn |
| $bn |
| $bn |
| | Europe | 287 |
| 235 |
| 249 |
| | Asia | 161 |
| 164 |
| 168 |
| | MENA | 6 |
| 2 |
| 1 |
| | North America | 44 |
| 36 |
| 37 |
| | Latin America | 8 |
| 7 |
| 7 |
| | Closing balance | 506 |
| 444 |
| 462 |
|
For footnotes, see page 84.
Funds under management represents assets managed, either actively or passively, on behalf of our customers. | | | | | | | | | | WPB – reported client assets and funds under management1 | | 2020 | 2019 | | | $bn | $bn | | | Global Private Banking client assets | 394 | | 361 | | | | – managed by Global Asset Management | 66 | | 61 | | | | – external managers, direct securities and other | 328 | | 300 | | | | Retail wealth balances | 407 | | 380 | | | | – managed by Global Asset Management | 219 | | 199 | | | | – external managers, direct securities and other | 188 | | 181 | | | | Asset Management third-party distribution | 317 | | 247 | | | | Closing balance | 1,118 | | 988 | | |
1 Client assets and funds distributed and under management 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. Customer deposits included in client assets are on balance sheet. WPB wealth balances The following table shows the consolidated areas of focus across all WPB wealth balances. | | | | | | | | | | | WPB wealth balances | | | | | | 2020 | 2019 | | | $bn | $bn | | | Client assets and funds under management | 1,118 | | 988 | | | Premier and Jade deposits1 | 470 | | 433 | | | | Total | 1,588 | | 1,421 | | |
1 Premier and Jade deposits, which include Prestige deposits in Hang Seng Bank, form part of the total WPB customer accounts balance of $835bn on page 99 (31 December 2019: $754bn).
Asset Management: Funds under management The following table shows the funds under management of our Asset Management business. Funds under management represents assets managed, either actively or passively, on behalf of our customers. Funds under management 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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Asset Management – reported funds under management | | 2020 | 2019 | 2018 | | $bn | $bn | $bn | | Opening balance | 506 | | 444 | | 462 | | | Net new money | 53 | | 30 | | 8 | | | Value change | 17 | | 30 | | (14) | | | Exchange and other | 26 | | 2 | | (12) | | | | | | | Closing balance | 602 | | 506 | | 444 | | | | | | | | | | | Asset Management – reported funds under management by geography | | 2020 | 2019 | 2018 | | $bn | $bn | $bn | | Europe | 346 | | 287 | | 235 | | | Asia | 176 | | 161 | | 164 | | | MENA | 6 | | 6 | | 2 | | | North America | 65 | | 44 | | 36 | | | Latin America | 9 | | 8 | | 7 | | | Closing balance | 602 | | 506 | | 444 | |
At 31 December 2019,2020, Asset Management funds under management amounted to $506bn,$602bn, an increase of $62bn$96bn or 14%19%. The increase reflected positive market performance and foreign exchange, together with strong net new money, primarily from money market solutionsfunds and discretionary products, notablypassive investment products. In addition, the growth reflected positive market performance and favourable foreign exchange translation. Global Private Banking: client assets The following table shows the client assets of our Global Private Banking business which are translated at the rates of exchange applicable for their respective year-ends, with the effects of currency translation reported separately. | | | | | | | | | | | | Global Private Banking – reported client assets1 | | 2020 | 2019 | 2018 | | $bn | $bn | $bn | | At 1 Jan | 361 | | 309 | | 330 | | | Net new money | 6 | | 23 | | 10 | | | | | | | Value change | 6 | | 23 | | (17) | | | Disposals | — | | — | | — | | | Exchange and other | 21 | | 6 | | (14) | | | At 31 Dec | 394 | | 361 | | 309 | |
| | | | | | | | | | | | | Global Private Banking – reported client assets by geography1 | | | 2020 | 2019 | 2018 | | | $bn | $bn | $bn | | Europe | | 174 | | 171 | | 149 | | | Asia | | 176 | | 151 | | 124 | | | North America | | 44 | | 39 | | 36 | | | | | | | | | | | | | At 31 Dec | | 394 | | 361 | | 309 | |
1 Client assets are not reported on the Group’s balance sheet, except where it is deemed that we are acting as principal rather than agent in the UK.our role as investment manager. Customer deposits included in these client assets are on balance sheet.
GB&M:GBM: Securities Services and Issuer Services Assets held in custody7 Custody is the safekeeping and servicing of securities and other financial assets on behalf of clients. 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.At 31 December 2019,2020, we held $8.5tn$10.0tn of assets as custodian, 16%17% higher than at 31 December 2018.2019. 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 mainlyand the effect of currency translation differences globally. In addition, there were increases from new client asset inflows, notably in Asia.
Report of the Directors | Financial summary
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 2019,2020, the value of assets held under administration by the Group amounted to $4.0tn,$4.5tn, which was 20%13% higher than at 31 December 2018.2019. This increase was mainly driven by the favourable effect of currency translation differences in Europe and favourable market movements globally. It also included increases from the onboarding of significant new client assets, notably in Europe, together with incremental net assets inflows for existing clients in both Europe and Asia.Europe. GPB client assets
The following table shows the client assets of our GPB business. | | | | | | | | | GPB – reported client assets | | | 2019 |
| 2018 |
| 2017 |
| | | $bn |
| $bn |
| $bn |
| | At 1 Jan | 309 |
| 330 |
| 298 |
| | Net new money | 23 |
| 10 |
| — |
| | Value change | 23 |
| (17 | ) | 21 |
| | Disposals | — |
| — |
| — |
| | Exchange and other | 6 |
| (14 | ) | 11 |
| | At 31 Dec | 361 |
| 309 |
| 330 |
|
| | | | | | | | | | GPB – reported client assets by geography | | | | 2019 |
| 2018 |
| 2017 |
| | | Footnotes | $bn |
| $bn |
| $bn |
| | Europe | | 171 |
| 149 |
| 161 |
| | Asia | | 151 |
| 124 |
| 130 |
| | North America | | 39 |
| 36 |
| 39 |
| | Latin America | | — |
| — |
| — |
| | Middle East | 8 | — |
| — |
| — |
| | At 31 Dec | | 361 |
| 309 |
| 330 |
|
For footnotes, see page 84.
| | | | Analysis of reported results by geographical regions |
| | | | | | | | | | | | | | | | | | HSBC reported profit/(loss) before tax and balance sheet data |
|
| 2019 |
|
| Europe |
| Asia |
| MENA |
| North America |
| Latin America |
| Intra-HSBC/ Global impairment |
| Total |
|
| Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Net interest income |
| 5,601 |
| 16,607 |
| 1,781 |
| 3,241 |
| 2,061 |
| 1,171 |
| 30,462 |
| | Net fee income |
| 3,668 |
| 5,325 |
| 685 |
| 1,804 |
| 540 |
| 1 |
| 12,023 |
| | Net income from financial instruments held for trading or managed on a fair value basis |
| 3,785 |
| 4,735 |
| 327 |
| 873 |
| 883 |
| (372 | ) | 10,231 |
| | Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit and loss |
| 1,656 |
| 1,803 |
| — |
| — |
| 14 |
| 5 |
| 3,478 |
| | Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss |
| 1,516 |
| 28 |
| 1 |
| 31 |
| 41 |
| (805 | ) | 812 |
| | Other income/(expense) | 9 | 1,830 |
| 1,921 |
| 916 |
| 638 |
| (23 | ) | (6,190 | ) | (908 | ) | Net operating income before change in
expected credit losses and other credit
impairment charges | 1 | 18,056 |
| 30,419 |
| 3,710 |
| 6,587 |
| 3,516 |
| (6,190 | ) | 56,098 |
| Change in expected credit losses and other credit
impairment charges |
| (938 | ) | (724 | ) | (117 | ) | (237 | ) | (740 | ) | — |
| (2,756 | ) | | Net operating income |
| 17,118 |
| 29,695 |
| 3,593 |
| 6,350 |
| 2,776 |
| (6,190 | ) | 53,342 |
| | Total operating expenses excluding goodwill impairment |
| (19,237 | ) | (13,297 | ) | (1,452 | ) | (5,152 | ) | (2,052 | ) | 6,190 |
| (35,000 | ) | | Goodwill impairment | | (2,522 | ) | — |
| (97 | ) | (431 | ) | (337 | ) | (3,962 | ) | (7,349 | ) | | Operating profit/(loss) |
| (4,641 | ) | 16,398 |
| 2,044 |
| 767 |
| 387 |
| (3,962 | ) | 10,993 |
| | Share of profit/(loss) in associates and joint ventures |
| (12 | ) | 2,070 |
| 283 |
| — |
| 13 |
| — |
| 2,354 |
| | Profit/(loss) before tax |
| (4,653 | ) | 18,468 |
| 2,327 |
| 767 |
| 400 |
| (3,962 | ) | 13,347 |
|
|
| % |
| % |
| % |
| % |
| % |
|
|
| % |
| | Share of HSBC’s profit before tax |
| (34.9 | ) | 138.4 |
| 17.4 |
| 5.7 |
| 3.0 |
| | 100.0 |
| | Cost efficiency ratio |
| 120.5 |
| 43.7 |
| 41.8 |
| 84.8 |
| 67.9 |
| | 75.5 |
| | Balance sheet data |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Loans and advances to customers (net) |
| 393,850 |
| 477,727 |
| 28,556 |
| 113,474 |
| 23,136 |
| — |
| 1,036,743 |
| | Total assets |
| 1,248,205 |
| 1,102,805 |
| 65,369 |
| 377,095 |
| 52,879 |
| (131,201 | ) | 2,715,152 |
| | Customer accounts |
| 528,718 |
| 697,358 |
| 38,126 |
| 146,676 |
| 28,237 |
| — |
| 1,439,115 |
| | Risk-weighted assets | 10 | 280,983 |
| 366,375 |
| 57,492 |
| 121,953 |
| 38,460 |
| — |
| 843,395 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | HSBC reported profit/(loss) before tax and balance sheet data | | | 2020 | | | Europe | Asia | MENA | North America | Latin America | Intra-HSBC | Total | | Footnotes | $m | $m | $m | $m | $m | $m | $m | | Net interest income | | 5,695 | | 14,318 | | 1,465 | | 2,836 | | 1,960 | | 1,304 | | 27,578 | | | Net fee income | | 3,499 | | 5,418 | | 695 | | 1,795 | | 467 | | — | | 11,874 | | | Net income from financial instruments held for trading or managed on a fair value basis | | 3,266 | | 4,273 | | 402 | | 997 | | 593 | | 51 | | 9,582 | | | Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit and loss | | 327 | | 1,699 | | — | | — | | 55 | | — | | 2,081 | | | Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss | | 1,747 | | 17 | | 3 | | 2 | | 40 | | (1,354) | | 455 | | | Other income/(expense) | 1 | 3,885 | | 1,197 | | 63 | | 745 | | (95) | | (6,936) | | (1,141) | | Net operating income before change in
expected credit losses and other credit
impairment charges | 2 | 18,419 | | 26,922 | | 2,628 | | 6,375 | | 3,020 | | (6,935) | | 50,429 | | Change in expected credit losses and other credit
impairment charges | | (3,751) | | (2,284) | | (758) | | (900) | | (1,124) | | — | | (8,817) | | | Net operating income | | 14,668 | | 24,638 | | 1,870 | | 5,475 | | 1,896 | | (6,935) | | 41,612 | | | Total operating expenses excluding impairment of goodwill and other intangible assets | | (17,860) | | (13,584) | | (1,521) | | (5,081) | | (1,933) | | 6,935 | | (33,044) | | | Impairment of goodwill and other intangible assets | | (1,014) | | (78) | | (65) | | (226) | | (5) | | — | | (1,388) | | | Operating profit/(loss) | | (4,206) | | 10,976 | | 284 | | 168 | | (42) | | — | | 7,180 | | | Share of profit/(loss) in associates and joint ventures | | 1 | | 1,856 | | (265) | | — | | 5 | | — | | 1,597 | | | Profit/(loss) before tax | | (4,205) | | 12,832 | | 19 | | 168 | | (37) | | — | | 8,777 | | | | % | % | % | % | % | | % | | Share of HSBC’s profit before tax | | (47.9) | 146.2 | 0.2 | 1.9 | (0.4) | | 100.0 | | Cost efficiency ratio | | 102.5 | 50.7 | 60.4 | 83.2 | 64.2 | | 68.3 | | Balance sheet data | | $m | $m | $m | $m | $m | $m | $m | | Loans and advances to customers (net) | | 408,495 | | 473,165 | | 28,700 | | 107,969 | | 19,658 | | — | | 1,037,987 | | | Total assets | | 1,416,111 | | 1,206,404 | | 68,860 | | 373,167 | | 49,703 | | (130,081) | | 2,984,164 | | | Customer accounts | | 629,647 | | 762,406 | | 41,221 | | 182,028 | | 27,478 | | — | | 1,642,780 | | | Risk-weighted assets | 3 | 284,322 | | 384,228 | | 60,181 | | 117,755 | | 35,240 | | — | | 857,520 | | | | | | | | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | Net interest income | | 5,601 | | 16,607 | | 1,781 | | 3,241 | | 2,061 | | 1,171 | | 30,462 | | | Net fee income | | 3,668 | | 5,325 | | 685 | | 1,804 | | 540 | | 1 | | 12,023 | | | Net income from financial instruments held for trading or managed on a fair value basis | | 3,785 | | 4,735 | | 327 | | 873 | | 883 | | (372) | | 10,231 | | | Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit and loss | | 1,656 | | 1,803 | | — | | — | | 14 | | 5 | | 3,478 | | | Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss | | 1,516 | | 28 | | 1 | | 31 | | 41 | | (805) | | 812 | | | Other income/(expense) | 1 | 1,830 | | 1,921 | | 916 | | 638 | | (23) | | (6,190) | | (908) | | Net operating income before change in
expected credit losses and other credit
impairment charges | 2 | 18,056 | | 30,419 | | 3,710 | | 6,587 | | 3,516 | | (6,190) | | 56,098 | | Change in expected credit losses and other credit
impairment charges | | (938) | | (724) | | (117) | | (237) | | (740) | | — | | (2,756) | | | Net operating income | | 17,118 | | 29,695 | | 3,593 | | 6,350 | | 2,776 | | (6,190) | | 53,342 | | | Total operating expenses excluding impairment of goodwill and other intangible assets | | (19,209) | | (13,284) | | (1,452) | | (5,150) | | (2,050) | | 6,190 | | (34,955) | | | Impairment of goodwill and other intangible assets | | (2,550) | | (13) | | (97) | | (433) | | (339) | | (3,962) | | (7,394) | | | Operating profit/(loss) | | (4,641) | | 16,398 | | 2,044 | | 767 | | 387 | | (3,962) | | 10,993 | | | Share of profit/(loss) in associates and joint ventures | | (12) | | 2,070 | | 283 | | — | | 13 | | — | | 2,354 | | | Profit/(loss) before tax | | (4,653) | | 18,468 | | 2,327 | | 767 | | 400 | | (3,962) | | 13,347 | | | | % | % | % | % | % | | % | | Share of HSBC’s profit before tax | | (34.9) | 138.4 | 17.4 | 5.7 | 3.0 | (29.6) | 100.0 | | Cost efficiency ratio | | 120.5 | 43.7 | 41.8 | 84.8 | 67.9 | | 75.5 | | Balance sheet data | | $m | $m | $m | $m | $m | $m | $m | | Loans and advances to customers (net) | | 393,850 | | 477,727 | | 28,556 | | 113,474 | | 23,136 | | — | | 1,036,743 | | | Total assets | | 1,248,205 | | 1,102,805 | | 65,369 | | 377,095 | | 52,879 | | (131,201) | | 2,715,152 | | | Customer accounts | | 528,718 | | 697,358 | | 38,126 | | 146,676 | | 28,237 | | — | | 1,439,115 | | | Risk-weighted assets | 3 | 280,983 | | 366,375 | | 57,492 | | 121,953 | | 38,460 | | — | | 843,395 | | | | | | | | | | |
| | | HSBC reported profit/(loss) before tax and balance sheet data (continued) | HSBC reported profit/(loss) before tax and balance sheet data (continued) | | HSBC reported profit/(loss) before tax and balance sheet data (continued) | | | | 2018 | | 2018 | | | | Europe |
| Asia |
| MENA |
| North America |
| Latin America |
| Intra-HSBC items |
| Total |
| | Europe | Asia | MENA | North America | Latin
America | Intra-HSBC items | Total | | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Footnotes | $m | | Net interest income | | 6,841 |
| 16,108 |
| 1,763 |
| 3,521 |
| 2,020 |
| 236 |
| 30,489 |
| Net interest income | | 6,841 | | 16,108 | | 1,763 | | 3,521 | | 2,020 | | 236 | | 30,489 | | | Net fee income | | 3,996 |
| 5,676 |
| 607 |
| 1,854 |
| 498 |
| (11 | ) | 12,620 |
| Net fee income | | 3,996 | | 5,676 | | 607 | | 1,854 | | 498 | | (11) | | 12,620 | | | Net income from financial instruments held for trading or managed on a fair value basis | | 3,942 |
| 4,134 |
| 285 |
| 728 |
| 736 |
| (294 | ) | 9,531 |
| Net income from financial instruments held for trading or managed on a fair value basis | | 3,942 | | 4,134 | | 285 | | 728 | | 736 | | (294) | | 9,531 | | | Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit and loss | | (789 | ) | (717 | ) | — |
| — |
| 18 |
| — |
| (1,488 | ) | | | Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit and loss | | Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit and loss | | (789) | | (717) | | — | | — | | 18 | | — | | (1,488) | | | Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss | | 601 |
| (26 | ) | (1 | ) | 36 |
| 27 |
| 58 |
| 695 |
| Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss | | 601 | | (26) | | (1) | | 36 | | 27 | | 58 | | 695 | | | Other income/(expense) | 9 | 3,113 |
| 3,609 |
| 33 |
| 586 |
| (237 | ) | (5,171 | ) | 1,933 |
| Other income/(expense) | 1 | 3,113 | | 3,609 | | 33 | | 586 | | (237) | | (5,171) | | 1,933 | | Net operating income before change in expected credit losses and other credit impairment charges/recoveries
| 1 | 17,704 |
| 28,784 |
| 2,687 |
| 6,725 |
| 3,062 |
| (5,182 | ) | 53,780 |
| | | Net operating income before loan impairment (charges)/recoveries and other credit risk provisions | | Net operating income before loan impairment (charges)/recoveries and other credit risk provisions | 2 | 17,704 | | 28,784 | | 2,687 | | 6,725 | | 3,062 | | (5,182) | | 53,780 | | Change in expected credit losses and other credit
impairment (charges)/recoveries | | (609 | ) | (602 | ) | (209 | ) | 223 |
| (570 | ) | — |
| (1,767 | ) | Change in expected credit losses and other credit
impairment (charges)/recoveries | | (609) | | (602) | | (209) | | 223 | | (570) | | — | | (1,767) | | | Net operating income | | 17,095 |
| 28,182 |
| 2,478 |
| 6,948 |
| 2,492 |
| (5,182 | ) | 52,013 |
| Net operating income | | 17,095 | | 28,182 | | 2,478 | | 6,948 | | 2,492 | | (5,182) | | 52,013 | | | Total operating expenses | | (17,934 | ) | (12,466 | ) | (1,357 | ) | (6,149 | ) | (1,935 | ) | 5,182 |
| (34,659 | ) | | | Total operating expenses excluding impairment of goodwill and other intangible assets | | Total operating expenses excluding impairment of goodwill and other intangible assets | | (17,912) | | (12,449) | | (1,357) | | (6,151) | | (1,935) | | 5,182 | | (34,622) | | | Impairment of goodwill and other intangible assets | | Impairment of goodwill and other intangible assets | | (22) | | (17) | | — | | 2 | | — | | — | | (37) | | | Operating profit/(loss) | | (839 | ) | 15,716 |
| 1,121 |
| 799 |
| 557 |
| — |
| 17,354 |
| Operating profit/(loss) | | (839) | | 15,716 | | 1,121 | | 799 | | 557 | | — | | 17,354 | | | Share of profit in associates and joint ventures | | 24 |
| 2,074 |
| 436 |
| — |
| 2 |
| — |
| 2,536 |
| Share of profit in associates and joint ventures | | 24 | | 2,074 | | 436 | | — | | 2 | | — | | 2,536 | | | Profit/(loss) before tax | | (815 | ) | 17,790 |
| 1,557 |
| 799 |
| 559 |
| — |
| 19,890 |
| Profit/(loss) before tax | | (815) | | 17,790 | | 1,557 | | 799 | | 559 | | — | | 19,890 | | | | | % |
| % |
| % |
| % |
| % |
| | % |
| | % | | % | | Share of HSBC’s profit before tax | | (4.1 | ) | 89.5 |
| 7.8 |
| 4.0 |
| 2.8 |
|
|
| 100.0 |
| Share of HSBC’s profit before tax | | (4.1) | | 89.5 | | 7.8 | | 4.0 | | 2.8 | | | 100.0 | | | Cost efficiency ratio | | 101.3 |
| 43.3 |
| 50.5 |
| 91.4 |
| 63.2 |
|
|
| 64.4 |
| Cost efficiency ratio | | 101.3 | | 43.3 | | 50.5 | | 91.4 | | 63.2 | | | 64.4 | | | Balance sheet data | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| Balance sheet data | | $m | | Loans and advances to customers (net) | | 373,073 |
| 450,545 |
| 28,824 |
| 108,146 |
| 21,108 |
| — |
| 981,696 |
| Loans and advances to customers (net) | | 373,073 | | 450,545 | | 28,824 | | 108,146 | | 21,108 | | — | | 981,696 | | | Total assets | | 1,150,235 |
| 1,047,636 |
| 57,455 |
| 390,410 |
| 51,923 |
| (139,535 | ) | 2,558,124 |
| Total assets | | 1,150,235 | | 1,047,636 | | 57,455 | | 390,410 | | 51,923 | | (139,535) | | 2,558,124 | | | Customer accounts | | 503,154 |
| 664,824 |
| 35,408 |
| 133,291 |
| 25,966 |
| — |
| 1,362,643 |
| Customer accounts | | 503,154 | | 664,824 | | 35,408 | | 133,291 | | 25,966 | | — | | 1,362,643 | | | Risk-weighted assets | 10 | 298,056 |
| 363,894 |
| 56,689 |
| 131,582 |
| 38,341 |
| — |
| 865,318 |
| Risk-weighted assets | 3 | 298,056 | | 363,894 | | 56,689 | | 131,582 | | 38,341 | | — | | 865,318 | | | | | | | | | | 2017 | | | Net interest income | | 6,970 |
| 14,153 |
| 1,752 |
| 3,441 |
| 2,098 |
| (238 | ) | 28,176 |
| | | Net fee income | | 4,161 |
| 5,631 |
| 619 |
| 1,880 |
| 520 |
| — |
| 12,811 |
| | | Net income from financial instruments held for trading or managed on a fair value basis | 11,12 | 4,066 |
| 2,929 |
| 180 |
| 527 |
| 486 |
| 238 |
| 8,426 |
| | | Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit and loss | | 769 |
| 2,003 |
| — |
| — |
| 64 |
| — |
| 2,836 |
| | | Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss | | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| | | Other income | 9,12 | 1,454 |
| 1,090 |
| 109 |
| 865 |
| 57 |
| (4,379 | ) | (804 | ) | | | Net operating income before loan impairment charges/recoveries and other credit risk provisions | 1 | 17,420 |
| 25,806 |
| 2,660 |
| 6,713 |
| 3,225 |
| (4,379 | ) | 51,445 |
| | | Loan impairment (charges)/recoveries and other credit risk provisions | | (658 | ) | (570 | ) | (207 | ) | 189 |
| (523 | ) | — |
| (1,769 | ) | | | Net operating income | | 16,762 |
| 25,236 |
| 2,453 |
| 6,902 |
| 2,702 |
| (4,379 | ) | 49,676 |
| | | Total operating expenses | | (18,665 | ) | (11,790 | ) | (1,394 | ) | (5,305 | ) | (2,109 | ) | 4,379 |
| (34,884 | ) | | | Operating profit/(loss) | | (1,903 | ) | 13,446 |
| 1,059 |
| 1,597 |
| 593 |
| — |
| 14,792 |
| | | Share of profit/(loss) in associates and joint ventures | | 39 |
| 1,883 |
| 442 |
| 4 |
| 7 |
| — |
| 2,375 |
| | | Profit/(loss) before tax | | (1,864 | ) | 15,329 |
| 1,501 |
| 1,601 |
| 600 |
| — |
| 17,167 |
| | | | | % |
| % |
| % |
| % |
| % |
| | % |
| | | Share of HSBC’s profit before tax | | (10.8 | ) | 89.3 |
| 8.7 |
| 9.3 |
| 3.5 |
|
|
| 100.0 |
| | | Cost efficiency ratio | | 107.1 |
| 45.7 |
| 52.4 |
| 79.0 |
| 65.4 |
|
|
| 67.8 |
| | | Balance sheet data | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | | Loans and advances to customers (net) | | 381,547 |
| 425,971 |
| 28,050 |
| 107,607 |
| 19,789 |
| — |
| 962,964 |
| | | Total assets | | 1,169,515 |
| 1,008,498 |
| 57,469 |
| 391,292 |
| 48,413 |
| (153,416 | ) | 2,521,771 |
| | | Customer accounts | | 505,182 |
| 657,395 |
| 34,658 |
| 143,432 |
| 23,795 |
| — |
| 1,364,462 |
| | | Risk-weighted assets | 10 | 311,612 |
| 357,808 |
| 59,196 |
| 131,276 |
| 36,372 |
| — |
| 871,337 |
| |
For footnotes, see page 84.1 ‘Other income/(expense)’ 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.
2 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.
3 Risk-weighted assets are non-additive across geographical regions due to market risk diversification effects within the Group.
Report of the Directors | Geographical regions
| | | | Reconciliation of reported and adjusted items – geographical regions |
| | Reconciliation of reported and adjusted items |
|
| 2019 | | 2020 |
|
| Europe |
| Asia |
| MENA |
| North
America |
| Latin
America |
| Total |
| | Europe | Asia | MENA | North
America | Latin
America | Total |
| Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Footnotes | $m | | Revenue | 1 |
|
|
|
|
|
|
|
|
|
|
|
| Revenue | 1 | | | Reported | 11 | 18,056 |
| 30,419 |
| 3,710 |
| 6,587 |
| 3,516 |
| 56,098 |
| Reported | 2 | 18,419 | | 26,922 | | 2,628 | | 6,375 | | 3,020 | | 50,429 | | | Significant items |
| 26 |
| 35 |
| (828 | ) | 68 |
| 10 |
| (689 | ) | Significant items | | (242) | | (37) | | — | | 43 | | (3) | | (63) | | | – customer redress programmes |
| 163 |
| — |
| — |
| — |
| — |
| 163 |
| – customer redress programmes | | 21 | | — | | — | | — | | — | | 21 | | | – disposals, acquisitions and investment in new businesses |
| — |
| — |
| (828 | ) | 59 |
| 1 |
| (768 | ) | – disposals, acquisitions and investment in new businesses | | — | | — | | — | | 10 | | — | | 10 | | – fair value movements on financial instruments
| 2 | (137 | ) | 35 |
| — |
| 9 |
| 9 |
| (84 | ) | – fair value movements on financial instruments | 3 | (254) | | (5) | | — | | (2) | | (3) | | (264) | | | – restructuring and other related costs | | – restructuring and other related costs | 2,4 | (9) | | (32) | | — | | 35 | | — | | 170 | | | Adjusted | 11 | 18,082 |
| 30,454 |
| 2,882 |
| 6,655 |
| 3,526 |
| 55,409 |
| Adjusted | 2 | 18,177 | | 26,885 | | 2,628 | | 6,418 | | 3,017 | | 50,366 | | | ECL |
| | ECL | | | | Reported |
| (938 | ) | (724 | ) | (117 | ) | (237 | ) | (740 | ) | (2,756 | ) | Reported | | (3,751) | | (2,284) | | (758) | | (900) | | (1,124) | | (8,817) | | | Adjusted |
| (938 | ) | (724 | ) | (117 | ) | (237 | ) | (740 | ) | (2,756 | ) | Adjusted | | (3,751) | | (2,284) | | (758) | | (900) | | (1,124) | | (8,817) | | | Operating expenses |
| | Operating expenses | | | | Reported | 11, 14 | (21,759 | ) | (13,297 | ) | (1,549 | ) | (5,583 | ) | (2,389 | ) | (42,349 | ) | Reported | 2 | (18,874) | | (13,662) | | (1,586) | | (5,307) | | (1,938) | | (34,432) | | | Significant items | 14 | 4,435 |
| 126 |
| 112 |
| 544 |
| 375 |
| 9,554 |
| Significant items | | 2,203 | | 171 | | 83 | | 601 | | 91 | | 2,973 | | | – costs of structural reform | 3 | 154 |
| 4 |
| — |
| — |
| — |
| 158 |
| | | – customer redress programmes |
| 1,281 |
| — |
| — |
| — |
| — |
| 1,281 |
| – customer redress programmes | | (54) | | — | | — | | — | | — | | (54) | | | – goodwill impairment | 14 | 2,522 |
| — |
| 97 |
| 431 |
| 337 |
| 7,349 |
| | | | – impairment of goodwill and other intangibles | | – impairment of goodwill and other intangibles | | 803 | | — | | 64 | | 223 | | — | | 1,090 | | | – past service costs of guaranteed minimum pension benefits equalisation | | – past service costs of guaranteed minimum pension benefits equalisation | | 17 | | — | | — | | — | | — | | 17 | | | – restructuring and other related costs |
| 538 |
| 123 |
| 15 |
| 113 |
| 38 |
| 827 |
| – restructuring and other related costs | 2,5 | 1,425 | | 171 | | 19 | | 378 | | 91 | | 1,908 | | | – settlements and provisions in connection with legal and regulatory matters |
| (60 | ) | (1 | ) | — |
| — |
| — |
| (61 | ) | – settlements and provisions in connection with legal and regulatory matters | | 12 | | — | | — | | — | | — | | 12 | | Adjusted
| 14 | (17,324 | ) | (13,171 | ) | (1,437 | ) | (5,039 | ) | (2,014 | ) | (32,795 | ) | Adjusted | 2 | (16,671) | | (13,491) | | (1,503) | | (4,706) | | (1,847) | | (31,459) | | | Share of profit/(loss) in associates and joint ventures |
| | Share of profit/(loss) in associates and joint ventures | | | | Reported |
| (12 | ) | 2,070 |
| 283 |
| — |
| 13 |
| 2,354 |
| Reported | | 1 | | 1,856 | | (265) | | — | | 5 | | 1,597 | | | Significant items | | Significant items | | — | | — | | 462 | | — | | — | | 462 | | | – impairment of goodwill | | – impairment of goodwill | 6 | — | | — | | 462 | | — | | — | | 462 | | | Adjusted |
| (12 | ) | 2,070 |
| 283 |
| — |
| 13 |
| 2,354 |
| Adjusted | | 1 | | 1,856 | | 197 | | — | | 5 | | 2,059 | | | Profit/(loss) before tax |
| | Profit/(loss) before tax | | | | Reported | 14 | (4,653 | ) | 18,468 |
| 2,327 |
| 767 |
| 400 |
| 13,347 |
| Reported | | (4,205) | | 12,832 | | 19 | | 168 | | (37) | | 8,777 | | | Significant items | 14 | 4,461 |
| 161 |
| (716 | ) | 612 |
| 385 |
| 8,865 |
| Significant items | | 1,961 | | 134 | | 545 | | 644 | | 88 | | 3,372 | | | – revenue |
| 26 |
| 35 |
| (828 | ) | 68 |
| 10 |
| (689 | ) | – revenue | 2 | (242) | | (37) | | — | | 43 | | (3) | | (63) | | | | – operating expenses | 14 | 4,435 |
| 126 |
| 112 |
| 544 |
| 375 |
| 9,554 |
| – operating expenses | 2 | 2,203 | | 171 | | 83 | | 601 | | 91 | | 2,973 | | | – share of profit in associates and joint ventures | | – share of profit in associates and joint ventures | | — | | — | | 462 | | — | | — | | 462 | | | Adjusted | | (192 | ) | 18,629 |
| 1,611 |
| 1,379 |
| 785 |
| 22,212 |
| Adjusted | | (2,244) | | 12,966 | | 564 | | 812 | | 51 | | 12,149 | | | Loans and advances to customers (net) |
| | Loans and advances to customers (net) | | | | Reported |
| 393,850 |
| 477,727 |
| 28,556 |
| 113,474 |
| 23,136 |
| 1,036,743 |
| Reported | | 408,495 | | 473,165 | | 28,700 | | 107,969 | | 19,658 | | 1,037,987 | | | Adjusted |
| 393,850 |
| 477,727 |
| 28,556 |
| 113,474 |
| 23,136 |
| 1,036,743 |
| Adjusted | | 408,495 | | 473,165 | | 28,700 | | 107,969 | | 19,658 | | 1,037,987 | | | Customer accounts |
| | Customer accounts | | | | Reported |
| 528,718 |
| 697,358 |
| 38,126 |
| 146,676 |
| 28,237 |
| 1,439,115 |
| Reported | | 629,647 | | 762,406 | | 41,221 | | 182,028 | | 27,478 | | 1,642,780 | | | Adjusted |
| 528,718 |
| 697,358 |
| 38,126 |
| 146,676 |
| 28,237 |
| 1,439,115 |
| Adjusted | | 629,647 | | 762,406 | | 41,221 | | 182,028 | | 27,478 | | 1,642,780 | |
For footnotes, see page 84.1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.
2 Amounts are non-additive across geographical regions due to inter-company transactions within the Group.
3 Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.
4 Comprises losses associated with the RWA reduction commitments and gains relating to the business update in February 2020. 5 Includes impairment of software intangible assets of $189m (of the total software intangible asset impairment of $1,347m) and impairment of tangible assets of $197m. 6 During the year, The Saudi British Bank ('SABB'), an associate of HSBC, impaired the goodwill that arose following the merger with Alawwal bank in 2019. HSBC's post-tax share of the goodwill impairment was $462m.
| | Reconciliation of reported and adjusted items (continued) | | | | 2019 | | 2020 | | | | UK |
| Hong
Kong |
| Mainland China |
| US |
| Mexico |
| | UK | Hong
Kong | Mainland China | US | Mexico | | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| | Footnotes | $m | | Revenue | 1 | | Revenue | 1 | | | Reported | | 13,538 |
| 19,412 |
| 3,101 |
| 4,638 |
| 2,555 |
| Reported | | 13,886 | | 16,345 | | 3,088 | | 4,590 | | 2,234 | | | Significant items | | 23 |
| 26 |
| 1 |
| 66 |
| 8 |
| Significant items | | (187) | | 15 | | (5) | | 41 | | (13) | | | – customer redress programmes | | 162 |
| — |
| — |
| — |
| — |
| – customer redress programmes | | 21 | | — | | — | | — | | — | | | – disposals, acquisitions and investment in new businesses | | — |
| — |
| — |
| 59 |
| — |
| – disposals, acquisitions and investment in new businesses | | — | | — | | — | | 10 | | — | | | – fair value movements on financial instruments | 2 | (139 | ) | 26 |
| 1 |
| 7 |
| 8 |
| – fair value movements on financial instruments | 2 | (256) | | — | | (1) | | (2) | | (1) | | | – restructuring and other related costs | | – restructuring and other related costs | 3 | 48 | | 15 | | (4) | | 33 | | (12) | | | Adjusted | | 13,561 |
| 19,438 |
| 3,102 |
| 4,704 |
| 2,563 |
| Adjusted | | 13,699 | | 16,360 | | 3,083 | | 4,631 | | 2,221 | | | ECL | | | ECL | | | | Reported | | (714 | ) | (459 | ) | (129 | ) | (170 | ) | (491 | ) | Reported | | (3,256) | | (824) | | (114) | | (622) | | (1,050) | | | Adjusted | | (714 | ) | (459 | ) | (129 | ) | (170 | ) | (491 | ) | Adjusted | | (3,256) | | (824) | | (114) | | (622) | | (1,050) | | | Operating expenses | | | Operating expenses | | | | Reported | | (16,157 | ) | (6,935 | ) | (2,111 | ) | (4,033 | ) | (1,390 | ) | Reported | | (14,855) | | (7,312) | | (2,211) | | (4,194) | | (1,376) | | | Significant items | | 1,795 |
| 64 |
| 6 |
| 93 |
| 20 |
| Significant items | | 1,318 | | 100 | | 19 | | 556 | | 42 | | | – costs of structural reform | 3 | 101 |
| 4 |
| — |
| — |
| — |
| | | – customer redress programmes | | 1,281 |
| — |
| — |
| — |
| — |
| – customer redress programmes | | (54) | | — | | — | | — | | — | | | | – impairment of goodwill and other intangibles | | – impairment of goodwill and other intangibles | | 650 | | — | | — | | 223 | | — | | | – past service costs of guaranteed minimum pension benefits equalisation | | – past service costs of guaranteed minimum pension benefits equalisation | | 17 | | — | | — | | — | | — | | | – restructuring and other related costs | | 405 |
| 61 |
| 6 |
| 93 |
| 20 |
| – restructuring and other related costs | | 693 | | 100 | | 19 | | 333 | | 42 | | | – settlements and provisions in connection with legal and regulatory matters | | 8 |
| (1 | ) | — |
| — |
| — |
| – settlements and provisions in connection with legal and regulatory matters | | 12 | | — | | — | | — | | — | | | Adjusted | | (14,362 | ) | (6,871 | ) | (2,105 | ) | (3,940 | ) | (1,370 | ) | Adjusted | | (13,537) | | (7,212) | | (2,192) | | (3,638) | | (1,334) | | | Share of profit/(loss) in associates and joint ventures | | | Share of profit/(loss) in associates and joint ventures | | | | Reported | | (12 | ) | 31 |
| 2,016 |
| — |
| 13 |
| Reported | | 1 | | (2) | | 1,849 | | — | | 5 | | | Significant items | | Significant items | | — | | — | | — | | — | | — | | | – impairment of goodwill | | – impairment of goodwill | | — | | — | | — | | — | | — | | | Adjusted | | (12 | ) | 31 |
| 2,016 |
| — |
| 13 |
| Adjusted | | 1 | | (2) | | 1,849 | | — | | 5 | | | Profit/(loss) before tax | | | Profit/(loss) before tax | | | | Reported | | (3,345 | ) | 12,049 |
| 2,877 |
| 435 |
| 687 |
| Reported | | (4,224) | | 8,207 | | 2,612 | | (226) | | (187) | | | Significant items | | 1,818 |
| 90 |
| 7 |
| 159 |
| 28 |
| Significant items | | 1,131 | | 115 | | 14 | | 597 | | 29 | | | – revenue | | 23 |
| 26 |
| 1 |
| 66 |
| 8 |
| – revenue | | (187) | | 15 | | (5) | | 41 | | (13) | | | | – operating expenses | | 1,795 |
| 64 |
| 6 |
| 93 |
| 20 |
| – operating expenses | | 1,318 | | 100 | | 19 | | 556 | | 42 | | | – share of profit in associates and joint ventures | | – share of profit in associates and joint ventures | | — | | — | | — | | — | | — | | | Adjusted | | (1,527 | ) | 12,139 |
| 2,884 |
| 594 |
| 715 |
| Adjusted | | (3,093) | | 8,322 | | 2,626 | | 371 | | (158) | | | Loans and advances to customers (net) | | | Loans and advances to customers (net) | | | | Reported | | 303,041 |
| 306,964 |
| 42,380 |
| 63,588 |
| 20,426 |
| Reported | | 314,530 | | 302,454 | | 46,113 | | 58,082 | | 17,296 | | | Adjusted | | 303,041 |
| 306,964 |
| 42,380 |
| 63,588 |
| 20,426 |
| Adjusted | | 314,530 | | 302,454 | | 46,113 | | 58,082 | | 17,296 | | | Customer accounts | | | Customer accounts | | | | Reported | | 419,642 |
| 499,955 |
| 48,323 |
| 90,834 |
| 23,051 |
| Reported | | 504,275 | | 531,489 | | 56,826 | | 117,485 | | 22,220 | | | Adjusted | | 419,642 |
| 499,955 |
| 48,323 |
| 90,834 |
| 23,051 |
| Adjusted | | 504,275 | | 531,489 | | 56,826 | | 117,485 | | 22,220 | |
For footnotes, see page 84.1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.
2 Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.
3 Comprises losses associated with the RWA reduction commitments and gains relating to the business update in February 2020.
Report of the Directors | Geographical regions
| | | | | | | | | | | | | | | | | | | | | | | | | Reconciliation of reported and adjusted items (continued) | | | | | | | | | | 2019 | | | Europe | Asia | MENA | North
America | Latin
America | Total | | Footnotes | $m | $m | $m | $m | $m | $m | | Revenue | 1 | | | | | | | Reported | 2 | 18,056 | | 30,419 | | 3,710 | | 6,587 | | 3,516 | | 56,098 | | | Currency translation | 2 | 125 | | 34 | | (26) | | (17) | | (613) | | (471) | | | Significant items | | 30 | | 35 | | (826) | | 68 | | 10 | | (683) | | | – customer redress programmes | | 163 | | — | | — | | — | | — | | 163 | | | – disposals, acquisitions and investment in new businesses | | — | | — | | (828) | | 59 | | 1 | | (768) | | | – fair value movements on financial instruments | 3 | (137) | | 35 | | — | | 9 | | 9 | | (84) | | | – currency translation on significant items | | 4 | | — | | 2 | | — | | — | | 6 | | Adjusted | 2 | 18,211 | | 30,488 | | 2,858 | | 6,638 | | 2,913 | | 54,944 | | | ECL | | | | | | | | | Reported | | (938) | | (724) | | (117) | | (237) | | (740) | | (2,756) | | | Currency translation | | (2) | | — | | 2 | | — | | 129 | | 129 | | | Adjusted | | (940) | | (724) | | (115) | | (237) | | (611) | | (2,627) | | | Operating expenses | | | | | | | | Reported | 2,5 | (21,759) | | (13,297) | | (1,549) | | (5,583) | | (2,389) | | (42,349) | | | Currency translation | 2 | (166) | | 25 | | 28 | | 11 | | 351 | | 223 | | | Significant items | 5 | 4,495 | | 126 | | 112 | | 543 | | 369 | | 9,607 | | | – costs of structural reform | 4 | 154 | | 4 | | — | | — | | — | | 158 | | | – customer redress programmes | | 1,281 | | — | | — | | — | | — | | 1,281 | | | – goodwill impairment | 5 | 2,522 | | — | | 97 | | 431 | | 337 | | 7,349 | | | | | | | | | | | – restructuring and other related costs | | 538 | | 123 | | 15 | | 113 | | 38 | | 827 | | | – settlements and provisions in connection with legal and regulatory matters | | (60) | | (1) | | — | | — | | — | | (61) | | | – currency translation on significant items | | 60 | | — | | — | | (1) | | (6) | | 53 | | Adjusted | 5 | (17,430) | | (13,146) | | (1,409) | | (5,029) | | (1,669) | | (32,519) | | | Share of profit/(loss) in associates and joint ventures | | | | | | | | | Reported | | (12) | | 2,070 | | 283 | | — | | 13 | | 2,354 | | | Currency translation | | — | | (1) | | — | | — | | (2) | | (3) | | | Adjusted | | (12) | | 2,069 | | 283 | | — | | 11 | | 2,351 | | | Profit/(loss) before tax | | | | | | | | | Reported | 5 | (4,653) | | 18,468 | | 2,327 | | 767 | | 400 | | 13,347 | | | Currency translation | 5 | (43) | | 58 | | 4 | | (6) | | (135) | | (122) | | | Significant items | | 4,525 | | 161 | | (714) | | 611 | | 379 | | 8,924 | | | – revenue | | 30 | | 35 | | (826) | | 68 | | 10 | | (683) | | | – operating expenses | | 4,495 | | 126 | | 112 | | 543 | | 369 | | 9,607 | | | Adjusted | 5 | (171) | | 18,687 | | 1,617 | | 1,372 | | 644 | | 22,149 | | | Loans and advances to customers (net) | | | | | | | | | Reported | | 393,850 | | 477,727 | | 28,556 | | 113,474 | | 23,136 | | 1,036,743 | | | Currency translation | | 18,021 | | 9,114 | | (537) | | 964 | | (1,609) | | 25,953 | | | Adjusted | | 411,871 | | 486,841 | | 28,019 | | 114,438 | | 21,527 | | 1,062,696 | | | Customer accounts | | | | | | | | | Reported | | 528,718 | | 697,358 | | 38,126 | | 146,676 | | 28,237 | | 1,439,115 | | | Currency translation | | 22,977 | | 10,172 | | (731) | | 979 | | (2,305) | | 31,092 | | | Adjusted | | 551,695 | | 707,530 | | 37,395 | | 147,655 | | 25,932 | | 1,470,207 | |
1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. | | | | | | | | | | | | | | | | Reconciliation of reported and adjusted items (continued) |
|
|
|
|
|
|
|
|
| 2018 |
|
| Europe |
| Asia |
| MENA |
| North
America |
| Latin
America |
| Total |
|
| Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Revenue | 1 | | | | | | | Reported | 11 | 17,704 |
| 28,784 |
| 2,687 |
| 6,725 |
| 3,062 |
| 53,780 |
| | Currency translation | 11 | (914 | ) | (316 | ) | (18 | ) | (40 | ) | (389 | ) | (1,617 | ) | | Significant items |
| 103 |
| (36 | ) | (1 | ) | 97 |
| 5 |
| 168 |
| | – customer redress programmes |
| (53 | ) | — |
| — |
| — |
| — |
| (53 | ) | | – disposals, acquisitions and investment in new businesses |
| (5 | ) | — |
| — |
| 103 |
| 15 |
| 113 |
| | – fair value movements on financial instruments | 2 | 156 |
| (38 | ) | (1 | ) | (8 | ) | (9 | ) | 100 |
| | – currency translation on significant items |
| 5 |
| 2 |
| — |
| 2 |
| (1 | ) | 8 |
| Adjusted | 11 | 16,893 |
| 28,432 |
| 2,668 |
| 6,782 |
| 2,678 |
| 52,331 |
| | Change in expected credit losses and other credit impairment charges |
| | | | | | | | Reported |
| (609 | ) | (602 | ) | (209 | ) | 223 |
| (570 | ) | (1,767 | ) | | Currency translation |
| 12 |
| 5 |
| 9 |
| (1 | ) | 53 |
| 78 |
| | Adjusted |
| (597 | ) | (597 | ) | (200 | ) | 222 |
| (517 | ) | (1,689 | ) | | Operating expenses |
| | | | | | | Reported | 11 | (17,934 | ) | (12,466 | ) | (1,357 | ) | (6,149 | ) | (1,935 | ) | (34,659 | ) | | Currency translation | 11 | 664 |
| 175 |
| 23 |
| 23 |
| 284 |
| 1,109 |
| | Significant items |
| 652 |
| 16 |
| — |
| 976 |
| — |
| 1,644 |
| | – costs of structural reform | 3 | 352 |
| 9 |
| — |
| — |
| — |
| 361 |
| | – customer redress programmes |
| 146 |
| — |
| — |
| — |
| — |
| 146 |
| | – disposals, acquisitions and investment in new businesses |
| 52 |
| — |
| — |
| — |
| — |
| 52 |
| – past service costs of guaranteed minimum pension benefits equalisation
|
| 228 |
| — |
| — |
| — |
| — |
| 228 |
| | – restructuring and other related costs | | 46 |
| 7 |
| — |
| 13 |
| — |
| 66 |
| | – settlements and provisions in connection with legal and regulatory matters |
| (147 | ) |
|
| — |
| 963 |
| — |
| 816 |
| | – currency translation on significant items |
| (25 | ) | — |
| — |
| — |
| — |
| (25 | ) | Adjusted | 11 | (16,618 | ) | (12,275 | ) | (1,334 | ) | (5,150 | ) | (1,651 | ) | (31,906 | ) | | Share of profit in associates and joint ventures |
| | | | | | | | Reported |
| 24 |
| 2,074 |
| 436 |
| — |
| 2 |
| 2,536 |
| | Currency translation |
| — |
| (89 | ) | — |
| — |
| (1 | ) | (90 | ) | | Adjusted |
| 24 |
| 1,985 |
| 436 |
| — |
| 1 |
| 2,446 |
| | Profit/(loss) before tax |
| | | | | | | | Reported |
| (815 | ) | 17,790 |
| 1,557 |
| 799 |
| 559 |
| 19,890 |
| | Currency translation |
| (238 | ) | (225 | ) | 14 |
| (18 | ) | (53 | ) | (520 | ) | | Significant items |
| 755 |
| (20 | ) | (1 | ) | 1,073 |
| 5 |
| 1,812 |
| | – revenue |
| 103 |
| (36 | ) | (1 | ) | 97 |
| 5 |
| 168 |
| | – operating expenses |
| 652 |
| 16 |
| — |
| 976 |
| — |
| 1,644 |
| | Adjusted | | (298 | ) | 17,545 |
| 1,570 |
| 1,854 |
| 511 |
| 21,182 |
| | Loans and advances to customers (net) |
| | | | | | | | Reported |
| 373,073 |
| 450,545 |
| 28,824 |
| 108,146 |
| 21,108 |
| 981,696 |
| | Currency translation |
| 8,887 |
| 1,875 |
| (84 | ) | 2,067 |
| (165 | ) | 12,580 |
| | Adjusted |
| 381,960 |
| 452,420 |
| 28,740 |
| 110,213 |
| 20,943 |
| 994,276 |
| | Customer accounts |
| | | | | | | | Reported |
| 503,154 |
| 664,824 |
| 35,408 |
| 133,291 |
| 25,966 |
| 1,362,643 |
| | Currency translation |
| 12,796 |
| 3,016 |
| 58 |
| 2,163 |
| (938 | ) | 17,095 |
| | Adjusted |
| 515,950 |
| 667,840 |
| 35,466 |
| 135,454 |
| 25,028 |
| 1,379,738 |
|
For footnotes, see page 84.3 Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.
4 Comprises costs associated with preparations for the UK’s exit from the European Union.
5 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.
| | Reconciliation of reported and adjusted items (continued) | | | | 2018 | | 2019 | | | | UK |
| Hong
Kong |
| Mainland China |
| US |
| Mexico |
| | UK | Hong
Kong | Mainland China | US | Mexico | | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| | Footnotes | $m | | Revenue | 1 | | Revenue | 1 | | | Reported | | 13,597 |
| 18,231 |
| 2,888 |
| 4,741 |
| 2,294 |
| Reported | | 13,538 | | 19,412 | | 3,101 | | 4,638 | | 2,555 | | | Currency translation | | (713 | ) | 6 |
| (125 | ) | — |
| (1 | ) | Currency translation | | 65 | | 192 | | — | | — | | (256) | | | Significant items | | 114 |
| 5 |
| (1 | ) | 97 |
| (8 | ) | Significant items | | 29 | | 26 | | 1 | | 66 | | 7 | | | – customer redress programmes | | (53 | ) | — |
| — |
| — |
| — |
| – customer redress programmes | | 162 | | — | | — | | — | | — | | | – disposals, acquisitions and investment in new businesses | | — |
| — |
| — |
| 103 |
| — |
| – disposals, acquisitions and investment in new businesses | | — | | — | | — | | 59 | | — | | | – fair value movements on financial instruments | 2 | 162 |
| 5 |
| (1 | ) | (6 | ) | (7 | ) | – fair value movements on financial instruments | 2 | (139) | | 26 | | 1 | | 7 | | 8 | | | – currency translation on significant items | | 5 |
| — |
| — |
| — |
| (1 | ) | – currency translation on significant items | | 6 | | — | | — | | — | | (1) | | | Adjusted | | 12,998 |
| 18,242 |
| 2,762 |
| 4,838 |
| 2,285 |
| Adjusted | | 13,632 | | 19,630 | | 3,102 | | 4,704 | | 2,306 | | | Change in expected credit losses and other credit impairment charges | | | | | ECL | | ECL | | | Reported | | (516 | ) | (214 | ) | (143 | ) | 199 |
| (463 | ) | Reported | | (714) | | (459) | | (129) | | (170) | | (491) | | | Currency translation | | 9 |
| (1 | ) | 4 |
| — |
| — |
| Currency translation | | (2) | | (4) | | — | | — | | 49 | | | Adjusted | | (507 | ) | (215 | ) | (139 | ) | 199 |
| (463 | ) | Adjusted | | (716) | | (463) | | (129) | | (170) | | (442) | | | Operating expenses | | | Operating expenses | | | Reported | | (14,502 | ) | (6,539 | ) | (1,920 | ) | (4,987 | ) | (1,303 | ) | Reported | | (16,157) | | (6,935) | | (2,111) | | (4,033) | | (1,390) | | | Currency translation | | 494 |
| (2 | ) | 81 |
| — |
| — |
| Currency translation | | (63) | | (66) | | (5) | | — | | 141 | | | Significant items | | 511 |
| 15 |
| — |
| 920 |
| — |
| Significant items | | 1,805 | | 65 | | 6 | | 93 | | 18 | | | – costs of structural reform | 3 | 294 |
| 9 |
| — |
| — |
| — |
| – costs of structural reform | 3 | 101 | | 4 | | — | | — | | — | | | – customer redress programmes | | 146 |
| — |
| — |
| — |
| — |
| – customer redress programmes | | 1,281 | | — | | — | | — | | — | | | – disposals, acquisitions and investment in new businesses | | — |
| — |
| — |
| — |
| — |
| | – past service costs of guaranteed minimum pension benefits equalisation
| | 228 |
| — |
| — |
| — |
| — |
| | | – restructuring and other related costs | | 39 |
| 7 |
| — |
| 11 |
| — |
| – restructuring and other related costs | | 405 | | 61 | | 6 | | 93 | | 20 | | | – settlements and provisions in connection with legal and regulatory matters | | (176 | ) | — |
| — |
| 908 |
| — |
| – settlements and provisions in connection with legal and regulatory matters | | 8 | | (1) | | — | | — | | — | | | – currency translation on significant items | | (20 | ) | (1 | ) | — |
| 1 |
| — |
| – currency translation on significant items | | 10 | | 1 | | — | | — | | (2) | | | Adjusted | | (13,497 | ) | (6,526 | ) | (1,839 | ) | (4,067 | ) | (1,303 | ) | Adjusted | | (14,415) | | (6,936) | | (2,110) | | (3,940) | | (1,231) | | | Share of profit in associates and joint ventures | | | | | Share of profit/(loss) in associates and joint ventures | | Share of profit/(loss) in associates and joint ventures | | | Reported | | 25 |
| 36 |
| 2,033 |
| — |
| — |
| Reported | | (12) | | 31 | | 2,016 | | — | | 13 | | | Currency translation | | (1 | ) | — |
| (90 | ) | — |
| — |
| Currency translation | | — | | 1 | | 1 | | — | | (2) | | | Adjusted | | 24 |
| 36 |
| 1,943 |
| — |
| — |
| Adjusted | | (12) | | 32 | | 2,017 | | — | | 11 | | | Profit/(loss) before tax | | | Profit/(loss) before tax | | | Reported | | (1,396 | ) | 11,514 |
| 2,858 |
| (47 | ) | 528 |
| Reported | | (3,345) | | 12,049 | | 2,877 | | 435 | | 687 | | | Currency translation | | (211 | ) | 3 |
| (130 | ) | — |
| (1 | ) | Currency translation | | — | | 123 | | (4) | | — | | (68) | | | Significant items | | 625 |
| 20 |
| (1 | ) | 1,017 |
| (8 | ) | Significant items | | 1,834 | | 91 | | 7 | | 159 | | 25 | | | – revenue | | 114 |
| 5 |
| (1 | ) | 97 |
| (8 | ) | – revenue | | 29 | | 26 | | 1 | | 66 | | 7 | | | – operating expenses | | 511 |
| 15 |
| — |
| 920 |
| — |
| – operating expenses | | 1,805 | | 65 | | 6 | | 93 | | 18 | | | Adjusted | | (982 | ) | 11,537 |
| 2,727 |
| 970 |
| 519 |
| Adjusted | | (1,511) | | 12,263 | | 2,880 | | 594 | | 644 | | | Loans and advances to customers (net) | | | Loans and advances to customers (net) | | | Reported | | 287,144 |
| 290,547 |
| 38,979 |
| 64,011 |
| 17,895 |
| Reported | | 303,041 | | 306,964 | | 42,380 | | 63,588 | | 20,426 | | | Currency translation | | 10,190 |
| 1,609 |
| (477 | ) | — |
| 763 |
| Currency translation | | 9,925 | | 1,403 | | 2,802 | | — | | (1,033) | | | Adjusted | | 297,334 |
| 292,156 |
| 38,502 |
| 64,011 |
| 18,658 |
| Adjusted | | 312,966 | | 308,367 | | 45,182 | | 63,588 | | 19,393 | | | Customer accounts | | | Customer accounts | | | Reported | | 399,487 |
| 484,897 |
| 45,712 |
| 82,523 |
| 19,936 |
| Reported | | 419,642 | | 499,955 | | 48,323 | | 90,834 | | 23,051 | | | Currency translation | | 14,173 |
| 2,686 |
| (559 | ) | — |
| 856 |
| Currency translation | | 13,744 | | 2,286 | | 3,194 | | — | | (1,166) | | | Adjusted | | 413,660 |
| 487,583 |
| 45,153 |
| 82,523 |
| 20,792 |
| Adjusted | | 433,386 | | 502,241 | | 51,517 | | 90,834 | | 21,885 | |
For footnotes, see page 84.1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.
2 Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.
3 Comprises costs associated with preparations for the UK’s exit from the European Union.
Report of the Directors | Geographical regions
| | | | | | | | | | | | | | | | | | | | | | | | | Reconciliation of reported and adjusted items (continued) | | | 2018 | | | Europe | Asia | MENA | North
America | Latin
America | Total | | Footnotes | $m | $m | $m | $m | $m | $m | | Revenue | 1 | | | | | | | | Reported | 2 | 17,704 | | 28,784 | | 2,687 | | 6,725 | | 3,062 | | 53,780 | | | Currency translation | 2 | (760) | | (263) | | (37) | | (57) | | (803) | | (1,854) | | | Significant items | | 105 | | (35) | | (1) | | 97 | | 6 | | 172 | | | – customer redress programmes | | (53) | | — | | — | | — | | — | | (53) | | | – disposals, acquisitions and investment in new businesses | | (5) | | — | | — | | 103 | | 15 | | 113 | | | – fair value movements on financial investments | 3 | 156 | | (38) | | (1) | | (8) | | (9) | | 100 | | | – currency translation on significant items | | 7 | | 3 | | — | | 2 | | — | | 12 | | | Adjusted | 2 | 17,049 | | 28,486 | | 2,649 | | 6,765 | | 2,265 | | 52,098 | | | ECL | | | | | | | | | Reported | | (609) | | (602) | | (209) | | 223 | | (570) | | (1,767) | | | Currency translation | | 5 | | 6 | | 17 | | (2) | | 121 | | 147 | | | Adjusted | | (604) | | (596) | | (192) | | 221 | | (449) | | (1,620) | | | Operating expenses | | | | | | | | | Reported | 2 | (17,934) | | (12,466) | | (1,357) | | (6,149) | | (1,935) | | (34,659) | | | Currency translation | 2 | 530 | | 185 | | 47 | | 33 | | 551 | | 1,280 | | | Significant items | | 664 | | 16 | | — | | 976 | | — | | 1,656 | | | – costs of structural reform | 4 | 352 | | 9 | | — | | — | | — | | 361 | | | – customer redress programmes | | 146 | | — | | — | | — | | — | | 146 | | | – disposals, acquisitions and investment in new businesses | | 52 | | — | | — | | — | | — | | 52 | | | – past service costs of guaranteed minimum pension benefits equalisation | | 228 | | — | | — | | — | | — | | 228 | | | – restructuring and other related costs | | 46 | | 7 | | — | | 13 | | — | | 66 | | | – settlements and provisions in connection with legal and regulatory matters | | (147) | | — | | — | | 963 | | — | | 816 | | | – currency translation on significant items | | (13) | | — | | — | | — | | — | | (13) | | | Adjusted | 2 | (16,740) | | (12,265) | | (1,310) | | (5,140) | | (1,384) | | (31,723) | | | Share of profit in associates and joint ventures | | | | | | | | | Reported | | 24 | | 2,074 | | 436 | | — | | 2 | | 2,536 | | | Currency translation | | (1) | | (90) | | — | | — | | (1) | | (92) | | | Adjusted | | 23 | | 1,984 | | 436 | | — | | 1 | | 2,444 | | | Profit/(loss) before tax | | | | | | | | | Reported | | (815) | | 17,790 | | 1,557 | | 799 | | 559 | | 19,890 | | | Currency translation | | (226) | | (162) | | 27 | | (26) | | (132) | | (519) | | | Significant items | | 769 | | (19) | | (1) | | 1,073 | | 6 | | 1,828 | | | – revenue | | 105 | | (35) | | (1) | | 97 | | 6 | | 172 | | | – operating expenses | | 664 | | 16 | | — | | 976 | | — | | 1,656 | | | Adjusted | | (272) | | 17,609 | | 1,583 | | 1,846 | | 433 | | 21,199 | | | Loans and advances to customers (net) | | | | | | | | | Reported | | 373,073 | | 450,545 | | 28,824 | | 108,146 | | 21,108 | | 981,696 | | | Currency translation | | 26,141 | | 10,289 | | (521) | | 2,957 | | (1,558) | | 37,308 | | | Adjusted | | 399,214 | | 460,834 | | 28,303 | | 111,103 | | 19,550 | | 1,019,004 | | | Customer accounts | | | | | | | | | Reported | | 503,154 | | 664,824 | | 35,408 | | 133,291 | | 25,966 | | 1,362,643 | | | Currency translation | | 34,940 | | 12,491 | | (632) | | 3,094 | | (2,814) | | 47,079 | | | Adjusted | | 538,094 | | 677,315 | | 34,776 | | 136,385 | | 23,152 | | 1,409,722 | |
1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. | | | | | | | | | | | | | | | | Reconciliation of reported and adjusted items (continued) |
|
| 2017 |
|
| Europe |
| Asia |
| MENA |
| North
America |
| Latin
America |
| Total |
|
| Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Revenue | 1 | | | | | | | | Reported | 11 | 17,420 |
| 25,806 |
| 2,660 |
| 6,713 |
| 3,225 |
| 51,445 |
| | Currency translation | 11 | (165 | ) | (418 | ) | (93 | ) | (36 | ) | (661 | ) | (1,344 | ) | | Significant items | | 61 |
| 118 |
| 1 |
| (94 | ) | (14 | ) | 72 |
| | – customer redress programmes | | 108 |
| — |
| — |
| — |
| — |
| 108 |
| | – disposals, acquisitions and investment in new businesses | | (98 | ) | (27 | ) | — |
| (130 | ) | (19 | ) | (274 | ) | | – fair value movements on financial investments | 2 | 54 |
| 148 |
| 1 |
| 37 |
| 5 |
| 245 |
| | – currency translation on significant items | | (3 | ) | (3 | ) | — |
| (1 | ) | — |
| (7 | ) | | Adjusted | 11 | 17,316 |
| 25,506 |
| 2,568 |
| 6,583 |
| 2,550 |
| 50,173 |
| | LICs | |
|
|
|
|
|
|
|
|
|
|
|
| | Reported | | (658 | ) | (570 | ) | (207 | ) | 189 |
| (523 | ) | (1,769 | ) | | Currency translation | | 26 |
| 9 |
| 5 |
| — |
| 43 |
| 83 |
| | Adjusted | | (632 | ) | (561 | ) | (202 | ) | 189 |
| (480 | ) | (1,686 | ) | | Operating expenses | | — |
| — |
| — |
| — |
| — |
| — |
| | Reported | 11 | (18,665 | ) | (11,790 | ) | (1,394 | ) | (5,305 | ) | (2,109 | ) | (34,884 | ) | | Currency translation | 11 | 135 |
| 229 |
| 87 |
| 21 |
| 472 |
| 915 |
| | Significant items | | 2,810 |
| 622 |
| 25 |
| 199 |
| 54 |
| 3,710 |
| | – costs of structural reform | 3 | 420 |
| — |
| — |
| — |
| — |
| 420 |
| | – costs to achieve | | 1,908 |
| 623 |
| 34 |
| 371 |
| 66 |
| 3,002 |
| | – customer redress programmes | | 655 |
| — |
| — |
| — |
| — |
| 655 |
| | – disposals, acquisitions and investment in new businesses | | 36 |
| — |
| — |
| 17 |
| — |
| 53 |
| | – gain on partial settlement of pension obligations | | — |
| — |
| — |
| (188 | ) | — |
| (188 | ) | | – settlements and provisions in connection with legal and regulatory matters | | (215 | ) | 17 |
| — |
| — |
| — |
| (198 | ) | | – currency translation on significant items | | 6 |
| (18 | ) | (9 | ) | (1 | ) | (12 | ) | (34 | ) | | Adjusted | 11 | (15,720 | ) | (10,939 | ) | (1,282 | ) | (5,085 | ) | (1,583 | ) | (30,259 | ) | | Share of profit in associates and joint ventures | |
|
|
|
|
|
| | Reported | | 39 |
| 1,883 |
| 442 |
| 4 |
| 7 |
| 2,375 |
| | Currency translation | | (2 | ) | (40 | ) | — |
| — |
| (5 | ) | (47 | ) | | Adjusted | | 37 |
| 1,843 |
| 442 |
| 4 |
| 2 |
| 2,328 |
| | Profit/(loss) before tax | | | | | | | | | Reported | | (1,864 | ) | 15,329 |
| 1,501 |
| 1,601 |
| 600 |
| 17,167 |
| | Currency translation | | (6 | ) | (220 | ) | (1 | ) | (15 | ) | (151 | ) | (393 | ) | | Significant items | | 2,871 |
| 740 |
| 26 |
| 105 |
| 40 |
| 3,782 |
| | – revenue | | 61 |
| 118 |
| 1 |
| (94 | ) | (14 | ) | 72 |
| | – operating expenses | | 2,810 |
| 622 |
| 25 |
| 199 |
| 54 |
| 3,710 |
| | Adjusted | | 1,001 |
| 15,849 |
| 1,526 |
| 1,691 |
| 489 |
| 20,556 |
| | Loans and advances to customers (net) | | | | | | | | | Reported | | 381,547 |
| 425,971 |
| 28,050 |
| 107,607 |
| 19,789 |
| 962,964 |
| | Currency translation | | (11,204 | ) | (6,374 | ) | (1,328 | ) | (1,373 | ) | (1,762 | ) | (22,041 | ) | | Adjusted | | 370,343 |
| 419,597 |
| 26,722 |
| 106,234 |
| 18,027 |
| 940,923 |
| | Customer accounts | | | | | | | | | Reported | | 505,182 |
| 657,395 |
| 34,658 |
| 143,432 |
| 23,795 |
| 1,364,462 |
| | Currency translation | | (14,581 | ) | (5,882 | ) | (963 | ) | (1,555 | ) | (2,409 | ) | (25,390 | ) | | Adjusted | | 490,601 |
| 651,513 |
| 33,695 |
| 141,877 |
| 21,386 |
| 1,339,072 |
|
For footnotes, see page 84.3 Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.
4 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.
| | Reconciliation of reported and adjusted items (continued)
| Reconciliation of reported and adjusted items (continued)
| Reconciliation of reported and adjusted items (continued) | | | | 2017 | | 2018 | | | | UK |
| Hong
Kong |
| Mainland China |
| US |
| Mexico |
| | UK | Hong
Kong | Mainland China | US | Mexico | | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| | Footnotes | $m | | Revenue | 1 | | Revenue | 1 | | | Reported | | 12,922 |
| 16,117 |
| 2,379 |
| 4,876 |
| 2,160 |
| Reported | | 13,597 | | 18,231 | | 2,888 | | 4,741 | | 2,294 | | | Currency translation | | (129 | ) | (87 | ) | (52 | ) | — |
| (47 | ) | Currency translation | | (616) | | 191 | | (120) | | — | | (232) | | | Significant items | | 50 |
| (52 | ) | 100 |
| (99 | ) | 5 |
| Significant items | | 115 | | 5 | | (1) | | 97 | | (7) | | | – customer redress programmes | | 108 |
| — |
| — |
| — |
| — |
| – customer redress programmes | | (53) | | — | | — | | — | | — | | | – disposals, acquisitions and investment in new businesses | | (78 | ) | (126 | ) | 99 |
| (130 | ) | — |
| – disposals, acquisitions and investment in new businesses | | — | | — | | — | | 103 | | — | | | – fair value movements on financial instruments | 2 | 24 |
| 75 |
| 2 |
| 31 |
| 5 |
| – fair value movements on financial instruments | 2 | 162 | | 5 | | (1) | | (6) | | (7) | | | – currency translation on significant items | | (4 | ) | (1 | ) | (1 | ) | — |
| — |
| – currency translation on significant items | | 6 | | — | | — | | — | | — | | | Adjusted | | 12,843 |
| 15,978 |
| 2,427 |
| 4,777 |
| 2,118 |
| Adjusted | | 13,096 | | 18,427 | | 2,767 | | 4,838 | | 2,055 | | | LICs | |
|
|
|
|
|
|
|
|
|
| | | ECL | | ECL | | | Reported | | (492 | ) | (396 | ) | (67 | ) | 108 |
| (473 | ) | Reported | | (516) | | (214) | | (143) | | 199 | | (463) | | | Currency translation | | 21 |
| 4 |
| 1 |
| — |
| 11 |
| Currency translation | | 4 | | (3) | | 1 | | — | | 45 | | | Adjusted | | (471 | ) | (392 | ) | (66 | ) | 108 |
| (462 | ) | Adjusted | | (512) | | (217) | | (142) | | 199 | | (418) | | | Operating expenses | |
|
|
|
|
|
|
|
|
|
| Operating expenses | | | Reported | | (15,086 | ) | (6,131 | ) | (1,687 | ) | (4,267 | ) | (1,297 | ) | Reported | | (14,502) | | (6,539) | | (1,920) | | (4,987) | | (1,303) | | | Currency translation | | 100 |
| 31 |
| 39 |
| — |
| 25 |
| Currency translation | | 425 | | (69) | | 76 | | — | | 131 | | | Significant items | | 2,476 |
| 306 |
| 68 |
| 119 |
| 46 |
| Significant items | | 519 | | 16 | | — | | 919 | | — | | | – costs of structural reform | 3 | 410 |
| — |
| — |
| — |
| — |
| – costs of structural reform | 3 | 294 | | 9 | | — | | — | | — | | | – costs to achieve | | 1,766 |
| 291 |
| 69 |
| 290 |
| 46 |
| | | – customer redress programmes | | 655 |
| — |
| — |
| — |
| — |
| – customer redress programmes | | 146 | | — | | — | | — | | — | | | – disposals, acquisitions and investment in new businesses | | — |
| — |
| — |
| 17 |
| — |
| | | – gain on partial settlement of pension obligations | | — |
| — |
| — |
| (188 | ) | — |
| | | – past service costs of guaranteed minimum pension benefits equalisation | | – past service costs of guaranteed minimum pension benefits equalisation | | 228 | | — | | — | | — | | — | | | – restructuring and other related costs | | – restructuring and other related costs | | 39 | | 7 | | — | | 11 | | — | | | – settlements and provisions in connection with legal and regulatory matters | | (362 | ) | 17 |
| — |
| — |
| — |
| – settlements and provisions in connection with legal and regulatory matters | | (176) | | — | | — | | 908 | | — | | | – currency translation on significant items | | 7 |
| (2 | ) | (1 | ) | — |
| — |
| – currency translation on significant items | | (12) | | — | | — | | — | | — | | | Adjusted | | (12,510 | ) | (5,794 | ) | (1,580 | ) | (4,148 | ) | (1,226 | ) | Adjusted | | (13,558) | | (6,592) | | (1,844) | | (4,068) | | (1,172) | | | Share of profit in associates and joint ventures | |
|
|
|
|
|
|
|
|
|
| Share of profit in associates and joint ventures | | | Reported | | 38 |
| 8 |
| 1,863 |
| — |
| — |
| Reported | | 25 | | 36 | | 2,033 | | — | | — | | | Currency translation | | (1 | ) | — |
| (40 | ) | — |
| — |
| Currency translation | | (1) | | — | | (90) | | — | | — | | | Adjusted | | 37 |
| 8 |
| 1,823 |
| — |
| — |
| Adjusted | | 24 | | 36 | | 1,943 | | — | | — | | | Profit/(loss) before tax | |
|
|
|
|
|
|
|
|
|
| Profit/(loss) before tax | | | Reported | | (2,618 | ) | 9,598 |
| 2,488 |
| 717 |
| 390 |
| Reported | | (1,396) | | 11,514 | | 2,858 | | (47) | | 528 | | | Currency translation | | (9 | ) | (52 | ) | (52 | ) | — |
| (11 | ) | Currency translation | | (188) | | 119 | | (133) | | — | | (56) | | | Significant items | | 2,526 |
| 254 |
| 168 |
| 20 |
| 51 |
| Significant items | | 634 | | 21 | | (1) | | 1,016 | | (7) | | | – revenue | | 50 |
| (52 | ) | 100 |
| (99 | ) | 5 |
| – revenue | | 115 | | 5 | | (1) | | 97 | | (7) | | | – operating expenses | | 2,476 |
| 306 |
| 68 |
| 119 |
| 46 |
| – operating expenses | | 519 | | 16 | | — | | 919 | | — | | | Adjusted | | (101 | ) | 9,800 |
| 2,604 |
| 737 |
| 430 |
| Adjusted | | (950) | | 11,654 | | 2,724 | | 969 | | 465 | | | Loans and advances to customers (net) | |
|
|
|
|
|
|
|
|
|
| Loans and advances to customers (net) | | | Reported | | 295,538 |
| 268,966 |
| 40,686 |
| 65,168 |
| 15,172 |
| Reported | | 287,144 | | 290,547 | | 38,979 | | 64,011 | | 17,895 | | | Currency translation | | (6,336 | ) | 904 |
| (2,666 | ) | 1 |
| 679 |
| Currency translation | | 19,928 | | 2,945 | | 2,068 | | — | | (180) | | | Adjusted | | 289,202 |
| 269,870 |
| 38,020 |
| 65,169 |
| 15,851 |
| Adjusted | | 307,072 | | 293,492 | | 41,047 | | 64,011 | | 17,715 | | | Customer accounts | |
|
|
|
|
|
|
|
|
|
| Customer accounts | | | Reported | | 401,733 |
| 477,104 |
| 45,991 |
| 89,887 |
| 17,809 |
| Reported | | 399,487 | | 484,897 | | 45,712 | | 82,523 | | 19,936 | | | Currency translation | | (8,593 | ) | 1,605 |
| (3,013 | ) | — |
| 798 |
| Currency translation | | 27,720 | | 4,915 | | 2,426 | | — | | (195) | | | Adjusted | | 393,140 |
| 478,709 |
| 42,978 |
| 89,887 |
| 18,607 |
| Adjusted | | 427,207 | | 489,812 | | 48,138 | | 82,523 | | 19,741 | |
For footnotes, see page 84.1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.
2 Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.
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.
Report of the Directors | Geographical regions
| | Profit/(loss) before tax by country/territory within global businesses | | | | Retail Banking
and Wealth
Management |
| Commercial
Banking |
| Global
Banking
and Markets |
| Global
Private
Banking |
| Corporate
Centre |
|
Total |
| | Wealth and
Personal
Banking | Commercial Banking | Global Banking and Markets | Corporate
Centre | Total | | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Footnotes | $m | | Europe | | (760 | ) | (889 | ) | (474 | ) | 72 |
| (2,602 | ) | (4,653 | ) | Europe | | (680) | | (529) | | (1,809) | | (1,187) | | (4,205) | | | – UK | 12 | (815 | ) | 1,365 |
| (650 | ) | (44 | ) | (3,201 | ) | (3,345 | ) | – UK | 1 | (357) | | (543) | | (1,769) | | (1,555) | | (4,224) | | – of which: HSBC UK Bank plc (RFB)
| | (399 | ) | 1,497 |
| 70 |
| 16 |
| 123 |
| 1,307 |
| – of which: HSBC UK Bank plc (RFB) | | 113 | | 167 | | 90 | | (124) | | 246 | | | – HSBC Bank plc (NRFB) | | 202 |
| 271 |
| (223 | ) | 39 |
| (419 | ) | (130 | ) | | | – Holdings and other | | (618 | ) | (403 | ) | (497 | ) | (99 | ) | (2,905 | ) | (4,522 | ) | | | – of which: HSBC Bank plc (NRFB) | | – of which: HSBC Bank plc (NRFB) | | 109 | | 36 | | (1,030) | | (454) | | (1,339) | | | – of which: Holdings and other | | – of which: Holdings and other | | (579) | | (746) | | (829) | | (977) | | (3,131) | | | – France | | 45 |
| 119 |
| (66 | ) | 9 |
| (71 | ) | 36 |
| – France | | (340) | | (168) | | (347) | | (310) | | (1,165) | | | – Germany | | 6 |
| 37 |
| 74 |
| 7 |
| 37 |
| 161 |
| – Germany | | 17 | | 16 | | 197 | | (15) | | 215 | | | – Switzerland | | (1 | ) | 7 |
| (3 | ) | 90 |
| (2 | ) | 91 |
| – Switzerland | | (2) | | (4) | | — | | (10) | | (16) | | | – other | 13 | 5 |
| (2,417 | ) | 171 |
| 10 |
| 635 |
| (1,596 | ) | – other | | 2 | | 170 | | 110 | | 703 | | 985 | | | Asia | | 6,935 |
| 4,266 |
| 3,793 |
| 381 |
| 3,093 |
| 18,468 |
| Asia | | 5,031 | | 1,944 | | 4,002 | | 1,855 | | 12,832 | | | – Hong Kong | | 6,550 |
| 3,107 |
| 1,663 |
| 366 |
| 363 |
| 12,049 |
| – Hong Kong | | 4,927 | | 1,787 | | 1,674 | | (181) | | 8,207 | | | – Australia | | 121 |
| 108 |
| 168 |
| (1 | ) | 48 |
| 444 |
| – Australia | | 108 | | 76 | | 138 | | (7) | | 315 | | | – India | | 48 |
| 181 |
| 466 |
| — |
| 311 |
| 1,006 |
| – India | | 16 | | 187 | | 593 | | 228 | | 1,024 | | | – Indonesia | | 12 |
| 49 |
| 123 |
| — |
| 32 |
| 216 |
| – Indonesia | | (6) | | (14) | | 147 | | (13) | | 114 | | | – mainland China | | (74 | ) | 296 |
| 498 |
| (5 | ) | 2,162 |
| 2,877 |
| – mainland China | | (34) | | 295 | | 506 | | 1,845 | | 2,612 | | | – Malaysia | | 85 |
| 66 |
| 184 |
| — |
| 7 |
| 342 |
| – Malaysia | | 8 | | 33 | | 141 | | (55) | | 127 | | | – Singapore | | 114 |
| 80 |
| 219 |
| 22 |
| 43 |
| 478 |
| – Singapore | | 45 | | (644) | | 239 | | (12) | | (372) | | | – Taiwan | | 41 |
| 23 |
| 91 |
| — |
| 6 |
| 161 |
| – Taiwan | | 9 | | 18 | | 104 | | (2) | | 129 | | | – other | | 38 |
| 356 |
| 381 |
| (1 | ) | 121 |
| 895 |
| – other | | (42) | | 206 | | 460 | | 52 | | 676 | | | Middle East and North Africa | | 190 |
| 174 |
| 722 |
| 1 |
| 1,240 |
| 2,327 |
| Middle East and North Africa | | (15) | | (120) | | 478 | | (324) | | 19 | | | – Egypt | | 44 |
| 65 |
| 222 |
| — |
| 79 |
| 410 |
| – Egypt | | 68 | | 46 | | 185 | | (1) | | 298 | | | – UAE | | 127 |
| 91 |
| 241 |
| 1 |
| (35 | ) | 425 |
| – UAE | | (21) | | (210) | | 102 | | (39) | | (168) | | | – Saudi Arabia | | (3 | ) | — |
| 13 |
| — |
| 1,145 |
| 1,155 |
| – Saudi Arabia | | 21 | | — | | 26 | | (264) | | (217) | | | – other | 13 | 22 |
| 18 |
| 246 |
| — |
| 51 |
| 337 |
| – other | | (83) | | 44 | | 165 | | (20) | | 106 | | | North America | | (219 | ) | 807 |
| 608 |
| (445 | ) | 16 |
| 767 |
| North America | | (449) | | 366 | | 712 | | (461) | | 168 | | | – US | | (323 | ) | 365 |
| 452 |
| (14 | ) | (45 | ) | 435 |
| – US | | (547) | | 139 | | 573 | | (391) | | (226) | | | – Canada | | 44 |
| 406 |
| 120 |
| — |
| 48 |
| 618 |
| – Canada | | 52 | | 225 | | 100 | | (67) | | 310 | | | – other | 13 | 60 |
| 36 |
| 36 |
| (431 | ) | 13 |
| (286 | ) | – other | | 46 | | 2 | | 39 | | (3) | | 84 | | | Latin America | | 282 |
| (86 | ) | 360 |
| — |
| (156 | ) | 400 |
| Latin America | | (183) | | (22) | | 233 | | (65) | | (37) | | | – Mexico | | 279 |
| 166 |
| 217 |
| — |
| 25 |
| 687 |
| – Mexico | | (115) | | (106) | | 59 | | (25) | | (187) | | | – other | 13 | 3 |
| (252 | ) | 143 |
| — |
| (181 | ) | (287 | ) | – other | | (68) | | 84 | | 174 | | (40) | | 150 | | | GB&M goodwill impairment | 13 | — |
| — |
| (3,962 | ) | — |
| — |
| (3,962 | ) | | Year ended 31 Dec 2019
| | 6,428 |
| 4,272 |
| 1,047 |
| 9 |
| 1,591 |
| 13,347 |
| | | Year ended 31 Dec 2020 | | Year ended 31 Dec 2020 | | 3,704 | | 1,639 | | 3,616 | | (182) | | 8,777 | | |
For footnotes, see page 84.1 UK includes results from the ultimate holding company, HSBC Holdings plc, and the separately incorporated group of service companies (‘ServCo Group’).
| | | | | | | | | | | | | | | | 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 |
| Total |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Europe |
| 440 |
| 2,289 |
| 690 |
| (122 | ) | (4,112 | ) | (815 | ) | | – UK | 12 | 476 |
| 1,901 |
| 409 |
| 23 |
| (4,205 | ) | (1,396 | ) | – of which: HSBC UK Bank plc (RFB)
| | 539 |
| 934 |
| 4 |
| 38 |
| (133 | ) | 1,382 |
| | – HSBC Bank plc (NRFB) |
| 548 |
| 1,394 |
| 795 |
| 60 |
| (719 | ) | 2,078 |
| | – Holdings and other | | (611 | ) | (427 | ) | (390 | ) | (75 | ) | (3,353 | ) | (4,856 | ) | | – France |
| (56 | ) | 170 |
| 8 |
| 16 |
| (101 | ) | 37 |
| | – Germany |
| 14 |
| 85 |
| 99 |
| 8 |
| (5 | ) | 201 |
| | – Switzerland |
| (1 | ) | 5 |
| (1 | ) | (100 | ) | 20 |
| (77 | ) | | – other |
| 7 |
| 128 |
| 175 |
| (69 | ) | 179 |
| 420 |
| | Asia |
| 6,190 |
| 4,176 |
| 3,773 |
| 353 |
| 3,298 |
| 17,790 |
| | – Hong Kong |
| 5,951 |
| 3,114 |
| 1,670 |
| 333 |
| 446 |
| 11,514 |
| | – Australia |
| 115 |
| 120 |
| 185 |
| (1 | ) | 44 |
| 463 |
| | – India |
| 20 |
| 143 |
| 387 |
| — |
| 275 |
| 825 |
| | – Indonesia |
| (1 | ) | 13 |
| 91 |
| — |
| 1 |
| 104 |
| | – mainland China |
| (200 | ) | 262 |
| 566 |
| (4 | ) | 2,234 |
| 2,858 |
| | – Malaysia |
| 130 |
| 82 |
| 132 |
| — |
| 30 |
| 374 |
| | – Singapore |
| 75 |
| 98 |
| 230 |
| 25 |
| 63 |
| 491 |
| | – Taiwan |
| 55 |
| 23 |
| 117 |
| — |
| 30 |
| 225 |
| | – other |
| 45 |
| 321 |
| 395 |
| — |
| 175 |
| 936 |
| | Middle East and North Africa |
| 182 |
| 108 |
| 733 |
| 7 |
| 527 |
| 1,557 |
| | – Egypt |
| 34 |
| 54 |
| 202 |
| — |
| 43 |
| 333 |
| | – UAE |
| 112 |
| 58 |
| 296 |
| 7 |
| — |
| 473 |
| | – Saudi Arabia |
| — |
| — |
| — |
| — |
| 436 |
| 436 |
| | – other |
| 36 |
| (4 | ) | 235 |
| — |
| 48 |
| 315 |
| | North America |
| (96 | ) | 968 |
| 738 |
| 11 |
| (822 | ) | 799 |
| | – US |
| (205 | ) | 473 |
| 624 |
| 23 |
| (962 | ) | (47 | ) | | – Canada |
| 55 |
| 455 |
| 139 |
| — |
| 116 |
| 765 |
| | – other |
| 54 |
| 40 |
| (25 | ) | (12 | ) | 24 |
| 81 |
| | Latin America |
| 166 |
| 178 |
| 378 |
| (1 | ) | (162 | ) | 559 |
| | – Mexico |
| 194 |
| 114 |
| 197 |
| — |
| 23 |
| 528 |
| | – other |
| (28 | ) | 64 |
| 181 |
| (1 | ) | (185 | ) | 31 |
| | Year ended 31 Dec 2018 | Year ended 31 Dec | 6,882 |
| 7,719 |
| 6,312 |
| 248 |
| (1,271 | ) | 19,890 |
|
| | | | | | | | | | | | | | | | Europe | | (159 | ) | 1,899 |
| 777 |
| (231 | ) | (4,150 | ) | (1,864 | ) | | – UK | 12 | (177 | ) | 1,539 |
| 192 |
| (23 | ) | (4,149 | ) | (2,618 | ) | – of which: HSBC UK Bank plc (RFB)
| | NA |
| NA |
| NA |
| NA |
| NA |
| NA |
| | – HSBC Bank plc (NRFB) | | 413 |
| 1,911 |
| 889 |
| 63 |
| (1,224 | ) | 2,052 |
| | – Holdings and other | | (590 | ) | (372 | ) | (697 | ) | (86 | ) | (2,925 | ) | (4,670 | ) | | – France | | (12 | ) | 204 |
| 228 |
| 5 |
| (156 | ) | 269 |
| | – Germany | | 21 |
| 61 |
| 141 |
| 9 |
| 39 |
| 271 |
| | – Switzerland | | (2 | ) | 7 |
| 1 |
| (192 | ) | 2 |
| (184 | ) | | – other | | 11 |
| 88 |
| 215 |
| (30 | ) | 114 |
| 398 |
| | Asia | | 5,372 |
| 3,394 |
| 3,135 |
| 285 |
| 3,143 |
| 15,329 |
| | – Hong Kong | | 5,039 |
| 2,460 |
| 1,357 |
| 257 |
| 485 |
| 9,598 |
| | – Australia | | 122 |
| 101 |
| 108 |
| (1 | ) | 35 |
| 365 |
| | – India | | 21 |
| 159 |
| 362 |
| — |
| 374 |
| 916 |
| | – Indonesia | | (24 | ) | 76 |
| 98 |
| — |
| 30 |
| 180 |
| | – mainland China | | (44 | ) | 161 |
| 387 |
| (4 | ) | 1,988 |
| 2,488 |
| | – Malaysia | | 85 |
| 50 |
| 162 |
| — |
| 28 |
| 325 |
| | – Singapore | | 69 |
| 94 |
| 202 |
| 34 |
| 64 |
| 463 |
| | – Taiwan | | 43 |
| 10 |
| 107 |
| (1 | ) | 40 |
| 199 |
| | – other | | 61 |
| 283 |
| 352 |
| — |
| 99 |
| 795 |
| | Middle East and North Africa | | 144 |
| 199 |
| 593 |
| — |
| 565 |
| 1,501 |
| | – Egypt | | 26 |
| 69 |
| 164 |
| — |
| 46 |
| 305 |
| | – UAE | | 110 |
| 53 |
| 268 |
| — |
| 48 |
| 479 |
| | – Saudi Arabia | | — |
| — |
| — |
| — |
| 441 |
| 441 |
| | – other | | 8 |
| 77 |
| 161 |
| — |
| 30 |
| 276 |
| | North America | | 305 |
| 932 |
| 671 |
| 67 |
| (374 | ) | 1,601 |
| | – US | | 166 |
| 435 |
| 494 |
| 66 |
| (444 | ) | 717 |
| | – Canada | | 61 |
| 453 |
| 132 |
| — |
| 43 |
| 689 |
| | – other | | 78 |
| 44 |
| 45 |
| 1 |
| 27 |
| 195 |
| | Latin America | | 161 |
| 199 |
| 259 |
| — |
| (19 | ) | 600 |
| | – Mexico | | 139 |
| 105 |
| 158 |
| — |
| (12 | ) | 390 |
| | – other | | 22 |
| 94 |
| 101 |
| — |
| (7 | ) | 210 |
| | Year ended 31 Dec 2017 | | 5,823 |
| 6,623 |
| 5,435 |
| 121 |
| (835 | ) | 17,167 |
|
| | | | | | | | | | | | | | | | | | | | | | Profit/(loss) before tax by country/territory within global businesses (continued) | | | | | Wealth and Personal Banking3 | Commercial Banking3 | Global Banking and Markets3 | Corporate Centre3 | Total | | Footnotes | $m | $m | $m | $m | $m | | Europe | | (841) | | (1,324) | | (997) | | (1,491) | | (4,653) | | | – UK | 1 | (1,053) | | 904 | | (1,217) | | (1,979) | | (3,345) | | | – of which: HSBC UK Bank plc (RFB) | | (331) | | 1,555 | | 70 | | 13 | | 1,307 | | | – of which: HSBC Bank plc (NRFB) | | 245 | | 278 | | (186) | | (467) | | (130) | | | – of which: Holdings and other | | (967) | | (929) | | (1,101) | | (1,525) | | (4,522) | | | – France | | 55 | | 120 | | (65) | | (74) | | 36 | | | – Germany | | 18 | | 46 | | 95 | | 2 | | 161 | | | – Switzerland | | 93 | | 7 | | (3) | | (6) | | 91 | | | – other | 2 | 46 | | (2,401) | | 193 | | 566 | | (1,596) | | | Asia | | 7,715 | | 4,519 | | 4,083 | | 2,151 | | 18,468 | | | – Hong Kong | | 7,220 | | 3,242 | | 1,729 | | (142) | | 12,049 | | | – Australia | | 130 | | 127 | | 199 | | (12) | | 444 | | | – India | | 67 | | 201 | | 533 | | 205 | | 1,006 | | | – Indonesia | | 20 | | 55 | | 127 | | 14 | | 216 | | | – mainland China | | (73) | | 317 | | 512 | | 2,121 | | 2,877 | | | – Malaysia | | 102 | | 73 | | 189 | | (22) | | 342 | | | – Singapore | | 154 | | 105 | | 250 | | (31) | | 478 | | | – Taiwan | | 43 | | 25 | | 97 | | (4) | | 161 | | | – other | | 52 | | 374 | | 447 | | 22 | | 895 | | | Middle East and North Africa | | 254 | | 212 | | 761 | | 1,100 | | 2,327 | | | – Egypt | | 73 | | 81 | | 245 | | 11 | | 410 | | | – UAE | | 139 | | 94 | | 246 | | (54) | | 425 | | | – Saudi Arabia | | (3) | | — | | 13 | | 1,145 | | 1,155 | | | – other | 2 | 45 | | 37 | | 257 | | (2) | | 337 | | | North America | | (573) | | 855 | | 729 | | (244) | | 767 | | | – US | | (277) | | 386 | | 547 | | (221) | | 435 | | | – Canada | | 70 | | 427 | | 143 | | (22) | | 618 | | | – other | 2 | (366) | | 42 | | 39 | | (1) | | (286) | | | Latin America | | 264 | | (103) | | 328 | | (89) | | 400 | | | – Mexico | | 311 | | 176 | | 229 | | (29) | | 687 | | | – other | 2 | (47) | | (279) | | 99 | | (60) | | (287) | | | GBM goodwill impairment | 2 | — | | — | | (3,962) | | — | | (3,962) | | | Year ended 31 Dec 2019 | | 6,819 | | 4,159 | | 942 | | 1,427 | | 13,347 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 UK includes results from the ultimate holding company, HSBC Holdings plc, and the separately incorporated group of service companies (‘ServCo Group’). 2 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. 3 A change in reportable segments was made in 2020. Comparative data have been re-presented accordingly. For footnotes,further guidance, see Note 10: Segmental analysis on page 84.347.
Report of the Directors | Global business | Geographical regions
| | | | | | | | | | | | | | | | | | | | | | Profit/(loss) before tax by country/territory within global businesses (continued) | | | Wealth and Personal Banking2 | Commercial Banking2 | Global Banking and Markets2 | Corporate Centre2 | Total | | Footnotes | $m | $m | $m | $m | $m | | Europe | | 134 | | 1,798 | | 147 | | (2,894) | | (815) | | | – UK | 1 | 256 | | 1,393 | | (175) | | (2,870) | | (1,396) | | | – of which: HSBC UK Bank plc (RFB) | | 602 | | 967 | | 4 | | (191) | | 1,382 | | | – of which: HSBC Bank plc (NRFB) | | 618 | | 1,408 | | 839 | | (787) | | 2,078 | | | – of which: Holdings and other | | (964) | | (982) | | (1,018) | | (1,892) | | (4,856) | | | – France | | (42) | | 163 | | 7 | | (91) | | 37 | | | – Germany | | 26 | | 92 | | 116 | | (33) | | 201 | | | – Switzerland | | (76) | | 5 | | (2) | | (4) | | (77) | | | – other | | (30) | | 145 | | 201 | | 104 | | 420 | | | Asia | | 7,025 | | 4,475 | | 4,097 | | 2,193 | | 17,790 | | | – Hong Kong | | 6,673 | | 3,291 | | 1,768 | | (218) | | 11,514 | | | – Australia | | 120 | | 137 | | 212 | | (6) | | 463 | | | – India | | 36 | | 157 | | 433 | | 199 | | 825 | | | – Indonesia | | 7 | | 21 | | 97 | | (21) | | 104 | | | – mainland China | | (195) | | 282 | | 592 | | 2,179 | | 2,858 | | | – Malaysia | | 145 | | 89 | | 137 | | 3 | | 374 | | | – Singapore | | 125 | | 127 | | 266 | | (27) | | 491 | | | – Taiwan | | 60 | | 29 | | 138 | | (2) | | 225 | | | – other | | 54 | | 342 | | 454 | | 86 | | 936 | | | Middle East and North Africa | | 251 | | 142 | | 769 | | 395 | | 1,557 | | | – Egypt | | 51 | | 63 | | 215 | | 4 | | 333 | | | – UAE | | 142 | | 65 | | 307 | | (41) | | 473 | | | – Saudi Arabia | | — | | — | | — | | 436 | | 436 | | | – other | | 58 | | 14 | | 247 | | (4) | | 315 | | | North America | | 37 | | 1,036 | | 901 | | (1,175) | | 799 | | | – US | | (106) | | 498 | | 734 | | (1,173) | | (47) | | | – Canada | | 99 | | 489 | | 187 | | (10) | | 765 | | | – other | | 44 | | 49 | | (20) | | 8 | | 81 | | | Latin America | | 133 | | 138 | | 354 | | (66) | | 559 | | | – Mexico | | 214 | | 119 | | 204 | | (9) | | 528 | | | – other | | (81) | | 19 | | 150 | | (57) | | 31 | | | | | | | | | | Year ended 31 Dec 2018 | | 7,580 | | 7,589 | | 6,268 | | (1,547) | | 19,890 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 UK includes results from the ultimate holding company, HSBC Holdings plc, and the separately incorporated group of service companies (‘ServCo Group’). | | Return on equity and return on tangible equity
|
2 A change in reportable segments was made in 2020. Comparative data have been re-presented accordingly. For further guidance, see Note 10: Segmental analysis on page 347. | | | | | | | | | Return on Equity and Return on Tangible Equity | | | 2019 |
| 2018 |
| 2017 |
| | | $m |
| $m |
| $m |
| | Profit | | | | | Profit attributable to the ordinary shareholders of the parent company | 5,969 |
| 12,608 |
| 9,683 |
| | Goodwill impairment | 7,349 |
| — |
| — |
| | Increase/(decrease) in PVIF (net of tax) | (1,248 | ) | (506 | ) | 16 |
| | Profit attributable to the ordinary shareholders, excluding goodwill impairment and PVIF | 12,070 |
| 12,102 |
| 9,699 |
| | Significant items (net of tax) and UK bank levy and other adjustments | 2,251 |
| 2,590 |
| 3,827 |
| | Profit attributable to the ordinary shareholders, excluding goodwill impairment, PVIF, significant items and UK bank levy | 14,321 |
| 14,692 |
| 13,526 |
| | Equity | | | | | Average ordinary shareholders’ equity | 165,421 |
| 163,483 |
| 163,419 |
| | Effect of goodwill, PVIF and other intangibles (net of deferred tax) | (22,574 | ) | (22,102 | ) | (20,721 | ) | | Average tangible equity | 142,847 |
| 141,381 |
| 142,698 |
| | Fair value of own debt, DVA and other adjustments | 1,032 |
| 2,439 |
| 2,788 |
| | Average tangible equity excluding fair value of own debt, DVA and other adjustments | 143,879 |
| 143,820 |
| 145,486 |
| | | % |
| % |
| % |
| | Ratio | | | | | Return on equity | 3.6 |
| 7.7 |
| 5.9 |
| | Return on tangible equity | 8.4 |
| 8.6 |
| 6.8 |
| | Return on tangible equity excluding significant items and UK bank levy | 10.0 |
| 10.2 |
| 9.3 |
|
| | | | | | | | | | | | | | | Return on tangible equity by global business | | | Year ended 31 Dec 2019 | | | Retail Banking and Wealth Management |
| Commercial Banking |
| Global Banking and Markets |
| Global Private Banking |
| Corporate Centre |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Profit before tax | 6,428 |
| 4,272 |
| 1,047 |
| 9 |
| 1,591 |
| 13,347 |
| | Tax expense | (1,111 | ) | (1,548 | ) | (1,013 | ) | (81 | ) | (886 | ) | (4,639 | ) | | Profit after tax | 5,317 |
| 2,724 |
| 34 |
| (72 | ) | 705 |
| 8,708 |
| | Less attributable to: preference shareholders, other equity holders, non-controlling interests | (849 | ) | (865 | ) | (625 | ) | (19 | ) | (381 | ) | (2,739 | ) | | Profit attributable to ordinary shareholders of the parent company | 4,468 |
| 1,859 |
| (591 | ) | (91 | ) | 324 |
| 5,969 |
| | Increase in PVIF (net of tax) | (1,204 | ) | (40 | ) | — |
| (2 | ) | (2 | ) | (1,248 | ) | | Significant items (net of tax) and UK bank levy | 1,234 |
| 3,033 |
| 4,213 |
| 401 |
| 716 |
| 9,597 |
| | Balance Sheet Management allocation and other adjustments | 497 |
| 528 |
| 802 |
| 59 |
| (1,883 | ) | 3 |
| | Profit attributable to ordinary shareholders, excluding PVIF, significant items and UK bank levy | 4,995 |
| 5,380 |
| 4,424 |
| 367 |
| (845 | ) | 14,321 |
| | Average tangible shareholders’ equity excluding fair value of own debt, DVA and other adjustments | 24,418 |
| 43,498 |
| 48,182 |
| 3,300 |
| 24,481 |
| 143,879 |
| | Return on tangible equity excluding significant items and UK bank levy (%) | 20.5% |
| 12.4% |
| 9.2% |
| 11.1% |
| (3.5)% |
| 10.0% |
| | | | | Year ended 31 Dec 2018 | | Profit before tax | 6,882 |
| 7,719 |
| 6,312 |
| 248 |
| (1,271 | ) | 19,890 |
| | Tax expense | (1,238 | ) | (1,680 | ) | (1,350 | ) | (53 | ) | (544 | ) | (4,865 | ) | | Profit after tax | 5,644 |
| 6,039 |
| 4,962 |
| 195 |
| (1,815 | ) | 15,025 |
| | Less attributable to: preference shareholders, other equity holders, non-controlling interests | (763 | ) | (746 | ) | (659 | ) | (19 | ) | (230 | ) | (2,417 | ) | | Profit attributable to ordinary shareholders of the parent company | 4,881 |
| 5,293 |
| 4,303 |
| 176 |
| (2,045 | ) | 12,608 |
| | Increase in PVIF (net of tax) | (483 | ) | (21 | ) | — |
| — |
| (2 | ) | (506 | ) | | Significant items (net of tax) and UK bank levy | 146 |
| (36 | ) | (168 | ) | 75 |
| 2,573 |
| 2,590 |
| | Balance Sheet Management allocation and other adjustments | 555 |
| 581 |
| 851 |
| 82 |
| (2,069 | ) | — |
| | Profit attributable to ordinary shareholders, excluding PVIF, significant items and bank levy | 5,099 |
| 5,817 |
| 4,986 |
| 333 |
| (1,543 | ) | 14,692 |
| | Average tangible shareholders’ equity excluding fair value of own debt, DVA and other adjustments | 24,287 |
| 41,550 |
| 47,477 |
| 3,376 |
| 27,130 |
| 143,820 |
| | Return on tangible equity excluding significant items and UK bank levy (%) | 21.0% |
| 14.0% |
| 10.5% |
| 9.9% |
| (5.7)% |
| 10.2% |
|
| | | | | | | Reconciliation of alternative performance measures | | Page | | | 84Use of alternative performance measures | HSBC Holdings plc |
| | Return on average ordinary shareholders’ equity and return on average tangible equity | | Footnotes to global businessesNet asset value and
geographical regions
|
| tangible net asset value per ordinary share | | 1Post-tax return and average total shareholders’ equity on average total assets | Net operating income before change in expected | Expected credit losses and other credit impairment charges/Loan impairment charges as % of average gross loans and other credit risk provisions, also referredadvances to as revenue.customers | |
| | 2 | Fair value movements on financial instruments include non-qualifying hedges and debt valuation adjustments on derivatives.
|
| | 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. |
| | | 10 | Risk-weighted assets are non-additive across geographical regions due to market risk diversification effects within the Group.Use of alternative performance measures |
Our reported results are prepared in accordance with IFRSs as detailed in our financial statements starting on page 314. As described on page 77, we use a combination of reported and alternative performance measures, including those derived from our reported results that eliminate factors that distort year-on-year comparisons. These are considered alternative performance measures (non-GAAP financial measures). The following information details the adjustments made to the reported results and the calculation of other alternative performance measures. All alternative performance measures are reconciled to the closest reported performance measure. | | | 11
| Amounts are non-additive across geographical regions due to intercompany transactions within the Group.Return on average ordinary shareholders’
equity and return on average tangible equity |
| |
Return on average ordinary shareholders’ equity (‘RoE’) is computed by taking profit attributable to the ordinary shareholders of the parent company (‘reported results’), divided by average ordinary shareholders’ equity (‘reported equity’) for the period. The adjustment to reported results and reported equity excludes amounts attributable to non-controlling interests and holders of preference shares and other equity instruments. Return on average tangible equity (‘RoTE’) is computed by adjusting reported results for the movements in the present value of in-force long-term insurance business (‘PVIF’) and for impairment of goodwill and other intangible assets (net of tax), divided by average reported equity adjusted for goodwill, intangibles and PVIF for the period. Return on average tangible equity excluding significant items and UK bank levy is annualised profit attributable to ordinary shareholders, excluding changes in PVIF, significant items and bank levy (net of tax), divided by average tangible shareholders’ equity excluding fair value of own debt, debt valuation adjustment (‘DVA’) and other adjustments for the period. We provide RoTE ratios in addition to RoE as a way of assessing our performance, which is closely aligned to our capital position. 12
| UK includes results from the ultimate holding company, HSBC Holdings plc, and the separately incorporated group of service companies (‘ServCo Group’). |
| | 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. |
| | | | | | | | | | | | | Return on average ordinary shareholders’ equity and return on average tangible equity | | 2020 | 2019 | 2018 | | $m | $m | $m | | Profit | | | | | Profit attributable to the ordinary shareholders of the parent company | 3,898 | | 5,969 | | 12,608 | | | Impairment of goodwill and other intangible assets (net of tax) | 1,036 | | 7,349 | | — | | | Increase/(decrease) in PVIF (net of tax) | (253) | | (1,248) | | (506) | | | Profit attributable to the ordinary shareholders, excluding goodwill impairment and PVIF | 4,681 | | 12,070 | | 12,102 | | | Significant items (net of tax) and UK bank levy | 2,402 | | 2,251 | | 2,590 | | | Profit attributable to the ordinary shareholders, excluding goodwill impairment, PVIF, significant items and UK bank levy | 7,083 | | 14,321 | | 14,692 | | | Equity | | | | | Average total shareholders’ equity | 189,719 | | 189,035 | | 186,979 | | | Effect of average preference shares and other equity instruments | (22,326) | | (23,614) | | (23,496) | | | Average ordinary shareholders’ equity | 167,393 | | 165,421 | | 163,483 | | | Effect of goodwill, PVIF and other intangibles (net of deferred tax) | (17,292) | | (22,574) | | (22,102) | | | Average tangible equity | 150,101 | | 142,847 | | 141,381 | | | Fair value of own debt, DVA and other adjustments | 422 | | 1,032 | | 2,439 | | | Average tangible equity excluding fair value of own debt, DVA and other adjustments | 150,523 | | 143,879 | | 143,820 | | | % | % | % | | Ratio | | | | | Return on average ordinary shareholders’ equity | 2.3 | 3.6 | | 7.7 | | | Return on average tangible equity | 3.1 | 8.4 | | 8.6 | | | Return on average tangible equity excluding significant items and UK bank levy | 4.7 | | 10.0 | | 10.2 | |
ReportReconciliation of the Directors | Other informationalternative performance measures
The following table details the adjustments made to reported results by global business:
| | | | | | | | | | | | | | | | | | | Return on average tangible equity by global business | | Year ended 31 Dec 2020 | | Wealth and
Personal
Banking | Commercial
Banking | Global
Banking and
Markets | Corporate
Centre | Total | | $m | $m | $m | $m | $m | | Profit before tax | 3,704 | | 1,639 | | 3,616 | | (182) | | 8,777 | | | Tax expense | (509) | | (661) | | (977) | | (531) | | (2,678) | | | Profit after tax | 3,195 | | 978 | | 2,639 | | (713) | | 6,099 | | | Less attributable to: preference shareholders, other equity holders, non-controlling interests | (736) | | (673) | | (784) | | (8) | | (2,201) | | | Profit attributable to ordinary shareholders of the parent company | 2,459 | | 305 | | 1,855 | | (721) | | 3,898 | | | Increase in PVIF (net of tax) | (242) | | (10) | | — | | (1) | | (253) | | | Significant items (net of tax) and UK bank levy | 190 | | 208 | | 958 | | 2,041 | | 3,397 | | | Markets Treasury allocation and other adjustments | 20 | | (14) | | (25) | | 60 | | 41 | | | Profit attributable to ordinary shareholders, excluding PVIF, significant items and UK bank levy | 2,427 | | 489 | | 2,788 | | 1,379 | | 7,083 | | | Average tangible shareholders’ equity excluding fair value of own debt, DVA and other adjustments | 26,551 | | 37,826 | | 41,566 | | 44,580 | | 150,523 | | | Return on average tangible equity excluding significant items and UK bank levy (%) | 9.1 | | 1.3 | | 6.7 | | 3.1 | | 4.7 | | | | Year ended 31 Dec 2019 | | Profit before tax | 6,819 | | 4,159 | | 942 | | 1,427 | | 13,347 | | | Tax expense | (720) | | (1,502) | | (460) | | (1,957) | | (4,639) | | | Profit after tax | 6,099 | | 2,657 | | 482 | | (530) | | 8,708 | | | Less attributable to: preference shareholders, other equity holders, non-controlling interests | (1,279) | | (846) | | (784) | | 170 | | (2,739) | | | Profit attributable to ordinary shareholders of the parent company | 4,820 | | 1,811 | | (302) | | (360) | | 5,969 | | | Increase in PVIF (net of tax) | (1,207) | | (40) | | — | | (1) | | (1,248) | | | Significant items (net of tax) and UK bank levy | 1,641 | | 3,036 | | 4,218 | | 702 | | 9,597 | | | Markets Treasury allocation and other adjustments | 1 | | — | | — | | 2 | | 3 | | | Profit attributable to ordinary shareholders, excluding PVIF, significant items and bank levy | 5,255 | | 4,807 | | 3,916 | | 343 | | 14,321 | | | Average tangible shareholders’ equity excluding fair value of own debt, DVA and other adjustments | 26,627 | | 36,856 | | 39,999 | | 40,397 | | 143,879 | | | Return on average tangible equity excluding significant items and UK bank levy (%) | 19.7 | | 13.0 | | 9.8 | | 0.8 | | 10.0 | |
| | | Other informationNet asset value and tangible net asset value per ordinary share |
Net asset value per ordinary share is total shareholders' equity less non-cumulative preference shares and capital securities (‘total ordinary shareholders’ equity’), divided by the number of ordinary shares in issue excluding shares that the company has purchased and are held in treasury. Tangible net asset value per ordinary share is total ordinary shareholders’ equity excluding goodwill, PVIF and other intangible assets (net of deferred tax) (‘tangible ordinary shareholders’ equity’), divided by the number of basic ordinary shares in issue excluding shares that the company has purchased and are held in treasury.
| | | | | | | | | | | | | Net asset value and tangible net asset value per ordinary share | | 2020 | 2019 | 2018 | | $m | $m | $m | | Total shareholders’ equity | 196,443 | | 183,955 | | 186,253 | | | Preference shares and other equity instruments | (22,414) | | (22,276) | | (23,772) | | | Total ordinary shareholders’ equity | 174,029 | | 161,679 | | 162,481 | | | Goodwill, PVIF and intangible assets (net of deferred tax) | (17,606) | | (17,535) | | (22,425) | | | Tangible ordinary shareholders’ equity | 156,423 | | 144,144 | | 140,056 | | | Basic number of $0.50 ordinary shares outstanding | 20,184 | | 20,206 | | 19,981 | | | $ | $ | $ | | Value per share | | | | | Net asset value per ordinary share | 8.62 | | 8.00 | | 8.13 | | | Tangible net asset value per ordinary share | 7.75 | | 7.13 | | 7.01 | |
| | | Post-tax return and average total shareholders’
equity on average total assets |
Post-tax return on average total assets is profit after tax divided by average total assets for the period. Average total shareholders’ equity to average total assets is average total shareholders' equity divided by average total assets for the period. | | | | | | | | | | | | | Post-tax return and average total shareholders’ equity on average total assets | | 2020 | 2019 | 2018 | | $m | $m | $m | | Profit after tax | 6,099 | | 8,708 | | 15,025 | | | Average total shareholders’ equity | 189,719 | | 189,035 | | 186,979 | | | Average total assets | 2,936,939 | | 2,712,376 | | 2,611,976 | | | | | | | Ratio | % | % | % | | Post-tax return on average total assets | 0.2 | | 0.3 | | 0.6 | | | Average total shareholders’ equity to average total assets | 6.46 | | 6.97 | | 7.16 | |
| | | | Expected credit losses and other credit impairment charges as % of average gross loans and advances to customers |
Expected credit losses and other credit impairment charges (‘ECL’) as % of average gross loans and advances to customers is the annualised adjusted ECL divided by adjusted average gross loans and advances to customers for the period. The adjusted numbers are derived by adjusting reported ECL and loans and advances to customers for the effects of foreign currency translation differences. | | | | | | | | | | | | | Expected credit losses and other credit impairment charges as % of average gross loans and advances to customers (%) | | 2020 | 2019 | 2018 | | $m | $m | $m | | Expected credit losses and other credit impairment charges (‘ECL’) | (8,817) | | (2,756) | | (1,767) | | | Currency translation | | 129 | | 147 | | | Adjusted ECL | (8,817) | | (2,627) | | (1,620) | | | Average gross loans and advances to customers | 1,047,114 | | 1,021,238 | | 982,409 | | | Currency translation | 36,702 | | 38,167 | | 14,911 | | | Average gross loans and advances to customers – at most recent balance sheet foreign exchange rates | 1,083,816 | | 1,059,405 | | 997,320�� | | | | | | | Ratio | % | % | % | | Expected credit losses and other credit impairment charges as % of average gross loans and advances to customers | 0.81 | | 0.25 | | 0.16 | |
| | | | | | | Other information | | Page | Taxes paid by region and country/territoryDisclosure controls | | Carbon dioxide emissions | | Disclosure controls | | | Management’s assessment of internal controls over financial reporting | 86 | | Regulation and supervision | | | Disclosures pursuant to Section 13(r) of the Securities Exchange Act | 93 |
| | 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 | | | | 2019 |
| 2018 |
| 2017 |
| | | | $m |
| $m |
| $m |
| | Europe | | 3,077 |
| 3,398 |
| 3,340 |
| | – UK | | 2,468 |
| 2,693 |
| 2,654 |
| | – of which: HSBC Holdings | | 889 |
| 832 |
| 1,078 |
| | – France | | 476 |
| 536 |
| 530 |
| | – Germany | | 116 |
| 111 |
| 140 |
| | – Switzerland | | (7 | ) | 13 |
| (67 | ) | | – other | | 24 |
| 45 |
| 83 |
| | Asia | | 1,487 |
| 2,742 |
| 2,277 |
| | – Hong Kong | | 248 |
| 1,398 |
| 1,043 |
| | – Australia | | 180 |
| 140 |
| 142 |
| | – mainland China | | 76 |
| 235 |
| 227 |
| | – India | | 398 |
| 384 |
| 297 |
| | – Indonesia | | 50 |
| 44 |
| 84 |
| | – Malaysia | | 119 |
| 94 |
| 81 |
| | – Singapore | | 104 |
| 88 |
| 64 |
| | – Taiwan | | 68 |
| 53 |
| 42 |
| | – other | | 244 |
| 306 |
| 297 |
| | Middle East and North Africa | | 313 |
| 234 |
| 419 |
| | – Saudi Arabia | | — |
| — |
| 170 |
| | – UAE | | 66 |
| 67 |
| 101 |
| | – Egypt | | 136 |
| 104 |
| 58 |
| | – Turkey | | 42 |
| — |
| — |
| | – other | | 69 |
| 63 |
| 90 |
| | North America | | 314 |
| 399 |
| 317 |
| | – US | | 152 |
| 162 |
| 134 |
| | – Canada | | 162 |
| 240 |
| 182 |
| | – other | | — |
| (3 | ) | 1 |
| | Latin America | | 400 |
| 281 |
| 443 |
| | – Mexico | | 179 |
| 90 |
| 129 |
| | – Argentina | | 188 |
| 163 |
| 278 |
| | – other | | 33 |
| 191 |
| 314 |
| | – of which: Brazil | | 21 |
| 28 |
| 36 |
| | Year ended 31 Dec | | 5,591 |
| 7,054 |
| 6,796 |
|
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.
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.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 | | | 2019 |
| 2018 |
| | Total | 530,000 |
| 559,000 |
| | From energy | 414,000 |
| 437,000 |
| | Included energy UK | 10,400 |
| 9,700 |
| | From travel | 116,000 |
| 122,000 |
|
| | | | | | | Carbon dioxide emissions in tonnes per FTE | | | 2019 |
| 2018 |
| | Total | 2.26 |
| 2.39 |
| | From energy | 1.76 |
| 1.87 |
| | From travel | 0.5 |
| 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.
| | | | | | | Energy consumption in GWh | | | 2019 |
| 2018 |
| | Total Group | 1,050 |
| 1,092 |
| | UK only | 281 |
| 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.
The Group Chief Executive and Group Chief Financial Officer, with the assistance of other members of management, carried out an evaluation of the effectiveness of the design and operation of HSBC Holdings’ disclosure controls and procedures as at
31 December 2019.2020. Based upon that evaluation, the Group Chief Executive and Group Chief Financial Officer concluded that the disclosure controls and procedures at 31 December 20192020 were effective to provide reasonable assurance that information
required to be disclosed in the reports that the company files and submits under the US Securities Exchange Act of 1934, as amended, is recorded, processed, summarised and reported as and when required. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. There have been no changes in HSBC Holdings’ internal control over financial reporting during the year ended 31 December 2019 2020 that have materially affected, or are reasonably likely to materially affect, HSBC Holdings’ internal control over financial reporting. | | | Management’s assessment of internal controls over financial reporting |
Management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and has completed an assessment of the effectiveness of the Group’s internal controls over financial reporting for the year ended 31 December 2019.2020. In making the assessment, management used the framework for internal control evaluation contained in the Financial Reporting Council’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (September 2014), as well as the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (‘COSO’) in ‘Internal Control-Integrated Framework (2013)’. Based on the assessment performed, management concluded that for the year ended 31 December 2019,2020, the Group’s internal controls over financial reporting were effective. PricewaterhouseCoopers LLP, which has audited the consolidated financial statements of the Group for the year ended 31 December 2019,2020, has also audited the effectiveness of the Group’s internal control over financial reporting under Auditing Standard No. 5 of the Public Company Accounting Oversight Board (United States) as stated in their report on pages 256 to 258.page 311.
Other information | Regulation and supervision
| | | | Regulation and supervision |
The ordinary shares of HSBC Holdings are listed in London,
Hong Kong, New York Paris and Bermuda. As a result of the listing in London, HSBC Holdings is subject to the Listing Rules of the Financial Conduct Authority (‘FCA’). As a result of the listing in Hong Kong, HSBC Holdings is subject to The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (‘HKE’). In the US, where the listing is through an American Depositary Receipt Programme, shares are traded in the form of American Depositary Shares (‘ADS’), which are registered with the US Securities and Exchange Commission (‘SEC’). As a consequence of its US listing, HSBC Holdings is also subject to the reporting and other requirements ofof: the US Securities Act of 1933, as amended; the Securities Exchange Act of 1934, as amended; and the New York Stock Exchange’s (‘NYSE’) Listed Company Manual, in each case as applied to foreign private issuers. In France and Bermuda, HSBC Holdings is subject to the listing rules of Euronext and the Paris and Bermuda Stock Exchanges, respectively,Exchange applicable to companies with secondary listings. A statement of our compliance with the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council and with the 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 can be found in the ‘Report of the Directors: Corporate Governance Codes’ on page 255.308. Our operations throughout the world are regulated and supervised globally by a large number of different regulatory authorities, central banks and other bodies in those jurisdictions in which we have offices, branches or subsidiaries. These authorities impose a variety of requirements and controls designed to provide financial stability, transparency in financial markets and a contribution to economic growth. Requirements to which our operations must adhere include those relating to capital and liquidity, disclosure standards and restrictions on certain types of products or transaction structures, recovery and resolution, governance standards, conduct of business and financial crime. The UK Prudential Regulation Authority (‘PRA’) is the HSBC Group’s consolidated lead regulator. The other lead UK regulator, the FCA, supervises 1615 HSBC entities in the UK, including nineeight where the PRA is responsible for prudential supervision. Additionally, both the PRA and FCA have certain direct supervisory powers over our unregulated qualifying parent company, HSBC Holdings, through which the FCA has maintained, and is expected in the future to maintain, global oversight of the Group’s management of financial crime risk.risk, is now required to obtain supervisory approval, following which it will be directly subject to consolidated supervision. In addition, each operating bank, finance company and insurance operation within HSBC is regulated by local supervisors. The Group’s primary regulatory authorities include those in the UK, Hong Kong and the US and our other principal jurisdictions of operation. However, and in addition, with the implementation of the European Union's (‘EU’) Single Supervisory Mechanism (‘SSM’) in 2014, the European Central Bank (‘ECB’) assumed direct supervisory responsibility for HSBC France and HSBC Malta as ‘significant supervised entities’ within the eurozone for the purposes of the EU’s SSM Regulation, and HSBC Germany may also come under the ECB's direct supervision in the near future.due course. Under the SSM, the ECB increasingly engages with the relevant ‘national competent authorities’ in relation to HSBC’s businesses in other eurozone countries and more widely with HSBC's other regulators. It is therefore expected that we will continue to see changes in how the Group is regulated and supervised on a day-to-day basis in the eurozone and, more generally, as the ECB and other of our regulators develop their powers having regard to some of the regulatory initiatives highlighted in this report including the UK’s exit from the EU. UK regulation and supervision The UK's financial services regulatory structure is comprised of three regulatory bodies: the Financial Policy Committee, a committee of the Bank of England (‘BoE’); the PRA; and the FCA. The Financial Policy Committee is responsible for macro-prudential supervision, focusing on systemic risks that may affect the UK’s financial stability. The BoE prudentially regulates and supervises financial services firms through the PRA, and in addition to its wider role as the UK’s central bank, the BoE is also the resolution authority responsible for taking action to manage the failure of financial institutions in the UK, if necessary. The latter involves a set of responsibilities and powers that apply outside of an actual bank failure and relate to general resolution planning, including an assessment of any barriers to the resolution of banks, the exercise of powers to require the removal of impediments to resolvability and the setting of minimum requirements for own funds and eligible liabilities. The PRA and the FCA are micro-prudential supervisors. The Group’s banking subsidiaries in the UK, such as HSBC Bank plc and HSBC UK, are ‘dual-regulated’ firms, subject to prudential regulation by the PRA and to conduct regulation by the FCA. Other (generally smaller, non-bank) UK-based Group subsidiaries are ‘solo regulated’ by the FCA (i.e. the FCA is responsible for both prudential and conduct regulation of those subsidiaries). HSBC Group is subject to consolidated supervision by the PRA. UK banking and financial services institutions are subject to multiple regulations. The primary UK statute in this context is the Financial Services and Markets Act 2000, as amended by subsequent legislation. OtherAs a result of a referendum in 2016, the UK left the EU on 31 January 2020 and agreed a transition period which ended at 11pm on 31 December 2020. At the end of the transition period, the HSBC Group and its subsidiaries in the UK ceased to be subject to EU law. However, at that time, the EU’s financial services legislation currently includes that derived fromwas onshored into UK law under the EU directives(Withdrawal) Act 2018 (‘EUWA’). EU law continues to apply to HSBC’s EU subsidiaries. The UK and regulationsthe EU have entered into a Trade and Cooperation Agreement, and have made certain declarations relating to banking, securities, insurance, investments and sales of personal financial services. The Banking Act 2009, as amended (‘Banking Act’) definesSee the UK's resolution regime that applies to banks and their financial holding companies incorporated in the UK. It sets out the objectives that the BoE must pursue in its role as resolution authority and defines the responsibilities of other UK
European Regulation and supervision
authorities (the PRA, the FCA and HM Treasury) in relation to specific aspects of the resolution regime. It also confers on the BoE a set of resolution tools to manage the failure of a bank and minimise the impact on financial stability. Further details can be found in the ‘Recovery and resolution’ section below.for more information.
The PRA and FCA are together responsible for authorising and supervising all our operating businesses in the UK that require authorisation under the Financial Services and Markets Act 2000. These include deposit-taking, retail banking, consumer credit, life and general insurance, pensions, investments, mortgages, custody and share-dealing businesses, and treasury and capital markets activity. The FCA is also responsible for promoting effective competition in the interests of consumers, and an independent subsidiary of the FCA, the Payment Systems Regulator, regulates payment systems in the UK. The PRA and FCA rules establish the minimum criteria for the authorisation of banks and other financial sector entities that carry out regulated activities. In the UK, the PRA and FCA have the right to object, on prudential grounds, to persons who hold, or intend to hold, 10% or more of the voting power or shares of a financial institution that they regulate, or of its parent undertaking. In its capacity as our supervisor on a consolidated basis, the PRA receives information on the capital adequacy of, and sets requirements for, the Group as a whole. In addition, it conducts stress tests both on HSBC’s UK entities and more widely on the Group. Individual banking subsidiaries in the Group are directly regulated by their local banking supervisors, who set and monitor, inter alia,inter-alia, their capital adequacy requirements. The Group is subject to capital requirements as set out in the EU Capital Requirements Regulation,, as amended and onshored by the EUWA (the ‘CRR’) and the EUUK law implementing the Capital Requirements Directive, as amended and onshored by the EUWA (the ‘CRD’ and together with the CRR, the ‘EU Capital‘Capital Requirements Legislative Package’) and implemented. Broadly, the changes to the framework that resulted from onshoring the legislation under EUWA will be delayed until 31 March 2022 under transitional powers exercised by the PRA. The Pillar 1 regulatory capital framework has been, and continues to be, significantly enhanced. The EUUK law implementing the Bank Recovery and Resolution Directive, as amended ('BRRD'and onshored under the EUWA (the 'BRRD') requires member states to enable theirthe UK’s resolution authoritiesauthority to set a minimum requirement for own funds and eligible
liabilities ('MREL') for banks in their jurisdiction.the UK. These include own funds and liabilities that can be written down or converted into capital resources in order to absorb losses or recapitalise a bank in the event of its failure. These requirements are based on the resolution strategy for the Group, as agreed by the BoE in consultation with our local regulators. The UK has implemented the MREL requirements through the Banking Act, and the Bank Recovery and Resolution (No 2) Order 2014. The BoE separately updated its statement of policy on its approach to setting MREL in June 2018. The BoE expects to direct firms to comply with an end-state MREL requirement from 1 January 2022 and has set interim MREL requirements from 1 January 2019. These interim MREL requirements apply to the Group and to some of the Group’s UK subsidiaries. The UK MREL framework has been designed to be broadly compatible with the term sheet published by the Financial Stability Board (the 'FSB') on total loss absorbing capacity ('TLAC') requirements for global systemically important banks ('G-SIBs'). In addition, additional TLAC requirements were implemented in 2019 through amendments to the CRR in line with the FSB TLAC standards; these also apply to HSBC as a G-SIB. The Group is also subject to liquidity requirements as set out in the EU Capital Requirements Legislative Packageand implemented by the PRA, and will in due course become subject to the net stable funding requirements prescribed under the Basel III Reforms andwhich are expected to be implemented in the first half of 2021 through changes to the CRD.January 2022. The PRA and FCA monitor authorised institutions through ongoing supervision and the review of routine and ad hoc reports relating to financial, prudential and conduct of business matters. They may also obtain independent reports from a Skilled Person on the adequacy of procedures and systems covering internal control and governing records and accounting. The PRA meets regularly with the Group’s senior executives to discuss our adherence to its prudential requirements. In addition, both the PRA and FCA regularly discuss with relevant management fundamental matters relating to our business in the UK and internationally, including areas such as strategic and operating plans, risk control, loan portfolio composition, organisational changes, succession planning and recovery and resolution arrangements. There are a substantial number of other ongoing regulatory initiatives affecting the Group driven by or from the UK. The current and anticipated areas of particular focus for the UK's regulators include: •the effects of the Covid-19 outbreak on the regulatory framework and its implications for banks’ credit risk management and provisioning processes, capital adequacy and liquidity; •changes to UK law and regulation following the UK's exit from the EU;EU, including the overarching Future Regulatory Framework Review led by HM Treasury; •the UK’s implementation of the final reforms to Basel III, including the changes to the market risk framework and the revised approaches to calculate credit, counterparty, operational and credit valuation adjustment RWAs, changes to the leverage ratio framework and the application of capital floors; •the UK’s implementation of changes to the internal ratings based (‘IRB’) approach to credit risk as part of the IRB Repair programme; •ongoing implementation of requirements regarding resolution plans (see further details outlined below under ‘Recovery and resolution’); implementation of revisions to the PRA’s Framework for Groups policy (particularly double-leverage) and large exposures/intra-group regimes;
•the ending of the production of the London Inter-bank Offered Rate (‘Libor’) and the transition to the Sterling Overnight Index Average and the replacement of other similar reference rates; ongoing embedding•measures designed to support both retail and business customers in the wake of the Senior ManagersCovid-19 outbreak, with particular focus on vulnerability and Certification Regime, aimed at strengthening accountability in banking and its extension from banksfinancial difficulty;
•consideration of the UK’s Cash Infrastructure including measures designed to all UK authorised firms during 2019; proposed plans to increase consumermaintain access to financial advice in the UK;cash for consumers;
•proposals to provide greater levels of protection and remediation to SMEs; •proposals for strengthening operational resilience and for outsourcing and third party risk management; continued high level•consideration of focusdigital regulatory reporting and the future of data collection by the FCA on management of conduct of businessregulators;
•review and customer outcomes (including fair pricingproposed approach to the UK payments infrastructure and additional High Cost Credit remedies including overdrafts)as well as on controlsregulation; •measures to combatprevent financial crime, (includingincluding market abuse and fraud); fraud;cyber risk, financial technology (including ‘Open Banking’), operational resilience and data security initiatives that may require changes to systems and processes; and
•the effects of climate change where the UK regulators expect firms to incorporate any financial risks arising within their Pillar 2 assessments.assessments, stress testing and mandatory disclosures; and •the continued assessment of the completeness and accuracy of regulatory returns by the PRA The FCA also continues to apply close scrutiny to the Group’s financial crime control framework both generally, in the exercise of its wider powers under FSMA, and more specifically through the exercise of direct supervisory powers over HSBC Holdings asdescribed above. As a result of the decision of the UK to leave the EU following the referendum on 23 June 2016, the UK left the EU on 31 January 2020. In order to smooth the transition, the UK will remain subject to EU law during an implementation period, which is expected to end on 31 December 2020. According to the withdrawal agreement entered into between the EU and the UK, this implementation period may be extended by a further two years, subject to political agreement. However, UK law currently prohibits the UK government from agreeing to an extension. At the end of the implementation period, the HSBC Group and its subsidiaries in the UK will cease to be subject to EU law; however, EU law will continue to apply to HSBC’s EU subsidiaries.
In preparation for there being no agreement to leave the EU, HM Treasury, the FCA and the PRA had been working to ensure that all the EU laws and regulations that are directly applicable to UK firms can be transposed on the official date of exit. A series of statutory instruments and changes to the FCA and PRA's Handbooks to onshore EU law and regulation were published. Although these statutory instruments were prepared in the
anticipation of the UK leaving without a deal, it is anticipated that these statutory instruments will form the basis of the UK’s regulation after the implementation period has ended; however, these may be subject to change to reflect the introduction of new EU law during the implementation period and the terms of any trade deal between the UK and the EU.2020 Direction as described above.
Hong Kong regulation and supervision The Banking Ordinance provides the legal framework for banking supervision in Hong Kong. Section 7(1) of the Ordinance provides that the principal function of the Hong Kong Monetary Authority (‘HKMA’) is to ‘promote the general stability and effective working of the banking system’. The HKMA seeks to establish a regulatory framework in line with international standards, in particular those issued by the Basel Committee on Banking Supervision (‘Basel Committee’) and the Financial Stability Board (‘FSB’). The objective is to maintain a prudential supervisory system that underpins the general stability and effective working of the banking system, while at the same time providing sufficient flexibility for authorised institutions to take commercial decisions. Under the Banking Ordinance, the HKMA is the licensing authority responsible for the authorisation, suspension and revocation of authorised institutions. To provide checks and balances, the HKMA is required under the Ordinance to consult with the Financial Secretary on important authorisation decisions, such as suspension and involuntary revocation. The Hongkong and Shanghai Banking Corporation Limited and its overseas branches and subsidiaries are licensed under the Banking Ordinance and hence subject to the supervision, regulation and examination of the HKMA. The HKMA follows international practices as recommended by the Basel Committee to supervise authorised institutions. Under the Banking Ordinance, the HKMA imposes capital requirements on authorised institutions through the Banking (Capital) Rules, liquidity requirements through the Banking (Liquidity) Rules and large exposure limits through the Banking (Exposure Limits) Rules. These rules take into account the latest standards set by the Basel Committee. The HKMA adopts a risk-based supervisory approach based on a policy of ‘continuous supervision’ through on-site examinations, off-site reviews, prudential meetings, cooperation with external auditors and sharing information with other supervisors. The HKMA requires all authorised institutions to have adequate systems of internal control and requires the institutions’ external auditors, upon request, to report on those systems and other matters, such as the accuracy of information provided to the HKMA. In addition, the HKMA may from time to time conduct tripartite discussions with authorised institutions and their external auditors. The HKMA aims to ensure that the standards for regulatory disclosure in Hong Kong remain in line with those of other leading financial centres. The Banking (Disclosure) Rules take into account the latest disclosure standards released by the Basel Committee, which prescribe quarterly, semi-annual and annual disclosure of specified items, including in the form of standard templates and tables, in order to promote user-relevance and the consistency and
Other information | Regulation and supervision comparability of regulatory disclosure among banks and across jurisdictions. The HKMA's powers to collect prudential data from authorised institutions on a routine or ad hoc basis are provided by Section 63 of the Banking Ordinance. The same section of the Ordinance also empowers the HKMA to require any holding company or subsidiary or sister company of an authorised institution to submit such information as may be required for the exercise of the HKMA’s functions under the Ordinance. The HKMA has the power to serve a notice of objection on persons if they are no longer deemed to be fit and proper to be controllers of the authorised institution, if they may otherwise threaten the interests of depositors or potential depositors, or if they have contravened any conditions specified by the HKMA. The HKMA may revoke authorisation in the event of an institution’s non-compliance with the provisions of the Banking Ordinance. These provisions require, among other things, the furnishing of accurate reports. The HKMA is the relevant authority under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance for supervising authorised institutions’ compliance with the legal and supervisory requirements set out in the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (for Authorised Institutions). The HKMA requires authorised institutions in Hong Kong and its overseas branches and subsidiaries to establish effective systems and controls to prevent and detect money laundering and terrorist financing. It works closely with other stakeholders within both the government and the industry to ensure that the banking sector is able to play its gatekeeper role in Hong Kong’s anti-money laundering and counter-financing of terrorism regime. To enhance the exchange of supervisory information and cooperation, the HKMA has entered into a Memorandum of Understanding or other formal arrangements with a number of banking supervisory authorities within and outside Hong Kong. The marketing of, dealing in and provision of advice and asset management services in relation to securities and futures in Hong Kong are subject to the provisions of the Securities and Futures Ordinance of Hong Kong. Entities engaging in activities regulated by the Ordinance are required to be licensed or registered with the Securities and Futures Commission (‘SFC’). The HKMA is the front-line regulator for banks involved in the securities and futures business. The HKMA and the SFC work very closely to ensure that there is an open market with a level playing field for all intermediaries in the securities industry of Hong Kong. The HKMA has entered into a Memorandum of Understanding with the SFC, which elaborates on the legal framework and sets out the operational details relating to the respective roles and responsibilities of the two regulators regarding the securities-related activities of authorised institutions. The HKMA and the SFC hold regular meetings under the Memorandum of Understanding to discuss matters of mutual interest. Among other functions, the Securities and Futures Ordinance vests the SFC with powers to set and enforce market regulations, including investigating breaches of rules and market misconduct and taking appropriate enforcement action. The SFC is responsible for licensing and supervising intermediaries conducting SFC-regulated activities, such as investment advisers, fund managers and brokers. Additionally, the SFC sets standards for the authorisation and regulation of investment products, and reviews and authorises offering documents of retail investment products to be marketed to the public. To promote proper conduct and increase awareness of individual responsibility and accountability, the SFC introduced and implemented the Manager-In-Charge (‘MIC’) regime in Hong Kong in October 2017. The MIC regime captures senior individuals of licensed corporations responsible for managing core functions within financial services businesses supervised by the SFC. The regime required SFC licensed corporations to review their organisational structure and the roles of senior management and their responsible officers in light of the SFC’s classification of core functions within licensed corporations and its guidelines on identifying Managers-In-Charge of Core Functions. The regime also imposes new reporting requirements on SFC licensed corporations. Similar to the SFC, the HKMA launched its Management Accountability Initiative in October 2017 aimed at increasing the accountability of the senior management of Hong Kong registered institutions (‘RIs’) i.e. Hong Kong banks registered to carry on one or more regulated activities under the SFO. The Management Accountability Initiative clarified the HKMA’s expectations on the responsibility and accountability of RIs’ senior management and enhanced its information gathering on RIs’ regulated activities, while requiring RIs to better identify lines of responsibility and accountability for their regulated activities.
Regulation and supervision
Theactivities.The HKMA and the Insurance Authority (‘IA’) have signed a Memorandum of Understanding to enhance the cooperation, exchange of information and mutual assistance between the two authorities. This Memorandum of Understanding sets out the framework between the HKMA and the IA for strengthening co-operation in respect of regulation and supervision of entities or financial groups in which the two authorities have a common regulatory interest.
Pursuant to the statutory regulatory regime for insurance intermediaries under the Insurance Ordinance, the IA has delegated its inspection and investigation powers to the HKMA in relation to insurance related businesses of authorised institutions in Hong Kong, which aims to improve efficiency and minimise possible regulatory overlap. Under the statutory regime for the regulation of Mandatory Provident Fund (‘MPF’) intermediaries, the Mandatory Provident Fund Schemes Authority is the lead regulator in respect of regulation of MPF intermediaries whereas the HKMA, the IA and the SFC are the front-line regulators of the MPF intermediaries. A Memorandum of Understanding Concerning the Regulation of Regulated Persons with Respect to Registered Schemes under the Mandatory Provident Fund Schemes Ordinance has been signed by the four regulators. It sets out certain administrative and operational arrangements among the four regulators regarding the exercise of their respective functions under the Mandatory Provident Fund Schemes Ordinance concerning regulation of MPF intermediaries. The Financial Institutions (Resolution) Ordinance established the legal basis for a cross-sector resolution regime in Hong Kong, under which the HKMA is the resolution authority for banking sector entities, including all authorised institutions. The HKMA is also designated as the lead resolution authority for the cross-sectoral groups in Hong Kong that include banking sector entities within the scope of the Financial Institutions (Resolution) Ordinance ('FIRO'). The HKMA’s function as a resolution authority is supported by the Resolution Office within the HKMA. The Resolution Office is operationally independent and has a direct reporting line to the chief executive of the HKMA. The Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements – Banking Sector) Rules (‘LAC Rules’) were made by the HKMA under section 19(1) of the FIRO. The LAC Rules enable the HKMA to designate entities within Hong Kong as resolution entities or material subsidiaries and require them to issue Loss Absorbing Capacity (‘LAC’) instruments, in accordance with the Financial Stability Board’s standard ‘Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution – Total Loss-absorbing Capacity (‘TLAC’) Term Sheet’. The LAC Rules also incorporate the Basel Committee’s disclosure standards on TLAC. In order to support capacity building and talent development, the HKMA is working with the banking industry and relevant professional bodies to implement an industry-wide enhanced competency framework for banking practitioners. The availability of a set of common and transparent competency standards enables more effective training for new entrants and professional development for existing practitioners. Authorised institutions are encouraged to adopt it as the benchmark for enhancing the level
of core competence and ongoing professional development of banking practitioners. Currently, the enhanced competency framework for banking practitioners covers four professional work streams: anti-money laundering and counter-financing of terrorism; cybersecurity; treasury management; and retail and wealth management, with credit risk management, risk management and compliance to be launched in due course. US regulation and supervision The Group is subject to federal and state supervision and regulation in the US. Banking laws and regulations of the Federal Reserve Board (‘FRB’), the Office of the Comptroller of the Currency (the ‘OCC’) and the Federal Deposit Insurance Corporation (the ‘FDIC’) (collectively, the ‘US banking regulators’) govern all aspects of our US business. HSBC Bank USA,, N.A., Tysons Corner, Virginia (‘HSBC Bank USA’) is subject to direct supervision and regulation by the Consumer Financial Protection Bureau (‘CFPB’), which has the authority to examine and take enforcement action related to compliance with US federal consumer financial laws and regulations. The Group’s US securities broker/dealer and investment banking operations are also subject to ongoing supervision and regulation by the SEC,Securities and Exchange Commission ('SEC'), the Financial Industry Regulatory Authority and other government agencies and self-regulatory organisations under US federal and state securities laws. Similarly, the Group’s US commodity futures, commodity options and swaps-related and client clearing operations are subject to ongoing supervision and regulation by the Commodity Futures Trading Commission (‘CFTC’), the National Futures Association and other self-regulatory organisations under US federal and state securitiescommodities laws. Furthermore, since we have substantial operations outside the US that conduct many of their day-to-day transactions with the US, HSBC entities’ operations outside the US are also subject to the extraterritorial effects of US regulation in many respects. In September 2017, HSBC Holdings and HSBC North America Holdings Inc. (‘HNAH’) entered into a consent order with the FRB in connection with its investigation into HSBC’s historical foreign exchange activities, which requires HSBC Holdings and HNAH to undertake certain remedial steps. In January 2018, HSBC Holdings entered into a three-year deferred prosecution agreement with the Criminal Division of the US Department of Justice (‘DoJ’) (the ‘FX DPA'), resolving the DOJ’s investigation into HSBC’s historical foreign exchange activities. Under the terms of the FX DPA, HSBC is required to further enhance its internal controls and procedures. For further details, see Note 34 on the Financial Statements.
HSBC Holdings and its US operations are subject to supervision, regulation and examination by the FRB because HSBC Holdings is a ‘bank holding company’ under the US Bank Holding Company Act of 1956, as a result of its control of HSBC Bank USA and HSBC Trust Company (Delaware), N.A., Wilmington, Delaware (‘HTCD’). HNAH is alsoand HSBC USA Inc., are each a ‘bank holding company’ and HNAH is also an intermediate holding company (‘IHC’). Both regulated by the FRB. HSBC Holdings, HNAH and HNAHHSBC USA Inc. have elected to be financial holding companies pursuant to the provisions of the Gramm-Leach-Bliley Act and, accordingly, may affiliate with securities firms and insurance companies, and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. Under regulations implemented by the FRB, if any financial holding company, or any depositary institution controlled by a financial holding company, ceases to meet certain capital or management standards, the FRB may impose corrective capital and/or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies. In addition, the FRB may require divestiture of the holding company’s depositary institutions or its affiliates engaged in broader financial activities in reliance on the Gramm-Leach-Bliley Act if the deficiencies persist. The regulations also provide that if any depositary institution controlled by a financial holding company fails to maintain a satisfactory rating under the Community Reinvestment Act of 1977, the FRB must prohibit the financial holding company and its subsidiaries from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. The two US banks, HSBC Bank USA and HTCD, are subject to regulation and examination primarily by the OCC. HSBC Bank USA and HTCD are subject to additional regulation and supervision by the FDIC, the Consumer Financial Protection Bureau and the FRB. Banking laws and regulations restrict many aspects of their operations and administration, including the establishment and maintenance of branch offices, capital and reserve requirements, deposits and borrowings, investment and lending activities, payment of dividends and numerous other matters. In the US, parent company insolvencies are governed by the US Bankruptcy Code, 11 U.S.C. § 101 et seq. (the ‘Bankruptcy Code’). Chapter 7 of the Bankruptcy Code sets forth the procedures for liquidation of a debtor company’s assets for distribution to creditors, whereas Chapter 11 permits the operation
of the debtor’s business while either negotiating a plan of reorganisation with the company’s creditors or liquidating the business. Subsidiary banks are subject to the Federal Deposit Insurance Act (the ‘FDIA’). Under the FDIA, the FDIC has the authority as receiver to liquidate and wind up a bank’s affairs and to succeed to all rights, titles, powers and privileges of the bank and relevant associated persons. Under a special regime introduced by Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘Dodd-Frank’), the US Secretary of the Treasury has the authority to appoint the FDIC as receiver of certain qualifying parent companies and their subsidiaries under specified conditions. The FDIC’s powers under what is referred to as the Orderly Liquidation Authority incorporate elements of both the FDIA and the Bankruptcy Code, and are intended to minimise the adverse effects of a complex financial group’s failure on the financial stability of the US. In respect of a banking group with a parent company not organised under the laws of the US, any actions under the Orderly Liquidation Authority would likely be directed at the US-based intermediate holding company. Following implementation of the Basel III capital framework by the US banking regulators, HNAH, HSBC USA Inc. and HSBC Bank USA are required to maintain minimum capital ratios (exclusive of any countercyclical capital buffer)buffers), including a minimum Tier 1 leverage ratio of 4%, and a minimum total risk-based capital ratio of at least 8%. HNAH and HSBC Bank USA are also subject to a minimum supplementary leverage ratio of 3%. Over and an effectiveabove the minimum total risk-based capital ratio of 10.5%requirements, HNAH is subject to a Stress Capital Buffer (‘SCB’), which has replaced the static 2.5% Capital Conservation Buffer (‘CCB’) and is floored at 2.5%. The 10.5% ratio includesHSBC USA Inc. and HSBC Bank USA continue to be subject to the capital conservation buffer, which isstatic 2.5% CCB. Compliance with the SCB / CCB does not arepresent minimum requirementrequirements per se, but rather a necessary condition to allow capital distributions. A countercyclical capital buffer requirement also applies to HNAH and HSBC Bank USA, and the buffer has currently been currently set at 0% by the US banking regulators. Additionally, failureIn addition to maintain minimum regulatory ratios in simulated stress conditions, as required bytesting requirements imposed under the FRB’s Comprehensive Capital Analysis and Review (‘CCAR’('CCAR') programme, would restrict HNAH from engaging in capital distributions such as dividends or share repurchases. In addition to the CCAR stress testing requirements,, the Dodd-Frank Act Stress Test (‘DFAST’) requires that HNAH undergo annual supervisory stress tests conducted by the FRB and company-run stress tests that HNAH must conduct annually (with disclosure of the company-run stress tests every other year). Under CCAR, the FRB assesses whether the largest US banking organisations have sufficient capital to continue operations throughout times of economic and financial stress and whether they have robust, forward-looking capital-planning processes that account for their unique risks. As part of the CCAR process, the FRB undertakes a supervisory assessment of the capital adequacy of bank holding companies, including HNAH, based on a review of a comprehensive capital plan submitted by each participating bank holding company to the FRB that describes the company’s planned capital actions, such as plans to pay or increase common stock dividends, reinstate or increase common stock repurchase programmes, or redeem preferred stock or other regulatory capital instruments, during the nine-quarter review period, as well as the results of stress tests conducted by both the company and the FRB under different hypothetical macroeconomic scenarios, including a severely adverse scenario provided by the FRB. The FRB can object to a capital plan, in which case the company cannot make capital distributions (with the exception of those that may have already received a non-objection in the previous year) without specific FRB approval. HNAH submitted its latest CCAR capital plan and annual company-run DFAST results in April 2019.2020. The company-run stress tests are forward-looking exercises to assess the impact of hypothetical macroeconomic baseline and severely adverse scenarios provided by the FRB for the annual exercise, and internally developed scenarios for both the annual periodic exercises, on the financial
Other information | Regulation and supervision condition and capital adequacy of a bank holding company or bank over a nine-quarter planning horizon. In June 2019, the FRB informed HNAH that it did not object to HNAH’s capital plan or the planned capital distributions included in its 2019 CCAR submission.
In April 2018,On 4 March 2020, the FRB issued a proposal to replacefinal rule that eliminated the quantitative and qualitative ‘pass/fail’ assessments from CCAR and modified the static capital conservation buffer with ato incorporate an institution-specific stress capital buffer, which would beis floored at 2.5%. Under the proposal, theThe stress capital buffer would equalequals (i) a bank holding company's projected decline in common equity tier 1 under the annual CCAR supervisory severely adverse stress testing scenario prior to any planned capital actions, plus (ii) one year of planned common stock dividends. The buffer wouldwill be reset each yearyear.
On 10 August 2020, the FRB announced an SCB for each CCAR firm based on 2020 supervisory stress testing results conducted as part of CCAR. The first SCB became effective 1 October 2020 and would generally remain in effect until 30 September 2021, at which point the size of the SCB for each bank will be recalibrated based on the results of the 2021 stress tests. HNAH already utilizes an internal capital assessment approach that is analogous to the SCB and continues to review the composition of its capital structures and capital buffers in light of the final rule. In June 2020, the FRB publicly disclosed its CCAR results along with aggregated results of a sensitivity analysis aimed at gauging the ongoing economic impact of the Covid-19 outbreak on CCAR firms. Each CCAR firm, including HNAH, was required to resubmit its capital plan in November 2020 based on additional economic scenarios provided by the FRB to assess the potential impact of the ongoing COVID-19 outbreak. On 18 December 2020, the FRB released certain information related to this second round of bank holding company's supervisory stress testing results.tests, and indicated that it is extending, through 31 March 2021, the time period for notifying CCAR firms, including HNAH, whether the FRB will recalculate a firm’s SCB. The FRB also announced it is limiting CCAR firms’ distributions in the first quarter of 2021. Under these restrictions, IHCs, such as HNAH, may make certain capital distributions in the first quarter of 2021, provided that the distributions paid in the final three quarters of 2020 and the first quarter of 2021, in the aggregate, do not exceed the amount of net income the IHC has earned in the preceding four calendar quarters. Large international banks, such as HSBC Holdings (generally with regard to its US operations), and large insured depositary institutions, such as HSBC Bank USA, are required to file resolution plans identifying among other things, material subsidiaries and core business lines, and describing which strategy would be followed to resolve the institution in the event of significant financial distress, including identifying how insured bank subsidiaries would be adequately protected from risk created by other affiliates. The failure to cure deficiencies in a resolution plan would enable the FRB and the FDIC, acting jointly, to impose more stringent capital, leverage or liquidity requirements, or restrictions on growth, activities or operations and, if such failure persists, require the divestiture of assets or operations. HSBC Holdings and HSBC Bank USA submitted their latest resolution plans in 2018. In 2014, the FRB adopted a rule requiring enhanced supervision of the US operations of non-US banks such as HSBC Holdings. The rule required HSBC to establish an IHC to hold theirits US bank and non-bank subsidiaries, although because the HSBC Group had already been operating in the US through such an IHC structure
(i.e.(i.e. HNAH), the implementation of this requirement did not itself have a significant impact on our US operations. In October 2019, the FRB and the other US banking regulators jointly finalised rules that would tailor the application of the enhanced prudential standards for large US banking organisations and certain foreign banking organisations (the ‘Tailoring Rules’). The Tailoring Rules assign each BHC and US IHC with $50bn or more in total US assets to one of five categories based on its size and four risk-based indicators. As a Category III firm under the Tailoring Rules, HNAH and its subsidiarysubsidiaries HSBC USA Inc. and HSBC Bank USA are no longer considered ‘Advanced Approaches banking organisations’. Prior to adoption of the Tailoring Rules, HNAH and HSBC Bank USA had requested and received regulatory approval to opt out of the Advanced Approaches and therefore have previously calculated and will continue to calculate their risk-based capital requirements for credit risk solely under the Standardised Approach. Under the Tailoring Rules, HNAH and HSBC Bank USA remain subject to certain other capital requirements that were previously applicable only to ‘Advanced Approaches banking organisations', including the SLR and the countercyclical capital buffer. The Tailoring Rules also permit Category III firms, including HNAH and HSBC Bank USA, to make a one-time election to opt-out of the requirement to recognise most elements of accumulated other comprehensive income in regulatory capital. The provisions of the Tailoring Rules relevant to HSBC, HNAH, HSBC USA Inc. and HSBC Bank USA became effective on
1 January 2020. Category III firms such as HNAH and HSBC Bank USA will also benefit from (i) simpler capital requirements for mortgage servicing assets, certain deferred tax assets, and investments in the capital of unconsolidated financial institutions and (ii) a simplified treatment for the amount of capital issued by consolidated subsidiaries to third parties (generally known as minority interests) which can be included in regulatory capital, relative to the rules that will continue to apply to Advanced Approaches banking organisations. These simplifying amendments were adopted in a separate rulemaking finalised by the US banking regulators in July 2019 and become effective
1 April 2020, although firms may choose to apply the simplificationsas early as 1 January 2020. In November 2019, the
Regulation and supervision
The US banking regulators finalised a rule to implement a revised standardised approach for counterparty credit risk (SA-CCR) to calculate exposure amounts for derivative transactions. SA-CCR would replace the existing current exposure method for certain bank holding companies. The Tailoring Rules clarifyin October 2020 which provides that Category III firms and their subsidiary banks arewill not requiredbe subject to use SA-CCR to measure their derivative exposure. Instead, Category III firms (such as HNAH and HSBC Bank USA) have the option to use either SA-CCR or the current exposure methodology for their risk-based capital ratios, SLR and single counterparty credit limits.The US banking regulators issued a separate proposal in April 2019 which would exclude Category III firms and their subsidiary banks from theany requirement to deduct from their regulatory capital holdings of TLAC instruments issued by other banks. The Tailoring Rules will also reducereduced the liquidity coverage ratio requirement for Category III IHCs with weighted short-term wholesale funding under $75bn, including HNAH, and their depository institution subsidiaries, including HNAH and HSBC Bank USA, from 100 to 85% on a daily basis. The Tailoring Rules also indicate thatIn October 2020, the agencies finalised the NSFR, which will apply an 85% NSFR would apply to Category III IHCs with weighted short-term wholesale funding under $75bn, including HNAH, and their depository institution subsidiaries, once the NSFR is finalised.including HSBC Bank USA beginning 1 July 2021. As a Category III firm, HNAH remains subject to liquidity stress testing on a monthly basis and related liquidity buffer and liquidity risk management requirements. Simultaneous with the Tailoring Rules, the FRB and FDIC jointly finalised a proposal to revise the regulations implementing the resolution planning requirements for depository institution holding companies in the Dodd-Frank Act (the ‘Holdco Resolution Plan Rule’). Under the Holdco Resolution Plan Rule, HSBC Holdings is required to file a resolution plan every three years (rather than annually), alternating between a full resolution plan and a targeted resolution plan, which would generally be limited to core areas such as capital and liquidity, as well as material changes in other areas. Under the Holdco Resolution Plan Rule, HSBC’s first targeted resolution plan submission is not required until 1 July17 December 2021 and its full resolution plan submission is not required until
1 July 2024. The Holdco Resolution Plan Rule did not revise the resolution plan requirements applicable to HSBC Bank USA, which are administered solely by the FDIC. In April 2019, the FDIC requested comment on an advance notice of proposed rulemaking that would alter the FDIC’s separate resolution plan requirements for insured depository institutions (the 'IDI Plan') with total consolidated assets of at least $50bn (‘Covered IDIs’), including HSBC Bank USA. The proposal delaysdelayed the requirement for HSBC Bank USA (as well as other Covered IDIs) to file a resolution plan under the FDIC’s current rules until a future date to be specified by the FDIC. Consequently, HSBC Bank USA didhas not been required to file an IDI Plan during 2019.since 2018. In January 2021, the FDIC announced it will resume requiring IDI Plan submission for banks with $100 billion or more in assets and will provide at least 12 months advance notice to firms required to submit IDI Plans. In June 2018, the FRB finalised a rule to limit credit exposures to single counterparties for large bank holding companies and IHCs, including HNAH. Under the rule, HNAH, together with its subsidiaries, will beis prohibited from having net credit exposure to a single unaffiliated counterparty in excess of 25% of HNAH’s tier 1 capital beginning 1 July 2020.capital. In addition, HNAH, together with its subsidiaries, could become subject to a separate limit on its exposures to certain unaffiliated systemically important counterparties if its parent, HSBC Holdings, cannot certify its compliance with a large exposure regime in the UK that is consistent with the Basel large exposure framework by 1 July 2020. In November 2019, the FRB proposed to extend the initial compliance dates for the combined US operations of foreign banks, but not their IHCs. We continue to evaluate the potential effects of this rule and the recent proposal on our operations.2021. In the US,2018, the FRB adopted final rules implementing the FSB’s TLAC standard. The rules require that IHC companiesIHCs of non-US G-SIBs, including HNAH, maintain minimum amounts of TLAC that may include minimum levels of tier 1 capital and long-term debt satisfying
certain eligibility criteria, and a related TLAC buffer commencing 1 January 2019 without the benefit of a phase-in period. In October 2020, the FRB finalised a proposal to align the calculation of TLAC buffer for US IHCs of non-US G-SIBs with the calculation methodology used by US G-SIBs which will take effect on 1 April 2021. The TLAC rules also include ‘clean holding company requirements’ that impose limitations on the types of financial transactions HSBC’s US intermediate holding company, HNAH, may engage in. In December 2018, the FRB formally approved HNAH’s TLAC structure. The FSB’s TLAC standard and the FRB’s TLAC rules represent a significant expansion of the current regulatory capital framework. ToHNAH maintains long-term debt to support compliance with the TLAC rules in 2018, HNAH has issuedand will continue to assess if additional long-term debt that is TLAC-compliant and has modified the terms of existing long-term debtneeded to remain compliant in order for that debt to be TLAC-compliant.future periods. In April 2018,September 2017, HSBC Holdings and HNAH entered into a consent order with the FRB in connection with its investigation into HSBC’s historical foreign exchange activities, which requires HSBC Holdings and HNAH to undertake certain remedial steps. The US government response to the Covid-19 outbreak included enactment of the Coronavirus Aid, Relief, and Economic Security Act (‘CARES Act’) and a number of emergency lending and liquidity facilities established by the FRB. The CARES Act provides financial institutions with the option to temporarily suspend certain requirements under U.S. GAAP for loan modifications related to Covid-19 and any determination that a loan modified as a result of Covid-19 is a troubled debt restructuring (including impairment for accounting purposes). The CARES Act also created the Paycheck Protection Program (the ‘PPP’), a programme designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. In December 2020, additional federal stimulus legislation was enacted, which includes additional funding for the PPP. HSBC Bank USA is participating in the PPP program. Throughout 2020, the US banking regulators issued a proposalnumber of regulatory rule changes in response to align the calculationCovid-19 outbreak, including the following key rules: In March 2020, the US banking regulators issued an interim final rule allowing US banks the option to delay, over a five-year transition period, the regulatory capital impacts of TLAC forimplementing the Current Expected Credit Loss accounting standard. In May 2020, the US IHCs of non-US G-SIBs withbanking regulators issued an interim final rule allowing banks that are subject to the calculation methodology used bySupplementary Leverage Ratio to temporarily exclude on-balance sheet US G-SIBs beginning on 1 January 2019. The proposal seeks to modifyTreasury securities and deposits held at the leverage requirements related to TLAC and will likely impactFederal Reserve from the calculation of TLAC for HNAH. The comment period for the proposal closed on 25 June 2018.Supplementary Leverage Ratio denominator until 31 March 2021. Title VII of Dodd-Frank provides for an extensive framework for the regulation of over-the-counter (‘OTC’) derivatives by the CFTC and the SEC, including mandatory clearing, exchange trading, and public and regulatory transaction reporting of certain OTC derivatives, as well as rules regarding the registration of swap dealers and major swap participants, and related capital, margin, business conduct, record keeping and other requirements applicable to such entities. The CFTC has adopted rules implementing many of the most significant provisions of Title VII. In particular, HSBC Bank USA and HSBC Bank plc are provisionally registered as swap dealers with the CFTC. Because HSBC Bank plc is a non-US swap dealer, theapplication of certain CFTC generally limits its direct regulation ofrequirements is limited to HSBC Bank plc's swap transactions to swaps with US persons and certain affiliates of US persons. However,In July 2020, the CFTC continuesfinalised rules that largely codified existing cross-border guidance and existing no action relief issued to consider whether to applydate for transactions between non-US persons. The cross-border application of CFTC requirements that were not addressed in the final rule, including mandatory clearing, exchange trading and public transaction reporting marginrequirements, remain subject to prior CFTC guidance and, business conduct rules to swaps with non-US persons arranged, negotiated or executed by US personnel or agents. Thewhere applicable, exemptive relief until the CFTC is also considering whether to apply regulatory transaction reporting requirements on all swaps entered into by a non-US swap dealer or insteadaddresses each in further rulemakings. In addition, the CFTC has continued to permit reliance on transaction reporting under comparable EU rules. The application of CFTC rules to HSBC Bank plc's swaps with non-US persons could have an adverse effect on the willingness of non-US counterparties to trade swaps with HSBC Bank plc, and we continue to assess how developments in these areas will affect our business. On 25 July 2017, the CFTC extended pre-existing relief from the requirement for non-USUK-based swap dealers (e.g., HSBC Bank plc) to comply with clearing, trade execution, reporting, and business conduct rules for swaps with non-US counterparties, when using personnel or agents located in the US to arrange, negotiate, or execute such swaps. This relief extends until the CFTC takes further actiontemporarily rely on whether to subject such swaps to particular rule requirements. HSBC Bank plc also relies onexisting substituted compliance withorders for comparable EU regulationregulations to satisfy certain CFTC internal business conduct requirements. In the eventThe ability of a withdrawal by the UK from the EU,HSBC Bank plc to transact with non-US persons and compete with other non-UK swap dealers located in the UK would technically no longercould be permittednegatively affected were existing CFTC exemptive relief to rely on substituted compliance with EU law, which would negatively affect HSBC Bank plc’s business and its abilityexpire or additional CFTC requirements to compete with swap dealers located outside the UK. As an interim measure, in April of 2019,apply. In October 2020, the CFTC issued relieffinalised rules that would permit swap dealers locatedwill apply position limits to certain physical commodity swaps beginning in the UK to continue to rely on substituted compliance with EU requirements in the event of a withdrawal of the UK from the EU until permanent steps are taken by the CFTC. In November 2018, the CFTC proposed amendments to rules governing swap execution facilities and the associated mandatory trading obligation that requires certain products subject to mandatory clearing to be executed on a swap execution facilities or a designated contract market.January 2022. The proposed rules would significantly expand the mandatory trading requirement to effectively cover all swaps subject to mandatory clearing. The proposed expansion of the mandatory tradingposition limits requirements wouldfor swaps will significantly increase the burden and cost of executing certain interest rate and credit-defaultcommodity swaps and may adversely affect HSBC to a greater extent than some of our competitors. The CFTC has also proposed rules that would apply position limits to certain physical commodity swaps.
The SEC has finalised the key rules governing the application of Title VII requirements to security-based swap (‘SBS’) dealers and major SBS participants. These rules share many similarities with parallel rules applicable to swap dealers finalised by the CFTC, but there are material differences in several key rulemaking areas. Because our equity and credit derivatives businesses are also subject to the CFTC’s jurisdiction under Title VII, material differences between the final SEC rules and existing CFTC rules could materially increase our costs of compliance with Title VII by requiring the implementation of significant additional policies, procedures, documentation, systems and controls for those businesses. Compliance with the SEC’s SBS dealer rules,including registration of SBS dealers, is expectedscheduled to begin in Septemberon 1 November 2021. Accordingly, HSBC Bank plc expects to rely on substituted compliance in connection with certain of its SBS dealer requirements, although the SEC has not yet made any substituted compliance determinations.determinations for UK-based firms. The substance and scope of those determinations will materially affect our costs of implementation and compliance. In 2015, the OCC, jointly with other US banking regulators, adopted final rules establishing margin requirements for non-cleared swaps and SBS. Subject to certain exceptions, the final margin rules require HSBC Bank USA and HSBC Bank plc to collect and post initial and variation margin for certain non-cleared swaps and SBS entered into with other swap dealers and financial end-users that exceed a minimum threshold of transactional activity and for financial end-users that do not meet the minimum transactional activity threshold, to collect and post variation margin (but not initial margin). The final margin rules also limit the types of assets that are eligible to satisfy initial and variation margin requirements, require initial margin to be segregated at a third-party custodian, impose requirements on internal models used to calculate initial margin requirements and contain specific provisions for cross-border transactions and inter-affiliate transactions. In June 2020, the U.S. banking regulators finalized a rule that makes significant amendments to the margin rules, including (i) mostly exempting swap entities from needing to collect initial margin for swaps with affiliates; (ii) preserving legacy status for swaps that are amended to replace certain interest rate provisions or due to technical amendments, notional reductions, or portfolio compression exercises; (iii) clarifying the time at which initial margin trading documentation must be in place; and (iv) adding a new compliance phase for initial margin requirements. The amendments in the final rule took effect 31 August 2020, which reduced the amount of initial margin HSBC Bank USA and HSBC Bank plc need to collect from many of their affiliates. The final margin rules follow a phased implementation schedule with additional counterparties becoming subject to initial margin requirements in September 2020,2021 and September 2022, depending on the transactional volume of the parties and their affiliates. These final rules, as well as parallel non-cleared swaps and SBS margin rules from the CFTC, the SEC and certain non-US regulators will increase the costs and liquidity burden associated with trading non-cleared swaps and SBS, and may adversely affect our business in such products. In particular, the imposition of initial margin requirements on inter-affiliate transactions will significantly increase the cost of certain consolidated risk management activities and may adversely affect HSBC to a greater extent than some of our competitors. Dodd-Frank grants the SEC discretionary rule-making authority to modify the standard of care that applies to brokers, dealers and investment advisers when providing personalised investment advice to retail customers and to harmonise other rules applying to these regulated entities. In June 2019, pursuant to this authority, the SEC finalised a rule that requires broker-dealers to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities. This rule impacts the manner in which business is
Other information | Regulation and supervision conducted with customers seeking investment advice and may affect certain investment product offerings. Dodd-Frank also expands the extra-territorial jurisdiction of US courts over actions brought by the SEC or the US with respect to violations of the anti-fraud provisions in the Securities Act, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. In addition, regulations which the FSOC, the consumer financial protection bureauConsumer Financial Protection Bureau or other regulators may adopt could affect the nature of the activities that our FDIC-insured depository institution subsidiaries may conduct, and may impose restrictions and limitations on the conduct of such activities. The implementation of the remaining Dodd-Frank provisions could result in additional costs or limit or restrict the way we conduct our business in the US. Global and regional prudential and other regulatory developments The Group is subject to regulation and supervision by a large number of regulatory bodies and other agencies. In addition to changes being introduced at a country level, changes are often driven by global bodies such as the G‑20, the FSB and the Basel Committee, which are then implemented at country level or regionally through the EU and the UK sometimes with modifications and with separate additional measures. We are also subject to regulatory stress testing in many jurisdictions. These have increased both in frequency and in the granularity of information required by supervisors. They include the programmes of the BoE, the FRB (as explained in the ‘US regulation and supervision’ section), the OCC, the EBA, the ECB, the HKMA and other regulators. For further details, see ‘Stress testing’ on page 97.134. On prudential changes, further details can be found in the ‘Regulatory developments’ section on page 56 of the Pillar 3 Disclosures at 31 December 20192020. Recovery and resolution The HSBC Group is subject to recovery and its subsidiariesresolution requirements in many of the jurisdictions in which it operates. In Europe, the BRRD establishes a framework for the recovery and resolution of EU credit institutions and investment firms. This framework has been established where HSBC has material or locally significant operating banks operating in the European region including France and Malta. Although outside the EU, the UK has implemented recovery and resolution requirements that are materially consistent with the framework set out in the BRRD. In Hong Kong, the Banking Ordinance and Financial Institutions (Resolution) Ordinance set out requirements for recovery and resolution planning, respectively. In the US, the Board of Governors of the Federal Reserve System ('FRB') and Federal Deposit Insurance Corporation ('FDIC') have jointly implemented Dodd-Frank Act resolution planning requirements for depository institution holding companies that are at or above certain thresholds. The FDIC has a separate resolution planning requirement for insured depository institutions (the ‘IDI Plan’), although the FDIC Chair has stated that the IDI Plan requirement is being held in abeyance pending finalisation of a new rule. The FRB has separately established a framework for recovery plans, although HSBC is not currently required to submit a recovery plan that details actions which management would take to mitigate actual or impending stress that would adversely impact key risk appetite metrics (capital, funding and liquidity). For a capital stress, these actions include measuresUS regulators unless specifically requested to de-risk the business, RWA management, reduction of costs, debt/liability management exercises, disposals, winding down businesses (for example investment banking business), reducing or cancelling dividends and raising new equity. For a liquidity stress, actions include measures to monetise assets to meet outflows (particularly high quality liquid assets), reduce lending, raise funding and access repo markets and central bank liquidity facilities. The choice of recovery actions to be taken would be dependent on the nature and severitydo so. In general, each respective part of the stress.HSBC Group is responsible for ensuring that it meets local recovery and resolution requirements where they exist, which are mainly applicable only to those regulated entities in a particular jurisdiction. The PRA/FCA and BoE, however, represent the lead regulators from a prudential and resolution perspective for the consolidated HSBC Group.
Recovery HSBC maintains recovery plans that are designed to outline credible actions that the HSBC Group could implement in the event of severe stress in order to restore its business to a stable and sustainable condition. HSBC typically submits recovery plans on an annual basis both to the PRA and to other regulators that have implemented recovery planning requirements. HSBC’s recovery plans are continually re-appraised, and this involves stress testing and regular ‘fire drill’ tests at the Group and material entity levels. HSBC files its recovery plans with its regulators typically on an annual basis. The Group’s corporate structure and global footprint mean that the preferred resolution strategy for the Group is a multiple point of entry ('MPE') strategy. Resolution
Resolution refers to the periodexercise of statutory powers where a financial institution and and/or its parent or other group company is unable to recover from an actual or impending stress and is deemed by its regulators to be failing, or likely to fail. In such a scenario, one or more regulators may exercise their statutory resolution powersfail and it is not reasonably likely that action could be taken that would result in the institution recovering. HSBC issues loss absorbing instruments to external investors predominantly from HSBC Holdings in order to ensure loss absorbing capacity is available to support the continuityobjectives of banking services and financial stability. Consistent with a MPE strategy,resolution, were such an event to occur. In the BoE is the Group’s lead regulator and would coordinate anyevent of a resolution of the HSBC Group, with host regulators. The Group’s other key regulators arein the HKMA, FRB/OCC andUK, it is anticipated that the EU’s Single Resolution Board. MREL issued externally by HSBC is a G-SIB and is required to hold an additional buffer of 2% of CET1 capital. It also has to meet requirements to maintain sufficient MREL resources which canHoldings would be written down or converted into capital resourcesto equity by the BoE using its statutory powers. This would enable subsidiaries of the HSBC Group to be recapitalised, as needed, to support the resolution objectives and maintain the provision of critical functions. Recapitalisation of subsidiaries could be achieved through the write-down, or conversion to equity, of internally issued MREL, TLAC or LAC. It is anticipated that this approach to recapitalising the HSBC Group’s subsidiaries could allow the HSBC Group to stay together in order to absorb lossesensure an effective stabilisation of the HSBC Group, as a whole, whilst also facilitating an orderly restructuring process, as needed, to remediate the cause of resolution. In view of the HSBC Group’s legal structure which comprises a group of locally regulated operating banks, HSBC recognises the imperative for local regulators to be satisfied with resolution planning as those regulators may ultimately determine the need to use the statutory powers available to them locally to resolve or recapitaliseplace into insolvency HSBC subsidiaries in their jurisdictions. In addition to the BoE and the PRA/FCA, HSBC is overseen locally by other regulators and resolution authorities such as the ECB, the European Banking Union’s Single Resolution Board, the HKMA, and the FRB, FDIC and OCC, and many of these have statutory resolution powers which could be applied to the local subsidiaries of the HSBC Group in their jurisdictions. The application of these local statutory resolution powers may result in one or more individual resolution authorities leading a financial institutionlocal resolution of the subsidiaries within their jurisdiction. This may or may not result in such subsidiaries ceasing to be part of the eventHSBC Group, depending on the resolution strategy adopted by the relevant resolution authority. The HSBC Group can, therefore, be resolved either on a consolidated basis or at a local level, in combination with a bail-in of its failure (see 'UK regulation and supervision' above).externally issued MREL is down-streamed fromat the HSBC Holdings tolevel. This preferred resolution strategy for the HSBC Group, as confirmed by its subsidiaries in accordance with set requirements from HSBC’s regulators. This strategy givesregulators, is a multiple point of entry (‘MPE’) strategy. In July 2019, the option to host regulators, in accordance with any statutory powers that they may exercise, to recapitalise subsidiaries in resolution. By 2022, HSBC has to comply withBoE and PRA published final policies on the BoE’s Resolvability Assessment Framework (the ‘RAF’('RAF'). The RAF sets out a framework to operationalise resolution planning and, which places the onus on firms to demonstrate their own resolvability.resolvability and is designed to increase transparency and accountability for resolution planning. In order to be considered resolvable, HSBC must meet three outcomes (i) have adequate resources in resolution; (ii) be able to continue business through resolution and restructuring; and (iii) be able to co-ordinate its resolution and communicate effectively with stakeholders.
The key requirements under the RAF are: maintaining sufficient MREL resources; the abilityrequires HSBC to assess the valueperform a self-assessment of its businesses; maintaining funding in resolution; and continuing to run its businesses or restructure it as appropriate. HSBC must also comply with a related Statement of Policy on valuation capabilities to support resolvability by 1 January 2021.
Regulation and supervision
Under the RAF, HSBC has topreparedness for resolution, submit a self-assessment report of its preparations for resolutionthe outcome of this self-assessment to the PRA in 2020October 2021 and makepublish a public a summary of this reportthe HSBC Group’s resolvability in 2021.June 2022. The BoE will makesimilarly publish a public statement regarding HSBC’sconcerning the resolvability following HSBC’s disclosure.of HSBC must meetat the RAF requirements fully by
1 January 2022.same time.
HSBC continues to engage with the BoE, PRA and its global regulators in other jurisdictions to ensure that it meets current and future recovery and resolution requirements. European regulation Through the UK’s membership of the EU, HSBC has been both directly and indirectly subject to European financial services regulation. As discussed in the ‘UK regulation and supervision’ section above, theThe UK left the EU on 31 January 2020 and will remainbut was subject
to EU law during an implementationa transition period, which is expected to endended on 31 December 2020. According to the withdrawal agreement entered into between the EU and the UK, this implementation period may be extended by a further two years, subject to political agreement. However, UK law currently prohibits the UK government from agreeing to an extension. At the end of the implementationtransition period, the HSBC Group and its subsidiaries in the UK will ceaseceased to be subject to EU law; however,law. However, EU law will continuecontinues to apply to HSBC’s EU subsidiaries. It is not clear howOn 30 December 2020, the UK and the EU signed a Trade and Cooperation Agreement ('TCA') setting out their future relationship. The TCA is in force in the UK and the agreement applies provisionally in the EU, pending the completion of the ratification procedures necessary for its entry into force. The financial services provisions of the agreement are limited. In particular, the TCA provided no new arrangements to replace the passporting arrangements which allowed UK and EU firms access to the others markets. The agreement preserves the respective rights of both the UK and EU to put in place measures for prudential reasons. In a declaration accompanying the TCA, the UK and EU have agreed to establish structured regulatory cooperation on financial services, with the aim of establishing a durable and stable relationship. The declaration states that these arrangements will treatallow for ‘transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions’ and ‘enhanced cooperation and coordination’. The EU regulationand UK have also committed to agree, by March 2021, a Memorandum of Understanding establishing the framework for this cooperation and to discuss how to move forward with equivalence determinations between them.
During the transition period, the UK implemented EU legislative changes that comeswere scheduled to enter into effect afterforce before the end of the implementation period. Certain changes that were scheduled to enter into force after 31 December 2020 will be implemented separately by the UK under the Financial Services Bill (the ‘Bill’) which proposes powers for HMT to revoke rules within the CRR where they are superseded by new rules published by the Basel Committee. The Bill contains a specified list of publications by the Basel Committee that may be used as a basis to revoke the CRR. This includes changes to EU law which are enacted but have yet to be implemented. In particular, it remains unclear how the UK will implement the changes to the CRD that were enacted by the EU during 2019 but are not scheduled to be implemented until 2021, after the anticipated endall of the implementation period. The changes implement partspapers that form the basis of the Basel III Reforms, including changesthose that have been enacted by the EU as part of its amendments to counterparty riskthe CRR (‘CRR2’). The PRA will be responsible for designing and equity investment in funds RWAs,writing the market risk framework andnew rules. The Bill does not require that the leverage ratio. It would also include various proposals falling underPRA implement rules that replicate the Capital Markets Union initiativeBasel III Reforms in the areasUK; instead, the PRA will be given the discretion to decide the substance of consumer protection and financial markets and various proposalsthe rule, having regards to the likely effect of the rules on the relative standing of the UK as a place for internationally active banks to be based or to carry on activities. In the EU, the principal changes arising from the CRR2 will enter into force in relationJune 2021. In order to cyber risk, usegive firms in the UK a reasonable time to implement following the finalisation of financial technology and data processing.the UK’s version of the rules, the PRA has announced a delay to the UK’s implementation of CRR2 until 1 January 2022. The remaining Basel III Reforms remain scheduled for 1 January 2023. Financial crime regulation HSBC operates in many countries around the world. As part ofhas built a strong financial crime risk management framework across its global Compliance function. We are committed to acting with integrity, and conducting our activities in each of the countries and territories in which we have built a strong global financial crime compliance framework, and have a dedicated financial crime risk team. HSBC takes a comprehensive, risk-based approach to complianceoperate around the world in accordance with applicable financial crime-relatedall laws and regulations including anti-moneyrelating to financial crime; namely money laundering, sanctions anti-briberybreaches, fraud, bribery and corruption, fraudtax evasion, and tax transparency lawsterrorist and regulations.proliferation financing. HSBC has established a global anti-money laundering ('AML') programme for this purpose. The objective ofto enable HSBC to appropriately mitigate the AML programme is to ensure that money laundering, terrorist and proliferation financing risks identified by HSBC are appropriately mitigated.that it may face. The AML programme is based uponinformed by various laws, regulations and regulatory guidance from the UK, the EU, Hong Kong, and the US, although local country requirements which are more stringent will apply to the local HSBC business or entity. The AML programme is designed to ensure that our employees know how to detect, prevent and as applicable, local jurisdictions in which HSBC does business. HSBC continuesmanage money laundering risks, and we continue to monitor and assess changes in financial crime regulationsevolve our AML programme in the countries in which it operates. Where appropriate, HSBC will incorporate revised standards as partlight of its Global AML Programme. Where local country regulations exceed the Global AML Programme requirements, all such requirements must be followed by the HSBC entities that are located in that jurisdiction or are obligated through their legal structure to incorporate them.emerging risks and new regulations.
HSBC’s global sanctions policy is based on a comprehensive assessment of financial crime risk and is informed byderived from the sanctions resolutions, laws and regulations administered by the US,of the United Nations Security Council, the UK, Hong Kong, the EU and Hong Kongthe US, and seeks to adopt the highest and most effective standard. During 2019,2020, the US has continued to expand the scope of sanctions against Iran, Russia, VenezuelaNorth Korea, Syria, Cuba and Cuba.Russian gas export pipeline projects. Some of these US sanctions have extraterritorial effect and may affect non-US operators undertaking certain activity captured by these sanctions. In addition, the US also enacted legislation authorising sanctions to be imposed on individuals and entities determined by the US to be involved in undermining Hong Kong’s autonomy and human rights abuses in the Xinjiang Uyghur Autonomous Region of China. The EU also imposed targeted sanctions against Russia and in September 2019, reaffirmed its commitmentTurkey. The UK enacted human rights sanctions legislation, which was the UK’s first new autonomous sanctions regime post-Brexit. The EU participants to the Joint Comprehensive Plan of Action (“JCPOA”) and Iran Nuclear Deal fromboth triggered the JCPOA’s dispute resolution mechanism, which could lead to the US had withdrawn in 2018. Undersnapback of EU and UN sanctions on Iran if the EU Blocking Regulation amendment in 2018, EU persons remain generally prohibited from complying with certain US Iran-related sanctions laws and regulations.disputes are unresolved. As HSBC’s global sanctions policy is based on a comprehensive assessment of financial crime risk and acknowledges the primacy of local laws, no material changes were required to our global sanctions policy as a result of the changes to the US, UK and EU sanctions regulations. We do not consider that our business activities with counterparties with whom transactions are restricted under applicable sanctions are material to our business for the year ended 31 December 2019.2020. HSBC requires compliance with all applicable anti-bribery and corruption laws in all markets and jurisdictions in which we operate. These laws include the UK Bribery Act, the US Foreign Corrupt Practices Act, and the Hong Kong Prevention of Bribery Ordinance, as well as other similar laws and regulations in the countries where we operate. We have a global anti-bribery and corruption policy, which gives practical effect to these laws and regulations, but also requires compliance with the spirit of laws and regulations to demonstrate HSBC’s commitment to ethical behaviours and conduct. Despite the expiration on 11 December 2017 of the five-year Deferred Prosecution Agreementdeferred prosecution agreement (‘DPA’) entered into with the US Department of Justice, and the dismissal of the charges contained within, we continue to take further steps to refine and strengthen our defences against financial crime by investing in advanced analytics and artificial intelligence. HSBC Bank USA entered into a Consent Order with the Office of the Comptroller of the Currency, and HSBC North American Holdings (‘HNAH’) entered into a Consent Order with the Federal Reserve Board in October 2010. The Orders required improvement of our compliance risk management programme, including AML controls across our US businesses. These Orders were both terminated in 2018. In 2012, Holdings entered into a Consent Order with the Federal Reserve Board (the “2012 Order”) and agreed to an undertaking with the Financial Services Authority (now(from 2013 a Direction from the UK Financial Conduct Authority (the “FCA Direction”)), both of which contained certain forward-looking obligations in relation to HSBC’s AML and sanctions compliance programme. Reflective of HSBC’s progress towards achieving a sustainable financial crime risk management capability, in July 2020, the FCA issued a new Direction, replacing the previous Direction issued in 2013. The 2012 Order and the FCA Direction remain in effect as of year-end 2019.2020.
Other information | Disclosures pursuant to Section 13(r) of the Securities Exchange Act | | | | Disclosures pursuant to Section 13(r) of the Securities Exchange Act |
Section 13(r) of the Securities Exchange Act requires each issuer registered with the SEC to disclose in its annual or quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions with persons or entities targeted by U.S. sanctions programmes relating to Iran, terrorism, or the proliferation of weapons of mass destruction, even if those activities are not prohibited by U.S. law and are conducted outside the U.S. by non-U.S. affiliates in compliance with local laws and regulations. To comply with this requirement, HSBC Holdings plc (together with its affiliates, “HSBC”) has requested relevant information from its affiliates globally. The following activities conducted by HSBC are disclosed in response to Section 13(r): Legacy contractual obligations related to guarantees Between 1996 and 2007, we provided guarantees to a number of our non-Iranian customers in Europe and the Middle East for various business activities in Iran. In a number of cases, we issued counter indemnities in support of guarantees issued byinvolving Iranian banks as the Iranian beneficiaries of the guarantees required that they be backed directly by Iranian banks. The Iranian banks to which we provided counter indemnities included Bank Tejarat, Bank Melli, and the Bank of Industry and Mine. There was no measurable gross revenue in 20192020 under those guarantees and counter indemnities. We do not allocate direct
costs to fees and commissions and, therefore, have not disclosed a separate net profit measure. We are seeking to cancel all relevant guarantees and counter indemnities, and we do not currently intend to provide any new guarantees or counter indemnities involving Iran. None were cancelled in 20192020 and approximately 1617 remain outstanding. Other relationships with Iranian banks Activity related to U.S.-sanctioned Iranian banks not covered elsewhere in this disclosure includes the following: •We act as the trustee and administrator for a pension scheme involving eight employees of a U.S.-sanctioned Iranian bank in Hong Kong. Under the rules of this scheme, we accept contributions from the Iranian bank each month and allocate the funds into the pension accounts of the Iranian bank’s employees. We run and operate this pension scheme in accordance with Hong Kong laws and regulations. Estimated gross revenue, which includes fees and/or commissions, generated by this pension scheme during 2019,2020, was approximately $1,736.$2,440. For the Iranian bank related-activity discussed above, we do not allocate direct costs to fees and commissions and, therefore, have not disclosed a separate net profit measure. We have been holding a safe custody box for the Central Bank of Iran. For a number of years, the box has not been accessed by the Central Bank of Iran, and no fees have been charged to the Central Bank of Iran. We currently intend to continue to wind down the activity discussed in this section, to the extent legally permissible, and not enter into any new such activity. Activity related to U.S. Executive Order 13224 During 2019,2020, we processed the following transactions relating to Executive Order 13224: We processed a local currency payment from a UK customer’s account to that customer’s account at another financial institution, which had been designated the previous day under Executive Order 13224.
We closed the accounts of and paid the closing balances to an individual designated under Executive Order 13224 in accordance with local legal requirements in that jurisdiction.
We set off mortgage debt owed by an individual who, at the time of the set-off, was designated under Executive Order 13224, using funds from the individual’s frozen local currency cash accounts. The individual is no longer designated.
We processed a number of small local currency payments on behalf of UK customers to a UK-registered charity that is designated under Executive Order 13224, but that is not sanctioned by the UK, EU, or the United Nations Security Council. We have identified that we also processed domestic payments from UK customers to this UK-registered charity over the course of 2013-2018.
We processed a local currency payment that was sent to a UK customer by another financial institution on behalf an individual that is designated under Executive Order 13224, but that is not sanctioned by the UK, EU, or the United Nations Security Council.
Council.There was no measurable gross revenue or net profit generated fromto HSBC during 2020 relating to these transactions.
Other activity We have an insurance company customer in the United Arab Emirates that, during 2019,2020, made local currency payments for the reimbursement of medical treatment to a hospital located in the United Arab Emirates and owned by the Government of Iran. We processed these payments to the hospital made by itsour customer. We have a customer in the United Arab Emirates that, during 2019, made credit card payments2020, received a local currency check for medical treatment tothe reimbursement for food and medicine samples from a hospital located in the United Arab Emirates and owned by the Government of Iran. We processed these payments tothis check from the hospital made by itsto our customer. We maintain certain accounts forhave a small number of customers in the United Arab Emirates that, during 2019,2020, received cheque paymentslocal currency checks from entities owned by the Government of Iran.an Iranian-owned insurance company. We processed these checks to our customers. We have a customer in India that, during 2019,2020, received four local currency checks from the Consulate General of the Islamic Republic of Iran as part of retirement settlement funds. We processed these checks to our customer. We have an international organisation as a customer in France, and during 2020, that customer received a domesticlocal currency payment for the reimbursement of a vehicle inspection that was provided for the benefit offrom the Iranian Embassy.Embassy in Austria for membership fees. We processed this payment. We have a customer in France that, during 2020, received four local currency payments from an Iranian-owned bank. We processed these payments to our customer. We exited a customer relationship with the Iranian Embassy in the UK in 2013. In 2020, we made two domestic local currency payments to return funds related to this legacy customer relationship that were being held in an unclaimed balance account. For these activities, there was no measurable gross revenue or net profit to HSBC during 2019.2020. Frozen accounts and transactions We maintain several accounts that are frozen as a result of relevant sanctions programmes, and safekeeping boxes and other similar custodial relationships, for which no activity, except as licensed or otherwise authorised, took place during 2019.2020. There was no measurable gross revenue or net profit to HSBC during 20192020 relating to these frozen accounts.
| | | | Risk | | Page | | Our approach to risk | | | Our risk appetite | | | Risk management | | Key developments in 20192020 | | | | | | | Risk elements in the loan portfolio | | Country distribution of outstandings and cross-border exposures | | | Top and emerging risks | | | Externally driven | | | Internally driven | | | | Risk Factorsfactors | | | Areas of special interest | | | Risks related to Covid-19 | | | 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 liquidityTreasury risk | | | Market risk | | | Resilience risk | | | Regulatory compliance risk | | Financial crime and fraud risk | | | | | Model risk | | | Insurance manufacturing operations risk | |
Operational resilience in a pandemic We upheld our operational resilience during the Covid-19 outbreak during a period of increased demand on our teams and systems, with approximately 1.6 million of our WPB customers granted payment relief options across more than 30 markets. We supplemented our existing approach to risk management with additional tools and practices helping to mitigate and manage risks. Initiatives included mortgage assistance, payment holidays, and the waiving of certain fees and charges. As we helped our customers during these challenging times, we continued to prioritise effective and robust credit risk management. We also increased our focus on the quality and timeliness of the data used to inform management decisions, so we were able to manage the varying level of risk actively throughout the year. For further details of our customer relief programmes, see page 184.
Our risk appetite 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 theseinto 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 athe 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 ourOur 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’;reports; •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’).RAS. 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 fundamentalapplied to the development of business line strategies, strategic and business planning and senior management balanced scorecards.remuneration. At a Group level, performance against the RAS is reported to the Group Risk Management Meeting of the Group Management Board (‘RMM’) alongside key risk indicators to support targeted insight and discussion on a monthly basis so that any actual performance that falls outside the approvedbreaches of risk appetite is discussed and appropriateassociated mitigating actions are determined.actions. 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.Group’s RAS. 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
Report of the Directors | Risk
our strategy and provide sustainable growth. This is supported through our three lines of defence model described on page 97. As134. We are focused on the implementation of our business strategy, as part of which we move into a revised business focus and carryare carrying out a major change programme, it will beprogramme. It is critical for us tothat we ensure that as we implement changes, 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’sour 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 202)251). | | | | | | | | | | 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 97134 and 119)160). | | | | | | | | | | | | 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 97)134). | | | | | | | | | | | | Processes and tools | | Risk appetite | | The Group has processes in place to identify/assess, monitor, manage and report risks to help ensure we remain within our risk appetite. | | | | | Enterprise-wide risk management tools | | | | | | Active risk management: identification/assessment, monitoring, management and reporting | | | | | | | | | | | | | Internal controls | | Policies and procedures | | Policies and procedures define the minimum requirements for the controls required to manage our risks. | | | | | | Control activities | | Operational and resilience 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. | | | | | | | | | | | | | | | | | | | | | | |
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 the 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. The management of regulatory compliance risk and financial crime risk resides with the Group Chief Compliance Officer. HeOversight is supportedmaintained by the Financial CrimeGroup Chief Risk Management Meeting, as described under ‘Financial crimeOfficer, in line with their enterprise risk management’ on page 181.oversight responsibilities, through the RMM. 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.
| | | | | | Governance structure for the management of risk | | Authority | Membership | Responsibilities include: | | | | Risk Management Meeting of the Group Management Board
| Group Chief Risk Officer Group Chief Legal Officer Group Chief Executive Group Chief Financial Officer All other Group Managing DirectorsExecutive Committee members | • Supporting the Group Chief Risk Officer in exercising Board-delegated risk management authority• Overseeing the implementation of risk appetite and the enterprise risk management framework• Forward-looking assessment of the risk environment, analysing possible risk impacts and taking appropriate action• Monitoring all categories of risk and determining appropriate mitigating action• Promoting a supportive Group culture in relation to risk management and conduct | Global Risk Management BoardExecutive Committee | Group Chief Risk Officer Chief risk officers of HSBC’s global businesses and regions Heads of Global Risk sub-functions | • Supporting the Group Chief Risk Officer in providing strategic direction for the Global Risk function, setting priorities and providing oversight• Overseeing a consistent approach to accountability for, and mitigation of, risk across the Global Risk functionGroup | | Global business/regional risk management meetings | 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• Forward-looking Group 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 207.255.
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 identifying and managing forward-looking risk identification and management.risk. 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 someis the risk to achieving our strategy or objectives as a result of the most material risks we face, such as cyber-attacks, the loss of datafailed internal processes, people and poor conduct outcomes. Actively managingsystems, or from external events. Sound non-financial risk management is crucialcentral to servingachieving good outcomes for our customers effectively and having a positive impact on customers.society. During 2019,2020, we continued to strengthen the control environment and our approach to the management of non-financial risk, as broadly set out in our operational risk management framework. The approach outlinesmanagement of non-financial risk focuses on governance and risk appetite, and provides a single view of the non-financial risks that matter the most and the 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 and Resilience Risk function, headed by the Group Head of Operational and Resilience 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 and liquidity 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 and liquidity 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 theThe 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 stress test in 2020 was cancelled and the publication of the results of the 2019 biennial exploratory scenario stress tests, run byon liquidity was postponed due to 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.
Report of the Directors | Risk
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.Covid-19 outbreak.
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.capital and liquidity. This in turn informs decisions about preferred capital and liquidity 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.Hong Kong Monetary Authority (‘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 20192020 We actively managed the risks resulting from the Covid-19 outbreak and its impacts on our customers and operations during 2020, as well as other key risks described in this section. In 2019, it was announced that Marc Moses was stepping down from his roleaddition, we enhanced our risk management in the following areas: •In January 2020, we simplified our approach and articulation of Group Chief Risk Officerrisk management through the combination of our enterprise risk management framework and our operational risk management framework. •The global model risk policy and associated standards were revised to improve how we manage model risk and meet enhanced external expectations. •We continued to focus 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 enhancesimplifying our approach to thenon-financial risk management. We are implementing more effective oversight and better end-to-end identification and management of risk. non-financial risks.
•We continued efforts to simplify and enhance how we manage risk. We simplifiedestablished 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 ResilienceTreasury Risk sub-function to reflect the growing regulatory importance of being able to ensure our
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 RiskManagement function. This function is the responsibility of the Global Head of Resilience Risk. For further details on resilience risk, see page 179.
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 provideproviding independent oversight of treasury activities across capital management activities. This will operate across the Group focusing on both adequacy of capitalrisk, liquidity and sufficiency of returns.funding risk, structural foreign exchange risk and
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.
interest rate risk in the banking book, together with pension risk. •We continued to support the business and our customers throughout the global pandemic, while continuing our focus on managing financial crime risk. We continued to invest in both advanced analytics and artificial intelligence, which remain key components of our next generation of tools to fight financial crime. •We combined our Operational Risk and Resilience Risk teams to form a new Operational and Resilience Risk sub-function. This sub-function provides robust non-financial risk first line of defence oversight and risk steward oversight of the management of risk by the Group’s businesses, functions, legal entities and critical business services. The sub-function helps to ensure that the first line of defence is focused firmly on priority tasks. By bringing the two teams together, we expect to benefit from improved stewardship, better risk management capabilities and better outcomes for our customers. •We established a dedicated Climate Risk Oversight Forum to shape and oversee our approach to climate risk. We have also established a climate risk programme to drive the delivery of our enhanced climate risk management approach. | | | | Risk elements in the loan portfolio |
Unless otherwise stated, the disclosure of credit risk elements in this section reflects US accounting practice and classifications. The purpose of the disclosure is to present within the US disclosure framework those elements of the loan portfolios with a greater risk of loss. The three main classifications of credit risk elements presented are: •impaired loans; •unimpaired loans contractually more than 90 days past due as to interest or principal; and •troubled debt restructurings not included in the above. | | | | | | | | | | Interest forgone on impaired and restructured loans | | 2020 | 2019 | | $m | $m | | Europe | 192 | | 181 | | | Asia | 122 | | 103 | | | Middle East and North Africa | 111 | | 125 | | | North America | 80 | | 69 | | | Latin America | 52 | | 37 | | | Year ended 31 Dec | 557 | | 515 | |
| | | | | | | | | | Interest recognised on impaired and restructured loans | | 2020 | 2019 | | $m | $m | | Europe | 192 | | 178 | | | Asia | 32 | | 43 | | | Middle East and North Africa | 23 | | 38 | | | North America | 60 | | 57 | | | Latin America | 58 | | 38 | | | Year ended 31 Dec | 365 | | 354 | |
| | | | | | | Interest forgone on impaired and restructured loans |
| 2019 |
| 2018 |
|
| $m |
| $m |
| | Europe | 181 |
| 152 |
| | Asia | 103 |
| 90 |
| | Middle East and North Africa | 125 |
| 107 |
| | North America | 69 |
| 104 |
| | Latin America | 37 |
| 27 |
| | Year ended 31 Dec | 515 |
| 480 |
|
| | | | | | | Interest recognised on impaired and restructured loans | | | 2019 | 2018 | | | $m |
| $m |
| | Europe | 178 |
| 145 |
| | Asia | 43 |
| 41 |
| | Middle East and North Africa | 38 |
| 29 |
| | North America | 57 |
| 85 |
| | Latin America | 38 |
| 26 |
| | Year ended 31 Dec | 354 |
| 326 |
|
Impaired loans A loan is impaired, and an impairment allowance is recognised, when there is objective evidence of a loss event that has an effect on the cash flows of the loan that can be reliably estimated. In accordance with IFRSs, we recognise interest income on assets after they have been written down as a result of an impairment loss. The balance of impaired loans at 31 December 20192020 was $13.7bn, $0.4bn$19.4bn, $5.7bn higher than $13.3bn$13.7bn at 31 December 2018.2019. This increase was largely due to pausean increase in write-offsimpaired loans and changes in credit quality in the UK. advances to customers with corporate and commercial customers of $4.6bn, personal lending customers of $0.8bn and non-bank financial institutions of $0.3bn.
Unimpaired loans more than 90 days past due Under IFRS 9, the Group 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 that 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). As a financial instrument is considered impaired if contractual payments of either principal or interest are past due for more than 90 days, these amounts will be reported under impaired loans with no balance reported under unimpaired loans more than 90 days past due. Previously under IAS 39, examples of unimpaired loans more than 90 days past due included individually assessed mortgages that are in arrears more than 90 days where there was no other indicators of impairment, but where the value of collateral was sufficient to repay both the principal debt and all potential interest for at least one year; and short-term trade facilities past due more than 90 days for technical reasons such as delays in documentation, but where there was no concern over the creditworthiness of the counterparty. Troubled debt restructurings Under US GAAP, a troubled debt restructuring (‘TDR’) is a loan, the terms of which have been modified for economic or legal reasons related to the borrower’s financial difficulties to grant a concession to the borrower that the lender would not otherwise consider. A modification that results in a delay in payment that is considered insignificant is not regarded as a concession for the purposes of this disclosure. The SEC requires separate disclosure of any loans that meet the definition of a TDR that are not included in the previous two loan categories. These are classified as TDRs in the table on page 100.137. Loans that have been identified as a TDR under the US guidance retain this designation until maturity or derecognition. This treatment differs from the Group’s impaired loans disclosure convention under IFRSs under which a loan may return to unimpaired status after demonstrating a significant reduction in the risk of non-payment of future cash flows. As a result, reported TDRs include those loans that have returned to unimpaired status under the Group’s disclosure convention for renegotiated loans. The balance of TDRs not included as impaired loans at
31 December 20192020 was $2.4bn, $0.4bn$1.3bn, $1bn lower than 20182019 mainly due to a reduction in Europe and Asia.MENA. Under the Group’s IFRS 9 methodology financial instruments (except for renegotiated loans) are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment. Wholesale renegotiated loans 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. Retail renegotiated loans are deemed to remain credit impaired until repayment or derecognition.
Potential problem loans Potential problem loans are loans where information on possible credit problems among borrowers causes management to seriously doubt their ability to comply with the loan repayment terms. The following concentrations of credit risk have a higher risk of containing potential problem loans. Interest bearing financial instruments included in the “substandard” credit quality classification as disclosed on page 136180 include financial instruments that would be regarded as potential problem loans. These are debt securities and bills with an external rating of CCC and below, wholesale lending rated CRR 8 and retail lending rated in band 6. Under IFRS 9, 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. Any financial instrument deemed to have suffered a significant increase in credit risk is transferred from stage 1 to stage 2. The assessment explicitly or implicitly compares the risk of default occurring at the reporting date compared to 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. ‘Renegotiated loans and forbearance’ on page 140184 includes disclosure about the credit quality of loans whose contractual terms have been changed at some point in the life of the loan because of significant concerns about the borrower’s ability to make contractual payments when due. Renegotiated loans are classified as impaired when: •there has been a change in contractual cash flow as a result of a concession that the lender would otherwise not consider; and •it is probable that without the concession, the borrower would be unable to meet contractual payment obligations in full. This presentation applies unless the concession is insignificant and there are no other indicators of impairment. The renegotiated loan will continue to be disclosed as impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-repayment of future cash flows, and there are no other indicators of impairment. Renegotiated loans that are not classified as impaired may have a higher risk of becoming delinquent in the future, and may therefore be potential problem loans. Further information regarding the credit quality classification of renegotiated loans can be found on page 121.161. Loans issued under customer relief schemes are not currently considered potential problem loans (unless otherwise categorised as stage 2 or 3), however, we continue to monitor the recoverability of loans granted under these programmes, including loans to a small number of customers that were subsequently found to be ineligible for such relief. The ongoing performance of such loans remains an area of uncertainty at 31 December 2020. Refer to page 184 for further details on customer relief schemes.
Analysis of risk elements in the loan portfolio by geographical region The following table sets out the amount of risk elements in loan portfolios included within loans and advances to customers and banks in the consolidated balance sheet, trading loans classified as in default and assets obtained by taking possession of security. The table excludes the amount of risk elements in loan portfolios classified as ‘Assets held for sale’ in the consolidated balance sheet.
| | | | | | | | | | | | | Risk elements in the loan portfolio by geographical region | | | 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| | Impaired loans | | | | | | | Europe | 7,135 |
| 6,434 |
| 8,042 |
| 8,062 |
| 9,265 |
| | Asia | 2,284 |
| 2,521 |
| 2,249 |
| 2,499 |
| 2,375 |
| | Middle East and North Africa | 2,003 |
| 2,233 |
| 1,949 |
| 2,230 |
| 2,178 |
| | North America | 1,696 |
| 1,500 |
| 2,606 |
| 4,842 |
| 8,930 |
| | Latin America | 592 |
| 659 |
| 624 |
| 595 |
| 1,030 |
| | | 13,710 |
| 13,347 |
| 15,470 |
| 18,228 |
| 23,778 |
| | Unimpaired loans contractually more than 90 days past due as to principal or interest |
|
|
|
|
|
|
|
|
|
| | Europe | — |
| — |
| — |
| — |
| 7 |
| | Asia | — |
| — |
| — |
| — |
| 2 |
| | Middle East and North Africa | — |
| — |
| 24 |
| 15 |
| 96 |
| | North America | — |
| — |
| — |
| 3 |
| 27 |
| | Latin America | — |
| — |
| — |
| — |
| — |
| | | — |
| — |
| 24 |
| 18 |
| 132 |
| | Troubled debt restructurings (not included in the classifications above) |
|
|
|
|
|
|
|
|
|
| | Europe | 1,665 |
| 1,682 |
| 1,890 |
| 1,900 |
| 1,495 |
| | Asia | 68 |
| 98 |
| 273 |
| 269 |
| 284 |
| | Middle East and North Africa | 452 |
| 527 |
| 459 |
| 549 |
| 584 |
| | North America | 136 |
| 229 |
| 174 |
| 518 |
| 3,698 |
| | Latin America | 30 |
| 189 |
| 83 |
| 130 |
| 164 |
| | | 2,351 |
| 2,725 |
| 2,879 |
| 3,366 |
| 6,225 |
| | Trading loans classified as in default |
|
|
|
|
|
|
|
|
|
| | North America | — |
| — |
| — |
| — |
| — |
| | Europe | — |
| — |
| 56 |
| — |
| — |
| | Middle East and North Africa | — |
| — |
| — |
| — |
| — |
| | North America | — |
| — |
| — |
| — |
| — |
| | Latin America | — |
| — |
| — |
| — |
| — |
| | | — |
| — |
| 56 |
| — |
| — |
| | Risk elements on loans |
|
|
|
|
|
|
|
|
|
| | Europe | 8,800 |
| 8,116 |
| 9,988 |
| 9,962 |
| 10,767 |
| | Asia | 2,352 |
| 2,619 |
| 2,522 |
| 2,768 |
| 2,661 |
| | Middle East and North Africa | 2,455 |
| 2,760 |
| 2,432 |
| 2,794 |
| 2,858 |
| | North America | 1,832 |
| 1,729 |
| 2,780 |
| 5,363 |
| 12,655 |
| | Latin America | 622 |
| 848 |
| 707 |
| 725 |
| 1,194 |
| | | 16,061 |
| 16,072 |
| 18,429 |
| 21,612 |
| 30,135 |
| | Assets held for sale |
|
|
|
|
|
|
|
|
|
| | Europe | 18 |
| 16 |
| 14 |
| 16 |
| 23 |
| | Asia | 27 |
| 39 |
| 51 |
| 46 |
| 19 |
| | Middle East and North Africa | — |
| — |
| — |
| 1 |
| 1 |
| | North America | 10 |
| 12 |
| 11 |
| 57 |
| 116 |
| | Latin America | 3 |
| 9 |
| 18 |
| 22 |
| 20 |
| | | 58 |
| 76 |
| 94 |
| 142 |
| 179 |
| | Total risk elements |
|
|
|
|
|
|
|
|
|
| | Europe | 8,818 |
| 8,132 |
| 10,002 |
| 9,978 |
| 10,790 |
| | Asia | 2,379 |
| 2,658 |
| 2,573 |
| 2,814 |
| 2,680 |
| | Middle East and North Africa | 2,455 |
| 2,760 |
| 2,432 |
| 2,795 |
| 2,859 |
| | North America | 1,842 |
| 1,741 |
| 2,791 |
| 5,420 |
| 12,771 |
| | Latin America | 625 |
| 857 |
| 725 |
| 747 |
| 1,214 |
| | At 31 Dec | 16,119 |
| 16,148 |
| 18,523 |
| 21,754 |
| 30,314 |
| | | % |
| % |
| % |
| % |
| % |
| | Allowance for ECL/loan impairment allowances as a percentage of risk elements on loans | 54.5 |
| 53.7 |
| 40.6 |
| 36.3 |
| 31.8 |
|
Supplementary information
| | | | | | | | | | | | | | Gross loans and advances by industry sector over five years | | | | In accordance with IFRS 9
| In accordance with IAS 39 | | | | 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| | | | $m |
| $m |
| $m |
| $m |
| $m |
| | Personal | | 434,271 |
| 394,337 |
| 376,481 |
| 339,798 |
| 374,082 |
| | – first lien residential mortgages | | 322,178 |
| 293,333 |
| 278,173 |
| 249,778 |
| 274,511 |
| | – other personal | | 112,093 |
| 101,004 |
| 98,308 |
| 90,020 |
| 99,571 |
| | Corporate and commercial | | 540,499 |
| 534,577 |
| 522,248 |
| 465,827 |
| 499,513 |
| – agriculture, forestry and fishing
| | 6,696 |
| 6,701 |
| 6,302 |
| 5,261 |
| 6,595 |
| – mining and quarrying
| | 14,435 |
| 14,172 |
| 10,911 |
| 15,781 |
| 22,236 |
| | – manufacturing | | 104,380 |
| 105,704 |
| 115,531 |
| 112,965 |
| 117,536 |
| – electricity, gas, steam and air-conditioning supply
| | 15,040 |
| 16,044 |
| 17,397 |
| 14,302 |
| 16,603 |
| – water supply, sewerage, waste management and remediation
| | 3,501 |
| 3,523 |
| 2,806 |
| 2,380 |
| 3,311 |
| | – construction | | 15,287 |
| 15,254 |
| 15,443 |
| 14,876 |
| 18,102 |
| – wholesale and retail trade, repair of motor vehicles and motorcycles
| | 94,681 |
| 97,665 |
| 98,079 |
| 82,848 |
| 90,719 |
| – transportation and storage
| | 25,580 |
| 25,541 |
| 24,258 |
| 23,081 |
| 26,399 |
| – accommodation and food
| | 24,656 |
| 21,547 |
| 16,971 |
| 12,823 |
| 14,135 |
| – publishing, audiovisual and broadcasting
| | 19,971 |
| 21,172 |
| 18,405 |
| 19,058 |
| 22,043 |
| | – real estate | | 130,752 |
| 123,233 |
| 114,349 |
| 96,639 |
| 95,768 |
| – professional, scientific and technical activities
| | 24,122 |
| 22,573 |
| 18,094 |
| 15,557 |
| 17,528 |
| – administrative and support services
| | 25,714 |
| 25,103 |
| 19,960 |
| 15,707 |
| 14,725 |
| – public administration and defence, compulsory social security
| | 2,377 |
| 1,463 |
| 221 |
| 137 |
| 167 |
| | – education | | 1,900 |
| 1,829 |
| 1,490 |
| 1,033 |
| 1,169 |
| | – health and care | | 4,465 |
| 4,308 |
| 5,688 |
| 4,971 |
| 4,896 |
| – arts, entertainment and recreation
| | 2,824 |
| 5,041 |
| 3,003 |
| 2,490 |
| 2,545 |
| | – other services | | 14,276 |
| 13,913 |
| 20,354 |
| 16,989 |
| 16,761 |
| – activities of households
| | 791 |
| 830 |
| — |
| — |
| — |
| – extra-territorial organisations and bodies activities
| | 2 |
| 59 |
| — |
| — |
| — |
| | – government | | 8,313 |
| 8,073 |
| 11,728 |
| 8,442 |
| 7,455 |
| | – asset-backed securities | | 736 |
| 829 |
| 1,258 |
| 487 |
| 820 |
| | Financial | | 139,924 |
| 133,587 |
| 162,112 |
| 151,855 |
| 150,833 |
| | – non-bank financial institutions | | 70,705 |
| 61,407 |
| 71,719 |
| 63,729 |
| 60,414 |
| | – banks | | 69,219 |
| 72,180 |
| 90,393 |
| 88,126 |
| 90,419 |
| | Total gross loans and advances | | 1,114,694 |
| 1,062,501 |
| 1,060,841 |
| 957,480 |
| 1,024,428 |
| | Impaired loans and advances to customers | | 13,710 |
| 13,347 |
| 15,470 |
| 18,228 |
| 23,758 |
| | Impairment allowances on loans and advances to customers and banks | | 8,748 |
| 8,638 |
| 7,484 |
| 7,850 |
| 9,555 |
| | Loans and advances change in ECL/Loan impairment charge | | 2,629 |
| 1,896 |
| 1,992 |
| 3,350 |
| 3,592 |
| | – new allowances net of allowance releases | | 2,990 |
| 2,304 |
| 2,636 |
| 3,977 |
| 4,400 |
| | – recoveries | | (361 | ) | (408 | ) | (644 | ) | (627 | ) | (808 | ) |
| | | | | | | | | | | | | | | | | | | | | Risk elements in the loan portfolio by geographical region | | | | 2020 | 2019 | 2018 | 2017 | 2016 | | | | $m | $m | $m | $m | $m | | | Impaired loans | | | | | | | | | Europe | | 9,151 | | 7,135 | | 6,434 | | 8,042 | | 8,062 | | | | Asia | | 4,718 | | 2,284 | | 2,521 | | 2,249 | | 2,499 | | | | Middle East and North Africa | | 2,233 | | 2,003 | | 2,233 | | 1,949 | | 2,230 | | | | North America | | 2,291 | | 1,696 | | 1,500 | | 2,606 | | 4,842 | | | | Latin America | | 979 | | 592 | | 659 | | 624 | | 595 | | | | | 19,372 | | 13,710 | | 13,347 | | 15,470 | | 18,228 | | | | Unimpaired loans contractually more than 90 days past due as to principal or interest | | | | | | | | | Europe | | — | | — | | — | | — | | — | | | | Asia | | — | | — | | — | | — | | — | | | | Middle East and North Africa | | — | | — | | — | | 24 | | 15 | | | | North America | | — | | — | | — | | — | | 3 | | | | Latin America | | — | | — | | — | | — | | — | | | | | — | | — | | — | | 24 | | 18 | | | | Troubled debt restructurings (not included in the classifications above) | | | | | | | | | Europe | | 1,073 | | 1,665 | | 1,682 | | 1,890 | | 1,900 | | | | Asia | | — | | 68 | | 98 | | 273 | | 269 | | | | Middle East and North Africa | | 150 | | 452 | | 527 | | 459 | | 549 | | | | North America | | 107 | | 136 | | 229 | | 174 | | 518 | | | | Latin America | | 19 | | 30 | | 189 | | 83 | | 130 | | | | | 1,349 | | 2,351 | | 2,725 | | 2,879 | | 3,366 | | | | Trading loans classified as in default | | | | | | | | | Europe | | — | | — | | — | | 56 | | — | | | | Asia | | — | | — | | — | | — | | — | | | | Middle East and North Africa | | — | | — | | — | | — | | — | | | | North America | | — | | — | | — | | — | | — | | | | Latin America | | — | | — | | — | | — | | — | | | | | — | | — | | — | | 56 | | — | | | | Risk elements on loans | | | | | | | | | Europe | | 10,224 | | 8,800 | | 8,116 | | 9,988 | | 9,962 | | | | Asia | | 4,718 | | 2,352 | | 2,619 | | 2,522 | | 2,768 | | | | Middle East and North Africa | | 2,383 | | 2,455 | | 2,760 | | 2,432 | | 2,794 | | | | North America | | 2,398 | | 1,832 | | 1,729 | | 2,780 | | 5,363 | | | | Latin America | | 998 | | 622 | | 848 | | 707 | | 725 | | | | | 20,721 | | 16,061 | | 16,072 | | 18,429 | | 21,612 | | | | Assets held for sale | | | | | | | | | Europe | | 10 | | 18 | | 16 | | 14 | | 16 | | | | Asia | | 28 | | 27 | | 39 | | 51 | | 46 | | | | Middle East and North Africa | | — | | — | | — | | — | | 1 | | | | North America | | 3 | | 10 | | 12 | | 11 | | 57 | | | | Latin America | | 3 | | 3 | | 9 | | 18 | | 22 | | | | | 44 | | 58 | | 76 | | 94 | | 142 | | | | Total risk elements | | | | | | | | | Europe | | 10,234 | | 8,818 | | 8,132 | | 10,002 | | 9,978 | | | | Asia | | 4,746 | | 2,379 | | 2,658 | | 2,573 | | 2,814 | | | | Middle East and North Africa | | 2,383 | | 2,455 | | 2,760 | | 2,432 | | 2,795 | | | | North America | | 2,401 | | 1,842 | | 1,741 | | 2,791 | | 5,420 | | | | Latin America | | 1,001 | | 625 | | 857 | | 725 | | 747 | | | | At 31 Dec | | 20,765 | | 16,119 | | 16,148 | | 18,523 | | 21,754 | | | | | % | % | % | % | % | | | Allowance for ECL/loan impairment allowances as a percentage of risk elements on loans | | 70.1 | | 54.5 | | 53.7 | | 40.6 | | 36.3 | | |
| | | | | | | | | | | | | | Loans and advances change in ECL/loan impairment charges by industry sector over five years | | | | In accordance with IFRS 9
| In accordance with IAS 39 | | | | 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| | | | $m |
| $m |
| $m |
| $m |
| $m |
| | Change in ECL/loan impairment charge/(release) | | | | | | | | Personal | | 1,221 |
| 1,158 |
| 959 |
| 1,703 |
| 1,834 |
| | Corporate and commercial | | 1,331 |
| 786 |
| 927 |
| 1,608 |
| 1,769 |
| | Financial | | 77 |
| (48 | ) | 106 |
| 39 |
| (11 | ) | | Year ended 31 Dec | | 2,629 |
| 1,896 |
| 1,992 |
| 3,350 |
| 3,592 |
|
| | | | | | | | | | | | | | Loans and advances change in ECL/impairment losses as a percentage of average gross loans and advances to customers | | | | In accordance with IFRS 9
| In accordance with IAS 39 | | | | 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| | | | % |
| % |
| % |
| % |
| % |
| | New allowances net of allowance releases | | 0.29 |
| 0.23 |
| 0.29 |
| 0.46 |
| 0.48 |
| | Recoveries | | (0.04 | ) | (0.04 | ) | (0.07 | ) | (0.07 | ) | (0.09 | ) | | Total charge for ECL/impairment losses | | 0.25 |
| 0.19 |
| 0.22 |
| 0.39 |
| 0.39 |
| | Amount written off net of recoveries | | 0.24 |
| 0.22 |
| 0.28 |
| 0.32 |
| 0.37 |
|
Supplementary information | | | | | | | | | | | | | | | | | | | | | | | Gross loans and advances by industry sector over five years | | | | In accordance with IFRS 9 | In accordance with IAS 39 | | | | 2020 | 2019 | 2018 | 2017 | 2016 | | | | $m | $m | $m | $m | $m | | | Personal | | 460,809 | | 434,271 | | 394,337 | | 376,481 | | 339,798 | | | | – first lien residential mortgages | | 352,282 | | 322,178 | | 293,333 | | 278,173 | | 249,778 | | | | – other personal | | 108,527 | | 112,093 | | 101,004 | | 98,308 | | 90,020 | | | | Corporate and commercial | | 527,088 | | 540,499 | | 534,577 | | 522,248 | | 465,827 | | | | – agriculture, forestry and fishing | | 7,445 | | 6,696 | | 6,701 | | 6,302 | | 5,261 | | | | – mining and quarrying | | 11,947 | | 14,435 | | 14,172 | | 10,911 | | 15,781 | | | | – manufacturing | | 93,906 | | 104,380 | | 105,704 | | 115,531 | | 112,965 | | | | – electricity, gas, steam and air-conditioning supply | | 16,200 | | 15,040 | | 16,044 | | 17,397 | | 14,302 | | | | – water supply, sewerage, waste management and remediation | | 3,174 | | 3,501 | | 3,523 | | 2,806 | | 2,380 | | | | – construction | | 14,600 | | 15,287 | | 15,254 | | 15,443 | | 14,876 | | | | – wholesale and retail trade, repair of motor vehicles and motorcycles | | 90,663 | | 94,681 | | 97,665 | | 98,079 | | 82,848 | | | | – transportation and storage | | 29,433 | | 25,580 | | 25,541 | | 24,258 | | 23,081 | | | | – accommodation and food | | 26,071 | | 24,656 | | 21,547 | | 16,971 | | 12,823 | | | | – publishing, audiovisual and broadcasting | | 19,979 | | 19,971 | | 21,172 | | 18,405 | | 19,058 | | | | – real estate | | 127,027 | | 130,752 | | 123,233 | | 114,349 | | 96,639 | | | | – professional, scientific and technical activities | | 24,072 | | 24,122 | | 22,573 | | 18,094 | | 15,557 | | | | – administrative and support services | | 26,423 | | 25,714 | | 25,103 | | 19,960 | | 15,707 | | | | – public administration and defence, compulsory social security | | 2,008 | | 2,377 | | 1,463 | | 221 | | 137 | | | | – education | | 2,122 | | 1,900 | | 1,829 | | 1,490 | | 1,033 | | | | – health and care | | 5,510 | | 4,465 | | 4,308 | | 5,688 | | 4,971 | | | | – arts, entertainment and recreation | | 3,437 | | 2,824 | | 5,041 | | 3,003 | | 2,490 | | | | – other services | | 13,110 | | 14,276 | | 13,913 | | 20,354 | | 16,989 | | | | – activities of households | | 802 | | 791 | | 830 | | — | | — | | | | – extra-territorial organisations and bodies activities | | 10 | | 2 | | 59 | | — | | — | | | | – government | | 8,538 | | 8,313 | | 8,073 | | 11,728 | | 8,442 | | | | – asset-backed securities | | 611 | | 736 | | 829 | | 1,258 | | 487 | | | | Financial | | 146,238 | | 139,924 | | 133,587 | | 162,112 | | 151,855 | | | | – non-bank financial institutions | | 64,580 | | 70,705 | | 61,407 | | 71,719 | | 63,729 | | | | – banks | | 81,658 | | 69,219 | | 72,180 | | 90,393 | | 88,126 | | | | Total gross loans and advances | | 1,134,135 | | 1,114,694 | | 1,062,501 | | 1,060,841 | | 957,480 | | | | Impaired loans and advances to customers | | 19,372 | | 13,710 | | 13,347 | | 15,470 | | 18,228 | | | | Impairment allowances on loans and advances to customers and banks | | 14,532 | | 8,748 | | 8,638 | | 7,484 | | 7,850 | | | | Loans and advances change in ECL/Loan impairment charge | | 8,102 | | 2,629 | | 1,896 | | 1,992 | | 3,350 | | | | – new allowances net of allowance releases | | 8,428 | | 2,990 | | 2,304 | | 2,636 | | 3,977 | | | | – recoveries | | (326) | | (361) | | (408) | | (644) | | (627) | | |
| | | | | | | | | | | | | | | | | | | | | | Loans and advances change in ECL/loan impairment charges by industry sector over five years | | | In accordance with IFRS 9 | In accordance with IAS 39 | | | 2020 | 2019 | 2018 | 2017 | 2016 | | | $m | $m | $m | $m | $m | | Change in ECL/loan impairment charge/(release) | | | | | | | | Personal | | 2,622 | | 1,221 | | 1,158 | | 959 | | 1,703 | | | Corporate and commercial | | 5,311 | | 1,331 | | 786 | | 927 | | 1,608 | | | Financial | | 169 | | 77 | | (48) | | 106 | | 39 | | | Year ended 31 Dec | | 8,102 | | 2,629 | | 1,896 | | 1,992 | | 3,350 | |
| | | | | | | | | | | | | | | | | | | | | | Loans and advances change in ECL/impairment losses as a percentage of average gross loans and advances to customers | | | In accordance with IFRS 9 | In accordance with IAS 39 | | | 2020 | 2019 | 2018 | 2017 | 2016 | | | % | % | % | % | % | | New allowances net of allowance releases | | 0.80 | | 0.29 | | 0.23 | | 0.29 | | 0.46 | | | Recoveries | | (0.03) | | (0.04) | | (0.04) | | (0.07) | | (0.07) | | | Total charge for ECL/impairment losses | | 0.77 | | 0.25 | | 0.19 | | 0.22 | | 0.39 | | | Amount written off net of recoveries | | 0.25 | | 0.24 | | 0.22 | | 0.28 | | 0.32 | |
| | | | | | | | | | | | | | Movement in loans and advances allowance for ECL/impairment allowances over five years | | | | | In accordance with IFRS 9
| In accordance with IAS 39 | | | | 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| | | | $m |
| $m |
| $m |
| $m |
| $m |
| | Impairment allowances at 1 Jan | | 8,638 |
| 7,484 |
| 7,850 |
| 9,573 |
| 12,386 |
| | Opening adjustment upon adoption of IFRS 9 | | — |
| 1,882 |
| N/A |
| N/A |
| N/A |
| | Amounts written off | | (2,797 | ) | (2,553 | ) | (3,173 | ) | (3,456 | ) | (4,194 | ) | | – personal | | (1,345 | ) | (1,380 | ) | (1,720 | ) | (1,602 | ) | (2,707 | ) | | – corporate and commercial | | (1,447 | ) | (1,050 | ) | (1,376 | ) | (1,830 | ) | (1,473 | ) | | – financial | | (5 | ) | (123 | ) | (77 | ) | (24 | ) | (14 | ) | | Recoveries of amounts written off in previous years | | 361 |
| 408 |
| 644 |
| 627 |
| 808 |
| | – personal | | 314 |
| 290 |
| 545 |
| 515 |
| 681 |
| | – corporate and commercial | | 46 |
| 108 |
| 97 |
| 109 |
| 124 |
| | – financial | | 1 |
| 10 |
| 2 |
| 3 |
| 3 |
| | Loans and advances change in ECL/loan impairment charge | | 2,970 |
| 1,896 |
| 1,992 |
| 3,350 |
| 3,592 |
| | Exchange and other movements | | (424 | ) | (479 | ) | 171 |
| (2,244 | ) | (3,019 | ) | | Allowance for ECL/Impairment allowances at 31 Dec | | 8,748 |
| 8,638 |
| 7,484 |
| 7,850 |
| 9,573 |
| ECL/Impairment allowances1 | | | | | | | | – stage 1 | | 1,311 |
| 1,287 |
| N/A |
| N/A |
| N/A |
| | – stage 2 | | 2,286 |
| 2,110 |
| N/A |
| N/A |
| N/A |
| | – stage 3 | | 5,052 |
| 5,047 |
| N/A |
| N/A |
| N/A |
| | – POCI | | 99 |
| 194 |
| N/A |
| N/A |
| N/A |
| | – individually assessed | | N/A |
| N/A |
| 4,960 |
| 4,932 |
| 5,420 |
| | – collectively assessed | | N/A |
| N/A |
| 2,524 |
| 2,918 |
| 4,153 |
| | Allowance for ECL/Impairment allowances at 31 Dec | | 8,748 |
| 8,638 |
| 7,484 |
| 7,850 |
| 9,573 |
|
| | | | | | 1138 | In IAS 39, impairment allowances were categorised as being either individually or collectively assessed whereas IFRS 9 categorises ECL by staging.HSBC Holdings plc |
| | | | | | | | | | | | | | | | | | | Movement in renegotiated loans and advances to customers | | | 2019 | 2018 | | | Personal |
| Corporate and commercial |
| Financial |
| Total |
| Personal |
| Corporate and commercial |
| Financial |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Renegotiated loans as at 1 Jan | 2,248 |
| 6,769 |
| 71 |
| 9,088 |
| 2,478 |
| 7,096 |
| 508 |
| 10,082 |
| | Loans renegotiated in the year without derecognition | 489 |
| 1,084 |
| 7 |
| 1,580 |
| 512 |
| 1,688 |
| 31 |
| 2,231 |
| | Loans renegotiated in the year resulting in recognition of a new loan (POCI in 2019) | — |
| 132 |
| — |
| 132 |
| — |
| 69 |
| — |
| 69 |
| | Net repayments and other | (530 | ) | (2,038 | ) | (15 | ) | (2,583 | ) | (742 | ) | (2,084 | ) | (468 | ) | (3,294 | ) | | – Repayments | (438 | ) | (1,345 | ) | (16 | ) | (1,799 | ) | (520 | ) | (1,610 | ) | (64 | ) | (2,194 | ) | | – Amounts written off | (108 | ) | (441 | ) | (2 | ) | (551 | ) | (104 | ) | (182 | ) | (121 | ) | (407 | ) | | – Other | 16 |
| (252 | ) | 3 |
| (233 | ) | (118 | ) | (292 | ) | (283 | ) | (693 | ) | | Renegotiated loans as at 31 Dec | 2,207 |
| 5,947 |
| 63 |
| 8,217 |
| 2,248 |
| 6,769 |
| 71 |
| 9,088 |
|
| | | | | | | | | | | | | | | | | | | | | Movement in loans and advances allowance for ECL/impairment allowances over five years | | | | | In accordance with IFRS 9 | In accordance with IAS 39 | | | | 2020 | 2019 | 2018 | 2017 | 2016 | | | | $m | $m | $m | $m | $m | | | Impairment allowances at 1 Jan | | 8,748 | | 8,638 | | 7,484 | | 7,850 | | 9,573 | | | | Opening adjustment upon adoption of IFRS 9 | | — | | — | | 1,882 | | N/A | N/A | | | Amounts written off | | (2,974) | | (2,797) | | (2,553) | | (3,173) | | (3,456) | | | | – personal | | (1,407) | | (1,345) | | (1,380) | | (1,720) | | (1,602) | | | | – corporate and commercial | | (1,537) | | (1,447) | | (1,050) | | (1,376) | | (1,830) | | | | – financial | | (30) | | (5) | | (123) | | (77) | | (24) | | | | Recoveries of amounts written off in previous years | | 326 | | 361 | | 408 | | 644 | | 627 | | | | – personal | | 280 | | 314 | | 290 | | 545 | | 515 | | | | – corporate and commercial | | 44 | | 46 | | 108 | | 97 | | 109 | | | | – financial | | 2 | | 1 | | 10 | | 2 | | 3 | | | | Loans and advances change in ECL/loan impairment charge | | 8,375 | | 2,970 | | 1,896 | | 1,992 | | 3,350 | | | | Exchange and other movements | | 57 | | (424) | | (479) | | 171 | | (2,244) | | | | Allowance for ECL/Impairment allowances at 31 Dec | | 14,532 | | 8,748 | | 8,638 | | 7,484 | | 7,850 | | | ECL/Impairment allowances1 | | | | | | | | | – stage 1 | | 2,007 | | 1,311 | | 1,287 | | N/A | N/A | | | – stage 2 | | 4,974 | | 2,286 | | 2,110 | | N/A | N/A | | | – stage 3 | | 7,439 | | 5,052 | | 5,047 | | N/A | N/A | | | – POCI | | 112 | | 99 | | 194 | | N/A | N/A | | | – individually assessed | | N/A | N/A | N/A | 4,960 | | 4,932 | | | | – collectively assessed | | N/A | N/A | N/A | 2,524 | | 2,918 | | | | Allowance for ECL/Impairment allowances at 31 Dec | | 14,532 | | 8,748 | | 8,638 | | 7,484 | | 7,850 | | |
1 In IAS 39, impairment allowances were categorised as being either individually or collectively assessed whereas IFRS 9 categorises ECL by staging.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Movement in renegotiated loans and advances to customers | | 2020 | 2019 | | Personal | Corporate
and
commercial | Financial | Total | Personal | Corporate
and
commercial | Financial | Total | | $m | $m | $m | $m | $m | $m | $m | $m | | Renegotiated loans as at 1 Jan | 2,207 | | 5,947 | | 63 | | 8,217 | | 2,248 | | 6,769 | | 71 | | 9,088 | | | Loans renegotiated in the year without derecognition | 740 | | 1,571 | | 9 | | 2,320 | | 489 | | 1,084 | | 7 | | 1,580 | | | Loans renegotiated in the year resulting in recognition of a new loan (POCI in 2020) | — | | 13 | | — | | 13 | | — | | 132 | | — | | 132 | | | Net repayments and other | (518) | | (2,093) | | (25) | | (2,636) | | (530) | | (2,038) | | (15) | | (2,583) | | | – Repayments | (408) | | (1,746) | | (29) | | (2,183) | | (438) | | (1,345) | | (16) | | (1,799) | | | – Amounts written off | (150) | | (448) | | (14) | | (612) | | (108) | | (441) | | (2) | | (551) | | | – Other | 40 | | 101 | | 18 | | 159 | | 16 | | (252) | | 3 | | (233) | | | Renegotiated loans as at 31 Dec | 2,429 | | 5,438 | | 47 | | 7,914 | | 2,207 | | 5,947 | | 63 | | 8,217 | |
| | | Country distribution of outstandings and cross-border exposures |
We control the risk associated with cross-border lending through a centralised structure of internal country limits. Exposures to individual countries and cross-border exposure in the aggregate are kept under continual review. The following table summarises the aggregate of our in-country foreign currency and cross-border outstandings by type of borrower to countries that individually represent in excess of 0.75% of our total assets. The classification is based on the country of residence of the borrower but also recognises the transfer of country risk in respect of third-party guarantees, eligible collateral held and residence of the head office when the borrower is a branch. In accordance with the Bank of England Country Exposure Report (Form CE) guidelines, outstandings comprise loans and advances (excluding settlement accounts), amounts receivable under finance leases, acceptances, commercial bills, certificates of deposit, and debt and equity securities (net of short positions), and exclude accrued interest and intra-HSBC exposures.
| | | | | | | | | | | | | | | | | | | In-country foreign currency and cross-border amounts outstanding | | | Banks | Government
and official
institutions | Other | Total | | Footnotes | $bn | $bn | $bn | $bn | | At 31 Dec 2020 | | | | | | | US | | 5.4 | | 65.4 | | 53.1 | | 123.9 | | | UK | | 15.9 | | 10.8 | | 45.1 | | 71.8 | | | Mainland China | | 21.7 | | 14.0 | | 35.4 | | 71.1 | | | Hong Kong | | 4.1 | | 0.3 | | 54.9 | | 59.3 | | | Japan | | 14.4 | | 31.7 | | 6.2 | | 52.3 | | | Germany | | 17.4 | | 12.4 | | 7.6 | | 37.4 | | | Canada | | 11.8 | | 13.0 | | 5.9 | | 30.7 | | | France | 1 | 9.6 | | 10.8 | | 7.9 | | 28.3 | | | Singapore | 1 | 1.6 | | 11.0 | | 14.8 | | 27.4 | | | | | | | | | At 31 Dec 2019 | | | | | | | US | | 4.4 | | 73.3 | | 36.7 | | 114.4 | | | UK | | 25.1 | | 9.6 | | 45.8 | | 80.5 | | | Mainland China | | 23.0 | | 8.3 | | 38.0 | | 69.3 | | | Hong Kong | | 2.6 | | 0.2 | | 43.7 | | 46.5 | | | Japan | | 17.9 | | 29.7 | | 10.5 | | 58.1 | | | Germany | | 15.7 | | 7.1 | | 7.6 | | 30.4 | | | Canada | 1 | 8.7 | | 9.2 | | 8.4 | | 26.3 | | | | | | | | | France | 1 | 6.2 | | 8.0 | | 7.4 | | 21.6 | | | | | | | | | Singapore | 1 | 2.9 | | 5.4 | | 15.0 | | 23.3 | | | | | | | | | At 31 Dec 2018 | | | | | | | US | | 4.3 | | 50.5 | | 30.6 | | 85.4 | | | UK | | 28.0 | | 9.5 | | 39.8 | | 77.3 | | | Mainland China | | 23.0 | | 6.7 | | 32.2 | | 61.9 | | | Hong Kong | | 5.8 | | 0.3 | | 40.6 | | 46.7 | | | Japan | | 18.6 | | 33.0 | | 7.7 | | 59.3 | | | Germany | | 15.0 | | 9.6 | | 5.5 | | 30.1 | | | Canada | | 10.2 | | 10.9 | | 8.4 | | 29.5 | | | | | | | | | France | 1 | 4.6 | | 5.9 | | 8.8 | | 19.3 | | | | | | | | | Singapore | 1 | 4.1 | | 8.9 | | 12.1 | | 25.1 | |
1 These balances were between 0.75% and 1% of total assets. All other balances were above 1%. | | | | | | | | | | | | In-country foreign currency and cross-border amounts outstanding |
|
| Banks |
| Government
and official
institutions |
| Other |
| Total |
|
| Footnotes | $bn |
| $bn |
| $bn |
| $bn |
| | At 31 Dec 2019 | | | | |
|
| | US | | 4.4 |
| 73.3 |
| 36.7 |
| 114.4 |
| | UK | | 25.1 |
| 9.6 |
| 45.8 |
| 80.5 |
| | Mainland China | | 23.0 |
| 8.3 |
| 38.0 |
| 69.3 |
| | Japan | | 17.9 |
| 29.7 |
| 10.5 |
| 58.1 |
| | Hong Kong | | 2.6 |
| 0.2 |
| 43.7 |
| 46.5 |
| | Germany | | 15.7 |
| 7.1 |
| 7.6 |
| 30.4 |
| | Canada | 1 | 8.7 |
| 9.2 |
| 8.4 |
| 26.3 |
| | Singapore | 1 | 2.9 |
| 5.4 |
| 15.0 |
| 23.3 |
| | France | 1 | 6.2 |
| 8.0 |
| 7.4 |
| 21.6 |
| | | | | | | | | At 31 Dec 2018 | | | | | | | US | | 4.3 |
| 50.5 |
| 30.6 |
| 85.4 |
| | UK | | 28.0 |
| 9.5 |
| 39.8 |
| 77.3 |
| | Mainland China | | 23.0 |
| 6.7 |
| 32.2 |
| 61.9 |
| | Japan | | 18.6 |
| 33.0 |
| 7.7 |
| 59.3 |
| | Hong Kong | | 5.8 |
| 0.3 |
| 40.6 |
| 46.7 |
| | Germany | | 15.0 |
| 9.6 |
| 5.5 |
| 30.1 |
| | Canada | | 10.2 |
| 10.9 |
| 8.4 |
| 29.5 |
| | Singapore | 1 | 4.1 |
| 8.9 |
| 12.1 |
| 25.1 |
| | France | 1 | 4.6 |
| 5.9 |
| 8.8 |
| 19.3 |
| | | | | | | | | At 31 Dec 2017 | | | | | | | US | | 5.8 |
| 29.5 |
| 37.6 |
| 72.9 |
| | UK | | 21.4 |
| 4.8 |
| 33.7 |
| 59.9 |
| | Mainland China | | 25.5 |
| 10.3 |
| 30.3 |
| 66.1 |
| | Japan | | 16.7 |
| 26.5 |
| 13.3 |
| 56.5 |
| | Hong Kong | | 4.3 |
| 0.3 |
| 39.3 |
| 43.9 |
| | Germany | | 10.8 |
| 8.8 |
| 10.7 |
| 30.3 |
| | Canada | 1 | 7.3 |
| 6.8 |
| 5.8 |
| 19.9 |
| | Singapore | 1 | 2.9 |
| 5.7 |
| 11.9 |
| 20.5 |
| | France | | 6.9 |
| 4.7 |
| 14.1 |
| 25.7 |
|
| | | 1 | These balances were between 0.75% and 1% of total assets. All other balances were above 1%. |
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
Report of the Directors | Risk
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.
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 97.
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.
InHong 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 riskand macroeconomic risks 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. The Covid-19 outbreak dominated the political and economic landscape through much of 2020. The twin shocks of a public health emergency and the resultant economic fallout were felt around the world, hitting both advanced and emerging markets. The closure of borders threatened medical and food supplies for many markets, leading to countries and territories focusing efforts on building resilient supply chains closer to home. The Covid-19 outbreak and corresponding vaccine roll-out will likely dominate the political and economic agenda for most of 2021. Tensions could increase as countries compete for access to the array of vaccines either under development, approved or pending approval, while the potential differences of protection offered by vaccines, and the speed and scale with which they can be manufactured and distributed may further add to tensions. The Covid-19 outbreak also heightened existing US-China tensions. Tensions span a wide range of issues, including trade, finance, military, technology and human rights. The Covid-19 outbreak has accelerated US and Chinese efforts to reduce mutual dependence in strategic industries such as sensitive technology, pharmaceuticals and precursor chemicals. A range of tensions in US-China relations could have potential ramifications for the Group and its customers. These tensions could include divisions over Hong Kong, US funding of and trading with strategic Chinese industries and claims of human rights violations. Some of these tensions have manifested themselves through actions taken by the governments of the US and China in
2020 and early 2021. These tensions may affect the Group through the impact of sanctions, including the impact of sanctions on customers, and could result in regulatory, reputational and market risks for the Group. The US has imposed a range of sanctions and trade restrictions on Chinese persons and companies, focusing on entities the US believes are involved in human rights violations, information technology and communications equipment and services, and military activities, among others. In 2019, societiesresponse, China has announced a number of sanctions and trade restrictions that target or provide authority to target foreign officials and companies, including those in nearly allthe US. Certain measures are of particular relevance. The US Hong Kong Autonomy Act provides 'secondary sanctions’ authority that allows for the imposition of US sanctions against non-US financial institutions found to be engaged in significant transactions with certain Chinese individuals and entities subject to US sanctions as a result of a US determination that these individuals or entities engaged in activities undermining Hong Kong’s autonomy. The US has also imposed restrictions on US persons’ ability to engage in transactions in or relating to publicly traded securities of a number of prominent Chinese companies. China has subsequently adopted regulations providing a framework for specific prohibitions against compliance with, and private rights of action for damages resulting from, measures that the government determines have an unjustified extraterritorial application that impairs Chinese sovereignty. No penalties have yet been imposed against financial institutions under any of these measures, and their scope and application remain uncertain. These and any future measures that may be taken by the US and China may affect the Group, its customers, and the markets in which we operate were affectedoperate. It remains unclear the extent to which the new US administration will affect the current geopolitical tensions, following the inauguration of President Biden on 20 January 2021. However, long-term differences between the two nations will likely remain, which could affect sentiment and restrict global economic activity. We continue to monitor the situation. While UK-China relations have historically been shaped by strong trade and investment, there are also emerging challenges. Following China’s implementation of the Hong Kong national security law, the UK offered residency rights and a seriespath to citizenship to eligible British National (Overseas) passport holders in Hong Kong. In addition, both the UK and Hong Kong governments have suspended their extradition treaties with each other. As geopolitical tensions rise, the compliance by multinational corporations with their legal or regulatory obligations in one jurisdiction may be seen as supporting the law or policy objectives of common issues, which are likelythat jurisdiction over another, creating additional reputational and political risks for the Group. We maintain an open dialogue with our regulators on the impact of legal and regulatory obligations on HSBC's business and customers. China’s expanding data privacy and cybersecurity laws could pose potential challenges to continueintra-group data sharing, especially within the Greater Bay Area. China’s draft Personal Information Protection Law and Data Security Law, if passed in 2020. Migration, income inequality, corruption, climate changetheir current forms, could increase financial institutions’ compliance burdens in respect of cross-border transfers of personal information. In Hong Kong, there is also an increasing focus by regulators on the use of data and terrorism are examplesartificial intelligence. Use of those issues, which have led to discontentpersonal data through digital platforms for initiatives in the Greater Bay Area may need to take into account these evolving data privacy and cybersecurity obligations. Emerging and frontier markets have suffered particularly heavily from the Covid-19 outbreak, in light of healthcare shortcomings, widespread labour informality, exposure to commodities production and often weak policy frameworks and buffers. Multilateral institutions have mobilised support for the weaker frontier markets, with the World Bank and G-20 marshalling efforts to implement a standstill on debt to public sector institutions. The International Monetary Fund has also, to date, made approximately $106bn in emergency funds available to over 80 countries. However, negotiations on debt to the private sector will likely prove more difficult, and may result in sovereign debt restructuring and defaults for several countries. Most developed markets are expected to recover from the crisis, as macroeconomic policies remain highly accommodative. However, permanent business closures and job losses in some sectors will likely prevent several developed markets from achieving pre-crisis growth rates or activity levels in the near term. These countries and territories should be able to shoulder the higher public deficits and debts necessary to offset private sector weaknesses, given the continuing low cost of servicing public debt. However, some continental European countries entered the Covid-19 crisis on a weak economic and fiscal footing and suffered high healthcare and economic costs. Although substantial joint EU monetary and fiscal measures should help support recoveries and keep debt servicing costs down at least through 2021, there are concerns that permanently higher debt burdens will eventually lead to investors questioning their sustainability. Renewed government restrictions in response to new waves of infections will put further pressure on these economies. Central banks have reduced interest rates in most financial markets due to the adverse impact on the path for economic recovery from the Covid-19 outbreak, which has in turn increased the likelihood of negative interest rates. This raises a number of risks and concerns, such as the readiness of our systems and processes to accommodate zero or negative rates, the resulting impacts on customers, and the financial implications given the significant impact that prolonged low interest rates have had, and may continue to have, on our net interest income. For some products, we operate.have floored deposit rates at zero or made decisions not to charge negative rates. This, discontent is reflectedalongside loans repriced at lower rates, will result in increased protest activity and challenging traditional political structures. This level of geopolitical riskour commercial margins being compressed, which is expected to remain heightened throughout 2020.be reflected in our profitability. The pricing of this risk will need to be carefully considered. These factors may challenge the long-term profitability of the banking sector, including HSBC, and will be considered as part of the Group’s transformation programme. The UK formally left the EU on 31 January 2020A Trade and entered a transition period until 31 December 2020. The top risk is that the UK fails to agree a trade deal withCooperation Agreement between the EU and commitsthe UK was agreed on 24 December 2020 and ratified by the UK on 30 December 2020. This avoids the imposition of tariffs and quotas on UK-EU goods trade, and thus a more material setback 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 severalexpected gradual recovery of the Group’s portfolios.
InUK and EU economies from recessions caused by the US, there will be political uncertainty Covid-19 outbreak. However, the new trading relationship features non-tariff barriers, and increased partisanship,asleaves several aspects of the US Presidential election campaign was preceded by a presidential impeachment trial.
More broadly, intensified US-China competition and occasional confrontation are expectedbroader relationship, including financial services trade, for further negotiation. While it is too early to feature prominently in 2020, despiteassess the ‘phase one’ trade deal, as negotiations move to phase two, which covers aspects such as intellectual property.
Thefull economic 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
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 may lead to an increase in market volatility and we are assessingeconomic risk, particularly in the potentialUK, which could adversely impact our profitability and prospects for growth in this market. For further details on our portfolios, operations and staff. This includesapproach to the increased possibilityUK’s withdrawal from the EU, see ‘Areas of an exit without a comprehensive trade agreement.special interest’ on page 157.
We have taken steps to enhance physical security
The contraction 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 supportthe global economy during 2020 has had varying effects on our customers, and manage risk and exposures as appropriate.
Thewith many of them experiencing financial difficulties. This has resulted in an increase in expected credit cycle
Dovish global monetary policies remained accommodative through much of 2019, and share indices hit record highs. The US FRB, European Central Banklosses (‘ECB’ECL’) and the Bank of Japan (’BoJ’risk-weighted assets (‘RWAs’) 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 deteriorating, leading to some analysts to predict a credit bear market largely centred. For further details 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.customer relief programmes, see page 184. For further details on RWAs, see page 216.
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. Cyber threat and unauthorised access to systems
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 formonitor the most prevalent attack types and their potential outcomes. To further protect our business and our customers,geopolitical outlook, in particular in countries where 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 ishave material exposures and/or 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 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.
significant physical presence. We have invested in significant resources and have taken, and will continuealso established dedicated forums 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 180. 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 withmonitor 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•We continue to carry out an annual OFAC compliance review atcontingency planning following the FRB’s discretion.The roleUK’s withdrawal from the EU and we are assessing the potential impact on our portfolios, operations and staff. This includes the possibility of disputes arising from differing interpretations of the Skilled Person/Independent Consultant is discussed on page 181.
ReportTrade and Cooperation Agreement and other aspects of the Directors | Risk
bilateral relationship.
Mitigating actions
•We continuehave taken steps to enhance our financial crimephysical security in those geographical areas deemed to be at high risk management capabilities. We are investing in next generation capabilities to fight financial crime through the application of advanced analyticsfrom terrorism and artificial intelligence.military conflicts. 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 and non-financial impacts for HSBC. ImpactsFinancial impacts could materialise through higher risk-weightedif transition and physical risks impact the ability of borrowers to repay their loans. Non-financial impacts could materialise if our own assets or operations are impacted by extreme weather or chronic changes in weather patterns, or as a result of business decisions to achieve our climate ambition. Climate risks increased 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 materialisation2020, primarily as a result of the risk have not materially heightened.pace and volume of policy and regulatory changes. These impacted the Group both directly and indirectly through our customers.
Mitigating actions We have an established governance framework to help ensure that risks associated with climate change are escalated to•A dedicated Climate Risk Oversight Forum is responsible for shaping 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 onoverseeing our approach to climate risk which we intend to further enhanceprovide support 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 protectmanaging the Group from climate-related risks that are outside of our risk appetite.
We have assigned responsibilityalso established a climate risk programme to relevant seniordrive the delivery of our plans relating to the enhancement of our risk management function holders, in line with the Prudential Regulation Authority (‘PRA’) and regulatory requirements. Climateapproach. •The Group’s risk appetite statement has been brought under Reputational and Sustainability Riskenhanced with quantitative metrics to promote alignment. Risk stewards are expected to consider physical and transitionarticulate the risks from climate change relevant to their specificand embed climate risk function. into our risk management framework. We are consideringestablished a transition risk from three perspectives:framework to gain a better understanding of our exposure to the highest transition risk; understanding howrisk sectors. •We implement sustainability risk policies as part of our clients are managing transition risk;reputational risk framework. We focus our policies on sensitive sectors that may have a high adverse impact on people or on the environment and measuringin which we have a significant number of customers. These include sectors with potentially high-carbon impacts. •We have conducted a climate stress test pilot to inform the development of our client’s progressapproach to climate risk management. This pilot also aims to help us prepare and build the necessary capabilities to execute the Bank of England’s climate biennial exploratory scenario in reducing carbon emissions. 2021. •We are carrying out sector-specific scenario analysis and continue to source data. For wholesale credit portfolios, we are using questionnairesengage with our customers, investors and regulators proactively when compiling and disclosing the information needed to assess transitionmanage climate risk. We also engage with initiatives actively, including the Climate Financial Risk Forum, Equator Principles, Taskforce on Climate-related Financial Disclosures and CDP (formerly the Carbon Disclosure Project) to drive best practice for climate risk across six sectors and 11 countries (formanagement. For further information, see our TCFD disclosurereport on page 2220. Ibor transition Interbank offered rates (‘Ibors’). For 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. The UK’s Financial Conduct Authority (‘FCA’) announced in July 2017 that it would no longer continue to persuade or require panel banks to submit rates for the London interbank offered rate (‘Libor’) after 2021. In addition, the 2016 EU Benchmark Regulation, which aims to ensure the accuracy, robustness and integrity of interest rate benchmarks, has resulted in other regulatory bodies reassessing their national benchmarks. As a result, industry-led national working groups are actively discussing the mechanisms for an orderly transition of five Libor currencies, four Asia-Pacific benchmarks that reference US dollar Libor, the Euro Overnight Index Average (‘Eonia’), the Singapore interbank offered rate (‘Sibor’), and the Turkish Lira interbank offered rate (‘TRLibor’) to their chosen replacement rates. The transition process away from Ibors, including the transition of legacy contracts that reference Ibors, exposes HSBC to material execution risks, and increases some financial and non-financial risks. As our retail credit portfolio,Ibor transition programme progresses into the execution phase, resilience and operational risks are heightened. This is due to an expected increase in the number of new near risk-free rate ('RFR') products being rolled out, compressed timelines for the transition of legacy Ibor contracts and the extensive systems and process changes required to facilitate both new products and the transition. This is being exacerbated by the current interest rate environment where low Libor rates, in comparison with replacement RFRs, could affect decisions to transition contracts early, further compressing transition timelines. Regulatory compliance, legal and conduct risks may also increase as a result of both the continued sale of products referencing Ibors, and the sale of new products referencing RFRs, principally due to the lack of established market conventions across the different RFR products, and the compressed timelines for transition. Financial risks resulting from the discontinuation of Ibors and the development of market liquidity in RFRs will also affect HSBC throughout transition. The differences in Ibor and RFR interest rates will create a basis risk that we review mortgage exposures on a geographical basisneed to actively manage through appropriate financial hedging. Basis risk in respect of natural hazard riskthe trading book and mitigants. For operational risk, we are working with our property insurers to understand geographical exposurein the banking book may arise out of the property portfolioasymmetric adoption of RFRs across assets and assess effectivenessliabilities and across currencies and products. In addition, this may limit the ability to hedge effectively. The continued orderly transition from Ibors continues to be the programme’s key objective through 2021 and can be broadly grouped into two workstreams: the development of controls for design resilience, operationsalternative rate 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, FCARFR product capabilities and the wider industry through the Climate Financial Risk Forum to help ensure we remain awaretransition of legacy Ibor contracts.
Development of alternative rate and drive emerging best practice.RFR product capabilities We continue to proactively engage our customers, investors and regulators in compiling and disclosing the data and 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 resilienceAll of our IT systemsglobal businesses have actively developed and critical services. We do soimplemented system and operational capabilities for alternative rates, such as base or prime rates and RFR products during 2020. Several key RFR product transactions were undertaken within the wholesale, Wealth and Personal Banking and Markets and Securities Services business areas. The offering of RFR products is expected to protect our customersbe expanded, with further releases for products referencing the Sterling Overnight Index Average (‘Sonia’) and ensure they do not receive disruptionthe Secured Overnight Financing Rate (‘SOFR’) set for the first half of 2021, in addition to services, which could resultproducts linked to other RFRs set to be released throughout 2021.
These developments and the reduced suitability of Ibor products have enabled HSBC to cease selling certain Ibor-linked products. Notably, the origination of US adjustable rate mortgages linked to Libor has ceased, and Libor-linked loan products have been demised for Business Banking and mid-market enterprise segments in reputational and regulatory damage.certain countries, where suitable alternatives are available.
While Ibor sales do continue for a number of product lines, Ibor exposures that have post-2021 maturities are reducing, aided by market compression of Ibor trades, and undertaking new transactions in alternative rate and replacement RFR products, as market liquidity builds. Transition legacy contracts In addition to offering alternative rate and replacement RFR products, the development of new product capabilities will also help facilitate the transition of legacy Ibor and Eonia products. HSBC has begun to engage clients to determine their ability to transition in line with the readiness of alternative rate and replacement RFR products. The Covid-19 outbreak and the interest-rate environment may have affected clients’ abilities to transition early, and has resulted in compressed timelines for the transition of legacy Ibor contracts. However, for some US dollar Libor legacy contracts, this timing risk may be mitigated in part by the recent announcement by the Libor benchmark administrator, ICE Benchmark Administration Limited (‘IBA’), to consult on extending the publication of overnight and one, three, six and 12 month US dollar Libor settings to 30 June 2023. Despite the proposed extension, regulatory and industry guidance has been clear that market participants should cease writing new US dollar Libor contracts as soon as is practicable, and in any event by the end of 2021 for the majority of products. While the extended deadline will result in additional US dollar Libor transactions maturing before cessation, not all of them will, so it is possible that other proposed solutions, including legislative relief, will still be needed. The Group continues to have Ibor and Eonia derivatives, loan and bond exposures maturing beyond 2021. For the derivatives exposures, HSBC’s main trading entities have adhered to the adoption of the International Swaps and Derivatives Association (‘ISDA’) protocol as a fallback provision, which came into effect in January 2021, and the successful changes made by clearing houses to discount derivatives using the euro short-term rate (‘€STR’) and SOFR, to reduce the risk of a disorderly transition of the derivatives market. For HSBC’s loan book, our global businesses have developed commercial strategies that include active client engagement and communication, providing detailed information on RFR products to determine our clients’ abilities to transition to a suitable alternative rate or replacement RFR product, before Ibor cessation. With respect to HSBC’s legacy bond issuances referencing Ibors that may be subject to demise, we continue to assess the terms of those bond issuances and a variety of transition options, with a view to implementing, through 2021 and beyond, transition plans that we expect to be value neutral and in line with market practice. The timing of that implementation will depend on a variety of factors, including the expected timing for the demise of the relevant Ibor rate. The success of these transition plans will, to a certain extent, also depend on the participation and engagement of third-party market participants. In addition, bond issuances that reference Ibors by certain issuing entities in the Group also reduced during 2020, with such entities opting to issue bonds that reference RFRs such as Sonia and SOFR. For those bonds where HSBC is the paying agent, there remains dependence on engagement of third-party market participants in the transition process of their issued debt. Mitigating actions •Our global Ibor transition programme continues to assist in progressing towards an orderly transition to alternative benchmarks and replacement RFRs for our business and our clients, which is overseen by the Group Chief Risk Officer. •We have widened the scope of the global Ibor transition programme to include additional interest rate benchmarks, where plans are in place to demise those benchmarks in the near future. •We have and continue to carry out extensive training, communication and client engagement to facilitate appropriate selection of products. •We have dedicated teams in place to support the development of and transition to alternative rate and replacement RFR products. •We are implementing IT and operational changes to enable a longer transition window. •We met the third quarter of 2020 regulatory endorsed milestones for implementing changes to contractual documentation and the clearing house-led transition to RFR discounting for derivatives. •We actively compressed derivative contracts and are targeting regulatory endorsed and industry-agreed milestones for the cessation of new issuance of Libor transactions maturing post-2021. These include the first quarter 2021 for sterling Libor and the second quarter 2021 for US dollar Libor. This led to a reduction in the Group’s Ibor portfolio of financial instruments. •We are undertaking reviews of existing Ibor hedge accounting strategies and have implemented policy and entity tools in respect of regulatory reliefs. •We assess, monitor and dynamically manage risks, and implement specific mitigating controls when required. •We continue to investengage with regulatory and industry bodies actively to mitigate risks relating to hedge accounting changes, multiple RFR market conventions, and so-called ‘tough legacy’ contracts that have no appropriate replacements or no likelihood of renegotiation to transition. This includes providing feedback and responses on recent IBA and FCA consultations. Financial instruments impacted by Ibor reform (Audited) Interest Rate Benchmark Reform Phase 2, the amendments to IFRSs issued in transformingAugust 2020, represents the second phase of the IASB’s project on the effects of interest rate benchmark reform. The amendments address issues affecting financial statements when changes are made to contractual cash flows and hedging relationships. Under these amendments, changes made to a financial instrument measured at other than fair value through profit or loss that are economically equivalent and required by interest rate benchmark reform, do not result in the derecognition or a change in the carrying amount of the financial instrument. Instead they require the effective interest rate to be updated to reflect the change in the interest rate benchmark. In addition, hedge accounting will not be discontinued solely because of the replacement of the interest rate benchmark if the hedge meets other hedge accounting criteria. These amendments applied from 1 January 2021 with early adoption permitted. HSBC adopted the amendments from
1 January 2020. | | | | | | | | | | | | | | | | | | | | Financial instruments yet to transition to alternative benchmarks, by main benchmark | | USD Libor | GBP Libor | JPY Libor | | | | Others1 | | | At 31 Dec 2020 | $m | $m | $m | | | | $m | | Non-derivative financial assets2 | 94,148 | | 46,587 | | 371 | | | | | 10,763 | | | Non-derivative financial liabilities2 | 33,602 | | 7,183 | | 1,548 | | | | | 549 | | | | Derivative notional contract amount | 3,045,337 | | 1,196,865 | | 508,200 | | | | | 514,959 | | |
1 Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (Euro Libor, Swiss franc Libor, Eonia, SOR, MIFOR, THBFIX, PHIREF, TRLibor and Sibor). 2 Gross carrying amount excluding allowances for expected credit losses.
The amounts in the above table relate to HSBC’s main operating entities where HSBC has material exposures impacted by Ibor reform, including in the UK, Hong Kong, France, the US, Mexico, Canada, Singapore, the UAE, Bermuda, Australia, Qatar, Germany, Japan and Thailand. The amounts provide an indication of the extent of the Group’s exposure to the Ibor benchmarks that are due to be replaced. Amounts are in respect of financial instruments that: •contractually reference an interest rate benchmark that is planned to transition to an alternative benchmark; •have a contractual maturity date after 31 December 2021, the date by which Libor is expected to cease; and •are recognised on HSBC’s consolidated balance sheet. The administrator of Libor, IBA, has announced a proposal to extend the publication date of most US dollar Libor tenors until
30 June 2023. Publication of one-week and two-month tenors will cease after 31 December 2021. This proposal, if endorsed, would reduce the amounts presented in the above table as some financial instruments included will reach their contractual maturity date prior to 30 June 2023. Financial crime risk environment Financial institutions remain under considerable regulatory scrutiny regarding their ability to prevent and detect financial crime. Financial crime threats continue to evolve, often in tandem with increased geopolitical developments and tensions, posing challenges for financial institutions to keep abreast of developments and manage conflicting laws. In particular, during 2020, the escalating US-China tensions had significant impacts on sanctions and export control legal and regulatory regimes. The global economic slowdown as a result of the Covid-19 outbreak, and the resulting rapid deployment of government relief measures to support individuals and businesses, have increased the risk of fraud. Developments around virtual currencies, stablecoins and central bank digital currencies have continued, with the industry’s financial crime risk assessment and management frameworks in their early stages. The evolving regulatory environment presents an execution challenge. We continue to face increasing challenges presented by national data privacy requirements in a global organisation, which may affect our ability to manage financial crime risks effectively. There has also been an increase in media and public scrutiny on how software solutions are developed, delivered and maintained, with a particular focus on providing high-quality, stable and secure services.financial crime is managed within financial institutions. Mitigating actions •We continue to enhance our financial crime risk management capabilities. We are materially improving system resilienceinvesting in next generation capabilities to fight financial crime through the application of advanced analytics and service continuity testing.artificial intelligence. We have enhancedcontinue to monitor geopolitical developments closely and the security features ofimpacts on our software development life cyclefinancial crime controls. •We are strengthening and improvedinvesting in 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 ledfraud controls, to continued global improvements in service availability during 2019 forintroduce next generation anti-fraud capabilities to protect both our customers and employees.the Group.
Risks•We have developed procedures and controls to manage the risks associated with workforce capability, capacitydirect 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 abilityindirect exposure to virtual currencies. We continue to attract, developmonitor external developments. We continue to educate our staff on emerging digital products and retain competent individualsassociated risks.
•We continue to monitor external developments on stablecoins and central bank digital currencies, engaging with central banks and regulators on financial crime risk management. •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 alignmentplace are both effective and sustainable over the long term. •We continue to work closely with our strategyregulators and engage in public-private partnerships, playing an employment market where expertise is often mobileactive role in shaping the industry’s financial crime controls for the future. Regulatory compliance risk environment including conduct Financial service providers continue to face numerous regulatory and supervisory requirements, particularly in short supply is critical, particularly as ourthe areas of capital and liquidity management, conduct of business, lines execute their strategic business outlooks. Thisfinancial crime, internal control frameworks, the use of models and the integrity of financial services delivery. The competitive landscape in which the Group operates may be affectedsignificantly altered by external, internalfuture regulatory changes and environmental factors,government intervention. Regulatory changes, including those driven by geopolitical issues, such as US-China tensions and those resulting from 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.may affect the activities of the Group as a whole, or of some or all of its principal subsidiaries. For further details, see page 140. Mitigating actions •We engage, wherever possible, with governments and regulators in the countries and territories in which we operate, to help ensure that new requirements are considered properly and can be implemented effectively. In particular, we were proactive with the global policy changes issued in response to the Covid-19 outbreak to help our customers and contribute to an economic recovery. •We have had regular meetings with all relevant authorities to discuss strategic contingency plans, including those arising from geopolitical issues. Cyber threat and unauthorised access to systems Together with other organisations, we continue to operate in an increasingly hostile cyber threat environment, which requires ongoing investment in business and technical controls to defend against these threats. Key threats include unauthorised access to online customer accounts, advanced malware attacks, attacks on our third-party suppliers and security vulnerabilities being exploited. Mitigating actions •We continually evaluate threat levels for the most prevalent attack types and their potential outcomes. To further protect HSBC University is focused on developing opportunities and tools for currentour customers and future skills, personal skillshelp ensure the safe expansion of our global business lines, we strengthen our controls to reduce the likelihood and leaders to create an environment for success. impact of advanced malware, data leakage, exposure through third parties and security vulnerabilities. •We continue to develop succession plansenhance our cybersecurity capabilities, including Cloud security, identity and access management, metrics and data analytics, and third-party security reviews. An important part of our defence strategy is ensuring our colleagues remain aware of cybersecurity issues and know how to report incidents. •We report and review cyber risk and control effectiveness quarterly at executive and non-executive Board level. We also report across our 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. Internally driven Data management We use a large number of systems and applications to support key business processes and operations. To manage the risk of error, HSBC employs data controls at the point of capture, transfer and consumption. Along with other organisations, we also need to meet external/regulatory obligations such as the General Data Protection Regulation (‘GDPR’) and Basel III.
Mitigating actions •We are improving data quality across a large number of systems globally. Our data management, aggregation and oversight continues to strengthen and enhance the effectiveness of internal systems and processes. We are implementing data controls for end-to-end critical processes to improve our data capture at the point of entry and throughout the data lifecycle. •Through our global data management framework we are expanding and enhancing our data governance processes to help monitor the quality of critical customer, product, reference and transaction data proactively and resolve associated data issues in a timely manner. •We continue to modernise our data and analytics infrastructure through investments in advanced capabilities in Cloud, visualisation, machine learning and artificial intelligence platforms. •We help protect customer data via our global data privacy framework programme, which establishes data privacy practices, design principles and guidelines that help enable us to demonstrate compliance with data privacy laws and regulations in the jurisdictions in which we operate. •To help our employees keep abreast of data privacy laws and regulations we hold data privacy awareness training, highlighting our commitment to protect personal data for our customers, employees and other stakeholders. Model risk management Model risk arises whenever business decision making includes reliance on models. We use models in both financial and non-financial contexts, as well as in a range of business applications such as customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting. Assessing model performance is a continuous undertaking. Models can need redevelopment as market conditions change. This was required following the outbreak of Covid-19 as some models used for estimating credit losses needed to be redeveloped due to the dramatic change to inputs including GDP, unemployment rates and housing prices. Prior to the Covid-19 outbreak a key area of focus was improving and enhancing our model risk governance, and this activity continued throughout 2020. We prioritised the redevelopment of internal ratings-based (‘IRB’) and internal models methods (‘IMM’) models, in relation to counterparty credit, as part of the IRB repair and Basel III programmes with a key focus on enhancing the quality of data used as model inputs. Mitigating actions •We enhanced the monitoring and review of loss model performance through our Model Risk Management function as part of a broader quarterly process to determine loss levels. The Model Risk Management team aims to provide strong and effective review and challenge of any future redevelopment of these models. •We appointed model risk stewards for each of the global businesses and functions to support, oversee and guide the global businesses and functions on model risk management. The risk stewards will provide close monitoring of changes in model behaviour, working closely with business and function model owners and sponsors. •We worked with the model owners of IRB models and traded risk models to increase our engagement on management roles,of model risk with actions agreedkey regulators including the Prudential Regulation Authority (‘PRA’). •We updated the model risk policy and reviewed onintroduced model risk standards to enable a regular basis bymore risk-based approach to model risk management. •We refreshed the model risk controls through the risk control assessment process. Employees who work in the first line of defence are expected to complete testing using the new enhanced controls in order to assess and understand model risk across the global businesses and key geographies. •We upgraded the Group Management Board.model inventory system to provide more granular measurement and management of model risk for multiple applications of a single model. •We actively respond to immigration changes throughare redeveloping our IRB and IMM models for counterparty credit and our internal models approach (‘IMA’) for traded risk models. These will be submitted for PRA approval over 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.next two years. 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. Mitigating actions •We continuedcontinue to embed our delivery model in the first line of defence throughled by a dedicated team.global third-party management team, which works closely with our global businesses, global functions and regions. We have deployed processes, controls and technology to assess third-party service providers against key criteria and associated control monitoring, testing and assurance. This includes requesting third-party service providers to attest to HSBC’s ethical code of conduct during onboarding. •A dedicated oversight forum in the second line of defence monitors the embedding of policy requirements and performance against risk appetite. •We delivered a major programme involving our global businesses, global functions and regions to help ensure that we are compliant with our third-party risk policy. Enhanced model•We reviewed our external supplier engagements to ensure that they meet our third-party risk management expectationsquality standards including remediation where necessary.
Model•We implemented a new process for risk arises wheneverassessing our internal group service providers and ensuring that services we provide to other parts of our business decision making includes reliancealso meet defined standards.
Risks associated with workforce capability, capacity and environmental factors with potential impact on models. We use modelsgrowth Our success in both financialdelivering our strategic priorities and non-financial contextsmanaging the regulatory environment proactively 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 a range of business applications such as customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluationan employment market impacted by the Covid-19 outbreak is challenging particularly due to organisational restructuring. Changed working arrangements, local Covid-19 restrictions and financial reporting.health concerns during the pandemic also impact on employee mental health and well-being. Mitigating actions •We strengthenedhave put in place measures to help support our people so they are able to work safely during 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 ofCovid-19 outbreak. While 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.workplace recovery around the world is consistent, the measures we take in different locations are specific to their environment.
•We conductedpromote a full reviewdiverse and enhancement of model governance arrangements overseeing model riskinclusive workforce and provide active support across the Group, resulting in a wide range of enhancements to the underlying structure to improve effectivenesshealth 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 Actin the US state of California.
well-being activities. We continue to hold annual data symposiums and data privacy awareness training to helpbuild 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.speak-up culture through active campaigns.
•We monitor people risks that could arise due to organisational restructuring, helping to ensure we manage redundancies sensitively and support impacted employees. •We launched the Future Skills curriculum through HSBC University to help provide critical skills that will enable employees and HSBC to be successful in the future. •We continue to develop succession plans for key management roles, with actions agreed and reviewed on a regular basis by the Group Executive Committee. •We have robust plans in place, driven by senior management, to mitigate the effects of external factors that may impact our employment practices. Political and regulatory challenges are closely monitored to minimise the impact on the attraction and retention of talent and key performers. 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 are not impacted by disruption to services. 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 concentrate on 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 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 2020 for both our customers and employees. Change execution risk In February 2020, we announced our plans to restructure our business, reallocate freed-up capital into higher-growth and higher-return businesses and markets, and to simplify our organisation and reduce costs. Our success in delivering our strategic priorities and continuing to address regulatory change and other top and emerging risks is dependent on the effective and safe delivery of change across the Group. Mitigating actions •We have established a global transformation programme to deliver the commitments made in February 2020. The programme is overseen by members of the Group Executive Committee. Related execution risks across the initiatives, including their sequencing and prioritisation, are being monitored and managed. Many of the initiatives impact our staff and require continued investment in technology. •We continue to work to strengthen our change management practices to deliver sustainable change. These include increased adoption across the Group of Agile ways of working to deliver change. We have identified a suite of risk factors that cover a broad range of risks our businesses are exposed to. These risks have the potential to have a material adverse effect on our business, financial condition, results of operations, prospects, capital position, strategy, reputation and/or customers. They may not necessarily be deemed as top or emerging risks; however, they inform the ongoing assessment of our top and emerging risks that may result in our risk appetite being revised. The risk factors are set out below. Macroeconomic and geopolitical risk Current economic and market conditions may adversely affect our results Our earnings are affected by global and local economic and market conditions. Uncertain and at times volatile economic conditions can create a challenging operating environment for financial services companies such as HSBC. In particular, we have faced and may continue to face the following challenges to our operations and operating model in connection with these factors: •the Covid-19 outbreak and its impact on global economies could have a material adverse effect on (among other things) the profitability, capital and liquidity of financial services companies such as HSBC (see 'Risks relating to the impact of Covid-19'); •the demand for borrowing from creditworthy customers may diminish ifduring periods of recession or where economic activity slows or remains subdued; if•low or negative interest rates rise, consumers and businesses may struggle with the additional debt burden, which could leadimpact bank profitability due to increased delinquencies and expectedreductions in banks’ net interest income. This deterioration in bank profits might affect financial stability or cause credit losses (‘ECLs’);supply to subsequently tighten;
•ourability to borrow from other financial institutions or to engage in funding transactions may be adversely affected by market disruption; and •market developments may depress consumer and business confidence beyond expected levels. If economic growth is subdued, for example, asset prices and payment patterns may be adversely affected, leading to greater than expected increases in delinquencies, default rates and ECLs. However, if growth is too rapid, new asset valuation bubbles could appear, particularly in the real estate sector, with potentially negative consequences for banks. The occurrence of any of these events or circumstances could have a material adverse effect on our business, financial condition, results of operations, prospects and customers. Risks relating to the impact of Covid-19 The UK’s withdrawal fromCovid-19 outbreak and its effect on the European Union may adversely affect our operating modelglobal economy have impacted the Group's customers and financial results The modalitiesperformance, and the future effects of the UK’s exitoutbreak are uncertain. Covid-19 necessitated governments to respond at unprecedented levels to protect public health, local economies and livelihoods. It has affected regions at different times and varying degrees as it has developed. The varying government support measures and restrictions imposed in response to the Covid-19 outbreak have added challenges, given the rapid pace of change and significant operational demands. The speed at which countries and territories will be able to unwind the government support measures and restrictions and return to pre-Covid-19 economic levels will vary based on the levels of infection, local governmental decisions and access to and ability to roll out vaccines. There remains a risk of subsequent waves of infection, as evidenced by the recently emerged variants of the virus. Renewed outbreaks emphasise the ongoing threat of Covid-19 even in countries that have recorded lower than average cases so far.
Government restrictions imposed around the world to limit the spread of Covid-19 resulted in a sharp contraction in global economic activity during 2020. At the same time governments also took steps designed to soften the extent of the damage to investment, trade and labour markets. Economic activity recovered unevenly in the second half of 2020 as some jurisdictions imposed renewed restrictions in the fourth quarter in response to a resurgence in Covid-19 cases. While a number of vaccine candidates have announced high efficacy rates, raising hopes of widespread immunisation from Covid-19 being achieved by the European Unionend of 2021 and government restrictions being eased, the rollout of vaccination programmes could be uneven across markets, hampering the global pace of recovery even as individual markets return to pre-pandemic levels of activity. A recovery in economic activity in the Group's major markets is currently expected in 2021, but the level of such recovery is contingent on
31 January 2020the successful containment of the virus and the scheduled endevolution of other top risks. These include the UK's relationship
with the EU now that the transition period has ended, political unrest in Hong Kong and tensions between the US and China. It also relies on the willingness and ability of households and businesses to return towards pre-Covid-19 spending levels. There is a material risk of a renewed drop in economic activity. The economic fallout from Covid-19 risks increasing inequality across markets that have already suffered from social unrest. This leaves the burden on governments and central banks to maintain or increase fiscal and monetary stimulus. After financial markets suffered a sharp fall in the early phases of the spread of Covid-19, they rebounded but still remain volatile. Depending on the degree to which global economic growth suffers permanent losses, financial asset prices may suffer a further sharp fall. Depending on the time taken for economic activity to return to previous levels, there could be further adverse impacts on the Group's income due to lower lending and transaction volumes and lower wealth and insurance manufacturing revenue due to equity market volatility and weakness. Lower or negative interest rates globally will increase the cost of guarantees for insurance manufacturing, and there could also be adverse impacts on other assets, such as the Group's investment in Bank of Communications Co., Limited, goodwill and other intangible assets. The Covid-19 outbreak may also have material impacts on capital and liquidity. This may include downward customer credit rating migration, which could negatively impact the Group's risk-weighted assets ('RWAs') and capital position, and potential liquidity stress due, among other factors, to increased customer drawdowns, notwithstanding the significant initiatives that governments and central banks have put in place to support funding and liquidity. Central banks in some markets have also initiated a series of capital measures, including the reduction of certain regulatory capital buffers, to support the ability of banks to supply credit to businesses and households through this period of economic disruption. For instance, the Bank of England's Financial Policy Committee reduced the UK countercyclical capital buffer rate to zero per cent. Governments and central banks in major economies have deployed extensive measures to support their local populations. Measures implemented by governments included income support to households and funding support to businesses. Central bank measures included cuts to policy rates, support to funding markets and asset purchases. These measures are being extended in countries where further waves of the pandemic are prompting renewed government restrictions. Central banks are expected to maintain low interest rates for a considerable period of time as inflation remains contained and the debt burden of governments is expected to rise significantly. The Group has initiated market-specific measures to support its personal and business customers through these challenging times. These have included mortgage assistance, payment holidays, the waiving of certain fees and charges, and liquidity relief for businesses facing market uncertainty and supply chain disruption. The Group is also working closely with governments, and providing support to national schemes that focus on the parts of the economy most impacted by Covid-19. Central bank and government actions and support measures taken in response to the Covid-19 outbreak, and the Group's responses to those, have created, and may in the future create, restrictions in relation to capital. This has limited and may in the future limit management's flexibility in managing the business and taking action in relation to capital distribution and capital allocation. For example, on 31 March 2020, HSBC announced that in response to a written request from the PRA, the Group had cancelled the fourth interim dividend for 2019. We also announced that we would make no quarterly or interim dividend payments or accruals in respect of ordinary shares until the end of 2020. Following this, in December 2020, will likely havethe PRA announced a significant impacttemporary approach to shareholder distributions by large UK banks for 2020 in which it set out a framework for board decisions on general economic conditionsdividends. After considering the requirements of the temporary approach, the Board announced an interim dividend for 2020 of $0.15 per ordinary share. Should central banks or regulatory authorities introduce further restrictions in relation to our capital distributions, our ability to declare, or to pay, dividends or to carry out share buybacks may be negatively impacted. It is recognised that all of the United Kingdomabove measures and actions, and the European Union.Group's responses to those, expose the Group to heightened risks. The UK’s future relationship with the EUrapid introduction and its trading relationships with the restvarying nature of the world will likely take a number of yearsgovernment support schemes, as well as customer expectations, has led to resolve. This may resultrisks as the Group implements large-scale changes in a prolongedshort period of uncertainty, unstable economic conditionstime. This has led to increased operational risks, including complex conduct considerations, increased reputational risk and market volatility, including currency fluctuations. We also expect the UK's withdrawal to have implications for our London-based cross-border operations. The extentincreased risk of these implications will depend on the outcome of negotiations. To ensure continuity of service, independent of the outcome of negotiations, HSBC assumes a scenario whereby the UK exits the EU without the existing passporting or regulatory equivalence framework that supports cross-border business. This scenario would impact (i) our legal entities in the UK and the EU, (ii) our product offering, (iii) our clients and (iv) our employees.
We made good progress to ensure we were prepared for the UK leaving the EU (see ‘Process of UK withdrawal from the European Union’ on page 116. However, there remain executionfraud. These risks many of them linked to the uncertain outcome of negotiations and potentially tight timelines to implement significant changes to our
UK and European operating models. If these risks materialise, HSBC’s clients and employees are likely to be affected.heightened further as and when those government support schemes are unwound. Central bank and government actions and support measures, and the Group's responses to those, have also led to increased litigation risk, including lawsuits that have been and may continue to be brought in connection with its cancellation of the fourth interim dividend for 2019.
In many of the Group's markets, the Covid-19 outbreak has led to a worsening of economic conditions and increased uncertainty, which has been reflected in higher ECL reserves. Furthermore, credit losses may increase due to exposure to vulnerable sectors of the economy, such as retail, hospitality and commercial real estate. The exact impact of the pandemic on our clientsthe long-term prospects of businesses in these sectors is uncertain and may lead to significant credit losses on specific exposures, which may not be fully captured in ECL estimates. In addition, in times of crisis, fraudulent activity is often more prevalent, leading to potentially significant credit or operational losses. The significant changes in economic and market drivers, customer behaviours and government actions caused by Covid-19 have also impacted the performance of financial models. These include retail and wholesale credit models such as IFRS loss models, as well as capital models, traded risk models and models used in the asset/ liability management process. This has required more ongoing monitoring and more frequent testing across the Group, particularly for credit models. It also has resulted in enhanced and more frequent loss model monitoring and the use of compensating controls, specifically management judgemental adjustments based on the expert judgement of senior credit risk managers. See "The Group could incur losses or be required to hold additional capital as a result of model limitations or failure." Central banks have reduced interest rates in most financial markets due to the adverse impact of the Covid-19 outbreak on the path for economic recovery, which in turn increased the likelihood of negative interest rates. This raises a number of risks and concerns, such as the readiness of the Group's systems and processes to accommodate zero or negative rates, the resulting impacts on customers and the financial implications given the significant impact that prolonged low interest rates have had, and may continue to have on the Group's net interest income. For some products, the Group has floored deposit rates at zero or made decisions not to charge negative rates. This, alongside loans repriced at lower rates, will dependresult in the Group's commercial margins being compressed, which has been and is expected to continue to impact the Group's profitability. The pricing of this risk will need to be considered carefully. If there is a rebalancing of portfolios toward fee-generating business and trading activities to offset reduced profits, the Group may become exposed once rates start rising again. These factors may challenge the long-term profitability of the banking sector, including the Group. There remain significant uncertainties in assessing the duration of the Covid-19 outbreak and its impact. The actions taken by various governments and central banks, in particular in the UK, mainland China, Hong Kong and the U.S., provide an indication of the potential severity of the downturn and post-recovery environment, which from a commercial, regulatory and risk perspective could be significantly different to past crises and persist for a prolonged period. A continued period of significantly reduced economic activity as a result of the impact of the Covid-19 outbreak could have a material adverse effect on their individual circumstancesthe Group's financial condition, results of operations, prospects, liquidity, capital position and credit ratings.
We are subject to political, social and other risks in a worst case scenario,the countries in which we operate We operate through an international network of subsidiaries and affiliates across countries and territories around the world. Our global operations are subject to potentially unfavourable political, social, environmental and economic developments in such jurisdictions, which may include: •coups, civil wars or acts of terrorism; •political and/or social instability; •geopolitical tensions; •climate change, acts of God, including epidemics and pandemics (such as the Covid-19 outbreak, further details on which can be found in 'Risks relating to the impact of Covid-19') and natural disasters (such as floods and hurricanes); and •infrastructure issues, such as transportation or power failures. Each of the above could includeimpact credit RWAs, and the financial losses caused by any of these risk events or developments could impair asset values and the creditworthiness of customers. These risk events or developments may also give rise to disruption to the provisionGroups services and some may result in physical damage to our operations and/or risks to the safety of productsour personnel and services.customers. In 2020, we saw heightened levels of geopolitical risk particularly with respect to our operations and portfolios in Asia-Pacific. Escalation could have broader social, political and economic ramifications, affecting the Group's portfolios. The financial impact to the Group of geopolitical risks in Asia is heightened due to the importance and profitability of the region, and Hong Kong in particular. These geopolitical risks include, but are not limited to the following: •Tensions in US-China relations, some of which have been heightened by the Covid-19 outbreak, could have potential ramifications for the Group and its customers. These tensions could include divisions over Hong Kong, US funding of and trading with strategic Chinese industries, claims of human rights violations, and others. Some of these tensions have manifested themselves through actions taken by the governments of the US and China in 2020 and early 2021. These tensions may affect the Group through the impact of sanctions, including on the Group’s customers, and could result in regulatory, reputational and market risks for the Group; •The US has imposed a range of sanctions and trade restrictions on Chinese persons and companies, focusing on entities the US believes are involved in human rights violations, information technology and communications equipment and services, and military activities, among others. In response, China has announced a number of sanctions and trade restrictions that target or provide authority to target foreign officials and companies, including those in the US. Certain measures are of particular relevance; •The US Hong Kong Autonomy Act provides “secondary sanctions” authority that allows for the imposition of US sanctions against non-US financial institutions found to be engaged in significant transactions with certain Chinese individuals and entities subject to US sanctions as a result of a US determination that these individuals or entities engaged in activities undermining Hong Kong’s autonomy. The US has also imposed restrictions on US persons’ ability to engage in transactions in or relating to publicly traded securities of a number of prominent Chinese companies. China has subsequently adopted regulations providing a framework for specific prohibitions against compliance with, and private rights of action for damages resulting from, measures that the government determines have an unjustified extraterritorial application that impairs Chinese sovereignty; •No penalties have yet been imposed against financial institutions under any of these measures, and their scope and application remain uncertain. These and any future measures that may be taken by the US and China may affect the Group, its customers, and the markets in which we operate; •While UK-China relations have historically been shaped by strong trade and investment, there are also emerging challenges. Following the implementation of the Hong Kong national security law, the UK has offered residency rights and a path to citizenship to eligible British National (Overseas) passport holders in Hong Kong. In addition, both the UK and Hong Kong have suspended their extradition treaties with each other; •Investor and business sentiment in some sectors in Hong Kong remains dampened and ongoing tensions could result in an increasingly fragmented trade and regulatory environment. The retail and leisure sectors also remain particularly affected by a decrease in tourism, resulting from both ongoing tensions and the Covid-19 outbreak. As geopolitical tensions rise, the compliance by multinational corporations with their legal or regulatory obligations in one jurisdiction may be seen as supporting the law or policy objectives of that jurisdiction over another, creating additional reputational and political risks for the Group. While it is the Group's policy to comply with all applicable laws and regulations of all jurisdictions in which it operates, geopolitical risks and tensions, and potential ambiguities in the Group’s compliance obligations, will continue to present challenges and risks for the Group and could have a material adverse impact on the Group's business, financial condition, results of operations, prospects and strategy, as well as on the Group’s customers. We are likely to be affected by global geopolitical trends, including the risk of government intervention While economic globalisation appears to remain deeply embedded in the international system, it is increasingly challenged by nationalism and protectionism and international institutions may be less capable of arresting this trend. A shift indispersion of global economic power from the US and Europe towards China and emerging markets as well as US-China competition and occasional confrontation also appears to be occurring, and may continue.providing a backdrop for greater US-China competition. A rise in nationalism and protectionism, including trade barriers, may be driven by populist sentiment and structural challenges facing developed and developing economies. Similarly, if capital flows are disrupted, some emerging markets may impose protectionist measures that could affect financial institutions and their clients, and other emerging, as well as developed, markets, may be tempted to follow suit. This rise could contribute to weaker global trade, potentially affecting HSBC’s traditional lines of business. The broad geographic footprint and coverage of HSBC will make us and our customers susceptible to protectionist measures taken by national governments and authorities, including imposition of trade tariffs, restrictions on market access, restrictions on the ability to transact on a cross border basis, expropriation, restrictions on international ownership, interest-rate caps, limits on dividend flows and increases in taxation. There may be uncertainty as to the conflicting nature of such measures, their duration, the potential for escalation, and their potential impact on global economies. Whether these emerging trends are cyclical or permanent is hard to determine, and their causes are likely to be difficult to address. The occurrence of any of these events or circumstances could have a material adverse effect on our business, financial condition, results of operations and prospects. We are subjectThe UK’s trading relationship with the EU, following its withdrawal from the European Union may adversely affect our operating model and financial results
The UK left the EU on 31 January 2020 and entered a transition period until 31 December 2020. During the transition period, the UK continued to political, socialbe bound by EU laws and other risks inregulations. A Trade and Cooperation Agreement between the countries in which we operate We operate through an international network of subsidiaries and affiliates in over 64 countries and territories around the world. Our global operations are subject to potentially unfavourable political, social, environmental and economic developments in such jurisdictions, which may include:
coups, civil wars or acts of terrorism;
political and / or social instability;
climate change and acts of God, such as natural disasters and epidemics; and
infrastructure issues, such as transportation or power failures.
These risk events may give rise to disruption to our services and result in physical damage to our operations and/or risks to the safety of our personnel and customers. In 2019, we saw heightened levels of geopolitical risk in Hong Kong. Escalation could have broader social, political and economic ramifications, affecting HSBC’s portfolios.
Physical risks from natural disasters such as floods and hurricanes, could also impact credit RWAs, while the financial losses caused by these events could impair asset valuesEU and the creditworthiness of customers.
Any ofUK was agreed on 24 December 2020 and ratified by the above events could also have a detrimental impactUK on the Group's customers30 December 2020. The agreement mainly focused on goods and any financial losses caused thereby could affect the credit worthiness of those customers. Such developments may result in a material adverse effect on our business, financial condition, results of operations, prospects and strategy.
Impact of coronavirus
Since the beginning of January 2020, the coronavirus outbreak has caused disruption to our customers, suppliers and staff,
services but also covered a wide range of other areas, including competition, state aid, tax, fishery, transport, data and security. However, it included limited elements on financial services: in this respect, it includes a joint declaration of cooperation through which in the coming months, both parties are expected to enter discussions with the aim of agreeing a memorandum of understanding establishing the framework for this cooperation. The parties are expected to discuss, inter alia, how to move forward on both sides with financial equivalence determinations between the EU and UK, given that the UK is now generally treated as a “third country” under EU law and regulation. The requirement to agree a framework of cooperation between the EU and UK under the new agreement will take some time to be fully implemented, and this could lead to some uncertainty and have negative economic impacts for both the UK and the EU. Meanwhile the financial passporting arrangement that existed prior to, and during, the transition period has expired. As a result financial institutions in the UK such as HSBC Bank (HBEU)/ HSBC UK (HBUK), no longer have EU regulatory permissions to continue servicing clients in regulated products in the European Economic Area (EEA) subject to certain exceptions. In our programme to manage the impact of the UK’s withdrawal from the EU, HSBC had assumed a scenario whereby the UK would exit the EU without the existing financial passporting rights or the establishment of a regulatory equivalence framework that supports cross-border business. This scenario impacts (i) our legal entities in the UK and the EU, (ii) our product offering, (iii) our clients and (iv) our employees. Notwithstanding the progress made in ensuring we were prepared for the end of the transition period, there remain execution risks, many of them linked to the uncertain outcome of ongoing negotiations relating to financial services and any potential financial equivalence determinations that may be agreed between the EU and the UK. The outcome of these negotiations could potentially trigger tight timelines to implement further changes to our UK and European operating models. If any of these risks materialise, HSBC’s clients and employees are likely to be affected. The exact impact on our clients will depend on their individual circumstances and, in a worst case scenario, could include disruption to the provision of products and services, and this could in turn increase operational complexity and/or costs for the Group. More generally, the UK’s exit from the EU and the operation of the new Trade and Cooperation Agreement (and any complexities that may result there from), may lead to increased market volatility and economic risk, particularly in mainland Chinathe UK, which could adversely impact our profitability and Hong Kong. It remains unclear howprospects for growth in this market. In addition, the UK’s future trading relationship with the EU, and the rest of the world will evolve through 2020 and we continuelikely take a number of years to monitor the situation closely. HSBC has centresfully resolve. This may result in mainland China and across Asia that perform key processes for HSBC’s global operations. To date in 2020 we have invoked business continuity plans in these centres and so far we have been able to maintain an acceptable level of service with minimal disruption to our customers.
HSBC’s Hong Kong operations commenced offering temporary relief measures in January 2020 to assist both personal and small business customers during thisa prolonged period of disruption. These measures are supported by the Hong Kong Monetary Authorityuncertainty, unstable economic conditions and are being offered throughout Hong Kong by the banking sector. The take up of these forbearance schemes has had an immaterial impact on ECL and RWAs to date.
An immediate financial impact in early 2020 will be higher Expected Credit Losses (‘ECL’) driven by a change in the economic scenarios used to calculate ECL. The outbreak has led to a weakening in GDP in Hong Kong and mainland China, and the probability of a more adverse economic scenario for the short term is higher than at 31 December 2019. The economic scenarios for Hong Kong and mainland China used to calculate ECL at 31 December 2019,market volatility, including tail risk scenarios are set out on pages 130 to 131.
Should the coronavirus outbreak continue to cause disruption to economic activity in Hong Kong and mainland China through 2020, there could be adverse impacts on other assets, such as our investment in Bank of Communications Co., Limited, as well as impacts on income due to lower lending and transaction volumes, and insurance manufacturing revenue, which may impact our RWAs and capital position. Further ECLs could arise from other parts of our business impacted by the disruption to global supply chains, and through the impact that coronoavirus is having more broadly on economic growth globally. If any such events materialise, it could have a material adverse effect on our business, financial condition, results of operations and prospects.currency fluctuations.
We operate in markets that are highly competitive We compete with other financial institutions in a highly competitive industry that continues to undergo significant change as a result of financial regulatory reform, including Open Banking in the UK, as well as increased public scrutiny stemming from the financial crisis and a continued challenging macro-economic environment. We target internationally mobile clients who need sophisticated global solutions and generally compete on the basis of the quality of our customer service, the wide variety of products and services that we can offer our customers, and the ability of those products and services to satisfy our customers’ needs, the extensive distribution channels available for our customers, our innovation and our reputation. Continued and increased competition in any one or all of these areas may negatively affect our market share and/or cause us to increase our capital investment in our businesses in order to remain competitive. Additionally, our products and services may not be accepted by our targeted clients. In many markets, there is increased competitive pressure to provide products and services at current or lower prices. Consequently, our ability to reposition or reprice our products and services from time to time may be limited, and could be influenced significantly by the actions of our competitors who may or may not charge similar fees for their products and services. Any changes in the types of products and services that we offer our customers, and/or the pricing for those products and services, could result in a loss of customers and market share. Further, new entrants to the market or new technologies could require us to spend more to modify or adapt our products to attract and retain customers. We may not respond effectively to these competitive threats from existing and new competitors, and may be forced to increase our investment in our business to modify or adapt our existing products and services or develop new products and services to respond to our customers’ needs. Any of these factors could have a material adverse effect on our business, financial condition, results of operations, prospects and reputation. We are subject to financial and non-financial risks associated with climate change Climate change brings risks to our business, our customers and wider society. Climate change could impact HSBC through both transition and physical channels: channels. Transition arisingrisk 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 events or other climatic events, (e.g.such as rising sea level rise, flooding).levels and flooding. The focus on Climate risks increased over 2020 primarily as a result of the pace and volume of policy and regulatory changes, which impacts HSBC both directly and indirectly through our customers. We currently expect that the following are the most likely ways in which climate risk may materialise for the Group:Group: Transition•transition and physical risk may impact our corporate customers, for example if regulatory, legislative or technological developments impact customers business models resulting in financial difficulty for customers and/or stranded assets;
Physical•residential real estate may be affected by changes to the climate and extreme weather events which could impact both property values and the ability of borrowers to afford their mortgage payments;
•physical risk may impact our mortgage portfolios, impacting the ability of customers to repay their mortgages as well as impacting the value of the underlying property. Physical risk may impact the bank’sHSBC’s operations, for example if flooding or extreme weather events impacted our critical operations;
Increasing•regulatory compliance risk may result from the increasing pace, breadth and depth of regulatory expectations requiring implementation in short timeframes across multiple jurisdictions in short timeframes;jurisdictions;
Conduct•conduct risks could develop associated with the increasing demand for ‘green’ products where there are as yet no agreeddiffering and developing standards or taxonomies;
Reputational•reputational risks may result from our decisions on how we support our customers in high-emitting sectors.
These events have potential to cause both idiosyncratic and systemic risks, resulting in potential financial and non-financial impacts for HSBC. These financial impactsHSBC which could, materialise through higher risk-weighted assets over the longer term, greater transactional losses and/or increased capital requirements. These risks are potentially enhanced by the complexity and availability of the data needed to model and measure climate-related risks over the long-term time horizon that such risks are likely to emerge. Any of such climate-related risks couldin turn, have a material adverse effect on our business, financial condition, results of operations, prospects and strategy.
Financial impacts could materialise, if, for example, transition and physical risks impact the ability of borrowers to repay their loans. This could in turn, result in higher risk weighted assets, greater impairment losses and/or increased capital requirements over the long term. Non-financial impacts could materialise, for example, through inability to adhere to emerging regulatory requirements. Additionally, our own assets or operations could be impacted by
extreme weather or chronic changes in weather patterns, or as a result of business decisions to achieve our climate ambition. In October 2020, the Group announced its ambition to become net zero in all direct and indirect emissions, known as scope 1, 2 and 3 emissions. We aim to deliver this by achieving net zero in our operations and our supply chain by 2030 or sooner. We also plan to align our financed emissions – the carbon emissions of our portfolio of customers – to the Paris Agreement goal of net zero by 2050 or sooner. In order to reach these ambitions and targets or any other climate-related ambitions or targets the Group may set, the Group will need to incorporate climate considerations into its business strategy; the products and services we provide to customers; and our financial and non-financial risk management processes (including processes to measure and manage the various financial and non-financial risks the Group faces as a result of climate change). We also need to ensure that our strategy and business model adapt to changing regulatory requirements and market expectations. Achieving our our climate-related ambitions and targets will also depend on a number of factors outside of the Group’s control, including availability of data to measure and assess the climate impact of our customers; advancements of low carbon technologies; and supportive public policies in the markets where we operate. If these external factors and other changes do not occur, or do not occur on a timely basis, the Group may fail to achieve its climate-related ambitions and targets and this could have an adverse impact on the Group’s business, financial condition, results of operations and prospects. Changes in foreign currency exchange rates may affect our results We prepare our accounts in US dollars because the US dollar and currencies linked to it form the major currency bloc in which we transact and fund our business. However, a substantial portion of our assets, liabilities, assets under management, revenues and expenses are denominated in other currencies. Changes in foreign exchange rates, including those that may result from a currency becoming de-pegged from the US dollar, have an effect on our accounting standards, reported income, cash flows and shareholders’ equity. For example, as a result of significant inflation, Argentina has been deemed a hyperinflationary economy effective 1 July 2018 and we are required to apply inflation accounting on a retrospective basis in accordance with IAS 29, as further described in our Financial Statements. Unfavourable changes in foreign exchange rates could have a material adverse effect on our business, financial condition, results of operations and prospects.
Market fluctuations may reduce our income or the value of our portfolios Our businesses are inherently subject to risks in financial markets and in the wider economy, including changes in, and increased volatility of, interest rates, inflation rates, credit spreads, foreign exchange rates, commodity, equity, bond and property prices, and the risk that our customers act in a manner inconsistent with our business, pricing and hedging assumptions. MarketSince February 2020, market volatility has been high, particularly as a result of the ongoing Covid-19 pandemic, and ongoing market movements could significantly affect us in a number of key areas. For example, banking and trading activities are subject to interest rate risk, foreign exchange risk, inflation risk and credit spread risk. Changes in interest rate levels, interbank spreads over official rates and yield curves affect the interest rate spread realised between lending and borrowing costs. A declining or low interest rate environment could increase prepayment activity that reduces the weighted average lives of our interest- earning assets and could have a material adverse effect on us. The potential for future volatility and margin changes remains. See 'Risks relating to the impact of Covid-19' above regarding the impact of Covid-19 on the interest rate environment.
Competitive pressures on fixed rates or product terms in existing loans and deposits sometimes restrict our ability to change interest rates applying to customers in response to changes in official and wholesale market rates. Our pension scheme assets include equity and debt securities, the cash flows of which change as equity prices and interest rates vary. Our insurance businesses are exposed to the risk that market fluctuations may cause mismatches to occur between product liabilities and the investment assets that back them. Market risks can affect our insurance products in a number of ways depending upon the product and associated contract. For example, mismatches between assets and liability yields and maturities give rise to interest rate risk. Some of these risks are borne directly by the customer and some are borne by the insurance businesses, with their excess capital invested in the markets. Some insurance contracts involve guarantees and options that increase in value in adverse investment markets. There is a risk that the insurance businesses could bear some of the cost of such guarantees and options. The performance of the investment markets could thus have a direct effect upon the value embedded in the insurance and investment contracts and our operating results, financial condition and prospects. It is difficult to predict with any degree of accuracy changes in market conditions, and such changes could have a material adverse effect on our business, financial condition, results of operations and prospects. Liquidity, or ready access to funds, is essential to our businesses Our ability to borrow on a secured or unsecured basis, and the cost of doing so, can be affected by increases in interest rates or credit spreads, the availability of credit, regulatory requirements relating to liquidity or the market perceptions of risk relating to the Group or the banking sector, including our perceived or actual creditworthiness. Current accounts and savings deposits payable on demand or at short notice form a significant part of our funding, and we place considerable importance on maintaining their stability. For deposits, stability depends upon preserving investor confidence in our capital strength and liquidity, and on comparable and transparent pricing. Although deposits have been a stable source of funding historically, this may not continue. We also access wholesale markets in order to provide funding for entities that do not accept deposits, to align asset and liability maturities and currencies, and to maintain a presence in local markets. In 20192020 we issued the equivalent of $25.1 bn$22.4bn of debt securities in the public capital markets in a range of currencies and maturities from a number of Group entities, including $10.97bn$16bn of senior securities issued by HSBC Holdings. An inability to obtain financing in the unsecured long-term or short-term debt capital markets, or to access the secured lending markets, could have a material adverse effect on our liquidity. Unfavourable macroeconomic developments, market disruptions or regulatory developments may increase our funding costs or challenge our ability to raise funds to support or expand our businesses. If we are unable to raise funds through deposits and/or in the capital markets, our liquidity position could be adversely affected,and we might be unable to meet deposit withdrawals on demand or at their contractual maturity, to repay borrowings as they mature, to meet our obligations under committed financing facilities and insurance contracts or to fund new loans, investments and businesses. We may need to liquidate unencumbered assets to meet our liabilities. In a time of reduced liquidity, we may be unable to sell some of our assets, or we may need to sell assets at reduced prices, which in either case could materially adversely affect our business, financial condition, results of operations and prospects.
Macro-prudential, regulatory and legal risks to our business model We are subject to unfavourablenumerous legislative or regulatory requirements and developments and changes in the policy of regulators or governments and we may fail to comply with all applicable regulations, particularly any changes thereto Our businesses are subject to ongoing regulation and associated regulatory risks, including the effects of changes in the laws, regulations, policies, voluntary codes of practice and interpretations in the UK, the US, Hong Kong, the EU, China and the other markets in which we operate. This is particularly the case given the current post-financial crisisexpected long term economic impact of the Covid-19 outbreak and the consequent high volume and wide-ranging regulatory and economic environment, where we expect government and regulatory intervention in the banking sector to remain high for the foreseeable future.interventions. Additionally, many of these changes have an effect beyond the country in which they are enacted, as either regulators deliberately enact regulation with extra-territorial impact or our global operations mean that the Group is obliged to give effect to ‘local’ laws and regulations on a wider basis. In recent years, regulators and governments have focused on reforming both the prudential regulation of the financial services industry and the ways in which the business of financial services is conducted. Measures include enhanced capital, liquidity and funding requirements, the separation or prohibition of certain activities by banks, changes in the operation of capital markets activities, the introduction of tax levies and transaction taxes, changes in compensation practices and more detailed requirements on how business is conducted. The governments and regulators in the UK, the US, Hong Kong, the EU or elsewhere may intervene further in relation to areas of industry risk already identified, or in new areas, which could adversely affect us. Specific areas where regulatory changes could have a material effect on our business, financial condition, results of operations, prospects, capital position, and reputation include, but are not limited to: •the structural separationregulatory response to the Covid-19 outbreak, and its implications for banks credit risk management and provisioning processes, capital adequacy and liquidity, and a renewed focus on vulnerable customers including the treatment of certain bankingcustomers during and other activities proposedfollowing the removal or enacted in a numberreduction of jurisdictions;support measures such as payment holidays; •requirements flowing from arrangements for the resolution strategy of the Group and its individual operating entities that may have different effects in different countries; •the abolition of certain Ibor reference rates across the world and the transition to new replacement rates (as discussed further under ‘We may not manage risks associated with the replacement of benchmark indices effectively’); •the UK’s exit from the EU, and the transposition of existing
EU financial services regulation into UK regulation, impactinglaw, affecting the way we do business; •the treatment of 'third countries' under EU law with regard to their access to EU markets (as discussed under ‘The UK’s trading relationship with the EU, following its withdrawal from the European Union may adversely affect our operating model and financial results');
•the implementation of the amendmentsreforms to the BRRD and CRD, designed to implement, amongst other things, parts of the Basel III package, includingwhich includes changes to the approaches to credit risk, market risk, counterparty risk, operational risk, equity investments in fund and credit valuation adjustment RWAs and the equity investments in funds RWAs and the leverage ratio; the implementation of the remaining reforms to the Basel III package, which include changes to the approaches to credit risk, operational risk, and credit valuation adjustment RWAsratio, and the application of capital floors (as discussed further under the 'Risks to Capital’ section on page 166;
213;the completion of the outstanding work by the Basel Committee in relation to the Basel III framework, including the treatment of sovereign risk and the long-term regulatory treatment for International Financial Reporting Standard 9, Financial Instruments (‘IFRS 9’) provisions;
•the financial effects of climate changes being incorporated within the global prudential framework, including the transition risks resulting from a shift to a low carbon economy; •increasing regulatory expectations of firms around governance and risk management frameworks, particularly for management of climate change and other ESG risks and enhanced ESG disclosure and reporting obligations; •the implementation of more stringent capital, liquidity and funding requirements, following supervisory review, including in relationchanges to the scope of model permissions for measuring riskIRB modelling requirements and as the result of industry wide reviews (e.g.e.g. structural foreign exchange risk);risk; the corporate governance, business conduct, capital, margin, reporting, clearing, execution and other regulatory requirements to which HSBC Bank USA and certain of our affiliates are or may become subject in their role as a swap dealer, including as imposed by the CFTC and the SEC;
•the increasing focus by regulators, international bodies, organisations and unions on how institutions conduct business, particularly with regard to the delivery of fair outcomes for customers, promoting effective competition in the interests of consumers and ensuring the orderly and transparent operation of global financial markets; •restrictions on the structure of remuneration and increasing requirements to detail management accountability within the Group (e.g.(for example, the requirements of the Senior Managers and Certification Regime in the UK and similar regimes in Hong Kong, Singapore, Australia and elsewhere that are either in effect or under consideration/implementation); •the implementation of any conduct measures as a result of regulators’ increased focus on institutional culture, employee behaviour and whistleblowing, including measures resulting from ongoing thematic reviews into the workings of the retail, SME and wholesale banking sectors and the provision of financial advice to consumers; •the focus globally on data (including on data processingtechnology and subject rights/transferdigital, underpinned by customer protection, including the use of information)artificial intelligence and digital assets (data, identity and disclosures), financial technology risks, operational resilience, crypto assetsvirtual currencies (including central bank digital currencies and Global Stablecoin) and cybersecurity and the introduction of new and/or enhanced standards in this area (as discussed further under ‘We remain susceptible to a wide range of cyber risks that impact and/or are facilitated by technology, and our operations are highly dependent on our information technology systems’ and ‘Our data management policies and processes may not be sufficiently robust’); ); •financial crime and market abuse standards and increasing expectations for control frameworks, to ensure firms are adapting to new threats such as those arising from the Covid-19 outbreak, and are protecting customers from cyber-enabled crime; •changes in national or supra-national requirements regarding the ability to offshore or outsource the provision of services and resources or transfer material risk to financial services companies located in other countries, which impact our ability to implement globally consistent and efficient operating models; and •the application and enforcement of economic sanctions including those with extra-territorial effect.effect and those arising from geopolitical tensions (see ‘We are subject to political, social and other risks in the countries in which we operate’); •the operational and business model implications of the introduction of negative interest rates; •the increasing regulatory expectations and requirements relating to various aspects of operational resilience, including an increasing focus on the response of institutions to operational disruptions; •the challenges for institutions arising from expanding and increasingly complex regulatory reporting obligations, including high supervisory expectations for data integrity and the governance around regulatory reporting; and •continuing regulatory focus on the effectiveness of internal controls and risk management frameworks, as evidenced in regulatory fines imposed against other financial institutions.
We continue to strengthen our processes and controls over regulatory reporting, including commissioning independent external reviews of various aspects of regulatory reporting. As we strengthen our processes and controls, there may be impacts on some of our regulatory ratios such as the CET1 and LCR. We continue to keep the PRA and other relevant regulators informed of adverse findings from external reviews and our progress in strengthening the control environment. We may not manage risks associated with the replacement of benchmark indices effectively 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 industry-led national working groups (‘NWGs’) to identify alternative replacementrates ('near risk-free rates'or 'RFRs') for these IborsInterbank offered rates (‘Ibors’) and, where appropriate, tomake recommendations that would facilitate an orderly transition to these rates. Following the announcement by the UK’s Financial Conduct Authority in July 2017 that it will no longer continue to persuade or require panel banks to submit rates for Liborthe London Interbank offered rate (‘Libor’) after 2021, the national workinggroupsNWGs for the affectedimpacted currencies were tasked with facilitatingproviding guidance and support to financial and non-financial firms to help them facilitate 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 Eoniaon euro risk free rates recommended replacing the euro overnight index average ('Eonia') with the euro short-term rate €STR (plus a fixed parameter spread), as changes needed to €STER as a result of the determination that Eonia cannot be made to complyEonia’s methodology as it was not compliant with the European2016 EU Benchmark Regulations and canRegulation. As such Eonia will therefore no longer be used beyond 2021. Although national working groups in other jurisdictions have identified replacements for their respective Ibors, there are no current plans for these benchmark rates to be discontinued. discontinued on 3 January 2022. The expected discontinuation of certain key Ibors, such as Libor, the adoption of replacement risk-free benchmark rates (‘RFRs’)RFRs by the market and the development of alternate RFR products by HSBC introduce a number of risks for HSBC, its clients and the financial services industry more widely. These include but are not limited to:to; Legal•Regulatory compliance, legal and execution risks, relating to documentation changes required for newRFRconduct risk, arises from both the continued sale of products referencing Ibors sales of products referencing RFRs and for the transition of legacy contracts to RFRs,alternative rates. There is a risk that HSBC is unable to meet regulatory milestones associated with the discontinuance of sale of certain Ibor products, which transition will,may result in turn, depend, to a certain extent, on the availability of RFR products and on theparticipation of customers and third-party market participants in the transition process; legal proceedings or other actions regarding the interpretation and enforceability of provisions in Libor-based contracts and regulatory investigations or reviews in respect ofbeing conducted into our preparation and readiness for the replacement of LiborIbors with alternative reference rates;
rates. Additionally, if HSBC’s sales processes are not appropriately adapted to account for the additional complexity of new products, or new RFR market conventions, additional conduct risks and regulatory actions may result and there may be a heightened risk of disputes;•Legal risks associated with the enforceability of fallback provisions in Ibor contracts. There is a risk that some contracts will not be transitioned before the relevant Ibor is discontinued and the parties will need to rely on the “fallback” provisions of those contracts. As these fallback provisions do not always contemplate the permanent cessation of the relevant Ibor, there is a risk that the provisions may not work from a contractual, practical or financial perspective, potentially resulting in unintended outcomes for clients. This may lead to complaints, litigation and/or regulatory action. While legislative solutions have been proposed in the UK, US and EU, market participants will need to consider the impact of any proposals ultimately adopted; •Financial risks arisingresulting from any changesthe discontinuation of Ibors and the development of RFR market liquidity will affect HSBC throughout transition. The differences in Ibor and RFR interest rate levels will create a basis risk that we need to actively manage through appropriate financial hedging. Basis risk in the valuationtrading book and in the banking book may arise out of financial instruments linkedthe asymmetric adoption of RFRs across assets and liabilities and across currencies and products. In addition, this may limit the ability to RFRshedge effectively; and •Resilience and operational risks are heightened, as HSBC's Ibor transition programme progresses to its execution phase, due to an expected increase in the number of new RFR products being rolled out, the short timelines for transitioning legacy Ibor contracts and the implementation of ISDA’s proposed protocol for the transition of derivatives contracts, such as potential earnings volatility resulting from contract modifications,continued systems changes in hedge accountingrequired to facilitate both new products and a large volume of product and associated process changes; Pricingtransition. These risks as changes to RFRs could impact pricing mechanisms on some instruments;
Operational risks,increased due to the needimpact that the Covid-19 outbreak and interest rate environment have had on client readiness to transition. This has resulted in compressed timelines for HSBC, our customers and the market to adapt IT systems, trade reporting infrastructure, operational processes and controls to accommodate one or more RFRs; andcompleting transition processes.
ConductIf any of these risks through potentially material adverse impacts on customers or financial markets if our customers are not ready and able to adapt their own processes and systems to accommodate the RFR products.
The benchmark specifications together with the timetable and mechanisms for discontinuation of existing Ibors and implementation of RFRs have not yet been agreed across the industry and regulatory authorities. Accordingly, it is not currently possible to determine to what extent any such changes would affect HSBC. However, the discontinuation of existing Ibors and implementation of RFRs could (among other things) result in the Group being required to enhance its capital position and/or position additional capital in specific subsidiaries andmaterialise this could in turn, have a material adverse effect on our business, financial condition, results of operations, prospects and customers.
We are subject to the risk of current and future legal, regulatory or administrative actions and investigations, the outcomes of which are inherently difficult to predict We face significant risks in our business relating to legal, regulatory or administrative actions and investigations. The
volume and amount of damages claimed in litigation, regulatory proceedings, investigations, administrative actions and other adversarial proceedings against financial institutions are increasing for many reasons, including a substantial increase in the number of regulatory changes taking place globally, increasing focus from regulators, investors and other stakeholders on ESG disclosures, including in relation to the measurement and reporting of such matters in the absence of local or internationally accepted standards, increased media attention and higher expectations from regulators and the public. In addition, criminal prosecutions of financial institutions for, among other things, alleged conduct breaches, breaches of AML, anti-bribery/corruption and sanctions regulations, antitrust violations, market manipulation, aiding and abetting tax evasion, and providing unlicensed cross-border banking services, have become more commonplace and may increase in frequency due to increased media attention and higher expectations from prosecutors and the public. Any such legal, regulatory or administrative action or investigation against HSBC Holdings or one or more of our subsidiaries could result in, among other things, substantial fines, civil penalties, criminal penalties, cease and desist orders, forfeitures, the suspension or revocation of key licences, requirements to exit certain businesses, other disciplinary actions and/or withdrawal of funding from depositors and other stakeholders. Additionally, the Group’s financial statements reflect provisioning for legal proceedings and regulatory matters. Provisions for legal proceedings and regulatory matters typically require a higher degree of judgment than other types of provisions, and the actual costs of any disciplinary action discussed above may exceed existing provisioning. Any threatened or actual litigation, regulatory proceeding, administrative action, investigation or other adversarial proceeding against HSBC Holdings or one or more of our subsidiaries could have a material adverse effect on our business, financial condition, results of operations, prospects and reputation. Additionally, the Group’s financial statements reflect provisioning for legal proceedings, regulatory and customer remediation matters. Provisions for legal proceedings, regulatory and customer remediation matters, such as, for example, the customer redress programme related to and any legal claims resulting from the mis-selling of payment protection insurance policies, typically require a higher degree of judgement than other types of provisions, and the actual costs resulting from such proceedings and matters may exceed existing provisioning. Additionally, we continue to be subject to a number of material legal proceedings, regulatory actions and investigations, including, for example, our January 2018 deferred prosecution agreement with the US DoJ arising from its investigation into HSBC’s historical foreign exchange activities (the ‘FX DPA’), and our December 2019 deferred prosecution agreement with the US DoJ arising from its investigation into our Swiss private bank (the ‘Swiss Tax DPA’). It is inherently difficult to predict the outcome of many of the legal, regulatory and other adversarial proceedings involving our businesses, particularly those cases in which the matters are brought on behalf of various classes of claimants, seek damages of unspecified or indeterminate amounts or involve novel legal claims. Potential consequences of breaching the FX DPA and/or Swiss Tax DPA could include the imposition of additional terms and conditions on HSBC, an extension of the agreement or the criminal prosecution of HSBC, which could, in turn, entail further financial penalties and collateral consequences. Moreover, we may face additional legal
proceedings, investigations or regulatory actions in the future, including in other jurisdictions and/or with respect to matters similar to, or broader than, the existing legal proceedings, investigations or regulatory actions. An unfavourable result in one or more of these proceedings could have a material adverse effect on our business, financial condition, results of operations, prospects and reputation. We may fail to meet the requirements of regulatory stress tests We are subject to regulatory stress testing in many jurisdictions, which are described on page 182.231. These exercises are designed to assess the resilience of banks to potential adverse economic or financial developments and ensure that they have robust, forward-looking capital planning processes that account for the risks associated with their business profile. Assessment by regulators is on both a quantitative and qualitative basis, the latter focusing on our data provision, stress testing capability and internal management processes and controls. Failure to meet quantitative or qualitative requirements of regulatory stress test programmes, or the failure by regulators to approve our stress results and capital plans, could result in the Group being required to enhance its capital position and / or position additional capital in specific subsidiaries, and this could, in turn, have a material adverse effect on our business, financial condition, results of operations, prospects, capital position and reputation. We and our UK subsidiaries may become subject to stabilisation provisions under the Banking Act, in certain significant stress situations The Banking Act implementsimplemented the BRRD in the UK and creates a special resolution regime (the ‘SRR’). Under the SRR, HM Treasury, the BoE and the PRA and FCA (together, the ‘Authorities’) are granted substantial powers to resolve and stabilise UK-incorporated institutions with permission to accept deposits pursuant to Part 4A of the FSMA that are failing or are likely to fail to satisfy the threshold conditions (within the meaning of section 55B of the FSMA) where it is in the public interest to do so. The SRR presently consists of five stabilisation options: (i) transfer of all of the business of a relevant entity or the shares of the relevant entity to a private sector purchaser; (ii) transfer of all or part of the business of the relevant entity to a ‘bridge bank’ wholly owned by the BoE; (iii) transfer of part of the assets, rights or liabilities of the relevant entity to one or more asset management vehicles for management of the transferor’s assets, rights or liabilities; (iv) the write-down, conversation, transfer, modification, or suspension of the relevant entity’s equity, capital instruments and liabilities;liabilities (the so-called “bail-in power”); and (v) temporary public ownership of the relevant entity. These tools may also be applied to a parent company or affiliate of a relevant entity where certain conditions are met. In addition, the SRR provides for modified insolvency and administration procedures for relevant entities. It also confers ancillary powers on the Authorities, including the power to modify or override certain contractual arrangements in certain circumstances. The Authorities are also empowered by order to amend the law for the purpose of enabling the powers under the SRR to be used effectively. Such orders may promulgate provisions with retrospective applicability. In addition to the stabilisation options, the relevant Authority may, in certain circumstances, in accordance with the Banking Act, require the permanent write-down or conversion into equity of any outstanding tier 1 capital instruments and tier 2 capital instruments prior to the exercise of any stabilisation option (including the bail-in power), which may lead to the cancellation, transfer or dilution of HSBC Holdings’ ordinary share capital. In general, the Banking Act requires the Authorities to have regard to specified objectives in exercising the powers provided for by the Banking Act. One of the objectives (which is required to be balanced as appropriate with the other specified objectives) refers to the protection and enhancement of the stability of the financial system of the UK. The Banking Act includes, in certain circumstances, and with respect to certain powers provided for by the Banking Act, provisions related to compensation in respect of transfer instruments and orders made under it. This includes a ‘no creditor worse off’ safeguard, which requires that no shareholder or creditor must be left worse off from the use of resolution powers than they would have been had the entity entered insolvency rather than resolution. However, if we are at or approaching the point where we may be deemed by our regulators to be failing, or likely to fail, such as to require regulatory intervention, any exercise of any resolution regimethe above mentioned powers by the Authorities may result in holders of our ordinary shares, or other instruments that may fall within the scope of the ‘bail in’ or other write-down and conversion powers granted under the Banking Act, being materially adversely affected, including by the cancellation of shares, the write-down or conversion into shares of other instruments, the transfer of shares to a third party appointed by the BoE, the loss of rights associated with shares or other instruments (including rights to dividends or interest payments), the dilution of their percentage ownership of our share capital, and any corresponding material adverse effect on the market price of our ordinary shares and other instruments. We are subject to tax-related risks in the countries in which we operate We are subject to the substance and interpretation of tax laws in all countries in which we operate and are subject to routine review and audit by tax authorities in relation thereto. Our interpretation or application of these tax laws may differ from those of the relevant tax authorities and we provide for potential tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. The amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of such matters. Changes to tax laws and tax rates, and penalties for failing to comply, could have a material adverse effect on our business, financial condition, results of operations, prospects, capital position and reputation.
Risks related to our operations Our operations are highly dependent on our information technology systems The reliability and security of ourthe HSBC Group's information and technology infrastructure and our customer databases areis crucial to maintaining the service availabilityHSBC Group's provision of banking applicationsservices and processes and to protecting the HSBC brand. The propereffective functioning of our payment systems, financial control, risk management, credit analysis and reporting, accounting, customer service and other information technology systems, as well as the communication networks between our branches and main data processing centres, are important to our operations. Critical system failure, any prolonged loss of service availability
unavailability or anya material breach of data security, particularly involvingof confidential customer data, could cause serious damage to ourcompromise HSBC Group's ability to service ourits clients, could breach regulations under which we operate and could cause long-term damage to our business and brand that could have a material adverse effect on ourthe HSBC Group's business, financial condition, results of operations, prospects and reputation. We remain susceptible to a wide range of cyber risks that impact and/or are facilitated by technology The threat fromof cyber-attacks remains a concern for our organisation, and failurethe HSBC Group, as it does across the entire financial sector. Failure to protect ourthe HSBC Group's operations from internet crime or cyber-attacks may result in financial loss, business disruption and/for customers or a loss of customer services and data or other sensitive information thatdata. This could undermine ourthe HSBC Group's reputation and ourits ability to attract and keep customers. The most prevalent cybersecurity threats are destructiveintend to prevent customers from accessing our online services by attempting to exploit vulnerabilities in our systems (through malware (including ransomware)or unauthorised access), organised cyber-attacks targeting banking systemsdisrupt our business, and customer transactions, distributed denial of service (DDoS) and attacks on our Personal Internet Banking (PIB) platform.cause data loss. In 2019, we were subjected to a small number of attacks on our PIB platformThere have been no material cyber- related breaches that were successfully mitigated across the Group with no destructive malware (including ransomware) or payment infrastructure attacks reported. Although cyber-attacks in 2019 had a negligible effect onimpacted our customers services or firm, due tooperations in 2020. However the increasing sophistication of cyber-attacks there is the potential forrisk remains that future cyber-related attacks towill have a material adverse effect on our business, financial condition, results of operations, prospects and reputation.
We could incur losses or be required to hold additional capital as a result of model limitations or failure HSBC uses models for a range of purposes in managing ourits business, including regulatory capital calculations, stress testing, credit approvals, calculation of ECLs on an IFRS 9, Financial Instruments (“IFRS 9”) basis, financial crime and fraud risk management and financial reporting. HSBC could face adverse consequences as a result of decisions that may lead to actions by management based on models that are poorly developed, implemented or used, or as a result of the modelled outcome being misunderstood or the use of such information for purposes for which it was not designed or by inherent limitations arising from the uncertainty inherent in predicting or estimating future outcomes. Regulatory scrutiny and supervisory concerns over banks’ use of models is considerable, particularly the internal models and assumptions used by banks in the calculation of regulatory capital. If regulatory approval for key capital models is not achieved in a timely manner or if those models are subject to review and challenge, weHSBC could be required to hold additional capital. Evolving regulatory requirements have resulted in changes to HSBC’s approach to model risk management, which poses execution challenges. The adoption of more sophisticated modelling approaches including machine learning and technology by both HSBC and the financial services industry could also lead to increased model risk. The economic consequences of the Covid-19 outbreak on macroeconomic variables that are used in models are outside of the bounds for which IFRS 9 models have been built and calibrated to operate. Moreover, complexities of current governmental support programmes and regulatory guidance on the treatment of customer impacts, such as forbearance and payment holidays, and the unpredictable pathways of the Covid-19 outbreak, cannot realistically be factored into the modelling. Consequently, IFRS 9 models under the current economic conditions are generating outputs that do not accurately assess the actual level of credit quality in all cases. In addition, compensating controls, such as post model management adjustments based on expert judgement are required. Such compensating controls require a significant degree of management judgment and assumptions. There is a risk that future actual results/performance may differ from such judgments and assumptions. The effectiveness of the existing models will depend in large part on the depth and length of the economic downturn faced by the world’s economies. Risks arising from the use of models could have a material adverse effect on our business, financial condition, results of operations, prospects, capital position and reputation. Our operations utilise third-party suppliers and service providers HSBC relies on third parties to supply goods and services. The use of third-party service providers by financial institutions is of particular focus to global regulators, including with respect to how outsourcing decisions are made and how key relationships are managed. The inadequate management of third-party risk could impact our ability to meet strategic, regulatory and client expectations. This may lead to a range of effects, including regulatory censure, civil penalties or damage both to shareholder value and to our reputation, which could have a material adverse effect on our business, financial condition, results of operations, prospects and strategy. Our operations have inherent reputational risk
Reputational risk is the risk of failing to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by HSBC , our employees or those with whom we are associated. Any material lapse in standards of integrity, compliance, customer service or operating efficiency may represent a potential reputational risk. Stakeholder expectations constantly evolve, and so reputational risk is dynamic and varies between geographical regions, groups and individuals.
Modern technologies, in particular online social media channels and other broadcast tools that facilitate communication with large audiences in short time frames and with minimal costs, may significantly enhance and accelerate the distribution and effect of damaging information and allegations. Reputational risk could also arise from negative public opinion about the actual, or perceived, manner in which we conduct our business activities, or our financial performance, as well as actual or perceived practices in banking and the financial services industry generally. Negative public opinion may adversely affect our ability to retain and attract customers, in particular, corporate and retail depositors, and to retain and motivate staff, and could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Risks related to our governance and internal controls Our data management and data privacy policies and processes may notcontrols must be sufficiently robust to support the increasing data volumes and evolving regulations. CriticalAs HSBC Group becomes more data-driven and our business processes acrossbecome more digital, the Groupvolume of data that we rely on large volumeshas grown exponentially. As a result, management of data from a number of different systems and sources. If data governance (including data retention and deletion, data quality, data privacy and data architecture policies and procedures) is not sufficientlyfrom creation to destruction must be robust and designed to effectively identify any
quality and availability issues. Inadequate data management could result in negative impacts to customer service, business process, or could result in manual intervention adjustments and reconciliations may be requiredreconciliation to reduce the risk of errorerrors in reporting to senior management, regulators or regulators. Inadequate policies and processes may also affect our ability to use data within the Group to service customers more effectively and/or improve our product offering. Moreover, financial institutions that fail to comply with in-country (local) and global regulatory and compliance requirements may face supervisory measures. executives. In addition, failure to comply with GDPR or similardata privacy laws and other legislation in the other jurisdictions in which we operate (such as Basel III) may result in regulatory sanctions. Any of these failures could have a material adverse effect on our business, financial condition, results of operations, prospects and reputation. Third parties may use us as a conduit for illegal activities without our knowledge We are required to comply with applicable AML and sanctions laws and regulations, and have adopted various policies and procedures, including internal control and ‘know your customer’ procedures, aimed at preventing use of HSBC products and services for the purpose of committing or concealing financial crime. Moreover, in relevant situations, and where permitted by regulation, we may rely upon certain counterparties to maintain and properly apply their own appropriate AML procedures. While permitted by regulation, such reliance may not prevent third parties from using us (and our relevant counterparties) as a conduit for money laundering, without our knowledge (and that of
our relevant counterparties). Further, a major focus of US and UK government policy relating to financial institutions in recent years has been combating money laundering and enforcing compliance with US and EU sanctions. HSBC Bank USA has taken a number of remedial actions as a result of the matters to which the AML DPA related, which are intended to better protect the Group’s businesses in respect of these risks. However, there can be no assurance that these will be completely effective. Becoming a party to, associated with, or even accusations of being associated with, money laundering, or violations of sanctions laws or regulations could damage our reputation and could make us subject to fines, sanctions and/or legal enforcement. Any one of these outcomes could have a material adverse effect on our business, financial condition, results of operations, prospects and reputation. HSBC Bank USA, as the primary US dollar correspondent bank for the Group, is subject to heightened financial crime risk arising from business conducted on behalf of its non-US HSBC affiliates. HSBC Bank USA has implemented policies, procedures and controls reasonably designed to comply with financial crime legal and regulatory requirements and mitigate financial crime risk from its affiliates. Nevertheless, in the event that these controls are ineffective, it could lead to a breach of these requirements resulting in a potential enforcement action by OFAC or other US agencies that may include substantial fines or penalties. Any such action against HSBC Bank USA could have a material adverse effect on our business, financial condition, results of operations, prospects and reputation. We may suffer losses due to employee misconduct Our businesses are exposed to risk from potential non-compliance with Group policies, including the HSBC Values, and related behaviours and employee misconduct such as fraud, negligence or negligence,non-financial misconduct, all of which could result in regulatory sanctions and/or reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not always be effective. Misconduct risks could be increased if prevent and detect measures are less effective because of remote and home working. Employee misconduct or regulatory sanctions if a regulator deems HSBC's actions to deter such activity to be insufficient, could have a material adverse effect on our business, financial condition, results of operations, prospects and reputation.
The delivery of our strategic actions is subject to execution risk and we may not achieve any of the expected benefits of our strategic initiatives Effective management of transformation projects is required to effectively deliver the Group's strategic priorities, involving delivering both on externally driven programmes (e.g. regulatory requirements andfor example, Ibor transition),transition, as well as key business initiatives to deliver revenue growth, product enhancement and operational efficiency outcomes. The magnitude, complexity and, at times, concurrent demands of the projects required to meet these can result in heightened execution risk. The Group’s strategy including the 2020 business updates (see pages 1213 to 13)14) is supported by global trends -– the continued economic development in Emerging Markets,growth of international trade and capital flows, and wealth creation, particularly in faster-growing markets. We take into consideration global trends along with our strategic advantages to help us better deploy capital. The development and implementation of our strategy requires difficult, subjective and complex judgements, including forecasts of economic conditions in various parts of the world. We may fail to correctly identify the relevant factors in making decisions as to capital deployment and cost reduction. Our ability to execute our strategy may be limited by our operational capacity and the increasing complexity of the regulatory environment in which we operate. We continue to pursue our cost management initiatives, though they may not be as effective as expected, and we may be unable to meet our cost saving targets. In addition, factors beyond our control, including but not limited to economic and market conditions, could limit our ability to achieve any of the expected benefits of these initiatives. The global economic outlook is more uncertain, particularly with regard to UK economic risks, social and political unrest in Hong Kong, the coronaviruseffects of the Covid-19 outbreak, the low global trade tensions and revised interest rate expectations.environment, heightened geopolitical tensions (particularly between the US and China) and the future UK relationship with the EU now that the transition period has ended. There remains a risk that, in the absence of an improvement in economic conditions, our cost and investment actions may not be sufficient to achieve the expected benefits.
The failure to successfully deliver or achieve any of the expected benefits of these key strategic initiatives could have a material adverse effect on our business, financial condition, results of operations, prospects and reputation. Our risk management measures may not be successful The management of risk is an integral part of all our activities. Risk constitutes our exposure to uncertainty and the consequent variability of return. Specifically, risk equates to the adverse effect on profitability or financial condition arising from different sources of uncertainty, including retail and wholesale credit risk, market risk, non-traded market risk, operational risk, insurance risk, concentration risk, liquidity and funding risk, litigation risk, reputational risk, strategic risk, pension risk and regulatory risk. While we employ a broad and diversified set of risk monitoring and mitigation techniques, such methods and the judgements that accompany their application cannot anticipate every unfavourable event or the specifics and timing of every outcome. Failure to manage risks appropriately could have a material adverse effect on our business, financial condition, results of operations, prospects, strategy and reputation. Risks related to our business Our business has inherent reputational risk Reputational risk is the risk of failing to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by HSBC, our employees or those with whom we are associated. Any material lapse in standards of integrity, compliance, customer service or operating efficiency may represent a potential reputational risk. Stakeholder expectations constantly evolve, and so reputational risk is dynamic and varies between geographical regions, groups and individuals. In addition, our business faces increasing scrutiny related to environmental, social and governance activities. If we fail to act responsibly, or to achieve our announced targets, in a number of areas, such as diversity and inclusion, climate change, sustainability, workplace conduct, human rights, and support for local communities, our reputation and the value of our brand may be negatively affected. Modern technologies, in particular online social media channels and other broadcast tools that facilitate communication with large audiences in short time frames and with minimal costs, may significantly enhance and accelerate the distribution and effect of damaging information and allegations. Reputational risk could also arise from negative public opinion about the actual, or perceived, manner in which we conduct our business activities, or our financial performance, as well as actual or perceived practices in banking and the financial services industry generally. Negative public opinion may adversely affect our ability to retain and attract customers, in particular, corporate and retail depositors, and to retain and motivate staff, and could have a material adverse effect on our business, financial condition, results of operations, and prospects. Non-Financial risks are inherent in our business, including the risk of fraudulent activity We are exposed to many types of non-financial risks that are inherent in banking operations, includingoperations. Non-financial risk can be defined as the risk to HSBC of achieving its strategy or objectives as a result of inadequate or failed internal processes, people and systems, or from external events. It includes; fraudulent and other criminal activities (both internal and external), breakdowns in processes or procedures, breaches of regulations or law, financial reporting and tax errors, external events and systems failure or non-availability. These risks are also present when we rely on outside suppliers or vendors to provide services to us and our customers. In particular, fraudsters may target any of our products, services and delivery channels, including lending, internet banking, payments, bank accounts and cards. This may result in financial loss to the Group and/or our customers, an adverse customer experience, reputational damage and potential litigation, regulatory proceeding, administrative action or other adversarial proceeding in any jurisdiction in which we operate, depending on the circumstances of the event. These non-financial risks could have a material adverse effect on our business, financial condition, results of operations, prospects, strategy and reputation. We rely on recruiting, retaining and developing appropriate senior management and skilled personnel Meeting the demand to recruit, retain and develop appropriate senior management and skilled personnel remains subject to a number of challenges. These include rapidly changing skill requirements and ways of working, the evolving regulatory landscape plus increased requirements and expectations regarding nationalisation and diversity in some jurisdictions. Ongoing talent shortages in key markets and capabilities, particularly where those with the scarce capabilities are globally mobile, add to the complexity of our supply challenge. Our continued success and implementation of our growth strategy depend in part on the retention of key members of our management team and wider employee base, the availability of skilled management in each of our global businesses and global
functions, and the ability to continue to attract, train, motivate and retain highly qualified professionals, each of which may depend on factors beyond our control, including economic, market and regulatory conditions.conditions, and the impact of the COVID-19 outbreak on health and well-being. In addition, the Group announced targets in relation to increasing the representation of women and Black employees in senior leadership roles by 2025. If the Group fails to achieve these targets, its ability to attract and retain qualified professionals may be negatively affected. If global businesses or global functions fail to staff their operations appropriately or lose one or more of their key senior executives and fail to successfully replace them in a satisfactory and timely manner, or fail to implement successfully the organisational changes required to support the Group’s strategy, our business,
financial condition, results of operations and prospects, including control and operational risks, could be materially adversely affected. We have significant exposure to counterparty risk We are exposed to counterparties that are involved in virtually all major industries, and we routinely execute transactions with counterparties in financial services, including brokers and dealers, central clearing counterparties, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default by our counterparty or client. Our ability to engage in routine transactions to fund our operations and manage our risks could be materially adversely affected by the actions and commercial soundness of other financial services institutions. Financial institutions are necessarily interdependent because of trading, clearing, counterparty or other relationships. As a consequence, a default by, or decline in market confidence in, individual institutions, or anxiety about the financial services industry generally, can lead to further individual and/or systemic difficulties, defaults and losses. Mandatory central clearing of OTC derivatives, including under Dodd-Frank and the EU’s European Market Infrastructure Regulation, poses risks to the Group. As a clearing member, we are required to underwrite losses incurred at a central counterparty by the default of other clearing members and their clients. Increased moves towards central clearing brings with it a further element of interconnectedness between clearing members and clients that we believe may increase rather than reduce our exposure to systemic risk. At the same time, our ability to manage such risk ourselves will be reduced because control has been largely outsourced to central counterparties, and it is unclear at present how, at a time of stress, regulators and resolution authorities will intervene. Where bilateral counterparty risk has been mitigated by taking collateral, our credit risk may remain high if the collateral we hold cannot be realised or has to be liquidated at prices that are insufficient to recover the full amount of our loan or derivative exposure. There is a risk that collateral cannot be realised, including situations where this arises by change of law that may influence our ability to foreclose on collateral or otherwise enforce contractual rights. The Group also has credit exposure arising from mitigants, such as credit default swaps, and other credit derivatives, each of which is carried at fair value. The risk of default by counterparties to credit default swaps and other credit derivatives used as mitigants affects the fair value of these instruments depending on the valuation and the perceived credit risk of the underlying instrument against which protection has been purchased. Any such adjustments or fair value changes could have a material adverse effect on our business, financial condition, results of operations and prospects. Any reduction in the credit rating assigned to HSBC Holdings, any subsidiaries of HSBC Holdings or any of their respective debt securities could increase the cost or decrease the availability of our funding and adversely affect our liquidity position and net interest margin Credit ratings affect the cost and other terms upon which we are able to obtain market funding. Rating agencies regularly evaluate HSBC Holdings and certain of its subsidiaries, as well as their respective debt securities. Their ratings are based on a number of factors, including their assessment of the relative financial strength of the Group or of the relevant subsidiary, as well as conditions affecting the financial services industry generally. There can be no assurance that the rating agencies will maintain HSBC Holdings’ or the relevant subsidiary’s current ratings or outlook, particularly given the rating agencies’ current review of their bank rating methodologies and the potential impact on HSBC Holdings’ or its subsidiaries’ ratings. At the date hereof, HSBC Holdings’ long-term debt was rated ‘A+’ by Fitch, ‘A’ by Standard and Poor’s (‘S&P’) and ‘A2’ by Moody’s. The ratings outlook by FitchS&P was stable and the ratings outlooks by both S&PFitch and Moody’s were negative. Any reductions in these ratings and outlook could increase the cost of our funding, limit access to capital markets and require additional collateral to be placed and, consequently, materially adversely affect our interest margins and our liquidity position. Under the terms of our current collateral obligations under derivative contracts, we could be required to post additional collateral as a result of a downgrade in HSBC Holdings’ credit rating. Risks concerning borrower credit quality are inherent in our businesses Risks arising from changes in credit quality and the recoverability of loans and amounts due from borrowers and counterparties (e.g. reinsurers and counterparties in derivative transactions) are inherent in a wide range of our businesses. Adverse changes in the credit quality of our borrowers and counterparties arising from a general deterioration in economic conditions or systemic risks in the financial systems, including from the impact of the ongoing Covid-19 outbreak (see 'Risks relating to the impact of Covid-19') could reduce the recoverability and value of our assets, and require an increase in our ECLs. We estimate and recognise ECLs in our credit exposure. This process, which is critical to our results and financial condition, requires difficult, subjective and complex judgements, including forecasts of how the economic conditions might impair the ability of our borrowers to repay their loans and the ability of other counterparties to meet their obligations. This assessment considers multiple alternative forward-looking economic conditions (including GSP estimates) and incorporates this into the ECL estimates to meet the measurement objective of IFRS 9. As is the case with any such assessments, we may fail to estimate accurately the effect of factors that we identify or fail to identify relevant factors. Further, the information we use to assess the creditworthiness of our counterparties may be inaccurate or incorrect. Any failure by us to accurately estimate the ability of our counterparties to meet their obligations could have a material adverse effect on our business, financial condition, results of operations and prospects. Our insurance businesses are subject to risks relating to insurance claim rates and changes in insurance customer behaviour We provide various insurance products for customers with whom we have a banking relationship, including several types of life insurance products. The cost of claims and benefits can be influenced by many factors, including mortality and morbidity rates, lapse and surrender rates and, if the policy has a savings element, the performance of assets to support the liabilities. Adverse developments in any of these factors could materially adversely affect our business, financial condition, results of operations and prospects. HSBC Holdings is a holding company and, as a result, is dependent on loan payments and dividends from its subsidiaries to meet its obligations, including obligations with respect to its debt securities, and to provide profits for payment of future dividends to shareholders HSBC Holdings is a non-operating holding company and, as such, its principal source of income is from operating subsidiaries that hold the principal assets of the Group. As a separate legal entity, HSBC Holdings relies on remittance of its subsidiaries’ loan interest payments and dividends in order to be able to pay obligations to debt holders as they fall due, and to pay dividends to its shareholders. The ability of HSBC Holdings' subsidiaries and
affiliates to pay remittances and dividends to HSBC Holdings is subject to such subsidiaries’ and affiliates’ financial performance and could also be restricted by changes in regulation,applicable laws, regulations, exchange controls and other requirements.
We may be required to make substantial contributions to our pension plans We operate a number of pension plans throughout the world for our personnel, including defined benefit plans. Pension scheme obligations fluctuate with changes in long-term interest rates, inflation, salary levels and the longevity of scheme members. They can also be affected by operational and legal risks. The level of contributions we make to our pension plans has a direct effect on our cash flow. To the extent plan assets are insufficient to cover existing liabilities, higher levels of contributions may be required. As a result, deficits in those pension plans could have a material adverse effect on our business, financial condition, operations and prospects. Risk related to our financial statements and accounts Our financial statements are based in part on judgements, estimates and assumptions that are subject to uncertainty The preparation of financial statementsinformation requires management to make judgements and use estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, particularly those involving the use of complex models, actual results reported in future periods may be based upon amounts thatcould differ from those estimates.on which management’s estimates are based. Estimates, judgements, assumptions and models are continually evaluated, and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the prevailing circumstances. RevisionsThe impacts of revisions to accounting estimates are recognised in the period in which the estimate isestimates are revised and in any future periods affected. The accountingAccounting policies deemed critical to our results and financial position based upon materialityare those that involve a high degree of uncertainty and significant judgements and estimates,have a material impact on the financial statements. In 2020 these include impairment of loansamortised cost financial assets and advances,assets measured at fair value through other comprehensive income, impairment of goodwill and non-financial assets, valuation of financial instruments, deferred tax assets, provisions, and impairment of interests in associates and post-employment benefit plans, which are discussed in detail in ‘Critical accounting estimates and judgements’ on page 47.77. The measurement of impairment of loansamortised cost financial assets and advancesfinancial assets measured at amortised costfair value through other comprehensive income requires the selection and calibration of complex models and the use of complex models, significantestimates and assumptions about credit behaviour, and judgement to incorporate relevant information about past events, current conditions and forecasts of economic conditions, andconditions. Additionally, significant judgement is involved in identifyingdetermining what is considered to be significant increases in credit risk.risk and what the point of initial recognition is for revolving facilities. The assessment of whether goodwill isand non-financial assets are impaired, and the measurement of any impairment, involves the application of judgement in determining key assumptions, including discount rates, estimated cash flows for the periods for which detailed cash flows are available and projecting nominal growth rates beyond initialthe long-term pattern of sustainable cash flow projections.flows thereafter. The recognition and measurement of deferred tax assets involves significant judgement in estimatingregarding the probability and sufficiency of future profitability required to absorbtaxable profits, taking into account the future reversal of existing taxable temporary differences and tax losses carried forward.planning strategies, including corporate reorganisations. The recognition and measurement of provisions involve significant judgements aboutdue to the point at whichhigh degree of uncertainty in determining whether a liability is recognised,present obligation exists, and in estimating the estimation of theprobability and amount of any such liability.outflows that may arise. The valuation of financial instruments measured at fair value can be subjective, in particular where models are used that include unobservable inputs. The assessment of interests in associates for impairment involves significant judgements in determining the value in use, 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. At 31 December 2019,2020, we performed an impairment review of our investment in BoCom and concluded it was not impaired based on our value in use calculation. The calculation of the defined benefit pension obligation involves the determination of key assumptions, including discount rate, inflation rate, pension payments and deferred pension and pay and mortality. Given the uncertainty and subjectivity associated with the above critical accounting judgements and estimates, future outcomes may differ materially from those assumed using information available at the reporting date. The effect of these changes on the future results of operations and the future financial position of the Group may be material, and could have a material adverse effect on our business, financial condition, results of operations and prospects. For further details, see ‘Critical accounting estimates and judgements’ on page 47.77. Changes in accounting standards may have a material impact on how we report our financial results and financial condition We prepare our consolidated financial statements in conformity with the requirements of the Companies Act 2006 and in accordance with International Financial Reporting Standards (‘IFRSs’IFRS’) as issued by the International Accounting Standards Board (‘IASB’), including interpretations (‘IFRICS’) issued by the IFRS Interpretations Committee, and as endorsed by the EU.Committee. From time to time, the IASB or the IFRS Interpretations Committee may issue new accounting standards or interpretations that could materially impact how we use models to calculate,report and disclose our financial results and financial condition, as well asand which may affect the calculation of our capital ratios, including the CET1 ratio. We could also be required to apply new or revised standards retrospectively, resulting in our restating prior period financial statements in material amounts. | | | | Areas of special interest |
During 2019,2020, 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 Covid-19 outbreak and the UK withdrawal from the EU, Ibor transitionEU. Risks related to Covid-19 The Covid-19 outbreak and its effect on the global economy have impacted our customers and our performance, and the future effects of the outbreak remain uncertain. The outbreak necessitated governments to respond at unprecedented levels to protect public health, local economies and livelihoods. It has affected regions at different times and to varying degrees as it has developed. The varying government support measures and restrictions in response have added challenges, given the rapid pace of change and significant operational demands. The speed at which countries and territories will be able to unwind the government support measures and restrictions and return to pre-Covid-19 economic levels will vary based on the levels of infection, local governmental decisions and access to and ability to roll out vaccines. There remains a risk of subsequent waves of infection, as evidenced by the recently emerged more transmissible variants of the virus. Renewed outbreaks emphasise the ongoing threat of Covid-19 even in countries that have recorded lower than average cases so far. Government restrictions imposed around the world to limit the spread of Covid-19 resulted in a sharp contraction in global economic activity during 2020. At the same time governments also took steps designed to soften the extent of the damage to investment, trade and labour markets. Our Central scenario used to calculate impairment assumes that economic activity will gradually recover over the course of 2021. In this scenario, recovery will be supported by a successful roll-out of vaccination programmes across our key markets, which, coupled with effective non-pharmacological measures to contain the virus, will lead to a decline in infections over the course of the year. Governments and central banks are expected to continue to work together across many of our key markets to ensure that households and firms receive an appropriate level of financial
support until restrictions on economic activity and mobility can be materially eased. Such support is intended to ensure that labour and housing markets do not experience abrupt, negative corrections. It is also intended to limit the extent of long-term structural damage to economies. There is a high degree of uncertainty associated with economic forecasts in the current environment and there are significant risks to our Central scenario. The degree of uncertainty varies by market, driven by country-specific trends in the evolution of the pandemic and associated policy responses. As a result, our Central scenario for impairment has not been assigned an equal likelihood of occurrence across our key markets. For further details of our Central and other scenarios see ‘Measurement uncertainty and sensitivity analysis’ on page 169. There is a material risk of a renewed drop in economic activity. The economic fallout from the Covid-19 outbreak risks increasing inequality across markets that have already suffered from social unrest. This will leave the burden on governments and central banks to maintain or increase fiscal and monetary stimulus. After financial markets suffered a sharp fall in the early phases of the spread of Covid-19, they rebounded but still remain volatile. Depending on the long-term impact on global economic growth, financial asset prices may suffer a further sharp fall. Governments and central banks in major economies have deployed extensive measures to support their local populations. Measures implemented by governments have included income support to households and funding support to businesses. Central bank measures have included cuts to policy rates, support to funding markets and asset purchases. These measures are being extended in countries where further waves of the Covid-19 outbreak are prompting renewed government restrictions. Central banks are expected to maintain record-low interest rates for a considerable period of time and the debt burden of governments is expected to rise significantly. We initiated market-specific measures to support our personal and business customers through these challenging times. These included mortgage assistance, payment holidays, the waiving of certain fees and charges, and liquidity relief for businesses facing market uncertainty and supply chain disruption. We are also working closely with governments, and supporting national schemes that focus on the parts of the economy most impacted by Covid-19. In the UK, this included providing access to the various government support schemes from the beginning. In Hong Kong, we provided prompt liquidity relief to businesses facing market uncertainty and supply chain pressures. For further details of our customer relief programmes, see page 184. Central bank and government actions and support measures taken in response to the Covid-19 outbreak, and our responses to those, have created, and may in the future create restrictions in relation to capital. This has limited and may in the future limit management's flexibility in managing the business and taking action in relation to capital distribution and capital allocation. For example, in response to a written request from the PRA, we cancelled the fourth interim dividend for 2019 of $0.21 per ordinary share. We also announced that we would make no quarterly or interim dividend payments or accruals in respect of ordinary shares until the end of 2020. Following this, in December 2020 the PRA announced a temporary approach to shareholder distributions for 2020 in which it set out a framework for board decisions on dividends. After considering the requirements of the temporary approach, the Board announced an interim dividend for 2020 of $0.15 per ordinary share. The rapid introduction and varying nature of the government support schemes, as well as customer expectations, has led to risks as the Group implements large-scale changes in a short period of time. This has led to increased operational risks, including complex conduct considerations, increased reputational risk and increased risk of fraud. These risks are likely to be heightened further as and when those government support schemes are unwound. Central bank and government actions and support measures, and our responses to those, have also led to increased litigation risk, including lawsuits that have been and may continue to be brought in connection with our cancellation of the fourth interim dividend for 2019. At 31 December 2020, our CET1 ratio was 15.9%, compared with 14.7% at 31 December 2019, and our liquidity coverage ratio (‘LCR’) was 139%. Our capital, funding and liquidity position is expected to help us to continue supporting our customers throughout the Covid-19 outbreak. In many of our markets the Covid-19 outbreak has led to a worsening of economic conditions and increased uncertainty, which has been reflected in higher ECL reserves. Furthermore, credit losses may increase due to exposure to vulnerable sectors of the economy such as retail, hospitality and commercial real estate. The impact of the pandemic on the long-term prospects of businesses in these sectors is uncertain and may lead to significant credit losses on specific exposures, which may not be fully captured in ECL estimates. In addition, in times of stress, fraudulent activity is often more prevalent, leading to potentially significant credit or operational losses. The significant changes in economic and market drivers, customer behaviours and government actions caused by Covid-19 have materially impacted the performance of financial models. ECL model performance has been significantly impacted, which has increased reliance on management judgement in determining the appropriate level of ECL estimates. The reliability of ECL models under these circumstances has also been impacted by the unprecedented response from governments to provide a variety of economic stimulus packages to support livelihoods and businesses. Historical observations on which the models were built do not reflect these unprecedented support measures. We continue to monitor credit performance against the level of government support and customer relief programmes. In order to address some model limitations and performance issues, we redeveloped some of the key models used to calculate ECL estimates. These models have been independently validated by the Model Risk Management team and assessed as having the ability to deliver reliable credit loss estimates. While this reduced the reliance on management judgement for determining ECL estimates, the current uncertain economic outlook, coupled with the expected end to government support schemes, resulted in judgemental post-model adjustments still being required. The Model Risk Management team is reviewing IFRS 9 model performance at the country and Group level on a quarterly basis to assess whether or not the models in place can deliver reliable outputs. These assessments provide the credit teams with a view of model reliability. The redevelopment of IFRS 9 models will continue as the economic consequences of the Covid-19 outbreak become clearer over time, economic conditions normalise and actual credit losses occur. As a result of the Covid-19 outbreak, business continuity responses were implemented and the majority of service level agreements have been maintained. We have not experienced any major impacts to the supply chain from our third-party service providers due to the pandemic. The risk of damage or theft to our physical assets or criminal injury to our employees remains unchanged and no significant incidents have impacted our buildings or staff. There remain significant uncertainties in assessing the duration of the Covid-19 outbreak and its impact. The actions taken by various governments and central banks, in particular in the UK, mainland China, Hong Kong and the US, provide an indication of the potential severity of the downturn and post-recovery environment, which from a commercial, regulatory and risk perspective could be significantly different to past crises and persist for a prolonged period. A continued prolonged period of significantly reduced economic activity as a result of the impact of the outbreak could have a materially adverse effect on our financial condition, results of operations, prospects, liquidity, capital position and portfolios in Asia-Pacific.credit ratings. We continue to monitor the situation closely, and given the novel or prolonged nature of the outbreak, additional mitigating actions may be required.
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 relationship2020. A Trade and Cooperation Agreement between the UKEU and the EU. AtUK was agreed on
24 December 2020 and ratified by the UK on 30 December 2020. It includes a joint declaration of cooperation, and in the coming months both parties are expected to enter discussions with the aim of agreeing a Memorandum of Understanding establishing the framework for this stage it remains unclear what that relationship will look like, potentially leaving firms with little timecooperation. As expected, the financial passporting arrangement expired at the end of the transition period, and therefore financial institutions in the UK including HSBC Bank plc and HSBC UK lost their EU regulatory permissions to adapt to changes, which may enter into force oncontinue servicing clients in the European Economic Area (‘EEA’) from 1 January 2021. The Trade and Cooperation Agreement mainly focused on goods and services but also covered a wide range of other areas, including competition, state aid, tax, fisheries, transport, data and security. However, it included limited elements on financial services, and, as a result, did not change HSBC’s planning in relation to the UK’s withdrawal from the EU. Our programme to manage the impact of the UK leavingwithdrawal from the EU has now been largely completed. It iswas based on the assumption of a scenario whereby the UK exits the transition period without the existingfinancial passporting or regulatory equivalence framework that supports cross-border business. Equivalence decisions are an established feature of EU law, which allow the authorities in the UK and EU to rely on the other’s regime for specific regulatory purposes only. While the UK and the EU have made a number of equivalence decisions, these decisions do not give UK firms full access to EU clients and counterparties. Our focus has beenprogramme focused on four main components: legal entity restructuring; product offering; customer migrations; and employees. However, there remain risks, many of them linked to the absence of some equivalence decisions between the EU and the UK. 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 and will continue to monitor any implications for our clients in adhering to the new requirements under the Trade and Cooperation Agreement. Legal entity restructuring Our branches in seven European Economic Area (‘EEA’)EEA countries (Belgium, the Netherlands, Luxembourg, Spain, Italy, Ireland and Czech Republic) relied on financial passporting out of the UK. We had worked on the assumption that this passporting willwould no longer be possible following the UK’s departurewithdrawal from the EU and therefore transferred our branch business to newly established branches of HSBC France,Continental Europe, 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 our product offering in a wide range of areas such as in our Markets and Securities Services franchise as well as in our Global Trade Business. We also enhanced our existing product offeringcash management solutions 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 departurewithdrawal from the EU is likely to havehas had 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 iswas to minimise the level of change for our customers, we arewere required to migrate some EEA-incorporated clients from the UK to HSBC France,Continental Europe or another EEA entity. We have now migrated mostalmost all clients who we expect can no longer be serviced out of the UK. The majority of remaining customers are covered by national regimes that allow continuity of financial services on a temporary or permanent basis between the UK and their respective jurisdictions. We are working in close collaboration with any remaining clients to makeour customers with the aim of managing their transition as smooth as possible.in 2021, where required.
Employees The migration of EEA-incorporated clients will requirerequired us to strengthen our local teams in the EU, and France in particular. We have now completed the transfer of roles from London to Paris to support our post-UK withdrawal from the EU operating model. 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.for example 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 131.
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-linkedapplications.
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 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 transitionthis 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
Report of the Directors | Risk
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 pages 131 to 133. 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 128.
| | | 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 120)161) | | 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 | | | | Treasury risk (see page 166)211) | Capital and liquidityTreasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including pension risk.the risk of adverse impact on earnings or capital due to structural foreign exchange exposures and changes in market interest rates, and including the financial risks arising from historical and current provision of pensions and other post-employment benefits to staff and their dependants. | Capital and liquidityTreasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions, or pension plan fiduciary decisions. It also arises from the external environment.environment, including changes to market parameters such as interest rates or foreign exchange rates, together with updates to the regulatory requirements.
| Capital and liquidityTreasury risk is:
• measured through appetitesrisk appetite and more granular limits, set as targetto provide an early warning of increasing risk, minimum ratios of relevant regulatory metrics, and minimum ratios;metrics to monitor the key risk drivers impacting treasury resources;• monitored and projected against appetites and by using operating plans based on strategic objectives together with stress and scenario testing; and• managed through control of capital and liquidity resources in conjunction with risk profiles, strategic objectives and cash flows.
| | | | | Market risk (see page 171)224) | | 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 185.
| 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 incomemeasures; 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 179)228) | 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 180)228) | | 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, as well as breaching regulatory licensing, permission and breaching other regulatory requirements.rules. | Regulatory compliance risk is: • measured by reference to risk appetite, 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 (see page 181)229) | Financial crime and fraud risk is the risk that weof knowingly or unknowingly helphelping parties to commit or to further potentially illegal activity through HSBC, including both internalmoney laundering, fraud, bribery and external fraud.corruption, tax evasion, sanctions breaches, and terrorist and proliferation financing. | Financial crime and fraud risk arises from day-to-day banking operations.operations involving customers, third parties and employees. Exceptional circumstances that impact day-to-day operations may additionally increase financial crime risk. | Financial crime and fraud risk is: • measured by reference to risk appetite, identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our financial crime riskregulatory compliance teams;• monitored against our financial crimethe first line of defence risk appetite statements and metrics,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. | |
| | | | | | | | | | Description of risks – banking operations | | Risks | Arising from | Measurement, monitoring and management of risk | Model risk (see page 182)230) | 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.
| 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.
|
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 many of the same risks as our banking operations, whichand these are covered by the Group’s risk management processes. However, there are specific risks inherent to the insurance operations as noted below. | | | | | | | | | | Description of risks – insurance manufacturing operations | | Risks | Arising from | Measurement, monitoring and management of risk | Financial risk (see page 185)234) | | Our abilityFor insurance entities, financial risk includes the risk of not being able to effectively match liabilities arising under insurance contracts with appropriate investments and that the asset portfolios that back them is contingent on the managementexpected sharing of financial risks and the extent to which these are borne by policyholders.performance with policyholders under certain contracts is not possible. | Exposure to financial risk arises from: • market risk affecting the fair values of financial assets or their future cash flows;• liquidity risk of entities being unable to make payments to policyholders as they fall due. | Financial risk is: • measured (i) for credit risk, in terms of economic capital and the amount that could be lost if a counterparty fails to make repayments; (ii) for market risk, in terms of economic capital, internal metrics and fluctuations in key financial variables; and (iii) for liquidity risk, in terms of internal metrics including stressed operational cash flow projections;• monitored through a framework of approved limits and delegated authorities; and• managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance. This includes using product design, asset liability matching and bonus rates. | Insurance risk (see page 187)236) | | | 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 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 | | Page | | Overview | | | Credit risk management | | Credit risk in 20192020 | | Summary of credit risk
| 165 | | | Credit exposure | | 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 lendingCustomer relief programmes | | PersonalWholesale lending | | Supplementary informationPersonal lending | | | Supplementary information | | | HSBC Holdings | | | | | |
Overview 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 20192020 There were no material changes to the policies and practices for the management of credit risk in 2019.2020. We continued to apply the requirements of IFRS 9 ‘Financial Instruments’ within the Credit Risk.Risk sub-function. Due to the unique market conditions observed during the Covid-19 outbreak, we expanded operational practices to provide short-term support to customers under the current credit policy framework. The outbreak necessitated governments to respond at unprecedented levels to protect public health, local economies and livelihoods. It has affected regions at different times and varying degrees as it has developed. The varying government support measures in response have added challenges, given the rapid pace of change and significant operational demands. The speed at which countries and territories will be able to unwind the government measures and return to pre-Covid-19 economic levels will vary based on the levels of infection, local political decisions and access to and ability to roll out vaccine. As we helped our customers during these challenging times, we continued to prioritise effective and robust credit risk management. We performed a number of reviews on segments of our loan portfolio that were likely to be impacted by the economic slowdown. A number of internal stress tests were conducted under different scenarios in order to assess the potential impact of the Covid-19 outbreak on expected credit losses. We reviewed and implemented the guidance provided by regulators on how to manage the credit portfolio, how to identify the effects of the various payment moratoria, and the appropriate classification of forborne/renegotiated loans under the various schemes. We also increased our focus on the quality and timeliness of the data used to inform management decisions, so we were able to manage the varying level of risk actively throughout the year. The Covid-19 outbreak and its effect on the global economy have impacted our customers and our performance during this year, and the future effects of the outbreak remain uncertain. For further details of market-specific measures to support our personal and business customers, see page 184.
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.
Credit riskRisk sub-function (Audited) Credit approval authorities are delegated by the Board to the Group Chief Executive together with the authority to sub-delegate them. The Credit Risk sub-function in Global Risk is responsible for the key policies and processes for managing credit risk, which include formulating Group credit policies and risk rating frameworks, guiding the Group’s appetite for credit risk exposures, undertaking independent reviews and objective assessment of credit risk, and monitoring performance and management of portfolios. The principal objectives of our credit risk management are: •to maintain across HSBC a strong culture of responsible lending, and robust risk policies and control frameworks; •to both partner and challenge our businesses in defining, implementing and continually re-evaluating our risk appetite under actual and scenario conditions; and •to ensure there is independent, expert scrutiny of credit risks, their costs and their mitigation. 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’)losses 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 RetailWealth and Personal 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 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.
| | | | | | | | | | Credit quality classification | | | | Sovereign debt securities and bills | Other debt securities and bills | Wholesale lending and derivatives | Retail lending | | | Footnotes | External credit rating | External credit rating | Internal credit rating | 12-month Basel probability of default % | Internal credit rating | 12 month probability- weighted PD % | | Quality classification | 1, 2 | | | | | | | | Strong | | BBB and above | A- and above | CRR 1 to CRR 2 | 0 – 0.169 | Band 1 and 2 | 0.000 – 0.500 | | Good | | BBB- to BB | BBB+ to BBB- | CRR 3 | 0.170 – 0.740 | Band 3 | 0.501 – 1.500 | | Satisfactory | | 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 | | Sub-standard | | B- to C | B- to C | CRR 6 to CRR 8 | 4.915 – 99.999 | Band 6 | 20.001 – 99.999 | | Credit impaired | | Default | Default | CRR 9 to CRR 10 | 100 | Band 7 | 100 |
| | | | | | 1162 | Customer risk rating (‘CRR’).HSBC Holdings plc |
| | | | | | | | | | | | | | | | | | | | | | | | | Credit quality classification | | | Sovereign debt securities
and bills | Other debt
securities
and bills | Wholesale lending
and derivatives | Retail lending | | Footnotes | External credit rating | External credit rating | Internal credit rating | 12-month Basel probability of default % | Internal credit rating | 12 month probability- weighted PD % | | Quality classification | 1, 2 | | | | | | | | Strong | | BBB and above | A- and above | CRR 1 to CRR 2 | 0–0.169 | Band 1 and 2 | 0.000–0.500 | | Good | | BBB- to BB | BBB+ to BBB- | CRR 3 | 0.170–0.740 | Band 3 | 0.501–1.500 | | Satisfactory | | 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 | | Sub-standard | | B- to C | B- to C | CRR 6 to CRR 8 | 4.915–99.999 | Band 6 | 20.001–99.999 | | Credit impaired | | Default | 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’). | | 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 (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.
Credit quality of renegotiated loans On execution of a renegotiation, the loan will also be classified as credit impaired if it is not already so classified. In wholesale lending, all facilities with a customer, including loans that have not been modified, are considered credit impaired following the identification of a renegotiated loan. 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.
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. Customer relief programmes and renegotiated loans In response to the Covid-19 outbreak, governments and regulators around the world encouraged a range of customer relief programmes including payment deferrals. In determining whether a customer is experiencing financial difficulty for the purposes of identifying renegotiated loans a payment deferral requested under such schemes, or an extension thereof, is not automatically determined to be evidence of financial difficulty and would therefore not automatically trigger identification as renegotiated loans. Rather, information provided by payment deferrals is considered in the context of other reasonable and supportable information. The IFRS 9 treatment of customer relief programmes is explained on page 184. 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 20192020 GrossAt 31 December 2020, gross loans and advances to customers and banks of $1,134bn increased by $19.4bn, compared with
31 December 2019. This included favourable foreign exchange movements of $26.4bn. Excluding foreign exchange movements, the decline was driven by a $33.2bn decrease in wholesale loans and advances to customers. This was partly offset by a $15bn increase in personal loans and advances and a $11.2bn increase in loans and advances to banks.
At 31 December 2020, the allowance for ECL of $15.7bn increased by $6.3bn compared with 31 December 2019, including adverse foreign exchange movements of $0.1bn. It increased by $1.2bn compared with 30 June 2020. The $15.7bn allowance comprised $14.7bn in respect of assets held at amortised cost, $0.9bn in respect of loan commitments and financial guarantees, and $0.1bn in respect of debt instruments measured at fair value through other comprehensive income (‘FVOCI’). During the first half of 2020, the Group experienced a significant increase in allowances for ECL, which subsequently stabilised during the second half of 2020. Excluding foreign exchange movements, the allowance for ECL in relation to loans and advances to customers increased by $5.7bn from
31 December 2019. This was attributable to: •a $4.1bn increase in wholesale loans and advances to customers, of $1,045bn atwhich $2.0bn was driven by stages 1 and 2; and •a $1.6bn increase in personal loans and advances to customers, of which $1.3bn was driven by stages 1 and 2. During the first six months of the year, the Group experienced significant migrations from stage 1 to stage 2, reflecting a worsening of the economic outlook. This trend slowed during the second half of 2020 as forward economic guidance remained broadly stable in comparison with 30 June 2020, with some regions experiencing transfers from stage 2 to stage 1. At 31 December 20192020, stage 3 gross loans and advances to customers and banks of $19.1bn increased from $990bn atby $5.7bn compared with 31 December 2018.2019. This increase included favourable foreign exchange movements of $13bn. Loans$0.2bn. Stage 3 gross loans and advances to customers and banks of $69bn at 31 December 2019 decreased2020 increased from $72bn$17.1bn at 31 December 2018. This included adverse foreign exchange movements30 June 2020, while benefiting from releases from historical default cases. As the Covid-19 pandemic continues, there may be volatility in future stage 3 balances, in particular due to the expiration of $0.1bn. Wholesalethe measures implemented by governments, regulators and banks to support customers. The ECL charge for 2020 was $8.8bn, inclusive of recoveries, which comprised $6.0bn in respect of wholesale lending, of which stage 3 and purchased or originated credit impaired ('POCI') was $3.4bn; $2.7bn in respect of personal lending, movements are disclosed on pages 140 to 160. of which stage 3 was $0.8bn; and $0.1bn in respect of other financial assets measured at amortised cost and debt instruments measured at FVOCI. The change in expected credit losses and other credit impairment charges, as it appears in the income statement,ECL charge for the periodsix months ended 30 June 2020 was $2.8bn compared with $1.8bn$6.9bn, which comprised $4.6bn in 2018.respect of wholesale lending, of which stage 3 and POCI was $2.2bn; $2.0bn in respect of personal lending, of which stage 3 was $0.5bn; and $0.2bn in respect of other financial assets measured at amortised cost and debt instruments measured at FVOCI. Income statement movements are analysed further on page 50.79. Our maximum exposure to credit risk is presented on page 127 and credit quality on page 136.
While credit risk arises across most of our balance sheet, ECL have typically been recognised on loans and advances to customers and banks, andin addition to securitisation exposures and other structured products. As a result, our disclosures focus primarily on these two areas. For further details of:•maximum exposure to credit risk, see page 168; Re-presentation•measurement uncertainty and sensitivity analysis of UK gross carrying/nominal amounts stagingECL estimates, see page 169;
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 125, 135, 139, 142, 144, 146 and 163.
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 125, 135, 139, 142, 144, 146 and 163.
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 125, 135, 139, 142, 144, 146 and 163.
Commercial real estate lending: There was a change of $819m, which can be seen on page 147.
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 150.
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 154.
The ‘Reconciliation•reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees’ disclosureguarantees, see page 177;
•credit quality, see page 180; •customer relief programmes, see page 184; •total wholesale lending for 31 December 2018 reflects this re-presentation in other movements of $8,935m,loans and for foreign exchange there was a$72m adverse movement. There is no impact upon advances to banks and customers by stage distribution, see page 187; •wholesale lending collateral, see page 192; •total gross carrying values/nominal amounts, personal lending amounts or allowance for ECL.loans and advances to customers at amortised cost by stage distribution, see page 201; and •personal lending collateral, see page 204.
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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary of financial instruments to which the impairment requirements in IFRS 9 are applied | | | | | | | | | | | | (Audited) | | | 31 Dec 2020 | At 31 Dec 2019 | | | | | | | | | | | | | Gross carrying/nominal amount | Allowance for ECL1 | Gross carrying/nominal amount | Allowance for ECL1 | | | | | | | | | | | | Footnotes | $m | $m | $m | $m | | | | | | | | | | | | Loans and advances to customers at amortised cost | | 1,052,477 | | (14,490) | | 1,045,475 | | (8,732) | | | | | | | | | | | | | – personal | | 460,809 | | (4,731) | | 434,271 | | (3,134) | | | | | | | | | | | | | – corporate and commercial | | 527,088 | | (9,494) | | 540,499 | | (5,438) | | | | | | | | | | | | | – non-bank financial institutions | | 64,580 | | (265) | | 70,705 | | (160) | | | | | | | | | | | | | Loans and advances to banks at amortised cost | | 81,658 | | (42) | | 69,219 | | (16) | | | | | | | | | | | | | Other financial assets measured at amortised cost | | 772,408 | | (175) | | 615,179 | | (118) | | | | | | | | | | | | | – cash and balances at central banks | | 304,486 | | (5) | | 154,101 | | (2) | | | | | | | | | | | | | – items in the course of collection from other banks | | 4,094 | | 0 | | 4,956 | | 0 | | | | | | | | | | | | | – Hong Kong Government certificates of indebtedness | | 40,420 | | 0 | | 38,380 | | 0 | | | | | | | | | | | | | – reverse repurchase agreements – non-trading | | 230,628 | | 0 | | 240,862 | | 0 | | | | | | | | | | | | | – financial investments | | 88,719 | | (80) | | 85,788 | | (53) | | | | | | | | | | | | | – prepayments, accrued income and other assets | 2 | 104,061 | | (90) | | 91,092 | | (63) | | | | | | | | | | | | | Total gross carrying amount on-balance sheet | | 1,906,543 | | (14,707) | | 1,729,873 | | (8,866) | | | | | | | | | | | | | Loans and other credit-related commitments | | 659,783 | | (734) | | 600,029 | | (329) | | | | | | | | | | | | | – personal | | 236,170 | | (40) | | 223,314 | | (15) | | | | | | | | | | | | | – corporate and commercial | | 299,802 | | (650) | | 278,524 | | (307) | | | | | | | | | | | | | – non-bank financial institutions | | 123,811 | | (44) | | 98,191 | | (7) | | | | | | | | | | | | | Financial guarantees | | 18,384 | | (125) | | 20,214 | | (48) | | | | | | | | | | | | | – personal | | 900 | | (1) | | 804 | | (1) | | | | | | | | | | | | | – corporate and commercial | | 12,946 | | (114) | | 14,804 | | (44) | | | | | | | | | | | | | – non-bank financial institutions | | 4,538 | | (10) | | 4,606 | | (3) | | | | | | | | | | | | | Total nominal amount off-balance sheet | 3 | 678,167 | | (859) | | 620,243 | | (377) | | | | | | | | | | | | | | 2,584,710 | | (15,566) | | 2,350,116 | | (9,243) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value | Memorandum allowance for ECL4 | Fair value | Memorandum allowance for ECL4 | | | | | | | | | | | | | $m | $m | $m | $m | | | | | | | | | | | | Debt instruments measured at fair value through other comprehensive income (‘FVOCI’) | | 399,717 | | (141) | | 355,664 | | (166) | | | | | | | | | | | |
1 The total ECL is recognised in the loss allowance for the financial asset unless the total ECL increased from $9.2bnexceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision. 2 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 316, includes both financial and non-financial assets. 3 Represents the maximum amount at 31 December 2018risk should the contracts be fully drawn upon and clients default. 4 Debt instruments measured at FVOCI continue 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 instrumentsbe measured at fair value throughwith the allowance for ECL as a memorandum item. Change in ECL is recognised in ‘Change in expected credit losses and other comprehensivecredit impairment charges’ in the income (‘FVOCI’).statement.
| | | | | | | | | | | | 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 |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| | Loans and advances to customers at amortised cost | | 1,045,475 |
| (8,732 | ) | 990,321 |
| (8,625 | ) | | – personal | | 434,271 |
| (3,134 | ) | 394,337 |
| (2,947 | ) | | – corporate and commercial | | 540,499 |
| (5,438 | ) | 534,577 |
| (5,552 | ) | | – non-bank financial institutions | | 70,705 |
| (160 | ) | 61,407 |
| (126 | ) | | Loans and advances to banks at amortised cost | | 69,219 |
| (16 | ) | 72,180 |
| (13 | ) | | Other financial assets measured at amortised cost | | 615,179 |
| (118 | ) | 582,917 |
| (55 | ) | | – cash and balances at central banks | | 154,101 |
| (2 | ) | 162,845 |
| (2 | ) | | – items in the course of collection from other banks | | 4,956 |
| — |
| 5,787 |
| — |
| | – Hong Kong Government certificates of indebtedness | | 38,380 |
| — |
| 35,859 |
| — |
| | – reverse repurchase agreements – non-trading | | 240,862 |
| — |
| 242,804 |
| — |
| | – financial investments | | 85,788 |
| (53 | ) | 62,684 |
| (18 | ) | | – prepayments, accrued income and other assets | 2 | 91,092 |
| (63 | ) | 72,938 |
| (35 | ) | | Total gross carrying amount on-balance sheet | | 1,729,873 |
| (8,866 | ) | 1,645,418 |
| (8,693 | ) | | Loans and other credit-related commitments | | 600,029 |
| (329 | ) | 592,008 |
| (325 | ) | | – personal | | 223,314 |
| (15 | ) | 207,351 |
| (13 | ) | | – corporate and commercial | | 278,524 |
| (307 | ) | 271,022 |
| (305 | ) | | – non-bank financial institutions | | 98,191 |
| (7 | ) | 113,635 |
| (7 | ) | Financial guarantees | | 20,214 |
| (48 | ) | 23,518 |
| (93 | ) | | – personal | | 804 |
| (1 | ) | 927 |
| (1 | ) | | – corporate and commercial | | 14,804 |
| (44 | ) | 17,355 |
| (85 | ) | | – non-bank financial institutions | | 4,606 |
| (3 | ) | 5,236 |
| (7 | ) | | Total nominal amount off-balance sheet | 3 | 620,243 |
| (377 | ) | 615,526 |
| (418 | ) | | | | 2,350,116 |
| (9,243 | ) | 2,260,944 |
| (9,111 | ) | | | | | | | | | | | Fair value |
| Memorandum allowance for ECL4 |
| Fair value |
| Memorandum allowance for
ECL4 |
| | | | $m |
| $m |
| $m |
| $m |
| Debt instruments measured at fair value through other comprehensive income (‘FVOCI’)
| | 355,664 |
| (166 | ) | 343,110 |
| (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 asset, in which case the ECL is recognised as a provision. |
| | 2 | 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 262, 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 1: These financial assets are unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL is recognised. •Stage 2: A significant increase in credit risk has been experienced on these financial assets since initial recognition for which a lifetime ECL is recognised.
•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. •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.
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 2020 | | (Audited) | | 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 | % | % | % | % | % | | Loans and advances to customers at amortised cost | 869,920 | | 163,185 | | 19,095 | | 277 | | 1,052,477 | | (1,974) | | (4,965) | | (7,439) | | (112) | | (14,490) | | 0.2 | | 3.0 | | 39.0 | | 40.4 | | 1.4 | | | – personal | 430,134 | | 25,064 | | 5,611 | | 0 | | 460,809 | | (827) | | (2,402) | | (1,502) | | 0 | | (4,731) | | 0.2 | | 9.6 | | 26.8 | | 0 | | 1.0 | | | – corporate and commercial | 387,563 | | 126,287 | | 12,961 | | 277 | | 527,088 | | (1,101) | | (2,444) | | (5,837) | | (112) | | (9,494) | | 0.3 | | 1.9 | | 45.0 | | 40.4 | | 1.8 | | | – non-bank financial institutions | 52,223 | | 11,834 | | 523 | | 0 | | 64,580 | | (46) | | (119) | | (100) | | 0 | | (265) | | 0.1 | | 1.0 | | 19.1 | | 0 | | 0.4 | | | Loans and advances to banks at amortised cost | 79,654 | | 2,004 | | 0 | | 0 | | 81,658 | | (33) | | (9) | | 0 | | 0 | | (42) | | 0 | | 0.4 | | 0 | | 0 | | 0.1 | | | Other financial assets measured at amortised cost | 768,216 | | 3,975 | | 177 | | 40 | | 772,408 | | (80) | | (44) | | (42) | | (9) | | (175) | | 0 | | 1.1 | | 23.7 | | 22.5 | | 0 | | | Loan and other credit-related commitments | 604,485 | | 54,217 | | 1,080 | | 1 | | 659,783 | | (290) | | (365) | | (78) | | (1) | | (734) | | 0 | | 0.7 | | 7.2 | | 100.0 | | 0.1 | | | – personal | 234,337 | | 1,681 | | 152 | | 0 | | 236,170 | | (39) | | (1) | | 0 | | 0 | | (40) | | 0 | | 0.1 | | 0 | | 0 | | 0 | | | – corporate and commercial | 253,062 | | 45,851 | | 888 | | 1 | | 299,802 | | (236) | | (338) | | (75) | | (1) | | (650) | | 0.1 | | 0.7 | | 8.4 | | 100.0 | | 0.2 | | | – financial | 117,086 | | 6,685 | | 40 | | 0 | | 123,811 | | (15) | | (26) | | (3) | | 0 | | (44) | | 0 | | 0.4 | | 7.5 | | 0 | | 0 | | | Financial guarantees | 14,090 | | 4,024 | | 269 | | 1 | | 18,384 | | (37) | | (62) | | (26) | | 0 | | (125) | | 0.3 | | 1.5 | | 9.7 | | 0 | | 0.7 | | | – personal | 872 | | 26 | | 2 | | 0 | | 900 | | 0 | | (1) | | 0 | | 0 | | (1) | | 0 | | 3.8 | | 0 | | 0 | | 0.1 | | | – corporate and commercial | 9,536 | | 3,157 | | 252 | | 1 | | 12,946 | | (35) | | (54) | | (25) | | 0 | | (114) | | 0.4 | | 1.7 | | 9.9 | | 0 | | 0.9 | | | – financial | 3,682 | | 841 | | 15 | | 0 | | 4,538 | | (2) | | (7) | | (1) | | 0 | | (10) | | 0.1 | | 0.8 | | 6.7 | | 0 | | 0.2 | | | At 31 Dec 2020 | 2,336,365 | | 227,405 | | 20,621 | | 319 | | 2,584,710 | | (2,414) | | (5,445) | | (7,585) | | (122) | | (15,566) | | 0.1 | | 2.4 | | 36.8 | | 38.2 | | 0.6 | |
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2019 | | (Audited) | | | 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 |
| % | % | % | % | % | | Loans and advances to customers at amortised cost | 951,583 |
| 80,182 |
| 13,378 |
| 332 |
| 1,045,475 |
| (1,297 | ) | (2,284 | ) | (5,052 | ) | (99 | ) | (8,732 | ) | 0.1 | 2.8 | 37.8 | 29.8 | 0.8 | | – personal | 413,669 |
| 15,751 |
| 4,851 |
| — |
| 434,271 |
| (583 | ) | (1,336 | ) | (1,215 | ) | — |
| (3,134 | ) | 0.1 | 8.5 | 25.0 | — | 0.7 | | – corporate and commercial | 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 | | – non-bank financial institutions | 65,661 |
| 4,832 |
| 212 |
| — |
| 70,705 |
| (42 | ) | (28 | ) | (90 | ) | — |
| (160 | ) | 0.1 | 0.6 | 42.5 | — | 0.2 | | Loans and advances to banks at amortised cost | 67,769 |
| 1,450 |
| — |
| — |
| 69,219 |
| (14 | ) | (2 | ) | — |
| — |
| (16 | ) | — | 0.1 | — | — | — | | Other financial assets measured at amortised cost | 613,200 |
| 1,827 |
| 151 |
| 1 |
| 615,179 |
| (38 | ) | (38 | ) | (42 | ) | — |
| (118 | ) | — | 2.1 | 27.8 | — | — | | Loan and other credit-related commitments | 577,631 |
| 21,618 |
| 771 |
| 9 |
| 600,029 |
| (137 | ) | (133 | ) | (59 | ) | — |
| (329 | ) | — | 0.6 | 7.7 | — | 0.1 | | – personal | 221,490 |
| 1,630 |
| 194 |
| — |
| 223,314 |
| (13 | ) | (2 | ) | — |
| — |
| (15 | ) | — | 0.1 | — | — | — | | – corporate and commercial | 259,138 |
| 18,804 |
| 573 |
| 9 |
| 278,524 |
| (118 | ) | (130 | ) | (59 | ) | — |
| (307 | ) | — | 0.7 | 10.3 | — | 0.1 | | – financial | 97,003 |
| 1,184 |
| 4 |
| — |
| 98,191 |
| (6 | ) | (1 | ) | — |
| — |
| (7 | ) | — | 0.1 | — | — | — | | Financial guarantees | 17,684 |
| 2,340 |
| 186 |
| 4 |
| 20,214 |
| (16 | ) | (22 | ) | (10 | ) | — |
| (48 | ) | 0.1 | 0.9 | 5.4 | — | 0.2 | | – personal | 802 |
| 1 |
| 1 |
| — |
| 804 |
| (1 | ) | — |
| — |
| — |
| (1 | ) | 0.1 | — | — | — | 0.1 | | – corporate and commercial | 12,540 |
| 2,076 |
| 184 |
| 4 |
| 14,804 |
| (14 | ) | (21 | ) | (9 | ) | — |
| (44 | ) | 0.1 | 1.0 | 4.9 | — | 0.3 | | – financial | 4,342 |
| 263 |
| 1 |
| — |
| 4,606 |
| (1 | ) | (1 | ) | (1 | ) | — |
| (3 | ) | — | 0.4 | 100.0 | — | 0.1 | | At 31 Dec 2019 | 2,227,867 |
| 107,417 |
| 14,486 |
| 346 |
| 2,350,116 |
| (1,502 | ) | (2,479 | ) | (5,163 | ) | (99 | ) | (9,243 | ) | 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 2020 | | | | | (Audited) | | Gross carrying amount | Allowance for ECL | ECL coverage % | | | | | | | | | | | | | | | | | | | | | Stage 2 | Up-to-date | 1 to 29 DPD1,2 | 30 and > DPD1,2 | Stage 2 | Up-to-date | 1 to 29 DPD1,2 | 30 and > DPD1,2 | Stage 2 | Up-to-date | 1 to 29 DPD1,2 | 30 and > DPD1,2 | | | | | $m | $m | $m | $m | $m | $m | $m | $m | % | % | % | % | | | | | Loans and advances to customers at amortised cost | 163,185 | | 159,367 | | 2,052 | | 1,766 | | (4,965) | | (4,358) | | (275) | | (332) | | 3.0 | | 2.7 | | 13.4 | | 18.8 | | | | | | – personal | 25,064 | | 22,250 | | 1,554 | | 1,260 | | (2,402) | | (1,895) | | (227) | | (280) | | 9.6 | | 8.5 | | 14.6 | | 22.2 | | | | | | – corporate and commercial | 126,287 | | 125,301 | | 489 | | 497 | | (2,444) | | (2,344) | | (48) | | (52) | | 1.9 | | 1.9 | | 9.8 | | 10.5 | | | | | | – non-bank financial institutions | 11,834 | | 11,816 | | 9 | | 9 | | (119) | | (119) | | 0 | | 0 | | 1.0 | | 1.0 | | 0 | | 0 | | | | | | Loans and advances to banks at amortised cost | 2,004 | | 2,004 | | 0 | | 0 | | (9) | | (9) | | 0 | | 0 | | 0.4 | | 0.4 | | 0 | | 0 | | | | | | Other financial assets measured at amortised cost | 3,975 | | 3,963 | | 3 | | 9 | | (44) | | (44) | | 0 | | 0 | | 1.1 | | 1.1 | | 0 | | 0 | | | | |
| | | | | | | | | | | | | | | | | | | Stage 2 days past due analysis at 31 December 2019 | | (Audited) | | | Gross carrying amount | Allowance for ECL | ECL coverage % | | | | Of which: |
| Of which: |
| | Of which: |
| Of which: |
| | Of which: |
| Of which: | | | Stage 2 |
| 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 |
| $m |
| $m |
| $m |
| $m |
| $m |
| % | % |
| % | | Loans and advances to customers at amortised cost | 80,182 |
| 2,471 |
| 1,676 |
| (2,284 | ) | (208 | ) | (247 | ) | 2.8 | 8.4 |
| 14.7 | | 15,751 |
| 1,804 |
| 1,289 |
| (1,336 | ) | (178 | ) | (217 | ) | 8.5 | 9.9 |
| 16.8 | – corporate and commercial | 59,599 |
| 657 |
| 385 |
| (920 | ) | (30 | ) | (30 | ) | 1.5 | 4.6 |
| 7.8 | – non-bank financial institutions | 4,832 |
| 10 |
| 2 |
| (28 | ) | — |
| — |
| 0.6 | — |
| — | | Loans and advances to banks at amortised cost | 1,450 |
| — |
| — |
| (2 | ) | — |
| — |
| 0.1 | — |
| — | | Other financial assets measured at amortised cost | 1,827 |
| 14 |
| 30 |
| (38 | ) | — |
| — |
| 2.1 | — |
| — |
| | 1 | Days past due (‘DPD’). Up to date accounts in stage 2 are not shown in amounts. |
2 The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.
| | Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 20183 (continued) | | Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2019 (continued) | | Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2019 (continued) | | | (Audited) | (Audited) | (Audited) | | | | Gross carrying/nominal amount1 | | Allowance for ECL | | ECL coverage % | | | 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 | | 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 |
| % | | $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 | ) | 0.1 | 3.1 | 38.8 | 59.9 | 0.9 | Loans and advances to customers at amortised cost | 951,583 | | 80,182 | | 13,378 | | 332 | | 1,045,475 | | (1,297) | | (2,284) | | (5,052) | | (99) | | (8,732) | | 0.1 | | 2.8 | | 37.8 | | 29.8 | | 0.8 | | | | – personal | 374,681 |
| 15,075 |
| 4,581 |
| — |
| 394,337 |
| (534 | ) | (1,265 | ) | (1,148 | ) | — |
| (2,947 | ) | 0.1 | 8.4 | 25.1 | — | 0.7 | – personal | 413,669 | | 15,751 | | 4,851 | | 0 | | 434,271 | | (583) | | (1,336) | | (1,215) | | 0 | | (3,134) | | 0.1 | | 8.5 | | 25.0 | | 0 | | 0.7 | | | | – corporate and commercial | 474,700 |
| 51,341 |
| 8,212 |
| 324 |
| 534,577 |
| (698 | ) | (812 | ) | (3,848 | ) | (194 | ) | (5,552 | ) | 0.1 | 1.6 | 46.9 | 59.9 | 1.0 | – corporate and commercial | 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 | | | | – non-bank financial institutions | 59,012 |
| 2,165 |
| 230 |
| — |
| 61,407 |
| (44 | ) | (31 | ) | (51 | ) | — |
| (126 | ) | 0.1 | 1.4 | 22.2 | — | 0.2 | – non-bank financial institutions | 65,661 | | 4,832 | | 212 | | 0 | | 70,705 | | (42) | | (28) | | (90) | | 0 | | (160) | | 0.1 | | 0.6 | | 42.5 | | 0 | | 0.2 | | | | Loans and advances to banks at amortised cost | 71,873 |
| 307 |
| — |
| — |
| 72,180 |
| (11 | ) | (2 | ) | — |
| — |
| (13 | ) | — | 0.7 | — | Loans and advances to banks at amortised cost | 67,769 | | 1,450 | | 0 | | 0 | | 69,219 | | (14) | | (2) | | 0 | | 0 | | (16) | | 0 | | 0.1 | | 0 | | 0 | | 0 | | | | Other financial assets measured at amortised cost | 581,118 |
| 1,673 |
| 126 |
| — |
| 582,917 |
| (27 | ) | (6 | ) | (22 | ) | — |
| (55 | ) | — | 0.4 | 17.5 | — | Other financial assets measured at amortised cost | 613,200 | | 1,827 | | 151 | | 1 | | 615,179 | | (38) | | (38) | | (42) | | 0 | | (118) | | 0 | | 2.1 | | 27.8 | | 0 | | 0 | | | | Loan and other credit-related commitments | 567,232 |
| 23,857 |
| 912 |
| 7 |
| 592,008 |
| (143 | ) | (139 | ) | (43 | ) | — |
| (325 | ) | — | 0.6 | 4.7 | — | 0.1 | Loan and other credit-related commitments | 577,631 | | 21,618 | | 771 | | 9 | | 600,029 | | (137) | | (133) | | (59) | | 0 | | (329) | | 0 | | 0.6 | | 7.7 | | 0 | | 0.1 | | | | – personal | 205,183 |
| 1,760 |
| 408 |
| — |
| 207,351 |
| (12 | ) | (1 | ) | — |
| — |
| (13 | ) | — | 0.1 | — | – personal | 221,490 | | 1,630 | | 194 | | 0 | | 223,314 | | (13) | | (2) | | 0 | | 0 | | (15) | | 0 | | 0.1 | | 0 | | 0 | | 0 | | | | – corporate and commercial | 249,587 |
| 20,925 |
| 503 |
| 7 |
| 271,022 |
| (126 | ) | (136 | ) | (43 | ) | — |
| (305 | ) | 0.1 | 0.6 | 8.5 | — | 0.1 | – corporate and commercial | 259,138 | | 18,804 | | 573 | | 9 | | 278,524 | | (118) | | (130) | | (59) | | 0 | | (307) | | 0 | | 0.7 | | 10.3 | | 0 | | 0.1 | | | | – financial | 112,462 |
| 1,172 |
| 1 |
| — |
| 113,635 |
| (5 | ) | (2 | ) | — |
| — |
| (7 | ) | — | 0.2 | — | – financial | 97,003 | | 1,184 | | 4 | | 0 | | 98,191 | | (6) | | (1) | | 0 | | 0 | | (7) | | 0 | | 0.1 | | 0 | | 0 | | 0 | | | | Financial guarantees | 20,834 |
| 2,384 |
| 297 |
| 3 |
| 23,518 |
| (19 | ) | (29 | ) | (45 | ) | — |
| (93 | ) | 0.1 | 1.2 | 15.2 | — | 0.4 | Financial guarantees | 17,684 | | 2,340 | | 186 | | 4 | | 20,214 | | (16) | | (22) | | (10) | | 0 | | (48) | | 0.1 | | 0.9 | | 5.4 | | 0 | | 0.2 | | | | – personal | 920 |
| 3 |
| 4 |
| — |
| 927 |
| (1 | ) | — |
| — |
| — |
| (1 | ) | 0.1 | — | 0.1 | – personal | 802 | | 1 | | 1 | | 0 | | 804 | | (1) | | 0 | | 0 | | 0 | | (1) | | 0.1 | | 0 | | 0 | | 0 | | 0.1 | | | | – corporate and commercial | 14,963 |
| 2,101 |
| 288 |
| 3 |
| 17,355 |
| (16 | ) | (25 | ) | (44 | ) | — |
| (85 | ) | 0.1 | 1.2 | 15.3 | — | 0.5 | – corporate and commercial | 12,540 | | 2,076 | | 184 | | 4 | | 14,804 | | (14) | | (21) | | (9) | | 0 | | (44) | | 0.1 | | 1.0 | | 4.9 | | 0 | | 0.3 | | | | – financial | 4,951 |
| 280 |
| 5 |
| — |
| 5,236 |
| (2 | ) | (4 | ) | (1 | ) | — |
| (7 | ) | — | 1.4 | 20.0 | — | 0.1 | – financial | 4,342 | | 263 | | 1 | | 0 | | 4,606 | | (1) | | (1) | | (1) | | 0 | | (3) | | 0 | | 0.4 | | 100.0 | | 0 | | 0.1 | | | | 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 | 2.4 | 35.9 | 58.1 | 0.4 | | | At 31 Dec 2019 | | At 31 Dec 2019 | 2,227,867 | | 107,417 | | 14,486 | | 346 | | 2,350,116 | | (1,502) | | (2,479) | | (5,163) | | (99) | | (9,243) | | 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’). |
| | 3 | During the period, the Group has re-presented the UK wholesale lending stage 1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 2 Purchased or originated credit-impaired (‘POCI’). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stage 2 days past due analysis at 31 December 2019 | | | | | (Audited) | | Gross carrying amount | Allowance for ECL | ECL coverage % | | | | | | | | | | | | | | | | | | | | | Stage 2 | Up-to-date | 1 to 29 DPD1 | 30 and > DPD1 | Stage 2 | Up-to-date | 1 to 29 DPD1 | 30 and > DPD1 | Stage 2 | Up-to-date | 1 to 29 DPD1 | 30 and > DPD1 | | | | | $m | $m | $m | $m | $m | $m | $m | $m | % | % | % | % | | | | | Loans and advances to customers at amortised cost | 80,182 | | 76,035 | | 2,471 | | 1,676 | | (2,284) | | (1,829) | | (208) | | (247) | | 2.8 | | 2.4 | | 8.4 | | 14.7 | | | | | | – personal | 15,751 | | 12,658 | | 1,804 | | 1,289 | | (1,336) | | (941) | | (178) | | (217) | | 8.5 | | 7.4 | | 9.9 | | 16.8 | | | | | | – corporate and commercial | 59,599 | | 58,557 | | 657 | | 385 | | (920) | | (860) | | (30) | | (30) | | 1.5 | | 1.5 | | 4.6 | | 7.8 | | | | | | – non-bank financial institutions | 4,832 | | 4,820 | | 10 | | 2 | | (28) | | (28) | | 0 | | 0 | | 0.6 | | 0.6 | | 0 | | 0 | | | | | | Loans and advances to banks at amortised cost | 1,450 | | 1,450 | | 0 | | 0 | | (2) | | (2) | | 0 | | 0 | | 0.1 | | 0.1 | | 0 | | 0 | | | | | | Other financial assets measured at amortised cost | 1,827 | | 1,783 | | 14 | | 30 | | (38) | | (38) | | 0 | | 0 | | 2.1 | | 2.1 | | 0 | | 0 | | | | |
1 and stage 2 amount. For further details, see page 122. |
| | | | | | | | | | | | | | | | | 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
|
| 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 |
| $m |
| $m |
| $m |
| $m |
| $m |
| % | % | % | | Loans and advances to customers at amortised cost | 68,581 |
| 2,561 |
| 1,914 |
| (2,108 | ) | (204 | ) | (254 | ) | 3.1 | 8.0 | 13.3 | | 15,075 |
| 1,807 |
| 1,383 |
| (1,265 | ) | (165 | ) | (220 | ) | 8.4 | 9.1 | 15.9 | – corporate and commercial | 51,341 |
| 744 |
| 485 |
| (812 | ) | (39 | ) | (34 | ) | 1.6 | 5.2 | 7.0 | – non-bank financial institutions | 2,165 |
| 10 |
| 46 |
| (31 | ) | — |
| — |
| 1.4 | — | — | | Loans and advances to banks at amortised cost | 307 |
| — |
| — |
| (2 | ) | — |
| — |
| 0.7 | — | — | | Other financial assets measured at amortised cost | 1,673 |
| 10 |
| 26 |
| (6 | ) | — |
| — |
| 0.4 | — | — |
| | 1 | Days past due (‘DPD’). Up to date accounts in stage 2 are not shown in amounts. |
| | 2 | During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 122. |
Report of the Directors | Risk
| | Personal gross loans to customers over five years ($bn) |
 | | | | | | Stage 1 and 2/Unimpaired | | Stage 3 and POCI/Impaired loans |
| | Wholesale gross loans to customers and banks over five years
($bn)
|
 | | | | | | Stage 1 and 2/Unimpaired | | Stage 3 and POCI/Impaired loans |
| | Loans and advances change in ECL/loan impairment charge ($bn) |
| | Loans and advances change in ECL by geographical region in
2019 ($bn)
|
| | Loan and advances change in ECL by geographical region in
2018 ($bn)
|
| | Loans and advances to customers change in ECL in 2019 ($bn) |
| | Loans and advances to customers loan impairment charges by
industry in 2018 ($bn)
|
| | Personal loans and advances allowance for ECL/loan impairment
allowance over five years ($bn)
167 |
| | | | Allowance for ECL/loan impairment allowance ($bn) |
| | Wholesale loans and advances allowance for ECL/loan
impairment allowance over five years ($bn)
|
| | | | Allowance for ECL/loan impairment allowance ($bn) |
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 20192020 is provided on page 54.85. 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;amount and is net of the allowance for ECL. 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 276329 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 148.192.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Maximum exposure to credit risk | | | | | | | | | | | (Audited) | | 2020 | 2019 | | | | | | | | | | | Maximum
exposure | Offset | Net | Maximum
exposure | Offset | Net | | | | | | | | | | | $m | $m | $m | $m | $m | $m | | | | | | | | | | | Loans and advances to customers held at amortised cost | 1,037,987 | | (27,221) | | 1,010,766 | | 1,036,743 | | (28,524) | 1,008,219 | | | | | | | | | | | | – personal | 456,078 | | (4,287) | | 451,791 | | 431,137 | | (4,640) | 426,497 | | | | | | | | | | | | – corporate and commercial | 517,594 | | (21,102) | | 496,492 | | 535,061 | | (21,745) | 513,316 | | | | | | | | | | | | – non-bank financial institutions | 64,315 | | (1,832) | | 62,483 | | 70,545 | | (2,139) | 68,406 | | | | | | | | | | | | Loans and advances to banks at amortised cost | 81,616 | | 0 | | 81,616 | | 69,203 | | 0 | | 69,203 | | | | | | | | | | | | Other financial assets held at amortised cost | 774,116 | | (14,668) | | 759,448 | | 616,648 | | (28,826) | 587,822 | | | | | | | | | | | | – cash and balances at central banks | 304,481 | | 0 | | 304,481 | | 154,099 | | 0 | | 154,099 | | | | | | | | | | | | – items in the course of collection from other banks | 4,094 | | 0 | | 4,094 | | 4,956 | | 0 | | 4,956 | | | | | | | | | | | | – Hong Kong Government certificates of indebtedness | 40,420 | | 0 | | 40,420 | | 38,380 | | 0 | | 38,380 | | | | | | | | | | | | – reverse repurchase agreements – non-trading | 230,628 | | (14,668) | | 215,960 | | 240,862 | | (28,826) | 212,036 | | | | | | | | | | | | – financial investments | 88,639 | | 0 | | 88,639 | | 85,735 | | 0 | | 85,735 | | | | | | | | | | | | – prepayments, accrued income and other assets | 105,854 | | 0 | | 105,854 | | 92,616 | | 0 | | 92,616 | | | | | | | | | | | | Derivatives | 307,726 | | (293,240) | | 14,486 | | 242,995 | | (232,908) | 10,087 | | | | | | | | | | | | Total on-balance sheet exposure to credit risk | 2,201,445 | | (335,129) | | 1,866,316 | | 1,965,589 | | (290,258) | 1,675,331 | | | | | | | | | | | | Total off-balance sheet | 940,185 | | 0 | | 940,185 | | 893,246 | | 0 | | 893,246 | | | | | | | | | | | | – financial and other guarantees | 96,147 | | 0 | | 96,147 | | 95,967 | | 0 | | 95,967 | | | | | | | | | | | | – loan and other credit-related commitments | 844,038 | | 0 | | 844,038 | | 797,279 | | 0 | | 797,279 | | | | | | | | | | | | At 31 Dec | 3,141,630 | | (335,129) | | 2,806,501 | | 2,858,835 | | (290,258) | 2,568,577 | | | | | | | | | | |
HSBC Holdings plc
| 127 |
Report of the Directors | Risk
| | | | | | | | | | | | | | | Maximum exposure to credit risk | | | | | (Audited) | | | | | | 2019 | 2018 | | | Maximum exposure |
| Offset |
| Net |
| Maximum exposure |
| Offset |
| Net |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Loans and advances to customers held at amortised cost | 1,036,743 |
| (28,524 | ) | 1,008,219 |
| 981,696 |
| (29,534 | ) | 952,162 |
| | – personal | 431,137 |
| (4,640 | ) | 426,497 |
| 391,390 |
| (3,679 | ) | 387,711 |
| | – corporate and commercial | 535,061 |
| (21,745 | ) | 513,316 |
| 529,025 |
| (23,421 | ) | 505,604 |
| | – non-bank financial institutions | 70,545 |
| (2,139 | ) | 68,406 |
| 61,281 |
| (2,434 | ) | 58,847 |
| | Loans and advances to banks at amortised cost | 69,203 |
| — |
| 69,203 |
| 72,167 |
| — |
| 72,167 |
| | Other financial assets held at amortised cost | 616,648 |
| (28,826 | ) | 587,822 |
| 585,600 |
| (21,788 | ) | 563,812 |
| | – cash and balances at central banks | 154,099 |
| — |
| 154,099 |
| 162,843 |
| — |
| 162,843 |
| | – items in the course of collection from other banks | 4,956 |
| — |
| 4,956 |
| 5,787 |
| — |
| 5,787 |
| | – Hong Kong Government certificates of indebtedness | 38,380 |
| — |
| 38,380 |
| 35,859 |
| — |
| 35,859 |
| | – reverse repurchase agreements – non-trading | 240,862 |
| (28,826 | ) | 212,036 |
| 242,804 |
| (21,788 | ) | 221,016 |
| | – financial investments | 85,735 |
| — |
| 85,735 |
| 62,666 |
| — |
| 62,666 |
| | – prepayments, accrued income and other assets | 92,616 |
| — |
| 92,616 |
| 75,641 |
| — |
| 75,641 |
| | Derivatives | 242,995 |
| (232,908 | ) | 10,087 |
| 207,825 |
| (194,306 | ) | 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 | 893,246 |
| — |
| 893,246 |
| 874,751 |
| — |
| 874,751 |
| | – financial and other guarantees | 95,967 |
| — |
| 95,967 |
| 94,810 |
| — |
| 94,810 |
| | – loan and other credit-related commitments | 797,279 |
| — |
| 797,279 |
| 779,941 |
| — |
| 779,941 |
| | At 31 Dec | 2,858,835 |
| (290,258 | ) | 2,568,577 |
| 2,722,039 |
| (245,628 | ) | 2,476,411 |
|
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 155200 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 140186 for wholesale lending and page 155200 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. Management judgemental adjustments are used to address late-breaking events, data and model limitations, model deficiencies and expert credit judgements. Methodology We use multipleNaN economic scenarios have been used 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 relevantexceptional nature of the current economic environment and to articulate management’s view of the range of potential outcomes. Scenarios produced to calculate ECL are aligned to HSBC’s top and emerging risks.
NaN of these scenarios are drawn from consensus forecasts and distributional estimates. The three economicCentral scenario is deemed the ‘most likely’ scenario, and usually attracts the largest probability weighting, while the outer scenarios represent the 'most likely' outcome and twotails of the distribution, which are less likely outcomes referred to as the Upside and Downside scenarios. Each outer scenario is consistent with a probability of 10%, while theoccur. 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 setcreated using the average of forecastsa panel of external economists. Reliance on external forecasts helps ensure that the Central scenario is unbiased and maximises the use of independent information. Theforecasters, while consensus Upside and Downside scenarios are selectedcreated with reference to externally available forecast distributions and are designed to be cyclical, infor select markets 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 percentilecapture forecasters’ views of the entire distributionrange of forecast outcomes for major economies. While keyoutcomes. Management has chosen to use an additional scenario to represent its view of severe downside risks. The use of an additional scenario is in line with HSBC’s forward economic variables are set with reference to external distributional forecasts, we also alignguidance methodology and has been regularly used over the overall narrativecourse of 2020. Management may include additional scenarios if it feels that the consensus scenarios todo not adequately capture the macroeconomic risks described in HSBC’s ‘Toptop and emerging risks’ on page 103. This ensures thatrisks. Unlike the consensus 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 ensuredriven by narrative assumptions, could be country-specific and may result in shocks that they are an appropriate reflection of management’s view and updated ifdrive 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.activity permanently away from trend.
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 world economy experienced a deep economic shock in 2020. As Covid-19 spread globally, governments in many of our markets sought to limit the human impact by imposing significant restrictions on mobility, in turn driving the deep falls in activity that were observed in the first half of the year. Restrictions were eased as cases declined in response to the initial measures, which supported an initial rebound in economic activity by the third quarter of 2020. This increase in mobility unfortunately led to renewed transmission of the virus in several countries, placing healthcare systems under significant burden, leading governments to reimpose restrictions on mobility and causing economic activity to decline once more. Economic forecasts are subject to a high degree of uncertainty in the current environment. Limitations of forecasts and economic models require a greater reliance on management judgement in addressing both the error inherent in economic forecasts and in assessing associated ECL outcomes. The scenarios used to calculate ECL in the Annual Report and Accounts 2020 are described below. The consensus Central scenario HSBC’s Central scenario features an improvement in economic growth in 2021 as activity and employment gradually return to the levels experienced prior to the outbreak of Covid-19. Despite the sharp contraction in activity, government support in advanced economies played a crucial role in averting significant financial distress. At the same time, central banks in our key markets implemented a variety of measures, which included lowering their main policy interest rates, implementing emergency support measures for funding markets, and either restarting or increasing quantitative easing programmes in order to support economies and the financial system. Across our key markets, governments and central banks are expected to continue to work together to ensure that households and firms receive an appropriate level of financial support until restrictions on economic activity and mobility can be materially eased. Such support intends to ensure that labour and housing markets do not experience abrupt, negative corrections and also intends to limit the extent of long-term structural damage to economies. Our Central scenario is oneincorporates expectations that governments and public health authorities in our key markets will implement large vaccination programmes, first by inoculating critical groups and then increasing coverage to include the wider population. The deployment of moderate growth overmass vaccination programmes marks a significant step forward in combating the forecast 2020–2024 period, which reflects an overall trendvirus and will ease the burden on healthcare systems. We expect vaccination programmes across our key markets to contribute positively to recovery prospects and our Central scenario assumes a steady increase in the proportion of deterioration
observedthe population inoculated against Covid-19 over the course of 2019. Global GDP growth is expected2021.
Differences across markets in the speed and scale of economic recovery in the Central scenario reflect timing differences in the progression of the Covid-19 outbreak, national level differences in restrictions imposed, the coverage achieved by vaccination programmes and the scale of support measures. The key features of our Central scenario are: •Economic activity across our top eight markets will recover in 2021, supported by a successful roll-out of vaccination programmes. We expect vaccination programmes, coupled with effective non-pharmacological measures to be 2.8% on averagecontain the virus including ‘track and trace’ systems and restrictions to mobility, to lead to a significant decline in infections across our key markets by the end of 2021. •Where government support programmes are available, they will continue to provide support to labour markets and households in 2021. We expect a gradual reversion of the unemployment rate to pre-crisis levels over the course of the projection 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 expectationsas a result of economic growth in Hong Kong weakened inrecovery and due to the second halforderly withdrawal of 2019.government support.
The unemployment rate is expected to rise over the forecast horizon in most of our major markets.
•Inflation is expected to be stable and will remain close toconverge towards central bank targets in our core marketskey markets. •In advanced economies, government support in 2020 led to large deficits and a significant increase in public debt. This support is expected to continue as needed and deficits are expected to reduce gradually over the forecastprojection period. Sovereign debt levels will remain high and our Central scenario does not assume fiscal austerity. Major central banks lowered their main policy•Policy interest rates in 2019key markets will remain at current levels for an extended period and are expected towill increase very modestly towards the end of our projection period. Central banks will 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 itsassistance through their asset purchase programmes.programmes as needed.
•The West Texas Intermediate oil price is forecast to average
$59 $43 per barrel over the projection period.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Central scenario. | | | | | | | | | | | | | | | | | | | | | | | | | | | | Central scenario 2021–2025 | | UK | US | Hong Kong | Mainland China | Canada | France | UAE | Mexico | | % | % | % | % | % | % | % | % | | GDP growth rate | | | | | | | | | | 2020: Annual average growth rate | (11.0) | | (4.1) | | (6.4) | | 2.0 | | (6.1) | | (9.7) | | (6.3) | | (9.7) | | | 2021: Annual average growth rate | 4.9 | | 3.8 | | 4.3 | | 7.8 | | 5.0 | | 5.9 | | 3.0 | | 3.7 | | | 2022: Annual average growth rate | 3.1 | | 2.9 | | 2.9 | | 5.3 | | 3.1 | | 2.9 | | 3.6 | | 2.5 | | | 2023: Annual average growth rate | 2.4 | | 2.4 | | 2.6 | | 5.2 | | 2.4 | | 2.2 | | 3.9 | | 2.4 | | | 5-year average | 2.8 | | 2.7 | | 2.9 | | 5.6 | | 2.9 | | 2.9 | | 3.4 | | 2.6 | | | Unemployment rate | | | | | | | | | | 2020: Annual average rate | 4.6 | | 8.3 | | 5.8 | | 3.9 | | 9.6 | | 7.9 | | 3.1 | | 5.4 | | | 2021: Annual average rate | 6.9 | | 6.7 | | 5.0 | | 4.1 | | 7.9 | | 10.0 | | 2.7 | | 5.3 | | | 2022: Annual average rate | 5.8 | | 5.8 | | 3.9 | | 4.2 | | 6.8 | | 9.1 | | 2.6 | | 4.7 | | | 2023: Annual average rate | 5.4 | | 4.9 | | 3.8 | | 4.1 | | 6.5 | | 8.8 | | 2.7 | | 4.5 | | | 5-year average | 5.6 | | 5.3 | | 4.0 | | 4.0 | | 6.8 | | 9.0 | | 2.7 | | 4.6 | | | House price growth | | | | | | | | | | 2020: Annual average growth rate | 2.3 | | 6.0 | | (0.8) | | 2.3 | | 5.7 | | 4.4 | | (11.6) | | 5.5 | | | 2021: Annual average growth rate | (2.1) | | 4.0 | | (2.2) | | 4.7 | | 2.1 | | (0.5) | | (9.8) | | 3.4 | | | 2022: Annual average growth rate | 0.9 | | 4.3 | | 2.4 | | 5.7 | | 2.0 | | 4.1 | | (1.3) | | 5.0 | | | 2023: Annual average growth rate | 3.0 | | 4.0 | | 5.2 | | 5.0 | | 3.1 | | 4.1 | | 2.6 | | 4.6 | | | 5-year average | 1.9 | | 4.0 | | 2.3 | | 4.7 | | 2.7 | | 2.8 | | 0 | | 4.2 | | | Short-term interest rate | | | | | | | | | | 2020: Annual average rate | 0.3 | | 0.7 | | 1.2 | | 3.2 | | 0.8 | | (0.4) | | 1.0 | | 5.7 | | | 2021: Annual average rate | 0.1 | | 0.3 | | 1.0 | | 2.9 | | 0.5 | | (0.5) | | 0.8 | | 4.5 | | | 2022: Annual average rate | 0.1 | | 0.3 | | 1.1 | | 3.0 | | 0.6 | | (0.5) | | 0.8 | | 4.7 | | | 2023: Annual average rate | 0.1 | | 0.4 | | 1.2 | | 3.1 | | 0.8 | | (0.5) | | 0.9 | | 5.2 | | | 5-year average | 0.2 | | 0.5 | | 1.3 | | 3.1 | | 0.8 | | (0.5) | | 1.0 | | 5.2 | | | Probability | 40 | | 65 | | 70 | | 80 | | 70 | | 40 | | 65 | | 65 | |
The graphs comparing the respective Central scenarios in the fourth quarters of 2019 and 2020 reveal the extent of economic dislocation that occurred in 2020 and the impact this has had on central projections made at the end of 2019. | | | | | | | | | | | | | | | | | | | Central scenario (average 2020–2024) | | | UK |
| France |
| Hong Kong |
| Mainland China |
| UAE |
| US |
| Canada |
| Mexico |
| | | % |
| % |
| % |
| % |
| % |
| % |
| % |
| % |
| GDP growth rate1 | 1.6 |
| 1.3 |
| 1.9 |
| 5.6 |
| 2.8 |
| 1.9 |
| 1.8 |
| 2.1 |
| | Inflation | 2.0 |
| 1.6 |
| 2.2 |
| 2.4 |
| 2.0 |
| 2.0 |
| 2.0 |
| 3.5 |
| | Unemployment | 4.4 |
| 7.8 |
| 3.1 |
| 4.0 |
| 2.7 |
| 4.1 |
| 6.0 |
| 3.6 |
| | Short-term interest rate | 0.6 |
| (0.6 | ) | 1.1 |
| 3.8 |
| 1.8 |
| 1.4 |
| 1.6 |
| 6.7 |
| | 10-year Treasury bond yields | 1.7 |
| 1.0 |
| 2.4 |
| N/A |
| N/A |
| 2.4 |
| 2.2 |
| 7.4 |
| | House price growth | 3.0 |
| 2.9 |
| 3.8 |
| 4.6 |
| (2.4 | ) | 3.4 |
| 2.6 |
| 5.4 |
| | Equity price growth | 2.8 |
| 3.4 |
| 5.1 |
| 7.9 |
| N/A |
| 6.4 |
| 3.8 |
| 5.6 |
| | Probability | 55.0 |
| 80.0 |
| 50.0 |
| 80.0 |
| 80.0 |
| 80.0 |
| 80.0 |
| 80.0 |
|
Note: N/A – not required in credit models.GDP growth: Comparison
 Note: Real GDP shown as year-on-year percentage change.
| 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%). |
 Note: Real GDP shown as year-on-year percentage change. Note: Real GDP shown as year-on-year percentage change.
 Note: Real GDP shown as year-on-year percentage change.
The consensus Upside scenario TheCompared with the consensus Central scenario, the consensus Upside scenario features a faster recovery in 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. Inactivity during the first two years, of the Upside scenario, global real GDP growth rises before converging to long-run trends.
The scenario is consistent with a number of key upside risk themes. These include the Central scenario. Increased confidence,orderly and rapid global abatement of Covid-19 via successful containment and prompt deployment of a vaccine; de-escalation of trade tensions removalbetween the US and China; de-escalation of trade barriers, expansionarypolitical tensions in Hong Kong; continued support from fiscal and monetary policy positive resolution of
economic uncertainty inand smooth relations between the UK stronger oil prices and the EU, which enables the 2 parties to swiftly reach a calming of geopolitical tensions are the risk themes that support the Upside scenario.comprehensive agreement on trade and services.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Upside scenario. | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consensus Upside scenario best outcome | | UK | US | Hong
Kong | Mainland
China | Canada | France | UAE | Mexico | | % | % | % | % | % | % | % | % | | GDP growth rate | 19.9 (2Q21) | 11.8 (2Q21) | 13.8 (4Q21) | 20.5 (1Q21) | 15.8 (2Q21) | 19.5 (2Q21) | 13.8 (4Q21) | 16.8 (2Q21) | | Unemployment rate | 3.7 (4Q22) | 3.9 (4Q22) | 3.0 (3Q22) | 3.9 (4Q21) | 5.3 (3Q22) | 7.9 (4Q22) | 2.2 (4Q21) | 3.6 (3Q22) | | House price growth | 6.9 (4Q22) | 6.4 (1Q22) | 4.9 (1Q22) | 12.2 (1Q22) | 5.2 (1Q21) | 5.7 (2Q22) | 18.5 (1Q22) | 8.2 (3Q22) | | Short-term interest rate | 0.1 (2Q22) | 0.4 (1Q21) | 1.1 (1Q21) | 3.0 (1Q21) | 0.6 (1Q21) | (0.4) (1Q21) | 0.9 (1Q21) | 5.0 (1Q21) | | Probability consensus Upside | 5 | | 5 | | 5 | | 10 | | 10 | | 5 | | 5 | | 5 | |
Note: Extreme point in the consensus Upside is ‘best outcome’ in the scenario, for example the highest GDP growth and the lowest unemployment rate, in the first two years of the scenario. Downside scenarios The year 2021 is expected to be a period of economic recovery, but the progression and management of the pandemic presents a key risk to global growth. A new and more contagious strain of the virus increased the transmission rate in the UK and resulted in stringent restrictions to mobility towards the end of 2020. This viral strain observed in the UK, together with aggressive strains observed in other countries including South Africa and Brazil, introduce the risk that transmission may increase significantly within the national borders of a number of countries in 2021 and also raise concerns around the efficacy of vaccines as the virus mutates. Some countries may keep significant restrictions to mobility in place for an extended period of time and at least until critical segments of the population can be inoculated. Further risks to international travel also arise. A number of vaccines have been developed and approved for use at a rapid pace and plans to inoculate significant proportions of national populations in 2021 across many of our key markets are a clear positive for economic recovery. While we expect vaccination programmes to be successful, governments and healthcare authorities face country-specific challenges that could affect the speed and spread of vaccinations. These challenges include the logistics of inoculating a significant proportion of national populations within a limited timeframe and the public acceptance of vaccines. On a global level, supply challenges could affect the pace of roll-out and the efficacy of vaccines is yet to be determined. Government support programmes in advanced economies in 2020 were supported by accommodative actions taken by central banks. These measures by governments and central banks have provided households and firms with significant support. An inability or unwillingness to continue with such support or the untimely withdrawal of support present a downside risk to growth. While Covid-19 and related risks dominate the economic outlook, geopolitical risks also present a threat. These risks include: | | | | | | | | | | | | | | | | | | | Upside scenario (average 2020–2024) | | | UK |
| France |
| Hong Kong |
| Mainland China |
| UAE |
| US |
| Canada |
| Mexico |
| | | % |
| % |
| % |
| % |
| % |
| % |
| % |
| % |
| GDP growth rate1 | 2.1 |
| 1.7 |
| 2.2 |
| 5.9 |
| 3.5 |
| 2.6 |
| 1.9 |
| 2.9 |
| | Inflation | 2.4 |
| 2.0 |
| 2.5 |
| 2.7 |
| 2.3 |
| 2.4 |
| 2.2 |
| 4.1 |
| | Unemployment | 4.0 |
| 7.4 |
| 2.9 |
| 3.9 |
| 2.5 |
| 3.7 |
| 5.7 |
| 3.3 |
| | Short-term interest rate | 0.6 |
| (0.5 | ) | 1.2 |
| 3.9 |
| 1.9 |
| 1.5 |
| 1.6 |
| 6.8 |
| | 10-year Treasury bond yields | 1.7 |
| 1.0 |
| 2.5 |
| N/A |
| N/A |
| 2.5 |
| 2.2 |
| 7.6 |
| | House price growth | 4.4 |
| 3.7 |
| 5.0 |
| 5.8 |
| 0.6 |
| 4.5 |
| 5.7 |
| 6.1 |
| | Equity price growth | 4.4 |
| 7.3 |
| 6.9 |
| 10.7 |
| N/A |
| 10.0 |
| 6.7 |
| 9.6 |
| | Probability | 10 |
| 10 |
| 10 |
| 10 |
| 10 |
| 10 |
| 10 |
| 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%). |
•Continued long-term differences between the US and China, which could affect sentiment and restrict global economic activity. •The Covid-19 outbreak reduced the incidence of protests in Hong Kong. Despite the passage of the national security law in 2020, such unrest has the potential to return as the virus abates and restrictions to mobility ease. •The Trade and Cooperation Agreement between the UK and EU averted a disorderly UK departure from the EU, but the risk of future disagreements remains, which may hinder the ability to reach a more comprehensive agreement on trade and services. 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 consensus Downside scenario, global realeconomic recovery is considerably weaker compared with the Central scenario. GDP growth declines for two yearsremains weak, unemployment rates stay elevated and asset and commodity prices fall before gradually recovering towards itstheir 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
trends.some markets would result in a reduction in the key policy interest rate. The scenario is consistent with our topthe key downside risks articulated above. Further outbreaks of Covid-19, coupled with delays in vaccination programmes, lead to longer-lasting restrictions on economic activity in this scenario. Other global risks also increase and emerging risks, which include an intensification of global protectionism and trade barriers, a worsening of economic uncertaintydrive increased risk-aversion in the UK, a slowdown in China, further risks to economic growth in Hong Kong and weaker commodity prices.asset markets.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Downside scenario. | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consensus Downside scenario worst outcome | | UK | US | Hong
Kong | Mainland
China | Canada | France | UAE | Mexico | | % | % | % | % | % | % | % | % | | GDP growth rate | (7.6) (1Q21) | (3.4) (1Q21) | (2.1) (3Q21) | (1.3) (4Q21) | (3.6) (1Q21) | (3.0) (1Q21) | (7.3) (1Q21) | (8.0) (1Q21) | | Unemployment rate | 9.4 (4Q21) | 8.2 (2Q21) | 6.4 (1Q21) | 4.3 (3Q22) | 9.2 (1Q21) | 11.2 (1Q21) | 3.0 (1Q21) | 6.2 (3Q21) | | House price growth | (10.8) (4Q21) | 0.1 (3Q21) | (6.8) (3Q21) | 0.3 (4Q21) | (1.3) (1Q22) | (3.3) (2Q21) | (19.2) (2Q21) | 1.0 (4Q21) | | Short-term interest rate | 0.1 (1Q21) | 0.3 (1Q22) | 1.1 (4Q22) | 2.8 (1Q21) | 0.5 (1Q21) | (0.5) (1Q21) | 0.8 (1Q22) | 3.8 (1Q21) | | Probability consensus Downside | 40 | | 25 | | 20 | | 8 | | 10 | | 40 | | 25 | | 25 | | | | | | | | | | |
Note: Extreme point in the consensus Downside is 'worst outcome' in the scenario, for example lowest GDP growth and the highest unemployment rate, in the first two years of the scenario.
Additional Downside scenario
Report of the Directors | Risk
| | | | | | | | | | | | | | | | | | | Downside scenario (average 2020–2024) | | | UK |
| France |
| Hong Kong |
| Mainland China |
| UAE |
| US |
| Canada |
| Mexico |
| | | % |
| % |
| % |
| % |
| % |
| % |
| % |
| % |
| GDP growth rate1 | 1.0 |
| 1.0 |
| 1.4 |
| 5.6 |
| 2.1 |
| 1.2 |
| 1.5 |
| 1.5 |
| | Inflation | 1.7 |
| 1.3 |
| 1.9 |
| 2.1 |
| 1.7 |
| 1.7 |
| 1.8 |
| 3.1 |
| | Unemployment | 4.8 |
| 8.2 |
| 3.3 |
| 4.0 |
| 2.9 |
| 4.5 |
| 6.4 |
| 4.0 |
| | Short-term interest rate | 0.1 |
| (0.9 | ) | (0.1 | ) | 3.6 |
| 0.4 |
| 0.3 |
| 0.8 |
| 5.7 |
| | 10-year Treasury bond yields | 0.8 |
| 0.2 |
| 1.2 |
| N/A |
| N/A |
| 1.2 |
| 1.4 |
| 6.6 |
| | House price growth | 1.6 |
| 1.9 |
| 2.3 |
| 3.9 |
| (5.2 | ) | 2.2 |
| (0.8 | ) | 4.9 |
| | Equity price growth | (1.1 | ) | (2.3 | ) | (0.7 | ) | 1.1 |
| N/A |
| 1.2 |
| 0.6 |
| (1.6 | ) | | Probability | 0 |
| 10 |
| 10 |
| 0 |
| 10 |
| 10 |
| 10 |
| 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%). |
AlternativeAn additional Downside scenarios
Alternative Downside scenarios havescenario that features a global recession has been created to reflect management’s view of risksevere risks. In this scenario, infections rise in some2021 and setbacks to vaccine programmes imply that successful roll-out of our keyvaccines only occurs towards the end of 2021 and it takes until the end of 2022 for the
pandemic to come to an end. The scenario also assumes governments and central banks are unable to significantly increase fiscal and monetary programmes, which results in abrupt corrections in labour and asset 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.
Thefollowing table below describes key macroeconomic variables and the probabilities assigned in the additional Downside scenario.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Additional Downside scenario worst outcome | | UK | US | Hong
Kong | Mainland
China | Canada | France | UAE | Mexico | | % | % | % | % | % | % | % | % | | GDP growth rate | (10.1) (1Q21) | (4.2) (1Q21) | (8.3) (4Q21) | (9.5) (4Q21) | (5.0) (1Q21) | (6.7) (1Q21) | (12.2) (1Q21) | (10.9) (1Q21) | | Unemployment rate | 9.8 (3Q21) | 11.4 (4Q22) | 6.7 (3Q21) | 6.1 (3Q22) | 11.3 (1Q21) | 12.3 (1Q21) | 3.9 (1Q21) | 6.9 (4Q21) | | House price growth | (14.5) (4Q21) | (9.3) (3Q21) | (21.0) (4Q21) | (19.4) (4Q21) | (10.4) (4Q21) | (7.1) (3Q21) | (22.9) (2Q21) | (2.7) (4Q21) | | Short-term interest rate | 0.8 (2Q21) | 1.1 (1Q21) | 1.3 (1Q21) | 4.0 (2Q21) | 0.4 (1Q21) | 0.2 (2Q21) | 0.5 (3Q21) | 6.7 (2Q21) | | Probability additional Downside | 15 | | 5 | | 5 | | 2 | | 10 | | 15 | | 5 | | 5 | |
Note: Extreme point in the additional Downside is 'worst outcome' in the scenario, for eachexample lowest GDP growth and the highest unemployment rate, in the first two years of the alternativescenario. In considering economic uncertainty and assigning probabilities to scenarios, management has considered both global and country-specific factors. This has led management to assigning scenario probabilities that are tailored to its view of uncertainty in individual markets. To inform its view, management has considered trends in the progression of the virus in individual countries, the expected reach and efficacy of vaccine roll-outs over the course of 2021, the size and effectiveness of future government support schemes and the connectivity with other countries. Management has also been guided by the actual response to the Covid-19 outbreak and by the economic experience across countries in 2020. China’s visible success at containing the virus and its repeated rapid response to localised outbreaks, coupled with government support programmes and clear signs of economic recovery, have led management to conclude that the economic outlook for mainland China is the least volatile out of all our top markets. The Central scenario for mainland China has an 80% probability while a total of 10% has been assigned to the 2 Downside scenarios:scenarios. In Hong Kong, the combination of recurrent outbreaks, a lack of details around the roll-out of a vaccination programme and the other risks outlined above, have led management to assign 25% weight to the 2 Downside scenarios. The UK and France face the greatest economic uncertainty in our key markets. In the UK, the discovery of a more infectious strain of the virus and subsequent national restrictions on activity imposed before the end of 2020 have resulted in considerable uncertainty in the economic outlook. In France, the increases in cases and hospitalisations towards the end of 2020, the difficulties experienced with the launch of a national vaccination programme and the wide range of measures taken to restrict activity similarly affect the economic outlook. Given these considerations, the Central and the consensus Downside scenario for the UK and France have each been assigned 40% probability. This reflects management’s view that, as a result of elevated uncertainty in these 2 markets, the Central scenario cannot be viewed as the single most likely outcome. The additional Downside scenario has been assigned 15% probability to reflect the view that the balance of risks is weighted to the downside. | | | | | | | | | Average 2020–2024 | | | Alternative Downside scenario 1 |
| Alternative Downside scenario 2 |
| Alternative Downside scenario 3 |
| | | % |
| % |
| % |
| | GDP growth rate | 0.3 |
| (0.3 | ) | (0.8 | ) | | Inflation | 2.3 |
| 2.5 |
| 2.7 |
| | Unemployment | 6.5 |
| 8.0 |
| 7.7 |
| | Short-term interest rate | 0.4 |
| 2.5 |
| 2.5 |
| | 10-year Treasury bond yields | 1.8 |
| 4.0 |
| 4.0 |
| | House price growth | (1.7 | ) | (3.7 | ) | (4.8 | ) | | Equity price growth | (3.3 | ) | (4.6 | ) | (9.6 | ) | | Probability | 25 |
| 5 |
| 5 |
|
Asia-Pacific alternative Downside scenarios
Two alternativeUncertainty related to the continued impact of the pandemic and the ability of governments to control its spread via restrictions and vaccinations over the course of 2021 also play a prominent role in assigning scenario weights to our other markets. In addition, for the US, Canada and Mexico, connectivity across the 3 North American economies has been considered. In the UAE, the impact of the oil price on the economy and the ability of non-oil sectors to contribute to economic recovery have influenced the view of uncertainty. The Central scenario has been assigned between 65% and 70% weight for these 4 markets and, with risks perceived as being weighted to the downside, the 2 Downside scenarios have been created for key Asia-Pacific markets to represent management’s view of economic uncertainty arising from tradegiven weights between 20% 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.
30%.Asia-Pacific alternative Downside scenario
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 | | | Hong Kong |
| Mainland China |
| | | % |
| % |
| | GDP growth rate | 0.8 |
| 5.2 |
| | Inflation | 1.6 |
| 2.0 |
| | Unemployment | 5.1 |
| 4.3 |
| | Short-term interest rate | 0.7 |
| 2.9 |
| | 10-year Treasury bond yields | 1.6 |
| N/A |
| | House price growth | (3.7 | ) | 2.6 |
| | Equity price growth | (3.3 | ) | (1.6 | ) | | Probability | 20 |
| 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 | | Hong Kong |
| | % |
| GDP growth rate | (0.1 | ) | Inflation | 1.3 |
| Unemployment | 5.1 |
| Short-term interest rate | 0.4 |
| 10-year Treasury bond yields | 1.4 |
| House price growth | (3.7 | ) | Equity price growth | (8.4 | ) | Probability | 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.
 The calculation of ECL under IFRS 9 involves significant judgements, assumptions and estimates. The level of estimation uncertainty and judgement has increased during 2020 as a result of the economic effects of the Covid-19 outbreak, including significant judgements relating to: •the selection and weighting of economic scenarios, given rapidly changing economic conditions in an unprecedented manner, uncertainty as to the effect of government and central bank support measures designed to alleviate adverse economic impacts, and a wider distribution of economic forecasts than before the pandemic. The key judgements are the length of time over which the economic effects of the pandemic will occur, the speed and shape of recovery. The main factors include the effectiveness of pandemic containment measures, the pace of roll-out and effectiveness of vaccines, and the emergence of new variants of the virus, plus a range of geopolitical uncertainties, which together represent a very high degree of estimation uncertainty, particularly in assessing Downside scenarios; •estimating the economic effects of those scenarios on ECL, where there is no observable historical trend that can be reflected in the models that will accurately represent the effects of the economic changes of the severity and speed brought about by the Covid-19 outbreak. Modelled assumptions and linkages between economic factors and credit losses may underestimate or overestimate ECL in these conditions, and there is significant uncertainty in the estimation of parameters such as collateral values and loss severity; and •the identification of customers experiencing significant increases in credit risk and credit impairment, particularly where those customers have accepted payment deferrals and other reliefs designed to address short-term liquidity issues given muted default experience to date. The use of segmentation techniques for indicators of significant increases in credit risk involves significant estimation uncertainty. How economic scenarios are reflected in ECL calculations Models are used to reflect economic scenarios on ECL estimates. As described above, modelled assumptions and linkages based on historical information could not alone produce relevant information under the wholesale calculation of ECLunprecedented conditions experienced in 2020, and it was necessary to place greater emphasis on judgemental adjustments to modelled outcomes than in previous years. We have developed a globally consistent methodologymethodologies for the application of forward economic guidance into the calculation of ECL for wholesale and retail credit risk. These standard approaches are described below, followed by incorporating forward economic guidance intothe management judgemental adjustments made, including those to reflect the circumstances experienced in 2020. For wholesale, a global methodology is used for 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 inFor retail, 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 the 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.
These models are based largely on historical observations and correlations with default rates. Management judgemental adjustments are described below. ImpactManagement judgemental adjustments
In the context of alternative/additional scenariosIFRS 9, management judgemental adjustments are short-term increases or decreases to the ECL at either a customer or portfolio level to account for late-breaking events, model and data limitations and deficiencies, and expert credit judgement applied following management review and challenge. In the Annual Report and Accounts 2019, these were ‘Post-model adjustments’. AtThe most severe projections at 31 December 2019,2020 of macroeconomic variables are outside the impacthistorical observations on which IFRS 9 models have been built and calibrated to operate. Moreover, the complexities of using additional scenarios tocountry-specific governmental support programmes, 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 Chinaimpacts on customer behaviours and the US on key Asian economies, andunpredictable pathways of the possibility of a further weakeningpandemic have never been modelled. Consequently, HSBC’s IFRS 9 models, 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,some cases, generate outputs that appear overly sensitive when 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.
with other economic and credit metrics. Governmental support programmes and customer payment reliefs have dislocated the correlation between economic conditions and defaults on which models are based. Management judgemental adjustments are required to help ensure that an appropriate amount of ECL impairment is recognised. ReportWe have internal governance in place to regularly monitor management judgemental adjustments and, where possible, to reduce the reliance on these through model recalibration or redevelopment, as appropriate. During 2020 the composition of modelled ECL and management judgemental adjustments changed significantly, reflecting the path of the Directors | Riskpandemic, containment efforts and government support measures, and this is expected to continue to be the case until economic conditions improve. Wider-ranging model changes will take time to develop and need observable loss data on which models can be developed. Models will be revisited over time once the longer-term impacts of Covid-19 are observed. Therefore, we anticipate significant management judgemental adjustments for the foreseeable future.
Management judgemental adjustments made in estimating the reported ECL at 31 December 2020 are set out in the following table. The table includes adjustments in relation to data and model limitations resulting from the pandemic, and as a result of the regular process of model development and implementation. It shows the adjustments applicable to the scenario-weighted ECL numbers. Adjustments in relation to Downside scenarios are more significant, as results are subject to greater uncertainty. | | | | | | | | | | | | Management judgemental adjustments to ECL1 | | Retail | Wholesale | Total | | $bn | $bn | $bn | | | | | | Low-risk counterparties (banks, sovereigns and government entities) | — | | (0.7) | | (0.7) | | | Corporate lending adjustments | — | | 0.5 | | 0.5 | | | Retail lending PD adjustments | (0.8) | | | (0.8) | | | Retail model default suppression adjustment | 1.9 | | — | | 1.9 | | | Other retail lending adjustments | 0.4 | | — | | 0.4 | | | Total | 1.5 | | (0.2) | | 1.3 | |
1 Management judgemental adjustments presented in the table reflect increases or (decreases) to ECL, respectively. Management judgemental adjustments at 31 December 2019 were an increase to ECL of $75m for the wholesale portfolio and $131m for the retail portfolio. This excludes adjustments for alternative scenarios. During 2020, management judgemental adjustments reflected the volatile economic conditions associated with the Covid-19 pandemic. The composition of modelled ECL and management judgemental adjustments changed significantly over 2020 as certain economic measures, such as GDP growth rate, passed the expected low point in a number of key markets and returned towards those reflected in modelled relationships, subject to continued uncertainty in the recovery paths of different economies. At 31 December 2020, wholesale management judgemental adjustments were an ECL reduction of $0.2bn (31 December 2019: $0.1bn increase). These wholesale adjustments were lower than those made in the second and third quarters of 2020 following an improvement in macroeconomic assumptions, with models operating closer to their calibration range and following recalibration for stressed conditions. The adjustments relating to low-credit-risk exposures are mainly to highly rated banks, sovereigns and US government-sponsored entities, where modelled credit factors did not fully reflect the underlying fundamentals of these entities or the effect of government support and economic programmes in the Covid-19 environment. Adjustments to corporate exposures principally reflect the outcome of management judgements for high-risk and vulnerable sectors in some of our key markets, supported by credit experts’ input, quantitative analyses and benchmarks. Considerations
include potential default suppression in some sectors due to government intervention and late-breaking idiosyncratic developments. In the fourth quarter of 2020, retail management judgemental adjustments led to an ECL increase of $1.5bn, primarily from additional ECL of $1.9bn to reflect adjustments to the timing of default, which has been delayed by government support and customer relief measures. This was partly offset by adjustments to retail lending PD outputs, to reduce ECL of $0.8bn for unintuitive model responses, primarily where economic forecasts were beyond the bounds of the model development period. Other retail lending adjustments of $0.4bn led to an increase in ECL from areas such as customer relief and data limitations. The retail model default suppression adjustment was applied as defaults remain temporarily suppressed due to government support and customer relief programmes, which have supported stabilised portfolio performance. Retail models are reliant on the assumption that as macroeconomic conditions deteriorate, defaults will crystallise. This adjustment aligns the increase in default due to changes in economic conditions to the period of time when defaults are expected to be observed. The retail model default suppression adjustment will be monitored and updated prospectively to ensure appropriate alignment with expected performance taking into consideration the levels and timing of government support and customer relief programmes. Retail lending PD adjustments are primarily related to an adjustment made in relation to the UK. The downside unemployment forecasts were outside the historical bounds on which the model was developed resulting in unintuitive levels of PD. This adjustment reduced the sensitivity of PD to better align with the historical correlation between changes in levels of unemployment and defaults. 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 the 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. 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.weighting. 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, andscenarios. Therefore, 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. Wholesale and retail sensitivity The wholesale and retail sensitivity analysis is stated inclusive of management judgemental adjustments, as appropriate to each scenario. The results tables exclude portfolios held by the insurance business and small portfolios, and as such cannot be
| | | | | | | | | | | | 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 20192
| $m | $m | $m |
| $m |
| $m | $m | $m | $m | | Reported ECL | 725 | 148 | 328 | 124 | 80 | 69 | 97 | 55 | | Consensus scenarios | | | | | | | | | | Central scenario | 536 | 149 | 243 | 118 | 79 | 68 | 97 | 53 | | Upside scenario | 480 | 132 | 241 | 95 | 63 | 48 | 89 | 50 | | Downside scenario | 635 | 161 | 244 | 106 | 108 | 99 | 108 | 79 | | Alternative scenarios | | | | | | | | | | UK alternative Downside scenario 1 | 1,050 | | | | | | | | | Tail risk scenarios (UK alternative Downside scenarios 2 and 3) | 1,900–2,100 | | | | | | | | | Asia-Pacific alternative Downside scenario | | | 550 |
| 150 |
| | | | | | Hong Kong alternative Downside scenario | | | 700 |
| | | | | | Gross carrying amount/nominal amount3 | 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 | $m | $m | $m | $m | $m | $m | $m | $m | | Reported ECL | 906 | 163 | 162 | 83 | 81 | 76 | 74 | 46 | | Consensus scenarios | | | | | | | | | Central scenario
| 649 | 156 | 162 | 82 | 81 | 74 | 74 | 44 | | Upside scenario | 595 | 142 | 156 | 78 | 75 | 58 | 69 | 43 | | Downside scenario | 745 | 177 | 170 | 88 | 88 | 93 | 80 | 58 | | Alternative scenarios | | | | | | | | | | UK alternative Downside scenario 1 | 1,000 | | | | | | | | | Tail risk scenarios (UK alternative Downside scenarios 2 and 3) | 1,700–1,900 | | | | | | | | | Trade Downside scenario | | | 500 | 150 | | | | | Gross carrying value/nominal amount3 | 360,637 | 211,318 | 407,402 | 99,379 | 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 specific to the obligor than future economic scenarios. |
| | 2 | Includes off-balance sheet financial instruments that are subject to significant measurement uncertainty. |
| | 3 | 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. |
directly compared to personal and wholesale lending presented in other credit risk tables. Additionally in both the wholesale and retail analysis, the comparative period results for additional/ alternative Downside scenarios are also not directly comparable with the current period, because they reflect different risk profiles relative to the consensus scenarios for the period end.
Wholesale analysis | | | | | | | | | | | | | | | | | | | | | | IFRS 9 ECL sensitivity to future economic conditions | | Gross carrying amount2 | Reported ECL | Central scenario ECL | Upside scenario ECL | Downside scenario ECL | Additional Downside scenario ECL | ECL of loans and advances to customers at 31 December 20201 | $m | $m | $m | $m | $m | $m | | | | | | | | | UK | 430,555 | | 2,077 | | 1,514 | | 1,026 | | 2,271 | | 3,869 | | | US | 201,263 | | 369 | | 314 | | 219 | | 472 | | 723 | | | Hong Kong | 452,983 | | 474 | | 388 | | 211 | | 672 | | 1,363 | | | Mainland China | 118,163 | | 116 | | 93 | | 28 | | 252 | | 1,158 | | | Canada | 85,720 | | 183 | | 140 | | 82 | | 253 | | 528 | | | Mexico | 25,920 | | 246 | | 222 | | 177 | | 285 | | 437 | | | UAE | 44,777 | | 250 | | 241 | | 190 | | 330 | | 536 | | | France | 164,899 | | 117 | | 109 | | 97 | | 131 | | 238 | |
| | | | | | | | | | | | | | | | | | | | | IFRS 9 ECL sensitivity to future economic conditions3 | | Gross carrying amount2 | Reported ECL | Central scenario ECL | Upside scenario ECL | Downside scenario ECL | Alternative scenarios ECL4 | ECL of loans and advances to customers at 31 December 20191 | $m | $m | $m | $m | $m | $m | | | | | | | | | UK | 346,035 | 725 | 536 | 480 | 635 | 1,050–2,100 | | US | 203,610 | 148 | 149 | 132 | 161 | | | Hong Kong | 418,102 | 328 | 243 | 241 | 244 | 550-700 | | Mainland China | 104,004 | 124 | 118 | 95 | 106 | 150 | | Canada | 74,620 | 80 | 79 | 63 | 108 | | | Mexico | 32,632 | 69 | 68 | 48 | 99 | | | UAE | 42,304 | 97 | 97 | 89 | 108 | | | France | 124,618 | 55 | 53 | 50 | 79 | |
1 ECL sensitivity includes off-balance sheet financial instruments that are subject to significant measurement uncertainty. 2 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. 3 ECL sensitivities for 2019 exclude portfolios utilising less complex modelling approaches and management judgemental adjustments only included in reported ECL. 4 The UK alternative Downside (‘AD’) scenario 1 had an ECL impact of $1bn with AD2 and AD3 scenarios with ECL impacts of $1.9bn and $2.1bn respectively. The Hong Kong AD1 and AD2 scenarios had an impact of $0.55bn and $0.7bn respectively. 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
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.
| | | | | | | | | | | | IFRS 9 ECL sensitivity to future economic conditions1 | | | UK | Mexico | Hong Kong | UAE | France | US | Malaysia | Singapore | Australia | Canada | ECL of loans and advances to customers at 31 December 20192 | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | | Reported ECL | 936 | 584 | 349 | 174 | 133 | 90 | 94 | 60 | 38 | 39 | | Consensus scenarios | | | | | | | | | | | | Central scenario | 773 | 583 | 296 | 173 | 133 | 90 | 94 | 58 | 37 | 39 | | Upside scenario | 686 | 526 | 282 | 158 | 132 | 84 | 85 | 57 | 32 | 36 | | Downside scenario | 918 | 652 | 306 | 193 | 133 | 98 | 106 | 58 | 45 | 41 | | Alternative scenarios | | | | | | | | | | | | 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 | | | 530 | | | | 110 | 80 | 50 | | | Hong Kong alternative Downside scenario | | | 540 | | | | | | | | | 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 | | | UK |
| Mexico | Hong Kong | UAE | France | US | Malaysia | Singapore | Australia | Canada | ECL of loans and advances to customers at
31 December 20182 | $m |
| $m | $m | $m | $m | $m | $m | $m | $m | $m | | Reported ECL | 705 |
| 520 | 341 | 204 | 150 | 102 | 93 | 68 | 58 | 29 | | Consensus scenarios | | | | | | | | | | | | Central scenario | 540 |
| 517 | 338 | 204 | 150 | 101 | 92 | 66 | 57 | 29 | | Upside scenario | 480 |
| 475 | 322 | 195 | 149 | 94 | 82 | 61 | 54 | 28 | | Downside scenario | 641 |
| 564 | 344 | 209 | 150 | 115 | 104 | 67 | 63 | 31 | | Alternative scenarios | | | | | | | | | | | | UK alternative Downside scenario 1 | 900 |
| | | | | | | | | | | Tail risk scenarios (UK alternative Downside scenarios 2 and 3) | 1,100-1,300 |
| | | | | | | | | | Asia-Pacific alternative Downside scenario3 | | | 400 | | | | 110 | 70 | 70 | | | Gross carrying amount | 138,026 |
| 6,098 | 92,356 | 3,453 | 21,622 | 15,262 | 5,906 | 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 2019,2020, the most significant level of ECL sensitivity was observed in the retail portfolioUK, Hong Kong and mainland China. This higher sensitivity is largely driven by significant exposure in these regions and more severe impacts of the Downside scenarios relative to the Central and probability-weighted scenarios. For mainland China, the additional Downside scenario weighting of
2% reflects a scenario that is considered highly unlikely and is significantly more adverse compared with the Central scenario, resulting in a higher ECL estimate relative to the reported and Central scenarios.
Retail analysis | | | | | | | | | | | | | | | | | | | | | IFRS 9 ECL sensitivity to future economic conditions1 | | Gross carrying amount | Reported ECL | Central scenario ECL | Upside scenario ECL | Downside scenario ECL | Additional Downside scenario | ECL of loans and advances to customers at 31 December 20202 | $m | $m | $m | $m | $m | $m | | UK | | | | | | | | Mortgages | 146,478 | | 197 | | 182 | | 172 | | 205 | | 221 | | | Credit cards | 7,869 | | 857 | | 774 | | 589 | | 904 | | 1,084 | | | Other | 9,164 | | 897 | | 795 | | 471 | | 1,022 | | 1,165 | | | Mexico | | | | | | | | Mortgages | 3,896 | | 111 | | 101 | | 79 | | 136 | | 167 | | | Credit cards | 1,113 | | 260 | | 255 | | 243 | | 269 | | 290 | | | Other | 2,549 | | 436 | | 428 | | 411 | | 451 | | 491 | | | Hong Kong | | | | | | | | Mortgages | 89,943 | | 0 | | 0 | | 0 | | 0 | | 0 | | | Credit cards | 7,422 | | 266 | | 259 | | 247 | | 277 | | 405 | | | Other | 6,020 | | 112 | | 105 | | 102 | | 115 | | 130 | | | UAE | | | | | | | | Mortgages | 1,889 | | 66 | | 63 | | 53 | | 73 | | 78 | | | Credit cards | 426 | | 92 | | 81 | | 62 | | 107 | | 126 | | | Other | 683 | | 38 | | 37 | | 33 | | 41 | | 46 | | | France | | | | | | | | Mortgages | 24,565 | | 68 | | 68 | | 68 | | 69 | | 70 | | | Other | 1,725 | | 88 | | 87 | | 85 | | 88 | | 91 | | | US | | | | | | | | Mortgages | 15,399 | | 41 | | 39 | | 38 | | 41 | | 53 | | | Credit cards | 570 | | 86 | | 84 | | 81 | | 88 | | 119 | | | Canada | | | | | | | | Mortgages | 22,454 | | 31 | | 30 | | 29 | | 31 | | 36 | | | Credit cards | 260 | | 9 | | 9 | | 8 | | 9 | | 9 | | | Other | 1,775 | | 22 | | 21 | | 20 | | 24 | | 28 | |
| | | | | | | | | | | | | | | | | | | | | IFRS 9 ECL sensitivity to future economic conditions1 (continued) | | Gross carrying amount | Reported ECL | Central scenario ECL | Upside scenario ECL | Downside scenario ECL | Alternative scenarios ECL | ECL of loans and advances to customers at 31 December 20192 | $m | $m | $m | $m | $m | $m | | UK | | | | | | | | Mortgages | 130,079 | | 123 | 33 | 28 | 38 | 50-80 | | Credit cards | 9,359 | | 431 | 421 | 376 | 506 | 670-930 | | Other | 10,137 | | 382 | 318 | 282 | 374 | 490-700 | | Mexico | | | | | | | | Mortgages | 3,385 | | 32 | 31 | 24 | 41 | | | Credit cards | 1,295 | | 211 | 211 | 190 | 231 | | | Other | 3,001 | | 341 | 340 | 312 | 380 | | | Hong Kong | | | | | | | | Mortgages | 86,448 | | 0 | 0 | 0 | 0 | 0 | | Credit cards | 7,795 | | 243 | 201 | 191 | 201 | 400 | | Other | 7,446 | | 105 | 95 | 90 | 104 | 130 | | UAE | | | | | | | | Mortgages | 1,983 | | 92 | 92 | 83 | 91 | | | Credit cards | 513 | | 54 | 54 | 49 | 72 | | | Other | 895 | | 28 | 28 | 26 | 31 | | | France | | | | | | | | Mortgages | 21,374 | | 60 | 60 | 59 | 60 | | | Other | 1,643 | | 73 | 73 | 73 | 74 | | | US | | | | | | | | Mortgages | 14,732 | | 22 | 22 | 21 | 24 | | | Credit cards | 738 | | 68 | 68 | 62 | 74 | | | Canada | | | | | | | | Mortgages | 19,843 | | 15 | 14 | 13 | 16 | | | Credit cards | 270 | | 7 | 7 | 7 | 7 | | | Other | 2,231 | | 17 | 17 | 16 | 18 | |
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.
At 31 December 2020, the most significant level of ECL sensitivity was observed in the UK, Mexico and Hong Kong. Mortgages reflected the lowest level of ECL sensitivity across most markets as collateral values remain resilient. Hong Kong mortgages had low levels of reported ECL due to the interaction betweencredit quality of the portfolio, and so presented sensitivity was negligible. Credit cards and other unsecured lending are more sensitive to economic forecasts, which have deteriorated in 2020 due to the quantum of exposures and credit characteristics of the underlying portfolios.Covid-19 pandemic. In France, following management’s review of the calculated ECL, results were adjusted to more accurately reflect views ofGroup 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.results
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
Reportscenarios and management judgemental adjustments are highly sensitive to movements in economic forecasts, including the efficacy of government support measures. Based upon the sensitivity tables presented above, if the Group ECL balance (excluding wholesale stage 3, which is assessed individually) was estimated solely on the basis of the Directors | Risk
economic uncertainty, global trade- and tariff-related tensions in Asia-Pacific, andCentral scenario, Downside scenario or 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 adjustmentsadditional Downside scenario at 31 December 20192020, it would increase/(decrease) as presented in the below table.
| | | | | | | | | | Retail1 | Wholesale1 | | Total Group ECL 2020 | $bn | $bn | | Reported ECL | 4.5 | | 4.5 | | | Scenarios | | | | 100% consensus Central scenario | (0.3) | | (0.9) | | | 100% consensus Downside scenario | 0.3 | | 1.0 | | | 100% additional Downside scenario | 1.3 | | 5.9 | |
| | | | | | | | | | Retail1 | Wholesale | | Total Group ECL 2019 | $bn | $bn | | Reported ECL | 2.9 | | 2.0 | | | Scenarios | | | | 100% consensus Central scenario | (0.2) | | (0.3) | | | 100% consensus Downside scenario | 0.1 | | 0 | | | 100% alternative Downside scenario | n/a | n/a |
1 On the same basis as retail and wholesale sensitivity analysis. There still remains a significant degree of uncertainty in relation to the UK economic outlook. If a 100% weight were $75m (2018: $161m)applied to the consensus Downside and additional Downside scenario for the UK, respectively, it would result in an increase in ECL of $0.2bn and $1.8bn in wholesale business and $131m (2018: $117m) for the retail business.$0.2bn and $0.5bn in retail.
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 |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
|
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | At 1 Jan 2019 | 1,502,976 |
| (1,449 | ) | 95,104 |
| (2,278 | ) | 14,232 |
| (5,135 | ) | 334 |
| (194 | ) | 1,612,646 |
| (9,056 | ) | | Transfers of financial instruments: | (36,244 | ) | (543 | ) | 31,063 |
| 1,134 |
| 5,181 |
| (591 | ) | — |
| — |
| — |
| — |
| | – transfers from stage 1 to stage 2 | (108,434 | ) | 487 |
| 108,434 |
| (487 | ) | — |
| — |
| — |
| — |
| — |
| — |
| | – transfers from stage 2 to stage 1 | 73,086 |
| (1,044 | ) | (73,086 | ) | 1,044 |
| — |
| — |
| — |
| — |
| — |
| — |
| | – transfers to stage 3 | (1,284 | ) | 59 |
| (5,022 | ) | 665 |
| 6,306 |
| (724 | ) | — |
| — |
| — |
| — |
| | – transfers from stage 3 | 388 |
| (45 | ) | 737 |
| (88 | ) | (1,125 | ) | 133 |
| — |
| — |
| — |
| — |
| | Net remeasurement of ECL arising from transfer of stage | — |
| 669 |
| — |
| (676 | ) | — |
| (114 | ) | — |
| — |
| — |
| (121 | ) | | New financial assets originated or purchased | 504,064 |
| (534 | ) | — |
| — |
| — |
| — |
| 135 |
| (21 | ) | 504,199 |
| (555 | ) | | Assets derecognised (including final repayments) | (352,961 | ) | 112 |
| (19,909 | ) | 553 |
| (2,712 | ) | 656 |
| (26 | ) | 8 |
| (375,608 | ) | 1,329 |
| | Changes to risk parameters – further lending/repayment | (72,239 | ) | 291 |
| (2,560 | ) | 67 |
| 402 |
| (6 | ) | 28 |
| 12 |
| (74,369 | ) | 364 |
| | Changes to risk parameters – credit quality | — |
| 2 |
| — |
| (1,208 | ) | — |
| (2,704 | ) | — |
| (51 | ) | — |
| (3,961 | ) | | Changes to models used for ECL calculation | — |
| (6 | ) | — |
| 4 |
| — |
| 14 |
| — |
| — |
| — |
| 12 |
| | Assets written off | — |
| — |
| — |
| — |
| (2,657 | ) | 2,657 |
| (140 | ) | 140 |
| (2,797 | ) | 2,797 |
| | Credit-related modifications that resulted in derecognition | — |
| — |
| — |
| — |
| (268 | ) | 125 |
| — |
| — |
| (268 | ) | 125 |
| | Foreign exchange | 16,838 |
| (9 | ) | 1,201 |
| (40 | ) | 160 |
| (31 | ) | 1 |
| 1 |
| 18,200 |
| (79 | ) | | Others | (821 | ) | 3 |
| 652 |
| 3 |
| (3 | ) | 8 |
| 13 |
| 6 |
| (159 | ) | 20 |
| | At 31 Dec 2019 | 1,561,613 |
| (1,464 | ) | 105,551 |
| (2,441 | ) | 14,335 |
| (5,121 | ) | 345 |
| (99 | ) | 1,681,844 |
| (9,125 | ) | | ECL income statement change for the period |
|
| 534 |
|
|
| (1,260 | ) |
|
| (2,154 | ) |
|
| (52 | ) |
|
| (2,932 | ) | | Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 361 |
| | Others |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (20 | ) | | Total ECL income statement change for the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,591 | ) |
| | | | | | | | | | At 31 Dec 2019 | 12 months ended
31 Dec 2019 |
| | | Gross carrying/nominal amount |
| Allowance for ECL |
| ECL charge |
| | | $m |
| $m |
| $m |
| | As above | 1,681,844 |
| (9,125 | ) | (2,591 | ) | | Other financial assets measured at amortised cost | 615,179 |
| (118 | ) | (26 | ) | | Non-trading reverse purchase agreement commitments | 53,093 |
| — |
| — |
| | Performance and other guarantees not considered for IFRS 9 | — |
| — |
| (34 | ) | | Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement | 2,350,116 |
| (9,243 | ) | (2,651 | ) | | Debt instruments measured at FVOCI | 355,664 |
| (166 | ) | (105 | ) | | Total allowance for ECL/total income statement ECL change for the period | n/a |
| (9,409 | ) | (2,756 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | | | | | | | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | | | | | | | At 1 Jan 2020 | 1,561,613 | | (1,464) | | 105,551 | | (2,441) | | 14,335 | | (5,121) | | 345 | | (99) | | 1,681,844 | | (9,125) | | | | | | | | Transfers of financial instruments: | (129,236) | | (1,122) | | 116,783 | | 1,951 | | 12,453 | | (829) | | — | | — | | — | | — | | | | | | | | – transfers from stage 1 to stage 2 | (298,725) | | 947 | | 298,725 | | (947) | | — | | — | | — | | — | | — | | — | | | | | | | | – transfers from stage 2 to stage 1 | 172,894 | | (2,073) | | (172,894) | | 2,073 | | — | | — | | — | | — | | — | | — | | | | | | | | – transfers to stage 3 | (3,942) | | 30 | | (10,320) | | 986 | | 14,262 | | (1,016) | | — | | — | | — | | — | | | | | | | | – transfers from stage 3 | 537 | | (26) | | 1,272 | | (161) | | (1,809) | | 187 | | — | | — | | — | | — | | | | | | | | Net remeasurement of ECL arising from transfer of stage | — | | 907 | | — | | (1,158) | | — | | (750) | | — | | — | | — | | (1,001) | | | | | | | | | | | | | | | | | | | | | | | | New financial assets originated or purchased | 437,836 | | (653) | | — | | — | | — | | — | | 25 | | (1) | | 437,861 | | (654) | | | | | | | | Assets derecognised (including final repayments) | (313,347) | | 160 | | (37,409) | | 464 | | (3,430) | | 485 | | (23) | | 2 | | (354,209) | | 1,111 | | | | | | | | Changes to risk parameters – further lending/repayment | (83,147) | | 157 | | 29,092 | | 85 | | (597) | | 248 | | (50) | | (2) | | (54,702) | | 488 | | | | | | | | Changes to risk parameters – credit quality | — | | (408) | | — | | (4,374) | | — | | (4,378) | | — | | (39) | | — | | (9,199) | | | | | | | | Changes to models used for ECL calculation | — | | 134 | | — | | 294 | | — | | 5 | | — | | — | | — | | 433 | | | | | | | | Assets written off | — | | — | | — | | — | | (2,946) | | 2,944 | | (30) | | 30 | | (2,976) | | 2,974 | | | | | | | | Credit-related modifications that resulted in derecognition | — | | — | | — | | — | | (23) | | 7 | | — | | — | | (23) | | 7 | | | | | | | | Foreign exchange | 32,808 | | (47) | | 9,123 | | (223) | | 633 | | (163) | | 4 | | (3) | | 42,568 | | (436) | | | | | | | | Others | (76) | | 5 | | 292 | | (1) | | (1) | | 8 | | 8 | | (1) | | 223 | | 11 | | | | | | | | At 31 Dec 2020 | 1,506,451 | | (2,331) | | 223,432 | | (5,403) | | 20,424 | | (7,544) | | 279 | | (113) | | 1,750,586 | | (15,391) | | | | | | | | ECL income statement change for the period | | 297 | | | (4,689) | | | (4,390) | | | (40) | | | (8,822) | | | | | | | | Recoveries | | | | | | | | | | 326 | | | | | | | | Others | | | | | | | | | | (84) | | | | | | | | Total ECL income statement change for the period | | | | | | | | | | (8,580) | | | | | | |
| | | | | | | | | | | | | At 31 Dec 2020 | 12 months ended
31 Dec 2020 | | Gross carrying/nominal amount | Allowance for ECL | ECL charge | | | $m | $m | $m | | As above | 1,750,586 | | (15,391) | | (8,580) | | | Other financial assets measured at amortised cost | 772,408 | | (175) | | (95) | | | Non-trading reverse purchase agreement commitments | 61,716 | | — | | — | | | Performance and other guarantees not considered for IFRS 9 | — | | — | | (94) | | | Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement | 2,584,710 | | (15,566) | | (8,769) | | | Debt instruments measured at FVOCI | 399,717 | | (141) | | (48) | | | Total allowance for ECL/total income statement ECL change for the period | n/a | (15,707) | | (8,817) | |
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$6,266m during the period from $9,056m at 31 December 2018 to $9,125m at 31 December 2019.2019 to $15,391m at 31 December 2020. This increase was primarily driven by: •$3,961m9,199m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages; •$121m1,001m relating to the net remeasurement impact of stage transfers; and •foreign exchange and other movements of $59m. $425m.These decreases were partly offset by: •$2,797m2,974m of assets written off;
•$1,138m945m 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
•$12m433m of changes to models used for ECL calculation.calculation; and •$7m of credit-related modifications that resulted in derecognitions. The ECL charge for the period of $2,932m$8,822m presented in the previous table consisted of $3,961m$9,199m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stage and $121m$1,001m relating to the net remeasurement impact of stage transfers. This was partly offset by $1,138m$945m relating to underlying net book volume movementsmovement and $12m$433m in changes to models used for ECL calculation. Summary views of the movement in wholesale and personal lending are presented on pages 143189 and 156.202. | | | | | | | | | | | | | | | | | | | | | | 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 | Total | | | Stage 1 | Stage 2 | Stage 3 | POCI | | | Gross exposure |
| Allowance/ provision for ECL |
| Gross exposure |
| Allowance/ provision for ECL |
| Gross exposure |
| Allowance/ provision for ECL |
| Gross exposure |
| Allowance/ provision for ECL |
| Gross exposure |
| Allowance/ provision for ECL |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | At 1 Jan 2018 | 1,446,857 |
| (1,469 | ) | 102,032 |
| (2,406 | ) | 15,083 |
| (5,722 | ) | 1,042 |
| (242 | ) | 1,565,014 |
| (9,839 | ) | | Transfers of financial instruments: | (8,747 | ) | (685 | ) | 3,582 |
| 1,185 |
| 5,165 |
| (500 | ) | — |
| — |
| — |
| — |
| | – transfers from stage 1 to stage 2 | (84,181 | ) | 319 |
| 84,181 |
| (319 | ) | — |
| — |
| — |
| — |
| — |
| — |
| | – transfers from stage 2 to stage 1 | 77,325 |
| (999 | ) | (77,325 | ) | 999 |
| — |
| — |
| — |
| — |
| — |
| — |
| | – transfers to stage 3 | (2,250 | ) | 35 |
| (4,439 | ) | 607 |
| 6,689 |
| (642 | ) | — |
| — |
| ��� |
| — |
| | – transfers from stage 3 | 359 |
| (40 | ) | 1,165 |
| (102 | ) | (1,524 | ) | 142 |
| — |
| — |
| — |
| — |
| | Net remeasurement of ECL arising from transfer of stage | — |
| 620 |
| — |
| (605 | ) | — |
| (103 | ) | — |
| — |
| — |
| (88 | ) | | Net new lending and further lending/payments | 126,868 |
| (512 | ) | (16,162 | ) | 564 |
| (2,902 | ) | 733 |
| (587 | ) | 42 |
| 107,217 |
| 827 |
| | Changes to risk parameters – credit quality | — |
| 423 |
| — |
| (1,087 | ) | — |
| (2,238 | ) | — |
| (51 | ) | — |
| (2,953 | ) | | Changes to models used for ECL calculation | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | Assets written off | — |
| — |
| — |
| — |
| (2,568 | ) | 2,552 |
| (1 | ) | 1 |
| (2,569 | ) | 2,553 |
| | Foreign exchange | (52,911 | ) | 76 |
| (2,935 | ) | 99 |
| (636 | ) | 232 |
| (26 | ) | 6 |
| (56,508 | ) | 413 |
| | Other | (9,091 | ) | 98 |
| 8,587 |
| (28 | ) | 90 |
| (89 | ) | (94 | ) | 50 |
| (508 | ) | 31 |
| | At 31 Dec 2018 | 1,502,976 |
| (1,449 | ) | 95,104 |
| (2,278 | ) | 14,232 |
| (5,135 | ) | 334 |
| (194 | ) | 1,612,646 |
| (9,056 | ) | | ECL income statement change for the period | | 531 |
| | (1,128 | ) | | (1,608 | ) | | (9 | ) | | (2,214 | ) | | Recoveries | | | | | | | | | | 408 |
| | Others | | | | | | | | | | (62 | ) | | Total ECL income statement change for the period | | | | | | | | | | (1,868 | ) |
| | | | | | | | | | At 31 Dec 2018 | 12 months ended 31 Dec 2018 |
| | | Gross carrying/nominal amount |
| Allowance for ECL |
| ECL charge |
| | | $m |
| $m |
| $m |
| | As above | 1,612,646 |
| (9,056 | ) | (1,868 | ) | | Other financial assets measured at amortised cost | 582,917 |
| (55 | ) | 21 |
| | Non-trading reverse purchase agreement commitments | 65,381 |
| — |
| — |
| | Performance and other guarantees not considered for IFRS 9 | — |
| — |
| (25 | ) | | Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/ Summary consolidated income statement | 2,260,944 |
| (9,111 | ) | (1,872 | ) | | Debt instruments measured at FVOCI | 343,110 |
| (84 | ) | 105 |
| | Total allowance for ECL/total income statement ECL change for the period | n/a |
| (9,195 | ) | (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 122. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | Total | | | | | | | Stage 1 | Stage 2 | Stage 3 | POCI | | | | | | | Gross exposure | Allowance/ provision for ECL | Gross exposure | Allowance/ provision for ECL | Gross exposure | Allowance/ provision for ECL | Gross exposure | Allowance/ provision for ECL | Gross exposure | Allowance/ provision for ECL | | | | | | | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | | | | | | | At 1 Jan 2019 | 1,502,976 | | (1,449) | | 95,104 | | (2,278) | | 14,232 | | (5,135) | | 334 | | (194) | | 1,612,646 | | (9,056) | | | | | | | | Transfers of financial instruments: | (36,244) | | (543) | | 31,063 | | 1,134 | | 5,181 | | (591) | | — | | — | | — | | — | | | | | | | | – transfers from stage 1 to stage 2 | (108,434) | | 487 | | 108,434 | | (487) | | — | | — | | — | | — | | — | | — | | | | | | | | – transfers from stage 2 to stage 1 | 73,086 | | (1,044) | | (73,086) | | 1,044 | | — | | — | | — | | — | | — | | — | | | | | | | | – transfers to stage 3 | (1,284) | | 59 | | (5,022) | | 665 | | 6,306 | | (724) | | — | | — | | — | | — | | | | | | | | – transfers from stage 3 | 388 | | (45) | | 737 | | (88) | | (1,125) | | 133 | | — | | — | | — | | — | | | | | | | | Net remeasurement of ECL arising from transfer of stage | — | | 669 | | — | | (676) | | — | | (114) | | — | | — | | — | | (121) | | | | | | | | New financial assets originated or purchased | 504,064 | | (534) | | — | | — | | — | | — | | 135 | | (21) | | 504,199 | | (555) | | | | | | | | Assets derecognised (including final repayments) | (352,961) | | 112 | | (19,909) | | 553 | | (2,712) | | 656 | | (26) | | 8 | | (375,608) | | 1,329 | | | | | | | | Changes to risk parameters – further lending/repayment | (72,239) | | 291 | | (2,560) | | 67 | | 402 | | (6) | | 28 | | 12 | | (74,369) | | 364 | | | | | | | | Changes to risk parameters – credit quality | — | | 2 | | — | | (1,208) | | — | | (2,704) | | — | | (51) | | — | | (3,961) | | | | | | | | Changes to models used for ECL calculation | — | | (6) | | — | | 4 | | — | | 14 | | — | | — | | — | | 12 | | | | | | | | Assets written off | — | | — | | — | | — | | (2,657) | | 2,657 | | (140) | | 140 | | (2,797) | | 2,797 | | | | | | | | Credit-related modifications that resulted in derecognition | — | | —�� | | — | | — | | (268) | | 125 | | — | | — | | (268) | | 125 | | | | | | | | Foreign exchange | 16,838 | | (9) | | 1,201 | | (40) | | 160 | | (31) | | 1 | | 1 | | 18,200 | | (79) | | | | | | | | Others | (821) | | 3 | | 652 | | 3 | | (3) | | 8 | | 13 | | 6 | | (159) | | 20 | | | | | | | | At 31 Dec 2019 | 1,561,613 | | (1,464) | | 105,551 | | (2,441) | | 14,335 | | (5,121) | | 345 | | (99) | | 1,681,844 | | (9,125) | | | | | | | | ECL income statement change for the period | | 534 | | | (1,260) | | | (2,154) | | | (52) | | | (2,932) | | | | | | | | Recoveries | | | | | | | | | | 361 | | | | | | | | Others | | | | | | | | | | (20) | | | | | | | | Total ECL income statement change for the period | | | | | | | | | | (2,591) | | | | | | |
| | | | | | | | | | | | | At 31 Dec 2019 | 12 months ended 31 Dec 2019 | | Gross carrying/nominal amount | Allowance for ECL | ECL charge | | | $m | $m | $m | | As above | 1,681,844 | | (9,125) | | (2,591) | | | Other financial assets measured at amortised cost | 615,179 | | (118) | | (26) | | | Non-trading reverse purchase agreement commitments | 53,093 | | — | | — | | | Performance and other guarantees not considered for IFRS 9 | — | | — | | (34) | | | Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/ Summary consolidated income statement | 2,350,116 | | (9,243) | | (2,651) | | | Debt instruments measured at FVOCI | 355,664 | | (166) | | (105) | | | Total allowance for ECL/total income statement ECL change for the period | n/a | (9,409) | | (2,756) | |
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 121.163. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Distribution of financial instruments by credit quality at 31 December 2020 | | | | | | | | | (Audited) | | Gross carrying/notional amount | Allowance for ECL/other credit provisions | Net | | | | | | | | | Strong | Good | Satisfactory | Sub-standard | Credit impaired | Total | | | | | | | | | $m | $m | $m | $m | $m | $m | $m | $m | | | | | | | | | In-scope for IFRS 9 | | | | | | | | | | | | | | | | | Loans and advances to customers held at amortised cost | 506,231 | | 233,320 | | 256,584 | | 36,970 | | 19,372 | | 1,052,477 | | (14,490) | | 1,037,987 | | | | | | | | | | – personal | 357,821 | | 53,892 | | 38,520 | | 4,965 | | 5,611 | | 460,809 | | (4,731) | | 456,078 | | | | | | | | | | – corporate and commercial | 120,971 | | 158,601 | | 203,560 | | 30,718 | | 13,238 | | 527,088 | | (9,494) | | 517,594 | | | | | | | | | | – non-bank financial institutions | 27,439 | | 20,827 | | 14,504 | | 1,287 | | 523 | | 64,580 | | (265) | | 64,315 | | | | | | | | | | Loans and advances to banks held at amortised cost | 71,318 | | 5,496 | | 3,568 | | 1,276 | | 0 | | 81,658 | | (42) | | 81,616 | | | | | | | | | | Cash and balances at central banks | 302,028 | | 1,388 | | 1,070 | | 0 | | 0 | | 304,486 | | (5) | | 304,481 | | | | | | | | | | Items in the course of collection from other banks | 4,079 | | 9 | | 6 | | 0 | | 0 | | 4,094 | | 0 | | 4,094 | | | | | | | | | | Hong Kong Government certificates of indebtedness | 40,420 | | 0 | | 0 | | 0 | | 0 | | 40,420 | | 0 | | 40,420 | | | | | | | | | | Reverse repurchase agreements – non-trading | 177,457 | | 40,461 | | 12,398 | | 312 | | 0 | | 230,628 | | 0 | | 230,628 | | | | | | | | | | Financial investments | 77,361 | | 9,781 | | 1,537 | | 1 | | 39 | | 88,719 | | (80) | | 88,639 | | | | | | | | | | Prepayments, accrued income and other assets | 81,886 | | 10,129 | | 11,570 | | 298 | | 178 | | 104,061 | | (90) | | 103,971 | | | | | | | | | | – endorsements and acceptances | 1,458 | | 4,355 | | 4,245 | | 229 | | 20 | | 10,307 | | (30) | | 10,277 | | | | | | | | | | – accrued income and other | 80,428 | | 5,774 | | 7,325 | | 69 | | 158 | | 93,754 | | (60) | | 93,694 | | | | | | | | | Debt instruments measured at
fair value through other comprehensive income1 | 367,685 | | 12,678 | | 10,409 | | 825 | | 306 | | 391,903 | | (141) | | 391,762 | | | | | | | | | | Out-of-scope for IFRS 9 | | | | | | | | | | | | | | | | | Trading assets | 117,972 | | 14,694 | | 20,809 | | 829 | | 43 | | 154,347 | | 0 | | 154,347 | | | | | | | | | | Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss | 6,440 | | 2,378 | | 1,827 | | 109 | | 0 | | 10,754 | | 0 | | 10,754 | | | | | | | | | | Derivatives | 243,005 | | 54,581 | | 8,709 | | 1,359 | | 72 | | 307,726 | | 0 | | 307,726 | | | | | | | | | | | | | | | | | | | | | | | | | | Total gross carrying amount on balance sheet | 1,995,882 | | 384,915 | | 328,487 | | 41,979 | | 20,010 | | 2,771,273 | | (14,848) | | 2,756,425 | | | | | | | | | | Percentage of total credit quality | 72.0% | 13.9% | 11.9% | 1.5% | 0.7% | 100% | | | | | | | | | | | Loan and other credit-related commitments | 400,911 | | 157,339 | | 90,784 | | 9,668 | | 1,081 | | 659,783 | | (734) | | 659,049 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial guarantees | 6,356 | | 5,194 | | 5,317 | | 1,247 | | 270 | | 18,384 | | (125) | | 18,259 | | | | | | | | | | In-scope: Irrevocable loan commitments and financial guarantees | 407,267 | | 162,533 | | 96,101 | | 10,915 | | 1,351 | | 678,167 | | (859) | | 677,308 | | | | | | | | | | Loan and other credit-related commitments | 59,392 | | 62,664 | | 59,666 | | 2,837 | | 430 | | 184,989 | | 0 | | 184,989 | | | | | | | | | | Performance and other guarantees | 26,082 | | 27,909 | | 21,256 | | 2,112 | | 755 | | 78,114 | | (226) | | 77,888 | | | | | | | | | | Out-of-scope: Revocable loan commitments and non-financial guarantees | 85,474 | | 90,573 | | 80,922 | | 4,949 | | 1,185 | | 263,103 | | (226) | | 262,877 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Distribution of financial instruments by credit quality at 31 December 2019 | | (Audited) | | | Gross carrying/notional amount | Allowance for ECL/other credit provisions |
| Net |
| | | Strong |
| Good |
| Satisfactory |
| Sub-standard |
| Credit impaired |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | In-scope for IFRS 9 | | | | | | | | | | Loans and advances to customers held at amortised cost | 524,889 |
| 258,402 |
| 228,485 |
| 20,007 |
| 13,692 |
| 1,045,475 |
| (8,732 | ) | 1,036,743 |
| | – personal | 354,461 |
| 45,037 |
| 27,636 |
| 2,286 |
| 4,851 |
| 434,271 |
| (3,134 | ) | 431,137 |
| | – corporate and commercial | 138,126 |
| 190,470 |
| 186,383 |
| 16,891 |
| 8,629 |
| 540,499 |
| (5,438 | ) | 535,061 |
| | – non-bank financial institutions | 32,302 |
| 22,895 |
| 14,466 |
| 830 |
| 212 |
| 70,705 |
| (160 | ) | 70,545 |
| | Loans and advances to banks held at amortised cost | 60,636 |
| 5,329 |
| 1,859 |
| 1,395 |
| — |
| 69,219 |
| (16 | ) | 69,203 |
| | Cash and balances at central banks | 151,788 |
| 1,398 |
| 915 |
| — |
| — |
| 154,101 |
| (2 | ) | 154,099 |
| | Items in the course of collection from other banks | 4,935 |
| 18 |
| 3 |
| — |
| — |
| 4,956 |
| — |
| 4,956 |
| | Hong Kong Government certificates of indebtedness | 38,380 |
| — |
| — |
| — |
| — |
| 38,380 |
| — |
| 38,380 |
| | Reverse repurchase agreements – non-trading | 193,157 |
| 37,947 |
| 9,621 |
| 137 |
| — |
| 240,862 |
| — |
| 240,862 |
| | Financial investments | 78,318 |
| 6,503 |
| 906 |
| 61 |
| — |
| 85,788 |
| (53 | ) | 85,735 |
| | Prepayments, accrued income and other assets | 70,675 |
| 8,638 |
| 11,321 |
| 306 |
| 152 |
| 91,092 |
| (63 | ) | 91,029 |
| | – endorsements and acceptances | 1,133 |
| 4,651 |
| 4,196 |
| 230 |
| 4 |
| 10,214 |
| (16 | ) | 10,198 |
| | – accrued income and other | 69,542 |
| 3,987 |
| 7,125 |
| 76 |
| 148 |
| 80,878 |
| (47 | ) | 80,831 |
| Debt instruments measured at
fair value through other comprehensive income1
| 333,158 |
| 10,966 |
| 7,222 |
| 544 |
| 1 |
| 351,891 |
| (166 | ) | 351,725 |
| | Out-of-scope for IFRS 9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Trading assets | 135,059 |
| 15,240 |
| 22,964 |
| 2,181 |
| — |
| 175,444 |
| — |
| 175,444 |
| | Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss | 4,655 |
| 1,391 |
| 5,584 |
| 139 |
| — |
| 11,769 |
| — |
| 11,769 |
| | Derivatives | 187,636 |
| 42,642 |
| 11,894 |
| 821 |
| 2 |
| 242,995 |
| — |
| 242,995 |
| | Total gross carrying amount on balance sheet | 1,783,286 |
| 388,474 |
| 300,774 |
| 25,591 |
| 13,847 |
| 2,511,972 |
| (9,032 | ) | 2,502,940 |
| | Percentage of total credit quality | 70.9% |
| 15.5% |
| 12.0% |
| 1.0% |
| 0.6% |
| 100% |
|
|
|
|
| | Loan and other credit-related commitments | 369,424 |
| 146,988 |
| 77,499 |
| 5,338 |
| 780 |
| 600,029 |
| (329 | ) | 599,700 |
| | Financial guarantees | 7,441 |
| 6,033 |
| 5,539 |
| 1,011 |
| 190 |
| 20,214 |
| (48 | ) | 20,166 |
| | In-scope: Irrevocable loan commitments and financial guarantees | 376,865 |
| 153,021 |
| 83,038 |
| 6,349 |
| 970 |
| 620,243 |
| (377 | ) | 619,866 |
| Loan and other credit-related commitments2 | 66,148 |
| 69,890 |
| 58,754 |
| 2,605 |
| 182 |
| 197,579 |
| — |
| 197,579 |
| | Performance and other guarantees | 30,099 |
| 23,335 |
| 20,062 |
| 2,057 |
| 380 |
| 75,933 |
| (132 | ) | 75,801 |
| | Out-of-scope: Revocable loan commitments and non-financial guarantees | 96,247 |
| 93,225 |
| 78,816 |
| 4,662 |
| 562 |
| 273,512 |
| (132 | ) | 273,380 |
|
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.
| | | Distribution of financial instruments by credit quality at 31 December 2018 (continued) | | | Distribution of financial instruments by credit quality at 31 December 2019 (continued) | | Distribution of financial instruments by credit quality at 31 December 2019 (continued) | (Audited) | | | Gross carrying/notional amount | Allowance for ECL/other credit provisions |
| Net |
| | Gross carrying/notional amount | Allowance for ECL/other credit provisions | Net | | | Strong |
| Good |
| Satisfactory |
| Sub- standard |
| Credit impaired |
| Total |
| | Strong | Good | Satisfactory | Sub- standard | Credit impaired | Total | | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | $m | | In-scope for IFRS 9 | | In-scope for IFRS 9 | | | Loans and advances to customers held at amortised cost | 485,451 |
| 244,199 |
| 230,357 |
| 16,993 |
| 13,321 |
| 990,321 |
| (8,625 | ) | 981,696 |
| Loans and advances to customers held at amortised cost | 524,889 | | 258,402 | | 228,485 | | 20,007 | | 13,692 | | 1,045,475 | | (8,732) | | 1,036,743 | | | – personal | 316,616 |
| 43,764 |
| 27,194 |
| 2,182 |
| 4,581 |
| 394,337 |
| (2,947 | ) | 391,390 |
| – personal | 354,461 | | 45,037 | | 27,636 | | 2,286 | | 4,851 | | 434,271 | | (3,134) | | 431,137 | | | – corporate and commercial | 140,387 |
| 181,984 |
| 189,357 |
| 14,339 |
| 8,510 |
| 534,577 |
| (5,552 | ) | 529,025 |
| – corporate and commercial | 138,126 | | 190,470 | | 186,383 | | 16,891 | | 8,629 | | 540,499 | | (5,438) | | 535,061 | | | – non-bank financial institutions | 28,448 |
| 18,451 |
| 13,806 |
| 472 |
| 230 |
| 61,407 |
| (126 | ) | 61,281 |
| – non-bank financial institutions | 32,302 | | 22,895 | | 14,466 | | 830 | | 212 | | 70,705 | | (160) | | 70,545 | | | Loans and advances to banks held at amortised cost | 60,249 |
| 7,371 |
| 4,549 |
| 11 |
| — |
| 72,180 |
| (13 | ) | 72,167 |
| Loans and advances to banks held at amortised cost | 60,636 | | 5,329 | | 1,859 | | 1,395 | | 0 | | 69,219 | | (16) | | 69,203 | | | Cash and balances at central banks | 160,995 |
| 1,508 |
| 324 |
| 18 |
| — |
| 162,845 |
| (2 | ) | 162,843 |
| Cash and balances at central banks | 151,788 | | 1,398 | | 915 | | 0 | | 0 | | 154,101 | | (2) | | 154,099 | | | Items in the course of collection from other banks | 5,765 |
| 21 |
| 1 |
| — |
| — |
| 5,787 |
| — |
| 5,787 |
| Items in the course of collection from other banks | 4,935 | | 18 | | 3 | | 0 | | 0 | | 4,956 | | 0 | | 4,956 | | | Hong Kong Government certificates of indebtedness | 35,859 |
| — |
| — |
| — |
| — |
| 35,859 |
| — |
| 35,859 |
| Hong Kong Government certificates of indebtedness | 38,380 | | 0 | | 0 | | 0 | | 0 | | 38,380 | | 0 | | 38,380 | | | Reverse repurchase agreements – non-trading | 200,774 |
| 29,423 |
| 12,607 |
| — |
| — |
| 242,804 |
| — |
| 242,804 |
| Reverse repurchase agreements – non-trading | 193,157 | | 37,947 | | 9,621 | | 137 | | 0 | | 240,862 | | 0 | | 240,862 | | | Financial investments | 56,031 |
| 5,703 |
| 949 |
| 1 |
| — |
| 62,684 |
| (18 | ) | 62,666 |
| Financial investments | 78,318 | | 6,503 | | 906 | | 61 | | 0 | | 85,788 | | (53) | | 85,735 | | | Prepayments, accrued income and other assets | 55,424 |
| 8,069 |
| 9,138 |
| 181 |
| 126 |
| 72,938 |
| (35 | ) | 72,903 |
| Prepayments, accrued income and other assets | 70,675 | | 8,638 | | 11,321 | | 306 | | 152 | | 91,092 | | (63) | | 91,029 | | | – endorsements and acceptances | 1,514 |
| 4,358 |
| 3,604 |
| 155 |
| 3 |
| 9,634 |
| (11 | ) | 9,623 |
| – endorsements and acceptances | 1,133 | | 4,651 | | 4,196 | | 230 | | 4 | | 10,214 | | (16) | | 10,198 | | | – accrued income and other | 53,910 |
| 3,711 |
| 5,534 |
| 26 |
| 123 |
| 63,304 |
| (24 | ) | 63,280 |
| – accrued income and other | 69,542 | | 3,987 | | 7,125 | | 76 | | 148 | | 80,878 | | (47) | | 80,831 | | Debt instruments measured at fair value through other comprehensive income1
| 319,632 |
| 12,454 |
| 7,210 |
| 2,558 |
| 12 |
| 341,866 |
| (84 | ) | 341,782 |
| Debt instruments measured at fair value through other comprehensive income1 | 333,158 | | 10,966 | | 7,222 | | 544 | | 1 | | 351,891 | | (166) | | 351,725 | | | Out-of-scope for IFRS 9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Out-of-scope for IFRS 9 | | | Trading assets | 139,484 |
| 18,888 |
| 16,991 |
| 1,871 |
| — |
| 177,234 |
| — |
| 177,234 |
| Trading assets | 135,059 | | 15,240 | | 22,964 | | 2,181 | | 0 | | 175,444 | | 0 | | 175,444 | | | Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss | 6,079 |
| 2,163 |
| 6,683 |
| 9 |
| — |
| 14,934 |
| — |
| 14,934 |
| Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss | 4,655 | | 1,391 | | 5,584 | | 139 | | 0 | | 11,769 | | 0 | | 11,769 | | | Derivatives | 169,121 |
| 31,225 |
| 6,813 |
| 625 |
| 41 |
| 207,825 |
| — |
| 207,825 |
| Derivatives | 187,636 | | 42,642 | | 11,894 | | 821 | | 2 | | 242,995 | | 0 | | 242,995 | | | | Total gross carrying amount on balance sheet | 1,694,864 |
| 361,024 |
| 295,622 |
| 22,267 |
| 13,500 |
| 2,387,277 |
| (8,777 | ) | 2,378,500 |
| Total gross carrying amount on balance sheet | 1,783,286 | | 388,474 | | 300,774 | | 25,591 | | 13,847 | | 2,511,972 | | (9,032) | | 2,502,940 | | | Percentage of total credit quality | 71% |
| 15.1% |
| 12.4% |
| 0.9% |
| 0.6% |
| 100% |
|
|
|
|
| Percentage of total credit quality | 70.9% | 15.5% | 12.0% | 1.0% | 0.6% | 100% | | | Loan and other credit-related commitments | 373,302 |
| 137,076 |
| 75,478 |
| 5,233 |
| 919 |
| 592,008 |
| (325 | ) | 591,683 |
| Loan and other credit-related commitments | 369,424 | | 146,988 | | 77,499 | | 5,338 | | 780 | | 600,029 | | (329) | | 599,700 | | | | Financial guarantees | 9,716 |
| 7,400 |
| 5,505 |
| 597 |
| 300 |
| 23,518 |
| (93 | ) | 23,425 |
| Financial guarantees | 7,441 | | 6,033 | | 5,539 | | 1,011 | | 190 | | 20,214 | | (48) | | 20,166 | | | In-scope: Irrevocable loan commitments and financial guarantees | 383,018 |
| 144,476 |
| 80,983 |
| 5,830 |
| 1,219 |
| 615,526 |
| (418 | ) | 615,108 |
| In-scope: Irrevocable loan commitments and financial guarantees | 376,865 | | 153,021 | | 83,038 | | 6,349 | | 970 | | 620,243 | | (377) | | 619,866 | | Loan and other credit-related commitments2 | 188,258 |
| — |
| — |
| — |
| — |
| 188,258 |
| — |
| 188,258 |
| | | Loan and other credit-related commitments | | Loan and other credit-related commitments | 66,148 | | 69,890 | | 58,754 | | 2,605 | | 182 | | 197,579 | | 0 | | 197,579 | | | Performance and other guarantees | 26,679 |
| 25,743 |
| 16,790 |
| 1,869 |
| 403 |
| 71,484 |
| (99 | ) | 71,385 |
| Performance and other guarantees | 30,099 | | 23,335 | | 20,062 | | 2,057 | | 380 | | 75,933 | | (132) | | 75,801 | | | Out-of-scope: Revocable loan commitments and non-financial guarantees | 214,937 |
| 25,743 |
| 16,790 |
| 1,869 |
| 403 |
| 259,742 |
| (99 | ) | 259,643 |
| Out-of-scope: Revocable loan commitments and non-financial guarantees | 96,247 | | 93,225 | | 78,816 | | 4,662 | | 562 | | 273,512 | | (132) | | 273,380 | |
| | 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 | In 2018, revocable loan and other commitments, which are out of scope of IFRS 9, are presented within the ‘Strong’ classification. |
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.
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 | Allowance for ECL | Net | | | Strong | Good | Satisfactory | Sub-
standard | Credit impaired | Total | | Footnotes | $m | $m | $m | $m | $m | $m | $m | $m | | Loans and advances to customers at amortised cost | | 506,231 | | 233,320 | | 256,584 | | 36,970 | | 19,372 | | 1,052,477 | | (14,490) | | 1,037,987 | | | – stage 1 | | 499,836 | | 199,138 | | 165,507 | | 5,439 | | 0 | | 869,920 | | (1,974) | | 867,946 | | | – stage 2 | | 6,395 | | 34,182 | | 91,077 | | 31,531 | | 0 | | 163,185 | | (4,965) | | 158,220 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 19,095 | | 19,095 | | (7,439) | | 11,656 | | | – POCI | | 0 | | 0 | | 0 | | 0 | | 277 | | 277 | | (112) | | 165 | | | Loans and advances to banks at amortised cost | | 71,318 | | 5,496 | | 3,568 | | 1,276 | | 0 | | 81,658 | | (42) | | 81,616 | | | – stage 1 | | 71,126 | | 5,098 | | 3,357 | | 73 | | 0 | | 79,654 | | (33) | | 79,621 | | | – stage 2 | | 192 | | 398 | | 211 | | 1,203 | | 0 | | 2,004 | | (9) | | 1,995 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | – POCI | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | Other financial assets measured at amortised cost | | 683,231 | | 61,768 | | 26,581 | | 611 | | 217 | | 772,408 | | (175) | | 772,233 | | | – stage 1 | | 682,412 | | 61,218 | | 24,532 | | 54 | | 0 | | 768,216 | | (80) | | 768,136 | | | – stage 2 | | 819 | | 550 | | 2,049 | | 557 | | 0 | | 3,975 | | (44) | | 3,931 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 177 | | 177 | | (42) | | 135 | | | – POCI | | 0 | | 0 | | 0 | | 0 | | 40 | | 40 | | (9) | | 31 | | | Loan and other credit-related commitments | | 400,911 | | 157,339 | | 90,784 | | 9,668 | | 1,081 | | 659,783 | | (734) | | 659,049 | | | – stage 1 | | 396,028 | | 143,600 | | 63,592 | | 1,265 | | 0 | | 604,485 | | (290) | | 604,195 | | | – stage 2 | | 4,883 | | 13,739 | | 27,192 | | 8,403 | | 0 | | 54,217 | | (365) | | 53,852 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 1,080 | | 1,080 | | (78) | | 1,002 | | | – POCI | | 0 | | 0 | | 0 | | 0 | | 1 | | 1 | | (1) | | 0 | | | Financial guarantees | | 6,356 | | 5,194 | | 5,317 | | 1,247 | | 270 | | 18,384 | | (125) | | 18,259 | | | – stage 1 | | 6,286 | | 4,431 | | 3,163 | | 210 | | 0 | | 14,090 | | (37) | | 14,053 | | | – stage 2 | | 70 | | 763 | | 2,154 | | 1,037 | | 0 | | 4,024 | | (62) | | 3,962 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 269 | | 269 | | (26) | | 243 | | | – POCI | | 0 | | 0 | | 0 | | 0 | | 1 | | 1 | | 0 | | 1 | | | At 31 Dec 2020 | | 1,668,047 | | 463,117 | | 382,834 | | 49,772 | | 20,940 | | 2,584,710 | | (15,566) | | 2,569,144 | | | Debt instruments at FVOCI | 1 | | | | | | | | | | – stage 1 | | 367,542 | | 12,585 | | 10,066 | | 0 | | 0 | | 390,193 | | (88) | | 390,105 | | | – stage 2 | | 143 | | 93 | | 343 | | 825 | | 0 | | 1,404 | | (20) | | 1,384 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 257 | | 257 | | (23) | | 234 | | | – POCI | | 0 | | 0 | | 0 | | 0 | | 49 | | 49 | | (10) | | 39 | | | At 31 Dec 2020 | | 367,685 | | 12,678 | | 10,409 | | 825 | | 306 | | 391,903 | | (141) | | 391,762 | |
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. | | | | | | | | | | | | | | | | | | | | 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 | Allowance for ECL |
| Net |
| | | | Strong |
| Good |
| Satisfactory |
| Sub-
standard |
| Credit impaired |
| Total |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Loans and advances to customers at amortised cost | | 524,889 |
| 258,402 |
| 228,485 |
| 20,007 |
| 13,692 |
| 1,045,475 |
| (8,732 | ) | 1,036,743 |
| | – stage 1 | | 523,092 |
| 242,631 |
| 181,056 |
| 4,804 |
| — |
| 951,583 |
| (1,297 | ) | 950,286 |
| | – stage 2 | | 1,797 |
| 15,771 |
| 47,429 |
| 15,185 |
| — |
| 80,182 |
| (2,284 | ) | 77,898 |
| | – stage 3 | | — |
| — |
| — |
| — |
| 13,378 |
| 13,378 |
| (5,052 | ) | 8,326 |
| | – POCI | | — |
| — |
| — |
| 18 |
| 314 |
| 332 |
| (99 | ) | 233 |
| | Loans and advances to banks at amortised cost | | 60,636 |
| 5,329 |
| 1,859 |
| 1,395 |
| — |
| 69,219 |
| (16 | ) | 69,203 |
| | – stage 1 | | 60,548 |
| 5,312 |
| 1,797 |
| 112 |
| — |
| 67,769 |
| (14 | ) | 67,755 |
| | – stage 2 | | 88 |
| 17 |
| 62 |
| 1,283 |
| — |
| 1,450 |
| (2 | ) | 1,448 |
| | – stage 3 | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | – POCI | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | Other financial assets measured at amortised cost | | 537,253 |
| 54,505 |
| 22,766 |
| 503 |
| 152 |
| 615,179 |
| (118 | ) | 615,061 |
| | – stage 1 | | 536,942 |
| 54,058 |
| 21,921 |
| 279 |
| — |
| 613,200 |
| (38 | ) | 613,162 |
| | – stage 2 | | 311 |
| 447 |
| 845 |
| 224 |
| — |
| 1,827 |
| (38 | ) | 1,789 |
| | – stage 3 | | — |
| — |
| — |
| — |
| 151 |
| 151 |
| (42 | ) | 109 |
| | – POCI | | — |
| — |
| — |
| — |
| 1 |
| 1 |
| — |
| 1 |
| | Loan and other credit-related commitments | | 369,424 |
| 146,988 |
| 77,499 |
| 5,338 |
| 780 |
| 600,029 |
| (329 | ) | 599,700 |
| | – stage 1 | | 368,711 |
| 141,322 |
| 66,283 |
| 1,315 |
| — |
| 577,631 |
| (137 | ) | 577,494 |
| | – stage 2 | | 713 |
| 5,666 |
| 11,216 |
| 4,023 |
| — |
| 21,618 |
| (133 | ) | 21,485 |
| | – stage 3 | | — |
| — |
| — |
| — |
| 771 |
| 771 |
| (59 | ) | 712 |
| | – POCI | | — |
| — |
| — |
| — |
| 9 |
| 9 |
| — |
| 9 |
| | Financial guarantees | | 7,441 |
| 6,033 |
| 5,539 |
| 1,011 |
| 190 |
| 20,214 |
| (48 | ) | 20,166 |
| | – stage 1 | | 7,400 |
| 5,746 |
| 4,200 |
| 338 |
| — |
| 17,684 |
| (16 | ) | 17,668 |
| | – stage 2 | | 41 |
| 287 |
| 1,339 |
| 673 |
| — |
| 2,340 |
| (22 | ) | 2,318 |
| | – stage 3 | | — |
| — |
| — |
| — |
| 186 |
| 186 |
| (10 | ) | 176 |
| | – POCI | | — |
| — |
| — |
| — |
| 4 |
| 4 |
| — |
| 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 | | 333,072 |
| 10,941 |
| 6,902 |
| — |
| — |
| 350,915 |
| (39 | ) | 350,876 |
| | – stage 2 | | 86 |
| 25 |
| 320 |
| 544 |
| — |
| 975 |
| (127 | ) | 848 |
| | – stage 3 | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | – POCI | | — |
| — |
| — |
| — |
| 1 |
| 1 |
| — |
| 1 |
| | At 31 Dec 2019 | | 333,158 |
| 10,966 |
| 7,222 |
| 544 |
| 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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation (continued) | | (Audited) | | | Gross carrying/notional amount | | | | | Strong | Good | Satisfactory | Sub-standard | Credit impaired | Total | Allowance for ECL | Net | | Footnotes | $m | $m | $m | $m | $m | $m | $m | $m | | Loans and advances to customers at amortised cost | | 524,889 | | 258,402 | | 228,485 | | 20,007 | | 13,692 | | 1,045,475 | | (8,732) | | 1,036,743 | | | – stage 1 | | 523,092 | | 242,631 | | 181,056 | | 4,804 | | 0 | | 951,583 | | (1,297) | | 950,286 | | | – stage 2 | | 1,797 | | 15,771 | | 47,429 | | 15,185 | | 0 | | 80,182 | | (2,284) | | 77,898 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 13,378 | | 13,378 | | (5,052) | | 8,326 | | | – POCI | | 0 | | 0 | | 0 | | 18 | | 314 | | 332 | | (99) | | 233 | | | Loans and advances to banks at amortised cost | | 60,636 | | 5,329 | | 1,859 | | 1,395 | | 0 | | 69,219 | | (16) | | 69,203 | | | – stage 1 | | 60,548 | | 5,312 | | 1,797 | | 112 | | 0 | | 67,769 | | (14) | | 67,755 | | | – stage 2 | | 88 | | 17 | | 62 | | 1,283 | | 0 | | 1,450 | | (2) | | 1,448 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | – POCI | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | Other financial assets measured at amortised cost | | 537,253 | | 54,505 | | 22,766 | | 503 | | 152 | | 615,179 | | (118) | | 615,061 | | | – stage 1 | | 536,942 | | 54,058 | | 21,921 | | 279 | | 0 | | 613,200 | | (38) | | 613,162 | | | – stage 2 | | 311 | | 447 | | 845 | | 224 | | 0 | | 1,827 | | (38) | | 1,789 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 151 | | 151 | | (42) | | 109 | | | – POCI | | 0 | | 0 | | 0 | | 0 | | 1 | | 1 | | 0 | | 1 | | | Loan and other credit-related commitments | | 369,424 | | 146,988 | | 77,499 | | 5,338 | | 780 | | 600,029 | | (329) | | 599,700 | | | – stage 1 | | 368,711 | | 141,322 | | 66,283 | | 1,315 | | 0 | | 577,631 | | (137) | | 577,494 | | | – stage 2 | | 713 | | 5,666 | | 11,216 | | 4,023 | | 0 | | 21,618 | | (133) | | 21,485 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 771 | | 771 | | (59) | | 712 | | | – POCI | | 0 | | 0 | | 0 | | 0 | | 9 | | 9 | | 0 | | 9 | | | Financial guarantees | | 7,441 | | 6,033 | | 5,539 | | 1,011 | | 190 | | 20,214 | | (48) | | 20,166 | | | – stage 1 | | 7,400 | | 5,746 | | 4,200 | | 338 | | 0 | | 17,684 | | (16) | | 17,668 | | | – stage 2 | | 41 | | 287 | | 1,339 | | 673 | | 0 | | 2,340 | | (22) | | 2,318 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 186 | | 186 | | (10) | | 176 | | | – POCI | | 0 | | 0 | | 0 | | 0 | | 4 | | 4 | | 0 | | 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 | | 333,072 | | 10,941 | | 6,902 | | 0 | | 0 | | 350,915 | | (39) | | 350,876 | | | – stage 2 | | 86 | | 25 | | 320 | | 544 | | 0 | | 975 | | (127) | | 848 | | | – stage 3 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | – POCI | | 0 | | 0 | | 0 | | 0 | | 1 | | 1 | | 0 | | 1 | | | At 31 Dec 2019 | | 333,158 | | 10,966 | | 7,222 | | 544 | | 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. | | | | | | | | | | | | | | | | | | | Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation2 (continued) | | (Audited) | | | | Gross carrying/notional amount | | | | | | Strong |
| Good |
| Satisfactory |
| Sub-standard |
| Credit impaired |
| Total |
| Allowance for ECL |
| Net |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Loans and advances to customers at amortised cost | | 485,451 |
| 244,199 |
| 230,357 |
| 16,993 |
| 13,321 |
| 990,321 |
| (8,625 | ) | 981,696 |
| | – stage 1 | | 483,170 |
| 232,004 |
| 187,773 |
| 5,446 |
| — |
| 908,393 |
| (1,276 | ) | 907,117 |
| | – stage 2 | | 2,281 |
| 12,195 |
| 42,584 |
| 11,521 |
| — |
| 68,581 |
| (2,108 | ) | 66,473 |
| | – stage 3 | | — |
| — |
| — |
| — |
| 13,023 |
| 13,023 |
| (5,047 | ) | 7,976 |
| | – POCI | | — |
| — |
| — |
| 26 |
| 298 |
| 324 |
| (194 | ) | 130 |
| | Loans and advances to banks at amortised cost | | 60,249 |
| 7,371 |
| 4,549 |
| 11 |
| — |
| 72,180 |
| (13 | ) | 72,167 |
| | – stage 1 | | 60,199 |
| 7,250 |
| 4,413 |
| 11 |
| — |
| 71,873 |
| (11 | ) | 71,862 |
| | – stage 2 | | 50 |
| 121 |
| 136 |
| — |
| — |
| 307 |
| (2 | ) | 305 |
| | – stage 3 | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | – POCI | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | Other financial assets measured at amortised cost | | 514,848 |
| 44,724 |
| 23,019 |
| 200 |
| 126 |
| 582,917 |
| (55 | ) | 582,862 |
| | – stage 1 | | 514,525 |
| 44,339 |
| 22,184 |
| 70 |
| — |
| 581,118 |
| (27 | ) | 581,091 |
| | – stage 2 | | 323 |
| 385 |
| 835 |
| 130 |
| — |
| 1,673 |
| (6 | ) | 1,667 |
| | – stage 3 | | — |
| — |
| — |
| — |
| 126 |
| 126 |
| (22 | ) | 104 |
| | – POCI | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | Loan and other credit-related commitments | | 373,302 |
| 137,076 |
| 75,478 |
| 5,233 |
| 919 |
| 592,008 |
| (325 | ) | 591,683 |
| | – stage 1 | | 372,529 |
| 131,278 |
| 62,452 |
| 973 |
| — |
| 567,232 |
| (143 | ) | 567,089 |
| | – stage 2 | | 773 |
| 5,798 |
| 13,026 |
| 4,260 |
| — |
| 23,857 |
| (139 | ) | 23,718 |
| | – stage 3 | | — |
| — |
| — |
| — |
| 912 |
| 912 |
| (43 | ) | 869 |
| | – POCI | | — |
| — |
| — |
| — |
| 7 |
| 7 |
| — |
| 7 |
| | Financial guarantees | | 9,716 |
| 7,400 |
| 5,505 |
| 597 |
| 300 |
| 23,518 |
| (93 | ) | 23,425 |
| | – stage 1 | | 9,582 |
| 6,863 |
| 4,231 |
| 158 |
| — |
| 20,834 |
| (19 | ) | 20,815 |
| | – stage 2 | | 134 |
| 537 |
| 1,274 |
| 439 |
| — |
| 2,384 |
| (29 | ) | 2,355 |
| | – stage 3 | | — |
| — |
| — |
| — |
| 297 |
| 297 |
| (45 | ) | 252 |
| | – POCI | | — |
| — |
| — |
| — |
| 3 |
| 3 |
| — |
| 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 | | 319,623 |
| 12,358 |
| 6,856 |
| 2,218 |
| — |
| 341,055 |
| (33 | ) | 341,022 |
| | – stage 2 | | 9 |
| 96 |
| 354 |
| 340 |
| — |
| 799 |
| (50 | ) | 749 |
| | – stage 3 | | — |
| — |
| — |
| — |
| 8 |
| 8 |
| (1 | ) | 7 |
| | – POCI | | — |
| — |
| — |
| — |
| 4 |
| 4 |
| — |
| 4 |
| | At 31 Dec 2018 | | 319,632 |
| 12,454 |
| 7,210 |
| 2,558 |
| 12 |
| 341,866 |
| (84 | ) | 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 122. |
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. Mandatory and general offer loan modifications that are not borrower-specific, for example market-wide customer relief programmes, have not been classified as renegotiated loans. For details on customer relief schemes see page 184. A summary of our current policies and practices for renegotiated loans and forbearance is set out in ‘Credit risk management’ on page 120.161.
| | | | | | | | | | | | | | | | | | | Renegotiated loans and advances to customers at amortised cost by stage allocation | | Stage 1 | Stage 2 | Stage 3 | POCI | Total | | $m | $m | $m | $m | $m | | Gross carrying amount | | | | | | | Personal | — | | — | | 2,429 | | — | | 2,429 | | | – first lien residential mortgages | — | | — | | 1,692 | | — | | 1,692 | | | – other personal lending | — | | — | | 737 | | — | | 737 | | | Wholesale | 328 | | 989 | | 3,929 | | 239 | | 5,485 | | | – corporate and commercial | 324 | | 972 | | 3,903 | | 239 | | 5,438 | | | – non-bank financial institutions | 4 | | 17 | | 26 | | — | | 47 | | | At 31 Dec 2020 | 328 | | 989 | | 6,358 | | 239 | | 7,914 | | | Allowance for ECL | | | | | | | Personal | — | | — | | (452) | | — | | (452) | | | – first lien residential mortgages | — | | — | | (152) | | — | | (152) | | | – other personal lending | — | | — | | (300) | | — | | (300) | | | Wholesale | (10) | | (36) | | (1,276) | | (86) | | (1,408) | | | – corporate and commercial | (10) | | (36) | | (1,263) | | (86) | | (1,395) | | | – non-bank financial institutions | — | | — | | (13) | | — | | (13) | | | At 31 Dec 2020 | (10) | | (36) | | (1,728) | | (86) | | (1,860) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross carrying amount | | | | | | | Personal | — | | — | | 2,207 | | — | | 2,207 | | | – first lien residential mortgages | — | | — | | 1,558 | | — | | 1,558 | | | – other personal lending | — | | — | | 649 | | — | | 649 | | | Wholesale | 1,168 | | 1,179 | | 3,353 | | 310 | | 6,010 | | | – corporate and commercial | 1,168 | | 1,179 | | 3,290 | | 310 | | 5,947 | | | – non-bank financial institutions | — | | — | | 63 | | — | | 63 | | | At 31 Dec 2019 | 1,168 | | 1,179 | | 5,560 | | 310 | | 8,217 | | | Allowance for ECL | | | | | | | Personal | — | | — | | (397) | | — | | (397) | | | – first lien residential mortgages | — | | — | | (181) | | — | | (181) | | | – other personal lending | — | | — | | (216) | | — | | (216) | | | Wholesale | (13) | | (55) | | (1,349) | | (86) | | (1,503) | | | – corporate and commercial | (13) | | (55) | | (1,316) | | (86) | | (1,470) | | | – non-bank financial institutions | — | | — | | (33) | | — | | (33) | | | At 31 Dec 2019 | (13) | | (55) | | (1,746) | | (86) | | (1,900) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Renegotiated loans and advances to customers by geographical region | | | | | | | | Of which: | | Europe | Asia | MENA | North America | Latin
America | Total | UK | Hong Kong | | $m | $m | $m | $m | $m | $m | $m | $m | | At 31 Dec 2020 | 4,274 | | 745 | | 1,279 | | 1,349 | | 267 | | 7,914 | | 3,483 | | 220 | | | At 31 Dec 2019 | 4,182 | | 838 | | 1,805 | | 1,185 | | 207 | | 8,217 | | 3,438 | | 277 | |
Customer relief programmes In response to the Covid-19 outbreak, governments and regulators around the world have introduced a number of support measures for both personal and wholesale customers in market-wide schemes. The following table presents the number of personal accounts/wholesale customers and the associated drawn loan values of customers under these schemes and HSBC-specific measures for major markets at 31 December 2020. In relation to personal lending, the majority of relief measures, including payment holidays, relate to existing lending, while in wholesale lending the relief measures comprise payment holidays, refinancing of existing facilities and new lending under government-backed schemes.
At 31 December 2020, the gross carrying value of loans to personal customers under relief was $5.5bn (30 June 2020: $26.3bn). This comprised $4.7bn in relation to mortgages (30 June 2020: $21.1bn) and $0.9bn in relation to other personal lending (30 June 2020: $5.2bn). The decrease in personal customer relief during the second half of the year was driven by customers exiting relief measures. The gross carrying value of loans to wholesale customers under relief was $35.3bn (30 June 2020: $51.8bn). We continue to monitor the recoverability of loans granted under customer relief programmes, including loans to a small number of customers that were subsequently found to be ineligible for such relief. The ongoing performance of such loans remains an area of uncertainty at 31 December 2020.
| | | | | | | | | | | | | | | | | | | | | | Personal lending | | Extant at 31 December 2020 | | UK | Hong
Kong | US | Other major markets1,2,3 | Total | | Market-wide schemes | | | | | | | | Number of accounts in mortgage customer relief | 000s | 6 | — | | — | | 5 | 11 | | | Drawn loan value of accounts in mortgage customer relief | $m | 1,412 | — | | — | | 908 | 2,320 | | | Number of accounts in other personal lending customer relief | 000s | 15 | — | | — | | 28 | 43 | | | Drawn loan value of accounts in other personal lending customer relief | $m | 140 | — | | — | | 386 | 526 | | | HSBC-specific measures | | | | | | | | Number of accounts in mortgage customer relief | 000s | — | | 3 | 2 | 3 | 8 | | | Drawn loan value of accounts in mortgage customer relief | $m | 7 | | 1,124 | 864 | 360 | 2,355 | | | Number of accounts in other personal lending customer relief | 000s | — | | 1 | 6 | 18 | 25 | | | Drawn loan value of accounts in other personal lending customer relief | $m | — | | 75 | 67 | 182 | 324 | | | Total personal lending to major markets under market-wide schemes and HSBC-specific measures | | | | | | | | Number of accounts in mortgage customer relief | 000s | 6 | | 3 | | 2 | | 8 | | 19 | | | Drawn loan value of accounts in mortgage customer relief | $m | 1,419 | | 1,124 | | 864 | | 1,268 | | 4,675 | | | Number of accounts in other personal lending customer relief | 000s | 15 | | 1 | | 6 | | 46 | | 68 | | | Drawn loan value of accounts in other personal lending customer relief | $m | 140 | | 75 | | 67 | | 568 | | 850 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Market-wide schemes and HSBC-specific measures – mortgage relief as a proportion of total mortgages | % | 0.9 | | 1.2 | | 4.7 | | 1.6 | | 1.4 | | | Market-wide schemes and HSBC-specific measures – other personal lending relief as a proportion of total other personal lending loans and advances | % | 0.7 | | 0.2 | | 3.1 | | 1.1 | | 0.8 | | | | | | | | | | Wholesale lending | | Extant at 31 December 2020 | | UK | Hong
Kong | US | Other major markets1 | Total | | Market-wide schemes | | | | | | | | Number of customers under market-wide measures | 000s | 226 | 3 | 3 | 5 | 237 | | | Drawn loan value of customers under market-wide schemes | $m | 13,517 | 10,622 | 1,043 | 6,017 | 31,199 | | | HSBC-specific schemes | | | | | | | | Number of customers under HSBC-specific measures | 000s | — | — | — | | — | — | | | Drawn loan value of customers under HSBC-specific measures | $m | 349 | — | 924 | 2,869 | 4,142 | | | Total wholesale lending to major markets under market-wide schemes and HSBC-specific measures | | | | | | | | Number of customers | 000s | 226 | | 3 | | 3 | | 5 | | 237 | | | Drawn loan value | $m | 13,866 | | 10,622 | | 1,967 | | 8,886 | | 35,341 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Market-wide schemes and HSBC-specific measures as a proportion of total wholesale lending loans and advances | % | 9.6 | | 5.9 | | 5.2 | | 4.6 | | 6.4 | |
1 Other major markets include Australia, Canada, mainland China, Egypt, France, Germany, India, Indonesia, Malaysia, Mexico, Singapore, Switzerland, Taiwan and UAE. 2 In Malaysia, personal lending customers are granted an automatic moratorium programme for all eligible retail customers. At 31 December 2020, the number of accounts under this moratorium was 26,000 with an associated drawn balance of $452m. 3 In Mexico, there were 16,000 personal lending accounts under customer relief with an associated drawn balance of $233m.
ReportThe initial granting of customer relief does not automatically trigger a migration to stage 2 or 3. However, information provided by payment deferrals is considered in the context of other reasonable and supportable information. This forms part of the Directors | Riskoverall assessment for whether there has been a significant increase in credit risk and credit impairment to identify loans for which lifetime ECL is appropriate. An extension in payment deferral does not automatically result in a migration to stage 2 or stage 3. The key accounting and credit risk judgement to ascertain whether a significant increase in credit risk has occurred is whether the economic effects of the Covid-19 outbreak on the customer are likely to be temporary over the lifetime of the loan, and whether they indicate that a concession is being made in respect of financial difficulty that would be consistent with stage 3.
Market-wide schemes The following narrative provides further details on the major government and regulatory schemes offered in the UK, Hong Kong and the US. UK personal lending Mortgages Customer relief granted on UK mortgages primarily consists of payment holidays or partial payment deferrals. Relief is offered for an initial period of three months and may be extended for a further three months in certain circumstances. No payment is required from the customer during this period (though
| | | | | | | | | | | | | Renegotiated loans and advances to customers at amortised cost by stage allocation | | | Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| | Gross carrying amount | | | | | | | Personal | — |
| — |
| 2,207 |
| — |
| 2,207 |
| | – first lien residential mortgages | — |
| — |
| 1,558 |
| — |
| 1,558 |
| | – other personal lending | — |
| — |
| 649 |
| — |
| 649 |
| | Wholesale | 1,168 |
| 1,179 |
| 3,353 |
| 310 |
| 6,010 |
| | – corporate and commercial | 1,168 |
| 1,179 |
| 3,290 |
| 310 |
| 5,947 |
| | – non-bank financial institutions | — |
| — |
| 63 |
| — |
| 63 |
| | At 31 Dec 2019 | 1,168 |
| 1,179 |
| 5,560 |
| 310 |
| 8,217 |
| | Allowance for ECL | | | | | | | Personal | — |
| — |
| (397 | ) | — |
| (397 | ) | | – first lien residential mortgages | — |
| — |
| (181 | ) | — |
| (181 | ) | | – other personal lending | — |
| — |
| (216 | ) | — |
| (216 | ) | | Wholesale | (13 | ) | (55 | ) | (1,349 | ) | (86 | ) | (1,503 | ) | | – corporate and commercial | (13 | ) | (55 | ) | (1,316 | ) | (86 | ) | (1,470 | ) | | – non-bank financial institutions | — |
| — |
| (33 | ) | — |
| (33 | ) | | At 31 Dec 2019 | (13 | ) | (55 | ) | (1,746 | ) | (86 | ) | (1,900 | ) |
| | | | | | | | | | | | | Gross carrying amount | | | | | | | Personal | — |
| — |
| 2,248 |
| — |
| 2,248 |
| | – first lien residential mortgages | — |
| — |
| 1,641 |
| — |
| 1,641 |
| | – other personal lending | — |
| — |
| 607 |
| — |
| 607 |
| | Wholesale | 1,532 |
| 1,193 |
| 3,845 |
| 270 |
| 6,840 |
| | – corporate and commercial | 1,517 |
| 1,193 |
| 3,789 |
| 270 |
| 6,769 |
| | – non-bank financial institutions | 15 |
| — |
| 56 |
| — |
| 71 |
| | At 31 Dec 2018 | 1,532 |
| 1,193 |
| 6,093 |
| 270 |
| 9,088 |
| | Allowance for ECL |
|
|
|
|
|
|
|
|
|
| | Personal | — |
| — |
| (381 | ) | — |
| (381 | ) | | – first lien residential mortgages | — |
| — |
| (186 | ) | — |
| (186 | ) | | – other personal lending | — |
| — |
| (195 | ) | — |
| (195 | ) | | Wholesale | (29 | ) | (49 | ) | (1,461 | ) | (146 | ) | (1,685 | ) | | – corporate and commercial | (29 | ) | (49 | ) | (1,438 | ) | (146 | ) | (1,662 | ) | | – non-bank financial institutions | — |
| — |
| (23 | ) | — |
| (23 | ) | | At 31 Dec 2018 | (29 | ) | (49 | ) | (1,842 | ) | (146 | ) | (2,066 | ) |
Customer relief is granted for an initial period of three months and may be extended for a further three months. The maximum relief value is up to the due payment amount during the period. UK wholesale lending The primary relief granted under government schemes consists of the Bounce Back Loan Scheme, Coronavirus Business Interruption Loan Scheme and Coronavirus Large Business Interruption Loan Scheme. Since their initial launch, the application deadline for these schemes has been extended until 31 March 2021. The key features of these schemes are as follows: •The Bounce Back Loan Scheme provides small and medium-sized enterprises (‘SME’) with loans of up to £50,000 for a maximum period of six years. Interest is charged at 2.5% and the government pays the fees and interest for the first 12 months. No capital repayment is required by the customer for the first 12 months of the scheme. A government guarantee of 100% is provided under the scheme. Before their first payment is due customers can extend the term of the loan to 10 years, move to interest-only repayments for a period of six months (customers can use this option up to three times) and/or pause repayments for a period of six months (customers can use this option once). | | | | | | | | | | | | | | | | | | | Renegotiated loans and advances to customers by geographical region | | | | | | | | | Of which: | | | Europe |
| Asia |
| MENA |
| North America |
| Latin
America |
| Total |
| UK |
| Hong Kong |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | At 31 Dec 2019 | 4,182 |
| 838 |
| 1,805 |
| 1,185 |
| 207 |
| 8,217 |
| 3,438 |
| 277 |
| | At 31 Dec 2018 | 4,533 |
| 864 |
| 1,973 |
| 1,352 |
| 366 |
| 9,088 |
| 3,609 |
| 305 |
|
•The Coronavirus Business Interruption Loan Scheme provides SMEs that have a turnover of less than £45m with loans of up to £5m for a maximum period of six years. Interest is charged between 3.49% and 3.99% above the UK base rate and no capital repayment is required by the customer for the first 12 months of the scheme. A government guarantee of up to 80% is provided under the scheme. •The Coronavirus Large Business Interruption Loan Scheme provides medium and large-sized enterprises that have a turnover in excess of £45m with loans of up to £200m. The interest rate and tenor of the loan are negotiated on commercial terms. A government guarantee of 80% is provided under the scheme. Hong Kong wholesale lending Pre-approved Principal Payment Holiday Scheme for Corporate Customers The above scheme enables eligible customers to apply for a payment holiday of six months (or 90 days for trade finance) with no change to the existing interest rate charge. On 2 September 2020, the Hong Kong Monetary Authority announced that this scheme has been extended for a further six months to April 2021. US wholesale lending Paycheck Protection Program The CARES Act created the Paycheck Protection Program (‘PPP’) loan guarantee programme to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the Small Business Administration, whose guarantee is backed by the full faith and credit of the US. PPP-covered loans also afford customers forgiveness up to the principal amount of the PPP-covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The Small Business Administration will reimburse PPP lenders for any amount of a PPP-covered loan that is forgiven, and PPP lenders will not be liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Lenders receive pre-determined fees for processing and servicing PPP loans. HSBC-specific measures UK wholesale lending HSBC is offering capital repayment holidays to CMB customers. Relief is offered on a preferred term of six months. However, some are granted for three months with the option of an extension. Interest continues to be paid as usual. Hong Kong personal lending Mortgages Customer relief granted on Hong Kong mortgages consists of deferred principal repayment of up to 12 months. This relief programme is available to existing HSBC mortgage loan customers who have a good repayment record during the past six months. US total personal lending Customer relief granted on US mortgages and other personal lending consists of deferrals of up to 12 months and up to nine months respectively.
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 20192020 to 31 December 20192020 closing gross carrying/nominal amounts and the associated allowance for ECL. At 31 December 2019,2020, wholesale lending for loans and advances to banks and customers of $680bn increased$673bn decreased by $12.3bn$7.1bn since
31 December 2018.2019. This included favourable foreign exchange movements of $6.1bn. $14.9bn. Excluding foreign exchange movements, the total wholesale lending growthdecrease was driven by an $8.7bn increasea $25.3bn decline in corporate and commercial balances and a $8bn decline in balances from non-bank financial institutions and $0.3bn in corporate and commercial balances. These wereinstitutions. This was partly offset by a decrease$11.2bn increase in loans and advances to banks of $2.8bn. banks. The primary driversdriver of the increasedecline in corporate and commercial balances from non-bank financial institutions were $3.4bnwas $14.5bn in Asia, notably $7.1 bn in Hong Kong, $2.8bn in Australia and $1.5bn in Singapore. Balances in Europe declined $4.3bn, notably $2.8bn$2.4bn in France,Germany and $4.9bn$2bn in Asia. the UK, partly offset by growth of $1.8bn in France. In North America and Latin America, balances declined $6.8bn and $1.3bn respectively, while they grew in MENA by $1.6bn. Loan commitments and financial guarantees grew $45bn since 31 December 2019 to $441bn at 31 December 2020, including a $8.6bn increase related to unsettled reverse repurchase agreements. This also included favourable foreign exchange movements of $15.4bn. The allowance for ECL attributable to wholesale loans and advances to banks and customers ofincreased $4.2bn to $9.8bn at 31 December 2020 from $5.6bn at 31 December 2019 decreased from $5.7bn2019. This included adverse foreign exchange movements of $0.1bn. Excluding foreign exchange movements, the total increase in the wholesale ECL allowance for loans and advances to customers and banks was driven by a $4bn rise in corporate and commercial balances. The primary driver of this increase in corporate and commercial allowance for ECL was $1.5bn in Europe, notably $1.3bn in the UK. There was an increase of $1.3bn in Asia, notably $0.7bn in Singapore and $0.4bn in Hong Kong. Additionally, there were increases of $0.5bn, $0.4bn and $0.4bn in MENA, North America and Latin America, respectively. The allowance for ECL attributable to loan commitments and financial guarantees of $0.8bn at 31 December 2018.
2020 increased from $0.4bn at 31 December 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total wholesale lending for loans and advances to banks and customers by stage distribution | | Gross carrying amount | Allowance for ECL | | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | | Corporate and commercial | 387,563 | | 126,287 | | 12,961 | | 277 | | 527,088 | | (1,101) | | (2,444) | | (5,837) | | (112) | | (9,494) | | | – agriculture, forestry and fishing | 6,087 | | 1,026 | | 331 | | 1 | | 7,445 | | (12) | | (45) | | (149) | | (1) | | (207) | | | – mining and quarrying | 7,429 | | 3,705 | | 797 | | 16 | | 11,947 | | (33) | | (112) | | (209) | | (11) | | (365) | | | – manufacturing | 68,179 | | 23,564 | | 2,076 | | 87 | | 93,906 | | (201) | | (442) | | (905) | | (40) | | (1,588) | | | – electricity, gas, steam and air-conditioning supply | 14,240 | | 1,907 | | 53 | | — | | 16,200 | | (25) | | (40) | | (8) | | — | | (73) | | | – water supply, sewerage, waste management and remediation | 2,874 | | 253 | | 47 | | — | | 3,174 | | (8) | | (7) | | (22) | | — | | (37) | | | – construction | 9,368 | | 4,455 | | 773 | | 4 | | 14,600 | | (42) | | (118) | | (426) | | (4) | | (590) | | | – wholesale and retail trade, repair of motor vehicles and motorcycles | 65,937 | | 21,518 | | 3,196 | | 12 | | 90,663 | | (174) | | (326) | | (2,029) | | (3) | | (2,532) | | | – transportation and storage | 19,510 | | 9,143 | | 769 | | 11 | | 29,433 | | (90) | | (163) | | (240) | | — | | (493) | | | – accommodation and food | 10,616 | | 14,918 | | 536 | | 1 | | 26,071 | | (76) | | (285) | | (129) | | (1) | | (491) | | | – publishing, audiovisual and broadcasting | 17,019 | | 2,796 | | 131 | | 33 | | 19,979 | | (45) | | (85) | | (39) | | (20) | | (189) | | | – real estate | 102,933 | | 22,186 | | 1,907 | | 1 | | 127,027 | | (169) | | (260) | | (738) | | — | | (1,167) | | | – professional, scientific and technical activities | 17,162 | | 6,379 | | 498 | | 33 | | 24,072 | | (56) | | (149) | | (185) | | (8) | | (398) | | | – administrative and support services | 17,085 | | 8,361 | | 907 | | 70 | | 26,423 | | (66) | | (153) | | (291) | | (24) | | (534) | | | – public administration and defence, compulsory social security | 1,530 | | 475 | | 3 | | — | | 2,008 | | (2) | | (11) | | (1) | | — | | (14) | | | – education | 1,402 | | 691 | | 29 | | — | | 2,122 | | (12) | | (20) | | (9) | | — | | (41) | | | – health and care | 4,049 | | 1,192 | | 261 | | 8 | | 5,510 | | (21) | | (45) | | (120) | | — | | (186) | | | – arts, entertainment and recreation | 1,631 | | 1,570 | | 236 | | — | | 3,437 | | (9) | | (62) | | (87) | | — | | (158) | | | – other services | 11,380 | | 1,320 | | 410 | | — | | 13,110 | | (54) | | (105) | | (249) | | — | | (408) | | | – activities of households | 660 | | 142 | | — | | — | | 802 | | — | | (1) | | — | | — | | (1) | | | – extra-territorial organisations and bodies activities | 10 | | — | | — | | — | | 10 | | — | | — | | — | | — | | — | | | – government | 7,866 | | 671 | | 1 | | — | | 8,538 | | (6) | | (2) | | (1) | | — | | (9) | | | – asset-backed securities | 596 | | 15 | | — | | — | | 611 | | — | | (13) | | — | | — | | (13) | | | Non-bank financial institutions | 52,223 | | 11,834 | | 523 | | — | | 64,580 | | (46) | | (119) | | (100) | | — | | (265) | | | Loans and advances to banks | 79,654 | | 2,004 | | — | | — | | 81,658 | | (33) | | (9) | | — | | — | | (42) | | | At 31 Dec 2020 | 519,440 | | 140,125 | | 13,484 | | 277 | | 673,326 | | (1,180) | | (2,572) | | (5,937) | | (112) | | (9,801) | | | By geography | | | | | | | | | | | | Europe | 156,474 | | 51,708 | | 6,531 | | 109 | | 214,822 | | (589) | | (1,400) | | (2,097) | | (51) | | (4,137) | | | – of which: UK | 104,534 | | 40,454 | | 4,712 | | 53 | | 149,753 | | (536) | | (1,234) | | (1,320) | | (33) | | (3,123) | | | Asia | 279,985 | | 58,159 | | 3,443 | | 106 | | 341,693 | | (337) | | (383) | | (2,040) | | (43) | | (2,803) | | | – of which: Hong Kong | 156,817 | | 39,257 | | 1,637 | | 45 | | 197,756 | | (162) | | (260) | | (751) | | (23) | | (1,196) | | | MENA | 24,753 | | 7,893 | | 1,952 | | 30 | | 34,628 | | (91) | | (216) | | (1,205) | | (12) | | (1,524) | | | North America | 46,852 | | 18,220 | | 913 | | — | | 65,985 | | (77) | | (302) | | (281) | | — | | (660) | | | Latin America | 11,376 | | 4,145 | | 645 | | 32 | | 16,198 | | (86) | | (271) | | (314) | | (6) | | (677) | | | At 31 Dec 2020 | 519,440 | | 140,125 | | 13,484 | | 277 | | 673,326 | | (1,180) | | (2,572) | | (5,937) | | (112) | | (9,801) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1 | | Nominal amount | Allowance for ECL | | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | | Corporate and commercial | 262,598 | | 49,008 | | 1,140 | | 2 | | 312,748 | | (271) | | (392) | | (100) | | (1) | | (764) | | | Financial | 120,768 | | 7,526 | | 55 | | — | | 128,349 | | (17) | | (33) | | (4) | | — | | (54) | | | At 31 Dec 2020 | 383,366 | | 56,534 | | 1,195 | | 2 | | 441,097 | | (288) | | (425) | | (104) | | (1) | | (818) | | | By geography | | | | | | | | | | | | Europe | 210,141 | | 28,705 | | 851 | | 2 | | 239,699 | | (152) | | (208) | | (83) | | (1) | | (444) | | | – of which: UK | 81,153 | | 17,048 | | 480 | | 1 | | 98,682 | | (138) | | (176) | | (72) | | (1) | | (387) | | | Asia | 63,586 | | 6,311 | | 20 | | — | | 69,917 | | (73) | | (43) | | (6) | | — | | (122) | | | – of which: Hong Kong | 26,502 | | 3,639 | | 4 | | — | | 30,145 | | (24) | | (22) | | (1) | | — | | (47) | | | MENA | 4,975 | | 1,609 | | 85 | | — | | 6,669 | | (14) | | (44) | | (2) | | — | | (60) | | | North America | 102,399 | | 19,360 | | 198 | | — | | 121,957 | | (39) | | (124) | | (7) | | — | | (170) | | | Latin America | 2,265 | | 549 | | 41 | | — | | 2,855 | | (10) | | (6) | | (6) | | — | | (22) | | | At 31 Dec 2020 | 383,366 | | 56,534 | | 1,195 | | 2 | | 441,097 | | (288) | | (425) | | (104) | | (1) | | (818) | |
1 Included in loans and other credit-related commitments and financial guarantees is $62bn relating to unsettled reverse repurchase agreements, which once drawn are classified as ‘Reverse repurchase agreements – non-trading’.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total wholesale lending for loans and advances to banks and customers by stage distribution | | Gross carrying amount | | Allowance for ECL | | | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | | Corporate and commercial | 472,253 | | 59,599 | | 8,315 | | 332 | | 540,499 | | (672) | | (920) | | (3,747) | | (99) | | (5,438) | | | – agriculture, forestry and fishing | 5,416 | | 1,000 | | 278 | | 2 | | 6,696 | | (13) | | (29) | | (139) | | (1) | | (182) | | | – mining and quarrying | 9,923 | | 4,189 | | 311 | | 12 | | 14,435 | | (22) | | (70) | | (122) | | (12) | | (226) | | | – manufacturing | 88,138 | | 14,525 | | 1,581 | | 136 | | 104,380 | | (143) | | (211) | | (806) | | (50) | | (1,210) | | | – electricity, gas, steam and air-conditioning supply | 13,479 | | 1,386 | | 175 | | — | | 15,040 | | (14) | | (41) | | (25) | | — | | (80) | | | – water supply, sewerage, waste management and remediation | 2,963 | | 508 | | 30 | | — | | 3,501 | | (6) | | (4) | | (18) | | — | | (28) | | | – construction | 10,520 | | 3,883 | | 852 | | 32 | | 15,287 | | (16) | | (49) | | (467) | | (32) | | (564) | | | – wholesale and retail trade, repair of motor vehicles and motorcycles | 83,151 | | 9,897 | | 1,625 | | 8 | | 94,681 | | (111) | | (137) | | (934) | | (2) | | (1,184) | | | – transportation and storage | 22,604 | | 2,359 | | 588 | | 29 | | 25,580 | | (42) | | (37) | | (158) | | — | | (237) | | | – accommodation and food | 20,109 | | 4,284 | | 262 | | 1 | | 24,656 | | (37) | | (46) | | (62) | | (1) | | (146) | | | – publishing, audiovisual and broadcasting | 18,103 | | 1,706 | | 141 | | 21 | | 19,971 | | (30) | | (23) | | (33) | | (1) | | (87) | | | – real estate | 122,972 | | 6,450 | | 1,329 | | 1 | | 130,752 | | (108) | | (97) | | (475) | | — | | (680) | | | – professional, scientific and technical activities | 21,085 | | 2,687 | | 350 | | — | | 24,122 | | (31) | | (33) | | (145) | | — | | (209) | | | – administrative and support services | 21,370 | | 3,817 | | 438 | | 89 | | 25,714 | | (33) | | (58) | | (179) | | — | | (270) | | | – public administration and defence, compulsory social security | 1,889 | | 488 | | — | | — | | 2,377 | | (1) | | (7) | | — | | — | | (8) | | | – education | 1,700 | | 184 | | 16 | | — | | 1,900 | | (7) | | (5) | | (6) | | — | | (18) | | | – health and care | 3,543 | | 811 | | 111 | | — | | 4,465 | | (9) | | (20) | | (28) | | — | | (57) | | | – arts, entertainment and recreation | 2,537 | | 257 | | 30 | | — | | 2,824 | | (6) | | (8) | | (11) | | — | | (25) | | | – other services | 13,143 | | 941 | | 191 | | 1 | | 14,276 | | (35) | | (31) | | (133) | | — | | (199) | | | – activities of households | 725 | | 66 | | — | | — | | 791 | | — | | — | | — | | — | | — | | | – extra-territorial organisations and bodies activities | 2 | | — | | — | | — | | 2 | | — | | — | | — | | — | | — | | | – government | 8,159 | | 147 | | 7 | | — | | 8,313 | | (6) | | (2) | | (6) | | — | | (14) | | | – asset-backed securities | 722 | | 14 | | — | | — | | 736 | | (2) | | (12) | | — | | — | | (14) | | | Non-bank financial institutions | 65,661 | | 4,832 | | 212 | | — | | 70,705 | | (42) | | (28) | | (90) | | — | | (160) | | | Loans and advances to banks | 67,769 | | 1,450 | | — | | — | | 69,219 | | (14) | | (2) | | — | | — | | (16) | | | At 31 Dec 2019 | 605,683 | | 65,881 | | 8,527 | | 332 | | 680,423 | | (728) | | (950) | | (3,837) | | (99) | | (5,614) | | | By geography | | | | | | | | | | | | Europe | 190,528 | | 20,276 | | 4,671 | | 129 | | 215,604 | | (318) | | (458) | | (1,578) | | (45) | | (2,399) | | | – of which: UK | 131,007 | | 16,253 | | 3,343 | | 79 | | 150,682 | | (252) | | (385) | | (989) | | (32) | | (1,658) | | | Asia | 308,305 | | 32,287 | | 1,419 | | 148 | | 342,159 | | (228) | | (253) | | (986) | | (38) | | (1,505) | | | – of which: Hong Kong | 182,501 | | 23,735 | | 673 | | 48 | | 206,957 | | (118) | | (172) | | (475) | | (28) | | (793) | | | MENA | 25,470 | | 3,314 | | 1,686 | | 18 | | 30,488 | | (55) | | (85) | | (946) | | (12) | | (1,098) | | | North America | 64,501 | | 7,495 | | 458 | | — | | 72,454 | | (45) | | (96) | | (141) | | — | | (282) | | | Latin America | 16,879 | | 2,509 | | 293 | | 37 | | 19,718 | | (82) | | (58) | | (186) | | (4) | | (330) | | | At 31 Dec 2019 | 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 | | Nominal amount | Allowance for ECL | | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | | Corporate and commercial | 271,678 | | 20,880 | | 757 | | 13 | | 293,328 | | (132) | | (151) | | (68) | | — | | (351) | | | Financial | 101,345 | | 1,447 | | 5 | | — | | 102,797 | | (7) | | (2) | | (1) | | — | | (10) | | | At 31 Dec 2019 | 373,023 | | 22,327 | | 762 | | 13 | | 396,125 | | (139) | | (153) | | (69) | | — | | (361) | | | By geography | | | | | | | | | | | | Europe | 190,604 | | 7,852 | | 645 | | 13 | | 199,114 | | (60) | | (43) | | (56) | | — | | (159) | | | – of which: UK | 76,013 | | 4,193 | | 494 | | 9 | | 80,709 | | (48) | | (32) | | (31) | | — | | (111) | | | Asia | 60,759 | | 3,762 | | 8 | | — | | 64,529 | | (43) | | (33) | | (4) | | — | | (80) | | | – of which: Hong Kong | 27,047 | | 2,114 | | 5 | | — | | 29,166 | | (14) | | (23) | | (2) | | — | | (39) | | | MENA | 5,690 | | 621 | | 31 | | — | | 6,342 | | (12) | | (13) | | (4) | | — | | (29) | | | North America | 112,812 | | 9,933 | | 77 | | — | | 122,822 | | (22) | | (62) | | (5) | | — | | (89) | | | Latin America | 3,158 | | 159 | | 1 | | — | | 3,318 | | (2) | | (2) | | — | | — | | (4) | | | At 31 Dec 2019 | 373,023 | | 22,327 | | 762 | | 13 | | 396,125 | | (139) | | (153) | | (69) | | — | | (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’.
| | | | | | | | | | | | | | | | | | | | | | | Total wholesale lending for loans and advances to banks and customers by stage distribution |
| Gross carrying amount | Allowance for ECL |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
|
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Corporate and commercial | 472,253 |
| 59,599 |
| 8,315 |
| 332 |
| 540,499 |
| (672 | ) | (920 | ) | (3,747 | ) | (99 | ) | (5,438 | ) | – agriculture, forestry and fishing
| 5,416 |
| 1,000 |
| 278 |
| 2 |
| 6,696 |
| (13 | ) | (29 | ) | (139 | ) | (1 | ) | (182 | ) | – mining and quarrying
| 9,923 |
| 4,189 |
| 311 |
| 12 |
| 14,435 |
| (22 | ) | (70 | ) | (122 | ) | (12 | ) | (226 | ) | | – manufacturing | 88,138 |
| 14,525 |
| 1,581 |
| 136 |
| 104,380 |
| (143 | ) | (211 | ) | (806 | ) | (50 | ) | (1,210 | ) | – electricity, gas, steam and air-conditioning supply
| 13,479 |
| 1,386 |
| 175 |
| — |
| 15,040 |
| (14 | ) | (41 | ) | (25 | ) | — |
| (80 | ) | – water supply, sewerage, waste management and remediation
| 2,963 |
| 508 |
| 30 |
| — |
| 3,501 |
| (6 | ) | (4 | ) | (18 | ) | — |
| (28 | ) | | – construction | 10,520 |
| 3,883 |
| 852 |
| 32 |
| 15,287 |
| (16 | ) | (49 | ) | (467 | ) | (32 | ) | (564 | ) | – wholesale and retail trade, repair of motor vehicles and motorcycles
| 83,151 |
| 9,897 |
| 1,625 |
| 8 |
| 94,681 |
| (111 | ) | (137 | ) | (934 | ) | (2 | ) | (1,184 | ) | – transportation and storage
| 22,604 |
| 2,359 |
| 588 |
| 29 |
| 25,580 |
| (42 | ) | (37 | ) | (158 | ) | — |
| (237 | ) | – accommodation and food
| 20,109 |
| 4,284 |
| 262 |
| 1 |
| 24,656 |
| (37 | ) | (46 | ) | (62 | ) | (1 | ) | (146 | ) | – publishing, audiovisual and broadcasting
| 18,103 |
| 1,706 |
| 141 |
| 21 |
| 19,971 |
| (30 | ) | (23 | ) | (33 | ) | (1 | ) | (87 | ) | | – real estate | 122,972 |
| 6,450 |
| 1,329 |
| 1 |
| 130,752 |
| (108 | ) | (97 | ) | (475 | ) | — |
| (680 | ) | – professional, scientific and technical activities
| 21,085 |
| 2,687 |
| 350 |
| — |
| 24,122 |
| (31 | ) | (33 | ) | (145 | ) | — |
| (209 | ) | – administrative and support services
| 21,370 |
| 3,817 |
| 438 |
| 89 |
| 25,714 |
| (33 | ) | (58 | ) | (179 | ) | — |
| (270 | ) | – public administration and defence, compulsory social security
| 1,889 |
| 488 |
| — |
| — |
| 2,377 |
| (1 | ) | (7 | ) | — |
| — |
| (8 | ) | | – education | 1,700 |
| 184 |
| 16 |
| — |
| 1,900 |
| (7 | ) | (5 | ) | (6 | ) | — |
| (18 | ) | | – health and care | 3,543 |
| 811 |
| 111 |
| — |
| 4,465 |
| (9 | ) | (20 | ) | (28 | ) | — |
| (57 | ) | – arts, entertainment and recreation
| 2,537 |
| 257 |
| 30 |
| — |
| 2,824 |
| (6 | ) | (8 | ) | (11 | ) | — |
| (25 | ) | | – other services | 13,143 |
| 941 |
| 191 |
| 1 |
| 14,276 |
| (35 | ) | (31 | ) | (133 | ) | — |
| (199 | ) | – activities of households
| 725 |
| 66 |
| — |
| — |
| 791 |
| — |
| — |
| — |
| — |
| — |
| – extra-territorial organisations and bodies activities
| 2 |
| — |
| — |
| — |
| 2 |
| — |
| — |
| — |
| — |
| — |
| | – government | 8,159 |
| 147 |
| 7 |
| — |
| 8,313 |
| (6 | ) | (2 | ) | (6 | ) | — |
| (14 | ) | | – asset-backed securities | 722 |
| 14 |
| — |
| — |
| 736 |
| (2 | ) | (12 | ) | — |
| — |
| (14 | ) | | Non-bank financial institutions | 65,661 |
| 4,832 |
| 212 |
| — |
| 70,705 |
| (42 | ) | (28 | ) | (90 | ) | — |
| (160 | ) | | Loans and advances to banks | 67,769 |
| 1,450 |
| — |
| — |
| 69,219 |
| (14 | ) | (2 | ) | — |
| — |
| (16 | ) | | At 31 Dec 2019 | 605,683 |
| 65,881 |
| 8,527 |
| 332 |
| 680,423 |
| (728 | ) | (950 | ) | (3,837 | ) | (99 | ) | (5,614 | ) | | By geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Europe | 190,528 |
| 20,276 |
| 4,671 |
| 129 |
| 215,604 |
| (318 | ) | (458 | ) | (1,578 | ) | (45 | ) | (2,399 | ) | | 131,007 |
| 16,253 |
| 3,343 |
| 79 |
| 150,682 |
| (252 | ) | (385 | ) | (989 | ) | (32 | ) | (1,658 | ) | | Asia | 308,305 |
| 32,287 |
| 1,419 |
| 148 |
| 342,159 |
| (228 | ) | (253 | ) | (986 | ) | (38 | ) | (1,505 | ) | | 182,501 |
| 23,735 |
| 673 |
| 48 |
| 206,957 |
| (118 | ) | (172 | ) | (475 | ) | (28 | ) | (793 | ) | | MENA | 25,470 |
| 3,314 |
| 1,686 |
| 18 |
| 30,488 |
| (55 | ) | (85 | ) | (946 | ) | (12 | ) | (1,098 | ) | | North America | 64,501 |
| 7,495 |
| 458 |
| — |
| 72,454 |
| (45 | ) | (96 | ) | (141 | ) | — |
| (282 | ) | | Latin America | 16,879 |
| 2,509 |
| 293 |
| 37 |
| 19,718 |
| (82 | ) | (58 | ) | (186 | ) | (4 | ) | (330 | ) | | At 31 Dec 2019 | 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 | | | Nominal amount | Allowance for ECL | | | Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Corporate and commercial | 271,678 |
| 20,880 |
| 757 |
| 13 |
| 293,328 |
| (132 | ) | (151 | ) | (68 | ) | — |
| (351 | ) | | Financial | 101,345 |
| 1,447 |
| 5 |
| — |
| 102,797 |
| (7 | ) | (2 | ) | (1 | ) | — |
| (10 | ) | | At 31 Dec 2019 | 373,023 |
| 22,327 |
| 762 |
| 13 |
| 396,125 |
| (139 | ) | (153 | ) | (69 | ) | — |
| (361 | ) | | By geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Europe | 190,604 |
| 7,852 |
| 645 |
| 13 |
| 199,114 |
| (60 | ) | (43 | ) | (56 | ) | — |
| (159 | ) | | 76,013 |
| 4,193 |
| 494 |
| 9 |
| 80,709 |
| (48 | ) | (32 | ) | (31 | ) | — |
| (111 | ) | | Asia | 60,759 |
| 3,762 |
| 8 |
| — |
| 64,529 |
| (43 | ) | (33 | ) | (4 | ) | — |
| (80 | ) | | 27,047 |
| 2,114 |
| 5 |
| — |
| 29,166 |
| (14 | ) | (23 | ) | (2 | ) | — |
| (39 | ) | | MENA | 5,690 |
| 621 |
| 31 |
| — |
| 6,342 |
| (12 | ) | (13 | ) | (4 | ) | — |
| (29 | ) | | North America | 112,812 |
| 9,933 |
| 77 |
| — |
| 122,822 |
| (22 | ) | (62 | ) | (5 | ) | — |
| (89 | ) | | Latin America | 3,158 |
| 159 |
| 1 |
| — |
| 3,318 |
| (2 | ) | (2 | ) | — |
| — |
| (4 | ) | | At 31 Dec 2019 | 373,023 |
| 22,327 |
| 762 |
| 13 |
| 396,125 |
| (139 | ) | (153 | ) | (69 | ) | — |
| (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’. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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) | | Non-credit impaired | Credit impaired | | | Stage 1 | Stage 2 | Stage 3 | POCI | Total | | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | | At 1 Jan 2020 | 925,652 | | (867) | | 88,169 | | (1,103) | | 9,289 | | (3,906) | | 345 | | (99) | | 1,023,455 | | (5,975) | | | Transfers of financial instruments | (113,217) | | (493) | | 103,413 | | 770 | | 9,804 | | (277) | | — | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net remeasurement of ECL arising from transfer of stage | — | | 476 | | — | | (603) | | — | | (742) | | — | | — | | — | | (869) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net new and further lending/ repayments | 10,451 | | (437) | | (2,910) | | 141 | | (3,350) | | 583 | | (48) | | (1) | | 4,143 | | 286 | | | Change in risk parameters – credit quality | — | | (261) | | — | | (2,349) | | — | | (3,120) | | — | | (39) | | — | | (5,769) | | | Changes to models used for ECL calculation | — | | 137 | | — | | 303 | | — | | — | | — | | — | | — | | 440 | | | Assets written off | — | | — | | — | | — | | (1,537) | | 1,537 | | (30) | | 30 | | (1,567) | | 1,567 | | | Credit-related modifications that resulted in derecognition | — | | — | | — | | — | | (23) | | 7 | | — | | — | | (23) | | 7 | | | Foreign exchange and other | 18,219 | | (20) | | 7,990 | | (157) | | 479 | | (123) | | 12 | | (4) | | 26,700 | | (304) | | | | | | | | | | | | | | | | | | | | | | | | | At 31 Dec 2020 | 841,105 | | (1,465) | | 196,662 | | (2,998) | | 14,662 | | (6,041) | | 279 | | (113) | | 1,052,708 | | (10,617) | | | ECL income statement change for the period | | (85) | | | (2,508) | | | (3,279) | | | (40) | | | (5,912) | | | Recoveries | | | | | | | | | | 46 | | | Others | | | | | | | | | | (59) | | | Total ECL income statement change for the period | | | | | | | | | | (5,925) | |
Report of the Directors | Risk
| | | | | | | | | | | | | | | | | | | | | | Total wholesale lending for loans and advances to banks and customers by stage distribution1 | | | Gross carrying amount | | Allowance for ECL | | | | Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Corporate and commercial | 474,700 |
| 51,341 |
| 8,212 |
| 324 |
| 534,577 |
| (698 | ) | (812 | ) | (3,848 | ) | (194 | ) | (5,552 | ) | – agriculture, forestry and fishing
| 4,791 |
| 1,672 |
| 236 |
| 2 |
| 6,701 |
| (15 | ) | (34 | ) | (117 | ) | (1 | ) | (167 | ) | – mining and quarrying
| 11,892 |
| 1,919 |
| 359 |
| 2 |
| 14,172 |
| (29 | ) | (51 | ) | (94 | ) | (2 | ) | (176 | ) | | – manufacturing | 92,193 |
| 11,817 |
| 1,569 |
| 125 |
| 105,704 |
| (132 | ) | (156 | ) | (791 | ) | (83 | ) | (1,162 | ) | – electricity, gas, steam and air-conditioning supply
| 14,431 |
| 1,513 |
| 40 |
| 60 |
| 16,044 |
| (18 | ) | (60 | ) | (15 | ) | (54 | ) | (147 | ) | – water supply, sewerage, waste management and remediation
| 3,212 |
| 287 |
| 24 |
| — |
| 3,523 |
| (5 | ) | (2 | ) | (17 | ) | — |
| (24 | ) | | – construction | 12,577 |
| 1,458 |
| 1,168 |
| 51 |
| 15,254 |
| (27 | ) | (41 | ) | (524 | ) | (44 | ) | (636 | ) | – wholesale and retail trade, repair of motor vehicles and motorcycles
| 83,192 |
| 12,784 |
| 1,652 |
| 37 |
| 97,665 |
| (115 | ) | (128 | ) | (968 | ) | (7 | ) | (1,218 | ) | – transportation and storage
| 23,195 |
| 1,957 |
| 351 |
| 38 |
| 25,541 |
| (37 | ) | (46 | ) | (82 | ) | (1 | ) | (166 | ) | – accommodation and food
| 18,370 |
| 2,904 |
| 270 |
| 3 |
| 21,547 |
| (43 | ) | (41 | ) | (83 | ) | (1 | ) | (168 | ) | – publishing, audiovisual and broadcasting
| 19,529 |
| 1,453 |
| 189 |
| 1 |
| 21,172 |
| (42 | ) | (16 | ) | (84 | ) | — |
| (142 | ) | | – real estate | 115,615 |
| 6,502 |
| 1,115 |
| 1 |
| 123,233 |
| (97 | ) | (80 | ) | (594 | ) | — |
| (771 | ) | – professional, scientific and technical activities
| 19,567 |
| 2,656 |
| 350 |
| — |
| 22,573 |
| (29 | ) | (29 | ) | (113 | ) | — |
| (171 | ) | – administrative and support services
| 22,553 |
| 2,110 |
| 437 |
| 3 |
| 25,103 |
| (41 | ) | (48 | ) | (166 | ) | (1 | ) | (256 | ) | – public administration and defence, compulsory social security
| 1,425 |
| 30 |
| 8 |
| — |
| 1,463 |
| (1 | ) | (3 | ) | (5 | ) | — |
| (9 | ) | | – education | 1,585 |
| 230 |
| 14 |
| — |
| 1,829 |
| (11 | ) | (7 | ) | (6 | ) | — |
| (24 | ) | | – health and care | 3,558 |
| 609 |
| 141 |
| — |
| 4,308 |
| (10 | ) | (16 | ) | (33 | ) | — |
| (59 | ) | – arts, entertainment and recreation
| 4,244 |
| 758 |
| 39 |
| — |
| 5,041 |
| (9 | ) | (9 | ) | (15 | ) | — |
| (33 | ) | | – other services | 13,234 |
| 436 |
| 242 |
| 1 |
| 13,913 |
| (31 | ) | (31 | ) | (140 | ) | — |
| (202 | ) | – activities of households
| 770 |
| 59 |
| 1 |
| — |
| 830 |
| — |
| — |
| — |
| — |
| — |
| – extra-territorial organisations and bodies activities
| 49 |
| 3 |
| 7 |
| — |
| 59 |
| — |
| — |
| (1 | ) | — |
| (1 | ) | | – government | 7,905 |
| 168 |
| — |
| — |
| 8,073 |
| (6 | ) | (1 | ) | — |
| — |
| (7 | ) | | – asset-backed securities | 813 |
| 16 |
| — |
| — |
| 829 |
| — |
| (13 | ) | — |
| — |
| (13 | ) | | Non-bank financial institutions | 59,012 |
| 2,165 |
| 230 |
| — |
| 61,407 |
| (44 | ) | (31 | ) | (51 | ) | — |
| (126 | ) | | Loans and advances to banks | 71,873 |
| 307 |
| — |
| — |
| 72,180 |
| (11 | ) | (2 | ) | — |
| — |
| (13 | ) | At 31 Dec 2018
| 605,585 |
| 53,813 |
| 8,442 |
| 324 |
| 668,164 |
| (753 | ) | (845 | ) | (3,899 | ) | (194 | ) | (5,691 | ) | | By geography | | | | | |
|
|
|
|
|
|
|
| | | Europe | 183,592 |
| 25,868 |
| 4,233 |
| 150 |
| 213,843 |
| (366 | ) | (529 | ) | (1,598 | ) | (102 | ) | (2,595 | ) | | – of which: UK | 126,209 |
| 22,165 |
| 2,928 |
| 8 |
| 151,310 |
| (313 | ) | (471 | ) | (998 | ) | — |
| (1,782 | ) | | Asia | 314,591 |
| 17,729 |
| 1,736 |
| 92 |
| 334,148 |
| (179 | ) | (121 | ) | (1,040 | ) | (36 | ) | (1,376 | ) | | – of which: Hong Kong | 194,186 |
| 8,425 |
| 729 |
| 69 |
| 203,409 |
| (99 | ) | (54 | ) | (413 | ) | (35 | ) | (601 | ) | | MENA | 25,684 |
| 2,974 |
| 1,769 |
| 53 |
| 30,480 |
| (73 | ) | (77 | ) | (974 | ) | (46 | ) | (1,170 | ) | | North America | 62,631 |
| 6,928 |
| 314 |
| — |
| 69,873 |
| (37 | ) | (107 | ) | (101 | ) | — |
| (245 | ) | | Latin America | 19,087 |
| 314 |
| 390 |
| 29 |
| 19,820 |
| (98 | ) | (11 | ) | (186 | ) | (10 | ) | (305 | ) | 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 122. |
| | | | | | | | | | | | | | | | | | | | | | Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1,2 | | | Nominal amount | Allowance for ECL | | | Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Corporate and commercial | 264,550 |
| 23,026 |
| 791 |
| 10 |
| 288,377 |
| (142 | ) | (161 | ) | (87 | ) | — |
| (390 | ) | | Financial | 117,413 |
| 1,452 |
| 6 |
| — |
| 118,871 |
| (7 | ) | (6 | ) | (1 | ) | — |
| (14 | ) | At 31 Dec 2018
| 381,963 |
| 24,478 |
| 797 |
| 10 |
| 407,248 |
| (149 | ) | (167 | ) | (88 | ) | — |
| (404 | ) | | By geography | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | Europe | 201,024 |
| 11,794 |
| 614 |
| 10 |
| 213,442 |
| (82 | ) | (66 | ) | (53 | ) | — |
| (201 | ) | | – of which: UK | 80,504 |
| 8,446 |
| 442 |
| — |
| 89,392 |
| (69 | ) | (57 | ) | (39 | ) | — |
| (165 | ) | | Asia | 61,206 |
| 3,076 |
| 102 |
| — |
| 64,384 |
| (39 | ) | (16 | ) | (28 | ) | — |
| (83 | ) | | – of which: Hong Kong | 27,022 |
| 1,115 |
| 89 |
| — |
| 28,226 |
| (12 | ) | (2 | ) | (27 | ) | — |
| (41 | ) | | MENA | 5,304 |
| 732 |
| 18 |
| — |
| 6,054 |
| (8 | ) | (10 | ) | (2 | ) | — |
| (20 | ) | | North America | 111,494 |
| 8,850 |
| 62 |
| — |
| 120,406 |
| (17 | ) | (75 | ) | (4 | ) | — |
| (96 | ) | | Latin America | 2,935 |
| 26 |
| 1 |
| — |
| 2,962 |
| (3 | ) | — |
| (1 | ) | — |
| (4 | ) | At 31 Dec 2018
| 381,963 |
| 24,478 |
| 797 |
| 10 |
| 407,248 |
| (149 | ) | (167 | ) | (88 | ) | — |
| (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 122. |
| | | | | | | | | | | | | | | | | | | | | | 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) | | | Non-credit impaired | Credit impaired | | | | Stage 1 | Stage 2 | Stage 3 | POCI | Total | | | Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | At 1 Jan 2019 | 922,192 |
| (902 | ) | 78,266 |
| (1,012 | ) | 9,239 |
| (3,987 | ) | 334 |
| (194 | ) | 1,010,031 |
| (6,095 | ) | | Transfers of financial instruments | (31,493 | ) | (169 | ) | 28,418 |
| 276 |
| 3,075 |
| (107 | ) | — |
| — |
| — |
| — |
| | Net remeasurement of ECL arising from transfer of stage | — |
| 223 |
| — |
| (268 | ) | — |
| (38 | ) | — |
| — |
| — |
| (83 | ) | | Net new and further lending/ repayments | 27,918 |
| (134 | ) | (20,121 | ) | 167 |
| (1,552 | ) | 369 |
| 137 |
| (1 | ) | 6,382 |
| 401 |
| | Change in risk parameters – credit quality | — |
| 102 |
| — |
| (193 | ) | — |
| (1,514 | ) | — |
| (51 | ) | — |
| (1,656 | ) | | Changes to models used for ECL calculation | — |
| — |
| — |
| (56 | ) | — |
| — |
| — |
| — |
| — |
| (56 | ) | | Assets written off | — |
| — |
| — |
| — |
| (1,312 | ) | 1,312 |
| (140 | ) | 140 |
| (1,452 | ) | 1,452 |
| | Credit-related modifications that resulted in derecognition | — |
| — |
| — |
| — |
| (268 | ) | 125 |
| — |
| — |
| (268 | ) | 125 |
| | Foreign exchange and other | 7,035 |
| 13 |
| 1,606 |
| (17 | ) | 107 |
| (66 | ) | 14 |
| 7 |
| 8,762 |
| (63 | ) | | At 31 Dec 2019 | 925,652 |
| (867 | ) | 88,169 |
| (1,103 | ) | 9,289 |
| (3,906 | ) | 345 |
| (99 | ) | 1,023,455 |
| (5,975 | ) | | ECL income statement change for the period |
| 191 |
|
| (350 | ) |
| (1,183 | ) |
| (52 | ) |
| (1,394 | ) | | Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
| 47 |
| | Others |
| | | | | | | | | (24 | ) | | Total ECL income statement change for the period |
|
|
|
|
|
|
|
|
| (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 $120mincreased $4,642m during the period from $6,095m at 31 December 2018 to $5,975m at 31 December 2019.2019 to $10,617m at 31 December 2020. This decreaseincrease was primarily driven by: •$5,769m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages; •$1,452m869m relating to the net remeasurement impact of stage transfers; and •foreign exchange and other movements of $304m. These were partly offset by: •$1,567m of assets written off;
•$401m440m of changes to models used for ECL calculation; •$286m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further lending/repayments; and •$125m7m of credit-related modifications that resulted in derecognition. 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;
$56m changes to models used for ECL calculation; and
foreign exchange and other movements of $63m.
The ECL charge for the period of $1,394m$5,912m presented in the above table consisted of $1,656m$5,769m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stage and $83m$869m relating to the net remeasurement impact of stage transfers. This wasThese charges were partly offset by $401m relating to underlying net book volume movements and $56m$440m in changes to models used for ECL calculation.calculation and $286m relating to underlying net book volume movements.
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 guarantees | | (Audited) | | Non-credit impaired | Credit impaired | | | Stage 1 | Stage 2 | Stage 3 | POCI | Total | | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | | At 1 Jan 2019 | 922,192 | | (902) | | 78,266 | | (1,012) | | 9,239 | | (3,987) | | 334 | | (194) | | 1,010,031 | | (6,095) | | | Transfers of financial instruments | (31,493) | | (169) | | 28,418 | | 276 | | 3,075 | | (107) | | — | | — | | — | | — | | | Net remeasurement of ECL arising from transfer of stage | — | | 223 | | — | | (268) | | — | | (38) | | — | | — | | — | | (83) | | | Net new and further lending/repayments | 27,918 | | (134) | | (20,121) | | 167 | | (1,552) | | 369 | | 137 | | (1) | | 6,382 | | 401 | | | Changes to risk parameters – credit quality | — | | 102 | | — | | (193) | | — | | (1,514) | | — | | (51) | | — | | (1,656) | | | Changes to models used for ECL calculation | — | | — | | — | | (56) | | — | | — | | — | | — | | — | | (56) | | | Assets written off | — | | — | | — | | — | | (1,312) | | 1,312 | | (140) | | 140 | | (1,452) | | 1,452 | | | Credit-related modifications that resulted in derecognition | — | | — | | — | | — | | (268) | | 125 | | — | | — | | (268) | | 125 | | | Foreign exchange and other | 7,035 | | 13 | | 1,606 | | (17) | | 107 | | (66) | | 14 | | 7 | | 8,762 | | (63) | | | At 31 Dec 2019 | 925,652 | | (867) | | 88,169 | | (1,103) | | 9,289 | | (3,906) | | 345 | | (99) | | 1,023,455 | | (5,975) | | | ECL income statement change for the period | | 191 | | | (350) | | | (1,183) | | | (52) | | | (1,394) | | | Recoveries | | | | | | | | | | 47 | | | Others | | | | | | | | | | (24) | | | Total ECL income statement change for the period | | | | | | | | | | (1,371) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Wholesale lending – distribution of financial instruments to which the impairment requirements of IFRS 9 are applied by credit quality | | Gross carrying/nominal amount | Allowance for ECL | Net | | Strong | Good | Satisfactory | Sub-
standard | Credit impaired | Total | | $m | $m | $m | $m | $m | $m | $m | $m | | By geography | | | | | | | | | | Europe | 53,373 | 55,436 | 81,049 | 18,327 | 6,637 | 214,822 | (4,137) | | 210,685 | | | – of which: UK | 35,050 | 42,476 | 55,106 | 12,357 | 4,764 | 149,753 | (3,123) | | 146,630 | | | Asia | 141,811 | 93,350 | 98,488 | 4,493 | 3,551 | 341,693 | (2,803) | | 338,890 | | | – of which: Hong Kong | 72,088 | 52,601 | 68,826 | 2,558 | 1,683 | 197,756 | (1,196) | | 196,560 | | | MENA | 12,398 | 7,810 | 10,990 | 1,448 | 1,982 | 34,628 | (1,524) | | 33,104 | | | North America | 11,157 | 22,973 | 24,978 | 5,964 | 913 | 65,985 | (660) | | 65,325 | | | Latin America | 989 | 5,355 | 6,127 | 3,049 | 678 | 16,198 | (677) | | 15,521 | | | At 31 Dec 2020 | 219,728 | 184,924 | 221,632 | 33,281 | 13,761 | 673,326 | (9,801) | | 663,525 | | | Percentage of total credit quality | 32.6% | 27.5% | 32.9% | 4.9% | 2.0% | 100.0% | | |
| | | | | | | | | | | | | | | | | | | | | | 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 | | | Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | At 1 Jan 2018 | 897,529 |
| (873 | ) | 84,354 |
| (1,249 | ) | 10,209 |
| (4,410 | ) | 1,042 |
| (242 | ) | 993,134 |
| (6,774 | ) | | Transfers of financial instruments | (4,477 | ) | (274 | ) | 1,535 |
| 386 |
| 2,942 |
| (112 | ) | — |
| — |
| — |
| — |
| | Net remeasurement of ECL arising from transfer of stage | — |
| 262 |
| — |
| (231 | ) | — |
| (92 | ) | — |
| — |
| — |
| (61 | ) | | Net new and further lending/repayments | 74,107 |
| (271 | ) | (13,709 | ) | 342 |
| (2,414 | ) | 406 |
| (587 | ) | 42 |
| 57,397 |
| 519 |
| | Changes to risk parameters – credit quality | — |
| 157 |
| — |
| (301 | ) | — |
| (1,041 | ) | — |
| (51 | ) | — |
| (1,236 | ) | | Assets written off | — |
| — |
| — |
| — |
| (1,182 | ) | 1,172 |
| (1 | ) | 1 |
| (1,183 | ) | 1,173 |
| | Foreign exchange and other | (44,967 | ) | 97 |
| 6,086 |
| 41 |
| (316 | ) | 90 |
| (120 | ) | 56 |
| (39,317 | ) | 284 |
| | At 31 Dec 2018 | 922,192 |
| (902 | ) | 78,266 |
| (1,012 | ) | 9,239 |
| (3,987 | ) | 334 |
| (194 | ) | 1,010,031 |
| (6,095 | ) | | ECL income statement change for the period | | 148 |
| | (190 | ) | | (727 | ) | | (9 | ) | | (778 | ) | | Recoveries | | | | | | | | | | 118 |
| | Others | | | | | | | | | | (69 | ) | | Total ECL income statement change for the period | | | | | | | | | | (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 122. |
| | | | | | | | | | | | | Wholesale lending – distribution of financial instruments to which the impairment requirements of IFRS 9 are applied by credit quality | | | Gross carrying/nominal amount | Allowance for ECL |
| Net |
| | | Strong | Good | Satisfactory | Sub-standard | Credit impaired | Total | | | $m | $m | $m | $m | $m | $m | $m |
| $m |
| | By geography | | | | | | | | | | Europe | 57,340 | 69,427 | 74,143 | 9,895 | 4,799 | 215,604 | (2,399 | ) | 213,205 |
| | of which: UK | 35,838 | 53,046 | 51,355 | 7,023 | 3,420 | 150,682 | (1,658 | ) | 149,024 |
| | Asia | 145,450 | 106,313 | 86,685 | 2,158 | 1,553 | 342,159 | (1,505 | ) | 340,654 |
| | of which: Hong Kong | 82,053 | 67,541 | 55,379 | 1,263 | 721 | 206,957 | (793 | ) | 206,164 |
| | MENA | 12,036 | 6,003 | 9,307 | 1,439 | 1,703 | 30,488 | (1,098 | ) | 29,390 |
| | North America | 12,319 | 31,496 | 24,860 | 3,320 | 459 | 72,454 | (282 | ) | 72,172 |
| | Latin America | 3,919 | 5,455 | 7,713 | 2,304 | 327 | 19,718 | (330 | ) | 19,388 |
| | At 31 Dec 2019 | 231,064 | 218,694 | 202,708 | 19,116 | 8,841 | 680,423 | (5,614 | ) | 674,809 |
| | Percentage of total credit quality | 34.0% | 32.1% | 29.8% | 2.8% | 1.3% | 100.0% | | |
| | | | | | By geography | | | By geography | | | | Europe | 60,145 | 62,098 | 79,466 | 7,752 | 4,382 | 213,843 | (2,595 | ) | 211,248 |
| Europe | 57,340 | 69,427 | 74,143 | 9,895 | 4,799 | 215,604 | (2,399) | | 213,205 | | | of which: UK | 39,840 | 46,396 | 56,974 | 5,164 | 2,936 | 151,310 | (1,782 | ) | 149,528 |
| | | – of which: UK | | – of which: UK | 35,838 | 53,046 | 51,355 | 7,023 | 3,420 | 150,682 | (1,658) | | 149,024 | | | Asia | 143,864 | 100,437 | 86,065 | 1,977 | 1,805 | 334,148 | (1,376 | ) | 332,772 |
| Asia | 145,450 | 106,313 | | 86,685 | | 2,158 | | 1,553 | | 342,159 | | (1,505) | | 340,654 | | | | of which: Hong Kong | 82,854 | 63,564 | 55,357 | 837 | 797 | 203,409 | (601 | ) | 202,808 |
| | | – of which: Hong Kong | | – of which: Hong Kong | 82,053 | 67,541 | | 55,379 | | 1,263 | | 721 | | 206,957 | | (793) | | 206,164 | | | | MENA | 10,393 | 7,905 | 9,173 | 1,186 | 1,823 | 30,480 | (1,170 | ) | 29,310 |
| MENA | 12,036 | 6,003 | | 9,307 | | 1,439 | | 1,703 | | 30,488 | | (1,098) | | 29,390 | | | | North America | 10,952 | 31,278 | 24,708 | 2,621 | 314 | 69,873 | (245 | ) | 69,628 |
| North America | 12,319 | 31,496 | | 24,860 | | 3,320 | | 459 | | 72,454 | | (282) | | 72,172 | | | | Latin America | 3,730 | 6,088 | 8,300 | 1,286 | 416 | 19,820 | (305 | ) | 19,515 |
| Latin America | 3,919 | 5,455 | | 7,713 | | 2,304 | | 327 | | 19,718 | | (330) | | 19,388 | | | | At 31 Dec 2018 | 229,084 | 207,806 | 207,712 | 14,822 | 8,740 | 668,164 | (5,691 | ) | 662,473 |
| | | At 31 Dec 2019 | | At 31 Dec 2019 | 231,064 | 218,694 | | 202,708 | | 19,116 | | 8,841 | | 680,423 | | (5,614) | | 674,809 | | | | Percentage of total credit quality | 34.3% | 31.1% | 2.2% | 1.3% | 100.0% | | Percentage of total credit quality | 34.0% | 32.1% | 29.8% | 2.8% | 1.3% | 100.0% | | |
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 121.
163.
| | Wholesale lending – credit risk profile by obligor grade for loans and advances at amortised cost | | | | Gross carrying amount | Allowance for ECL | | | | 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 | | 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 |
| % | | | % | $m | % | | | Corporate and commercial | | 472,253 |
| 59,599 |
| 8,315 |
| 332 |
| 540,499 |
| (672 | ) | (920 | ) | (3,747 | ) | (99 | ) | (5,438 | ) | 1.0 | | Corporate and commercial | | 387,563 | | 126,287 | | 12,961 | | 277 | | 527,088 | | (1,101) | | (2,444) | | (5,837) | | (112) | | (9,494) | | 1.8 | | | | – CRR 1 | 0.000 to 0.053 |
| 44,234 |
| 18 |
| — |
| — |
| 44,252 |
| (7 | ) | — |
| — |
| — |
| (7 | ) | — | AA- and above | – CRR 1 | 0.000 to 0.053 | 36,047 | | 486 | | — | | — | | 36,533 | | (8) | | (5) | | — | | — | | (13) | | — | | AA- and above | | – CRR 2 | 0.054 to 0.169 |
| 92,861 |
| 1,013 |
| — |
| — |
| 93,874 |
| (20 | ) | (10 | ) | — |
| — |
| (30 | ) | — | A+ to A- | – CRR 2 | 0.054 to 0.169 | 81,298 | | 3,140 | | — | | — | | 84,438 | | (42) | | (36) | | — | | — | | (78) | | 0.1 | | A+ to A- | | – CRR 3 | 0.170 to 0.740 |
| 178,662 |
| 11,808 |
| — |
| — |
| 190,470 |
| (164 | ) | (91 | ) | — |
| — |
| (255 | ) | 0.1 | BBB+ to BBB- | – CRR 3 | 0.170 to 0.740 | 131,540 | | 27,061 | | — | | — | | 158,601 | | (262) | | (197) | | — | | — | | (459) | | 0.3 | | BBB+ to BBB- | | – CRR 4 | 0.741 to 1.927 |
| 105,708 |
| 17,829 |
| — |
| — |
| 123,537 |
| (244 | ) | (151 | ) | — |
| — |
| (395 | ) | 0.3 | BB+ to BB- | – CRR 4 | 0.741 to 1.927 | 91,385 | | 35,376 | | — | | — | | 126,761 | | (390) | | (375) | | — | | — | | (765) | | 0.6 | | BB+ to BB- | | – CRR 5 | 1.928 to 4.914 |
| 46,423 |
| 16,423 |
| — |
| — |
| 62,846 |
| (190 | ) | (218 | ) | — |
| — |
| (408 | ) | 0.6 | BB- to B | – CRR 5 | 1.928 to 4.914 | 42,214 | | 34,585 | | — | | — | | 76,799 | | (330) | | (686) | | — | | — | | (1,016) | | 1.3 | | BB- to B | | – CRR 6 | 4.915 to 8.860 |
| 3,323 |
| 7,592 |
| — |
| 15 |
| 10,930 |
| (33 | ) | (141 | ) | — |
| — |
| (174 | ) | 1.6 | B- | – CRR 6 | 4.915 to 8.860 | 3,523 | | 14,560 | | — | | — | | 18,083 | | (35) | | (476) | | — | | — | | (511) | | 2.8 | | B- | | – CRR 7 | 8.861 to 15.000 |
| 795 |
| 3,067 |
| — |
| 3 |
| 3,865 |
| (11 | ) | (172 | ) | — |
| — |
| (183 | ) | 4.7 | CCC+ | – CRR 7 | 8.861 to 15.000 | 1,111 | | 7,241 | | — | | — | | 8,352 | | (21) | | (322) | | — | | — | | (343) | | 4.1 | | CCC+ | | – CRR 8 | 15.001 to 99.999 |
| 247 |
| 1,849 |
| — |
| — |
| 2,096 |
| (3 | ) | (137 | ) | — |
| — |
| (140 | ) | 6.7 | CCC to C | – CRR 8 | 15.001 to 99.999 | 445 | | 3,838 | | — | | — | | 4,283 | | (13) | | (347) | | — | | — | | (360) | | 8.4 | | CCC to C | | – CRR 9/10 | 100.000 |
| — |
| — |
| 8,315 |
| 314 |
| 8,629 |
| — |
| — |
| (3,747 | ) | (99 | ) | (3,846 | ) | 44.6 | D | – CRR 9/10 | 100.000 | | — | | — | | 12,961 | | 277 | | 13,238 | | — | | — | | (5,837) | | (112) | | (5,949) | | 44.9 | | D | | Non-bank financial institutions | | 65,661 |
| 4,832 |
| 212 |
| — |
| 70,705 |
| (42 | ) | (28 | ) | (90 | ) | — |
| (160 | ) | 0.2 | | Non-bank financial institutions | | 52,223 | | 11,834 | | 523 | | — | | 64,580 | | (46) | | (119) | | (100) | | — | | (265) | | 0.4 | | | | – CRR 1 | 0.000 to 0.053 |
| 16,616 |
| — |
| — |
| — |
| 16,616 |
| (1 | ) | — |
| — |
| — |
| (1 | ) | — | AA- and above | – CRR 1 | 0.000 to 0.053 | 12,234 | | 28 | | — | | — | | 12,262 | | (3) | | — | | — | | — | | (3) | | — | | AA- and above | | – CRR 2 | 0.054 to 0.169 |
| 15,630 |
| 56 |
| — |
| — |
| 15,686 |
| (4 | ) | — |
| — |
| — |
| (4 | ) | — | A+ to A- | – CRR 2 | 0.054 to 0.169 | 15,128 | | 49 | | — | | — | | 15,177 | | (5) | | (1) | | — | | — | | (6) | | — | | A+ to A- | | – CRR 3 | 0.170 to 0.740 |
| 21,562 |
| 1,333 |
| — |
| — |
| 22,895 |
| (12 | ) | (4 | ) | — |
| — |
| (16 | ) | 0.1 | BBB+ to BBB- | – CRR 3 | 0.170 to 0.740 | 16,741 | | 4,086 | | — | | — | | 20,827 | | (12) | | (9) | | — | | — | | (21) | | 0.1 | | BBB+ to BBB- | | – CRR 4 | 0.741 to 1.927 |
| 7,535 |
| 1,169 |
| — |
| — |
| 8,704 |
| (12 | ) | (7 | ) | — |
| — |
| (19 | ) | 0.2 | BB+ to BB- | – CRR 4 | 0.741 to 1.927 | 4,931 | | 3,917 | | — | | — | | 8,848 | | (15) | | (27) | | — | | — | | (42) | | 0.5 | | BB+ to BB- | | – CRR 5 | 1.928 to 4.914 |
| 4,024 |
| 1,738 |
| — |
| — |
| 5,762 |
| (12 | ) | (11 | ) | — |
| — |
| (23 | ) | 0.4 | BB- to B | – CRR 5 | 1.928 to 4.914 | 2,859 | | 2,797 | | — | | — | | 5,656 | | (10) | | (34) | | — | | — | | (44) | | 0.8 | | BB- to B | | – CRR 6 | 4.915 to 8.860 |
| 280 |
| 517 |
| — |
| — |
| 797 |
| (1 | ) | (4 | ) | — |
| — |
| (5 | ) | 0.6 | B- | – CRR 6 | 4.915 to 8.860 | 103 | | 505 | | — | | — | | 608 | | (1) | | (22) | | — | | — | | (23) | | 3.8 | | B- | | – CRR 7 | 8.861 to 15.000 |
| 12 |
| 7 |
| — |
| — |
| 19 |
| — |
| — |
| — |
| — |
| — |
| — | CCC+ | – CRR 7 | 8.861 to 15.000 | 87 | | 329 | | — | | — | | 416 | | — | | (9) | | — | | — | | (9) | | 2.2 | | CCC+ | | – CRR 8 | 15.001 to 99.999 |
| 2 |
| 12 |
| — |
| — |
| 14 |
| — |
| (2 | ) | — |
| — |
| (2 | ) | 14.3 | CCC to C | – CRR 8 | 15.001 to 99.999 | 140 | | 123 | | — | | — | | 263 | | — | | (17) | | — | | — | | (17) | | 6.5 | | CCC to C | | – CRR 9/10 | 100.000 |
| — |
| — |
| 212 |
| — |
| 212 |
| — |
| — |
| (90 | ) | — |
| (90 | ) | 42.5 | D | – CRR 9/10 | 100.000 | | — | | — | | 523 | | — | | 523 | | — | | — | | (100) | | — | | (100) | | 19.1 | | D | | Banks | | 67,769 |
| 1,450 |
| — |
| — |
| 69,219 |
| (14 | ) | (2 | ) | — |
| — |
| (16 | ) | — | | Banks | | 79,654 | | 2,004 | | — | | — | | 81,658 | | (33) | | (9) | | — | | — | | (42) | | 0.1 | | | | – CRR 1 | 0.000 to 0.053 |
| 49,858 |
| 21 |
| — |
| — |
| 49,879 |
| (2 | ) | — |
| — |
| — |
| (2 | ) | — | AA- and above | – CRR 1 | 0.000 to 0.053 | 62,291 | | 46 | | — | | — | | 62,337 | | (10) | | — | | — | | — | | (10) | | — | | AA- and above | | – CRR 2 | 0.054 to 0.169 |
| 10,689 |
| 68 |
| — |
| — |
| 10,757 |
| (7 | ) | — |
| — |
| — |
| (7 | ) | 0.1 | A+ to A- | – CRR 2 | 0.054 to 0.169 | 8,835 | | 146 | | — | | — | | 8,981 | | (7) | | — | | — | | — | | (7) | | 0.1 | | A+ to A- | | – CRR 3 | 0.170 to 0.740 |
| 5,312 |
| 17 |
| — |
| — |
| 5,329 |
| (2 | ) | — |
| — |
| — |
| (2 | ) | — | BBB+ to BBB- | – CRR 3 | 0.170 to 0.740 | 5,098 | | 398 | | — | | — | | 5,496 | | (5) | | (2) | | — | | — | | (7) | | 0.1 | | BBB+ to BBB- | | – CRR 4 | 0.741 to 1.927 |
| 1,725 |
| 31 |
| — |
| — |
| 1,756 |
| (1 | ) | (1 | ) | — |
| — |
| (2 | ) | 0.1 | BB+ to BB- | – CRR 4 | 0.741 to 1.927 | 2,558 | | 168 | | — | | — | | 2,726 | | (4) | | (4) | | — | | — | | (8) | | 0.3 | | BB+ to BB- | | – CRR 5 | 1.928 to 4.914 |
| 71 |
| 32 |
| — |
| — |
| 103 |
| — |
| — |
| — |
| — |
| — |
| — | BB- to B | – CRR 5 | 1.928 to 4.914 | 799 | | 43 | | — | | — | | 842 | | (1) | | (1) | | — | | — | | (2) | | 0.2 | | BB- to B | | – CRR 6 | 4.915 to 8.860 |
| 113 |
| 2 |
| — |
| — |
| 115 |
| (2 | ) | — |
| — |
| — |
| (2 | ) | 1.7 | B- | – CRR 6 | 4.915 to 8.860 | 71 | | 20 | | — | | — | | 91 | | (6) | | — | | — | | — | | (6) | | 6.6 | | B- | | – CRR 7 | 8.861 to 15.000 |
| 1 |
| 1 |
| — |
| — |
| 2 |
| — |
| — |
| — |
| — |
| — |
| — | CCC+ | – CRR 7 | 8.861 to 15.000 | 2 | | 1 | | — | | — | | 3 | | — | | — | | — | | — | | — | | — | | CCC+ | | – CRR 8 | 15.001 to 99.999 |
| — |
| 1,278 |
| — |
| — |
| 1,278 |
| — |
| (1 | ) | — |
| — |
| (1 | ) | 0.1 | CCC to C | – CRR 8 | 15.001 to 99.999 | — | | 1,182 | | — | | — | | 1,182 | | — | | (2) | | — | | — | | (2) | | 0.2 | | CCC to C | | – CRR 9/10 | 100.000 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — | D | – CRR 9/10 | 100.000 | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | D | | At 31 Dec 2019 | | 605,683 |
| 65,881 |
| 8,527 |
| 332 |
| 680,423 |
| (728 | ) | (950 | ) | (3,837 | ) | (99 | ) | (5,614 | ) | 0.8 | | | | At 31 Dec 2020 | | At 31 Dec 2020 | | 519,440 | | 140,125 | | 13,484 | | 277 | | 673,326 | | (1,180) | | (2,572) | | (5,937) | | (112) | | (9,801) | | 1.5 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate and
commercial | | 472,253 | | 59,599 | | 8,315 | | 332 | | 540,499 | | (672) | | (920) | | (3,747) | | (99) | | (5,438) | | 1.0 | | | | – CRR 1 | 0.000 to 0.053 | 44,234 | | 18 | | — | | — | | 44,252 | | (7) | | — | | — | | — | | (7) | | — | | AA- and above | | – CRR 2 | 0.054 to 0.169 | 92,861 | | 1,013 | | — | | — | | 93,874 | | (20) | | (10) | | — | | — | | (30) | | — | | A+ to A- | | – CRR 3 | 0.170 to 0.740 | 178,662 | | 11,808 | | — | | — | | 190,470 | | (164) | | (91) | | — | | — | | (255) | | 0.1 | | BBB+ to BBB- | | – CRR 4 | 0.741 to 1.927 | 105,708 | | 17,829 | | — | | — | | 123,537 | | (244) | | (151) | | — | | — | | (395) | | 0.3 | | BB+ to BB- | | – CRR 5 | 1.928 to 4.914 | 46,423 | | 16,423 | | — | | — | | 62,846 | | (190) | | (218) | | — | | — | | (408) | | 0.6 | | BB- to B | | – CRR 6 | 4.915 to 8.860 | 3,323 | | 7,592 | | — | | 15 | | 10,930 | | (33) | | (141) | | — | | — | | (174) | | 1.6 | | B- | | – CRR 7 | 8.861 to 15.000 | 795 | | 3,067 | | — | | 3 | | 3,865 | | (11) | | (172) | | — | | — | | (183) | | 4.7 | | CCC+ | | – CRR 8 | 15.001 to 99.999 | 247 | | 1,849 | | — | | — | | 2,096 | | (3) | | (137) | | — | | — | | (140) | | 6.7 | | CCC to C | | – CRR 9/10 | 100.000 | | — | | — | | 8,315 | | 314 | | 8,629 | | — | | — | | (3,747) | | (99) | | (3,846) | | 44.6 | | D | | Non-bank financial institutions | | 65,661 | | 4,832 | | 212 | | — | | 70,705 | | (42) | | (28) | | (90) | | — | | (160) | | 0.2 | | | | – CRR 1 | 0.000 to 0.053 | 16,616 | | — | | — | | — | | 16,616 | | (1) | | — | | — | | — | | (1) | | — | | AA- and above | | – CRR 2 | 0.054 to 0.169 | 15,630 | | 56 | | — | | — | | 15,686 | | (4) | | — | | — | | — | | (4) | | — | | A+ to A- | | – CRR 3 | 0.170 to 0.740 | 21,562 | | 1,333 | | — | | — | | 22,895 | | (12) | | (4) | | — | | — | | (16) | | 0.1 | | BBB+ to BBB- | | – CRR 4 | 0.741 to 1.927 | 7,535 | | 1,169 | | — | | — | | 8,704 | | (12) | | (7) | | — | | — | | (19) | | 0.2 | | BB+ to BB- | | – CRR 5 | 1.928 to 4.914 | 4,024 | | 1,738 | | — | | — | | 5,762 | | (12) | | (11) | | — | | — | | (23) | | 0.4 | | BB- to B | | – CRR 6 | 4.915 to 8.860 | 280 | | 517 | | — | | — | | 797 | | (1) | | (4) | | — | | — | | (5) | | 0.6 | | B- | | – CRR 7 | 8.861 to 15.000 | 12 | | 7 | | — | | — | | 19 | | — | | — | | — | | — | | — | | — | | CCC+ | | – CRR 8 | 15.001 to 99.999 | 2 | | 12 | | — | | — | | 14 | | — | | (2) | | — | | — | | (2) | | 14.3 | | CCC to C | | – CRR 9/10 | 100.000 | | — | | — | | 212 | | — | | 212 | | — | | — | | (90) | | — | | (90) | | 42.5 | | D | | Banks | | 67,769 | | 1,450 | | — | | — | | 69,219 | | (14) | | (2) | | — | | — | | (16) | | — | | | | – CRR 1 | 0.000 to 0.053 | 49,858 | | 21 | | — | | — | | 49,879 | | (2) | | — | | — | | — | | (2) | | — | | AA- and above | | – CRR 2 | 0.054 to 0.169 | 10,689 | | 68 | | — | | — | | 10,757 | | (7) | | — | | — | | — | | (7) | | 0.1 | | A+ to A- | | – CRR 3 | 0.170 to 0.740 | 5,312 | | 17 | | — | | — | | 5,329 | | (2) | | — | | — | | — | | (2) | | — | | BBB+ to BBB- | | – CRR 4 | 0.741 to 1.927 | 1,725 | | 31 | | — | | — | | 1,756 | | (1) | | (1) | | — | | — | | (2) | | 0.1 | | BB+ to BB- | | – CRR 5 | 1.928 to 4.914 | 71 | | 32 | | — | | — | | 103 | | — | | — | | — | | — | | — | | — | | BB- to B | | – CRR 6 | 4.915 to 8.860 | 113 | | 2 | | — | | — | | 115 | | (2) | | — | | — | | — | | (2) | | 1.7 | | B- | | – CRR 7 | 8.861 to 15.000 | 1 | | 1 | | — | | — | | 2 | | — | | — | | — | | — | | — | | — | | CCC+ | | – CRR 8 | 15.001 to 99.999 | — | | 1,278 | | — | | — | | 1,278 | | — | | (1) | | — | | — | | (1) | | 0.1 | | CCC to C | | – CRR 9/10 | 100.000 | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | D | | At 31 Dec 2019 | | 605,683 | | 65,881 | | 8,527 | | 332 | | 680,423 | | (728) | | (950) | | (3,837) | | (99) | | (5,614) | | 0.8 | | |
Report of the Directors | Risk
| | | | | | | | | | | | | | | | | | | | | | | | | | Wholesale lending – credit risk profile by obligor grade for loans and advances at amortised cost1 (continued) | | | Basel one-year PD range |
| Gross carrying amount | Allowance for ECL | ECL coverage | Mapped external rating | | | Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| | | % |
| $m |
| $m |
| $m |
| $m |
| $m
|
| $m |
| $m |
| $m |
| $m |
| $m |
| % | | Corporate and commercial |
|
| 474,700 |
| 51,341 |
| 8,212 |
| 324 |
| 534,577 |
| (698 | ) | (812 | ) | (3,848 | ) | (194 | ) | (5,552 | ) | 1.0 |
| | – CRR 1 | 0.000 to 0.053 |
| 45,401 |
| 67 |
| — |
| — |
| 45,468 |
| (4 | ) | (2 | ) | — |
| — |
| (6 | ) | — | AA- and above | | – CRR 2 | 0.054 to 0.169 |
| 93,266 |
| 1,653 |
| — |
| — |
| 94,919 |
| (17 | ) | (4 | ) | — |
| — |
| (21 | ) | — | A+ to A- | | – CRR 3 | 0.170 to 0.740 |
| 172,496 |
| 9,487 |
| — |
| — |
| 181,983 |
| (162 | ) | (85 | ) | — |
| — |
| (247 | ) | 0.1 | BBB+ to BBB- | | – CRR 4 | 0.741 to 1.927 |
| 111,949 |
| 14,352 |
| — |
| — |
| 126,301 |
| (231 | ) | (114 | ) | — |
| — |
| (345 | ) | 0.3 | BB+ to BB- | | – CRR 5 | 1.928 to 4.914 |
| 46,396 |
| 16,661 |
| — |
| — |
| 63,057 |
| (209 | ) | (252 | ) | — |
| — |
| (461 | ) | 0.7 | BB- to B | | – CRR 6 | 4.915 to 8.860 |
| 3,662 |
| 4,544 |
| — |
| 22 |
| 8,228 |
| (41 | ) | (103 | ) | — |
| — |
| (144 | ) | 1.8 | B- | | – CRR 7 | 8.861 to 15.000 |
| 1,228 |
| 2,882 |
| — |
| 4 |
| 4,114 |
| (22 | ) | (147 | ) | — |
| — |
| (169 | ) | 4.1 | CCC+ | | – CRR 8 | 15.001 to 99.999 |
| 302 |
| 1,695 |
| — |
| — |
| 1,997 |
| (12 | ) | (105 | ) | — |
| — |
| (117 | ) | 5.9 | CCC to C | | – CRR 9/10 | 100.000 |
| — |
| — |
| 8,212 |
| 298 |
| 8,510 |
| — |
| — |
| (3,848 | ) | (194 | ) | (4,042 | ) | 47.5 | D | | Non-bank financial institutions |
| 59,012 |
| 2,165 |
| 230 |
| — |
| 61,407 |
| (44 | ) | (31 | ) | (51 | ) | — |
| (126 | ) | 0.2 |
| | – CRR 1 | 0.000 to 0.053 |
| 13,256 |
| — |
| — |
| — |
| 13,256 |
| (1 | ) | — |
| — |
| — |
| (1 | ) | — | AA- and above | | – CRR 2 | 0.054 to 0.169 |
| 15,172 |
| 20 |
| — |
| — |
| 15,192 |
| (2 | ) | — |
| — |
| — |
| (2 | ) | — | A+ to A- | | – CRR 3 | 0.170 to 0.740 |
| 17,950 |
| 501 |
| — |
| — |
| 18,451 |
| (13 | ) | (1 | ) | — |
| — |
| (14 | ) | 0.1 | BBB+ to BBB- | | – CRR 4 | 0.741 to 1.927 |
| 7,521 |
| 798 |
| — |
| — |
| 8,319 |
| (10 | ) | (2 | ) | — |
| — |
| (12 | ) | 0.1 | BB+ to BB- | | – CRR 5 | 1.928 to 4.914 |
| 4,882 |
| 606 |
| — |
| — |
| 5,488 |
| (14 | ) | (5 | ) | — |
| — |
| (19 | ) | 0.3 | BB- to B | | – CRR 6 | 4.915 to 8.860 |
| 61 |
| 133 |
| — |
| — |
| 194 |
| — |
| (2 | ) | — |
| — |
| (2 | ) | 1.0 | B- | | – CRR 7 | 8.861 to 15.000 |
| 169 |
| 23 |
| — |
| — |
| 192 |
| (4 | ) | (1 | ) | — |
| — |
| (5 | ) | 2.6 | CCC+ | | – CRR 8 | 15.001 to 99.999 |
| 1 |
| 84 |
| — |
| — |
| 85 |
| — |
| (20 | ) | — |
| — |
| (20 | ) | 23.5 | CCC to C | | – CRR 9/10 | 100.000 |
| — |
| — |
| 230 |
| — |
| 230 |
| — |
| — |
| (51 | ) | — |
| (51 | ) | 22.2 | D | | Banks |
| 71,873 |
| 307 |
| — |
| — |
| 72,180 |
| (11 | ) | (2 | ) | — |
| — |
| (13 | ) | — |
| | – CRR 1 | 0.000 to 0.053 |
| 47,680 |
| 32 |
| — |
| — |
| 47,712 |
| (3 | ) | — |
| — |
| — |
| (3 | ) | — | AA- and above | | – CRR 2 | 0.054 to 0.169 |
| 12,519 |
| 18 |
| — |
| — |
| 12,537 |
| (2 | ) | — |
| — |
| — |
| (2 | ) | — | A+ to A- | | – CRR 3 | 0.170 to 0.740 |
| 7,250 |
| 121 |
| — |
| — |
| 7,371 |
| (3 | ) | (1 | ) | — |
| — |
| (4 | ) | 0.1 | BBB+ to BBB- | | – CRR 4 | 0.741 to 1.927 |
| 4,032 |
| 118 |
| — |
| — |
| 4,150 |
| (3 | ) | (1 | ) | — |
| — |
| (4 | ) | 0.1 | BB+ to BB- | | – CRR 5 | 1.928 to 4.914 |
| 381 |
| 18 |
| — |
| — |
| 399 |
| — |
| — |
| — |
| — |
| — |
| — | BB- to B | | – CRR 6 | 4.915 to 8.860 |
| 8 |
| — |
| — |
| — |
| 8 |
| — |
| — |
| — |
| — |
| — |
| — | B- | | – CRR 7 | 8.861 to 15.000 |
| 1 |
| — |
| — |
| — |
| 1 |
| — |
| — |
| — |
| — |
| — |
| — | CCC+ | | – CRR 8 | 15.001 to 99.999 |
| 2 |
| — |
| — |
| — |
| 2 |
| — |
| — |
| — |
| — |
| — |
| — | CCC to C | | – CRR 9/10 | 100.000 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — | D | | At 31 Dec 2018 |
| 605,585 |
| 53,813 |
| 8,442 |
| 324 |
| 668,164 |
| (753 | ) | (845 | ) | (3,899 | ) | (194 | ) | (5,691 | ) | 0.9 |
|
| | 1 | During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 122. |
Risk
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,declined $5bn, including favourable foreign exchange movements of $2.4bn, mainly in Hong Kong and, to a lesser extent, within Canada.the UK. | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial real estate lending | | | | | | | | Of which: | | Europe | Asia | MENA | North
America | Latin America | Total | UK | Hong Kong | | $m | $m | $m | $m | $m | $m | $m | $m | | Gross loans and advances | | | | | | | | | | Stage 1 | 22,639 | | 63,276 | | 1,147 | | 7,373 | | 1,269 | | 95,704 | | 16,207 | | 48,735 | | | Stage 2 | 5,549 | | 11,686 | | 436 | | 4,093 | | 381 | | 22,145 | | 4,299 | | 9,105 | | | Stage 3 | 1,114 | | 37 | | 250 | | 42 | | 240 | | 1,683 | | 966 | | 18 | | | POCI | 1 | | — | | — | | — | | — | | 1 | | — | | — | | | At 31 Dec 2020 | 29,303 | | 74,999 | | 1,833 | | 11,508 | | 1,890 | | 119,533 | | 21,472 | | 57,858 | | | – of which: renegotiated loans | 751 | | 3 | | 201 | | — | | — | | 955 | | 744 | | — | | | Allowance for ECL | (650) | | (117) | | (190) | | (64) | | (120) | | (1,141) | | (575) | | (65) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross loans and advances | | | | | | | | | | Stage 1 | 25,017 | | 76,832 | | 1,507 | | 10,938 | | 1,653 | | 115,947 | | 17,953 | | 60,632 | | | Stage 2 | 3,988 | | 2,673 | | 18 | | 508 | | 41 | | 7,228 | | 2,953 | | 1,696 | | | Stage 3 | 1,115 | | 21 | | 208 | | 33 | | 27 | | 1,404 | | 948 | | 17 | | | POCI | 1 | | — | | — | | — | | — | | 1 | | — | | — | | | At 31 Dec 2019 | 30,121 | | 79,526 | | 1,733 | | 11,479 | | 1,721 | | 124,580 | | 21,854 | | 62,345 | | | – of which: renegotiated loans | 788 | | — | | 195 | | — | | — | | 983 | | 782 | | — | | | Allowance for ECL | (372) | | (78) | | (170) | | (17) | | (7) | | (644) | | (305) | | (40) | |
| | | | | | | | | | | | | | | | | | | Commercial real estate lending | | | | | | | | | Of which: |
| Europe |
| Asia |
| MENA |
| North America |
| Latin America |
| Total |
| UK |
| Hong Kong |
|
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Gross loans and advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Stage 1 | 25,017 |
| 76,832 |
| 1,507 |
| 10,938 |
| 1,653 |
| 115,947 |
| 17,953 |
| 60,632 |
| | Stage 2 | 3,988 |
| 2,673 |
| 18 |
| 508 |
| 41 |
| 7,228 |
| 2,953 |
| 1,696 |
| | Stage 3 | 1,115 |
| 21 |
| 208 |
| 33 |
| 27 |
| 1,404 |
| 948 |
| 17 |
| | POCI | 1 |
| — |
| — |
| — |
| — |
| 1 |
| — |
| — |
| | At 31 Dec 2019 | 30,121 |
| 79,526 |
| 1,733 |
| 11,479 |
| 1,721 |
| 124,580 |
| 21,854 |
| 62,345 |
| | – of which: renegotiated loans | 788 |
| — |
| 195 |
| — |
| — |
| 983 |
| 782 |
| — |
| | Allowance for ECL | (372 | ) | (78 | ) | (170 | ) | (17 | ) | (7 | ) | (644 | ) | (305 | ) | (40 | ) |
| | | | | | | | | | | | | | | | | | Commercial real estate lending1 (continued) | | | | | | | | | Of which: | | | Europe |
| Asia |
| MENA |
| North America |
| Latin America |
| Total |
| UK |
| Hong Kong |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Gross loans and advances | | | | | | | | | | Stage 1 | 26,265 |
| 70,769 |
| 1,607 |
| 9,129 |
| 1,796 |
| 109,566 |
| 19,624 |
| 55,872 |
| | Stage 2 | 2,406 |
| 3,176 |
| 120 |
| 677 |
| 13 |
| 6,392 |
| 1,809 |
| 2,032 |
| | Stage 3 | 1,022 |
| 16 |
| 209 |
| 43 |
| 118 |
| 1,408 |
| 673 |
| 12 |
| | POCI | — |
| — |
| — |
| — |
| 14 |
| 14 |
| — |
| — |
| | At 31 Dec 2018 | 29,693 |
| 73,961 |
| 1,936 |
| 9,849 |
| 1,941 |
| 117,380 |
| 22,106 |
| 57,916 |
| | – of which: renegotiated loans | 944 |
| 1 |
| 186 |
| 1 |
| — |
| 1,132 |
| 816 |
| — |
| | Allowance for ECL | (364 | ) | (59 | ) | (171 | ) | (9 | ) | (52 | ) | (655 | ) | (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 122. |
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 | | | | | | | | | Of which: |
| Europe |
| Asia |
| MENA |
| North America |
| Latin America |
| Total |
| UK |
| Hong Kong |
|
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | On demand, overdrafts or revolving |
|
|
|
|
|
|
|
| | < 1 year | 13,808 |
| 21,625 |
| 816 |
| 5,905 |
| 135 |
| 42,289 |
| 11,775 |
| 16,937 |
| | 1–2 years | 6,197 |
| 17,638 |
| 142 |
| 1,548 |
| 107 |
| 25,632 |
| 5,274 |
| 13,776 |
| | 2–5 years | 7,797 |
| 35,557 |
| 509 |
| 3,511 |
| 1,332 |
| 48,706 |
| 4,347 |
| 27,860 |
| | > 5 years | 2,319 |
| 4,706 |
| 266 |
| 515 |
| 147 |
| 7,953 |
| 458 |
| 3,772 |
| | At 31 Dec 2019 | 30,121 |
| 79,526 |
| 1,733 |
| 11,479 |
| 1,721 |
| 124,580 |
| 21,854 |
| 62,345 |
|
| | | | | | | | | | | | | | | | | | | On demand, overdrafts or revolving | | | | | | | | | | < 1 year | 13,790 |
| 22,100 |
| 896 |
| 4,942 |
| 427 |
| 42,155 |
| 11,305 |
| 18,094 |
| | 1–2 years | 5,850 |
| 13,174 |
| 305 |
| 1,949 |
| 117 |
| 21,395 |
| 5,153 |
| 9,120 |
| | 2–5 years | 7,257 |
| 32,894 |
| 417 |
| 2,152 |
| 1,053 |
| 43,773 |
| 5,232 |
| 26,061 |
| | > 5 years | 2,796 |
| 5,793 |
| 318 |
| 806 |
| 344 |
| 10,057 |
| 416 |
| 4,641 |
| | At 31 Dec 2018 | 29,693 |
| 73,961 |
| 1,936 |
| 9,849 |
| 1,941 |
| 117,380 |
| 22,106 |
| 57,916 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial real estate gross loans and advances maturity analysis | | | | | | | | Of which: | | Europe | Asia | MENA | North America | Latin America | Total | UK | Hong Kong | | $m | $m | $m | $m | $m | $m | $m | $m | | On demand, overdrafts or revolving | | | | | | | | | | < 1 year | 13,728 | | 25,075 | | 750 | | 5,793 | | 263 | | 45,609 | | 12,131 | | 19,998 | | | 1–2 years | 6,373 | | 18,396 | | 119 | | 3,112 | | 434 | | 28,434 | | 4,991 | | 13,237 | | | 2–5 years | 6,241 | | 27,699 | | 668 | | 2,288 | | 927 | | 37,823 | | 3,135 | | 21,694 | | | > 5 years | 2,961 | | 3,829 | | 296 | | 315 | | 266 | | 7,667 | | 1,215 | | 2,929 | | | At 31 Dec 2020 | 29,303 | | 74,999 | | 1,833 | | 11,508 | | 1,890 | | 119,533 | | 21,472 | | 57,858 | |
Report of the Directors | Risk
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | On demand, overdrafts or revolving | | | | | | | | | | < 1 year | 13,808 | | 21,625 | | 816 | | 5,905 | | 135 | | 42,289 | | 11,775 | | 16,937 | | | 1–2 years | 6,197 | | 17,638 | | 142 | | 1,548 | | 107 | | 25,632 | | 5,274 | | 13,776 | | | 2–5 years | 7,797 | | 35,557 | | 509 | | 3,511 | | 1,332 | | 48,706 | | 4,347 | | 27,860 | | | > 5 years | 2,319 | | 4,706 | | 266 | | 515 | | 147 | | 7,953 | | 458 | | 3,772 | | | At 31 Dec 2019 | 30,121 | | 79,526 | | 1,733 | | 11,479 | | 1,721 | | 124,580 | | 21,854 | | 62,345 | |
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, ourthe Group’s exposure to CDS protection providers is diversified among mainly banking counterparties with strong credit ratings. CDS mitigants are held at portfolio level and are not included in the expected loss calculations. CDS mitigants are not reported in the following tables. Collateral on loans and advances Collateral held is analysed separately for commercial real estate and for other corporate, commercial and financial (non-bank) lending. The following tables include off-balance sheet loan commitments, primarily undrawn credit lines. The collateral measured in the following tables consists of fixed first charges on real estate, and charges over cash and marketable financial instruments. The values in the tables represent the expected market value on an open market basis. No adjustment has been made to the collateral for any expected costs of recovery. Marketable securities are measured at their fair value. Other types of collateral such as unsupported guarantees and floating charges over the assets of a customer’s business are not measured in the following tables. While such mitigants have value, often providing rights in insolvency, their assignable value is not sufficiently certain and they are therefore assigned no value for disclosure purposes. The LTV ratios presented are calculated by directly associating loans and advances with the collateral that individually and uniquely supports each facility. When collateral assets are shared by multiple loans and advances, whether specifically or, more generally, by way of an all monies charge, the collateral value is pro-rated across the loans and advances protected by the collateral. For credit-impaired loans, the collateral values cannot be directly compared with impairment allowances recognised. The LTV figures use open market values with no adjustments. Impairment allowances are calculated on a different basis, by considering other cash flows and adjusting collateral values for costs of realising collateral as explained further on page 275.330.
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.
| | | | | | | | | | | | | | | | | | | | | | | Wholesale lending – commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories (by stage) | | (Audited) | | | | Of which: | | Total | UK | Hong Kong | | | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | | | | $m | % | $m | % | $m | % | | | | Stage 1 | | | | | | | | | | Not collateralised | 55,376 | | 0.1 | | 7,205 | | 0.6 | | 29,422 | | 0 | | | | | Fully collateralised | 71,915 | | 0.2 | | 14,053 | | 0.2 | | 33,386 | | 0 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 36,408 | | 0.1 | | 4,665 | | 0.3 | | 22,361 | | 0 | | | | | – 51% to 75% | 26,081 | | 0.2 | | 7,031 | | 0.2 | | 9,091 | | 0 | | | | | – 76% to 90% | 5,098 | | 0.3 | | 1,932 | | 0.2 | | 1,093 | | 0 | | | | | – 91% to 100% | 4,328 | | 0.3 | | 425 | | 0.5 | | 841 | | 0 | | | | | Partially collateralised (A): | 5,477 | | 0.2 | | 1,463 | | 0.1 | | 769 | | 0 | | | | | – collateral value on A | 3,486 | | | 912 | | | 594 | | | | | | Total | 132,768 | | 0.1 | | 22,721 | | 0.4 | | 63,577 | | 0 | | | | | Stage 2 | | | | | | | | | | Not collateralised | 8,710 | | 1.3 | | 3,337 | | 2.2 | | 1,084 | | 0.1 | | | | | Fully collateralised | 18,383 | | 1.0 | | 2,534 | | 1.6 | | 8,719 | | 0.5 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 8,544 | | 0.8 | | 1,132 | | 1.5 | | 5,359 | | 0.4 | | | | | – 51% to 75% | 8,097 | | 1.1 | | 1,020 | | 2.0 | | 2,955 | | 0.8 | | | | | – 76% to 90% | 849 | | 1.1 | | 350 | | 0.9 | | 319 | | 0.3 | | | | | – 91% to 100% | 893 | | 1.0 | | 32 | | 3.1 | | 86 | | 0 | | | | | Partially collateralised (B): | 1,260 | | 1.0 | | 713 | | 0.8 | | 196 | | 1.0 | | | | | – collateral value on B | 517 | | | 246 | | | 147 | | | | | | Total | 28,353 | | 1.1 | | 6,584 | | 1.8 | | 9,999 | | 0.5 | | | | | Stage 3 | | | | | | | | | | Not collateralised | 1,038 | | 45.3 | | 635 | | 50.7 | | 0 | | 0 | | | | | Fully collateralised | 583 | | 11.5 | | 348 | | 9.5 | | 20 | | 5.0 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 177 | | 13.6 | | 56 | | 5.4 | | 11 | | 0 | | | | | – 51% to 75% | 161 | | 15.5 | | 128 | | 12.5 | | 3 | | 0 | | | | | – 76% to 90% | 149 | | 6.7 | | 139 | | 5.8 | | 0 | | 0 | | | | | – 91% to 100% | 96 | | 8.3 | | 25 | | 24.0 | | 6 | | 16.7 | | | | | Partially collateralised (C): | 474 | | 45.6 | | 195 | | 27.7 | | 0 | | 0 | | | | | – collateral value on C | 331 | | | 120 | | | 0 | | | | | | Total | 2,095 | | 35.9 | | 1,178 | | 34.7 | | 20 | | 5.0 | | | | | POCI | | | | | | | | | | Not collateralised | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | Fully collateralised | 1 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 1 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | – 51% to 75% | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | – 76% to 90% | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | – 91% to 100% | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | Partially collateralised (D): | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | – collateral value on D | 0 | | | 0 | | | 0 | | | | | | Total | 1 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | At 31 Dec 2020 | 163,217 | | 0.8 | | 30,483 | | 2.0 | | 73,596 | | 0.1 | | | |
| | Wholesale lending – commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories (by stage) | | Wholesale lending – commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories (by stage) (continued) | | Wholesale lending – commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories (by stage) (continued) | | (Audited) | (Audited) | (Audited) | | | | | Of which: | | | Of which: | | | Total | UK | Hong Kong | US | | Total | UK | Hong Kong | | | | Gross carrying/nominal amount |
| ECL coverage | Gross carrying/nominal amount |
| ECL coverage | Gross carrying/nominal amount |
| ECL coverage | Gross carrying/nominal amount |
| ECL coverage | | Gross carrying/nominal amount | ECL
coverage | Gross carrying/nominal amount | ECL
coverage | Gross carrying/nominal amount | ECL
coverage | | | | $m |
| % | $m |
| % | $m |
| % | $m |
| % | | $m | % | $m | % | $m | % | | | Stage 1 | | | | | | | | | Stage 1 | | | | Not collateralised | 61,820 |
| 0.1 | 7,266 |
| 0.1 | 32,478 |
| — | 541 |
| — | Not collateralised | 61,820 | | 0.1 | | 7,266 | | 0.1 | | 32,478 | | 0 | | | | Fully collateralised | 89,319 |
| 0.1 | 18,535 |
| — | 41,798 |
| — | 4,722 |
| — | Fully collateralised | 89,319 | | 0.1 | | 18,535 | | 0 | | 41,798 | | 0 | | | | LTV ratio: |
|
|
|
|
|
|
|
|
|
|
|
| LTV ratio: | | | | – less than 50% | 46,318 |
| 0.1 | 7,018 |
| 0.1 | 28,776 |
| — | 1,703 |
| 0.1 | – less than 50% | 46,318 | | 0.1 | | 7,018 | | 0.1 | | 28,776 | | 0 | | | | – 51% to 75% | 32,583 |
| 0.1 | 9,349 |
| — | 10,815 |
| 0.1 | 2,854 |
| — | – 51% to 75% | 32,583 | | 0.1 | | 9,349 | | 0 | | 10,815 | | 0.1 | | | | – 76% to 90% | 5,018 |
| 0.1 | 1,649 |
| 0.1 | 1,436 |
| 0.1 | 96 |
| — | – 76% to 90% | 5,018 | | 0.1 | | 1,649 | | 0.1 | | 1,436 | | 0.1 | | | | – 91% to 100% | 5,400 |
| 0.2 | 519 |
| — | 771 |
| — | 69 |
| — | – 91% to 100% | 5,400 | | 0.2 | | 519 | | 0 | | 771 | | 0 | | | | Partially collateralised (A): | 6,563 |
| 0.2 | 682 |
| — | 1,627 |
| 0.1 | — |
| — | Partially collateralised (A): | 6,563 | | 0.2 | | 682 | | 0 | | 1,627 | | 0.1 | | | | – collateral value on A | 3,602 |
| | 535 |
|
| 1,142 |
|
| — |
|
| – collateral value on A | 3,602 | | | 535 | | | 1,142 | | | | | Total | 157,702 |
| 0.1 | 26,483 |
| 0.1 | 75,903 |
| — | 5,263 |
| — | Total | 157,702 | | 0.1 | | 26,483 | | 0.1 | | 75,903 | | 0 | | | | Stage 2 | | | | | | | | | Stage 2 | | | | Not collateralised | 3,040 |
| 1.2 | 1,857 |
| 1.2 | 440 |
| 0.2 | — |
| — | Not collateralised | 3,040 | | 1.2 | | 1,857 | | 1.2 | | 440 | | 0.2 | | | | Fully collateralised | 5,184 |
| 1.1 | 1,419 |
| 1.2 | 1,501 |
| 0.6 | 354 |
| 1.4 | Fully collateralised | 5,184 | | 1.1 | | 1,419 | | 1.2 | | 1,501 | | 0.6 | | | | LTV ratio: |
|
|
|
|
|
|
|
|
|
|
|
| LTV ratio: | | | | – less than 50% | 2,167 |
| 1.1 | 615 |
| 1.8 | 955 |
| 0.3 | 62 |
| — | – less than 50% | 2,167 | | 1.1 | | 615 | | 1.8 | | 955 | | 0.3 | | | | – 51% to 75% | 1,986 |
| 0.9 | 712 |
| 0.6 | 497 |
| 1.0 | 292 |
| 1.4 | – 51% to 75% | 1,986 | | 0.9 | | 712 | | 0.6 | | 497 | | 1.0 | | | | – 76% to 90% | 333 |
| 2.1 | 16 |
| 6.3 | 29 |
| — | — |
| — | – 76% to 90% | 333 | | 2.1 | | 16 | | 6.3 | | 29 | | 0 | | | | – 91% to 100% | 698 |
| 1.1 | 76 |
| 1.3 | 20 |
| — | — |
| — | – 91% to 100% | 698 | | 1.1 | | 76 | | 1.3 | | 20 | | 0 | | | | Partially collateralised (B): | 500 |
| 0.6 | 296 |
| 0.3 | 42 |
| — | — |
| — | Partially collateralised (B): | 500 | | 0.6 | | 296 | | 0.3 | | 42 | | 0 | | | | – collateral value on B | 203 |
|
| 56 |
| | 25 |
|
| — |
| | – collateral value on B | 203 | | | 56 | | | 25 | | | | | Total | 8,724 |
| 1.1 | 3,572 |
| 1.1 | 1,983 |
| 0.5 | 354 |
| — | Total | 8,724 | | 1.1 | | 3,572 | | 1.1 | | 1,983 | | 0.5 | | | | Stage 3 | | | | | | | | | Stage 3 | | | | Not collateralised | 315 |
| 57.8 | 66 |
| 92.4 | — |
| — | — |
| — | Not collateralised | 315 | | 57.8 | | 66 | | 92.4 | | 0 | | 0 | | | | Fully collateralised | 557 |
| 14.9 | 404 |
| 12.9 | 17 |
| 11.8 | — |
| — | Fully collateralised | 557 | | 14.9 | | 404 | | 12.9 | | 17 | | 11.8 | | | | LTV ratio: |
|
|
|
|
|
|
|
|
|
|
|
| LTV ratio: | | | | – less than 50% | 87 |
| 16.1 | 42 |
| 7.1 | 6 |
| 16.7 | — |
| — | – less than 50% | 87 | | 16.1 | | 42 | | 7.1 | | 6 | | 16.7 | | | | – 51% to 75% | 90 |
| 7.8 | 69 |
| 4.3 | 10 |
| — | — |
| — | – 51% to 75% | 90 | | 7.8 | | 69 | | 4.3 | | 10 | | 0 | | | | – 76% to 90% | 89 |
| 15.7 | 72 |
| 4.2 | — |
| — | — |
| — | – 76% to 90% | 89 | | 15.7 | | 72 | | 4.2 | | 0 | | 0 | | | | – 91% to 100% | 291 |
| 16.5 | 221 |
| 19.5 | 1 |
| — | — |
| — | – 91% to 100% | 291 | | 16.5 | | 221 | | 19.5 | | 1 | | 0 | | | | Partially collateralised (C): | 773 |
| 41.5 | 507 |
| 27.8 | — |
| — | — |
| — | Partially collateralised (C): | 773 | | 41.5 | | 507 | | 27.8 | | 0 | | 0 | | | | – collateral value on C | 380 |
|
| 166 |
| | — |
|
| — |
|
| – collateral value on C | 380 | | | 166 | | | 0 | | | | | Total | 1,645 |
| 35.6 | 977 |
| 26.0 | 17 |
| 11.8 | — |
| — | Total | 1,645 | | 35.6 | | 977 | | 26.0 | | 17 | | 11.8 | | | | POCI | | | | | | | | | POCI | | | | Not collateralised | — |
| — | — |
| — | — |
| — | — |
| — | Not collateralised | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | Fully collateralised | 1 |
| — | — |
| — | — |
| — | — |
| — | Fully collateralised | 1 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | LTV ratio: |
|
|
|
|
|
|
|
|
|
|
|
| LTV ratio: | | | | – less than 50% | 1 |
| — | — |
| — | — |
| — | — |
| — | – less than 50% | 1 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | – 51% to 75% | — |
| — | — |
| — | — |
| — | — |
| — | – 51% to 75% | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | – 76% to 90% | — |
| — | — |
| — | — |
| — | — |
| — | – 76% to 90% | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | – 91% to 100% | — |
| — | — |
| — | — |
| — | — |
| — | – 91% to 100% | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | Partially collateralised (D): | — |
| — | — |
| — | — |
| — | — |
| — | Partially collateralised (D): | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | – collateral value on D | — |
| | — |
| | — |
| | — |
| | – collateral value on D | 0 | | | 0 | | | 0 | | | | | Total | 1 |
| — | — |
| — | — |
| — | — |
| — | Total | 1 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | At 31 Dec 2019 | 168,072 |
| 0.5 | 31,032 |
| 1.0 | 77,903 |
| 0.1 | 5,617 |
| 0.1 | At 31 Dec 2019 | 168,072 | | 0.5 | | 31,032 | | 1.0 | | 77,903 | | 0.1 | | |
Report of the Directors | Risk
| | | | | | | | | | | | | | | | | | | | | | | Wholesale lending – commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories | | (Audited) | | | | Of which: | | Total | UK | Hong Kong | | | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | | | | $m | % | $m | % | $m | % | | | | Rated CRR/PD1 to 7 | | | | | | | | | | Not collateralised | 64,046 | | 0.3 | | 10,527 | | 1.1 | | 30,506 | | 0 | | | | | Fully collateralised | 89,664 | | 0.3 | | 16,483 | | 0.4 | | 41,861 | | 0.1 | | | | | Partially collateralised (A): | 6,728 | | 0.4 | | 2,174 | | 0.3 | | 965 | | 0.2 | | | | | – collateral value on A | 3,994 | | | 1,157 | | | 741 | | | | | | Total | 160,438 | | 0.3 | | 29,184 | | 0.6 | | 73,332 | | 0 | | | | | Rated CRR/PD8 | | | | | | | | | | Not collateralised | 40 | | 22.5 | | 15 | | 6.7 | | 0 | | 0 | | | | | Fully collateralised | 634 | | 8.2 | | 104 | | 12.5 | | 244 | | 12.7 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 282 | | 7.1 | | 15 | | 6.7 | | 102 | | 11.8 | | | | | – 51% to 75% | 321 | | 9.0 | | 75 | | 13.3 | | 138 | | 13.0 | | | | | – 76% to 90% | 14 | | 21.4 | | 5 | | 20.0 | | 4 | | 25.0 | | | | | – 91% to 100% | 17 | | 0 | | 9 | | 0 | | 0 | | 0 | | | | | Partially collateralised (B): | 9 | | 11.1 | | 2 | | 50.0 | | 0 | | 0 | | | | | – collateral value on B | 9 | | | 1 | | | 0 | | | | | | Total | 683 | | 9.1 | | 121 | | 12.4 | | 244 | | 12.7 | | | | | Rated CRR/PD9 to 10 | | | | | | | | | | Not collateralised | 1,038 | | 45.3 | | 635 | | 50.7 | | 0 | | 0 | | | | | Fully collateralised | 584 | | 11.5 | | 348 | | 9.5 | | 20 | | 5.0 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 178 | | 13.5 | | 56 | | 5.4 | | 11 | | 0 | | | | | – 51% to 75% | 161 | | 15.5 | | 128 | | 12.5 | | 3 | | 0 | | | | | – 76% to 90% | 149 | | 6.7 | | 139 | | 5.8 | | 0 | | 0 | | | | | – 91% to 100% | 96 | | 8.3 | | 25 | | 24.0 | | 6 | | 16.7 | | | | | Partially collateralised (C): | 474 | | 45.6 | | 195 | | 27.7 | | 0 | | 0 | | | | | – collateral value on C | 331 | | | 120 | | | 0 | | | | | | Total | 2,096 | | 35.9 | | 1,178 | | 34.7 | | 20 | | 5.0 | | | | | At 31 Dec 2020 | 163,217 | | 0.8 | | 30,483 | | 2.0 | | 73,596 | | 0.1 | | | |
| | | | | | | | | | | | | | 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: | | | Total | UK | 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 | | | $m |
| % | $m |
| % | $m |
| % | $m |
| % | | Stage 1 | | | | | | | | | | Not collateralised | 61,486 |
| 0.1 | 9,920 |
| 0.2 | 31,224 |
| — | — |
| — | | Fully collateralised | 86,960 |
| 0.1 | 17,196 |
| 0.1 | 39,174 |
| — | 4,862 |
| — | | LTV ratio: | | | | | | | | | | – less than 50% | 46,650 |
| 0.1 | 7,673 |
| 0.1 | 25,870 |
| — | 3,463 |
| — | | – 51% to 75% | 29,384 |
| 0.1 | 7,937 |
| 0.1 | 10,452 |
| 0.1 | 787 |
| — | | – 76% to 90% | 5,167 |
| 0.1 | 1,038 |
| — | 1,168 |
| 0.1 | 519 |
| — | | – 91% to 100% | 5,759 |
| 0.2 | 548 |
| 0.2 | 1,684 |
| 0.1 | 93 |
| — | | Partially collateralised (A): | 6,101 |
| 0.1 | 487 |
| 0.2 | 2,130 |
| — | — |
| — | | – collateral value on A | 3,735 |
| | 285 |
| | 1,401 |
| | — |
| | | Total | 154,547 |
| 0.1 | 27,603 |
| 0.1 | 72,528 |
| — | 4,862 |
| — | | Stage 2 | | | | | | | | | | Not collateralised | 2,886 |
| 0.9 | 1,083 |
| 1.0 | 1,140 |
| 0.2 | — |
| — | | Fully collateralised | 5,309 |
| 1.1 | 1,352 |
| 2.6 | 1,576 |
| 0.4 | 439 |
| 0.5 | | LTV ratio: | | | | | | | | | | – less than 50% | 2,372 |
| 0.9 | 727 |
| 1.9 | 795 |
| 0.4 | 303 |
| 0.7 | | – 51% to 75% | 1,667 |
| 0.7 | 567 |
| 0.7 | 505 |
| 0.4 | 7 |
| — | | – 76% to 90% | 363 |
| 5.0 | 34 |
| 44.1 | 29 |
| — | 129 |
| — | | – 91% to 100% | 907 |
| 1.0 | 24 |
| 8.3 | 247 |
| — | — |
| — | | Partially collateralised (B): | 289 |
| 1.4 | 52 |
| 5.8 | 15 |
| — | — |
| — | | – collateral value on B | 156 |
| | 20 |
| | 5 |
| | — |
| | | Total | 8,484 |
| 1.1 | 2,487 |
| 2.0 | 2,731 |
| 0.3 | 439 |
| 0.5 | | Stage 3 | | | | | | | | | | Not collateralised | 338 |
| 57.1 | 61 |
| 85.2 | — |
| — | — |
| — | | Fully collateralised | 606 |
| 12.7 | 433 |
| 9.2 | 12 |
| — | — |
| — | | LTV ratio: | | | | | | | | | | – less than 50% | 412 |
| 10.0 | 304 |
| 9.2 | 2 |
| — | — |
| — | | – 51% to 75% | 88 |
| 27.3 | 58 |
| 6.9 | 10 |
| — | — |
| — | | – 76% to 90% | 38 |
| 2.6 | 35 |
| 5.7 | — |
| — | — |
| — | | – 91% to 100% | 68 |
| 16.2 | 36 |
| 16.7 | — |
| — | — |
| — | | Partially collateralised (C): | 474 |
| 56.5 | 261 |
| 42.9 | — |
| — | — |
| — | | – collateral value on C | 321 |
| | 137 |
| | — |
| | — |
| | | Total | 1,418 |
| 37.9 | 755 |
| 27.0 | 12 |
| — | — |
| — | | POCI | | | | | | | | | | Not collateralised | — |
| — | — |
| — | — |
| — | — |
| — | | Fully collateralised | 15 |
| 53.3 | — |
| — | — |
| — | — |
| — | | LTV ratio: | | | | | | | | | | – less than 50% | 13 |
| 61.5 | — |
| — | — |
| — | — |
| — | | – 51% to 75% | 2 |
| — | — |
| — | — |
| — | — |
| — | | – 76% to 90% | — |
| — | — |
| — | — |
| — | — |
| — | | – 91% to 100% | — |
| — | — |
| — | — |
| — | — |
| — | | Partially collateralised (D): | — |
| — | — |
| — | — |
| — | — |
| — | | – collateral value on D | — |
| | — |
| | — |
| | — |
| | | Total | 15 |
| 53.3 | — |
| — | — |
| — | — |
| — | | At 31 Dec 2018 | 164,464 |
| 0.5 | 30,845 |
| 0.9 | 75,271 |
| — | 5,301 |
| 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 122. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Rated CRR/PD1 to 7 | | | | | | | | | | Not collateralised | 64,850 | | 0.1 | | 9,119 | | 0.3 | | 32,918 | | 0 | | | | | Fully collateralised | 94,299 | | 0.1 | | 19,833 | | 0.1 | | 43,299 | | 0.1 | | | | | Partially collateralised (A): | 7,052 | | 0.2 | | 971 | | 0.1 | | 1,669 | | 0.1 | | | | | – collateral value on A | 3,796 | | | 586 | | | 1,167 | | | | | | Total | 166,201 | | 0.1 | | 29,923 | | 0.1 | | 77,886 | | 0 | | | | | Rated CRR/PD8 | | | | | | | | | | Not collateralised | 10 | | 50.0 | | 4 | | 100.0 | | 0 | | 0 | | | | | Fully collateralised | 204 | | 4.9 | | 121 | | 5.0 | | 0 | | 0 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 47 | | 8.5 | | 27 | | 14.8 | | 0 | | 0 | | | | | – 51% to 75% | 120 | | 3.3 | | 68 | | 1.5 | | 0 | | 0 | | | | | – 76% to 90% | 25 | | 4.0 | | 15 | | 6.7 | | 0 | | 0 | | | | | – 91% to 100% | 12 | | 8.3 | | 11 | | 0 | | 0 | | 0 | | | | | Partially collateralised (B): | 11 | | 0 | | 7 | | 0 | | 0 | | 0 | | | | | – collateral value on B | 9 | | | 5 | | | 0 | | | | | | Total | 225 | | 6.7 | | 132 | | 7.6 | | 0 | | 0 | | | | | Rated CRR/PD9 to 10 | | | | | | | | | | Not collateralised | 315 | | 57.8 | | 66 | | 92.4 | | 0 | | 0 | | | | | Fully collateralised | 557 | | 14.9 | | 404 | | 12.9 | | 17 | | 11.8 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 87 | | 16.1 | | 42 | | 7.1 | | 6 | | 16.7 | | | | | – 51% to 75% | 90 | | 7.8 | | 69 | | 4.3 | | 10 | | 0 | | | | | – 76% to 90% | 89 | | 15.7 | | 72 | | 4.2 | | 0 | | 0 | | | | | – 91% to 100% | 291 | | 16.5 | | 221 | | 19.5 | | 1 | | 100.0 | | | | | Partially collateralised (C): | 774 | | 41.6 | | 507 | | 27.8 | | 0 | | 0 | | | | | – collateral value on C | 380 | | | 166 | | | 0 | | | | | | Total | 1,646 | | 35.7 | | 977 | | 26.0 | | 17 | | 11.8 | | | | | At 31 Dec 2019 | 168,072 | | 0.5 | | 31,032 | | 1.0 | | 77,903 | | 0.1 | | | |
| | | | | | | | | | | | | | Wholesale lending – commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories | | (Audited) | | | | | Of which: | | | Total | UK | 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 | | | $m |
| % | $m |
| % | $m |
| % | $m |
| % | | Rated CRR/PD1 to 7 | | | | | | | | | | Not collateralised | 64,850 |
| 0.1 | 9,119 |
| 0.3 | 32,918 |
| — | 541 |
| — | | Fully collateralised | 94,299 |
| 0.1 | 19,833 |
| 0.1 | 43,299 |
| 0.1 | 5,021 |
| 0.1 | | Partially collateralised (A): | 7,052 |
| 0.2 | 971 |
| 0.1 | 1,669 |
| 0.1 | — |
| — | | – collateral value on A | 3,796 |
| | 586 |
| | 1,167 |
| | — |
| | | Total | 166,201 |
| 0.1 | 29,923 |
| 0.1 | 77,886 |
| — | 5,562 |
| 0.1 | | Rated CRR/PD8 | | | | | | | | | | Not collateralised | 10 |
| 50.0 | 4 |
| 100.0 | — |
| — | — |
| — | | Fully collateralised | 204 |
| 4.9 | 121 |
| 5.0 | — |
| — | 55 |
| 3.6 | | LTV ratio: | | | | | | | | | | – less than 50% | 47 |
| 8.5 | 27 |
| 14.8 | — |
| — | 13 |
| — | | – 51% to 75% | 120 |
| 3.3 | 68 |
| 1.5 | — |
| — | 42 |
| 4.8 | | – 76% to 90% | 25 |
| 4.0 | 15 |
| 6.7 | — |
| — | — |
| — | | – 91% to 100% | 12 |
| 8.3 | 11 |
| — | — |
| — | — |
| — | | Partially collateralised (B): | 11 |
| — | 7 |
| — | — |
| — | — |
| — | | – collateral value on B | 9 |
| | 5 |
| | — |
| | — |
| | | Total | 225 |
| 6.7 | 132 |
| 7.6 | — |
| — | 55 |
| 3.6 | | Rated CRR/PD9 to 10 | | | | | | | | | | Not collateralised | 315 |
| 57.8 | 66 |
| 92.4 | — |
| — | — |
| — | | Fully collateralised | 557 |
| 14.9 | 404 |
| 12.9 | 17 |
| 11.8 | — |
| — | | LTV ratio: | | | | | | | | | | – less than 50% | 87 |
| 16.1 | 42 |
| 7.1 | 6 |
| 16.7 | — |
| — | | – 51% to 75% | 90 |
| 7.8 | 69 |
| 4.3 | 10 |
| — | — |
| — | | – 76% to 90% | 89 |
| 15.7 | 72 |
| 4.2 | — |
| — | — |
| — | | – 91% to 100% | 291 |
| 16.5 | 221 |
| 19.5 | 1 |
| 100.0 | — |
| — | | Partially collateralised (C): | 774 |
| 41.6 | 507 |
| 27.8 | — |
| — | — |
| — | | – collateral value on C | 380 |
| | 166 |
| | — |
| | — |
| | | Total | 1,646 |
| 35.7 | 977 |
| 26.0 | 17 |
| 11.8 | — |
| — | | At 31 Dec 2019 | 168,072 |
| 0.5 | 31,032 |
| 1.0 | 77,903 |
| 0.1 | 5,617 |
| 0.1 |
| | | | | | | | | | | | | | | Rated CRR/PD1 to 7 | | | | | | | | | | Not collateralised | 64,324 |
| 0.1 | 11,001 |
| 0.2 | 32,364 |
| — | — |
| — | | Fully collateralised | 91,791 |
| 0.1 | 18,112 |
| 0.2 | 40,747 |
| 0.1 | 5,282 |
| 0.1 | | Partially collateralised (A): | 6,377 |
| 0.2 | 532 |
| 0.6 | 2,145 |
| — | — |
| — | | – collateral value on A | 3,879 |
|
| 299 |
|
| 1,406 |
|
| — |
|
| | Total | 162,492 |
| 0.1 | 29,645 |
| 0.3 | 75,256 |
| — | 5,282 |
| 0.1 | | Rated CRR/PD8 |
|
|
|
|
|
|
|
| | Not collateralised | 49 |
| 2.0 | 2 |
| — | — |
| — | — |
| — | | Fully collateralised | 477 |
| 1.5 | 435 |
| 1.1 | 3 |
| 33.3 | 19 |
| — | | LTV ratio: |
|
|
|
|
|
|
|
| | – less than 50% | 178 |
| 1.7 | 149 |
| 1.3 | 3 |
| 33.3 | 19 |
| — | | – 51% to 75% | 269 |
| 0.4 | 265 |
| 0.4 | — |
| — | — |
| — | | – 76% to 90% | 13 |
| 7.7 | 7 |
| 14.3 | — |
| — | — |
| — | | – 91% to 100% | 17 |
| 11.8 | 14 |
| 14.3 | — |
| — | — |
| — | | Partially collateralised (B): | 13 |
| 7.7 | 8 |
| 12.5 | — |
| — | — |
| — | | – collateral value on B | 12 |
|
| 6 |
|
| — |
|
| — |
|
| | Total | 539 |
| 1.7 | 445 |
| 1.3 | 3 |
| 33.3 | 19 |
| — | | Rated CRR/PD9 to 10 |
|
|
|
|
|
|
|
| | Not collateralised | 338 |
| 57.1 | 61 |
| 85.2 | — |
| — | — |
| — | | Fully collateralised | 621 |
| 13.5 | 433 |
| 9.2 | 12 |
| — | — |
| — | | LTV ratio: |
|
|
|
|
|
|
|
| | – less than 50% | 425 |
| 11.5 | 304 |
| 9.2 | 2 |
| — | — |
| — | | – 51% to 75% | 90 |
| 26.7 | 58 |
| 6.9 | 10 |
| — | — |
| — | | – 76% to 90% | 38 |
| 2.6 | 35 |
| 5.7 | — |
| — | — |
| — | | – 91% to 100% | 68 |
| 16.2 | 36 |
| 16.7 | — |
| — | — |
| — | | Partially collateralised (C): | 474 |
| 56.5 | 261 |
| 42.9 | — |
| — | — |
| — | | – collateral value on C | 321 |
|
| 137 |
|
| — |
|
| — |
|
| | Total | 1,433 |
| 38.0 | 755 |
| 27.0 | 12 |
| — | — |
| — | | At 31 Dec 2018 | 164,464 |
| 0.5 | 30,845 |
| 0.9 | 75,271 |
| — | 5,301 |
| 0.1 |
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) | 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) | 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) | | | | | Of which: | | | Of which: | | | Total | UK | Hong Kong | US | | Total | UK | Hong Kong | | | | Gross carrying/nominal amount |
| ECL coverage | Gross carrying/nominal amount |
| ECL coverage | Gross carrying/nominal amount |
| ECL coverage | Gross carrying/nominal amount |
| ECL coverage | | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | | | | $m |
| % | $m |
| % | $m |
| % | $m |
| % | | $m | % | $m | % | $m | % | | | Stage 1 | | | | | | | | | Stage 1 | | | | Not collateralised | 680,079 |
| 0.1 | 132,197 |
| 0.2 | 116,536 |
| — | 112,911 |
| — | Not collateralised | 617,592 | | 0.2 | | 122,554 | | 0.4 | | 95,061 | | 0.1 | | | | Fully collateralised | 128,290 |
| 0.1 | 40,172 |
| 0.1 | 32,818 |
| 0.1 | 14,830 |
| — | Fully collateralised | 110,528 | | 0.2 | | 28,232 | | 0.3 | | 40,207 | | 0.1 | | | | LTV ratio: |
|
|
|
|
|
|
|
| LTV ratio: | | | | – less than 50% | 48,012 |
| 0.1 | 13,831 |
| 0.1 | 11,009 |
| 0.1 | 5,326 |
| — | – less than 50% | 37,991 | | 0.1 | | 7,367 | | 0.3 | | 14,744 | | 0.1 | | | | – 51% to 75% | 37,891 |
| 0.1 | 11,903 |
| 0.2 | 12,783 |
| 0.1 | 3,717 |
| 0.1 | – 51% to 75% | 36,696 | | 0.2 | | 11,891 | | 0.3 | | 13,961 | | 0.2 | | | | – 76% to 90% | 13,072 |
| 0.1 | 3,399 |
| 0.2 | 4,697 |
| 0.1 | 130 |
| — | – 76% to 90% | 13,542 | | 0.2 | | 2,624 | | 0.4 | | 6,522 | | 0.1 | | | | – 91% to 100% | 29,315 |
| — | 11,039 |
| — | 4,329 |
| 0.1 | 5,657 |
| — | – 91% to 100% | 22,299 | | 0.1 | | 6,350 | | 0.1 | | 4,980 | | 0.1 | | | | Partially collateralised (A): | 52,890 |
| 0.1 | 8,122 |
| 0.1 | 20,162 |
| 0.1 | 1,629 |
| — | Partially collateralised (A): | 52,892 | | 0.2 | | 6,826 | | 0.5 | | 19,163 | | 0.1 | | | | – collateral value on A | 25,824 |
|
| 3,809 |
|
| 9,616 |
|
| 1,337 |
|
| – collateral value on A | 25,903 | | | 3,524 | | | 9,208 | | | | | Total | 861,259 |
| 0.1 | 180,491 |
| 0.2 | 169,516 |
| — | 129,370 |
| — | Total | 781,012 | | 0.2 | | 157,612 | | 0.4 | | 154,431 | | 0.1 | | | | Stage 2 |
|
|
|
|
|
|
|
| Stage 2 | | | | Not collateralised | 61,540 |
| 1.2 | 13,318 |
| 2.2 | 13,308 |
| 0.7 | 10,129 |
| 0.9 | Not collateralised | 118,959 | | 1.6 | | 37,430 | | 2.6 | | 19,466 | | 0.4 | | | | Fully collateralised | 21,126 |
| 0.8 | 3,139 |
| 1.8 | 12,934 |
| 0.6 | 868 |
| 0.8 | Fully collateralised | 37,753 | | 1.3 | | 9,316 | | 2.1 | | 15,044 | | 0.8 | | | | LTV ratio: |
|
|
|
|
|
|
|
| LTV ratio: | | | | – less than 50% | 7,081 |
| 0.9 | 1,208 |
| 2.0 | 3,845 |
| 0.6 | 303 |
| 0.3 | – less than 50% | 11,992 | | 1.3 | | 2,498 | | 1.5 | | 3,920 | | 0.7 | | | | – 51% to 75% | 8,482 |
| 0.9 | 1,111 |
| 1.8 | 5,580 |
| 0.7 | 465 |
| 1.1 | – 51% to 75% | 16,982 | | 1.6 | | 5,715 | | 2.2 | | 6,657 | | 1.0 | | | | – 76% to 90% | 2,684 |
| 0.9 | 282 |
| 2.1 | 1,646 |
| 0.5 | 47 |
| 2.1 | – 76% to 90% | 3,727 | | 1.2 | | 502 | | 3.2 | | 2,150 | | 0.7 | | | | – 91% to 100% | 2,879 |
| 0.6 | 538 |
| 1.3 | 1,863 |
| 0.2 | 53 |
| — | – 91% to 100% | 5,052 | | 0.9 | | 601 | | 2.0 | | 2,317 | | 0.3 | | | | Partially collateralised (B): | 8,463 |
| 0.8 | 1,516 |
| 1.4 | 3,768 |
| 0.4 | 124 |
| 1.6 | Partially collateralised (B): | 16,829 | | 1.5 | | 3,984 | | 2.7 | | 3,849 | | 0.9 | | | | – collateral value on B | 3,669 |
|
| 370 |
|
| 1,801 |
|
| 53 |
|
| – collateral value on B | 9,425 | | | 1,714 | | | 2,104 | | | | | Total | 91,129 |
| 1.1 | 17,973 |
| 2.1 | 30,010 |
| 0.6 | 11,121 |
| 0.9 | Total | 173,541 | | 1.5 | | 50,730 | | 2.5 | | 38,359 | | 0.6 | | | | Stage 3 |
|
|
|
|
|
|
|
| Stage 3 | | | | Not collateralised | 4,768 |
| 49.2 | 1,899 |
| 33.0 | 504 |
| 83.5 | 2 |
| 50.0 | Not collateralised | 7,852 | | 50.0 | | 2,793 | | 28.5 | | 865 | | 66.0 | | | | Fully collateralised | 1,479 |
| 22.4 | 494 |
| 12.6 | 86 |
| 12.8 | 214 |
| — | Fully collateralised | 1,939 | | 17.3 | | 585 | | 7.9 | | 342 | | 6.4 | | | | LTV ratio: |
|
|
|
|
|
|
|
| LTV ratio: | | | | – less than 50% | 335 |
| 35.2 | 103 |
| 17.5 | 9 |
| 33.3 | 2 |
| — | – less than 50% | 637 | | 24.0 | | 151 | | 8.6 | | 83 | | 6.0 | | | | – 51% to 75% | 352 |
| 24.4 | 198 |
| 8.6 | 21 |
| 4.8 | — |
| — | – 51% to 75% | 526 | | 19.0 | | 182 | | 12.6 | | 128 | | 4.7 | | | | – 76% to 90% | 373 |
| 23.6 | 101 |
| 20.8 | 40 |
| 7.5 | — |
| — | – 76% to 90% | 294 | | 9.2 | | 211 | | 1.9 | | 49 | | 14.3 | | | | – 91% to 100% | 419 |
| 9.1 | 92 |
| 7.6 | 16 |
| 25.0 | 212 |
| — | – 91% to 100% | 482 | | 11.6 | | 41 | | 14.6 | | 82 | | 4.9 | | | | Partially collateralised (C): | 1,367 |
| 44.8 | 369 |
| 20.1 | 87 |
| 48.3 | 92 |
| 44.6 | Partially collateralised (C): | 2,847 | | 35.5 | | 553 | | 23.1 | | 592 | | 26.4 | | | | – collateral value on C | 693 |
|
| 192 |
|
| 34 |
|
| 65 |
|
| – collateral value on C | 1,619 | | | 337 | | | 322 | | | | | Total | 7,614 |
| 43.2 | 2,762 |
| 27.6 | 677 |
| 70.0 | 308 |
| 13.6 | Total | 12,638 | | 41.7 | | 3,931 | | 24.7 | | 1,799 | | 41.6 | | | | POCI |
|
|
|
|
|
|
|
| POCI | | | | Not collateralised | 223 |
| 32.7 | 32 |
| 96.9 | 7 |
| — | — |
| — | Not collateralised | 211 | | 39.8 | | 54 | | 63.0 | | 1 | | 0 | | | | Fully collateralised | 28 |
| 3.6 | — |
| — | 10 |
| — | — |
| — | Fully collateralised | 63 | | 41.3 | | 0 | | 0 | | 45 | | 51.1 | | | | LTV ratio: |
|
|
|
|
|
|
|
| LTV ratio: | | | | – less than 50% | 2 |
| 50.0 | — |
| — | — |
| — | — |
| — | – less than 50% | 6 | | 50.0 | | 0 | | 0 | | 0 | | 0 | | | | – 51% to 75% | 26 |
| — | — |
| — | 10 |
| — | — |
| — | – 51% to 75% | 11 | | 9.1 | | 0 | | 0 | | 11 | | 9.1 | | | | – 76% to 90% | — |
| — | — |
| — | — |
| — | — |
| — | – 76% to 90% | 34 | | 64.7 | | 0 | | 0 | | 34 | | 64.7 | | | | – 91% to 100% | — |
| — | — |
| — | — |
| — | — |
| — | – 91% to 100% | 12 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | Partially collateralised (D): | 97 |
| 33.0 | 57 |
| 1.8 | 31 |
| 90.3 | — |
| — | Partially collateralised (D): | 4 | | 75.0 | | 0 | | 0 | | 0 | | 0 | | | | – collateral value on D | 57 |
|
| 19 |
|
| 30 |
|
| — |
|
| – collateral value on D | 4 | | | 0 | | | 0 | | | | | Total | 348 |
| 30.5 | 89 |
| 36.0 | 48 |
| 58.3 | — |
| — | Total | 278 | | 40.6 | | 54 | | 63.0 | | 46 | | 50.0 | | | | At 31 Dec 2019 | 960,350 |
| 0.5 | 201,315 |
| 0.7 | 200,251 |
| 0.4 | 140,799 |
| 0.1 | | | At 31 Dec 2020 | | At 31 Dec 2020 | 967,469 | | 1.0 | | 212,327 | | 1.3 | | 194,635 | | 0.6 | | |
| | | | | | | | | | | | | | | | | | | | | | | 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) (continued) | | (Audited) | | | | Of which: | | Total | UK | Hong Kong | | | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | | | | $m | % | $m | % | $m | % | | | | Stage 1 | | | | | | | | | | Not collateralised | 680,079 | | 0.1 | | 132,197 | | 0.2�� | | 116,536 | | 0 | | | | | Fully collateralised | 128,290 | | 0.1 | | 40,172 | | 0.1 | | 32,818 | | 0.1 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 48,012 | | 0.1 | | 13,831 | | 0.1 | | 11,009 | | 0.1 | | | | | – 51% to 75% | 37,891 | | 0.1 | | 11,903 | | 0.2 | | 12,783 | | 0.1 | | | | | – 76% to 90% | 13,072 | | 0.1 | | 3,399 | | 0.2 | | 4,697 | | 0.1 | | | | | – 91% to 100% | 29,315 | | 0 | | 11,039 | | 0 | | 4,329 | | 0.1 | | | | | Partially collateralised (A): | 52,890 | | 0.1 | | 8,122 | | 0.1 | | 20,162 | | 0.1 | | | | | – collateral value on A | 25,824 | | | 3,809 | | | 9,616 | | | | | | Total | 861,259 | | 0.1 | | 180,491 | | 0.2 | | 169,516 | | 0 | | | | | Stage 2 | | | | | | | | | | Not collateralised | 61,540 | | 1.2 | | 13,318 | | 2.2 | | 13,308 | | 0.7 | | | | | Fully collateralised | 21,126 | | 0.8 | | 3,139 | | 1.8 | | 12,934 | | 0.6 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 7,081 | | 0.9 | | 1,208 | | 2.0 | | 3,845 | | 0.6 | | | | | – 51% to 75% | 8,482 | | 0.9 | | 1,111 | | 1.8 | | 5,580 | | 0.7 | | | | | – 76% to 90% | 2,684 | | 0.9 | | 282 | | 2.1 | | 1,646 | | 0.5 | | | | | – 91% to 100% | 2,879 | | 0.6 | | 538 | | 1.3 | | 1,863 | | 0.2 | | | | | Partially collateralised (B): | 8,463 | | 0.8 | | 1,516 | | 1.4 | | 3,768 | | 0.4 | | | | | – collateral value on B | 3,669 | | | 370 | | | 1,801 | | | | | | Total | 91,129 | | 1.1 | | 17,973 | | 2.1 | | 30,010 | | 0.6 | | | | | Stage 3 | | | | | | | | | | Not collateralised | 4,768 | | 49.2 | | 1,899 | | 33.0 | | 504 | | 83.5 | | | | | Fully collateralised | 1,479 | | 22.4 | | 494 | | 12.6 | | 86 | | 12.8 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 335 | | 35.2 | | 103 | | 17.5 | | 9 | | 33.3 | | | | | – 51% to 75% | 352 | | 24.4 | | 198 | | 8.6 | | 21 | | 4.8 | | | | | – 76% to 90% | 373 | | 23.6 | | 101 | | 20.8 | | 40 | | 7.5 | | | | | – 91% to 100% | 419 | | 9.1 | | 92 | | 7.6 | | 16 | | 25.0 | | | | | Partially collateralised (C): | 1,367 | | 44.8 | | 369 | | 20.1 | | 87 | | 48.3 | | | | | – collateral value on C | 693 | | | 192 | | | 34 | | | | | | Total | 7,614 | | 43.2 | | 2,762 | | 27.6 | | 677 | | 70.0 | | | | | POCI | | | | | | | | | | Not collateralised | 223 | | 32.7 | | 32 | | 96.9 | | 7 | | 0 | | | | | Fully collateralised | 28 | | 3.6 | | 0 | | 0 | | 10 | | 0 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 2 | | 50.0 | | 0 | | 0 | | 0 | | 0 | | | | | – 51% to 75% | 26 | | 0 | | 0 | | 0 | | 10 | | 0 | | | | | – 76% to 90% | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | – 91% to 100% | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | Partially collateralised (D): | 97 | | 33.0 | | 57 | | 1.8 | | 31 | | 90.3 | | | | | – collateral value on D | 57 | | | 19 | | | 30 | | | | | | Total | 348 | | 30.5 | | 89 | | 36.0 | | 48 | | 58.3 | | | | | At 31 Dec 2019 | 960,350 | | 0.5 | | 201,315 | | 0.7 | | 200,251 | | 0.4 | | | |
| | | | | | | | | | | | | | | | | | | | | | | Wholesale lending – other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories | | (Audited) | | | | Of which: | | Total | UK | Hong Kong | | | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | | | | $m | % | $m | % | $m | % | | | | Rated CRR/PD8 | | | | | | | | | | Not collateralised | 3,787 | | 7.1 | | 924 | | 8.7 | | 103 | | 25.2 | | | | | Fully collateralised | 1,107 | | 5.2 | | 171 | | 9.4 | | 15 | | 0 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 269 | | 4.1 | | 29 | | 10.3 | | 1 | | 0 | | | | | – 51% to 75% | 480 | | 6.3 | | 87 | | 6.9 | | 0 | | 0 | | | | | – 76% to 90% | 140 | | 5.0 | | 13 | | 23.1 | | 14 | | 0 | | | | | – 91% to 100% | 218 | | 4.1 | | 42 | | 9.5 | | 0 | | 0 | | | | | Partially collateralised (A): | 493 | | 8.1 | | 174 | | 9.2 | | 27 | | 3.7 | | | | | – collateral value on A | 352 | | | 83 | | | 13 | | | | | | Total | 5,387 | | 6.8 | | 1,269 | | 8.7 | | 145 | | 18.6 | | | | | Rated CRR/PD9 to 10 | | | | | | | | | | Not collateralised | 8,062 | | 49.7 | | 2,847 | | 29.1 | | 865 | | 66.0 | | | | | Fully collateralised | 2,003 | | 18.1 | | 585 | | 7.9 | | 388 | | 11.6 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 644 | | 24.2 | | 151 | | 8.6 | | 84 | | 6.0 | | | | | – 51% to 75% | 538 | | 18.8 | | 182 | | 12.6 | | 139 | | 5.0 | | | | | – 76% to 90% | 327 | | 15.0 | | 211 | | 1.9 | | 83 | | 34.9 | | | | | – 91% to 100% | 494 | | 11.3 | | 41 | | 14.6 | | 82 | | 4.9 | | | | | Partially collateralised (B): | 2,851 | | 35.6 | | 553 | | 23.1 | | 592 | | 26.4 | | | | | – collateral value on B | 1,623 | | | 337 | | | 322 | | | | | | Total | 12,916 | | 41.7 | | 3,985 | | 25.2 | | 1,845 | | 41.8 | | | | | At 31 Dec 2020 | 18,303 | | 31.4 | | 5,254 | | 21.2 | | 1,990 | | 40.2 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Rated CRR/PD8 | | | | | | | | | | Not collateralised | 2,499 | | 5.8 | | 285 | | 13.0 | | 10 | | 70.0 | | | | | Fully collateralised | 694 | | 3.3 | | 382 | | 2.6 | | 0 | | 0 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 246 | | 2.8 | | 120 | | 1.7 | | 0 | | 0 | | | | | – 51% to 75% | 189 | | 4.2 | | 93 | | 3.2 | | 0 | | 0 | | | | | – 76% to 90% | 97 | | 2.1 | | 42 | | 2.4 | | 0 | | 0 | | | | | – 91% to 100% | 162 | | 3.7 | | 127 | | 3.9 | | 0 | | 0 | | | | | Partially collateralised (A): | 279 | | 4.7 | | 53 | | 5.7 | | 73 | | 2.7 | | | | | – collateral value on A | 152 | | | 34 | | | 6 | | | | | | Total | 3,472 | | 5.2 | | 720 | | 6.9 | | 83 | | 12.0 | | | | | Rated CRR/PD9 to 10 | | | | | | | | | | Not collateralised | 4,991 | | 48.5 | | 1,930 | | 34.1 | | 510 | | 82.5 | | | | | Fully collateralised | 1,507 | | 22.0 | | 494 | | 12.6 | | 96 | | 11.5 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 338 | | 35.2 | | 103 | | 17.5 | | 10 | | 0 | | | | | – 51% to 75% | 377 | | 22.8 | | 198 | | 8.6 | | 30 | | 3.3 | | | | | – 76% to 90% | 373 | | 23.6 | | 101 | | 20.8 | | 40 | | 7.5 | | | | | – 91% to 100% | 419 | | 9.1 | | 92 | | 7.6 | | 16 | | 0 | | | | | Partially collateralised (B): | 1,464 | | 44.0 | | 427 | | 17.6 | | 119 | | 58.8 | | | | | – collateral value on B | 750 | | | 211 | | | 64 | | | | | | Total | 7,962 | | 42.7 | | 2,851 | | 27.9 | | 725 | | 69.2 | | | | | At 31 Dec 2019 | 11,434 | | 31.3 | | 3,571 | | 23.7 | | 808 | | 63.4 | | | |
| | | | | | | | | | | | | | 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)
| | | | | Of which: | | | Total | UK | 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 | | | $m |
| % | $m |
| % | $m |
| % | $m |
| % | | Stage 1 | | | | | | | | | | Not collateralised | 673,589 |
| 0.1 | 137,269 |
| 0.2 | 122,259 |
| — | 116,001 |
| — | | Fully collateralised | 127,443 |
| 0.1 | 30,492 |
| 0.1 | 36,730 |
| 0.1 | 11,229 |
| 0.1 | | LTV ratio: | | | | | | | | | | – less than 50% | 39,509 |
| 0.1 | 8,519 |
| 0.2 | 12,032 |
| 0.1 | 4,686 |
| — | | – 51% to 75% | 49,518 |
| 0.1 | 9,275 |
| 0.2 | 14,264 |
| 0.1 | 2,424 |
| — | | – 76% to 90% | 12,627 |
| 0.1 | 3,201 |
| 0.2 | 4,567 |
| 0.1 | 318 |
| — | | – 91% to 100% | 25,789 |
| 0.1 | 9,497 |
| — | 5,867 |
| 0.1 | 3,801 |
| — | | Partially collateralised (A): | 54,412 |
| 0.1 | 6,668 |
| 0.2 | 21,942 |
| — | 1,875 |
| — | | – collateral value on A | 23,857 |
| | 3,250 |
| | 10,263 |
| | 912 |
| | | Total | 855,444 |
| 0.1 | 174,429 |
| 0.2 | 180,931 |
| — | 129,105 |
| — | | Stage 2 | | | | | | | | | | Not collateralised | 61,464 |
| 1.1 | 21,035 |
| 1.7 | 6,212 |
| 0.4 | 10,085 |
| 1.2 | | Fully collateralised | 13,633 |
| 1.2 | 5,645 |
| 1.5 | 3,378 |
| 0.5 | 1,131 |
| 9.3 | | LTV ratio: | | | | | | | | | | – less than 50% | 5,109 |
| 1.1 | 2,047 |
| 1.7 | 1,421 |
| 0.4 | 342 |
| 0.6 | | – 51% to 75% | 4,950 |
| 1.3 | 2,154 |
| 1.8 | 1,290 |
| 0.6 | 467 |
| 0.6 | | – 76% to 90% | 1,399 |
| 1.8 | 496 |
| 1.2 | 391 |
| 0.5 | 85 |
| 1.2 | | – 91% to 100% | 2,175 |
| 0.8 | 948 |
| 0.4 | 276 |
| 0.4 | 237 |
| 1.7 | | Partially collateralised (B): | 6,623 |
| 0.7 | 1,793 |
| 1.2 | 2,287 |
| 0.3 | 63 |
| 1.6 | | – collateral value on B | 2,324 |
| | 339 |
| | 971 |
| | 16 |
| | | Total | 81,720 |
| 1.1 | 28,473 |
| 1.6 | 11,877 |
| 0.4 | 11,279 |
| 1.1 | | Stage 3 | | | | | | | | | | Not collateralised | 5,240 |
| 50.2 | 1,882 |
| 38.8 | 478 |
| 81.2 | 1 |
| 100.0 | | Fully collateralised | 1,460 |
| 22.9 | 517 |
| 6.2 | 146 |
| — | 130 |
| 13.8 | | LTV ratio: | | | | | | | | | | – less than 50% | 361 |
| 36.0 | 133 |
| 10.5 | 11 |
| — | 4 |
| — | | – 51% to 75% | 328 |
| 9.8 | 179 |
| 1.7 | 62 |
| — | — |
| — | | – 76% to 90% | 427 |
| 24.6 | 131 |
| 13.7 | 32 |
| — | — |
| — | | – 91% to 100% | 344 |
| 19.8 | 74 |
| 8.1 | 41 |
| — | 126 |
| — | | Partially collateralised (C): | 1,147 |
| 43.1 | 228 |
| 21.1 | 158 |
| 15.2 | 71 |
| 31.0 | | – collateral value on C | 580 |
| | 132 |
| | 38 |
| | 55 |
| | | Total | 7,847 |
| 44.1 | 2,627 |
| 31.2 | 782 |
| 52.7 | 202 |
| 10.9 | | POCI | | | | | | | | | | Not collateralised | 232 |
| 66.8 | — |
| — | 25 |
| 20.0 | — |
| — | | Fully collateralised | 37 |
| 2.7 | — |
| — | 9 |
| — | — |
| — | | LTV ratio: | | | | | | | | | | – less than 50% | 1 |
| — | — |
| — | — |
| — | — |
| — | | – 51% to 75% | — |
| — | — |
| — | — |
| — | — |
| — | | – 76% to 90% | 22 |
| — | — |
| — | — |
| — | — |
| — | | – 91% to 100% | 14 |
| — | — |
| — | 9 |
| — | — |
| — | | Partially collateralised (D): | 49 |
| 63.3 | 8 |
| — | 35 |
| 85.7 | — |
| — | | – collateral value on D | 38 |
| | 3 |
| | 34 |
| | — |
| | | Total | 318 |
| 59.2 | 8 |
| — | 69 |
| 50.7 | — |
| — | | At 31 Dec 2018 | 945,329 |
| 0.6 | 205,537 |
| 0.8 | 193,659 |
| 0.3 | 140,586 |
| 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 122. |
| | 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. |
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) | | | | | Of which: | | | Total | UK | 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 | | | $m |
| % | $m |
| % | $m |
| % | $m |
| % | | Rated CRR/PD8 | | | | | | | | | | Not collateralised | 2,499 |
| 5.8 | 285 |
| 13.0 | 10 |
| 70.0 | 1,645 |
| 3.3 | | Fully collateralised | 694 |
| 3.3 | 382 |
| 2.6 | — |
| — | 166 |
| 1.2 | | LTV ratio: | | | | | | | | | | – less than 50% | 246 |
| 2.8 | 120 |
| 1.7 | — |
| — | 85 |
| 1.2 | | – 51% to 75% | 189 |
| 4.2 | 93 |
| 3.2 | — |
| — | 18 |
| — | | – 76% to 90% | 97 |
| 2.1 | 42 |
| 2.4 | — |
| — | 45 |
| 2.2 | | – 91% to 100% | 162 |
| 3.7 | 127 |
| 3.9 | — |
| — | 18 |
| — | | Partially collateralised (A): | 279 |
| 4.7 | 53 |
| 5.7 | 73 |
| 2.7 | 66 |
| 3.0 | | – collateral value on A | 152 |
|
| 34 |
|
| 6 |
|
| 39 |
|
| | Total | 3,472 |
| 5.2 | 720 |
| 6.9 | 83 |
| 12.0 | 1,877 |
| 3.0 | | Rated CRR/PD9 to 10 | | | |
| |
| |
| | Not collateralised | 4,991 |
| 48.5 | 1,930 |
| 34.1 | 510 |
| 82.5 | 2 |
| 50.0 | | Fully collateralised | 1,507 |
| 22.0 | 494 |
| 12.6 | 96 |
| 11.5 | 214 |
| — | | LTV ratio: | | | | | | | | | | – less than 50% | 338 |
| 35.2 | 103 |
| 17.5 | 10 |
| — | 2 |
| — | | – 51% to 75% | 377 |
| 22.8 | 198 |
| 8.6 | 30 |
| 3.3 | — |
| — | | – 76% to 90% | 373 |
| 23.6 | 101 |
| 20.8 | 40 |
| 7.5 | — |
| — | | – 91% to 100% | 419 |
| 9.1 | 92 |
| 7.6 | 16 |
| — | 212 |
| — | | Partially collateralised (B): | 1,464 |
| 44.0 | 427 |
| 17.6 | 119 |
| 58.8 | 92 |
| 44.6 | | – collateral value on B | 750 |
|
| 211 |
|
| 64 |
|
| 65 |
|
| | Total | 7,962 |
| 42.7 | 2,851 |
| 27.9 | 725 |
| 69.2 | 308 |
| 13.6 | | At 31 Dec 2019 | 11,434 |
| 31.3 | 3,571 |
| 23.7 | 808 |
| 63.4 | 2,185 |
| 4.5 |
| | | | | | | | | | | | | | | Rated CRR/PD8 | | | | | | | | | | Not collateralised | 1,243 |
| 5.4 | 565 |
| 6.2 | 94 |
| 7.4 | 191 |
| 5.2 | | Fully collateralised | 1,895 |
| 3.6 | 74 |
| 4.1 | 11 |
| 9.1 | 1,621 |
| 3.1 | | LTV ratio: | | | | | | | | | | – less than 50% | 693 |
| 4.2 | 21 |
| 4.8 | — |
| — | 594 |
| 4.2 | | – 51% to 75% | 292 |
| 2.7 | 49 |
| 2.0 | 11 |
| 9.1 | 169 |
| 2.4 | | – 76% to 90% | 45 |
| 15.6 | 2 |
| — | — |
| — | 20 |
| — | | – 91% to 100% | 865 |
| 2.8 | 2 |
| — | — |
| — | 838 |
| — | | Partially collateralised (A): | 212 |
| 2.8 | 23 |
| 4.3 | 153 |
| 1.3 | — |
| — | | – collateral value on A | 84 |
| | 14 |
| | 49 |
| | — |
| | | Total | 3,350 |
| 4.2 | 662 |
| 6 | 258 |
| 3.9 | 1,812 |
| 3.4 | | Rated CRR/PD9 to 10 | | | | | | | | | | Not collateralised | 5,199 |
| 53.2 | 1,775 |
| 42.1 | 503 |
| 78.1 | 6 |
| 16.7 | | Fully collateralised | 1,719 |
| 24.8 | 513 |
| 6.2 | 155 |
| — | 188 |
| 9.6 | | LTV ratio: | | | | | | | | | | – less than 50% | 608 |
| 36.0 | 181 |
| 7.7 | 11 |
| — | 77 |
| 22.1 | | – 51% to 75% | 503 |
| 8.7 | 172 |
| 1.7 | 62 |
| — | 103 |
| 1.0 | | – 76% to 90% | 405 |
| 24.2 | 86 |
| 10.5 | 32 |
| — | — |
| — | | – 91% to 100% | 203 |
| 31.5 | 74 |
| 8.1 | 50 |
| — | 8 |
| — | | Partially collateralised (B): | 974 |
| 46.1 | 187 |
| 21.9 | 193 |
| 28.0 | 5 |
| 60.0 | | – collateral value on B | 466 |
| | 116 |
| | 73 |
| | 2 |
| | | Total | 7,892 |
| 46.1 | 2,475 |
| 33.2 | 851 |
| 52.6 | 199 |
| 11.1 | | At 31 Dec 2018 | 11,242 |
| 33.7 | 3,137 |
| 27.4 | 1,109 |
| 41.3 | 2,011 |
| 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.
•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 313366 of the financial statements. •The Group’s maximum exposure to credit risk includes financial guarantees and similar contracts granted, as well as loan and other credit-related commitments. Depending on the terms of the arrangement, we may use additional credit mitigation if a
guarantee is called upon or a loan commitment is drawn and subsequently defaults. For further information on these arrangements, see Note 32 on the financial statements.
Derivatives 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 reference to a market factor such as an interest rate, exchange rate or asset price. The counterparty risk from derivative transactions is taken into account when reporting the fair value of derivative positions. The adjustment to the fair value is known as the credit 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 | | 2020 | 2019 | | Notional | Fair value | Notional | Fair value | | amount | Assets | Liabilities | amount | Assets | Liabilities | | $m | $m | $m | $m | $m | $m | | Total OTC derivatives | 22,749,280 | | 372,373 | | 368,010 | | 26,244,531 | | 282,778 | | 279,101 | | | – total OTC derivatives cleared by central counterparties | 9,898,260 | | 74,054 | | 75,253 | | 12,563,343 | | 45,140 | | 46,351 | | | – total OTC derivatives not cleared by central counterparties | 12,851,020 | | 298,319 | | 292,757 | | 13,681,188 | | 237,638 | | 232,750 | | | Total exchange traded derivatives | 1,332,438 | | 4,456 | | 4,094 | | 1,583,590 | | 1,956 | | 2,135 | | | Gross | 24,081,718 | | 376,829 | | 372,104 | | 27,828,121 | | 284,734 | | 281,236 | | | Offset | | (69,103) | | (69,103) | | | (41,739) | | (41,739) | | | At 31 Dec | | 307,726 | | 303,001 | | | 242,995 | | 239,497 | |
| | | | | | | | | | | | | | | Notional contract amounts and fair values of derivatives | | | 2019 | 2018 | | | Notional |
| Fair value | Notional |
| Fair value | | | amount |
| Assets |
| Liabilities |
| amount |
| Assets |
| Liabilities |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Total OTC derivatives | 26,244,531 |
| 282,778 |
| 279,101 |
| 31,982,343 |
| 255,190 |
| 251,001 |
| | – total OTC derivatives cleared by central counterparties | 12,563,343 |
| 45,140 |
| 46,351 |
| 17,939,035 |
| 52,424 |
| 52,845 |
| | – total OTC derivatives not cleared by central counterparties | 13,681,188 |
| 237,638 |
| 232,750 |
| 14,043,308 |
| 202,766 |
| 198,156 |
| | Total exchange traded derivatives | 1,583,590 |
| 1,956 |
| 2,135 |
| 2,030,580 |
| 2,346 |
| 4,545 |
| | Gross | 27,828,121 |
| 284,734 |
| 281,236 |
| 34,012,923 |
| 257,536 |
| 255,546 |
| | Offset |
|
| (41,739 | ) | (41,739 | ) |
|
| (49,711 | ) | (49,711 | ) | | At 31 Dec |
|
| 242,995 |
| 239,497 |
|
|
| 207,825 |
| 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 335387 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 20192020 to 31 December 20192020 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 2019,2020, total personal lending for loans and advances to customers of $434bn$461bn increased by $40bn$26.5bn compared with 31 December 2018.2019. This increase included favourable foreign exchange movements of $6bn.$11.5bn. Excluding foreign exchange movements, there was growth of $34bn,$15.1bn, primarily driven by $18bn$10.1bn in AsiaEurope and $14bn$3.4bn in Europe.Asia. The allowance for ECL attributable to personal lending, excluding off-balance sheet loan commitments and guarantees, and foreign exchange movements, increased $0.2bn.$1.6bn to $4.7bn at 31 December 2020. Excluding foreign exchange movements, total personal lending was primarily driven by mortgage growth, which grew by $23bn.$21.5bn. Mortgages grew $12.3bn in the UK; $6.4bn in Asia, by $12bn, notably $7bn$4.7bn in Hong Kong and $3bn$1.6bn in Australia. In Europe,Australia; and $1.8bn in Canada. The allowance for ECL, excluding foreign exchange, attributable to mortgages grew by $10bn, notably $9bn in the UK, driven by stronger acquisition performance, including the expanded use of broker relationships.$0.8bn increased $0.2bn compared with
31 December 2019. The quality of both our Hong Kong and UK mortgage books remained high, with negligible defaults andlow levels of impairment allowances. The average LTV ratio on new mortgage lending in Hong Kong was 49%61%, compared with an estimated 41%45% for the overall mortgage portfolio. The average LTV ratio on new lending in the UK was 67%70%, compared with an estimated 51% for the overall mortgage portfolio. Excluding foreign exchange movements, other personal lending balances at 31 December 2019 increased2020 declined by $11bn$6.5bn compared with 31 December 2018.2019. The increasedecline was attributable to a $3.8bn decline in credit cards and a $2.4bn decline in loans and overdrafts, which grew by $4bnoverdrafts. The $3.8bn decrease in credit card lending was attributable to declines of $2.1bn in the UK, $0.5bn in Hong Kong and $4bn$0.3bn in Europe, notably $2bnthe US. The $2.4bn decrease in loans and overdrafts was attributable to declines of $1.1bn in Hong Kong, $1.4bn in the UK, $0.5bn in Singapore and $0.3bn in MENA. These declines were partly offset by growth of $1bn in France, primarily in other personal lending guaranteed by Crédit Logement and $1bn$0.5bn in Switzerland. The allowance for ECL, excluding foreign exchange, attributable to other personal lending of $4.0bn increased $1.4bn compared with 31 December 2019. Excluding foreign exchange, the UK. Creditallowance for ECL attributable to credit cards increased by $1bn in the US, China$0.7bn while loans and to a lesser extent from Mexico.
overdrafts increased by $0.7bn.
Report of the Directors | Risk
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Total personal lending for loans and advances to customers at amortised cost by stage distribution | | Gross carrying amount | | Allowance for ECL | | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | | $m | $m | $m | $m | $m | $m | $m | $m | | By portfolio | | | | | | | | | | First lien residential mortgages | 336,666 | | 12,233 | | 3,383 | | 352,282 | | (125) | | (188) | | (442) | | (755) | | | – of which: interest only (including offset) | 29,143 | | 3,074 | | 351 | | 32,568 | | (9) | | (19) | | (88) | | (116) | | | – affordability (including US adjustable rate mortgages) | 13,265 | | 2,209 | | 606 | | 16,080 | | (11) | | (11) | | (5) | | (27) | | | Other personal lending | 93,468 | | 12,831 | | 2,228 | | 108,527 | | (702) | | (2,214) | | (1,060) | | (3,976) | | | – other | 74,174 | | 7,288 | | 1,489 | | 82,951 | | (305) | | (914) | | (665) | | (1,884) | | | – credit cards | 17,327 | | 5,292 | | 680 | | 23,299 | | (386) | | (1,281) | | (380) | | (2,047) | | | – second lien residential mortgages | 593 | | 100 | | 51 | | 744 | | (3) | | (9) | | (10) | | (22) | | | – motor vehicle finance | 1,374 | | 151 | | 8 | | 1,533 | | (8) | | (10) | | (5) | | (23) | | | At 31 Dec 2020 | 430,134 | | 25,064 | | 5,611 | | 460,809 | | (827) | | (2,402) | | (1,502) | | (4,731) | | | By geography | | | | | | | | | | Europe | 200,120 | | 11,032 | | 2,511 | | 213,663 | | (247) | | (1,271) | | (826) | | (2,344) | | | – of which: UK | 163,338 | | 9,476 | | 1,721 | | 174,535 | | (223) | | (1,230) | | (545) | | (1,998) | | | Asia | 178,175 | | 7,969 | | 1,169 | | 187,313 | | (234) | | (446) | | (241) | | (921) | | | – of which: Hong Kong | 118,252 | | 5,133 | | 206 | | 123,591 | | (102) | | (237) | | (48) | | (387) | | | MENA | 4,879 | | 403 | | 251 | | 5,533 | | (54) | | (112) | | (152) | | (318) | | | North America | 40,387 | | 4,613 | | 1,378 | | 46,378 | | (93) | | (200) | | (132) | | (425) | | | Latin America | 6,573 | | 1,047 | | 302 | | 7,922 | | (199) | | (373) | | (151) | | (723) | | | At 31 Dec 2020 | 430,134 | | 25,064 | | 5,611 | | 460,809 | | (827) | | (2,402) | | (1,502) | | (4,731) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | Stage 1 | Stage 2 | Stage 3 | Total | | $m | $m | $m | $m | $m | $m | $m | $m | | Europe | 56,920 | | 719 | | 96 | | 57,735 | | (22) | | (2) | | — | | (24) | | | – of which: UK | 54,348 | | 435 | | 92 | | 54,875 | | (21) | | (2) | | — | | (23) | | | Asia | 156,057 | | 790 | | 11 | | 156,858 | | — | | — | | — | | — | | | – of which: Hong Kong | 118,529 | | 10 | | 10 | | 118,549 | | — | | — | | — | | — | | | MENA | 2,935 | | 46 | | 8 | | 2,989 | | (1) | | — | | — | | (1) | | | North America | 15,835 | | 124 | | 38 | | 15,997 | | (11) | | — | | — | | (11) | | | Latin America | 3,462 | | 28 | | 1 | | 3,491 | | (5) | | — | | — | | (5) | | | At 31 Dec 2020 | 235,209 | | 1,707 | | 154 | | 237,070 | | (39) | | (2) | | — | | (41) | |
| | | | | | | | | | | | | | | | | | | Total personal lending for loans and advances to customers at amortised cost by stage distribution | | | Gross carrying amount | | Allowance for ECL | | | Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | By portfolio | | | | | | | | | | First lien residential mortgages | 312,031 |
| 7,077 |
| 3,070 |
| 322,178 |
| (39 | ) | (68 | ) | (422 | ) | (529 | ) | | – of which: interest only (including offset) | 31,201 |
| 1,602 |
| 376 |
| 33,179 |
| (6 | ) | (15 | ) | (91 | ) | (112 | ) | | – affordability (including US adjustable rate mortgages) | 14,222 |
| 796 |
| 514 |
| 15,532 |
| (3 | ) | (3 | ) | (3 | ) | (9 | ) | | Other personal lending | 101,638 |
| 8,674 |
| 1,781 |
| 112,093 |
| (544 | ) | (1,268 | ) | (793 | ) | (2,605 | ) | | – other | 77,031 |
| 4,575 |
| 1,193 |
| 82,799 |
| (229 | ) | (451 | ) | (491 | ) | (1,171 | ) | | – credit cards | 22,285 |
| 3,959 |
| 524 |
| 26,768 |
| (310 | ) | (801 | ) | (284 | ) | (1,395 | ) | | – second lien residential mortgages | 750 |
| 84 |
| 55 |
| 889 |
| (1 | ) | (6 | ) | (10 | ) | (17 | ) | | – motor vehicle finance | 1,572 |
| 56 |
| 9 |
| 1,637 |
| (4 | ) | (10 | ) | (8 | ) | (22 | ) | | At 31 Dec 2019 | 413,669 |
| 15,751 |
| 4,851 |
| 434,271 |
| (583 | ) | (1,336 | ) | (1,215 | ) | (3,134 | ) | | By geography |
|
|
|
|
|
|
|
| | Europe | 186,561 |
| 6,854 |
| 2,335 |
| 195,750 |
| (112 | ) | (538 | ) | (578 | ) | (1,228 | ) | | 153,313 |
| 5,455 |
| 1,612 |
| 160,380 |
| (104 | ) | (513 | ) | (370 | ) | (987 | ) | | Asia | 173,523 |
| 5,855 |
| 717 |
| 180,095 |
| (223 | ) | (339 | ) | (170 | ) | (732 | ) | | 117,013 |
| 2,751 |
| 189 |
| 119,953 |
| (90 | ) | (220 | ) | (44 | ) | (354 | ) | | MENA | 5,671 |
| 247 |
| 299 |
| 6,217 |
| (50 | ) | (58 | ) | (189 | ) | (297 | ) | | North America | 41,148 |
| 1,930 |
| 1,238 |
| 44,316 |
| (56 | ) | (119 | ) | (141 | ) | (316 | ) | | Latin America | 6,766 |
| 865 |
| 262 |
| 7,893 |
| (142 | ) | (282 | ) | (137 | ) | (561 | ) | | At 31 Dec 2019 | 413,669 |
| 15,751 |
| 4,851 |
| 434,271 |
| (583 | ) | (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 |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Europe | 51,575 |
| 604 |
| 110 |
| 52,289 |
| (10 | ) | (2 | ) | — |
| (12 | ) | | 49,322 |
| 493 |
| 105 |
| 49,920 |
| (8 | ) | (1 | ) | — |
| (9 | ) | | Asia | 149,336 |
| 682 |
| 9 |
| 150,027 |
| — |
| — |
| — |
| — |
| | 115,025 |
| 27 |
| 3 |
| 115,055 |
| — |
| — |
| — |
| — |
| | MENA | 3,150 |
| 46 |
| 53 |
| 3,249 |
| — |
| — |
| — |
| — |
| | North America | 13,919 |
| 256 |
| 20 |
| 14,195 |
| (1 | ) | — |
| — |
| (1 | ) | | Latin America | 4,312 |
| 43 |
| 3 |
| 4,358 |
| (3 | ) | — |
| — |
| (3 | ) | | At 31 Dec 2019 | 222,292 |
| 1,631 |
| 195 |
| 224,118 |
| (14 | ) | (2 | ) | — |
| (16 | ) |
| | | Total personal lending for loans and advances to customers at amortised cost by stage distribution (continued) | Total personal lending for loans and advances to customers at amortised cost by stage distribution (continued) | Total personal lending for loans and advances to customers at amortised cost by stage distribution (continued) | | | | Gross carrying amount | | Allowance for ECL | | | Gross carrying amount | | Allowance for ECL | | | | | Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
| | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | | | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | $m | | | By portfolio | | By portfolio | | | | First lien residential mortgages | 284,103 |
| 6,286 |
| 2,944 |
| 293,333 |
| (41 | ) | (62 | ) | (432 | ) | (535 | ) | First lien residential mortgages | 312,031 | | 7,077 | | 3,070 | | 322,178 | | (39) | | (68) | | (422) | | (529) | | | | – of which: interest only (including offset) | 31,874 |
| 1,324 |
| 338 |
| 33,536 |
| (3 | ) | (13 | ) | (92 | ) | (108 | ) | – of which: interest only (including offset) | 31,201 | | 1,602 | | 376 | | 33,179 | | (6) | | (15) | | (91) | | (112) | | | | – affordability (including US adjustable rate mortgages) | 16,110 |
| 1,065 |
| 507 |
| 17,682 |
| (3 | ) | (4 | ) | (5 | ) | (12 | ) | – affordability (including US adjustable rate mortgages) | 14,222 | | 796 | | 514 | | 15,532 | | (3) | | (3) | | (3) | | (9) | | | | Other personal lending | 90,578 |
| 8,789 |
| 1,637 |
| 101,004 |
| (493 | ) | (1,203 | ) | (716 | ) | (2,412 | ) | Other personal lending | 101,638 | | 8,674 | | 1,781 | | 112,093 | | (544) | | (1,268) | | (793) | | (2,605) | | | | – other | 67,196 |
| 4,400 |
| 1,121 |
| 72,717 |
| (214 | ) | (435 | ) | (465 | ) | (1,114 | ) | – other | 77,031 | | 4,575 | | 1,193 | | 82,799 | | (229) | | (451) | | (491) | | (1,171) | | | | – credit cards | 20,932 |
| 4,259 |
| 453 |
| 25,644 |
| (272 | ) | (756 | ) | (233 | ) | (1,261 | ) | – credit cards | 22,285 | | 3,959 | | 524 | | 26,768 | | (310) | | (801) | | (284) | | (1,395) | | | | – second lien residential mortgages | 1,022 |
| 100 |
| 57 |
| 1,179 |
| (2 | ) | (9 | ) | (13 | ) | (24 | ) | – second lien residential mortgages | 750 | | 84 | | 55 | | 889 | | (1) | | (6) | | (10) | | (17) | | | | – motor vehicle finance | 1,428 |
| 30 |
| 6 |
| 1,464 |
| (5 | ) | (3 | ) | (5 | ) | (13 | ) | – motor vehicle finance | 1,572 | | 56 | | 9 | | 1,637 | | (4) | | (10) | | (8) | | (22) | | | | At 31 Dec 2018 | 374,681 |
| 15,075 |
| 4,581 |
| 394,337 |
| (534 | ) | (1,265 | ) | (1,148 | ) | (2,947 | ) | | | At 31 Dec 2019 | | At 31 Dec 2019 | 413,669 | | 15,751 | | 4,851 | | 434,271 | | (583) | | (1,336) | | (1,215) | | (3,134) | | | | By geography | | By geography | | | | Europe | 169,782 |
| 5,731 |
| 2,051 |
| 177,564 |
| (105 | ) | (453 | ) | (450 | ) | (1,008 | ) | Europe | 186,561 | | 6,854 | | 2,335 | | 195,750 | | (112) | | (538) | | (578) | | (1,228) | | | | – of which: UK | 139,237 |
| 4,308 |
| 1,315 |
| 144,860 |
| (93 | ) | (421 | ) | (219 | ) | (733 | ) | – of which: UK | 153,313 | | 5,455 | | 1,612 | | 160,380 | | (104) | | (513) | | (370) | | (987) | | | | Asia | 155,661 |
| 5,413 |
| 693 |
| 161,767 |
| (207 | ) | (353 | ) | (180 | ) | (740 | ) | Asia | 173,523 | | 5,855 | | 717 | | 180,095 | | (223) | | (339) | | (170) | | (732) | | | | – of which: Hong Kong | 104,909 |
| 2,715 |
| 169 |
| 107,793 |
| (71 | ) | (220 | ) | (39 | ) | (330 | ) | – of which: Hong Kong | 117,013 | | 2,751 | | 189 | | 119,953 | | (90) | | (220) | | (44) | | (354) | | | | MENA | 5,565 |
| 350 |
| 411 |
| 6,326 |
| (61 | ) | (70 | ) | (263 | ) | (394 | ) | MENA | 5,671 | | 247 | | 299 | | 6,217 | | (50) | | (58) | | (189) | | (297) | | | | North America | 38,283 |
| 2,552 |
| 1,186 |
| 42,021 |
| (29 | ) | (90 | ) | (142 | ) | (261 | ) | North America | 41,148 | | 1,930 | | 1,238 | | 44,316 | | (56) | | (119) | | (141) | | (316) | | | | Latin America | 5,390 |
| 1,029 |
| 240 |
| 6,659 |
| (132 | ) | (299 | ) | (113 | ) | (544 | ) | Latin America | 6,766 | | 865 | | 262 | | 7,893 | | (142) | | (282) | | (137) | | (561) | | | At 31 Dec 2018
| 374,681 |
| 15,075 |
| 4,581 |
| 394,337 |
| (534 | ) | (1,265 | ) | (1,148 | ) | (2,947 | ) | | | At 31 Dec 2019 | | At 31 Dec 2019 | 413,669 | | 15,751 | | 4,851 | | 434,271 | | (583) | | (1,336) | | (1,215) | | (3,134) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution (continued) | | Nominal amount | Allowance for ECL | | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | | $m | $m | $m | $m | $m | $m | $m | $m | | Europe | 51,575 | | 604 | | 110 | | 52,289 | | (10) | | (2) | | — | | (12) | | | – of which: UK | 49,322 | | 493 | | 105 | | 49,920 | | (8) | | (1) | | — | | (9) | | | Asia | 149,336 | | 682 | | 9 | | 150,027 | | — | | — | | — | | — | | | – of which: Hong Kong | 115,025 | | 27 | | 3 | | 115,055 | | — | | — | | — | | — | | | MENA | 3,150 | | 46 | | 53 | | 3,249 | | — | | — | | — | | — | | | North America | 13,919 | | 256 | | 20 | | 14,195 | | (1) | | — | | — | | (1) | | | Latin America | 4,312 | | 43 | | 3 | | 4,358 | | (3) | | — | | — | | (3) | | | At 31 Dec 2019 | 222,292 | | 1,631 | | 195 | | 224,118 | | (14) | | (2) | | — | | (16) | |
| | | | | | | | | | | | | | | | | | | Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution (continued) | | | Nominal amount | Allowance for ECL | | | Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Europe | 52,719 |
| 291 |
| 290 |
| 53,300 |
| (7 | ) | — |
| — |
| (7 | ) | | – of which: UK | 50,195 |
| 224 |
| 285 |
| 50,704 |
| (5 | ) | — |
| — |
| (5 | ) | | Asia | 131,333 |
| 1,034 |
| 1 |
| 132,368 |
| — |
| — |
| — |
| — |
| | – of which: Hong Kong | 102,156 |
| 366 |
| — |
| 102,522 |
| — |
| — |
| — |
| — |
| | MENA | 3,264 |
| 67 |
| 23 |
| 3,354 |
| — |
| — |
| — |
| — |
| | North America | 14,469 |
| 312 |
| 94 |
| 14,875 |
| (1 | ) | (1 | ) | — |
| (2 | ) | | Latin America | 4,318 |
| 59 |
| 4 |
| 4,381 |
| (5 | ) | — |
| — |
| (5 | ) | At 31 Dec 2018
| 206,103 |
| 1,763 |
| 412 |
| 208,278 |
| (13 | ) | (1 | ) | — |
| (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.$15.0bn. This excludes offset mortgages in the first direct brand and Private Bank mortgages, endowment mortgages and other products.mortgages. At the end of 2019,2020, the average LTV ratio in the portfolio was 42% 41% and 99% of mortgages had an LTV ratio of 75% or less. Of the interest-only mortgages that expired in 2017, 86%2018, 89% were repaid within 12 months of expiry with a total of 95%98% being repaid within 24 months of expiry. For interest-only mortgages expiring during 2018, 91%2019, 89% were fully repaid within 12 months of expiry. The profile of maturing UK interest-only loans is as follows:
| | | | | | | UK interest-only mortgage loans |
| $m |
| | Expired interest-only mortgage loans | 158169 |
| | Interest-only mortgage loans by maturity |
|
| – 20202021 | 306356 |
| – 20212022 | 435392 |
| – 20222023 | 430500 |
| – 20232024 | 556407 |
| – 2024–20282025–2029 | 3,1013,317 |
| – Post 20282029 | 9,5879,914 |
| At 31 Dec 20192020 | 14,57315,055 |
|
| | | | | | | | | | | | | | | | | | 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 | | | Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | At 1 Jan 2019 | 580,784 |
| (547 | ) | 16,838 |
| (1,266 | ) | 4,993 |
| (1,148 | ) | 602,615 |
| (2,961 | ) | | Transfers of financial instruments | (4,751 | ) | (374 | ) | 2,645 |
| 858 |
| 2,106 |
| (484 | ) | — |
| — |
| | Net remeasurement of ECL arising from transfer of stage | — |
| 446 |
| — |
| (408 | ) | — |
| (76 | ) | — |
| (38 | ) | | Net new and further lending/repayments | 50,946 |
| 3 |
| (2,348 | ) | 453 |
| (758 | ) | 281 |
| 47,840 |
| 737 |
| | Change in risk parameters – credit quality | — |
| (100 | ) | — |
| (1,015 | ) | — |
| (1,190 | ) | — |
| (2,305 | ) | | Changes to models used for ECL calculation | — |
| (6 | ) | — |
| 60 |
| — |
| 14 |
| — |
| 68 |
| | Assets written off | — |
| — |
| — |
| — |
| (1,345 | ) | 1,345 |
| (1,345 | ) | 1,345 |
| | Foreign exchange and other | 8,982 |
| (19 | ) | 247 |
| (20 | ) | 50 |
| 43 |
| 9,279 |
| 4 |
| | At 31 Dec 2019 | 635,961 |
| (597 | ) | 17,382 |
| (1,338 | ) | 5,046 |
| (1,215 | ) | 658,389 |
| (3,150 | ) | | ECL income statement change for the period |
|
| 343 |
|
|
| (910 | ) |
|
| (971 | ) |
|
| (1,538 | ) | | Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 314 |
| | Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4 |
| | Total ECL income statement change for the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,220 | ) |
Exposure to offset mortgage in first direct The offset mortgage in first direct is a flexible way for our customers to take control of their finances. It works by grouping together the customer’s mortgage, savings and current accounts to off-set their credit and debit balances against their mortgage exposure which at the end of 2020 is of $8.6bn with an average LTV ratio of 37%. | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | | $m | $m | $m | $m | $m | $m | $m | $m | | At 1 Jan 2020 | 635,961 | | (597) | | 17,382 | | (1,338) | | 5,046 | | (1,215) | | 658,389 | | (3,150) | | | Transfers of financial instruments | (16,019) | | (629) | | 13,370 | | 1,181 | | 2,649 | | (552) | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net remeasurement of ECL arising from transfer of stage | — | | 431 | | — | | (555) | | — | | (8) | | — | | (132) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net new and further lending/repayments | 30,891 | | 101 | | (5,407) | | 408 | | (677) | | 150 | | 24,807 | | 659 | | | Change in risk parameters – credit quality | — | | (147) | | — | | (2,025) | | — | | (1,258) | | — | | (3,430) | | | Changes to models used for ECL calculation | — | | (3) | | — | | (9) | | — | | 5 | | — | | (7) | | | Assets written off | — | | — | | — | | — | | (1,409) | | 1,407 | | (1,409) | | 1,407 | | | | | | | | | | | | Foreign exchange and other | 14,513 | | (22) | | 1,425 | | (67) | | 153 | | (32) | | 16,091 | | (121) | | | | | | | | | | | | | | | | | | | | | At 31 Dec 2020 | 665,346 | | (866) | | 26,770 | | (2,405) | | 5,762 | | (1,503) | | 697,878 | | (4,774) | | | ECL income statement change for the period | | 382 | | | (2,181) | | | (1,111) | | | (2,910) | | | Recoveries | | | | | | | | 280 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other | | | | | | | | (25) | | | Total ECL income statement change for the period | | | | | | | | (2,655) | |
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$1,624m during the period from $2,961m at 31 December 2018 to $3,150m at 31 December 2019.2019 to $4,774m at 31 December 2020. This increase was primarily driven by: •$3,430m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages;
•$737m132m relating to the net remeasurement impact of stage transfers; •foreign exchange and other movements of $121m; and •$7m due to changes to models used for ECL calculation. These were partly offset by: •$1,407m of assets written off; •$659m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further lending/repayments;repayments. $68m due to changes to models used for ECL calculation;
$1,345mThe ECL charge for the period of assets written off; and foreign exchange and other movements$2,910m presented in the above table consisted of $4m.
These were offset by:
$2,305m$3,430m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages; and
$38mstages, $132m relating to the
net remeasurement impact of stage transfers. 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 stagetransfers 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$7m in changes to models used for ECL calculation. This was partly offset by $659m relating to underlying net book volume movements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | Personal lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees (continued) | | (Audited) | | Non-credit impaired | Credit impaired | | | Stage 1 | Stage 2 | Stage 3 | Total | | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | Gross carrying/ nominal amount | Allowance for ECL | | $m | $m | $m | $m | $m | $m | $m | $m | | At 1 Jan 2019 | 580,784 | | (547) | | 16,838 | | (1,266) | | 4,993 | | (1,148) | | 602,615 | | (2,961) | | | Transfers of financial instruments | (4,751) | | (374) | | 2,645 | | 858 | | 2,106 | | (484) | | — | | — | | | Net remeasurement of ECL arising from transfer of stage | — | | 446 | | — | | (408) | | — | | (76) | | — | | (38) | | | Net new and further lending/repayments | 50,946 | | 3 | | (2,348) | | 453 | | (758) | | 281 | | 47,840 | | 737 | | | Change in risk parameters – credit quality | — | | (100) | | — | | (1,015) | | — | | (1,190) | | — | | (2,305) | | | Changes to models used for ECL calculation | — | | (6) | | — | | 60 | | — | | 14 | | — | | 68 | | | Assets written off | — | | — | | — | | — | | (1,345) | | 1,345 | | (1,345) | | 1,345 | | | Foreign exchange and other | 8,982 | | (19) | | 247 | | (20) | | 50 | | 43 | | 9,279 | | 4 | | | At 31 Dec 2019 | 635,961 | | (597) | | 17,382 | | (1,338) | | 5,046 | | (1,215) | | 658,389 | | (3,150) | | | ECL income statement change for the period | | 343 | | | (910) | | | (971) | | | (1,538) | | | Recoveries | | | | | | | | 314 | | | Other | | | | | | | | 4 | | | Total ECL income statement change for the period | | | | | | | | (1,220) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | Total | ECL coverage | | % | $m | $m | $m | $m | $m | $m | $m | $m | % | | First lien residential mortgages | | 336,666 | | 12,233 | | 3,383 | | 352,282 | | (125) | | (188) | | (442) | | (755) | | 0.2 | | | – Band 1 | 0.000 to 0.250 | 284,252 | | 1,283 | | — | | 285,535 | | (36) | | (3) | | — | | (39) | | — | | | – Band 2 | 0.251 to 0.500 | 16,259 | | 302 | | — | | 16,561 | | (9) | | (3) | | — | | (12) | | 0.1 | | | – Band 3 | 0.501 to 1.500 | 27,055 | | 1,755 | | — | | 28,810 | | (64) | | (8) | | — | | (72) | | 0.2 | | | – Band 4 | 1.501 to 5.000 | 8,858 | | 5,134 | | — | | 13,992 | | (15) | | (32) | | — | | (47) | | 0.3 | | | – Band 5 | 5.001 to 20.000 | 238 | | 1,806 | | — | | 2,044 | | (1) | | (41) | | — | | (42) | | 2.1 | | | – Band 6 | 20.001 to 99.999 | 4 | | 1,953 | | — | | 1,957 | | — | | (101) | | — | | (101) | | 5.2 | | | – Band 7 | 100.000 | — | | — | | 3,383 | | 3,383 | | — | | — | | (442) | | (442) | | 13.1 | | | Other personal lending | | 93,468 | | 12,831 | | 2,228 | | 108,527 | | (702) | | (2,214) | | (1,060) | | (3,976) | | 3.7 | | | – Band 1 | 0.000 to 0.250 | 41,565 | | 589 | | — | | 42,154 | | (96) | | (8) | | — | | (104) | | 0.2 | | | – Band 2 | 0.251 to 0.500 | 13,053 | | 518 | | — | | 13,571 | | (31) | | (63) | | — | | (94) | | 0.7 | | | – Band 3 | 0.501 to 1.500 | 23,802 | | 1,280 | | — | | 25,082 | | (108) | | (37) | | — | | (145) | | 0.6 | | | – Band 4 | 1.501 to 5.000 | 11,787 | | 2,175 | | — | | 13,962 | | (270) | | (112) | | — | | (382) | | 2.7 | | | – Band 5 | 5.001 to 20.000 | 3,234 | | 5,288 | | — | | 8,522 | | (197) | | (821) | | — | | (1,018) | | 11.9 | | | – Band 6 | 20.001 to 99.999 | 27 | | 2,981 | | — | | 3,008 | | — | | (1,173) | | — | | (1,173) | | 39.0 | | | – Band 7 | 100.000 | — | | — | | 2,228 | | 2,228 | | — | | — | | (1,060) | | (1,060) | | 47.6 | | | At 31 Dec 2020 | | 430,134 | | 25,064 | | 5,611 | | 460,809 | | (827) | | (2,402) | | (1,502) | | (4,731) | | 1.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First lien residential mortgages | | 312,031 | | 7,077 | | 3,070 | | | 322,178 | | (39) | | (68) | | (422) | | | (529) | | 0.2 | | | – Band 1 | 0.000 to 0.250 | 268,490 | | 284 | | — | | | 268,774 | | (16) | | — | | — | | | (16) | | — | | | – Band 2 | 0.251 to 0.500 | 22,293 | | 301 | | — | | | 22,594 | | (4) | | — | | — | | | (4) | | — | | | – Band 3 | 0.501 to 1.500 | 17,247 | | 2,313 | | — | | | 19,560 | | (13) | | (3) | | — | | | (16) | | 0.1 | | | – Band 4 | 1.501 to 5.000 | 3,796 | | 1,970 | | — | | | 5,766 | | (5) | | (7) | | — | | | (12) | | 0.2 | | | – Band 5 | 5.001 to 20.000 | 198 | | 1,383 | | — | | | 1,581 | | (1) | | (23) | | — | | | (24) | | 1.5 | | | – Band 6 | 20.001 to 99.999 | 7 | | 826 | | — | | | 833 | | — | | (35) | | — | | | (35) | | 4.2 | | | – Band 7 | 100.000 | — | | — | | 3,070 | | | 3,070 | | — | | — | | (422) | | | (422) | | 13.7 | | | Other personal lending | | 101,638 | | 8,674 | | 1,781 | | | 112,093 | | (544) | | (1,268) | | (793) | | | (2,605) | | 2.3 | | | – Band 1 | 0.000 to 0.250 | 46,533 | | 60 | | — | | | 46,593 | | (120) | | — | | — | | | (120) | | 0.3 | | | – Band 2 | 0.251 to 0.500 | 16,435 | | 65 | | — | | | 16,500 | | (38) | | (26) | | — | | | (64) | | 0.4 | | | – Band 3 | 0.501 to 1.500 | 25,160 | | 317 | | — | | | 25,477 | | (110) | | (13) | | — | | | (123) | | 0.5 | | | – Band 4 | 1.501 to 5.000 | 10,951 | | 3,483 | | — | | | 14,434 | | (144) | | (329) | | — | | | (473) | | 3.3 | | | – Band 5 | 5.001 to 20.000 | 2,421 | | 3,434 | | — | | | 5,855 | | (132) | | (440) | | — | | | (572) | | 9.8 | | | – Band 6 | 20.001 to 99.999 | 138 | | 1,315 | | — | | | 1,453 | | — | | (460) | | — | | | (460) | | 31.7 | | | – Band 7 | 100.000 | — | | — | | 1,781 | | | 1,781 | | — | | — | | (793) | | | (793) | | 44.5 | | | At 31 Dec 2019 | | 413,669 | | 15,751 | | 4,851 | | | 434,271 | | (583) | | (1,336) | | (1,215) | | | (3,134) | | 0.7 | |
1 12-month point in time adjusted for multiple economic scenarios.
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 | Credit impaired | | | | Stage 1 | Stage 2 | Stage 3 | Total | | | Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| Gross carrying/ nominal amount |
| Allowance for ECL |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | At 1 Jan 2018 | 549,328 |
| (596 | ) | 17,678 |
| (1,157 | ) | 4,874 |
| (1,312 | ) | 571,880 |
| (3,065 | ) | | Transfers of financial instruments | (4,270 | ) | (411 | ) | 2,047 |
| 799 |
| 2,223 |
| (388 | ) | — |
| — |
| | Net remeasurement of ECL arising from transfer of stage | — |
| 358 |
| — |
| (374 | ) | — |
| (11 | ) | — |
| (27 | ) | | Net new and further lending/repayments | 52,761 |
| (241 | ) | (2,453 | ) | 222 |
| (488 | ) | 327 |
| 49,820 |
| 308 |
| | Changes to risk parameters – credit quality | — |
| 266 |
| — |
| (786 | ) | — |
| (1,197 | ) | — |
| (1,717 | ) | | Assets written off | — |
| — |
| — |
| — |
| (1,386 | ) | 1,380 |
| (1,386 | ) | 1,380 |
| | Foreign exchange and other | (17,035 | ) | 77 |
| (434 | ) | 30 |
| (230 | ) | 53 |
| (17,699 | ) | 160 |
| | At 31 Dec 2018 | 580,784 |
| (547 | ) | 16,838 |
| (1,266 | ) | 4,993 |
| (1,148 | ) | 602,615 |
| (2,961 | ) | | ECL income statement change for the period |
|
| 383 |
|
|
| (938 | ) |
|
| (881 | ) |
|
| (1,436 | ) | | Recoveries | | | | | | | | 290 |
| | Others | | | | | | | | (18 | ) | Total ECL income statement change for the period
| | | | | | | | (1,164 | ) |
| | | | | | | | | | | | | | | | | | | | | 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 |
| Total |
| ECL coverage | | | % | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| % | | First lien residential mortgages | | 312,031 |
| 7,077 |
| 3,070 |
| 322,178 |
| (39 | ) | (68 | ) | (422 | ) | (529 | ) | 0.2 | | – Band 1 | 0.000 to 0.250 | 268,490 |
| 284 |
| — |
| 268,774 |
| (16 | ) | — |
| — |
| (16 | ) | — | | – Band 2 | 0.251 to 0.500 | 22,293 |
| 301 |
| — |
| 22,594 |
| (4 | ) | — |
| — |
| (4 | ) | — | | – Band 3 | 0.501 to 1.500 | 17,247 |
| 2,313 |
| — |
| 19,560 |
| (13 | ) | (3 | ) | — |
| (16 | ) | 0.1 | | – Band 4 | 1.501 to 5.000 | 3,796 |
| 1,970 |
| — |
| 5,766 |
| (5 | ) | (7 | ) | — |
| (12 | ) | 0.2 | | – Band 5 | 5.001 to 20.000 | 198 |
| 1,383 |
| — |
| 1,581 |
| (1 | ) | (23 | ) | — |
| (24 | ) | 1.5 | | – Band 6 | 20.001 to 99.999 | 7 |
| 826 |
| — |
| 833 |
| — |
| (35 | ) | — |
| (35 | ) | 4.2 | | – Band 7 | 100.000 | — |
| — |
| 3,070 |
| 3,070 |
| — |
| — |
| (422 | ) | (422 | ) | 13.7 | | Other personal lending | | 101,638 |
| 8,674 |
| 1,781 |
| 112,093 |
| (544 | ) | (1,268 | ) | (793 | ) | (2,605 | ) | 2.3 | | – Band 1 | 0.000 to 0.250 | 46,533 |
| 60 |
| — |
| 46,593 |
| (120 | ) | — |
| — |
| (120 | ) | 0.3 | | – Band 2 | 0.251 to 0.500 | 16,435 |
| 65 |
| — |
| 16,500 |
| (38 | ) | (26 | ) | — |
| (64 | ) | 0.4 | | – Band 3 | 0.501 to 1.500 | 25,160 |
| 317 |
| — |
| 25,477 |
| (110 | ) | (13 | ) | — |
| (123 | ) | 0.5 | | – Band 4 | 1.501 to 5.000 | 10,951 |
| 3,483 |
| — |
| 14,434 |
| (144 | ) | (329 | ) | — |
| (473 | ) | 3.3 | | – Band 5 | 5.001 to 20.000 | 2,421 |
| 3,434 |
| — |
| 5,855 |
| (132 | ) | (440 | ) | — |
| (572 | ) | 9.8 | | – Band 6 | 20.001 to 99.999 | 138 |
| 1,315 |
| — |
| 1,453 |
| — |
| (460 | ) | — |
| (460 | ) | 31.7 | | – Band 7 | 100.000 | — |
| — |
| 1,781 |
| 1,781 |
| — |
| — |
| (793 | ) | (793 | ) | 44.5 | | At 31 Dec 2019 | | 413,669 |
| 15,751 |
| 4,851 |
| 434,271 |
| (583 | ) | (1,336 | ) | (1,215 | ) | (3,134 | ) | 0.7 |
| | | | | | | | | | | | | | | | | | | | | First lien residential mortgages | | 284,103 |
| 6,286 |
| 2,944 |
| 293,333 |
| (41 | ) | (62 | ) | (432 | ) | (535 | ) | 0.2 | | – Band 1 | 0.000 to 0.250 | 247,046 |
| 308 |
| — |
| 247,354 |
| (15 | ) | — |
| — |
| (15 | ) | — | | – Band 2 | 0.251 to 0.500 | 15,458 |
| 78 |
| — |
| 15,536 |
| (4 | ) | — |
| — |
| (4 | ) | — | | – Band 3 | 0.501 to 1.500 | 17,987 |
| 1,881 |
| — |
| 19,868 |
| (14 | ) | (2 | ) | — |
| (16 | ) | 0.1 | | – Band 4 | 1.501 to 5.000 | 3,295 |
| 1,575 |
| — |
| 4,870 |
| (7 | ) | (6 | ) | — |
| (13 | ) | 0.3 | | – Band 5 | 5.001 to 20.000 | 301 |
| 1,445 |
| — |
| 1,746 |
| (1 | ) | (19 | ) | — |
| (20 | ) | 1.1 | | – Band 6 | 20.001 to 99.999 | 16 |
| 999 |
| — |
| 1,015 |
| — |
| (35 | ) | — |
| (35 | ) | 3.4 | | – Band 7 | 100.000 | — |
| — |
| 2,944 |
| 2,944 |
| — |
| — |
| (432 | ) | (432 | ) | 14.7 | | Other personal lending | | 90,578 |
| 8,789 |
| 1,637 |
| 101,004 |
| (493 | ) | (1,203 | ) | (716 | ) | (2,412 | ) | 2.4 | | – Band 1 | 0.000 to 0.250 | 41,048 |
| 38 |
| — |
| 41,086 |
| (95 | ) | — |
| — |
| (95 | ) | 0.2 | | – Band 2 | 0.251 to 0.500 | 12,524 |
| 116 |
| — |
| 12,640 |
| (34 | ) | — |
| — |
| (34 | ) | 0.3 | | – Band 3 | 0.501 to 1.500 | 23,573 |
| 323 |
| — |
| 23,896 |
| (122 | ) | (26 | ) | — |
| (148 | ) | 0.6 | | – Band 4 | 1.501 to 5.000 | 11,270 |
| 3,089 |
| — |
| 14,359 |
| (131 | ) | (285 | ) | — |
| (416 | ) | 2.9 | | – Band 5 | 5.001 to 20.000 | 2,158 |
| 4,061 |
| — |
| 6,219 |
| (111 | ) | (465 | ) | — |
| (576 | ) | 9.3 | | – Band 6 | 20.001 to 99.999 | 5 |
| 1,162 |
| — |
| 1,167 |
| — |
| (427 | ) | — |
| (427 | ) | 36.6 | | – Band 7 | 100.000 | — |
| — |
| 1,637 |
| 1,637 |
| — |
| — |
| (716 | ) | (716 | ) | 43.7 | | At 31 Dec 2018 | | 374,681 |
| 15,075 |
| 4,581 |
| 394,337 |
| (534 | ) | (1,265 | ) | (1,148 | ) | (2,947 | ) | 0.7 |
| | 1 | 12-month point in time adjusted for multiple economic scenarios. |
Risk
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) | | | | Of which: | | | Of which: | | | Total | UK | Hong Kong | US | | Total | UK | Hong Kong | | | | Gross carrying/nominal amount |
| ECL coverage |
| Gross carrying/nominal amount |
| ECL coverage | Gross carrying/nominal amount |
| ECL coverage |
| Gross carrying/nominal amount |
| ECL coverage | | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | | | | $m |
| % |
| $m |
| % | $m |
| % |
| $m |
| % | | $m | % | $m | % | $m | % | | | Stage 1 | | | | | Stage 1 | | | | Fully collateralised | 326,510 |
| — |
| 143,772 |
| — | 86,049 |
| — |
| 16,079 |
| — | Fully collateralised | 354,102 | | 0 | | 159,562 | | 0 | | 90,733 | | 0 | | | | LTV ratio: | | | | | | | | | LTV ratio: | | | | – less than 50% | 168,923 |
| — |
| 70,315 |
| — | 57,043 |
| — |
| 8,170 |
| — | – less than 50% | 174,370 | | 0 | | 76,535 | | 0 | | 54,866 | | 0 | | | | – 51% to 60% | 55,287 |
| — |
| 21,898 |
| — | 13,169 |
| — |
| 3,330 |
| — | – 51% to 60% | 60,180 | | 0 | | 23,967 | | 0 | | 14,253 | | 0 | | | | – 61% to 70% | 44,208 |
| — |
| 19,903 |
| — | 6,478 |
| — |
| 2,702 |
| — | – 61% to 70% | 48,159 | | 0 | | 23,381 | | 0 | | 6,042 | | 0 | | | | – 71% to 80% | 33,049 |
| — |
| 17,649 |
| — | 3,195 |
| — |
| 1,610 |
| — | – 71% to 80% | 40,395 | | 0.1 | | 20,846 | | 0 | | 4,288 | | 0 | | | | – 81% to 90% | 18,157 |
| — |
| 11,127 |
| — | 3,685 |
| — |
| 198 |
| — | – 81% to 90% | 23,339 | | 0.1 | | 12,936 | | 0 | | 6,837 | | 0 | | | | – 91% to 100% | 6,886 |
| — |
| 2,880 |
| — | 2,479 |
| — |
| 69 |
| — | – 91% to 100% | 7,659 | | 0.1 | | 1,897 | | 0.1 | | 4,447 | | 0 | | | | Partially collateralised (A): | 1,384 |
| 0.1 | 326 |
| — | 284 |
| — |
| 5 |
| — | Partially collateralised (A): | 973 | | 0.4 | 289 | | 0 | | 336 | | 0 | | | | LTV ratio: |
|
|
|
|
|
|
|
| LTV ratio: | | | | – 101% to 110% | 843 |
| 0.1 | 89 |
| — | 281 |
| — |
| 3 |
| — | – 101% to 110% | 592 | | 0.4 | 84 | | 0 | | 334 | | 0 | | | | – 111% to 120% | 195 |
| 0.2 | 48 |
| — | 1 |
| — |
| 1 |
| — | – 111% to 120% | 101 | | 0.5 | 45 | | 0 | | 0 | | 0 | | | | – greater than 120% | 346 |
| 0.1 | 189 |
| — | 2 |
| — |
| 1 |
| — | – greater than 120% | 280 | | 0.3 | 160 | | 0 | | 2 | | 0 | | | | – collateral value on A | 1,232 |
|
| 232 |
|
| 279 |
|
| 5 |
|
| – collateral value on A | 847 | | | 212 | | | 328 | | | | | Total | 327,894 |
| — |
| 144,098 |
| — | 86,333 |
| — |
| 16,084 |
| — | Total | 355,075 | | 0 | | 159,851 | | 0 | | 91,069 | | 0 | | | | Stage 2 |
|
|
|
|
| Stage 2 | | | | Fully collateralised | 7,087 |
| 0.9 | 1,941 |
| 1.0 | 1,116 |
| — |
| 1,074 |
| 0.3 | Fully collateralised | 12,252 | | 1.5 | 4,229 | | 1.4 | 1,802 | | 0 | | | | LTV ratio: |
|
|
|
|
|
|
|
| LTV ratio: | | | | – less than 50% | 3,781 |
| 0.5 | 1,146 |
| 0.7 | 892 |
| — |
| 680 |
| 0.2 | – less than 50% | 6,694 | | 1.1 | 2,442 | | 1.2 | 1,256 | | 0 | | | | – 51% to 60% | 923 |
| 1.1 | 233 |
| 1.5 | 95 |
| — |
| 184 |
| 0.3 | – 51% to 60% | 2,223 | | 1.1 | 730 | | 1.3 | 253 | | 0 | | | | – 61% to 70% | 909 |
| 1.2 | 262 |
| 1.2 | 59 |
| — |
| 130 |
| 0.6 | – 61% to 70% | 1,779 | | 1.6 | 606 | | 1.3 | 83 | | 0 | | | | – 71% to 80% | 894 |
| 1.1 | 231 |
| 1.0 | 32 |
| — |
| 53 |
| 1.3 | – 71% to 80% | 987 | | 2.8 | 244 | | 2.9 | 111 | | 0 | | | | – 81% to 90% | 425 |
| 1.6 | 36 |
| 2.9 | 25 |
| — |
| 17 |
| 2.7 | – 81% to 90% | 400 | | 4.9 | 139 | | 3.6 | 60 | | 0 | | | | – 91% to 100% | 155 |
| 4.4 | 33 |
| 1.8 | 13 |
| — |
| 10 |
| 1.1 | – 91% to 100% | 169 | | 5.7 | 68 | | 3.3 | 39 | | 0 | | | | Partially collateralised (B): | 76 |
| 7.2 | 23 |
| 1.8 | 1 |
| — |
| 4 |
| — | Partially collateralised (B): | 53 | | 13.6 | 4 | | 3.3 | 9 | | 0 | | | | LTV ratio: |
|
|
|
|
| LTV ratio: | | | | – 101% to 110% | 45 |
| 5.4 | 20 |
| 1.5 | 1 |
| — |
| 2 |
| — | – 101% to 110% | 28 | | 11.9 | 3 | | 1.5 | 9 | | 0 | | | | – 111% to 120% | 10 |
| 11.1 | 1 |
| 4.8 | — |
| — |
| 1 |
| — | – 111% to 120% | 9 | | 16.8 | 0 | | 0 | 0 | | 0 | | | | – greater than 120% | 21 |
| 9.0 | 2 |
| 3.0 | — |
| — |
| 1 |
| — | – greater than 120% | 16 | | 14.8 | 1 | | 8.5 | 0 | | 0 | | | | – collateral value on B | 69 |
|
| 20 |
|
| 1 |
|
| 3 |
|
| – collateral value on B | 47 | | | 4 | | | 9 | | | | | Total | 7,163 |
| 1.0 | 1,964 |
| 1.0 | 1,117 |
| — |
| 1,078 |
| 0.3 | Total | 12,305 | | 1.5 | 4,233 | | 1.4 | 1,811 | | 0 | | | | Stage 3 |
|
|
|
|
|
| Stage 3 | | | | Fully collateralised | 2,725 |
| 9.0 | 1,177 |
| 9.9 | 44 | 0.5 |
| 695 |
| 0.7 | Fully collateralised | 3,083 | | 9.8 | 1,050 | | 12.3 | 63 | 0 | | | | LTV ratio: |
|
|
|
|
|
|
|
| LTV ratio: | | | | – less than 50% | 1,337 |
| 7.1 | 711 |
| 7.8 | 39 |
| 0.5 |
| 279 |
| 0.7 | – less than 50% | 1,472 | | 8.0 | 676 | | 10.9 | 53 | | 0 | | | | – 51% to 60% | 410 |
| 7.0 | 159 |
| 10.0 | 3 |
| 0.2 |
| 126 |
| 0.8 | – 51% to 60% | 505 | | 8.7 | 144 | | 15.1 | 6 | | 0 | | | | – 61% to 70% | 358 |
| 7.9 | 136 |
| 10.6 | — |
| — |
| 125 |
| 0.8 | – 61% to 70% | 435 | | 9.2 | 112 | | 12.9 | 0 | | 0 | | | | – 71% to 80% | 309 |
| 13.4 | 100 |
| 18.9 | 1 |
| — |
| 93 |
| 1.1 | – 71% to 80% | 378 | | 11.5 | 81 | | 13.7 | 2 | | 0 | | | | – 81% to 90% | 178 |
| 13.8 | 47 |
| 12.3 | 1 |
| — |
| 51 |
| — | – 81% to 90% | 195 | | 17.3 | 28 | | 22.4 | 2 | | 0 | | | | – 91% to 100% | 133 |
| 21.8 | 24 |
| 26.3 | — |
| — |
| 21 |
| — | – 91% to 100% | 98 | | 24.3 | 9 | | 17.8 | 0 | | 0 | | | | Partially collateralised (C): | 371 |
| 47.6 | 25 |
| 27.3 | — |
| — |
| 13 |
| 0.2 | Partially collateralised (C): | 328 | | 42.7 | 17 | | 22.9 | 0 | | 0 | | | | LTV ratio: |
|
|
|
|
|
|
|
| LTV ratio: | | | | – 101% to 110% | 97 |
| 36.4 | 11 |
| 19.1 | — |
| — |
| 7 |
| 0.3 | – 101% to 110% | 75 | | 30.4 | 9 | | 16.7 | 0 | | 0 | | | | – 111% to 120% | 62 |
| 37.8 | 6 |
| 22.7 | — |
| — |
| 2 |
| 0.3 | – 111% to 120% | 56 | | 38.8 | 5 | | 17.6 | 0 | | 0 | | | | – greater than 120% | 212 |
| 55.6 | 8 |
| 42.0 | — |
| — |
| 4 |
| — | – greater than 120% | 197 | | 48.5 | 3 | | 50.3 | 0 | | 0 | | | | – collateral value on C | 305 |
|
| 24 |
|
| — |
|
| 13 |
|
| – collateral value on C | 228 | | | 10 | | | 1 | | | | | Total | 3,096 |
| 13.7 | 1,202 |
| 10.3 | 44 | 0.5 |
| 708 |
| 0.7 | Total | 3,411 | | 13.0 | 1,067 | | 12.5 | 63 | 0 | | | | At 31 Dec 2019 | 338,153 |
| 0.2 | 147,264 |
| 0.1 | 87,494 |
| — |
| 17,870 |
| 0.1 | | | At 31 Dec 2020 | | At 31 Dec 2020 | 370,791 | | 0.2 | 165,151 | | 0.1 | 92,943 | | 0 | | |
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) | | | | | Of which: | | | Total | UK | 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 | | | $m |
| % |
| $m |
| % | $m |
| % | $m |
| % | | Stage 1 | | | | | | | | | | Fully collateralised | 299,072 |
| — |
| 130,646 |
| — | 79,180 |
| — | 15,321 |
| — | | LTV ratio: |
|
|
|
|
|
|
|
| | – less than 50% | 160,563 |
| — |
| 66,834 |
| — | 54,262 |
| — | 8,060 |
| — | | – 51% to 60% | 51,415 |
| — |
| 20,937 |
| — | 11,591 |
| — | 3,382 |
| — | | – 61% to 70% | 40,273 |
| — |
| 17,480 |
| — | 5,979 |
| — | 2,473 |
| — | | – 71% to 80% | 28,383 |
| — |
| 15,086 |
| — | 2,986 |
| — | 1,113 |
| — | | – 81% to 90% | 14,191 |
| — |
| 8,824 |
| — | 2,637 |
| — | 158 |
| — | | – 91% to 100% | 4,247 |
| 0.1 | 1,485 |
| — | 1,725 |
| — | 135 |
| — | | Partially collateralised (A): | 1,420 |
| 0.1 | 581 |
| — | 300 |
| — | 10 |
| — | | LTV ratio: |
|
|
|
|
|
|
|
| | – 101% to 110% | 808 |
| 0.1 | 334 |
| — | 256 |
| — | 5 |
| — | | – 111% to 120% | 184 |
| 0.2 | 46 |
| — | 41 |
| — | 2 |
| — | | – greater than 120% | 428 |
| 0.2 | 201 |
| — | 3 |
| — | 3 |
| — | | – collateral value on A | 1,266 |
|
| 493 |
|
| 284 |
|
| 8 |
|
| | Total | 300,492 |
| — |
| 131,227 |
| — | 79,480 |
| — | 15,331 |
| — | | Stage 2 |
|
|
|
|
|
|
|
| | Fully collateralised | 6,170 |
| 1.0 | 1,234 |
| 1.3 | 867 |
| — | 1,435 |
| 0.3 | | LTV ratio: |
|
|
|
|
|
|
|
| | – less than 50% | 3,334 |
| 0.7 | 917 |
| 0.9 | 699 |
| — | 814 |
| 0.1 | | – 51% to 60% | 932 |
| 1.1 | 113 |
| 3.0 | 74 |
| — | 268 |
| 0.4 | | – 61% to 70% | 853 |
| 1.0 | 105 |
| 2.2 | 43 |
| — | 231 |
| 0.3 | | – 71% to 80% | 586 |
| 1.3 | 39 |
| 3.4 | 28 |
| — | 79 |
| 0.9 | | – 81% to 90% | 331 |
| 1.7 | 27 |
| 3.1 | 20 |
| — | 32 |
| 1.6 | | – 91% to 100% | 134 |
| 2.4 | 33 |
| 1.5 | 3 |
| — | 11 |
| 0.8 | | Partially collateralised (B): | 123 |
| 2.9 | 46 |
| 0.2 | 1 |
| — | 5 |
| 0.3 | | LTV ratio: |
|
|
|
|
|
|
|
| | – 101% to 110% | 76 |
| 1.5 | 44 |
| 0.1 | 1 |
| — | 3 |
| 0.5 | | – 111% to 120% | 17 |
| 4.5 | 1 |
| 4.3 | — |
| — | 1 |
| — | | – greater than 120% | 30 |
| 5.3 | 1 |
| 0.6 | — |
| — | 1 |
| — | | – collateral value on B | 118 |
|
| 44 |
|
| 1 |
|
| 4 |
|
| | Total | 6,293 |
| 1.0 | 1,280 |
| 1.3 | 868 |
| — | 1,440 |
| 0.3 | | Stage 3 |
|
|
|
|
|
|
|
| | Fully collateralised | 2,557 |
| 12.3 | 1,023 |
| 10.9 | 25 |
| 0.9 | 671 |
| 1.0 | | LTV ratio: |
|
|
|
|
|
|
|
| | – less than 50% | 1,255 |
| 13.6 | 638 |
| 7.8 | 24 |
| 0.9 | 219 |
| 0.9 | | – 51% to 60% | 359 |
| 8.3 | 151 |
| 11.3 | 1 |
| — | 107 |
| 0.9 | | – 61% to 70% | 336 |
| 12.0 | 119 |
| 18.4 | — |
| — | 105 |
| 1.0 | | – 71% to 80% | 280 |
| 9.9 | 70 |
| 14.8 | — |
| — | 114 |
| 0.9 | | – 81% to 90% | 190 |
| 9.4 | 33 |
| 19.4 | — |
| — | 81 |
| 1.2 | | – 91% to 100% | 137 |
| 19.8 | 12 |
| 45.9 | — |
| — | 45 |
| 2.2 | | Partially collateralised (C): | 391 |
| 33.6 | 23 |
| 15.8 | — |
| — | 24 |
| 0.4 | | LTV ratio: |
|
|
|
|
|
|
|
| | – 101% to 110% | 73 |
| 17.4 | 10 |
| 14.3 | — |
| — | 14 |
| 0.6 | | – 111% to 120% | 68 |
| 24.2 | 5 |
| 26.4 | — |
| — | 6 |
| 0.3 | | – greater than 120% | 250 |
| 40.8 | 8 |
| 11.1 | — |
| — | 4 |
| 0.2 | | – collateral value on C | 372 |
|
| 20 |
|
| — |
|
| 22 |
|
| | Total | 2,948 |
| 15.1 | 1,046 |
| 11.0 | 25 |
| 0.9 | 695 |
| 1.0 | | At 31 Dec 2018 | 309,733 |
| 0.2 | 133,553 |
| 0.1 | 80,373 |
| — | 17,466 |
| 0.1 |
| | | | | | | | | | | | | | | | | | | | | | | Personal lending – residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage (continued) | | (Audited) | | | | Of which: | | Total | UK | Hong Kong | | | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | | | | $m | % | $m | % | $m | % | | | | Stage 1 | | | | | | | | | | Fully collateralised | 326,510 | | 0 | | 143,772 | | 0 | | 86,049 | | 0 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 168,923 | | 0 | | 70,315 | | 0 | | 57,043 | | 0 | | | | | – 51% to 60% | 55,287 | | 0 | | 21,898 | | 0 | | 13,169 | | 0 | | | | | – 61% to 70% | 44,208 | | 0 | | 19,903 | | 0 | | 6,478 | | 0 | | | | | – 71% to 80% | 33,049 | | 0 | | 17,649 | | 0 | | 3,195 | | 0 | | | | | – 81% to 90% | 18,157 | | 0 | | 11,127 | | 0 | | 3,685 | | 0 | | | | | – 91% to 100% | 6,886 | | 0 | | 2,880 | | 0 | | 2,479 | | 0 | | | | | Partially collateralised (A): | 1,384 | | 0.1 | | 326 | | 0 | | 284 | | 0 | | | | | LTV ratio: | | | | | | | | | | – 101% to 110% | 843 | | 0.1 | | 89 | | 0 | | 281 | | 0 | | | | | – 111% to 120% | 195 | | 0.2 | | 48 | | 0 | | 1 | | 0 | | | | | – greater than 120% | 346 | | 0.1 | | 189 | | 0 | | 2 | | 0 | | | | | – collateral value on A | 1,232 | | | 232 | | | 279 | | | | | | Total | 327,894 | | 0 | | 144,098 | | 0 | | 86,333 | | 0 | | | | | Stage 2 | | | | | | | | | | Fully collateralised | 7,087 | | 0.9 | | 1,941 | | 1.0 | | 1,116 | | 0 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 3,781 | | 0.5 | | 1,146 | | 0.7 | | 892 | | 0 | | | | | – 51% to 60% | 923 | | 1.1 | | 233 | | 1.5 | | 95 | | 0 | | | | | – 61% to 70% | 909 | | 1.2 | | 262 | | 1.2 | | 59 | | 0 | | | | | – 71% to 80% | 894 | | 1.1 | | 231 | | 1.0 | | 32 | | 0 | | | | | – 81% to 90% | 425 | | 1.6 | | 36 | | 2.9 | | 25 | | 0 | | | | | – 91% to 100% | 155 | | 4.4 | | 33 | | 1.8 | | 13 | | 0 | | | | | Partially collateralised (B): | 76 | | 7.2 | | 23 | | 1.8 | | 1 | | 0 | | | | | LTV ratio: | | | | | | | | | | – 101% to 110% | 45 | | 5.4 | | 20 | | 1.5 | | 1 | | 0 | | | | | – 111% to 120% | 10 | | 11.1 | | 1 | | 4.8 | | 0 | | 0 | | | | | – greater than 120% | 21 | | 9.0 | | 2 | | 3.0 | | 0 | | 0 | | | | | – collateral value on B | 69 | | | 20 | | | 1 | | | | | | Total | 7,163 | | 1.0 | | 1,964 | | 1.0 | | 1,117 | | 0 | | | | | Stage 3 | | | | | | | | | | Fully collateralised | 2,725 | | 9.0 | | 1,177 | | 9.9 | | 44 | | 0.5 | | | | | LTV ratio: | | | | | | | | | | – less than 50% | 1,337 | | 7.1 | | 711 | | 7.8 | | 39 | | 0.5 | | | | | – 51% to 60% | 410 | | 7.0 | | 159 | | 10.0 | | 3 | | 0.2 | | | | | – 61% to 70% | 358 | | 7.9 | | 136 | | 10.6 | | 0 | | 0 | | | | | – 71% to 80% | 309 | | 13.4 | | 100 | | 18.9 | | 1 | | 0 | | | | | – 81% to 90% | 178 | | 13.8 | | 47 | | 12.3 | | 1 | | 0 | | | | | – 91% to 100% | 133 | | 21.8 | | 24 | | 26.3 | | 0 | | 0 | | | | | Partially collateralised (C): | 371 | | 47.6 | | 25 | | 27.3 | | 0 | | 0 | | | | | LTV ratio: | | | | | | | | | | – 101% to 110% | 97 | | 36.4 | | 11 | | 19.1 | | 0 | | 0 | | | | | – 111% to 120% | 62 | | 37.8 | | 6 | | 22.7 | | 0 | | 0 | | | | | – greater than 120% | 212 | | 55.6 | | 8 | | 42.0 | | 0 | | 0 | | | | | – collateral value on C | 305 | | | 24 | | | 0 | | | | | | Total | 3,096 | | 13.7 | | 1,202 | | 10.3 | | 44 | | 0.5 | | | | | At 31 Dec 2019 | 338,153 | | 0.2 | | 147,264 | | 0.1 | | 87,494 | | 0 | | | |
Supplementary information
| | | | | | | | | | | | | | | | | | | Wholesale lending – loans and advances to customers at amortised cost by country/territory | | | Gross carrying amount | Allowance for ECL | | | Corporate and commercial |
| Of which: real estate1 |
| Non-bank financial institutions |
| Total |
| Corporate and commercial |
| Of which: real estate1 |
| Non-bank financial institutions |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Europe | 175,215 |
| 26,587 |
| 26,497 |
| 201,712 |
| (2,304 | ) | (354 | ) | (81 | ) | (2,385 | ) | – UK | 126,760 |
| 18,941 |
| 18,545 |
| 145,305 |
| (1,629 | ) | (303 | ) | (26 | ) | (1,655 | ) | | – France | 27,885 |
| 5,643 |
| 4,899 |
| 32,784 |
| (423 | ) | (28 | ) | (52 | ) | (475 | ) | | – Germany | 9,771 |
| 390 |
| 1,743 |
| 11,514 |
| (60 | ) | — |
| — |
| (60 | ) | | – Switzerland | 1,535 |
| 554 |
| 406 |
| 1,941 |
| (1 | ) | — |
| — |
| (1 | ) | | – other | 9,264 |
| 1,059 |
| 904 |
| 10,168 |
| (191 | ) | (23 | ) | (3 | ) | (194 | ) | | Asia | 267,709 |
| 85,556 |
| 32,157 |
| 299,866 |
| (1,449 | ) | (94 | ) | (52 | ) | (1,501 | ) | | – Hong Kong | 168,380 |
| 67,856 |
| 19,776 |
| 188,156 |
| (750 | ) | (51 | ) | (40 | ) | (790 | ) | | – Australia | 11,428 |
| 1,993 |
| 1,743 |
| 13,171 |
| (70 | ) | (3 | ) | — |
| (70 | ) | | – India | 6,657 |
| 1,565 |
| 2,622 |
| 9,279 |
| (49 | ) | (3 | ) | (1 | ) | (50 | ) | | – Indonesia | 4,346 |
| 63 |
| 353 |
| 4,699 |
| (222 | ) | (1 | ) | (2 | ) | (224 | ) | | – mainland China | 26,594 |
| 5,304 |
| 5,911 |
| 32,505 |
| (198 | ) | (29 | ) | (8 | ) | (206 | ) | | – Malaysia | 6,914 |
| 1,597 |
| 230 |
| 7,144 |
| (40 | ) | (2 | ) | — |
| (40 | ) | | – Singapore | 19,986 |
| 5,235 |
| 618 |
| 20,604 |
| (60 | ) | (2 | ) | — |
| (60 | ) | | – Taiwan | 6,384 |
| 28 |
| 82 |
| 6,466 |
| (2 | ) | — |
| — |
| (2 | ) | | – other | 17,020 |
| 1,915 |
| 822 |
| 17,842 |
| (58 | ) | (3 | ) | (1 | ) | (59 | ) | | Middle East and North Africa (excluding Saudi Arabia) | 23,447 |
| 1,816 |
| 288 |
| 23,735 |
| (1,087 | ) | (181 | ) | (13 | ) | (1,100 | ) | | – Egypt | 1,889 |
| 35 |
| 16 |
| 1,905 |
| (132 | ) | — |
| (3 | ) | (135 | ) | | – UAE | 13,697 |
| 1,695 |
| 122 |
| 13,819 |
| (683 | ) | (179 | ) | (7 | ) | (690 | ) | | – other | 7,861 |
| 86 |
| 150 |
| 8,011 |
| (272 | ) | (2 | ) | (3 | ) | (275 | ) | | North America | 59,680 |
| 15,128 |
| 10,078 |
| 69,758 |
| (274 | ) | (43 | ) | (11 | ) | (285 | ) | | – US | 34,477 |
| 8,282 |
| 8,975 |
| 43,452 |
| (116 | ) | (14 | ) | (2 | ) | (118 | ) | | – Canada | 24,427 |
| 6,556 |
| 979 |
| 25,406 |
| (136 | ) | (10 | ) | (4 | ) | (140 | ) | | – other | 776 |
| 290 |
| 124 |
| 900 |
| (22 | ) | (19 | ) | (5 | ) | (27 | ) | | Latin America | 14,448 |
| 1,665 |
| 1,685 |
| 16,133 |
| (324 | ) | (8 | ) | (3 | ) | (327 | ) | | – Mexico | 12,352 |
| 1,664 |
| 1,625 |
| 13,977 |
| (221 | ) | (8 | ) | (3 | ) | (224 | ) | | – other | 2,096 |
| 1 |
| 60 |
| 2,156 |
| (103 | ) | — |
| — |
| (103 | ) | | At 31 Dec 2019 | 540,499 |
| 130,752 |
| 70,705 |
| 611,204 |
| (5,438 | ) | (680 | ) | (160 | ) | (5,598 | ) |
| | | | | | | | | | | | | | | | | | | Europe | 176,577 |
| 25,715 |
| 22,529 |
| 199,106 |
| (2,507 | ) | (481 | ) | (82 | ) | (2,589 | ) | – UK | 127,093 |
| 18,384 |
| 17,703 |
| 144,796 |
| (1,701 | ) | (410 | ) | (78 | ) | (1,779 | ) | | – France | 28,204 |
| 5,890 |
| 2,488 |
| 30,692 |
| (405 | ) | (36 | ) | (1 | ) | (406 | ) | | – Germany | 10,454 |
| 246 |
| 1,371 |
| 11,825 |
| (35 | ) | — |
| — |
| (35 | ) | | – Switzerland | 1,674 |
| 509 |
| 348 |
| 2,022 |
| (1 | ) | — |
| — |
| (1 | ) | | – other | 9,152 |
| 686 |
| 619 |
| 9,771 |
| (365 | ) | (35 | ) | (3 | ) | (368 | ) | | Asia | 263,608 |
| 79,941 |
| 27,284 |
| 290,892 |
| (1,343 | ) | (67 | ) | (31 | ) | (1,374 | ) | | – Hong Kong | 168,621 |
| 63,287 |
| 15,062 |
| 183,683 |
| (579 | ) | (40 | ) | (20 | ) | (599 | ) | | – Australia | 11,335 |
| 2,323 |
| 2,115 |
| 13,450 |
| (68 | ) | (3 | ) | — |
| (68 | ) | | – India | 6,396 |
| 1,408 |
| 2,846 |
| 9,242 |
| (77 | ) | (4 | ) | (1 | ) | (78 | ) | | – Indonesia | 4,286 |
| 35 |
| 354 |
| 4,640 |
| (269 | ) | — |
| (2 | ) | (271 | ) | | – mainland China | 24,225 |
| 4,423 |
| 5,146 |
| 29,371 |
| (172 | ) | (15 | ) | (6 | ) | (178 | ) | | – Malaysia | 7,924 |
| 1,649 |
| 274 |
| 8,198 |
| (77 | ) | (2 | ) | — |
| (77 | ) | | – Singapore | 17,564 |
| 4,463 |
| 431 |
| 17,995 |
| (31 | ) | (2 | ) | — |
| (31 | ) | | – Taiwan | 6,008 |
| 23 |
| 156 |
| 6,164 |
| (2 | ) | — |
| — |
| (2 | ) | | – other | 17,249 |
| 2,330 |
| 900 |
| 18,149 |
| (68 | ) | (1 | ) | (2 | ) | (70 | ) | | Middle East and North Africa (excluding Saudi Arabia) | 23,738 |
| 2,025 |
| 322 |
| 24,060 |
| (1,167 | ) | (178 | ) | (1 | ) | (1,168 | ) | | – Egypt | 1,746 |
| 41 |
| — |
| 1,746 |
| (125 | ) | — |
| — |
| (125 | ) | | – UAE | 14,445 |
| 1,849 |
| 206 |
| 14,651 |
| (721 | ) | (176 | ) | (1 | ) | (722 | ) | | – other | 7,547 |
| 135 |
| 116 |
| 7,663 |
| (321 | ) | (2 | ) | — |
| (321 | ) | | North America | 56,983 |
| 14,169 |
| 9,647 |
| 66,630 |
| (236 | ) | (37 | ) | (8 | ) | (244 | ) | | – US | 35,714 |
| 8,422 |
| 8,777 |
| 44,491 |
| (103 | ) | (8 | ) | (2 | ) | (105 | ) | | – Canada | 20,493 |
| 5,354 |
| 770 |
| 21,263 |
| (105 | ) | (5 | ) | (2 | ) | (107 | ) | | – other | 776 |
| 393 |
| 100 |
| 876 |
| (28 | ) | (24 | ) | (4 | ) | (32 | ) | | Latin America | 13,671 |
| 1,383 |
| 1,625 |
| 15,296 |
| (299 | ) | (8 | ) | (4 | ) | (303 | ) | | – Mexico | 11,302 |
| 1,354 |
| 1,567 |
| 12,869 |
| (225 | ) | (8 | ) | (4 | ) | (229 | ) | | – other | 2,369 |
| 29 |
| 58 |
| 2,427 |
| (74 | ) | — |
| — |
| (74 | ) | | At 31 Dec 2018 | 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 147 includes borrowers in multiple industries investing in income-producing assets and to a lesser extent, their construction and development. |
Supplementary information | | | | | | | | | | | | | | | | | | | | | | | | | | | | Wholesale lending – loans and advances to customers at amortised cost by country/territory | | Gross carrying amount | Allowance for ECL | | Corporate and commercial | Of which: real estate1 | Non-bank financial institutions | Total | Corporate and commercial | Of which: real estate1 | Non-bank financial institutions | Total | | $m | $m | $m | $m | $m | $m | $m | $m | | Europe | 179,104 | | 26,505 | | 22,176 | | 201,280 | | (3,918) | | (632) | | (185) | | (4,103) | | | – UK | 128,933 | | 18,890 | | 16,165 | | 145,098 | | (2,958) | | (574) | | (147) | | (3,105) | | | – France | 32,278 | | 5,740 | | 3,557 | | 35,835 | | (645) | | (40) | | (26) | | (671) | | | – Germany | 8,309 | | 364 | | 1,156 | | 9,465 | | (125) | | — | | (3) | | (128) | | | – Switzerland | 1,489 | | 576 | | 513 | | 2,002 | | (14) | | — | | — | | (14) | | | – other | 8,095 | | 935 | | 785 | | 8,880 | | (176) | | (18) | | (9) | | (185) | | | Asia | 257,942 | | 82,359 | | 31,637 | | 289,579 | | (2,766) | | (162) | | (38) | | (2,804) | | | – Hong Kong | 162,039 | | 64,216 | | 18,406 | | 180,445 | | (1,180) | | (83) | | (15) | | (1,195) | | | – Australia | 9,769 | | 1,813 | | 1,348 | | 11,117 | | (95) | | (2) | | — | | (95) | | | – India | 7,223 | | 1,951 | | 3,075 | | 10,298 | | (90) | | (18) | | (4) | | (94) | | | – Indonesia | 3,699 | | 81 | | 246 | | 3,945 | | (229) | | (2) | | 0 | | (229) | | | – mainland China | 28,443 | | 6,251 | | 7,128 | | 35,571 | | (187) | | (23) | | (18) | | (205) | | | – Malaysia | 7,228 | | 1,968 | | 123 | | 7,351 | | (86) | | (27) | | — | | (86) | | | – Singapore | 18,859 | | 4,637 | | 362 | | 19,221 | | (782) | | (2) | | — | | (782) | | | – Taiwan | 6,115 | | 50 | | 60 | | 6,175 | | 0 | | — | | — | | 0 | | | – other | 14,567 | | 1,392 | | 889 | | 15,456 | | (117) | | (5) | | (1) | | (118) | | | Middle East and North Africa (excluding Saudi Arabia) | 24,625 | | 1,839 | | 379 | | 25,004 | | (1,512) | | (187) | | (9) | | (1,521) | | | – Egypt | 2,162 | | 37 | | 13 | | 2,175 | | (157) | | (7) | | (3) | | (160) | | | – UAE | 13,485 | | 1,690 | | 170 | | 13,655 | | (1,019) | | (176) | | (2) | | (1,021) | | | – other | 8,978 | | 112 | | 196 | | 9,174 | | (336) | | (4) | | (4) | | (340) | | | North America | 53,386 | | 14,491 | | 9,292 | | 62,678 | | (637) | | (73) | | (23) | | (660) | | | – US | 30,425 | | 7,722 | | 7,708 | | 38,133 | | (367) | | (38) | | (3) | | (370) | | | – Canada | 22,361 | | 6,645 | | 1,440 | | 23,801 | | (243) | | (27) | | (9) | | (252) | | | – other | 600 | | 124 | | 144 | | 744 | | (27) | | (8) | | (11) | | (38) | | | Latin America | 12,031 | | 1,833 | | 1,096 | | 13,127 | | (661) | | (113) | | (10) | | (671) | | | – Mexico | 10,244 | | 1,832 | | 1,083 | | 11,327 | | (589) | | (113) | | (10) | | (599) | | | – other | 1,787 | | 1 | | 13 | | 1,800 | | (72) | | — | | — | | (72) | | | At 31 Dec 2020 | 527,088 | | 127,027 | | 64,580 | | 591,668 | | (9,494) | | (1,167) | | (265) | | (9,759) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Europe | 175,215 | | 26,587 | | 26,497 | | 201,712 | | (2,304) | | (354) | | (81) | | (2,385) | | – UK | 126,760 | | 18,941 | | 18,545 | | 145,305 | | (1,629) | | (303) | | (26) | | (1,655) | | | – France | 27,885 | | 5,643 | | 4,899 | | 32,784 | | (423) | | (28) | | (52) | | (475) | | | – Germany | 9,771 | | 390 | | 1,743 | | 11,514 | | (60) | | — | | — | | (60) | | | – Switzerland | 1,535 | | 554 | | 406 | | 1,941 | | (1) | | — | | — | | (1) | | | – other | 9,264 | | 1,059 | | 904 | | 10,168 | | (191) | | (23) | | (3) | | (194) | | | Asia | 267,709 | | 85,556 | | 32,157 | | 299,866 | | (1,449) | | (94) | | (52) | | (1,501) | | | – Hong Kong | 168,380 | | 67,856 | | 19,776 | | 188,156 | | (750) | | (51) | | (40) | | (790) | | | – Australia | 11,428 | | 1,993 | | 1,743 | | 13,171 | | (70) | | (3) | | — | | (70) | | | – India | 6,657 | | 1,565 | | 2,622 | | 9,279 | | (49) | | (3) | | (1) | | (50) | | | – Indonesia | 4,346 | | 63 | | 353 | | 4,699 | | (222) | | (1) | | (2) | | (224) | | | – mainland China | 26,594 | | 5,304 | | 5,911 | | 32,505 | | (198) | | (29) | | (8) | | (206) | | | – Malaysia | 6,914 | | 1,597 | | 230 | | 7,144 | | (40) | | (2) | | — | | (40) | | | – Singapore | 19,986 | | 5,235 | | 618 | | 20,604 | | (60) | | (2) | | — | | (60) | | | – Taiwan | 6,384 | | 28 | | 82 | | 6,466 | | (2) | | — | | — | | (2) | | | – other | 17,020 | | 1,915 | | 822 | | 17,842 | | (58) | | (3) | | (1) | | (59) | | | Middle East and North Africa (excluding Saudi Arabia) | 23,447 | | 1,816 | | 288 | | 23,735 | | (1,087) | | (181) | | (13) | | (1,100) | | | – Egypt | 1,889 | | 35 | | 16 | | 1,905 | | (132) | | — | | (3) | | (135) | | | – UAE | 13,697 | | 1,695 | | 122 | | 13,819 | | (683) | | (179) | | (7) | | (690) | | | – other | 7,861 | | 86 | | 150 | | 8,011 | | (272) | | (2) | | (3) | | (275) | | | North America | 59,680 | | 15,128 | | 10,078 | | 69,758 | | (274) | | (43) | | (11) | | (285) | | | – US | 34,477 | | 8,282 | | 8,975 | | 43,452 | | (116) | | (14) | | (2) | | (118) | | | – Canada | 24,427 | | 6,556 | | 979 | | 25,406 | | (136) | | (10) | | (4) | | (140) | | | – other | 776 | | 290 | | 124 | | 900 | | (22) | | (19) | | (5) | | (27) | | | Latin America | 14,448 | | 1,665 | | 1,685 | | 16,133 | | (324) | | (8) | | (3) | | (327) | | | – Mexico | 12,352 | | 1,664 | | 1,625 | | 13,977 | | (221) | | (8) | | (3) | | (224) | | | – other | 2,096 | | 1 | | 60 | | 2,156 | | (103) | | — | | — | | (103) | | | At 31 Dec 2019 | 540,499 | | 130,752 | | 70,705 | | 611,204 | | (5,438) | | (680) | | (160) | | (5,598) | |
1 Real estate lending within this disclosure corresponds solely to the industry of the Directors | Risk
| | | | | | | | | | | | | | | | | | | Personal lending – loans and advances to customers at amortised cost by country/territory | | | Gross carrying amount | Allowance for ECL | | | First lien residential mortgages |
| Other personal |
| Of which: credit cards |
| Total |
| First lien residential mortgages |
| Other personal |
| Of which: credit cards |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Europe | 145,382 |
| 50,368 |
| 10,246 |
| 195,750 |
| (266 | ) | (962 | ) | (438 | ) | (1,228 | ) | – UK | 137,985 |
| 22,395 |
| 9,816 |
| 160,380 |
| (159 | ) | (828 | ) | (434 | ) | (987 | ) | | – France | 3,520 |
| 21,120 |
| 376 |
| 24,640 |
| (39 | ) | (101 | ) | (3 | ) | (140 | ) | | – Germany | — |
| 325 |
| — |
| 325 |
| — |
| — |
| — |
| — |
| | – Switzerland | 1,183 |
| 6,165 |
| — |
| 7,348 |
| (6 | ) | (17 | ) | — |
| (23 | ) | | – other | 2,694 |
| 363 |
| 54 |
| 3,057 |
| (62 | ) | (16 | ) | (1 | ) | (78 | ) | | Asia | 131,864 |
| 48,231 |
| 12,144 |
| 180,095 |
| (42 | ) | (690 | ) | (463 | ) | (732 | ) | | – Hong Kong | 86,892 |
| 33,061 |
| 8,043 |
| 119,953 |
| (1 | ) | (353 | ) | (242 | ) | (354 | ) | | – Australia | 16,997 |
| 693 |
| 603 |
| 17,690 |
| (5 | ) | (34 | ) | (33 | ) | (39 | ) | | – India | 1,047 |
| 528 |
| 219 |
| 1,575 |
| (5 | ) | (21 | ) | (15 | ) | (26 | ) | | – Indonesia | 67 |
| 329 |
| 204 |
| 396 |
| — |
| (24 | ) | (18 | ) | (24 | ) | | – mainland China | 8,966 |
| 1,190 |
| 656 |
| 10,156 |
| (2 | ) | (74 | ) | (68 | ) | (76 | ) | | – Malaysia | 2,840 |
| 3,200 |
| 980 |
| 6,040 |
| (22 | ) | (73 | ) | (33 | ) | (95 | ) | | – Singapore | 6,687 |
| 7,033 |
| 452 |
| 13,720 |
| (1 | ) | (60 | ) | (19 | ) | (61 | ) | | – Taiwan | 5,286 |
| 1,004 |
| 297 |
| 6,290 |
| 0 |
| (14 | ) | (4 | ) | (14 | ) | | – other | 3,082 |
| 1,193 |
| 690 |
| 4,275 |
| (6 | ) | (37 | ) | (31 | ) | (43 | ) | | Middle East and North Africa (excluding Saudi Arabia) | 2,303 |
| 3,914 |
| 1,042 |
| 6,217 |
| (62 | ) | (235 | ) | (111 | ) | (297 | ) | | – Egypt | — |
| 346 |
| 88 |
| 346 |
| — |
| (3 | ) | (1 | ) | (3 | ) | | – UAE | 1,920 |
| 1,462 |
| 517 |
| 3,382 |
| (59 | ) | (121 | ) | (54 | ) | (180 | ) | | – other | 383 |
| 2,106 |
| 437 |
| 2,489 |
| (3 | ) | (111 | ) | (56 | ) | (114 | ) | | North America | 39,065 |
| 5,251 |
| 1,742 |
| 44,316 |
| (122 | ) | (194 | ) | (142 | ) | (316 | ) | | – US | 17,870 |
| 2,551 |
| 1,424 |
| 20,421 |
| (8 | ) | (160 | ) | (134 | ) | (168 | ) | | – Canada | 19,997 |
| 2,495 |
| 271 |
| 22,492 |
| (21 | ) | (25 | ) | (7 | ) | (46 | ) | | – other | 1,198 |
| 205 |
| 47 |
| 1,403 |
| (93 | ) | (9 | ) | (1 | ) | (102 | ) | | Latin America | 3,564 |
| 4,329 |
| 1,594 |
| 7,893 |
| (37 | ) | (524 | ) | (241 | ) | (561 | ) | | – Mexico | 3,419 |
| 3,780 |
| 1,308 |
| 7,199 |
| (31 | ) | (488 | ) | (224 | ) | (519 | ) | | – other | 145 |
| 549 |
| 286 |
| 694 |
| (6 | ) | (36 | ) | (17 | ) | (42 | ) | | At 31 Dec 2019 | 322,178 |
| 112,093 |
| 26,768 |
| 434,271 |
| (529 | ) | (2,605 | ) | (1,395 | ) | (3,134 | ) |
| | | | | | | | | | | | | | | | | | | Europe | 131,557 |
| 46,007 |
| 9,790 |
| 177,564 |
| (258 | ) | (750 | ) | (313 | ) | (1,008 | ) | – UK | 124,357 |
| 20,503 |
| 9,356 |
| 144,860 |
| (141 | ) | (592 | ) | (309 | ) | (733 | ) | | – France | 3,454 |
| 19,616 |
| 376 |
| 23,070 |
| (43 | ) | (114 | ) | (4 | ) | (157 | ) | | – Germany | — |
| 288 |
| — |
| 288 |
| — |
| — |
| — |
| — |
| | – Switzerland | 1,120 |
| 5,213 |
| — |
| 6,333 |
| (2 | ) | (19 | ) | — |
| (21 | ) | | – other | 2,626 |
| 387 |
| 58 |
| 3,013 |
| (72 | ) | (25 | ) | — |
| (97 | ) | | Asia | 119,718 |
| 42,049 |
| 11,900 |
| 161,767 |
| (44 | ) | (696 | ) | (465 | ) | (740 | ) | | – Hong Kong | 79,059 |
| 28,734 |
| 8,124 |
| 107,793 |
| (1 | ) | (329 | ) | (228 | ) | (330 | ) | | – Australia | 13,858 |
| 764 |
| 626 |
| 14,622 |
| (5 | ) | (55 | ) | (54 | ) | (60 | ) | | – India | 1,030 |
| 608 |
| 228 |
| 1,638 |
| (5 | ) | (20 | ) | (14 | ) | (25 | ) | | – Indonesia | 59 |
| 279 |
| 206 |
| 338 |
| — |
| (34 | ) | (27 | ) | (34 | ) | | – mainland China | 8,706 |
| 1,139 |
| 502 |
| 9,845 |
| (2 | ) | (57 | ) | (50 | ) | (59 | ) | | – Malaysia | 2,890 |
| 3,209 |
| 888 |
| 6,099 |
| (24 | ) | (71 | ) | (33 | ) | (95 | ) | | – Singapore | 5,991 |
| 5,353 |
| 434 |
| 11,344 |
| — |
| (70 | ) | (21 | ) | (70 | ) | | – Taiwan | 5,123 |
| 860 |
| 289 |
| 5,983 |
| (1 | ) | (20 | ) | (5 | ) | (21 | ) | | – other | 3,002 |
| 1,103 |
| 603 |
| 4,105 |
| (6 | ) | (40 | ) | (33 | ) | (46 | ) | | Middle East and North Africa (excluding Saudi Arabia) | 2,393 |
| 3,933 |
| 1,181 |
| 6,326 |
| (88 | ) | (306 | ) | (148 | ) | (394 | ) | | – Egypt | — |
| 309 |
| 71 |
| 309 |
| — |
| (5 | ) | (1 | ) | (5 | ) | | – UAE | 1,974 |
| 1,477 |
| 538 |
| 3,451 |
| (82 | ) | (126 | ) | (54 | ) | (208 | ) | | – other | 419 |
| 2,147 |
| 572 |
| 2,566 |
| (6 | ) | (175 | ) | (93 | ) | (181 | ) | | North America | 36,964 |
| 5,057 |
| 1,341 |
| 42,021 |
| (122 | ) | (139 | ) | (81 | ) | (261 | ) | | – US | 17,464 |
| 2,280 |
| 1,028 |
| 19,744 |
| (13 | ) | (106 | ) | (75 | ) | (119 | ) | | – Canada | 18,267 |
| 2,562 |
| 265 |
| 20,829 |
| (16 | ) | (23 | ) | (5 | ) | (39 | ) | | – other | 1,233 |
| 215 |
| 48 |
| 1,448 |
| (93 | ) | (10 | ) | (1 | ) | (103 | ) | | Latin America | 2,701 |
| 3,958 |
| 1,432 |
| 6,659 |
| (23 | ) | (521 | ) | (254 | ) | (544 | ) | | – Mexico | 2,550 |
| 3,192 |
| 1,121 |
| 5,742 |
| (22 | ) | (465 | ) | (227 | ) | (487 | ) | | – other | 151 |
| 766 |
| 311 |
| 917 |
| (1 | ) | (56 | ) | (27 | ) | (57 | ) | | At 31 Dec 2018 | 293,333 |
| 101,004 |
| 25,644 |
| 394,337 |
| (535 | ) | (2,412 | ) | (1,261 | ) | (2,947 | ) |
borrower. Commercial real estate on page 192 includes borrowers in multiple industries investing in income-producing assets and to a lesser extent, their construction and development.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Personal lending – loans and advances to customers at amortised cost by country/territory | | Gross carrying amount | Allowance for ECL | | First lien residential mortgages | Other personal | Of which: credit cards | Total | First lien residential mortgages | Other personal | Of which: credit cards | Total | | $m | $m | $m | $m | $m | $m | $m | $m | | Europe | 162,630 | | 51,033 | | 8,471 | | 213,663 | | (364) | | (1,980) | | (859) | | (2,344) | | | – UK | 154,839 | | 19,696 | | 8,064 | | 174,535 | | (236) | | (1,762) | | (852) | | (1,998) | | – France1 | 3,623 | | 23,982 | | 358 | | 27,605 | | (43) | | (120) | | (5) | | (163) | | | – Germany | — | | 368 | | — | | 368 | | — | | — | | — | | — | | | – Switzerland | 1,195 | | 6,641 | | — | | 7,836 | | — | | (79) | | — | | (79) | | | – other | 2,973 | | 346 | | 49 | | 3,319 | | (85) | | (19) | | (2) | | (104) | | | Asia | 141,581 | | 45,732 | | 11,186 | | 187,313 | | (80) | | (841) | | (563) | | (921) | | | – Hong Kong | 91,997 | | 31,594 | | 7,573 | | 123,591 | | — | | (387) | | (265) | | (387) | | | – Australia | 20,320 | | 602 | | 514 | | 20,922 | | (12) | | (47) | | (45) | | (59) | | | – India | 933 | | 544 | | 215 | | 1,477 | | (9) | | (45) | | (34) | | (54) | | | – Indonesia | 71 | | 288 | | 167 | | 359 | | — | | (37) | | (26) | | (37) | | | – mainland China | 9,679 | | 1,155 | | 644 | | 10,834 | | (6) | | (81) | | (73) | | (87) | | | – Malaysia | 2,797 | | 2,964 | | 841 | | 5,761 | | (41) | | (102) | | (35) | | (143) | | | – Singapore | 7,394 | | 6,537 | | 375 | | 13,931 | | — | | (55) | | (17) | | (55) | | | – Taiwan | 5,407 | | 1,069 | | 277 | | 6,476 | | — | | (15) | | (5) | | (15) | | | – other | 2,983 | | 979 | | 580 | | 3,962 | | (12) | | (72) | | (63) | | (84) | | | Middle East and North Africa (excluding Saudi Arabia) | 2,192 | | 3,341 | | 863 | | 5,533 | | (43) | | (275) | | (142) | | (318) | | | – Egypt | — | | 360 | | 89 | | 360 | | — | | (8) | | (3) | | (8) | | | – UAE | 1,841 | | 1,158 | | 432 | | 2,999 | | (37) | | (163) | | (92) | | (200) | | | – other | 351 | | 1,823 | | 342 | | 2,174 | | (6) | | (104) | | (47) | | (110) | | | North America | 41,826 | | 4,552 | | 1,373 | | 46,378 | | (159) | | (266) | | (193) | | (425) | | | – US | 18,430 | | 2,141 | | 1,091 | | 20,571 | | (26) | | (226) | | (182) | | (252) | | | – Canada | 22,241 | | 2,230 | | 244 | | 24,471 | | (36) | | (31) | | (10) | | (67) | | | – other | 1,155 | | 181 | | 38 | | 1,336 | | (97) | | (9) | | (1) | | (106) | | | Latin America | 4,053 | | 3,869 | | 1,406 | | 7,922 | | (109) | | (614) | | (290) | | (723) | | | – Mexico | 3,901 | | 3,351 | | 1,119 | | 7,252 | | (107) | | (578) | | (268) | | (685) | | | – other | 152 | | 518 | | 287 | | 670 | | (2) | | (36) | | (22) | | (38) | | | At 31 Dec 2020 | 352,282 | | 108,527 | | 23,299 | | 460,809 | | (755) | | (3,976) | | (2,047) | | (4,731) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Europe | 145,382 | | 50,368 | | 10,246 | | 195,750 | | (266) | | (962) | | (438) | | (1,228) | | – UK | 137,985 | | 22,395 | | 9,816 | | 160,380 | | (159) | | (828) | | (434) | | (987) | | – France1 | 3,520 | | 21,120 | | 376 | | 24,640 | | (39) | | (101) | | (3) | | (140) | | | – Germany | — | | 325 | | — | | 325 | | — | | — | | — | | — | | | – Switzerland | 1,183 | | 6,165 | | — | | 7,348 | | (6) | | (17) | | — | | (23) | | | – other | 2,694 | | 363 | | 54 | | 3,057 | | (62) | | (16) | | (1) | | (78) | | | Asia | 131,864 | | 48,231 | | 12,144 | | 180,095 | | (42) | | (690) | | (463) | | (732) | | | – Hong Kong | 86,892 | | 33,061 | | 8,043 | | 119,953 | | (1) | | (353) | | (242) | | (354) | | | – Australia | 16,997 | | 693 | | 603 | | 17,690 | | (5) | | (34) | | (33) | | (39) | | | – India | 1,047 | | 528 | | 219 | | 1,575 | | (5) | | (21) | | (15) | | (26) | | | – Indonesia | 67 | | 329 | | 204 | | 396 | | — | | (24) | | (18) | | (24) | | | – mainland China | 8,966 | | 1,190 | | 656 | | 10,156 | | (2) | | (74) | | (68) | | (76) | | | – Malaysia | 2,840 | | 3,200 | | 980 | | 6,040 | | (22) | | (73) | | (33) | | (95) | | | – Singapore | 6,687 | | 7,033 | | 452 | | 13,720 | | (1) | | (60) | | (19) | | (61) | | | – Taiwan | 5,286 | | 1,004 | | 297 | | 6,290 | | 0 | | (14) | | (4) | | (14) | | | – other | 3,082 | | 1,193 | | 690 | | 4,275 | | (6) | | (37) | | (31) | | (43) | | | Middle East and North Africa (excluding Saudi Arabia) | 2,303 | | 3,914 | | 1,042 | | 6,217 | | (62) | | (235) | | (111) | | (297) | | | – Egypt | — | | 346 | | 88 | | 346 | | — | | (3) | | (1) | | (3) | | | – UAE | 1,920 | | 1,462 | | 517 | | 3,382 | | (59) | | (121) | | (54) | | (180) | | | – other | 383 | | 2,106 | | 437 | | 2,489 | | (3) | | (111) | | (56) | | (114) | | | North America | 39,065 | | 5,251 | | 1,742 | | 44,316 | | (122) | | (194) | | (142) | | (316) | | | – US | 17,870 | | 2,551 | | 1,424 | | 20,421 | | (8) | | (160) | | (134) | | (168) | | | – Canada | 19,997 | | 2,495 | | 271 | | 22,492 | | (21) | | (25) | | (7) | | (46) | | | – other | 1,198 | | 205 | | 47 | | 1,403 | | (93) | | (9) | | (1) | | (102) | | | Latin America | 3,564 | | 4,329 | | 1,594 | | 7,893 | | (37) | | (524) | | (241) | | (561) | | | – Mexico | 3,419 | | 3,780 | | 1,308 | | 7,199 | | (31) | | (488) | | (224) | | (519) | | | – other | 145 | | 549 | | 286 | | 694 | | (6) | | (36) | | (17) | | (42) | | | At 31 Dec 2019 | 322,178 | | 112,093 | | 26,768 | | 434,271 | | (529) | | (2,605) | | (1,395) | | (3,134) | |
1 Included in other personal lending at 31 December 2020 is $20,625m (31 December 2019: $17,585m) guaranteed by Crédit Lodgement.
| | | | | | | | | | | | | | | | | | | | | | | Summary of financial instruments to which the impairment requirements in IFRS 9 are applied – by global business | | | Gross carrying/nominal amount | Allowance for ECL | | | Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Loans and advances to customers at amortised cost | 951,583 |
| 80,182 |
| 13,378 |
| 332 |
| 1,045,475 |
| (1,297 | ) | (2,284 | ) | (5,052 | ) | (99 | ) | (8,732 | ) | | – RBWM | 378,792 |
| 15,251 |
| 4,472 |
| — |
| 398,515 |
| (593 | ) | (1,320 | ) | (1,210 | ) | — |
| (3,123 | ) | | – CMB | 297,319 |
| 46,423 |
| 6,649 |
| 212 |
| 350,603 |
| (520 | ) | (765 | ) | (3,190 | ) | (68 | ) | (4,543 | ) | | – GB&M | 228,546 |
| 16,934 |
| 1,598 |
| 120 |
| 247,198 |
| (173 | ) | (176 | ) | (550 | ) | (31 | ) | (930 | ) | | – GPB | 45,512 |
| 1,543 |
| 659 |
| — |
| 47,714 |
| (9 | ) | (10 | ) | (102 | ) | — |
| (121 | ) | | – Corporate Centre | 1,414 |
| 31 |
| — |
| — |
| 1,445 |
| (2 | ) | (13 | ) | — |
| — |
| (15 | ) | | Loans and advances to banks at amortised cost | 67,769 |
| 1,450 |
| — |
| — |
| 69,219 |
| (14 | ) | (2 | ) | — |
| — |
| (16 | ) | | – RBWM | 4,733 |
| 388 |
| — |
| — |
| 5,121 |
| — |
| (1 | ) | — |
| — |
| (1 | ) | | – CMB | 1,245 |
| 216 |
| — |
| — |
| 1,461 |
| (2 | ) | — |
| — |
| — |
| (2 | ) | | – GB&M | 23,420 |
| 801 |
| — |
| — |
| 24,221 |
| (9 | ) | (1 | ) | — |
| — |
| (10 | ) | | – GPB | 28 |
| — |
| — |
| — |
| 28 |
| — |
| — |
| — |
| — |
| — |
| | – Corporate Centre | 38,343 |
| 45 |
| — |
| — |
| 38,388 |
| (3 | ) | — |
| — |
| — |
| (3 | ) | | Other financial assets measured at amortised cost | 613,200 |
| 1,827 |
| 151 |
| 1 |
| 615,179 |
| (38 | ) | (38 | ) | (42 | ) | — |
| (118 | ) | | – RBWM | 55,915 |
| 535 |
| 32 |
| — |
| 56,482 |
| (21 | ) | (30 | ) | (3 | ) | — |
| (54 | ) | | – CMB | 13,698 |
| 900 |
| 47 |
| 1 |
| 14,646 |
| (8 | ) | (7 | ) | (26 | ) | — |
| (41 | ) | | – GB&M | 280,621 |
| 372 |
| 34 |
| — |
| 281,027 |
| (5 | ) | (1 | ) | (11 | ) | — |
| (17 | ) | | – GPB | 1,406 |
| 9 |
| 4 |
| — |
| 1,419 |
| — |
| — |
| (2 | ) | — |
| (2 | ) | | – Corporate Centre | 261,560 |
| 11 |
| 34 |
| — |
| 261,605 |
| (4 | ) | — |
| — |
| — |
| (4 | ) | | Total gross carrying amount on-balance sheet at 31 Dec 2019 | 1,632,552 |
| 83,459 |
| 13,529 |
| 333 |
| 1,729,873 |
| (1,349 | ) | (2,324 | ) | (5,094 | ) | (99 | ) | (8,866 | ) | | Loans and other credit-related commitments | 577,631 |
| 21,618 |
| 771 |
| 9 |
| 600,029 |
| (137 | ) | (133 | ) | (59 | ) | — |
| (329 | ) | | – RBWM | 171,118 |
| 1,850 |
| 180 |
| — |
| 173,148 |
| (14 | ) | (1 | ) | — |
| — |
| (15 | ) | | – CMB | 117,703 |
| 11,403 |
| 558 |
| 9 |
| 129,673 |
| (69 | ) | (65 | ) | (56 | ) | — |
| (190 | ) | | – GB&M | 246,805 |
| 8,270 |
| 28 |
| — |
| 255,103 |
| (53 | ) | (67 | ) | (3 | ) | — |
| (123 | ) | | – GPB | 41,975 |
| 95 |
| 5 |
| — |
| 42,075 |
| (1 | ) | — |
| — |
| — |
| (1 | ) | | – Corporate Centre | 30 |
| — |
| — |
| — |
| 30 |
| — |
| — |
| — |
| — |
| — |
| Financial guarantees
| 17,684 |
| 2,340 |
| 186 |
| 4 |
| 20,214 |
| (16 | ) | (22 | ) | (10 | ) | — |
| (48 | ) | | – RBWM | 61 |
| 2 |
| 1 |
| — |
| 64 |
| — |
| — |
| — |
| — |
| — |
| | – CMB | 7,446 |
| 1,442 |
| 105 |
| 4 |
| 8,997 |
| (9 | ) | (12 | ) | (6 | ) | — |
| (27 | ) | | – GB&M | 9,263 |
| 894 |
| 80 |
| — |
| 10,237 |
| (7 | ) | (10 | ) | (4 | ) | — |
| (21 | ) | | – GPB | 911 |
| 2 |
| — |
| — |
| 913 |
| — |
| — |
| — |
| — |
| — |
| | – Corporate Centre | 3 |
| — |
| — |
| — |
| 3 |
| — |
| — |
| — |
| — |
| — |
| | Total nominal amount off-balance sheet at 31 Dec 2019 | 595,315 |
| 23,958 |
| 957 |
| 13 |
| 620,243 |
| (153 | ) | (155 | ) | (69 | ) | — |
| (377 | ) | | | | | | | | | | | | | | RBWM | 13,754 |
| 278 |
| — |
| — |
| 14,032 |
| (5 | ) | (58 | ) | — |
| — |
| (63 | ) | | CMB | 250 |
| 25 |
| — |
| 1 |
| 276 |
| — |
| (12 | ) | — |
| — |
| (12 | ) | | GB&M | 1,055 |
| 18 |
| — |
| — |
| 1,073 |
| — |
| (8 | ) | — |
| — |
| (8 | ) | | GPB | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | Corporate Centre | 339,590 |
| 693 |
| — |
| — |
| 340,283 |
| (34 | ) | (49 | ) | — |
| — |
| (83 | ) | Debt instruments measured at FVOCI at 31 Dec 2019 | 354,649 |
| 1,014 |
| — |
| 1 |
| 355,664 |
| (39 | ) | (127 | ) | — |
| — |
| (166 | ) |
Report of the Directors | Risk
Change in reportable segments Effective from 30 June 2020, we made the following realignments within our internal reporting: •We simplified our matrix organisational structure by merging Global Private Banking and Retail Banking and Wealth Management to form Wealth and Personal Banking (‘WPB’). As a result, the gross carrying/nominal values and the associated allowance for ECL of Global Private Banking and Retail Banking and Wealth Management have been merged into WPB. •We reallocated Markets Treasury from Corporate Centre to the global businesses. As a result, Market Treasury's gross carrying/nominal values and the associated allowance for ECL have been transferred from the Corporate Centre into the other global businesses. Comparative data have been re-presented accordingly. There is no impact upon total gross carrying/nominal values, total allowance for ECL or the staging of financial instruments. | | | | | | | | | | | | | | | | | | | | | | Summary of financial instruments to which the impairment requirements in IFRS 9 are applied – by global business1 (continued) | | | Gross carrying/nominal amount | Allowance for ECL | | | Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| POCI |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $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 | ) | | – RBWM | 340,606 |
| 19,228 |
| 4,960 |
| — |
| 364,794 |
| (544 | ) | (1,250 | ) | (1,129 | ) | — |
| (2,923 | ) | | – CMB | 299,523 |
| 32,109 |
| 5,732 |
| 298 |
| 337,662 |
| (538 | ) | (659 | ) | (3,110 | ) | (194 | ) | (4,501 | ) | | – GB&M | 228,035 |
| 16,327 |
| 1,683 |
| 25 |
| 246,070 |
| (188 | ) | (182 | ) | (718 | ) | — |
| (1,088 | ) | | – GPB | 37,970 |
| 724 |
| 618 |
| 1 |
| 39,313 |
| (5 | ) | (3 | ) | (89 | ) | — |
| (97 | ) | | – Corporate Centre | 2,259 |
| 193 |
| 30 |
| — |
| 2,482 |
| (1 | ) | (14 | ) | (1 | ) | — |
| (16 | ) | | Loans and advances to banks at amortised cost | 71,873 |
| 307 |
| — |
| — |
| 72,180 |
| (11 | ) | (2 | ) | — |
| — |
| (13 | ) | | – RBWM | 5,801 |
| 5 |
| — |
| — |
| 5,806 |
| (1 | ) | — |
| — |
| — |
| (1 | ) | | – CMB | 1,912 |
| 15 |
| — |
| — |
| 1,927 |
| (1 | ) | — |
| — |
| — |
| (1 | ) | | – GB&M | 25,409 |
| 212 |
| — |
| — |
| 25,621 |
| (7 | ) | (2 | ) | — |
| — |
| (9 | ) | | – GPB | 46 |
| — |
| — |
| — |
| 46 |
| — |
| — |
| — |
| — |
| — |
| | – Corporate Centre | 38,705 |
| 75 |
| — |
| — |
| 38,780 |
| (2 | ) | — |
| — |
| — |
| (2 | ) | | Other financial assets measured at amortised cost | 581,118 |
| 1,673 |
| 126 |
| — |
| 582,917 |
| (27 | ) | (6 | ) | (22 | ) | — |
| (55 | ) | | – RBWM | 49,142 |
| 184 |
| 32 |
| — |
| 49,358 |
| (14 | ) | (2 | ) | (1 | ) | — |
| (17 | ) | | – CMB | 15,082 |
| 774 |
| 60 |
| — |
| 15,916 |
| (7 | ) | (3 | ) | (21 | ) | — |
| (31 | ) | | – GB&M | 272,028 |
| 703 |
| 20 |
| — |
| 272,751 |
| (1 | ) | (1 | ) | — |
| — |
| (2 | ) | | – GPB | 924 |
| 1 |
| 2 |
| — |
| 927 |
| — |
| — |
| — |
| — |
| — |
| | – Corporate Centre | 243,942 |
| 11 |
| 12 |
| — |
| 243,965 |
| (5 | ) | — |
| — |
| — |
| (5 | ) | Total gross carrying amount on-balance sheet at 31 Dec 2018 | 1,561,384 |
| 70,561 |
| 13,149 |
| 324 |
| 1,645,418 |
| (1,314 | ) | (2,116 | ) | (5,069 | ) | (194 | ) | (8,693 | ) | | Loans and other credit-related commitments | 567,232 |
| 23,857 |
| 912 |
| 7 |
| 592,008 |
| (143 | ) | (139 | ) | (43 | ) | — |
| (325 | ) | | – RBWM | 164,589 |
| 1,792 |
| 399 |
| — |
| 166,780 |
| (6 | ) | (1 | ) | (1 | ) | — |
| (8 | ) | | – CMB | 112,969 |
| 10,129 |
| 308 |
| 5 |
| 123,411 |
| (72 | ) | (52 | ) | (40 | ) | — |
| (164 | ) | | – GB&M | 251,676 |
| 10,892 |
| 194 |
| 2 |
| 262,764 |
| (58 | ) | (86 | ) | (2 | ) | — |
| (146 | ) | | – GPB | 33,885 |
| 1,044 |
| 11 |
| — |
| 34,940 |
| — |
| — |
| — |
| — |
| — |
| | – Corporate Centre | 4,113 |
| — |
| — |
| — |
| 4,113 |
| (7 | ) | — |
| — |
| — |
| (7 | ) | | Financial guarantees | 20,834 |
| 2,384 |
| 297 |
| 3 |
| 23,518 |
| (19 | ) | (29 | ) | (45 | ) | — |
| (93 | ) | | – RBWM | 54 |
| 3 |
| 3 |
| — |
| 60 |
| — |
| — |
| — |
| — |
| — |
| | – CMB | 7,605 |
| 1,227 |
| 230 |
| 3 |
| 9,065 |
| (10 | ) | (11 | ) | (39 | ) | — |
| (60 | ) | | – GB&M | 12,067 |
| 1,141 |
| 63 |
| — |
| 13,271 |
| (8 | ) | (18 | ) | (5 | ) | — |
| (31 | ) | | – GPB | 1,053 |
| 13 |
| — |
| — |
| 1,066 |
| (1 | ) | — |
| — |
| — |
| (1 | ) | | – Corporate Centre | 55 |
| — |
| 1 |
| — |
| 56 |
| — |
| — |
| (1 | ) | — |
| (1 | ) | Total nominal amount off-balance sheet at 31 Dec 2018 | 588,066 |
| 26,241 |
| 1,209 |
| 10 |
| 615,526 |
| (162 | ) | (168 | ) | (88 | ) | — |
| (418 | ) | | | | | | | | | | | | | | RBWM | 13,160 |
| 153 |
| — |
| — |
| 13,313 |
| (5 | ) | — |
| — |
| — |
| (5 | ) | | CMB | 226 |
| — |
| — |
| 1 |
| 227 |
| (2 | ) | — |
| — |
| — |
| (2 | ) | | GB&M | 1,994 |
| — |
| — |
| — |
| 1,994 |
| (5 | ) | — |
| — |
| — |
| (5 | ) | | GPB | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | Corporate Centre | 326,795 |
| 770 |
| 7 |
| 4 |
| 327,576 |
| (21 | ) | (50 | ) | (1 | ) | — |
| (72 | ) | Debt instruments measured at FVOCI at 31 Dec 2018 | 342,175 |
| 923 |
| 7 |
| 5 |
| 343,110 |
| (33 | ) | (50 | ) | (1 | ) | — |
| (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 122. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary of financial instruments to which the impairment requirements in IFRS 9 are applied – by global business | | | | Gross carrying/nominal amount | Allowance for ECL | | | | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | | | | Loans and advances to customers at amortised cost | 869,920 | | 163,185 | | 19,095 | | 277 | | 1,052,477 | | (1,974) | | (4,965) | | (7,439) | | (112) | | (14,490) | | | | | – WPB | 442,641 | | 25,694 | | 5,753 | | — | | 474,088 | | (854) | | (2,458) | | (1,590) | | — | | (4,902) | | | | | – CMB | 238,517 | | 101,960 | | 10,408 | | 212 | | 351,097 | | (917) | | (2,029) | | (4,874) | | (96) | | (7,916) | | | | | – GBM | 187,564 | | 35,461 | | 2,934 | | 65 | | 226,024 | | (203) | | (465) | | (975) | | (16) | | (1,659) | | | | | – Corporate Centre | 1,198 | | 70 | | — | | — | | 1,268 | | — | | (13) | | — | | — | | (13) | | | | | Loans and advances to banks at amortised cost | 79,654 | | 2,004 | | — | | — | | 81,658 | | (33) | | (9) | | — | | — | | (42) | | | | | – WPB | 16,837 | | 519 | | — | | — | | 17,356 | | (2) | | (2) | | — | | — | | (4) | | | | | – CMB | 12,253 | | 222 | | — | | — | | 12,475 | | (2) | | — | | — | | — | | (2) | | | | | – GBM | 33,361 | | 1,166 | | — | | — | | 34,527 | | (23) | | (7) | | — | | — | | (30) | | | | | – Corporate Centre | 17,203 | | 97 | | — | | — | | 17,300 | | (6) | | — | | — | | — | | (6) | | | | | Other financial assets measured at amortised cost | 768,216 | | 3,975 | | 177 | | 40 | | 772,408 | | (80) | | (44) | | (42) | | (9) | | (175) | | | | | – WPB | 167,053 | | 1,547 | | 50 | | 39 | | 168,689 | | (41) | | (22) | | (7) | | (9) | | (79) | | | | | – CMB | 111,299 | | 1,716 | | 65 | | 1 | | 113,081 | | (17) | | (19) | | (25) | | — | | (61) | | | | | – GBM | 391,967 | | 705 | | 56 | | — | | 392,728 | | (22) | | (3) | | (10) | | — | | (35) | | | | | – Corporate Centre | 97,897 | | 7 | | 6 | | — | | 97,910 | | — | | — | | — | | — | | — | | | | | Total gross carrying amount on-balance sheet at 31 Dec 2020 | 1,717,790 | | 169,164 | | 19,272 | | 317 | | 1,906,543 | | (2,087) | | (5,018) | | (7,481) | | (121) | | (14,707) | | | | | Loans and other credit-related commitments | 604,485 | | 54,217 | | 1,080 | | 1 | | 659,783 | | (290) | | (365) | | (78) | | (1) | | (734) | | | | | – WPB | 232,027 | | 2,591 | | 136 | | — | | 234,754 | | (41) | | (2) | | — | | — | | (43) | | | | | – CMB | 111,800 | | 29,150 | | 779 | | 1 | | 141,730 | | (157) | | (203) | | (72) | | (1) | | (433) | | | | | – GBM | 260,527 | | 22,476 | | 165 | | — | | 283,168 | | (92) | | (160) | | (6) | | — | | (258) | | | | | – Corporate Centre | 131 | | — | | — | | — | | 131 | | — | | — | | — | | — | | — | | | | | Financial guarantees | 14,090 | | 4,024 | | 269 | | 1 | | 18,384 | | (37) | | (62) | | (26) | | — | | (125) | | | | | – WPB | 1,048 | | 23 | | 2 | | — | | 1,073 | | — | | — | | — | | — | | — | | | | | – CMB | 5,556 | | 2,519 | | 146 | | 1 | | 8,222 | | (19) | | (36) | | (12) | | — | | (67) | | | | | – GBM | 7,482 | | 1,482 | | 121 | | — | | 9,085 | | (17) | | (26) | | (14) | | — | | (57) | | | | | – Corporate Centre | 4 | | — | | — | | — | | 4 | | (1) | | — | | — | | — | | (1) | | | | | Total nominal amount off-balance sheet at 31 Dec 2020 | 618,575 | | 58,241 | | 1,349 | | 2 | | 678,167 | | (327) | | (427) | | (104) | | (1) | | (859) | | | | | | | | | | | | | | | | | | WPB | 159,988 | | 625 | | 154 | | 39 | | 160,806 | | (27) | | (10) | | (15) | | (8) | | (60) | | | | | CMB | 95,182 | | 313 | | 51 | | 10 | | 95,556 | | (22) | | (3) | | (2) | | (2) | | (29) | | | | | GBM | 136,909 | | 126 | | 93 | | — | | 137,128 | | (24) | | (1) | | (3) | | — | | (28) | | | | | Corporate Centre | 5,838 | | 389 | | — | | — | | 6,227 | | (17) | | (6) | | (1) | | — | | (24) | | | | Debt instruments measured at FVOCI at
31 Dec 2020 | 397,917 | | 1,453 | | 298 | | 49 | | 399,717 | | (90) | | (20) | | (21) | | (10) | | (141) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary of financial instruments to which the impairment requirements in IFRS 9 are applied – by global business (continued)1 | | | | Gross carrying/nominal amount | Allowance for ECL | | | | Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | | | | Loans and advances to customers at amortised cost | 951,583 | | 80,182 | | 13,378 | | 332 | | 1,045,475 | | (1,297) | | (2,284) | | (5,052) | | (99) | | (8,732) | | | | | – WPB | 424,342 | | 16,797 | | 5,131 | | — | | 446,270 | | (602) | | (1,330) | | (1,312) | | — | | (3,244) | | | | | – CMB | 297,364 | | 46,423 | | 6,649 | | 212 | | 350,648 | | (520) | | (765) | | (3,190) | | (68) | | (4,543) | | | | | – GBM | 228,770 | | 16,934 | | 1,598 | | 120 | | 247,422 | | (173) | | (177) | | (550) | | (31) | | (931) | | | | | | | | | | | | | | | | | | – Corporate Centre | 1,107 | | 28 | | — | | — | | 1,135 | | (2) | | (12) | | — | | — | | (14) | | | | | Loans and advances to banks at amortised cost | 67,769 | | 1,450 | | — | | — | | 69,219 | | (14) | | (2) | | — | | — | | (16) | | | | | – WPB | 14,636 | | 393 | | — | | — | | 15,029 | | (1) | | (1) | | — | | — | | (2) | | | | | – CMB | 8,842 | | 219 | | — | | — | | 9,061 | | (2) | | — | | — | | — | | (2) | | | | | – GBM | 30,391 | | 818 | | — | | — | | 31,209 | | (9) | | (1) | | — | | — | | (10) | | | | | | | | | | | | | | | | | | – Corporate Centre | 13,900 | | 20 | | — | | — | | 13,920 | | (2) | | — | | — | | — | | (2) | | | | | Other financial assets measured at amortised cost | 613,200 | | 1,827 | | 151 | | 1 | | 615,179 | | (38) | | (38) | | (42) | | — | | (118) | | | | | – WPB | 109,423 | | 548 | | 41 | | — | | 110,012 | | (21) | | (30) | | (5) | | — | | (56) | | | | | – CMB | 64,586 | | 904 | | 51 | | 1 | | 65,542 | | (10) | | (7) | | (26) | | — | | (43) | | | | | – GBM | 361,541 | | 374 | | 37 | | — | | 361,952 | | (7) | | (1) | | (11) | | — | | (19) | | | | | | | | | | | | | | | | | | – Corporate Centre | 77,650 | | 1 | | 22 | | — | | 77,673 | | — | | — | | — | | — | | — | | | | Total gross carrying amount on-balance sheet at
31 Dec 2019 | 1,632,552 | | 83,459 | | 13,529 | | 333 | | 1,729,873 | | (1,349) | | (2,324) | | (5,094) | | (99) | | (8,866) | | | | | Loans and other credit-related commitments | 577,631 | | 21,618 | | 771 | | 9 | | 600,029 | | (137) | | (133) | | (59) | | — | | (329) | | | | | – WPB | 213,093 | | 1,945 | | 185 | | — | | 215,223 | | (15) | | (1) | | — | | — | | (16) | | | | | – CMB | 117,703 | | 11,403 | | 558 | | 9 | | 129,673 | | (69) | | (65) | | (56) | | — | | (190) | | | | | – GBM | 246,805 | | 8,270 | | 28 | | — | | 255,103 | | (53) | | (67) | | (3) | | — | | (123) | | | | | | | | | | | | | | | | | | – Corporate Centre | 30 | | — | | — | | — | | 30 | | — | | — | | — | | — | | — | | | | | Financial guarantees | 17,684 | | 2,340 | | 186 | | 4 | | 20,214 | | (16) | | (22) | | (10) | | — | | (48) | | | | | – WPB | 972 | | 4 | | 1 | | — | | 977 | | — | | — | | — | | — | | — | | | | | – CMB | 7,446 | | 1,442 | | 105 | | 4 | | 8,997 | | (9) | | (12) | | (6) | | — | | (27) | | | | | – GBM | 9,263 | | 894 | | 80 | | — | | 10,237 | | (7) | | (10) | | (4) | | — | | (21) | | | | | | | | | | | | | | | | | | – Corporate Centre | 3 | | — | | — | | — | | 3 | | — | | — | | — | | — | | — | | | | Total nominal amount off-balance sheet at
31 Dec 2019 | 595,315 | | 23,958 | | 957 | | 13 | | 620,243 | | (153) | | (155) | | (69) | | — | | (377) | | | | | | | | | | | | | | | | | | WPB | 144,632 | | 378 | | — | | — | | 145,010 | | (13) | | (81) | | — | | — | | (94) | | | | | CMB | 85,353 | | 62 | | — | | 1 | | 85,416 | | (5) | | (19) | | — | | — | | (24) | | | | | GBM | 118,571 | | 68 | | — | | — | | 118,639 | | (9) | | (16) | | — | | — | | (25) | | | | | | | | | | | | | | | | | | Corporate Centre | 6,093 | | 506 | | — | | — | | 6,599 | | (12) | | (11) | | — | | — | | (23) | | | | Debt instruments measured at FVOCI at
31 Dec 2019 | 354,649 | | 1,014 | | — | | 1 | | 355,664 | | (39) | | (127) | | — | | — | | (166) | | | |
1 2019 figures are restated for the change in reportable segments. | | | | | | | | | | | | | | | | | Loans and advances to customers and banks metrics | | | 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 |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | First lien residential mortgages | 322,178 |
| 3,070 |
| (529 | ) | (422 | ) | (107 | ) | (139 | ) | 54 |
| | Other personal lending | 112,093 |
| 1,781 |
| (2,605 | ) | (793 | ) | (1,114 | ) | (1,206 | ) | 260 |
| | Personal lending | 434,271 |
| 4,851 |
| (3,134 | ) | (1,215 | ) | (1,221 | ) | (1,345 | ) | 314 |
| | – agriculture, forestry and fishing | 6,696 |
| 280 |
| (182 | ) | (140 | ) | (15 | ) | (6 | ) | — |
| | – mining and quarrying | 14,435 |
| 323 |
| (226 | ) | (134 | ) | (31 | ) | (4 | ) | — |
| | – manufacturing | 104,380 |
| 1,717 |
| (1,210 | ) | (856 | ) | (392 | ) | (332 | ) | 8 |
| – electricity, gas, steam and air-conditioning supply | 15,040 |
| 175 |
| (80 | ) | (25 | ) | 14 |
| (54 | ) | 2 |
| – water supply, sewerage, waste management and remediation | 3,501 |
| 30 |
| (28 | ) | (18 | ) | (4 | ) | — |
| — |
| | – construction | 15,287 |
| 884 |
| (564 | ) | (499 | ) | (171 | ) | (191 | ) | 12 |
| – wholesale and retail trade, repair of motor vehicles and motorcycles | 94,681 |
| 1,633 |
| (1,184 | ) | (936 | ) | (330 | ) | (389 | ) | 13 |
| | – transportation and storage | 25,580 |
| 617 |
| (237 | ) | (158 | ) | (93 | ) | (37 | ) | — |
| | – accommodation and food | 24,656 |
| 263 |
| (146 | ) | (63 | ) | (49 | ) | (81 | ) | — |
| | – publishing, audiovisual and broadcasting | 19,971 |
| 162 |
| (87 | ) | (34 | ) | (17 | ) | (31 | ) | — |
| | – real estate | 130,752 |
| 1,330 |
| (680 | ) | (475 | ) | (34 | ) | (168 | ) | 6 |
| | – professional, scientific and technical activities | 24,122 |
| 350 |
| (209 | ) | (145 | ) | (47 | ) | (10 | ) | 1 |
| | – administrative and support services | 25,714 |
| 527 |
| (270 | ) | (179 | ) | (80 | ) | (22 | ) | — |
| – public administration and defence, compulsory social security | 2,377 |
| — |
| (8 | ) | — |
| — |
| — |
| — |
| | – education | 1,900 |
| 16 |
| (18 | ) | (6 | ) | 6 |
| (3 | ) | — |
| | – health and care | 4,465 |
| 111 |
| (57 | ) | (28 | ) | (6 | ) | (13 | ) | 1 |
| | – arts, entertainment and recreation | 2,824 |
| 30 |
| (25 | ) | (11 | ) | 3 |
| (4 | ) | — |
| | – other services | 14,276 |
| 192 |
| (199 | ) | (133 | ) | (79 | ) | (102 | ) | 2 |
| | – activities of households | 791 |
| — |
| — |
| — |
| — |
| — |
| — |
| – extra-territorial organisations and bodies activities | 2 |
| — |
| — |
| — |
| 2 |
| — |
| 1 |
| | – government | 8,313 |
| 7 |
| (14 | ) | (6 | ) | (8 | ) | — |
| — |
| | – asset-backed securities | 736 |
| — |
| (14 | ) | — |
| — |
| — |
| — |
| | Corporate and commercial | 540,499 |
| 8,647 |
| (5,438 | ) | (3,846 | ) | (1,331 | ) | (1,447 | ) | 46 |
| | Non-bank financial institutions | 70,705 |
| 212 |
| (160 | ) | (90 | ) | (71 | ) | (5 | ) | 1 |
| | Wholesale lending | 611,204 |
| 8,859 |
| (5,598 | ) | (3,936 | ) | (1,402 | ) | (1,452 | ) | 47 |
| | Loans and advances to customers | 1,045,475 |
| 13,710 |
| (8,732 | ) | (5,151 | ) | (2,623 | ) | (2,797 | ) | 361 |
| | Loans and advances to banks | 69,219 |
| — |
| (16 | ) | — |
| (6 | ) | — |
| — |
| | At 31 Dec 2019 | 1,114,694 |
| 13,710 |
| (8,748 | ) | (5,151 | ) | (2,629 | ) | (2,797 | ) | 361 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to customers and banks metrics | | 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 | $m | | $m | $m | | $m | $m | $m | | First lien residential mortgages | 352,282 | | 3,383 | | | (755) | | (442) | | | (259) | | (92) | | 35 | | | Other personal lending | 108,527 | | 2,228 | | | (3,976) | | (1,060) | | | (2,363) | | (1,315) | | 245 | | | Personal lending | 460,809 | | 5,611 | | | (4,731) | | (1,502) | | | (2,622) | | (1,407) | | 280 | | | | | | | | | | | | | – agriculture, forestry and fishing | 7,445 | | 332 | | | (207) | | (150) | | | (28) | | (3) | | — | | | – mining and quarrying | 11,947 | | 813 | | | (365) | | (220) | | | (513) | | (311) | | — | | | – manufacturing | 93,906 | | 2,163 | | | (1,588) | | (945) | | | (652) | | (375) | | 7 | | | – electricity, gas, steam and air-conditioning supply | 16,200 | | 53 | | | (73) | | (8) | | | (7) | | (14) | | — | | | – water supply, sewerage, waste management and remediation | 3,174 | | 47 | | | (37) | | (22) | | | (8) | | — | | — | | | – construction | 14,600 | | 777 | | | (590) | | (430) | | | (151) | | (135) | | 13 | | | – wholesale and retail trade, repair of motor vehicles and motorcycles | 90,663 | | 3,208 | | | (2,532) | | (2,032) | | | (1,560) | | (280) | | 11 | | | – transportation and storage | 29,433 | | 780 | | | (493) | | (240) | | | (308) | | (62) | | 1 | | | – accommodation and food | 26,071 | | 537 | | | (491) | | (130) | | | (365) | | (28) | | — | | | – publishing, audiovisual and broadcasting | 19,979 | | 164 | | | (189) | | (59) | | | (94) | | (2) | | — | | | – real estate | 127,027 | | 1,908 | | | (1,167) | | (738) | | | (424) | | (47) | | 4 | | | – professional, scientific and technical activities | 24,072 | | 531 | | | (398) | | (193) | | | (219) | | (36) | | 1 | | | – administrative and support services | 26,423 | | 977 | | | (534) | | (315) | | | (298) | | (61) | | — | | | – public administration and defence, compulsory social security | 2,008 | | 3 | | | (14) | | (1) | | | (5) | | — | | — | | | – education | 2,122 | | 29 | | | (41) | | (9) | | | (26) | | (6) | | 1 | | | – health and care | 5,510 | | 269 | | | (186) | | (120) | | | (127) | | (2) | | 1 | | | – arts, entertainment and recreation | 3,437 | | 236 | | | (158) | | (87) | | | (170) | | (2) | | — | | | – other services | 13,110 | | 410 | | | (408) | | (249) | | | (360) | | (168) | | 4 | | | – activities of households | 802 | | — | | | (1) | | — | | | — | | — | | — | | | – extra-territorial organisations and bodies activities | 10 | | — | | | — | | — | | | 1 | | — | | 1 | | | – government | 8,538 | | 1 | | | (9) | | (1) | | | 2 | | (5) | | — | | | – asset-backed securities | 611 | | — | | | (13) | | — | | | 1 | | — | | — | | | Corporate and commercial | 527,088 | | 13,238 | | | (9,494) | | (5,949) | | | (5,311) | | (1,537) | | 44 | | | Non-bank financial institutions | 64,580 | | 523 | | | (265) | | (100) | | | (146) | | (30) | | 2 | | | Wholesale lending | 591,668 | | 13,761 | | | (9,759) | | (6,049) | | | (5,457) | | (1,567) | | 46 | | | Loans and advances to customers | 1,052,477 | | 19,372 | | | (14,490) | | (7,551) | | | (8,079) | | (2,974) | | 326 | | | Loans and advances to banks | 81,658 | | — | | | (42) | | — | | | (23) | | — | | — | | | At 31 Dec 2020 | 1,134,135 | | 19,372 | | | (14,532) | | (7,551) | | | (8,102) | | (2,974) | | 326 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First lien residential mortgages | 322,178 | | 3,070 | | | (529) | | (422) | | | (107) | | (139) | | 54 | | | Other personal lending | 112,093 | | 1,781 | | | (2,605) | | (793) | | | (1,114) | | (1,206) | | 260 | | | Personal lending | 434,271 | | 4,851 | | | (3,134) | | (1,215) | | | (1,221) | | (1,345) | | 314 | | | | | | | | | | | | | – agriculture, forestry and fishing | 6,696 | | 280 | | | (182) | | (140) | | | (15) | | (6) | | — | | | – mining and quarrying | 14,435 | | 323 | | | (226) | | (134) | | | (31) | | (4) | | — | | | – manufacturing | 104,380 | | 1,717 | | | (1,210) | | (856) | | | (392) | | (332) | | 8 | | | – electricity, gas, steam and air-conditioning supply | 15,040 | | 175 | | | (80) | | (25) | | | 14 | | (54) | | 2 | | | – water supply, sewerage, waste management and remediation | 3,501 | | 30 | | | (28) | | (18) | | | (4) | | — | | — | | | – construction | 15,287 | | 884 | | | (564) | | (499) | | | (171) | | (191) | | 12 | | | – wholesale and retail trade, repair of motor vehicles and motorcycles | 94,681 | | 1,633 | | | (1,184) | | (936) | | | (330) | | (389) | | 13 | | | – transportation and storage | 25,580 | | 617 | | | (237) | | (158) | | | (93) | | (37) | | — | | | – accommodation and food | 24,656 | | 263 | | | (146) | | (63) | | | (49) | | (81) | | — | | | – publishing, audiovisual and broadcasting | 19,971 | | 162 | | | (87) | | (34) | | | (17) | | (31) | | — | | | – real estate | 130,752 | | 1,330 | | | (680) | | (475) | | | (34) | | (168) | | 6 | | | – professional, scientific and technical activities | 24,122 | | 350 | | | (209) | | (145) | | | (47) | | (10) | | 1 | | | – administrative and support services | 25,714 | | 527 | | | (270) | | (179) | | | (80) | | (22) | | — | | | – public administration and defence, compulsory social security | 2,377 | | — | | | (8) | | — | | | — | | — | | — | | | – education | 1,900 | | 16 | | | (18) | | (6) | | | 6 | | (3) | | — | | | – health and care | 4,465 | | 111 | | | (57) | | (28) | | | (6) | | (13) | | 1 | | | – arts, entertainment and recreation | 2,824 | | 30 | | | (25) | | (11) | | | 3 | | (4) | | — | | | – other services | 14,276 | | 192 | | | (199) | | (133) | | | (79) | | (102) | | 2 | | | – activities of households | 791 | | — | | | — | | — | | | — | | — | | — | | | – extra-territorial organisations and bodies activities | 2 | | — | | | — | | — | | | 2 | | — | | 1 | | | – government | 8,313 | | 7 | | | (14) | | (6) | | | (8) | | — | | — | | | – asset-backed securities | 736 | | — | | | (14) | | — | | | — | | — | | — | | | Corporate and commercial | 540,499 | | 8,647 | | | (5,438) | | (3,846) | | | (1,331) | | (1,447) | | 46 | | | Non-bank financial institutions | 70,705 | | 212 | | | (160) | | (90) | | | (71) | | (5) | | 1 | | | Wholesale lending | 611,204 | | 8,859 | | | (5,598) | | (3,936) | | | (1,402) | | (1,452) | | 47 | | | Loans and advances to customers | 1,045,475 | | 13,710 | | | (8,732) | | (5,151) | | | (2,623) | | (2,797) | | 361 | | | Loans and advances to banks | 69,219 | | — | | | (16) | | — | | | (6) | | — | | — | | | At 31 Dec 2019 | 1,114,694 | | 13,710 | | | (8,748) | | (5,151) | | | (2,629) | | (2,797) | | 361 | |
HSBC Holdings (Audited) Risk in HSBC Holdings is overseen by the HSBC Holdings Asset and Liability Management Committee (‘Holdings ALCO’). The major risks faced by HSBC Holdings are credit risk, liquidity risk and market risk (in the form of interest rate risk and foreign exchange risk). Credit risk in HSBC Holdings primarily arises from transactions with Group subsidiaries and 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 268)321); 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$1.7bn at 31 December 2019 (2018: $1.5bn)2020 (2019: $0.1bn). 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:(2019: 100%). For further details of credit quality classification, see page 121.
| | | | | | | Treasury risk | | Page | | Overview | | | Treasury risk management | | | Capital risk in 2020 | | | | | Structural foreign exchange risk in 2020 | | 165 |
Report of the Directors | Risk
| Interest rate risk in the banking book in 2020 | | | | Capital and liquidity risk | | Page | Capital risk management | | Liquidity and funding risk management | | Liquidity and funding risk in 2019 | | Sources of funding | | Pension risk | |
Overview Capital and liquidityTreasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including pension risk.together with the financial risks arising from the provision of pensions and other post-employment benefits to staff and their dependants. Treasury risk also includes the risk to our earnings or capital due to structural foreign exchange exposures and changes in market interest rates.
Capital and liquidityTreasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions or the external environment.
Governance
Approach and structurepolicy Capital and liquidity are(Audited)
Our objective in the responsibilitymanagement 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
Capitaltreasury risk is theto maintain appropriate levels of capital, liquidity, funding, foreign exchange and market risk that we fail to support our business strategy, and meet our regulatory capital requirements either at Group, subsidiary or branch level.and stress testing-related requirements.
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. TheOur approach to capital risktreasury management is evolving. This will operate acrossdriven by our strategic and organisational requirements, taking into account the Group focusing on both adequacy of capitalregulatory, economic 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.
commercial environment. 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 188 to 191 in the Capital section.
ICAAP and risk appetite
The objectives of our capital management policy areaim to maintain a strong capital and liquidity 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 is underpinned by our risk management framework, our internal capital adequacy assessment process (‘ICAAP’) and our internal liquidity adequacy assessment process (‘ILAAP’). The risk framework incorporates a number of measures aligned to our assessment of risks for both internal and regulatory purposes. These risks include credit, market, operational, pensions, structural foreign exchange, banking book foreign exchange risk and interest rate risk in the banking book. The ICAAP and ILAAP provide an assessment of the Group’s capital and liquidity adequacy with consideration of HSBC’s risk metrics, business model, strategy, performance and planning, risks to capital, and the implications of stress testing to capital. For further details, refer to our Pillar 3 Disclosures at 31 December 2020. Treasury risk management Key developments in 2020 In 2020, we established the Treasury Risk Management function. This function is a dedicated second line of defence, providing independent oversight of treasury activities across capital risk, liquidity and funding risk, structural foreign exchange risk, banking book foreign exchange risk, and interest rate risk in the banking book, together with pension risk. The approach to treasury risk management is evolving. This will operate across the Group focusing on both adequacy of capital and sufficiency of returns. In 2020, we carried out several initiatives focused on treasury risk: •We focused on the management of capital and liquidity to ensure we responded to the unprecedented customer and capital demands arising from the Covid-19 outbreak. •In response to a written request from the PRA, we cancelled the fourth interim dividend for 2019 of $0.21 per ordinary share. Similar requests were also made to other UK incorporated banking groups. We also announced that we would make no quarterly or interim dividend payments or accruals in respect of ordinary shares until the end of 2020. In December 2020, the PRA announced a temporary approach to shareholder distributions for 2020. After considering the requirements of the temporary approach, the Board announced an interim dividend for 2020 of $0.15 per ordinary share. •In our response to the Covid-19 outbreak, we liaised with governments, central banks and regulatory authorities globally, to ensure there was continued support and provision of financial services to the real economy. The Bank of England’s Financial Policy Committee announced a reduction of the UK countercyclical buffer rate to 0% effective from March 2020. This change was reflected in the Group’s risk appetite statement, and together with other regulatory relief, resulted in a reduction to Group common equity tier 1 (‘CET1’) and leverage ratio requirements. •We implemented the acceleration of some of the beneficial elements of the amendments to the Capital Requirements Regulation (‘CRR II’) that were originally scheduled for June 2021. The relevant changes impacting the fourth quarter of 2020 positions included a resetting of the transitional provisions in relation to recognising IFRS 9 provisions and the application of the revised small and medium-sized enterprises (‘SME’) supporting factor. It also included changes in the capital treatment of software intangible assets and the netting of the leverage ratio exposure measure of regular-way purchases and sales. Additionally, there were changes that enabled more favourable prudential treatment for investments in infrastructure, beneficial changes to prudent valuation adjustments and exemptions of market risk back-testing exceptions that arose due to the extraordinary market dislocations. •The Group’s CET1 ratio was 15.9% at 31 December 2020 and the leverage ratio was 5.5%. The Group also continues to maintain the appropriate resources required for the risks to which it is exposed, while continuing to support local economies. This has been further informed by additional internal stress tests carried out in response to the Covid-19 outbreak. Capital risk management practices continued to be enhanced across the Group through the Treasury Risk Management function, focusing on both adequacy of capital and sufficiency of returns. •The Group’s liquidity levels were impacted by the drawdown of committed facilities and buy-backs of short-term debt. However, this was offset by increases in deposits, use of central bank facilities where appropriate, and the ability to issue in the short-term markets as they stabilised. As a result of these
liability enhancing actions, the Group and all entities had significant surplus liquidity, resulting in heightened liquidity coverage ratios throughout 2020. At 31 December 2020, all of the Group’s material operating entities were above regulatory minimum levels of liquidity and funding. •Declines in interest rates and the flattening of interest rate yield curves combined to put downwards pressure on net interest income (‘NII’). Balance sheet composition changed, with a significant build-up of liquidity that was deployed in short-term investments, which were predominantly cash, hold-to-collect-and-sell securities and reverse repos. This factor, together with the lower level of interest rates, increased the sensitivity of NII to future changes in interest rates. In the scenario where interest rates fall significantly from current levels, contractual floors would dampen the effect on the average rate that would be paid on liabilities whereas the asset side of the balance sheet would be more likely to reprice lower, reducing commercial margin. •During 2020 we worked with the fiduciaries of all our pension plans to ensure robust and timely actions were taken in response to the Covid-19 outbreak, including the smooth transition to remote working for plan providers and dealing appropriately with affected plan members. Our de-risking programmes provided protection against the volatility in financial markets that resulted from the outbreak’s economic impact. For quantitative disclosures on capital ratios, own funds and RWAs, see pages 215 to 216. For quantitative disclosures on liquidity and funding metrics, see pages 218 to 220. For quantitative disclosures on interest rate risk in the banking book, see pages 221 to 222. Governance and structure The Global Head of Treasury Risk Management and Global Risk Analytics is the accountable risk steward for all treasury risks, the Group Head of Performance and Reward is the risk owner for pensions and the Group Treasurer is the risk owner for remaining treasury risks. Capital and liquidity are the responsibility of the Group Executive Committee and directly addressed by the Group Risk Committee (‘GRC’). Treasury risks are generally managed through the Holdings Asset and Liability Management Committee (‘ALCO’) and local ALCOs and overseen by the Risk Management Meeting (‘RMM’). The Asset, Liability and Capital Management (‘ALCM’) function is responsible for managing interest rate risk in the banking book. It maintains the transfer pricing framework and informs the Holdings ALCO of the Group’s overall banking book interest rate exposure. Banking book interest rate positions may be transferred to be managed by the Markets Treasury business, previously known as Balance Sheet Management, within the market risk limits approved by the RMM. Effective governance of Markets Treasury is supported by the dual reporting lines it has to the Chief Executive Officer of Global Banking and Markets and to the Group Treasurer, with the Global Risk function acting as a second line of defence. Pension risk is managed by a network of local and regional pension risk forums. The Global Pensions Oversight Forum provides oversight of all pension plans sponsored by HSBC globally and is co-chaired by the Group Treasurer and the Global Head of Treasury Risk Management and Global Risk Analytics. Capital, liquidity and funding risk management processes Assessment and risk appetite 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 requiredrequirements for own funds and 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. AnThe Group ICAAP supports the determination of the consolidated and subsidiary capital risk appetite and target ratios as well as enables the assessment and determination of capital requirements by regulators. Subsidiaries prepare ICAAPs based on their local regulatory regimes in order to determine their own risk appetites and ratios. 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 investmentinvestments 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. 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 20192020 was in excess of $14bn$14bn. The portfolio of HQLA helps to mitigate holding company cash flow risk arising from double leverage, and to underpinunderpins the strength of support the holding company can offer its subsidiaries in times of stress. Further mitigation is provided by additional tier1 (‘AT1’) securities issued in excess of the regulatory requirements of our subsidiaries. We maintain a comprehensive liquidity and funding risk management framework (‘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 ILAAP, which ensures 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. The ILAAP 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. 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 BoardExecutive Committee 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 managementmanagement’s 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 therisk 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 2020.2021. Risks to liquiditycapital and fundingliquidity RisksOutside the stress testing framework, other risks may be identified that have the potential to liquidityaffect our RWAs and/or capital position. Downside and fundingUpside scenarios are assessed through forecasting, stressagainst our capital management objectives and mitigating actions are assigned as necessary. We closely monitor future regulatory changes and continue to evaluate the impact of these upon our capital requirements. This includes the UK’s implementation of amendments to the Capital Requirements Regulation, the Basel III Reforms, and the regulatory impact from the UK’s withdrawal from the EU, as well as other regulatory statements including changes to IRB modelling requirements.
We currently estimate that these regulatory changes could potentially increase RWAs, before any mitigating actions, by approximately 5% over 2022–23. We plan to take action to substantially mitigate a significant proportion of the increase. The Basel III Reforms introduce an output floor that will be introduced in 2023 with a five-year transitional provision. We estimate that there will be an additional RWA impact as a result of the output floor from 2027. In parallel with regulatory developments in the EU, the UK’s PRA is reviewing the requirements for the capitalisation of structural foreign exchange risk to align to a Pillar 1 approach. There remains a significant degree of uncertainty in the impact of the regulatory changes due to the number of national discretions and the need for further supporting technical standards to be developed. Furthermore, the impact does not take into consideration the possibility of offsets against Pillar 2, which may arise as shortcomings within Pillar 1 are addressed. We have applied the revised regulatory treatment of software assets that became law in the EU following its publication in December 2020. We are aware that the PRA intends to consult on this change with a view to returning to full deduction. In line with the PRA’s guidance, we have therefore excluded the capital benefit of $2.1bn from our decisions about distributions. Regulatory reporting processes and controls There is a continued focus on the quality of regulatory reporting by the PRA and other regulators globally. We continue to strengthen our processes and controls, including commissioning independent external reviews of various aspects of regulatory reporting. As a result, there may be impacts on some of our regulatory ratios such as the CET1 and LCR. We continue to keep the PRA and other relevant regulators informed of adverse findings from external reviews and our progress in strengthening the control environment. Further details can be found in the ‘Regulatory developments’ section of the Group’s Pillar 3 Disclosures at 31 December 2020. 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 meetingto meet the requirements for stress testing set by supervisors. Stress testing also informs the ICAAP and ILAAP and supports recovery planning in many jurisdictions. It is a critical methodologyan important output used to evaluate how much fundingcapital and liquidity the Group requires in setting risk appetite.appetite for capital and liquidity risk. It is also used to re-evaluate business plans where analysis shows capital, liquidity and/or returns do not meet their target. All entities maintain contingency plans that can be enacted in the eventIn addition to a range of internal or external triggers, which threatenstress tests, we are subject to supervisory stress testing in many jurisdictions. These include the liquidity or funding position. They alsoprogrammes of the Bank of England, the US Federal Reserve Board, the European Banking Authority, the European Central Bank and the Hong Kong Monetary Authority, as well as stress tests undertaken in other jurisdictions. The results of regulatory stress testing and our internal stress tests are used when assessing our internal capital requirements through the ICAAP. The outcomes of stress testing exercises carried out by the PRA and other regulators feed into the setting of regulatory minimum ratios and buffers.
The Group and subsidiaries have established recovery plans, addressingwhich set out potential options management could take in a range of stress scenarios that could result in a breach of our internal capital buffers. This is to help ensure that our capital and liquidity position can be recovered even in an extreme stress event. During 2020, in light of the Covid-19 outbreak, we carried out additional internal testing on baseline and stressed scenarios. The results of these stress tests were considered in determining capital actions to manage the Group’s position. Additionally, further stress testing was carried out to include scenarios relating to the impact of the UK’s withdrawal from the EU and elevated tensions between the US and China. All entities monitor internal and external triggers that could threaten their capital, liquidity or funding positions. Entities have established recovery plans providing detailed actions that management would consider taking in a stress scenario if the position deterioratesshould their positions deteriorate and threatensthreaten 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 2019.2020. Liquidity and fundingMeasurement of interest rate risk in 2019the banking book processes
Liquidity metrics
At 31 December 2019, allAssessment and risk appetite
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 held in order to hedge positions held with trading intent. Interest rate risk that can be economically hedged may be transferred to the Group’s material operating entities were above regulatory minimum levels.Markets Treasury business. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Markets Treasury cannot economically hedge is not transferred and will remain within the global business where the risks originate. Each entity maintains sufficient unencumbered liquid assetsThe ALCM function uses a number of measures to comply with localmonitor and regulatory requirements. The liquiditycontrol interest rate risk in the banking book, including:
•net interest income sensitivity; •economic value of these liquidity assets for eachequity sensitivity; and •hold-to-collect-and-sell stressed value at risk. Net interest income sensitivity A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected net interest income (‘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 is shown in the following table along with the individual LCR levels onlevel by local ALCOs, where entities forecast both one-year and five-year NII sensitivities across 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 endrange of 2019 is analysed in the following sections.interest rate scenarios.
ReportProjected 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 Directors | Risk
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 Markets Treasury or in the business that originates the risk to mitigate the effect of interest rate movements.
| | | | | | | | | | | | Operating entities’ liquidity | | | | At 31 December 2019 | | | | LCR |
| HQLA |
| Net outflows |
| NSFR |
| | | Footnotes | % |
| $bn
|
| $bn |
| % |
| | HSBC UK Bank plc (ring-fenced bank) | 1 | 165 |
| 75 |
| 45 |
| 150 |
| | HSBC Bank plc (non-ring-fenced bank) | 2 | 142 |
| 103 |
| 72 |
| 106 |
| | The Hongkong and Shanghai Banking Corporation – Hong Kong branch | 3 | 163 |
| 109 |
| 67 |
| 128 |
| | The Hongkong and Shanghai Banking Corporation – Singapore branch | 3 | 147 |
| 14 |
| 10 |
| 120 |
| | Hang Seng Bank | | 185 |
| 42 |
| 23 |
| 148 |
| | HSBC Bank China | | 180 |
| 21 |
| 11 |
| 151 |
| | HSBC Bank USA | | 125 |
| 73 |
| 59 |
| 122 |
| | HSBC France | 4 | 152 |
| 44 |
| 29 |
| 117 |
| | HSBC Middle East – UAE branch | | 202 |
| 11 |
| 5 |
| 159 |
| | HSBC Canada | 4 | 124 |
| 18 |
| 14 |
| 124 |
| | HSBC Mexico | | 208 |
| 9 |
| 4 |
| 136 |
|
| | | | | | | | | | | | | | At 31 December 2018 | | HSBC UK Bank plc (ring-fenced bank) | 1 | 143 |
| 59 |
| 41 |
| 144 |
| | HSBC Bank plc (non-ring-fenced bank) | 2 | 147 |
| 117 |
| 80 |
| 113 |
| | The Hongkong and Shanghai Banking Corporation – Hong Kong branch | 3 | 161 |
| 125 |
| 78 |
| 132 |
| | The Hongkong and Shanghai Banking Corporation – Singapore branch | 3 | 149 |
| 12 |
| 8 |
| 123 |
| | Hang Seng Bank | | 202 |
| 38 |
| 19 |
| 152 |
| | HSBC Bank China | | 153 |
| 24 |
| 15 |
| 153 |
| | HSBC Bank USA | | 121 |
| 70 |
| 58 |
| 131 |
| | HSBC France | 4 | 128 |
| 20 |
| 16 |
| 113 |
| | HSBC Middle East – UAE branch | | 182 |
| 7 |
| 4 |
| 132 |
| | HSBC Canada | 4 | 115 |
| 16 |
| 14 |
| 126 |
| | HSBC Mexico | | 153 |
| 6 |
| 4 |
| 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 DecemberThe NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the ‘up-shock’ scenario. The sensitivity calculations in the ‘down-shock’ scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable. This is a change from the NII sensitivity methodology applied in the Annual Report and Accounts 2019 all, where market rates were floored to zero, unless the central bank rate was already negative as in the case of the Group’s principal operating entities were well above regulatory minimum levels.euro, Swiss franc and Japanese yen.
The most significant movements
Economic value of equity sensitivity 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 2019 are explained below: HSBC UK Bank plc improved its liquidity ratiothis scenario. EVE can be used 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 changesassess the economic capital required to support interest rate risk in the maturitybanking book. An EVE sensitivity represents the expected movement in EVE due to pre-specified interest rate shocks, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivities as a percentage of both customer lending and deposits.
capital resources.HSBC Bank China improved its LCRHold-to-collect-and-sell stressed value at risk
Hold-to-collect-and-sell stressed value at risk (‘VaR’) is a quantification of the potential losses to 180%, mainly reflecting increased customer deposits and wholesale funding issuance. HSBC France increased significantlya 99% confidence level of the liquidity position, reflecting management actions to address restructuring relatedportfolio of securities held under a held-to-collect-and-sell business model in the Markets Treasury business. The portfolio is accounted for at fair value through other comprehensive income together with the derivatives held in designated hedging relationships with these securities. This is quantified based on the worst losses over a one-year period going back to the UK’s departure frombeginning of 2007 and the EU.
assumed holding period is 60 days.Liquid assetsHold-to-collect-and-sell stressed VaR uses the same models as those used for trading book capitalisation and covers only the portfolio managed by Markets Treasury under this business model.
At 31 December 2019,
Other Group risks Structural foreign exchange exposures Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates, the Group had a totalfunctional currencies 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 reflectwhich are currencies other than the compositionUS dollar. An entity’s functional currency is normally that of the liquidity pool by asset typeprimary economic environment in which the entity operates.
Exchange differences on structural exposures are recognised in other comprehensive income (‘OCI’). 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 at 31 December 2019: | | | | | | | | | | | Liquidity pool by asset type | | | Liquidity pool |
| Cash |
| Level 11 |
| Level 21 |
| | | $bn |
| $bn |
| $bn |
| $bn |
| | Cash and balance at central bank | 158 |
| 158 |
| — |
| — |
| | Central and local government bonds | 375 |
| — |
| 334 |
| 41 |
| | Regional government PSE | 17 |
| — |
| 15 |
| 2 |
| | International organisation and MDBs | 15 |
| — |
| 15 |
| — |
| | Covered bonds | 12 |
| — |
| 3 |
| 9 |
| | Other | 24 |
| — |
| 16 |
| 8 |
| | Total at 31 Dec 2019 | 601 |
| 158 |
| 383 |
| 60 |
| | Total at 31 Dec 2018 | 567 |
| 165 |
| 338 |
| 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 | 179 |
| 117 |
| 93 |
| 47 |
| 165 |
| 601 |
| | Liquidity pool at 31 Dec 2018 | 164 |
| 105 |
| 81 |
| 57 |
| 160 |
| 567 |
|
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 setbloc in which we transact and managed based on factors relevant to the operating entities on a stand-alone basis. | | | | | | | | | | At | | | 31 Dec 2019 |
| 30 Jun 2019 |
| 31 Dec 2018 |
| | | $bn |
| $bn |
| $bn |
| | High-quality liquid assets (liquidity value) | 601 |
| 533 |
| 567 |
| | Net outflows | 400 |
| 391 |
| 369 |
| | Liquidity coverage ratio | 150 | % | 136 | % | 154 | % |
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 supplementfund 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 analysebusiness. Therefore, our consolidated balance sheet according tois affected by exchange differences between the assetsUS 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 primarilyour 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 221.
Banking book foreign exchange exposures Banking book foreign exchange exposures 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 totransactions in the banking sector.book generating profit and loss or OCI reserves in a currency other than the reporting currency of the operating entity. Transactional foreign exchange exposure is transferred to Markets and Securities Services or Markets Treasury and managed within limits, with the exception of both exposure generating OCI reserves and limited residual foreign exchange exposure arising from timing differences or for other reasons.
HSBC Holdings risk management | | | | | | | Funding sources | | (Audited) | | | 2019 |
| 2018 |
| | | $m |
| $m |
| | Customer accounts | 1,439,115 |
| 1,362,643 |
| | Deposits by banks | 59,022 |
| 56,331 |
| | Repurchase agreements – non-trading | 140,344 |
| 165,884 |
| | Debt securities in issue | 104,555 |
| 85,342 |
| | Cash collateral, margin and settlement accounts | 71,002 |
| 54,066 |
| | Liabilities of disposal groups held for sale | — |
| 313 |
| | Subordinated liabilities | 24,600 |
| 22,437 |
| | Financial liabilities designated at fair value | 164,466 |
| 148,505 |
| Liabilities under insurance contracts
| 97,439 |
| 87,330 |
| | Trading liabilities | 83,170 |
| 84,431 |
| | – repos | 558 |
| 1,495 |
| | – stock lending | 9,702 |
| 10,998 |
| | – other trading liabilities | 72,910 |
| 71,938 |
| | Total equity | 192,668 |
| 194,249 |
| Other balance sheet liabilities
| 338,771 |
| 296,593 |
| | At 31 Dec | 2,715,152 |
| 2,558,124 |
|
| | | | | | | | Funding uses | | (Audited) | | | | 2019 |
| 2018 |
| | | Footnotes | $m |
| $m |
| | Loans and advances to customers | | 1,036,743 |
| 981,696 |
| | Loans and advances to banks | | 69,203 |
| 72,167 |
| | Reverse repurchase agreements – non-trading | | 240,862 |
| 242,804 |
| | Prepayments, accrued income and other assets | 1 | 63,891 |
| 47,159 |
| – cash collateral, margin and settlement accounts
| | 63,891 |
| 47,159 |
| | Assets held for sale | | 123 |
| 735 |
| | Trading assets | | 254,271 |
| 238,130 |
| | – reverse repos | | 13,659 |
| 9,893 |
| | – stock borrowing | | 7,691 |
| 8,387 |
| | – other trading assets | | 232,921 |
| 219,850 |
| | Financial investments | | 443,312 |
| 407,433 |
| | Cash and balances with central banks | | 154,099 |
| 162,843 |
| | Other balance sheet assets | | 452,648 |
| 405,157 |
| | At 31 Dec | | 2,715,152 |
| 2,558,124 |
|
| | 1 | Includes only those financial instruments that are subject to the impairment requirementsAs 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 IFRS 9. ‘Prepayments, accrued income and other assets’ as presented within the consolidated balance sheet on page 262 includes both financial and non-financial assets. |
Wholesale term debt maturity profilecapital; and maintaining a supply of short-term liquid assets for deployment under extraordinary circumstances.
The maturity profilemain 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 our wholesale termHSBC Holdings’ market risk management strategy is to manage volatility in capital resources, cash flows and distributable reserves that could be caused by movements in market parameters. 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 obligations is setissues. During 2020, HSBC Holdings undertook a variety of liability management exercises, including the issuance of fixed-rate eligible liabilities. Group Treasury generally hedged out the fixed-rate interest rate risk on these liabilities in previous years, but as major interest rate markets remained at very low levels during 2020, this was assessed on a case-by-case basis and in some cases the decision was made to retain the fixed-rate risk. For quantitative disclosures on interest rate risk in the following table.banking book, see pages 221 to 222. 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.
Report of the Directors | Risk
| | | | | | | | | | | | | | | | | | | | | Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities | | | Due not more than 1 month |
| Due over
1 month
but not more than 3 months |
| Due over
3 months
but not more than 6 months |
| Due over
6 months
but not more than 9 months |
| Due over 9 months but not more than 1 year |
| Due over 1 year but not more than 2 years |
| Due over 2 years but not more than 5 years |
| Due over 5 years |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Debt securities issued | 17,728 |
| 19,758 |
| 15,654 |
| 16,284 |
| 16,132 |
| 35,836 |
| 57,387 |
| 53,768 |
| 232,547 |
| | – unsecured CDs and CP | 4,913 |
| 12,280 |
| 11,020 |
| 8,745 |
| 11,509 |
| 1,156 |
| 2,095 |
| 1,578 |
| 53,296 |
| | – unsecured senior MTNs | 8,198 |
| 2,462 |
| 695 |
| 4,595 |
| 1,753 |
| 25,121 |
| 42,316 |
| 38,812 |
| 123,952 |
| | – unsecured senior structured notes | 1,698 |
| 1,386 |
| 1,711 |
| 1,003 |
| 923 |
| 3,579 |
| 6,102 |
| 9,596 |
| 25,998 |
| | – secured covered bonds | — |
| — |
| — |
| — |
| 1,139 |
| 749 |
| 3,661 |
| 1,159 |
| 6,708 |
| | – secured asset-backed commercial paper | 1,933 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,933 |
| | – secured ABS | — |
| — |
| 248 |
| 161 |
| — |
| 205 |
| 911 |
| 741 |
| 2,266 |
| | – others | 986 |
| 3,630 |
| 1,980 |
| 1,780 |
| 808 |
| 5,026 |
| 2,302 |
| 1,882 |
| 18,394 |
| | Subordinated liabilities | 1,523 |
| — |
| 22 |
| 2,000 |
| — |
| 754 |
| 2,424 |
| 26,809 |
| 33,532 |
| | – subordinated debt securities | 1,500 |
| — |
| 22 |
| 2,000 |
| — |
| 754 |
| 2,424 |
| 24,587 |
| 31,287 |
| | – preferred securities | 23 |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,222 |
| 2,245 |
| | At 31 Dec 2019 | 19,251 |
| 19,758 |
| 15,676 |
| 18,284 |
| 16,132 |
| 36,590 |
| 59,811 |
| 80,577 |
| 266,079 |
| | | | | | | | | | | | | Debt securities issued | 8,091 |
| 13,362 |
| 15,808 |
| 10,241 |
| 5,447 |
| 21,811 |
| 70,462 |
| 63,914 |
| 209,136 |
| | – unsecured CDs and CP | 4,378 |
| 7,640 |
| 10,696 |
| 6,546 |
| 818 |
| 529 |
| 764 |
| 1,031 |
| 32,402 |
| | – unsecured senior MTNs | 467 |
| 1,233 |
| 3,107 |
| 2,263 |
| 2,172 |
| 11,252 |
| 55,307 |
| 54,256 |
| 130,057 |
| | – unsecured senior structured notes | 817 |
| 821 |
| 1,452 |
| 1,029 |
| 2,394 |
| 3,005 |
| 7,021 |
| 4,473 |
| 21,012 |
| | – secured covered bonds | — |
| — |
| 205 |
| — |
| — |
| 1,190 |
| 3,469 |
| 1,137 |
| 6,001 |
| | – secured asset-backed commercial paper | 2,094 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,094 |
| | – secured ABS | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 327 |
| 327 |
| | – others | 335 |
| 3,668 |
| 348 |
| 403 |
| 63 |
| 5,835 |
| 3,901 |
| 2,690 |
| 17,243 |
| | Subordinated liabilities | — |
| 95 |
| 2,007 |
| — |
| — |
| 2,021 |
| 1,383 |
| 31,131 |
| 36,637 |
| | – subordinated debt securities | — |
| 95 |
| 2,007 |
| — |
| — |
| 2,021 |
| 1,383 |
| 28,934 |
| 34,440 |
| | – preferred securities | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,197 |
| 2,197 |
| | At 31 Dec 2018 | 8,091 |
| 13,457 |
| 17,815 |
| 10,241 |
| 5,447 |
| 23,832 |
| 71,845 |
| 95,045 |
| 245,773 |
|
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 2020 we reviewed our risk appetite metrics and in 2021 we will continue to enhance and expand these to further assist the internal monitoring of our de-risking programmes. In defined contribution pension plans, the contributions that HSBC is required to make are known, while the ultimate pension benefit will vary, typically with investment returns achieved by investment choices made by the employee. While the market risk to HSBC of defined contribution plans is low, the Group is still exposed to operational and reputational risk. In defined benefit pension plans, the level of pension benefit is known. Therefore, the level of contributions required by HSBC will vary due to a number of risks, including: •investments delivering a return below that required to provide the projected plan benefits; •the prevailing economic environment leading to corporate failures, thus triggering write-downs in asset values (both equity and debt); •a change in either interest rates or inflation expectations, causing an increase in the value of plan liabilities; and •plan members living longer than expected (known as longevity risk).
Pension risk is assessed using an economic capital model that takes into account potential variations in these factors. The impact of these variations on both pension assets and pension liabilities is assessed using a one-in-200-year stress test. Scenario analysis and other stress tests are also used to support pension risk management. To fund the benefits associated with defined benefit plans, sponsoring Group companies, and in some instances employees, make regular contributions in accordance with advice from actuaries and in consultation with the plan’s trustees where relevant. These contributions are normally set to ensure that there are sufficient funds to meet the cost of the accruing benefits for the future service of active members. However, higher contributions are required when plan assets are considered insufficient to cover the existing pension liabilities. Contribution rates are typically revised annually or once every three years, depending on the plan. The defined benefit plans invest contributions in a range of investments designed to limit the risk of assets failing to meet a plan’s liabilities. Any changes in expected returns from the investments may also change future contribution requirements. In pursuit of these long-term objectives, an overall target allocation is established between asset classes of the defined benefit plan assets between asset classes is established.plan. 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 performedhold longevity swap transactions.contracts. 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 wasis the HSBC Bank (UK) Pension Scheme, which performedholds longevity swap transactions with The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc., and with Swiss Re. Together these coverswaps covering approximately three-quarters of the plan’s pensioner liabilities (50% with The Prudential Insurance Company of America and 25% with Swiss Re). Capital risk in 2020 Capital overview | | | | | | | | | | | Capital adequacy metrics | | | At | | | 31 Dec | 31 Dec | | | 2020 | 2019 | | | | | | Risk-weighted assets (‘RWAs’) ($bn) | | | | | Credit risk | | 691.9 | | 676.6 | | | Counterparty credit risk | | 42.8 | | 44.1 | | | Market risk | | 28.5 | | 29.9 | | | Operational risk | | 94.3 | | 92.8 | | | Total RWAs | | 857.5 | | 843.4 | | | Capital on a transitional basis ($bn) | | | | | Common equity tier 1 (‘CET1’) capital | | 136.1 | | 124.0 | | | Tier 1 capital | | 160.2 | | 148.4 | | | Total capital | | 184.4 | | 172.2 | | | Capital ratios on a transitional basis (%) | | | | | Common equity tier 1 ratio | | 15.9 | | 14.7 | | | Tier 1 ratio | | 18.7 | | 17.6 | | | Total capital ratio | | 21.5 | | 20.4 | | | Capital on an end point basis ($bn) | | | | | Common equity tier 1 (‘CET1’) capital | | 136.1 | | 124.0 | | | Tier 1 capital | | 158.5 | | 144.8 | | | Total capital | | 173.2 | | 159.3 | | | Capital ratios on an end point basis (%) | | | | | Common equity tier 1 ratio | | 15.9 | | 14.7 | | | Tier 1 ratio | | 18.5 | | 17.2 | | | Total capital ratio | | 20.2 | | 18.9 | | | Liquidity coverage ratio (‘LCR’) | | | | | Total high-quality liquid assets ($bn) | | 677.9 | 601.4 | | | Total net cash outflow ($bn) | | 487.3 | 400.5 | | | LCR ratio (%) | | 139.1 | | 150.2 | |
Following the end of the transition period following the UK's withdrawal from the EU, any reference to EU regulations and directives (including technical standards) should be read as a reference to the UK's version of such regulation or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, as amended. Capital figures and ratios in the previous table are calculated in accordance with the revised Capital Requirements Regulation and Directive, as implemented (‘CRR II’). The table presents them under the transitional arrangements in CRR II for capital instruments and after their expiry, known as the end point. The end point figures in the table above include the benefit of the regulatory transitional arrangements in CRR II for IFRS 9, which are more fully described below. Where applicable, they also reflect government relief schemes intended to mitigate the impact of the Covid-19 outbreak.
Regulatory transitional arrangements for IFRS 9 ‘Financial Instruments’ We have adopted the regulatory transitional arrangements in CRR II for IFRS 9, including paragraph four of article 473a. Our capital and ratios are presented under these arrangements throughout the table above, including in the end point figures. Without their application, our CET1 ratio would be 15.7%. The IFRS 9 regulatory transitional arrangements allow banks to add back to their capital base a proportion of the impact that
IFRS 9 has upon their loan loss allowances during the first five years of use. The impact is defined as: • the increase in loan loss allowances on day one of IFRS 9 adoption; and •any subsequent increase in ECL in the non-credit-impaired book thereafter. Any add-back must be tax affected and accompanied by a recalculation of exposure and RWAs. The impact is calculated separately for portfolios using the standardised (‘STD’) and internal ratings-based (‘IRB’) approaches. For IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses. The EU’s CRR II ‘Quick Fix’ relief package enacted in June 2020 increased from 70% to 100% the relief that banks may take for loan loss allowances recognised since 1 January 2020 on the
non-credit-impaired book. In the current period, the add-back to CET1 capital amounted to $1.6bn under the STD approach with a tax impact of $0.4bn. At 31 December 2019, the add-back to the capital base under the STD approach was $1.0bn with a tax impact of $0.2bn.
Own funds | | | | | | | | | | | | | | | Own funds disclosure | | (Audited) | | | | | | | | At | | | | 31 Dec | | 31 Dec | | | | 2020 | | 2019 | | Ref* | | | $m | | $m | | Common equity tier 1 (‘CET1’) capital: instruments and reserves | | | | | | 1 | Capital instruments and the related share premium accounts | | 23,219 | | | 22,873 | | | – ordinary shares | | 23,219 | | | 22,873 | | | 2 | Retained earnings | | 128,665 | | | 127,188 | | | 3 | Accumulated other comprehensive income (and other reserves)1 | | 9,768 | | | 1,735 | | | 5 | Minority interests (amount allowed in consolidated CET1) | | 4,079 | | | 4,865 | | | 5a | Independently reviewed interim net profits net of any foreseeable charge or dividend | | (252) | | | (3,381) | | | 6 | Common equity tier 1 capital before regulatory adjustments | | 165,479 | | | 153,280 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 28 | Total regulatory adjustments to common equity tier 1 | | (29,429) | | | (29,314) | | | 29 | Common equity tier 1 capital | | 136,050 | | | 123,966 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 36 | Additional tier 1 capital before regulatory adjustments | | 24,183 | | | 24,453 | | | | | | | | | | | | | | | | | | | | | | | | | | | 43 | Total regulatory adjustments to additional tier 1 capital | | (60) | | | (60) | | | 44 | Additional tier 1 capital | | 24,123 | | | 24,393 | | | 45 | Tier 1 capital | | 160,173 | | | 148,359 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 51 | Tier 2 capital before regulatory adjustments | | 25,722 | | | 25,192 | | | | | | | | | | | | | | | | | | | | | 57 | Total regulatory adjustments to tier 2 capital | | (1,472) | | | (1,401) | | | 58 | Tier 2 capital | | 24,250 | | | 23,791 | | | 59 | Total capital | | 184,423 | | | 172,150 | |
* The references identify the lines prescribed in the European Banking Authority (‘EBA’) template, which are applicable and where there is a value. 1Following the call and subsequent redemption of HSBC Holdings' non-cumulative preference shares, the remaining share premium that related to such preference shares is now treated as an 'other reserve' and included in CET1.
Throughout 2020, we complied with the PRA’s regulatory capital adequacy requirements, including those relating to stress testing. At 31 December 2020, our CET1 ratio increased to 15.9% from 14.7% at 31 December 2019. CET1 capital increased during the year by $12.1bn, mainly as a result of: •the cancellation of the fourth interim dividend of $3.4bn for 2019; •favourable foreign currency translation differences of $3.4bn; •capital generation of $2.8bn net of dividends relating to other equity instruments; •a fall of $2.1bn in the deduction for other intangible assets due to changes to the capital treatment of software assets; •a $1.8bn increase in fair value through other comprehensive income reserve; and •a $1.8bn fall in the deduction for excess expected loss.
These increases were partly offset by: •an interim dividend for 2020 of $3.1bn; and •a $0.8bn fall in allowable non-controlling interest in CET1. This partly reflected the acquisition in May 2020 of additional shares representing 18.66% of the capital of HSBC Trinkaus and Burkhardt from Landesbank Baden-Württemberg, the principal minority shareholder. We have applied the revised regulatory treatment of software assets, which became a UK requirement in December 2020. Subsequently, the PRA announced its intention to consult on a reversal of this change in due course and recommended firms do not base their distribution decision on any capital increase from applying this requirement. As a result, we have not considered the related capital benefit in our distributions. The impact of the change on our CET1 ratio was 0.2 percentage points. Our Pillar 2A requirement at 31 December 2020, as per the PRA’s Individual Capital Requirement based on a point-in-time assessment, was equivalent to 3.0% of RWAs, of which 1.7% was met by CET1.
Risk-weighted assets | | | | | | | | | | | | | | | | | | | RWAs by global business | | WPB | CMB | GBM | Corporate Centre | Total | | $bn | $bn | $bn | $bn | $bn | | Credit risk | 135.9 | | 300.0 | | 168.6 | | 87.4 | | 691.9 | | | Counterparty credit risk | 0.7 | | 0.2 | | 41.2 | | 0.7 | | 42.8 | | | Market risk | 1.6 | | 0.9 | | 22.9 | | 3.1 | | 28.5 | | | Operational risk | 34.6 | | 26.6 | | 32.4 | | 0.7 | | 94.3 | | | At 31 Dec 2020 | 172.8 | | 327.7 | | 265.1 | | 91.9 | | 857.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | RWAs by geographical region | | | | Europe | | Asia | | MENA | | North
America | | Latin
America | | Total | | Footnotes | | $bn | | $bn | | $bn | | $bn | | $bn | | $bn | | Credit risk | | | 211.2 | | | 307.3 | | | 50.2 | | | 96.1 | | | 27.1 | | | 691.9 | | | Counterparty credit risk | | | 23.7 | | | 10.7 | | | 1.4 | | | 5.3 | | | 1.7 | | | 42.8 | | | Market risk | 1 | | 23.5 | | | 20.9 | | | 2.4 | | | 4.7 | | | 1.2 | | | 28.5 | | | Operational risk | | | 25.9 | | | 45.3 | | | 6.2 | | | 11.7 | | | 5.2 | | | 94.3 | | | At 31 Dec 2020 | | | 284.3 | | | 384.2 | | | 60.2 | | | 117.8 | | | 35.2 | | | 857.5 | |
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 | | | Credit risk, counterparty credit risk and operational risk | | | | | | | WPB | | CMB | | GBM | | | Corporate Centre | | Market
risk | | Total
RWAs | | | $bn | | $bn | | $bn | | | $bn | | $bn | | $bn | | RWAs at 1 Jan 2020 | | 161.4 | | | 325.1 | | | 248.7 | | | | 78.3 | | | 29.9 | | | 843.4 | | | Asset size | | 2.2 | | | (12.3) | | | (3.1) | | | | 2.4 | | | 1.1 | | | (9.7) | | | Asset quality | | 0.3 | | | 14.5 | | | 9.3 | | | | 0.4 | | | — | | | 24.5 | | | Model updates | | 2.7 | | | 0.9 | | | (2.2) | | | | — | | | (2.0) | | | (0.6) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Methodology and policy | | 2.6 | | | (8.6) | | | (13.9) | | | | 6.2 | | | (0.5) | | | (14.2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acquisitions and disposals | | — | | | — | | | — | | | | 1.0 | | | — | | | 1.0 | | | Foreign exchange movements | | 2.0 | | | 7.2 | | | 3.4 | | | | 0.5 | | | — | | | 13.1 | | | Total RWA movement | | 9.8 | | | 1.7 | | | (6.5) | | | | 10.5 | | | (1.4) | | | 14.1 | | | RWAs at 31 Dec 2020 | | 171.2 | | | 326.8 | | | 242.2 | | | | 88.8 | | | 28.5 | | | 857.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | RWA movement by geographical region by key driver | | | Credit risk, counterparty credit risk and operational risk | | | | | | | Europe | | Asia | | MENA | | North
America | | Latin
America | | Market risk | | Total
RWAs | | | $bn | | $bn | | $bn | | $bn | | $bn | | $bn | | $bn | | RWAs at 1 Jan 2020 | | 257.9 | | | 345.9 | | | 55.5 | | | 117.6 | | | 36.6 | | | 29.9 | | | 843.4 | | | Asset size | | (9.9) | | | 3.4 | | | 1.1 | | | (6.1) | | | 0.7 | | | 1.1 | | | (9.7) | | | Asset quality | | 7.2 | | | 10.9 | | | 1.3 | | | 4.6 | | | 0.5 | | | — | | | 24.5 | | | Model updates | | 1.7 | | | 0.3 | | | — | | | (0.6) | | | — | | | (2.0) | | | (0.6) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Methodology and policy | | (6.8) | | | (3.0) | | | (0.2) | | | (3.2) | | | (0.5) | | | (0.5) | | | (14.2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acquisitions and disposals | | — | | | — | | | 1.0 | | | — | | | — | | | — | | | 1.0 | | | Foreign exchange movements | | 10.7 | | | 5.8 | | | (0.9) | | | 0.8 | | | (3.3) | | | — | | | 13.1 | | | Total RWA movement | | 2.9 | | | 17.4 | | | 2.3 | | | (4.5) | | | (2.6) | | | (1.4) | | | 14.1 | | | RWAs at 31 Dec 2020 | | 260.8 | | | 363.3 | | | 57.8 | | | 113.1 | | | 34.0 | | | 28.5 | | | 857.5 | | | | | | | | | | | | | | | | |
Risk-weighted assets (‘RWAs’) rose by $14.1bn during the year, including an increase of $13.1bn due to foreign currency translation differences. The $1.0bn increase (excluding foreign currency translation differences) is described in the commentary below. During the period we recognised RWA reductions through our transformation programme of $51.5bn. These are included within the movements described below, primarily under asset size movements and methodology and policy changes. Asset size The $9.7bn fall in RWAs due to asset size movements was due to reductions in CMB and GBM, partly offset by increases in Corporate Centre, WPB and market risk. The $12.3bn decrease in CMB RWAs was primarily due to management initiatives under our transformation programme, most notably in Europe, North America and Asia. The $3.1bn fall in GBM RWAs was driven by $16.4bn of reductions under the transformation programme, largely in North America, Europe, Asia and Latin America. This was partly offset by lending growth, mostly in Asia and MENA, and mark-to-market movements in counterparty credit risk RWAs. In Asia, an increase in the value of material holdings and lending growth in the property market drove increases in Corporate Centre and WPB RWAs of $2.4bn and $2.2bn respectively. Market risk RWAs increased by $1.1bn, largely due to market conditions, partly offset by management initiatives. Asset quality Changes in asset quality led to an RWA increase of $24.5bn, mostly in CMB and GBM. This included credit migration of $29.7bn, largely caused by the Covid-19 outbreak. These downgrades were mostly in Asia, North America and Europe, partly offset by decreases due to portfolio mix changes. Model updates The $0.6bn fall in RWAs due to model updates comprised decreases in GBM and market risk, partly offset by increases in WPB and CMB. The $2.2bn reduction in GBM RWAs was due to corporate model updates in our major regions, most significantly in North America. Market risk RWAs fell by $2.0bn primarily as a result of changes to the calculation of risks not in VaR, and the implementation of a new model for an options portfolio. The increases in WPB and CMB credit risk RWAs were mainly due to updates to French, Hong Kong and North American models. Methodology and policy The $14.2bn reduction in RWAs due to methodology and policy changes included reductions as a result of risk parameter refinements and regulatory responses to the Covid-19 outbreak, offset by changes in approach to credit risk exposures. GBM and CMB reduced RWAs by $23.8bn, of which $11.5bn were under the transformation programme. These reductions stem from a variety of actions, including risk parameter refinements, improved collateral linkage, and data enhancement. Changes under the CRR ‘Quick Fix’ relief package also reduced CMB and GBM RWAs. Implementation of the revised small and medium-sized enterprise supporting factor led to a $3.4bn fall in RWAs for CMB while the new infrastructure supporting factor
caused a $0.5bn fall in GBM. Partly offsetting these reductions, the recent change in the regulatory treatment of software assets caused a $2.3bn increase in Corporate Centre RWAs. At the start of 2020, we implemented two changes that led to a $6.4bn increase in our wholesale credit risk exposures. Application of the new securitisation framework to the pre-existing book caused RWAs to rise by $3.4bn, mainly in Corporate Centre and GBM. Following the conclusion of discussions with the PRA, we also transferred several UK corporate portfolios onto a Foundation IRB approach, causing a $3bn rise in RWAs in CMB and GBM. Corporate Centre and WPB RWAs increased by $5bn as a result of updates to exposures in Asia and the French retail business. The $0.5bn fall in market risk largely comprised reductions from updates to the calculation of stressed VaR and foreign exchange risk, partly offset by increases due to risks not in VaR. Acquisitions and disposals The increase in our shareholding of The Saudi British Bank from 29.2% to 31.0% led to $1.0bn additional Corporate Centre RWAs. Leverage ratio1 | | | | | | | | | | | | | | | | | | | At | | | | 31 Dec | | 31 Dec | | | | 2020 | | 2019 | | Ref* | | Footnotes | $bn | | $bn | | 20 | Tier 1 capital | | 158.5 | | | 144.8 | | | 21 | Total leverage ratio exposure | | 2,897.1 | | | 2,726.5 | | | | | % | | % | | 22 | Leverage ratio | | 5.5 | | | 5.3 | | | EU-23 | Choice of transitional arrangements for the definition of the capital measure | | Fully phased-in | | Fully phased-in | | UK leverage ratio exposure – quarterly average | 2 | 2,555.5 | | | 2,535.4 | | | | | % | | % | | UK leverage ratio – quarterly average | 2 | 6.1 | | | 5.8 | | | UK leverage ratio – quarter end | 2 | 6.2 | | | 5.7 | |
* The references identify the lines prescribed in the EBA template. 1 The CRR II regulatory transitional arrangements for IFRS 9 are applied in both leverage ratio calculations. 2 UK leverage ratio denotes the Group’s leverage ratio calculated under the PRA’s UK leverage framework. This measure excludes qualifying central bank balances and loans under the UK Bounce Back Loan Scheme from the calculation of exposure. Our leverage ratio calculated in accordance with the Capital Requirements Regulation was 5.5% at 31 December 2020, up from 5.3% at 31 December 2019, due to an increase in tier 1 capital, offset by an increase in exposure primarily due to growth in central bank deposits and financial investments. The change in treatment of software assets benefited our leverage ratio by 0.1 percentage points. At 31 December 2020, 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 0.1%. These additional buffers translated into capital values of $17.9bn and $1.8bn 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 2020 is published on our website, www.hsbc.com/investors.
Liquidity and funding risk in 2020 Liquidity metrics At 31 December 2020, all of the Group’s material operating entities were above regulatory minimum liquidity and funding 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 metrics. Given our continued focus on the quality of regulatory reporting, liquidity reporting processes are undergoing a detailed review, which may lead to impacts on some of our regulatory ratios, including LCR and NSFR. All entities are above regulatory minimums and are expected to continue to remain above risk appetite. The Group liquidity and funding position at the end of 2020 is analysed in the following sections.
| | | | | | | | | | | | | | | | | | | Operating entities’ liquidity | | | At 31 December 2020 | | | LCR | HQLA | Net outflows | NSFR | | Footnotes | % | $bn
| $bn | % | | HSBC UK Bank plc (ring-fenced bank) | 1 | 198 | | 121 | | 61 | | 164 | | | HSBC Bank plc (non-ring-fenced bank) | 2 | 136 | | 138 | | 102 | | 124 | | | The Hongkong and Shanghai Banking Corporation – Hong Kong branch | 3 | 195 | | 146 | | 75 | | 146 | | | The Hongkong and Shanghai Banking Corporation – Singapore branch | 3 | 162 | | 16 | | 10 | | 135 | | | Hang Seng Bank | | 212 | | 50 | | 24 | | 151 | | | HSBC Bank China | | 232 | | 24 | | 10 | | 158 | | | HSBC Bank USA | | 130 | | 106 | | 82 | | 130 | | | HSBC Continental Europe | 4 | 143 | | 48 | | 34 | | 130 | | | HSBC Middle East – UAE branch | | 280 | | 11 | | 4 | | 164 | | | HSBC Canada | 4 | 165 | | 30 | | 18 | | 136 | | | HSBC Mexico | | 198 | | 10 | | 5 | | 139 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating entities’ liquidity (continued) | | | At 31 December 2019 | | | LCR | HQLA | Net outflows | NSFR | | Footnotes | % | $m
| $m | %
| | HSBC UK Bank plc (ring-fenced bank) | 1 | 165 | | 75 | 45 | 150 | | HSBC Bank plc (non-ring-fenced bank) | 2 | 142 | | 103 | 72 | 106 | | The Hongkong and Shanghai Banking Corporation – Hong Kong branch | 3 | 163 | | 109 | 67 | 128 | | The Hongkong and Shanghai Banking Corporation – Singapore branch | 3 | 147 | | 14 | 10 | 120 | | Hang Seng Bank | | 185 | | 42 | 23 | 148 | | HSBC Bank China | | 180 | | 21 | 11 | 151 | | HSBC Bank USA | | 125 | | 73 | 59 | 122 | | HSBC Continental Europe | 4 | 152 | | 44 | 29 | 117 | | HSBC Middle East – UAE branch | | 202 | | 11 | 5 | 159 | | HSBC Canada | 4 | 124 | | 18 | 14 | 124 | | HSBC Mexico | | 208 | | 9 | 4 | 136 |
1HSBC 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. 2HSBC Bank plc includes oversea branches and special purpose entities consolidated by HSBC for financial statements purposes. 3The 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. 4HSBC Continental Europe and HSBC Canada represent the consolidated banking operations of the Group in France and Canada, respectively. HSBC Continental Europe and HSBC Canada are each managed as single distinct operating entities for liquidity purposes. At 31 December 2020, all of the Group’s principal operating entities were well above regulatory minimum levels. The most significant movements in 2020 are explained below: •HSBC UK Bank plc improved its liquidity ratio to 198%, mainly driven by growth in commercial and retail deposits. •HSBC Bank plc and HSBC Continental Europe maintained a strong liquidity position, with an increase in HQLA mainly due to deposit growth. However the LCR declined, reflecting a reassessment of potential outflows, particularly with respect to committed facilities. •The Hongkong and Shanghai Banking Corporation – Hong Kong branch, Hang Seng Bank and HSBC Bank China remained in a strong liquidity position, mainly as result of an increase in customer deposits. •HSBC Bank USA remained in a strong liquidity position, mainly driven by an increase in deposits and a reduction in illiquid assets. •HSBC Bank Middle East – UAE branch remained in a strong liquidity position, with a liquidity ratio of 280%. •HSBC Canada increased its LCR to 165%, mainly driven by increased customer deposits and covered bond issuance. Liquid assets At 31 December 2020, the Group had a total of $678bn of highly liquid unencumbered LCR eligible liquid assets (31 December 2019: $601bn) held in a range of asset classes and currencies. Of these, 90% were eligible as level 1 (31 December 2019: 90%). The following tables reflect the composition of the liquidity pool by asset type and currency at 31 December 2020: | | | | | | | | | | | | | | | | Liquidity pool by asset type | | Liquidity pool | Cash | Level 11 | Level 21 | | $bn | $bn | $bn | $bn | | Cash and balance at central bank | 307 | | 307 | | — | | — | | | Central and local government bonds | 312 | | — | | 263 | | 49 | | | Regional government public sector entities | 12 | | — | | 11 | | 1 | | | International organisation and multilateral developments banks | 14 | | — | | 14 | | — | | | Covered bonds | 11 | | — | | 3 | | 8 | | | Other | 22 | | — | | 10 | | 12 | | | Total at 31 Dec 2020 | 678 | | 307 | | 301 | | 70 | | | Total at 31 Dec 2019 | 601 | 158 | 383 | 60 |
1 As defined in EU regulations, 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 2020 | 218 | | 176 | | 117 | | 74 | | 93 | | 678 | | | Liquidity pool at 31 Dec 2019 | 179 | | 117�� | | 93 | | 47 | | 165 | | 601 | |
Consolidated liquidity metrics At 31 December 2020, the total HQLA held at entity level amounted to $857bn (31 December 2019: $646bn), an increase of $211bn, reflecting the increases in entity liquidity positions described above. Consistent with prior periods, the application of requirements under the EC Delegated Act resulted in an adjustment of $179bn (31 December 2019: $45bn) to reflect the limitations in the fungibility of entity liquidity around the Group. As a consequence, the Group consolidated LCR was 139% at
31 December 2020 (31 December 2019: 150%). The $179bn of HQLA remains available to cover liquidity risk in the relevant entities. The methodology used in the Group consolidated LCR in relation to the treatment of part of the Group’s HQLA is currently under review. Upon implementation of this revised approach it is anticipated that the Group’s consolidated LCR will reduce, although remain within appetite. The liquidity position of the entities is unaffected by this change and remains the key focus. | | | | | | | | | | | | | At | | 31 Dec
2020 | 30 Jun 2020 | 31 Dec 2019 | | $bn | $bn | $bn | | High-quality liquid assets (in entities) | 857 | 784 | 646 | | EC Delegated Act adjustment | (179) | (130) | (45) | | Group LCR HQLA | 678 | 654 | 601 | | Net outflows | 487 | 443 | 400 | | Liquidity coverage ratio | 139% | 148% | 150% |
Sources of funding Our primary sources of funding are customer current accounts and savings deposits payable on demand or at short notice. We issue secured and unsecured wholesale securities to supplement customer deposits, meet regulatory obligations and to change the currency mix, maturity profile or location of our liabilities. The following ‘Funding sources’ and ‘Funding uses’ tables provide a view of how our consolidated balance sheet is funded. In practice, all the principal operating entities are required 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 a net balancing source or deployment of funds. In 2020, the level of customer accounts continued to exceed the level of loans and advances to customers. The positive funding gap was predominantly deployed in liquid assets. | | | | | | | | | | Funding sources | | (Audited) | | 2020 | 2019 | | $m | $m | | Customer accounts | 1,642,780 | | 1,439,115 | | | Deposits by banks | 82,080 | | 59,022 | | | Repurchase agreements – non-trading | 111,901 | | 140,344 | | | Debt securities in issue | 95,492 | | 104,555 | | | | | | Cash collateral, margin and settlement accounts | 78,565 | | 71,002 | | | | | | Subordinated liabilities | 21,951 | | 24,600 | | | Financial liabilities designated at fair value | 157,439 | | 164,466 | | Liabilities under insurance contracts
| 107,191 | | 97,439 | | | Trading liabilities | 75,266 | | 83,170 | | | – repos | 11,728 | | 558 | | | – stock lending | 4,597 | | 9,702 | | | | | | – other trading liabilities | 58,941 | | 72,910 | | | Total equity | 204,995 | | 192,668 | | Other balance sheet liabilities
| 406,504 | | 338,771 | | | At 31 Dec | 2,984,164 | | 2,715,152 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Funding uses | | (Audited) | | | 2020 | 2019 | | Footnotes | $m | $m | | Loans and advances to customers | | 1,037,987 | | 1,036,743 | | | Loans and advances to banks | | 81,616 | | 69,203 | | | Reverse repurchase agreements – non-trading | | 230,628 | | 240,862 | | | Prepayments, accrued income and other assets | 1 | 76,859 | | 63,891 | | | – cash collateral, margin and settlement accounts | | 76,859 | | 63,891 | | | Assets held for sale | | 299 | | 123 | | | Trading assets | | 231,990 | | 254,271 | | | – reverse repos | | 13,990 | | 13,659 | | | – stock borrowing | | 8,286 | | 7,691 | | | | | | | – other trading assets | | 209,714 | | 232,921 | | | Financial investments | | 490,693 | | 443,312 | | | Cash and balances with central banks | | 304,481 | | 154,099 | | | Other balance sheet assets | | 529,611 | | 452,648 | | | At 31 Dec | | 2,984,164 | | 2,715,152 | |
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 316, 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 includes debt securities and subordinated liabilities measured at fair value.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities | | Due not
more than
1 month | Due over
1 month
but not more than
3 months | Due over
3 months
but not more than
6 months | Due over
6 months
but not more than
9 months | Due over
9 months
but not more
than
1 year | Due over
1 year
but not more than
2 years | Due over
2 years
but not more than
5 years | Due over
5 years | Total | | $m | $m | $m | $m | $m | $m | $m | $m | $m | | Debt securities issued | 18,057 | | 16,848 | | 20,314 | | 15,208 | | 7,561 | | 20,768 | | 49,948 | | 59,911 | | 208,615 | | | – unsecured CDs and CP | 4,048 | | 8,440 | | 9,977 | | 6,186 | | 2,945 | | 1,474 | | 1,454 | | 1,546 | | 36,070 | | | – unsecured senior MTNs | 9,625 | | 3,363 | | 3,915 | | 4,684 | | 2,005 | | 9,295 | | 35,834 | | 49,209 | | 117,930 | | | – unsecured senior structured notes | 2,075 | | 1,539 | | 1,451 | | 1,242 | | 1,241 | | 3,702 | | 4,979 | | 6,765 | | 22,994 | | | – secured covered bonds | — | | — | | 28 | | — | | 750 | | 2,514 | | 3,917 | | — | | 7,209 | | | – secured asset-backed commercial paper | 1,094 | | — | | — | | — | | — | | — | | — | | — | | 1,094 | | | – secured ABS | 19 | | 119 | | 171 | | 45 | | 41 | | 410 | | 1,865 | | 646 | | 3,316 | | | – others | 1,196 | | 3,387 | | 4,772 | | 3,051 | | 579 | | 3,373 | | 1,899 | | 1,745 | | 20,002 | | | Subordinated liabilities | 618 | | — | | 237 | | — | | 12 | | 12 | | 6,081 | | 22,941 | | 29,901 | | | – subordinated debt securities | 618 | | — | | 237 | | — | | 12 | | 12 | | 6,081 | | 21,085 | | 28,045 | | | – preferred securities | — | | — | | — | | — | | — | | — | | — | | 1,856 | | 1,856 | | | At 31 Dec 2020 | 18,675 | | 16,848 | | 20,551 | | 15,208 | | 7,573 | | 20,780 | | 56,029 | | 82,852 | | 238,516 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Debt securities issued | 17,728 | | 19,758 | | 15,654 | | 16,284 | | 16,132 | | 35,836 | | 57,387 | | 53,768 | | 232,547 | | | – unsecured CDs and CP | 4,913 | | 12,280 | | 11,020 | | 8,745 | | 11,509 | | 1,156 | | 2,095 | | 1,578 | | 53,296 | | | – unsecured senior MTNs | 8,198 | | 2,462 | | 695 | | 4,595 | | 1,753 | | 25,121 | | 42,316 | | 38,812 | | 123,952 | | | – unsecured senior structured notes | 1,698 | | 1,386 | | 1,711 | | 1,003 | | 923 | | 3,579 | | 6,102 | | 9,596 | | 25,998 | | | – secured covered bonds | — | | — | | — | | — | | 1,139 | | 749 | | 3,661 | | 1,159 | | 6,708 | | | – secured asset-backed commercial paper | 1,933 | | — | | — | | — | | — | | — | | — | | — | | 1,933 | | | – secured ABS | — | | — | | 248 | | 161 | | — | | 205 | | 911 | | 741 | | 2,266 | | | – others | 986 | | 3,630 | | 1,980 | | 1,780 | | 808 | | 5,026 | | 2,302 | | 1,882 | | 18,394 | | | Subordinated liabilities | 1,523 | | — | | 22 | | 2,000 | | — | | 754 | | 2,424 | | 26,809 | | 33,532 | | | – subordinated debt securities | 1,500 | | — | | 22 | | 2,000 | | — | | 754 | | 2,424 | | 24,587 | | 31,287 | | | – preferred securities | 23 | | — | | — | | — | | — | | — | | — | | 2,222 | | 2,245 | | | At 31 Dec 2019 | 19,251 | | 19,758 | | 15,676 | | 18,284 | | 16,132 | | 36,590 | | 59,811 | | 80,577 | | 266,079 | |
Structural foreign exchange risk in 2020 Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates, the functional currencies of which are currencies other than the US dollar. Exchange differences on structural exposures are recognised in ‘Other comprehensive income’. | | | | | | | | | | | | | Net structural foreign exchange exposures | | | 2020 | 2019 | | Footnotes | $m | $m | | Currency of structural exposure | | | | | Hong Kong dollars | | 47,623 | | 46,527 | | | Pound sterling | 1 | 35,285 | | 33,383 | | | Chinese renminbi | | 32,165 | | 28,847 | | | Euros | | 15,672 | | 14,881 | | | Canadian dollars | | 5,123 | | 4,416 | | | Indian rupees | | 4,833 | | 4,375 | | | Mexican pesos | | 4,139 | | 4,600 | | | Saudi riyals | | 3,892 | | 4,280 | | | UAE dirhams | | 3,867 | | 4,105 | | | Malaysian ringgit | | 2,771 | | 2,695 | | | Singapore dollars | | 2,473 | | 2,256 | | | Australian dollars | | 2,357 | | 1,898 | | | Taiwanese dollars | | 2,036 | | 1,957 | | | Indonesian rupiah | | 1,726 | | 1,665 | | | Swiss francs | | 1,444 | | 1,188 | | | Korean won | | 1,368 | | 1,245 | | | Thai baht | | 991 | | 910 | | | Egyptian pound | | 889 | | 875 | | | | | | | Others, each less than $700m | | 6,858 | | 7,029 | | | At 31 Dec | | 175,512 | | 167,132 | |
1 At 31 December 2020, we had forward foreign exchange contracts of $11.2bn (2019: $10.5bn) in order to manage our sterling structural foreign exchange exposure. Shareholders’ equity would decrease by $2,427m (2019: $2,298m) if euro and sterling foreign currency exchange rates weakened by 5% relative to the US dollar. Interest rate risk in the banking book in 2020
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 2021 (effects over one year and five years); and •an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 January 2021 (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 the Markets Treasury business. 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 sensitivity analysis performed in the case of a down-shock does not include floors to the shocked market rates for wholesale assets and liabilities including those denominated in US dollars and sterling. Floors have however been maintained for deposits and loans to customers where this is contractual or where negative rates would not be applied. This is a change from the NII sensitivity approach published in the Annual Report and Accounts 2019, where market rates were floored to zero, unless the central bank rate was already negative, as in the case of the euro, Swiss franc and Japanese yen. This reflects the increased risk of negative market interest rates going forward. As such, the one-year and five-year NII sensitivities in the down-shock scenarios have increased in December 2020 at Group level when compared with December 2019. This was driven by the change in approach, changes in the forecasted yield curves and changes in balance sheet composition. The NII sensitivities are forecasted for the whole period of one and five years each quarter. 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 2021 by $1,647m and $5,348m, respectively. Conversely, falls of 25bps and 100bps would decrease projected NII for the 12 months to 31 December 2021 by $1,508m and $4,854m, respectively. The sensitivity of NII for 12 months increased by $2,550m in the plus 100bps parallel shock and increased by $(1,542)m in the minus 100bps parallel shock, comparing December 2021 with December 2020. The increase in the sensitivity of NII for 12 months in the plus 100bps parallel shock was mainly driven by the growth of rate insensitive customer deposits, against an increase in rate sensitive assets due to a general build-up of liquidity throughout the Group, which has been deployed in short-term investments (predominantly cash, held-to-collect-and-sell securities, and reverse repos) as well as shortening of Markets Treasury’s positioning in view of the significant drop in interest rates. The change in NII sensitivity for five years is also driven by the factors above. The tables do not include Markets Treasury management actions or changes in MSS net trading income that may further limit the impact. The limitations of this analysis are discussed within the ‘Treasury risk management’ section on page 211. | | | | | | | | | | | | | | | | | | | | | | NII sensitivity to an instantaneous change in yield curves (12 months) | | | | | | | | | Currency | | | $ | HK$ | £ | € | Other | Total | | $m | $m | $m | $m | $m | $m | | Change in Jan 2021 to Dec 2021 (based on balance sheet at 31 December 2020) | | | | | | | | +25bps parallel | 223 | | 423 | | 555 | | 126 | | 320 | | 1,647 | | | -25bps parallel | (227) | | (343) | | (548) | | (88) | | (302) | | (1,508) | | | +100bps parallel | 546 | | 1,267 | | 1,811 | | 502 | | 1,222 | | 5,348 | | | -100bps parallel | (565) | | (749) | | (1,906) | | (299) | | (1,335) | | (4,854) | | | Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019) | | | | | | | | +25bps parallel | 59 | | 198 | | 278 | | 116 | | 202 | | 853 | | | -25bps parallel | (91) | | (255) | | (332) | | 11 | | (182) | | (849) | | | +100bps parallel | (16) | | 504 | | 1,123 | | 441 | | 746 | | 2,798 | | | -100bps parallel | (490) | | (1,023) | | (1,049) | | (23) | | (726) | | (3,311) | |
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.
| | | | | | | | | | | | | | | | | | | | | | NII sensitivity to an instantaneous change in yield curves (5 years) | | | | | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total | | $m | $m | $m | $m | $m | $m | | Change in Jan 2021 to Dec 2021 (based on balance sheet at 31 December 2020) | | | | | | | | +25bps parallel | 1,647 | | 1,866 | | 1,930 | | 2,028 | | 2,100 | | 9,571 | | | -25bps parallel | (1,508) | | (1,986) | | (2,307) | | (2,045) | | (2,113) | | (9,959) | | | +100bps parallel | 5,348 | | 6,538 | | 7,083 | | 7,444 | | 7,736 | | 34,149 | | | -100bps parallel | (4,854) | | (6,174) | | (7,087) | | (7,660) | | (8,323) | | (34,098) | | | Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019) | | | | | | | | +25bps parallel | 853 | | 1,158 | | 1,348 | | 1,449 | | 1,523 | | 6,331 | | | -25bps parallel | (849) | | (1,205) | | (1,402) | | (1,562) | | (1,649) | | (6,667) | | | +100bps parallel | 2,798 | | 4,255 | | 4,915 | | 5,155 | | 5,454 | | 22,577 | | | -100bps parallel | (3,311) | | (4,621) | | (5,289) | | (5,766) | | (6,164) | | (25,151) | |
Sensitivity of capital and reserves Hold-to-collect-and-sell stressed VaR is a quantification of the potential losses to a 99% confidence level of the portfolio of securities held under a hold-to-collect-and-and-sell business model in the Markets Treasury business. The portfolio is accounted for at fair value through other comprehensive income together with the derivatives held in designated hedging relationships with these securities. The mark-to-market of this portfolio therefore has an impact on CET1. Stressed VaR is quantified based on the worst losses over a one-year period going back to the beginning of 2007 and the assumed holding period is 60 days. At December 2020, the stressed VaR of the portfolio was $2.94bn (2019: $3.2bn). Alongside our monitoring of the stressed VaR of this portfolio, we also monitor the sensitivity of reported cash flow hedging reserves to interest rate movements on a yearly basis by assessing the expected reduction in valuation of cash flow hedges due to parallel movements of plus or minus 100bps in all yield curves. Although we allow rates to go negative in this assessment, we apply a floor on the shocks in the minus 100bps scenario set at the lower of either minus 50bps or the central bank deposit rate. 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 the year end. The sensitivities are indicative and based on simplified scenarios. Comparing December 2020 with December 2019, the sensitivity of the cash flow hedging reserve reduced by $37m in the plus 100bps scenario and reduced by $323m in the minus 100bps scenario. The reduction in the minus 100bps scenario was mainly driven by the significant downwards movement in sterling yields during 2020, which meant that the floor at minus 50bps had an impact across the yield curve. | | | | | | | Sensitivity of cash flow hedging reported reserves to interest rate movements | | | | $m | | At 31 Dec 2020 | | | +100 basis point parallel move in all yield curves | (665) | | As a percentage of total shareholders’ equity | (0.34)% | | -100 basis point parallel move in all yield curves | 409 | | As a percentage of total shareholders’ equity | 0.21% | | | | At 31 Dec 2019 | | | +100 basis point parallel move in all yield curves | (702) | | As a percentage of total shareholders’ equity | (0.38)% | | -100 basis point parallel move in all yield curves | 732 | | As a percentage of total shareholders’ equity | 0.4% |
Third-party assets in Markets Treasury For our Markets Treasury governance framework, see page 212. Third-party assets in Markets Treasury increased by 40% compared with 31 December 2019. Commercial surplus went up in 2020 due to an increase in client deposits and lower credit growth. This was partly reflected in the increase of $135bn in ‘Cash and balances at central banks’. The increase of $42bn across ‘Loans and advances to banks’ and ‘Reverse repurchase agreements’ was driven by the short-term investment of part of this surplus. The remainder was invested in high-quality liquid assets, contributing to the increase of $39bn in ‘Financial Investments’. | | | | | | | | | | Third-party assets in Markets Treasury | | 2020 | 2019 | | $m | $m | | Cash and balances at central banks | 263,656 | | 129,114 | | | Trading assets | 392 | | 268 | | | Loans and advances: | | | | – to banks | 34,555 | | 24,466 | | | – to customers | 1,167 | | 310 | | | Reverse repurchase agreements | 61,693 | | 29,868 | | | Financial investments | 391,017 | | 351,842 | | | Other | 8,724 | | 7,655 | | | At 31 Dec | 761,204 | | 543,523 | |
Defined benefit pension plans Market risk arises within our defined benefit pension plans to the extent that the obligations of the plans are not fully matched by assets with determinable cash flows. For details of our defined benefit plans, including asset allocation, see Note 5 on the financial statements, and for pension risk management, see page 214.
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 repricing gap tables. During 2020, HSBC Holdings undertook a variety of liability management exercises, replacing approximately $11.5bn of short-term fixed-rate debt and their corresponding hedges with longer term fixed-rate debt of five to 10 years. As major interest rate markets remained at very low levels during 2020, we left this replacement debt unhedged. In addition to these exercises, approximately $4bn of debt matured in 2020 and we issued $2.5bn of new debt. The impact of this can be observed in the ‘Repricing gap analysis of HSBC Holdings’ table below, where the gap switched from a net liability to a net asset profile in the ‘Up to 1 year’ bucket, with a concurrent liability gap increase in the ‘5 to 10 years’ bucket. Additionally it can be observed in the NII sensitivity tables, where NII now increases as interest rates rise. 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 2020, HSBC Holdings had forward foreign exchange contracts of $11.2bn (2019: $10.5bn) 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 2021. 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 2021 by $23m and $90m, respectively. Conversely, falls of 25bps and 100bps would decrease projected NII for the 12 months to 31 December 2021 by $23m and $96m, respectively. | | | | | | | | | | | | | | | | | | | | | | NII sensitivity to an instantaneous change in yield curves (12 months) | | $ | HK$ | £ | € | Other | Total | | $m | $m | $m | $m | $m | $m | | Change in Jan 2021 to Dec 2021 (based on balance sheet at 31 December 2020) | | | | | | | | +25bps | 13 | | — | | 8 | | 2 | | — | | 23 | | | -25bps | (12) | | — | | (8) | | (3) | | — | | (23) | | | +100bps | 50 | | — | | 33 | | 7 | | — | | 90 | | | -100bps | (51) | | — | | (32) | | (13) | | — | | (96) | | | Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019) | | | | | | | | +25bps | (30) | | — | | 7 | | 2 | | — | | (21) | | | -25bps | 30 | | — | | (7) | | — | | — | | 23 | | | +100bps | (120) | | — | | 30 | | (6) | | — | | (96) | | | -100bps | 120 | | — | | (21) | | — | | — | | 99 | |
| | | | | | | | | | | | | | | | | | | | | | NII sensitivity to an instantaneous change in yield curves (5 years) | | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total | | $m | $m | $m | $m | $m | $m | | Change in Jan 2021 to Dec 2021 (based on balance sheet at 31 December 2020) | | | | | | | | +25bps | 23 | | 40 | | 43 | | 39 | | 31 | | 176 | | | -25bps | (23) | | (42) | | (46) | | (41) | | (32) | | (184) | | | +100bps | 91 | | 159 | | 171 | | 156 | | 126 | | 702 | | | -100bps | (95) | | (169) | | (189) | | (169) | | (139) | | (761) | | | Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019) | | | | | — | | | | +25bps | (21) | | (14) | | (13) | | (14) | | (17) | | (79) | | | -25bps | 23 | | 12 | | 8 | | 9 | | 13 | | 65 | | | +100bps | (96) | | (64) | | (53) | | (54) | | (72) | | (339) | | | -100bps | 99 | | 61 | | 41 | | 38 | | 43 | | 282 | |
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 ‘Repricing gap analysis of HSBC Holdings’ 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 repricing date if floating rate or the maturity/call date (whichever is first) if fixed rate.
| | | | | | | | | | | | | | | | | | | | | | | | | Repricing gap analysis of HSBC Holdings | | | Total | Up to
1 year | From over
1 to 5 years | From over
5 to 10 years | More than
10 years | Non-interest
bearing | | Footnotes | $m | $m | $m | $m | $m | $m | | Cash at bank and in hand: | | | | | | | | | – balances with HSBC undertakings | | 2,913 | | 2,913 | | — | | — | | — | | — | | | Derivatives | | 4,698 | | — | | — | | — | | — | | 4,698 | | | Loans and advances to HSBC undertakings | | 75,696 | | 25,610 | | 22,190 | | 20,398 | | 2,000 | | 5,498 | | | Financial investments in HSBC undertakings | | 17,485 | | 15,112 | | 2,771 | | — | | — | | (398) | | | Investments in subsidiaries | | 156,485 | | 5,381 | | 7,660 | | 1,500 | | — | | 141,944 | | | Other assets | | 1,721 | | 257 | | — | | — | | — | | 1,464 | | | Total assets | | 258,998 | | 49,273 | | 32,621 | | 21,898 | | 2,000 | | 153,206 | | | Amounts owed to HSBC undertakings | | (330) | | (330) | | — | | — | | — | | — | | | Financial liabilities designated at fair values | | (25,664) | | (1,827) | | (6,533) | | (13,535) | | (750) | | (3,019) | | | Derivatives | | (3,060) | | — | | — | | — | | — | | (3,060) | | | Debt securities in issue | | (64,029) | | (9,932) | | (29,026) | | (22,063) | | (2,000) | | (1,008) | | | Other liabilities | | (5,375) | | — | | — | | — | | — | | (5,375) | | | Subordinated liabilities | | (17,916) | | — | | (3,839) | | (1,780) | | (10,463) | | (1,834) | | | Total equity | | (142,624) | | (1,464) | | (11,439) | | (9,198) | | | (120,523) | | | Total liabilities and equity | | (258,998) | | (13,553) | | (50,837) | | (46,576) | | (13,213) | | (134,819) | | | Off-balance sheet items attracting interest rate sensitivity | | | (20,324) | | 11,562 | | 2,492 | | 6,200 | | 70 | | | Net interest rate risk gap at 31 Dec 2020 | | | 15,396 | | (6,654) | | (22,186) | | (5,013) | | 18,457 | | | Cumulative interest rate gap | | | 15,396 | | 8,742 | | (13,444) | | (18,457) | | — | | | | | | | | | | | Cash at bank and in hand: | | | | | | | | | – balances with HSBC undertakings | | 2,382 | | 2,382 | | — | | — | | — | | — | | | Derivatives | | 2,002 | | — | | — | | — | | — | | 2,002 | | | Loans and advances to HSBC undertakings | | 72,182 | | 19,976 | | 21,084 | | 24,739 | | 2,000 | | 4,383 | | | Financial investments in HSBC undertakings | | 16,106 | | 13,054 | | 3,006 | | — | | — | | 46 | | | Investments in subsidiaries | | 163,948 | | 5,035 | | 5,118 | | 3,924 | | — | | 149,871 | | | Other assets | | 1,095 | | 102 | | — | | — | | — | | 993 | | | Total assets | | 257,715 | | 40,549 | | 29,208 | | 28,663 | | 2,000 | | 157,295 | | | Amounts owed to HSBC undertakings | | (464) | | (464) | | — | | — | | — | | — | | | Financial liabilities designated at fair values | | (30,303) | | — | | (14,628) | | (14,698) | | (750) | | (227) | | | Derivatives | | (2,021) | | — | | — | | — | | — | | (2,021) | | | Debt securities in issue | | (56,844) | | (15,446) | | (22,336) | | (15,154) | | (2,000) | | (1,908) | | | Other liabilities | | (2,203) | | — | | — | | — | | — | | (2,203) | | | Subordinated liabilities | | (18,361) | | — | | (2,000) | | (2,543) | | (11,284) | | (2,534) | | | Total equity | | (147,519) | | (2,950) | | (10,707) | | (9,975) | | — | | (123,887) | | | Total liabilities and equity | | (257,715) | | (18,860) | | (49,671) | | (42,370) | | (14,034) | | (132,780) | | | Off-balance sheet items attracting interest rate sensitivity | | | (30,363) | | 16,789 | | 6,796 | | 6,469 | | 309 | | | Net interest rate risk gap at 31 Dec 2019 | 1 | | (8,674) | | (3,674) | | (6,911) | | (5,565) | | 24,824 | | | Cumulative interest rate gap | | | (8,674) | | (12,348) | | (19,259) | | (24,824) | | — | |
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. | | | | | | | Market risk | | Page | | Market risk management | | Market risk in 20192020 | | | 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 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 20192020 There were no material changes to our policies and practices for the management of market risk in 2019.2020. 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 | • Structural foreign exchange•Foreign exchange | | Global business | GB&M and BSM2
GBM | GB&M, BSM2, GPB,GBM, ALCM, CMB and RBWM
WPB | | 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 178. |
| | 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. |
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 223. 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 trading VaR reside in GB&M.GBM. 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&MMarkets and Securities Services or Markets Treasury unit for management, or to separatebooks 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 changes that follow completion of the new product approval procedures.process. Traded Risk also restricts trading in the more complex derivative products to offices with appropriate levels of product expertise and robust control systems. Key risk management processes Monitoring and limiting market risk exposures Our objective is to manage and control market risk exposures while maintaining a market profile consistent with our risk appetite. We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, VaR and stress testing. Sensitivity analysis Sensitivity analysis measures the impact of individual market factor movements on specific instruments or portfolios, including interest rates, foreign exchange rates and equity prices. 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. 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 awarenessof 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.
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 measuredeal contingent derivatives capital charge to capture risk on non-recourse margin loans,for these transactions 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 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. 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 exposuresMarket risk in 2020
Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates,Global financial conditions worsened rapidly with the functional currencies of which are currencies other than the US dollar. An entity’s functional currency is normally thatonset of the primary economic environmentCovid-19 outbreak from mid-February 2020. Market volatility reached extreme levels across most asset classes and equity prices fell sharply. In credit markets, spreads and yields reached multi-year highs. The gold market experienced Covid-19-related disruption in whichrefining and transportation, affecting the entity operates.
Exchange differences on structural exposures are recognised in ‘Other comprehensive income’. We use the US dollarrelative pricing of gold futures contracts. Oil prices collapsed due to rising oversupply 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
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 protecteddemand reduced materially from the effect of changeseconomic slowdown. Financial markets stabilised from April onwards, as governments in exchange rates. We hedge structural foreign exchange exposures onlyseveral developed countries announced economic recovery programmes and key central banks intervened to provide liquidity and support asset prices. Global equity markets substantially recovered from their losses in limited circumstances.
For further details of our structural foreign exchange exposures, see page 175.
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 assetsMarch 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.
Measurement of interest rate risk in the banking book
The ALCM function uses a number of measures to monitor and control interest rate risk in the banking book, including:
non-traded VaR;
net interest income sensitivity; and
economic value of equity (‘EVE’).
Non-traded VaR
Non-traded VaR uses the same models as those used in the trading book and excludes both HSBC Holdings and the elements of risk that are not transferred to BSM.
NII sensitivity
A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected net interest income (‘NII’) under varying interest rate scenarios (i.e. simulation modelling), where all other economic variables are held constant. This monitoring is undertaken at an entity level by local ALCOs, where entities forecast both one-year and five-year 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 docredit
not incorporate actions that would be takenspreads reverted towards pre-Covid-19 levels. During the second half of 2020 markets remained susceptible to further bouts of volatility triggered by BSM orincreases in Covid-19 cases and various geopolitical risks. Market sentiment improved after positive vaccine news and the US presidential elections in November 2020, adding momentum to the performance of risky assets.
We managed market risk prudently during 2020. Sensitivity exposures remained within appetite as the business unitspursued its core market-making activity in support of our customers during the outbreak. We also undertook hedging activities to mitigateprotect the effect of interest rate movements. The NII sensitivity calculations assume that interest rates of all maturities move by the same amountbusiness from potential future deterioration 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 176.
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.credit conditions. 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 continuingcontinued to be the key drivermanaged using a complementary set 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 equitymeasures and foreign exchange components provided more limited contributions to the overall market risk in the trading book.limits, including stress and scenario analysis.
Trading portfolios Value at risk of the trading portfolios Trading VaR was predominantly resides within Global Markets.generated by the Markets and Securities Services business. The Fixed Income business continued to be the key driver of trading VaR for trading book activity atup to the end of 20192020, although with a lower contribution than in the first half of the year. Interest rate risks from market-making activities were the main drivers of trading VaR. Trading VaR at 31 December 2020 was lowerhigher than at the end of 2018.
31 December 2019. The decrease was attributable primarily to lower contributions from: credit spread risks due to a reduction of exposuresmoderate increase in trading VaR during the year and lower baseline credit spread levels;
reduced equity correlation and interest rate volatility risks captureda spike in the RNIV framework; and
some offsetting gains provided by the flow rates activity.
The lower contributionfirst half of the above driversyear were due primarily to higher levels of trading VaR was partly offset by reduced diversification benefits across asset classes.
Reportmarket volatility reached in March and April 2020, as a result of the Directors | Risk
economic impact of the Covid-19 outbreak. Trading VaR did not change significantly during the second half of the year and VaR remained in line with the normal range observed in 2019. Overall market risk in the trading book was actively managed during the year.
The daily levels of total trading VaR during 20192020 are set out in the graph below.
| | | | Daily VaR (trading portfolios), 99% 1 day ($m) |
The Group trading VaR for the year is shown in the table below. | | Trading VaR, 99% 1 day1 | Trading VaR, 99% 1 day1 | Trading VaR, 99% 1 day1 | | (Audited) | | (Audited) | | | | Foreign exchange and commodity |
| Interest rate |
| Equity |
| Credit spread |
| Portfolio diversification2 |
| Total3 |
| | Foreign
exchange and commodity | Interest
rate | Equity | Credit
spread | Portfolio diversification2 | Total3 | | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | $m | | Balance at 31 Dec 2020 | | Balance at 31 Dec 2020 | 13.7 | | 20.3 | | 21.5 | | 24.3 | | (36.4) | | 43.4 | | | Average | | Average | 11.0 | | 26.6 | | 27.3 | | 21.6 | | (38.3) | | 48.1 | | | Maximum | | Maximum | 25.7 | | 43.5 | | 42.0 | | 44.1 | | | 69.3 | | | Minimum | | Minimum | 5.6 | | 19.1 | | 13.6 | | 12.6 | | | 33.6 | | | | Balance at 31 Dec 2019 | 7.7 |
| 28.2 |
| 15.7 |
| 15.2 |
| (26.4 | ) | 40.3 |
| Balance at 31 Dec 2019 | 7.7 | | 28.2 | | 15.7 | | 15.2 | | (26.4) | | 40.3 | | | Average | 6.9 |
| 29.9 |
| 16.2 |
| 23.7 |
| (29.0 | ) | 47.8 |
| Average | 6.9 | | 29.9 | | 16.2 | | 23.7 | | (29.0) | | 47.8 | | | Maximum | 13.5 |
| 36.5 |
| 24.9 |
| 33.2 |
|
|
| 59.3 |
| Maximum | 13.5 | | 36.5 | | 24.9 | | 33.2 | | | 59.3 | | | Minimum | 4.1 |
| 22.9 |
| 12.4 |
| 11.7 |
|
|
| 33.3 |
| Minimum | 4.1 | | 22.9 | | 12.4 | | 11.7 | | | 33.3 | | | | | | | Balance at 31 Dec 2018 | 12.6 |
| 33.9 |
| 22.6 |
| 25.9 |
| (37.9 | ) | 57.1 |
| | | Average | 9.5 |
| 36.4 |
| 22.5 |
| 20.7 |
| (34.3 | ) | 54.8 |
| | | Maximum | 21.8 |
| 49.9 |
| 33.8 |
| 35.2 |
| | 71.2 |
| | | Minimum | 5.5 |
| 27.0 |
| 13.5 |
| 12.2 |
| | 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 | 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 In 2019,During 2020, the Group experienced six profitthree loss back-testing exceptions and one loss back-testing exception against actual profit and loss. Some of theselosses, with no additional back-testing 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 numbersecond half 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.
2020. The Group also experienced one profit back-testing exception and one10 loss back-testing exceptionexceptions against hypothetical profit and loss: a losslosses, including one back-testing exception in November driventhe second half of the year. The high number of hypothetical back-
testing exceptions that occurred from March 2020 was primarily bydue to the extreme market volatility resulting from the economic impact of the wideningCovid-19 outbreak, which was significantly greater than the volatility used in the model calibration. In recognition of the credit spreadexceptional market environment in 2020, the PRA granted an exemption from the higher VaR multiplier for market risk RWA purposes arising from six out of 10 VaR back-
testing exceptions that occurred after the onset of the Covid-19 outbreak. These six back-testing exceptions were granted on the basis that they were not the result of inherent model weaknesses but were driven by larger than normal market volatility in the first half of 2020 caused by the Covid-19 outbreak. The hypothetical profit and loss reflects the profit and loss that would be realised if positions were held constant from the end of one trading day to the end of the next. This measure of profit and loss does not align with how risk is dynamically hedged, and is not therefore indicative of the actual performance of the business. Accordingly, of the 10 loss back-testing exceptions against hypothetical profit and losses, only two corresponded to actual profit and loss exceptions. Despite the high number of loss exceptions, performance of the VaR model was in line with expectations when considered in the context of the extraordinary market movements observed in March and April 2020. During this period, market risk continued to be managed using a high-yield bond holding;complementary set of exposure measures and limits, including stress and scenario analysis. This ensured that the business was prudently managed and performed well across the period. a profit exception in December, due to gains from multiple desks and spread across all asset classes.
Non-trading portfolios 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 The VaR for non-trading booksactivity at the end of 201931 December 2020 was materially largerhigher than in 2018.at 31 December 2019. The increase was driven by an upliftarose primarily from the effect of higher levels of market volatility observed in contributions from bothMarch and April 2020 due to the economic impact of the Covid-19 outbreak. Although the size of interest rate and credit spread risksexposures did not change significantly during the last quarteryear, increased volatility of yields and spreads led to an increase in VaR and a reduction 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.diversification benefit effects across these exposures. Non-trading VaR includes the interest rate risk in the banking book transferred to and managed by BSMMarkets Treasury and the non-trading financial instruments held by BSM.Markets Treasury. 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.
Report of the Directors | Risk
| | | 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) | | Interest
rate | Credit
spread | Portfolio
diversification1 | Total2 | | $m | $m | $m | $m | | Balance at 31 Dec 2020 | 166.6 | | 87.0 | | (5.7) | | 247.8 | | | Average | 150.2 | | 82.5 | | (42.0) | | 190.7 | | | Maximum | 196.4 | | 133.4 | | — | | 274.6 | | | Minimum | 59.0 | | 44.2 | | — | | 79.7 | | | | | | | | Balance at 31 Dec 2019 | 96.2 | | 62.5 | | (28.2) | | 130.5 | | | Average | 65.9 | | 44.2 | | (25.6) | | 84.5 | | | Maximum | 100.1 | | 81.2 | | 0 | 132.8 | | | Minimum | 49.2 | | 26.6 | | 0 | 60.9 | |
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, 99% 1 day | | (Audited) | | | Interest rate |
| Credit spread |
| Portfolio
diversification1 |
| Total2 |
| | | $m |
| $m |
| $m |
| $m |
| | Balance at 31 Dec 2019 | 96.2 |
| 62.5 |
| (28.2 | ) | 130.5 |
| | Average | 65.9 |
| 44.2 |
| (25.6 | ) | 84.5 |
| | Maximum | 100.1 |
| 81.2 |
|
|
| 132.8 |
| | Minimum | 49.2 |
| 26.6 |
|
|
| 60.9 |
| | | | | | | | Balance at 31 Dec 2018 | 61.4 |
| 37.2 |
| (30.6 | ) | 68 |
| | Average | 96.8 |
| 48.3 |
| (29.1 | ) | 116 |
| | Maximum | 129.3 |
| 96 |
| | 154.1 |
| | Minimum | 59.9 |
| 27.6 |
| | 68 |
|
| | | | | | 1HSBC Holdings plc | 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.227 |
| | 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.books is described further in the Treasury Risk section. 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.GBM. 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.GBM. 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 172 of the ‘Risk management’ section.
Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates, the functional currencies of which are currencies other than the US dollar. Exchange differences on structural exposures are recognised in ‘Other comprehensive income’.
| | | | | | | | Net structural foreign exchange exposures | | | | 2019 |
| 2018 |
| | | Footnotes | $m |
| $m |
| | Currency of structural exposure | | | | | Hong Kong dollars | | 46,527 |
| 41,477 |
| | Pound sterling | 1 | 33,383 |
| 36,642 |
| | Chinese renminbi | | 28,847 |
| 27,554 |
| | Euros | | 14,881 |
| 20,964 |
| | Mexican pesos | | 4,600 |
| 4,363 |
| | Canadian dollars | | 4,416 |
| 3,815 |
| | Indian rupees | | 4,375 |
| 3,837 |
| | Saudi riyals | | 4,280 |
| 3,913 |
| | UAE dirhams | | 4,105 |
| 2,185 |
| | Malaysian ringgit | | 2,695 |
| 2,572 |
| | Singapore dollars | | 2,256 |
| 2,246 |
| | Taiwanese dollars | | 1,957 |
| 1,904 |
| | Australian dollars | | 1,898 |
| 1,823 |
| | Indonesian rupiah | | 1,665 |
| 1,792 |
| | Korean won | | 1,245 |
| 1,285 |
| | Swiss francs | | 1,188 |
| 987 |
| | Thai baht | | 910 |
| 856 |
| | Egyptian pound | | 875 |
| 697 |
| | Brazilian real | | 271 |
| 707 |
| | Others, each less than $700m | | 6,758 |
| 6,140 |
| | At 31 Dec | | 167,132 |
| 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
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 171.
| | | | | | | | | | | | | | | NII sensitivity to an instantaneous change in yield curves (12 months) | | | Currency | | | | $ |
| HK$ |
| £ |
| € |
| Other |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019) | | | | | | | | +25bps parallel | 59 |
| 198 |
| 278 |
| 116 |
| 202 |
| 853 |
| | -25bps parallel | (91 | ) | (255 | ) | (332 | ) | 11 |
| (182 | ) | (849 | ) | | +100bps parallel | (16 | ) | 504 |
| 1,123 |
| 441 |
| 746 |
| 2,798 |
| | -100bps parallel | (490 | ) | (1,023 | ) | (1,049 | ) | (23 | ) | (726 | ) | (3,311 | ) | | Change in Jan 2019 to Dec 2019 (based on balance sheet at 31 December 2018) | | | | | | | | +25bps parallel | 70 |
| 232 |
| 198 |
| 115 |
| 213 |
| 828 |
| | -25bps parallel | (160 | ) | (301 | ) | (244 | ) | 8 |
| (187 | ) | (884 | ) | | +100bps parallel | 147 |
| 773 |
| 777 |
| 408 |
| 673 |
| 2,778 |
| | -100bps parallel | (523 | ) | (1,046 | ) | (1,122 | ) | 9 |
| (772 | ) | (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.
Report of the Directors | Risk
| | | | | | | | | | | | | | | NII sensitivity to an instantaneous change in yield curves (5 years) | | | Year 1 |
| Year 2 |
| Year 3 |
| Year 4 |
| Year 5 |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019) | | | | | | | | +25bps parallel | 853 |
| 1,158 |
| 1,348 |
| 1,449 |
| 1,523 |
| 6,331 |
| | -25bps parallel | (849 | ) | (1,205 | ) | (1,402 | ) | (1,562 | ) | (1,649 | ) | (6,667 | ) | | +100bps parallel | 2,798 |
| 4,255 |
| 4,915 |
| 5,155 |
| 5,454 |
| 22,577 |
| | -100bps parallel | (3,311 | ) | (4,621 | ) | (5,289 | ) | (5,766 | ) | (6,164 | ) | (25,151 | ) | | Change in Jan 2019 to Dec 2019 (based on balance sheet at 31 December 2018) | | | | | | | | +25bps parallel | 828 |
| 1,155 |
| 1,416 |
| 1,529 |
| 1,428 |
| 6,356 |
| | -25bps parallel | (884 | ) | (1,127 | ) | (1,206 | ) | (1,296 | ) | (1,597 | ) | (6,110 | ) | | +100bps parallel | 2,778 |
| 3,863 |
| 4,542 |
| 4,968 |
| 5,096 |
| 21,247 |
| | -100bps parallel | (3,454 | ) | (4,632 | ) | (5,276 | ) | (5,691 | ) | (6,187 | ) | (25,240 | ) |
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
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 | | | | $m | At 31 Dec 2019 |
| +100 basis point parallel move in all yield curves | (702) | As a percentage of total shareholders’ equity | (0.38)% | -100 basis point parallel move in all yield curves | 732 | As a percentage of total shareholders’ equity | 0.4% |
|
| At 31 Dec 2018 |
| +100 basis point parallel move in all yield curves | (492) | As a percentage of total shareholders’ equity | (0.26)% | -100 basis point parallel move in all yield curves | 550 | As a percentage of total shareholders’ equity | 0.3% |
Third-party assets in Balance Sheet Management
For our BSM governance framework, see page 172.
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 | | | 2019 |
| 2018 |
| | | $m |
| $m |
| | Cash and balances at central banks | 129,114 |
| 144,802 |
| | Trading assets | 268 |
| 601 |
| | Loans and advances: | | | | – to banks | 24,466 |
| 25,257 |
| | – to customers | 310 |
| 964 |
| | Reverse repurchase agreements | 29,868 |
| 22,899 |
| | Financial investments | 351,842 |
| 333,622 |
| | Other | 7,655 |
| 6,880 |
| | At 31 Dec | 543,523 |
| 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 170.
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) | | | $ |
| HK$ |
| £ |
| € |
| Other |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019) | | | | | | | | +25bps | (30 | ) | — |
| 7 |
| 2 |
| — |
| (21 | ) | | -25bps | 30 |
| — |
| (7 | ) | — |
| — |
| 23 |
| | +100bps | (120 | ) | — |
| 30 |
| (6 | ) | — |
| (96 | ) | | -100bps | 120 |
| — |
| (21 | ) | — |
| — |
| 99 |
| | Change in Jan 2019 to Dec 2019 (based on balance sheet at 31 December 2018) | | | | | | | | +25bps | (10 | ) | — |
| 8 |
| (5 | ) | — |
| (7 | ) | | -25bps | 10 |
| — |
| (8 | ) | 8 |
| — |
| 10 |
| | +100bps | (38 | ) | — |
| 31 |
| (22 | ) | — |
| (29 | ) | | -100bps | 38 |
| — |
| (28 | ) | 33 |
| — |
| 43 |
|
| | | | | | | | | | | | | | | NII sensitivity to an instantaneous change in yield curves (5 years) | | | Year 1 |
| Year 2 |
| Year 3 |
| Year 4 |
| Year 5 |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019) | | | | | | | | +25bps | (21 | ) | (14 | ) | (13 | ) | (14 | ) | (17 | ) | (79 | ) | | -25bps | 23 |
| 12 |
| 8 |
| 9 |
| 13 |
| 65 |
| | +100bps | (96 | ) | (64 | ) | (53 | ) | (54 | ) | (72 | ) | (339 | ) | | -100bps | 99 |
| 61 |
| 41 |
| 38 |
| 43 |
| 282 |
| | Change in Jan 2019 to Dec 2019 (based on balance sheet at 31 December 2018) | | | | | — |
| | | +25bps | (7 | ) | (9 | ) | (9 | ) | (4 | ) | (8 | ) | (37 | ) | | -25bps | 10 |
| 12 |
| 11 |
| 11 |
| 11 |
| 55 |
| | +100bps | (29 | ) | (36 | ) | (36 | ) | (16 | ) | (32 | ) | (149 | ) | | -100bps | 43 |
| 47 |
| 47 |
| 29 |
| 42 |
| 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.
Report of the Directors | Risk
| | | | | | | | | | | | | | | | Repricing gap analysis of HSBC Holdings | | | | Total |
| Up to 1 year |
| From over 1 to 5 years |
| From over 5 to 10 years |
| More than 10 years |
| Non-interest bearing |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| $m |
| | Cash at bank and in hand: | | | | | | | | | – balances with HSBC undertakings | | 2,382 |
| 2,382 |
| — |
| — |
| — |
| — |
| | Derivatives | | 2,002 |
| — |
| — |
| — |
| — |
| 2,002 |
| | Loans and advances to HSBC undertakings | | 72,182 |
| 19,976 |
| 21,084 |
| 24,739 |
| 2,000 |
| 4,383 |
| | Financial investments in HSBC undertakings | | 16,106 |
| 13,054 |
| 3,006 |
| — |
| — |
| 46 |
| | Investments in subsidiaries | | 163,948 |
| 5,035 |
| 5,118 |
| 3,924 |
| — |
| 149,871 |
| | Other assets | | 1,095 |
| 102 |
| — |
| — |
| — |
| 993 |
| | Total assets | | 257,715 |
| 40,549 |
| 29,208 |
| 28,663 |
| 2,000 |
| 157,295 |
| | Amounts owed to HSBC undertakings | | (464 | ) | (464 | ) | — |
| — |
| — |
| — |
| | Financial liabilities designated at fair values | | (30,303 | ) | — |
| (14,628 | ) | (14,698 | ) | (750 | ) | (227 | ) | | Derivatives | | (2,021 | ) | — |
| — |
| — |
| — |
| (2,021 | ) | | Debt securities in issue | | (56,844 | ) | (15,446 | ) | (22,336 | ) | (15,154 | ) | (2,000 | ) | (1,908 | ) | | Other liabilities | | (2,203 | ) | — |
| — |
| — |
| — |
| (2,203 | ) | | Subordinated liabilities | | (18,361 | ) | — |
| (2,000 | ) | (2,543 | ) | (11,284 | ) | (2,534 | ) | | Total equity | | (147,519 | ) | (2,950 | ) | (10,707 | ) | (9,975 | ) | — |
| (123,887 | ) | | Total liabilities and equity | | (257,715 | ) | (18,860 | ) | (49,671 | ) | (42,370 | ) | (14,034 | ) | (132,780 | ) | | Off-balance sheet items attracting interest rate sensitivity | | | (30,363 | ) | 16,789 |
| 6,796 |
| 6,469 |
| 309 |
| | Net interest rate risk gap at 31 Dec 2019 | | | (8,674 | ) | (3,674 | ) | (6,911 | ) | (5,565 | ) | 24,824 |
| | Cumulative interest rate gap | | | (8,674 | ) | (12,348 | ) | (19,259 | ) | (24,824 | ) | — |
| | | | | | | | | | | Cash at bank and in hand: | | | | | | | | | – balances with HSBC undertakings | | 3,509 |
| 3,509 |
| — |
| — |
| — |
| — |
| | Derivatives | | 707 |
| — |
| — |
| — |
| — |
| 707 |
| | Loans and advances to HSBC undertakings | | 79,657 |
| 39,316 |
| 16,717 |
| 18,382 |
| 2,000 |
| 3,242 |
| | Financial investments in HSBC undertakings | | — |
| — |
| — |
| — |
| — |
| — |
| | Investments in subsidiaries | | 160,231 |
| 4,703 |
| 2,136 |
| 379 |
| | 153,013 |
| | Other assets | | 1,077 |
| — |
| — |
| — |
| — |
| 1,077 |
| | Total assets | | 245,181 |
| 47,528 |
| 18,853 |
| 18,761 |
| 2,000 |
| 158,039 |
| | Amounts owed to HSBC undertakings | | (949 | ) | — |
| — |
| — |
| — |
| (949 | ) | | Financial liabilities designated at fair values | | (25,049 | ) | (1,920 | ) | (11,871 | ) | (9,299 | ) | (750 | ) | (1,208 | ) | | Derivatives | | (2,159 | ) | — |
| — |
| — |
| — |
| (2,159 | ) | | Debt securities in issue | | (50,800 | ) | (14,879 | ) | (16,753 | ) | (18,156 | ) | (2,900 | ) | 1,888 |
| | Other liabilities | | (1,156 | ) | — |
| — |
| — |
| — |
| (1,156 | ) | | Subordinated liabilities | | (17,715 | ) | (1,646 | ) | — |
| (4,476 | ) | (10,317 | ) | (1,277 | ) | | Total equity | | (147,353 | ) | (1,450 | ) | (9,861 | ) | (10,777 | ) | (1,372 | ) | (123,893 | ) | | Total liabilities and equity | | (245,181 | ) | (19,895 | ) | (38,485 | ) | (42,708 | ) | (15,339 | ) | (128,754 | ) | | Off-balance sheet items attracting interest rate sensitivity | | | (30,713 | ) | 10,544 |
| 12,718 |
| 6,410 |
| 1,041 |
| | Net interest rate risk gap at 31 Dec 2018 | 1 | | (3,080 | ) | (9,088 | ) | (11,229 | ) | (6,929 | ) | 30,326 |
| | Cumulative interest rate gap | | | (3,080 | ) | (12,168 | ) | (23,397 | ) | (30,326 | ) | |
| | 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. |
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 20192020 In May 2019, in line with the increasing expectations from customers, regulators and the Board, and in response to a continually evolving threat landscape that the wider industry faces, we face, we formedcombined Operational Risk and Resilience Risk to form a new Operational and Resilience Risk sub-function. The function seeks to take a holistic viewThis sub-function provides robust non-financial risk steward oversight of the increasing geopolitical, environmentalmanagement of risk by the Group businesses, functions, legal entities and technologicalcritical business services. It also provides effective and timely independent challenge. We carried out several initiatives during the year: •We developed regional hubs accountable for core Operational and Resilience Risk activities. •We implemented teams aligned to businesses and functions, which were focused on emerging 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.material products and services. •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 operationaldeployed risk management frameworkoversight of the most material transformation programmes across the Group.
•We implemented central services including governance, reporting and the agreed non-financial risk responsibilities.transformation. •We developedcreated a new risk taxonomy with control library changes, simplifyingstand-alone assurance capability that provides independent review and removing duplication that existed in the previously independent risk functions, which helped to strengthen our overall managementevaluation of operational risks. We focused on the establishment of preventative measures, which include deepening an understanding of resilience risk,end-to-end processes, risks 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.
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.key controls.
We prioritise our efforts on material risks and areas of material risk andundergoing strategic growth, by being present in higher risk profile countries. However, we arealigning our location strategy to this need. We also supportingremotely provide oversight and stewardship, including support of chief risk officers, and our colleagues in the Operational Risk function in countriesterritories where we have no physical presence, with assessing and understanding their risk profile.presence. Governance and structure Resilience Risk provides oversight, advice, guidanceThe Operational 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 provideprovides 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 sixacross seven risk lenses: strategic changetypes related to: third parties and emerging threats; third-party risk;supply chains; information, technology and data resilience;cybersecurity; payments and processing resilience; systemsmanual processing; physical security; business interruption and cyber resilience;contingency risk; building unavailability; and protective security risk.
The Resilience Risk structure simplifies interactions with our key stakeholders by providing a single channel of contact for all areasacross 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.workplace safety.
A strategic changeprincipal senior management meeting for operational 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 meetinggovernance 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 issueschaired by the Group Chief Risk Officer, with an escalation path to the Group Risk Committee.Management Meeting.
Key risk management processes Operational resilience is our ability to anticipate, prevent, adapt, operationsrespond to, recover and learn from internal or external disruption, protecting customers, the markets we operate in and economic stability. Resilience is determined by assessing whether we are able to continue functioning whento provide our most important services, within an operational disturbance occurs.agreed level. We measure resilience in termsaccept we will not be able to prevent all disruption but we prioritise investment to continually improve the response and recovery strategies for our most important business services. Business operations continuity As a result of the maximum disruption periodCovid-19 outbreak, we successfully implemented business continuity responses and continue to maintain the majority of service level agreements. We did not experience any major impacts to the supply chain from our third-party service providers due to the pandemic. The risk of damage 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 servicetheft to our customers.physical assets or criminal injury to our colleagues remains unchanged and no significant incidents impacted our buildings or people. 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.
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.
| | | | Regulatory compliance risk |
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, as well as breaching regulatory licensing, permissions and breaching other regulatory requirements.rules. Regulatory compliance risk management Key developments in 20192020 There were no materialIn 2020, we made changes to our wider approach to the policiesgovernance and practices forstructure of the management of regulatory compliance risk in 2019, except for the initiatives that we undertookCompliance function and continued to raise our standards in relationrelated to the conduct of our business, as described below under ‘Conduct of business’.set out below.
Governance and structure The Regulatory Compliance sub-function provides independent, objective oversight and challenge, and promotesIn May, we introduced 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 ofnew operating model to transform the Compliance function,function. We created a new Group capability called Group Regulatory Conduct, which is headed bywas formed from the regulatory compliance and regulatory affairs capabilities, and the monitor liaison office team. The Group Head of Regulatory Conduct continues to report to the Group Chief Compliance Officer. The Group Regulatory Compliance is structured as a global sub-functionConduct capability works with the newly appointed regional chief compliance officers and country Regulatory Compliancetheir respective teams whichto help them identify and manage regulatory compliance risks across the Group. They also work together to ensure good conduct outcomes and provide enterprise-wide support and advise each global business and global function.on the regulatory agenda.
Key risk management processes WeThe Group Regulatory Conduct capability is responsible for setting global policies, standards and risk appetite to guide the Group’s management of regulatory compliance. It also devises clear
frameworks and support processes to protect against regulatory compliance risks. The capability provides oversight, review and challenge to the regional chief compliance officers and their teams to help them identify, assess and mitigate regulatory compliance risks, where required. The Group’s regulatory compliance risk policies are regularly review our policies and procedures.reviewed. Global policies and procedures require the prompt identification and escalation of any actual or potential regulatory breach to Regulatory Compliance. Reportablebreach. Relevant reportable events are escalated to the Group RMM and the GRC, as appropriate. Matters relating to the Group’s regulatory conduct of business are reported to the GRC. Conduct of business In 2019,2020, 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 2019:2020: 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 champion a strong conduct and customer-focused culture. We implemented a number of measures throughout the Covid-19 outbreak to support our customers in financial difficulties. We also maintained service and supported colleagues in unprecedented conditions. •We continued our focus on culture and behaviours, adapting our controls and risk management processes to reflect significant levels of remote working throughout the year. •We continued to invest significant resources to improve our compliance systems and controls relating to our activities in Global Markets and to ensure market integrity. These included enhancements to: pricing and disclosure, order management and trade execution; trade; voice and audio surveillance; front office supervision; and the enforcement and discipline framework for employee misconduct. •We continued to emphasise – and worked to create – an environment in which employees are encouraged and feel safe to speak up. We placed a particular focus on the needsimportance of vulnerable customers inwell-being during the pandemic through regular top-down communications, virtual town halls, videos and podcasts. •We continued to embed conduct within our productbusiness line processes. We also considered 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 partsought to mitigate the conduct impacts of the enterprise risk management framework acrossGroup’s strategic transformation programme and other key business change programmes, including those relating to the Group to considerUK’s departure from the customer in decision makingEU and action.
the Ibor transition.•We delivered our fifthsixth annual global mandatory training course on conduct, and reinforced to reinforce the importance of conduct by highlighting examplesfor all colleagues. •We are refreshing our approach to conduct arrangements across the Group with a view to ensuring that the arrangements remain appropriate for the nature of good conduct.
Report of the Directors | Risk
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.business.
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 weof knowingly or unknowingly helphelping parties to commit or to further potentially illegal activity through HSBC, including both internalmoney laundering, fraud, bribery and external fraud.corruption, tax evasion, sanctions breaches, and terrorist and proliferation financing. Financial crime and fraud risk arises from day-to-day banking operations.operations involving customers, third parties and employees. Financial crime and fraud risk management Key developments in 20192020 In 2019,2020, we continued to increase our efforts to strengthen our abilityfight against financial crime and to combat financial crime. We integrated intoenhance our day-to-day operations the majority of the financial crime risk core capabilities delivered throughmanagement capability. Amid the Global Standards programme, whichchallenges posed by the Covid-19 outbreak, we set up in 2013 to enhance our risk management policies, processes and systems. We have begun several initiatives to define the next phaseintroduced a number of financial crime risk management measures during this period to support the business and our customers. These included: •We supported the most vulnerable customers and those in financial difficulty, including by increasing the awareness of fraud during this period. •The Compliance function proactively engaged with other parts of the organisation to ensure financial crime risks were considered as part of Covid-19-related decisions. •Compliance colleagues were seconded to other parts of the organisation to assist with supporting the establishment of government relief measures. •We supported customers and the organisation through policy exceptions, including by allowing email instructions instead of face-to-face meetings, and introducing virtual onboarding. We consistently review the effectiveness of our financial crime risk management framework, which includes consideration of geopolitical and wider economic factors. The sanctions regulatory environment remained changeable and uncertain during the course of 2020 due to the ongoing geopolitical tensions between the US and China, the end of the transition period following the UK’s departure from the EU, and the increasing divergence in sanctions policies between the US and the EU on Iran and Russia. Our policy is to comply with all applicable sanctions regulations in the jurisdictions in which we operate, and we continue to monitor the geopolitical landscape for ongoing developments. We also continued to progress several key financial crime risk management initiatives, including: •We continued to strengthen our anti-fraud capabilities, focusing uponon threats posed by new and existing technologies, and have delivered a comprehensive fraud training programme to our people.across the Group. •We continued to invest in the use of AIartificial intelligence (‘AI’) and advanced analytics techniques to manage financial crime risk, and we published our principles for the ethical use of Big Data and AI. •We continued to work on strengthening our ability to combat money laundering and terrorist financing. In particular, we focused on the use of technology to enhance our risk management processes while minimising the impact to the customer. We also continued to develop aour approach of intelligence-led financial crime risk management, framework for the future. We launched advanced anti-money laundering (‘AML’) and sanctions automation systemsin part, through enhancements 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.automated transaction monitoring systems.
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,global businesses, and are chaired by the respective CEOs.chief executive officers. 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 At a Group level, the Financial System Vulnerabilities Committee (‘FSVC’) reported to the Board on matters relating to financial crime. The committee, which was attendedCrime Risk Management Meeting, chaired by the Group Chief Compliance Officer, received regular reports on actions being taken to address issues and vulnerabilities, and updates onhas served as the ongoing work to strengthenpinnacle of this governance structure, ultimately responsible for the management of financial crime controls in relation to money laundering and sanctions. In order to simplify our governance framework and processes, and asrisk. As a reflection of the growing maturity and effectiveness of our financial crime and fraud risk management, responsibility forthis meeting was integrated with the oversightGroup Risk Management Meeting in January 2021. During the course of 2021, we will review the management of financial crime risk transferred fromacross the FSVCGroup to identify other areas that could be simplified.
During 2020, we redesigned and delivered an integrated operating model for our Compliance function, with the accompanying restructure providing greater accountability to our regional Compliance teams. These teams, led by regional chief compliance officers, will support the Group Chief Compliance Officer in aligning the way in which we manage all compliance risks, including financial crime risk, to the GRC, with the final meetingneeds and aims of the FSVC taking place on 15 January 2020. Forwider
business. They will also support making our compliance risk management processes and procedures more details on the work of the FSVC, see page 218.efficient and effective. 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 programmeRecognising that the fight against financial crime is a constant challenge, we maintained our investment in operational controls and new technology to deter and detect criminal activity in the banking system. We continued to focus onsimplify our anti-fraud and anti-tax evasion capabilities. Further enhancements have been made to our governance and policy frameworks, and to theour management information reporting process, which demonstrates the effectiveness of our financial crime controls. We are investingremain committed to enhancing our risk assessment capabilities and to delivering more proactive risk management, including our ongoing investment in the next generation of capabilities to fight financial crime by applying advanced analytics and AI. We remainare committed to enhancing our risk assessment capabilities and to delivering more proactive risk management. Workingworking in partnership with the wider industry and the public sector and other financial institutions is vital toin managing financial crime risk.risk, protecting the integrity of the financial system, and helping to protect the communities we serve. We are a strong proponentadvocate of public-private partnerships and participate in a number of information-sharing initiatives around the worldworld. We are a constructive partner to gainnational governments and international standard setters, and support reforms being undertaken in key markets such as the UK and the EU where the Group is represented on the joint public-private Economic Crime Strategic Board and the Centre for European Policy Studies taskforce on anti-money laundering, respectively. We also work closely with peer banks in Singapore, and with the Monetary Authority of Singapore. In the US, we are a better understandingmember of these risks sothe Bank Secrecy Act Advisory Group, which has put forward recommendations for reform that they can be mitigatedhave been supported by the US Treasury and the Financial Crimes Enforcement Network.
We have been an advocate for a more effectively.effective international framework for managing financial crime risk, whether through engaging directly with intergovernmental bodies such as the Financial Action Task Force, or via our key role in industry groups such as the Wolfsberg Group and the Institute of International Finance. Skilled Person/Independent Consultant Following expiration inIn December 2017 of the anti-money laundering deferred prosecution agreement2012, HSBC Holdings entered into a number of agreements, including an undertaking 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 theUK Financial Services and Markets Act under theAuthority (replaced with a Direction issued by the UK Financial Conduct Authority (‘FCA’) in 2013. He has also continued to work2013 and again in his capacity2020), as an Independent Consultant underwell as a cease-and-desist order issued bywith 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 was, 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 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,In 2020, HSBC’s engagement with the currentindependent compliance monitor, acting in his roles as both Skilled Person and Independent Consultant, concluded. The role of FCA Skilled Person was assigned to a new individual in the second quarter of 2020. Separately, a new FRB Independent Consultant will be terminated and aappointed pursuant to the cease-and-desist order.
The new Skilled Person withhas 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 intendsreview is ongoing and is expected to take steps to maintain global oversight of HSBC’s management of financial crime risk. complete later in 2021. The new 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 continueis expected to carry out anthe eighth annual Office of Foreign Assets Control compliance review atfor the FRB’s discretion.FRB during 2021. Throughout 2019, the FSVC received regular reports on HSBC’s relationshipIn accordance with the Skilled PersonDirection issued by the FCA to HSBC Holdings in 2020, the Group Risk Committee retains oversight of matters relating to anti-money laundering, sanctions, terrorist financing and Independent Consultant. The FSVCproliferation financing. Throughout 2020, the Group
Risk Committee 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.
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 20192020 In 2019,2020, we carried out a number of initiatives to further develop and embed the Model Risk Management sub-function, including: •We appointed regional heads ofa Group Chief Model Risk Management in all of our key geographies, andOfficer, which is a Global Head of Modelsenior role reporting to the Group Chief Risk Governance.Officer. •We refinedupdated the model risk policy and introduced model risk standards to enable a more risk-based approach to model risk management.management while retaining a consistent approach. We conducted a full review of model governance arrangements overseeing•Working with the businesses and functions, new model risk acrosscontrols were developed in the Group, resulting in a range of enhancements torisk control library. These controls formed the underlying structure to improve effectivenessbasis for model risk control assessments that have been implemented for businesses and increase business engagement.functions.
•We designed a newupdated the target operating model for Model Risk Management, referring to internal and industry best practice.practice and added risk stewards for key businesses, functions and legal vehicles. The risk stewards will also provide close monitoring of changes in model behaviour, working closely with business and function model owners and sponsors. We•The independent model validation team began a transformation programme that will use advanced analytics and new workflow tools, with the objective of providing a more risk-based, efficient and effective management of model validation processes.
•The consequences of the Covid-19 outbreak on model performance and reliability resulted in enhanced monitoring of models and related model adjustments. Dramatic changes to model inputs such as GDP and unemployment rates made the calculation methodology within our Group risk appetitemodel results unreliable. Model performance limitations have been most pronounced for IFRS 9 models, which calculate expected credit losses. As a result, greater reliance has been placed on management underlays and overlays based on business judgement to derive expected credit losses. •New IFRS 9 models for portfolios that required the largest model risk.overlays during 2020 have been redeveloped, validated and implemented in the fourth quarter of 2020. Limited new data was available for the use in the recalibrations, therefore judgemental post-model adjustments were required to allow for the economic effects of the pandemic not captured by the models. Governance and structure We placed greater focus on our model risk activities during 2019,2020, and to reflect this, we created the role of Chiefelevated Model Risk Officer, reportingManagement to a function in its own right within the Global Risk structure. Previously, structured as a sub-function within the Global Risk Strategy function, the team now reports directly 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, inapplications. These activities such asinclude 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 GlobalGroup 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.
| | | | | | | Insurance manufacturing operations risk | | Page | | 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
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 96. 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
| | | | Measurement | | 183 | | | Key risk types | | | – Market risk | | | – Credit risk | | | – Capital and liquidity risk | | | – Insurance risk | |
Report of the Directors | Risk
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 2019Overview
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. Insurance manufacturing operations risk management Key developments in 2020 There were no material changes to the insurance risk management framework in 2020. Policies and practices for the management of risks associated with the selling of insurance contracts outside of bancassurance channels were enhanced in response to this being an increasing area of importance for the insurance business. Also, enhancements were made to the capital risk framework for insurance operations to better align to the Group’s capital risk framework. 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 132. The Global Insurance Risk Management Meeting oversees the control framework globally and is accountable to the WPB 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 and 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, as well as internally-developed stress and scenario tests, including Group internal stress test exercises. 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 2020 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. EachThe Covid-19 outbreak caused sales of insurance products to be lower than forecast in 2020, although we responded by expanding digital and remote servicing capabilities. To date there has been limited impact on claims or lapse behaviours, although this remains under close monitoring. The largest effect on insurance entities came from volatility in the businesses operates to appetite limitsfinancial markets and the material fall in interest rates, which impact levels 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.and profitability. Businesses responded by executing de-risking strategies followed by subsequent re-risking of positions as markets recovered. Enhanced monitoring of risks and pricing conditions continues.
The following tables show the composition of assets and liabilities by contract type and by geographical region. | | | | | | | | | | | | | | | | | | | | | Balance sheet of insurance manufacturing subsidiaries by type of contract1 | | (Audited) | | | | | | | | | With
DPF | Unit-linked | Other contracts2 | Shareholder
assets and liabilities | Total | | Footnotes | $m | $m | $m | $m | $m | | Financial assets | | 84,478 | | 8,802 | | 18,932 | | 8,915 | | 121,127 | | | – trading assets | | 0 | | 0 | | 0 | | 0 | | 0 | | | – financial assets designated and otherwise mandatorily measured at fair value through profit or loss | | 26,002 | | 8,558 | | 3,508 | | 1,485 | | 39,553 | | | – derivatives | | 262 | | 3 | | 13 | | 3 | | 281 | | | – financial investments at amortised cost | | 39,891 | | 30 | | 13,984 | | 4,521 | | 58,426 | | | – financial investments at fair value through other comprehensive income | | 12,531 | | 0 | | 459 | | 1,931 | | 14,921 | | | – other financial assets | 3 | 5,792 | | 211 | | 968 | | 975 | | 7,946 | | | Reinsurance assets | | 2,256 | | 65 | | 1,447 | | 2 | | 3,770 | | | PVIF | 4 | 0 | | 0 | | 0 | | 9,435 | | 9,435 | | | Other assets and investment properties | | 2,628 | | 1 | | 227 | | 721 | | 3,577 | | | Total assets | | 89,362 | | 8,868 | | 20,606 | | 19,073 | | 137,909 | | | Liabilities under investment contracts designated at fair value | | 0 | | 2,285 | | 4,100 | | 0 | | 6,385 | | | Liabilities under insurance contracts | | 84,931 | | 6,503 | | 15,827 | | 0 | | 107,261 | | | Deferred tax | 5 | 145 | | 5 | | 25 | | 1,400 | | 1,575 | | | Other liabilities | | 0 | | 0 | | 0 | | 7,244 | | 7,244 | | | Total liabilities | | 85,076 | | 8,793 | | 19,952 | | 8,644 | | 122,465 | | | Total equity | | 0 | | 0 | | 0 | | 15,444 | | 15,444 | | | Total liabilities and equity at 31 Dec 2020 | | 85,076 | | 8,793 | | 19,952 | | 24,088 | | 137,909 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets | | 73,929 | | 7,333 | | 17,514 | | 8,269 | | 107,045 | | | – trading assets | | 0 | | 0 | | 0 | | 0 | | 0 | | | – financial assets designated and otherwise mandatorily measured at fair value through profit or loss | | 21,652 | | 7,119 | | 3,081 | | 2,426 | | 34,278 | | | – derivatives | | 202 | | (6) | | 9 | | 3 | | 208 | | | – financial investments at amortised cost | | 35,299 | | 18 | | 13,436 | | 4,076 | | 52,829 | | | – financial investments at fair value through other comprehensive income | | 12,447 | | 0 | | 445 | | 1,136 | | 14,028 | | | – other financial assets | 3 | 4,329 | | 202 | | 543 | | 628 | | 5,702 | | | Reinsurance assets | | 2,208 | | 72 | | 1,563 | | 1 | | 3,844 | | | PVIF | 4 | 0 | | 0 | | 0 | | 8,945 | | 8,945 | | | Other assets and investment properties | | 2,495 | | 2 | | 211 | | 602 | | 3,310 | | | Total assets | | 78,632 | | 7,407 | | 19,288 | | 17,817 | | 123,144 | | | Liabilities under investment contracts designated at fair value | | 0 | | 2,011 | | 3,881 | | 0 | | 5,892 | | | Liabilities under insurance contracts | | 77,147 | | 6,151 | | 14,141 | | 0 | | 97,439 | | | Deferred tax | 5 | 197 | | 23 | | 6 | | 1,297 | | 1,523 | | | Other liabilities | | 0 | | 0 | | 0 | | 4,410 | | 4,410 | | | Total liabilities | | 77,344 | | 8,185 | | 18,028 | | 5,707 | | 109,264 | | | Total equity | | 0 | | 0 | | 0 | | 13,879 | | 13,879 | | | Total liabilities and equity at 31 Dec 2019 | | 77,344 | | 8,185 | | 18,028 | | 19,586 | | 123,143 | |
1Balance sheet of insurance manufacturing operations are shown before elimination of inter-company transactions with HSBC non-insurance operations. 2‘Other Contracts’ includes term insurance, credit life insurance, universal life insurance and investment contracts not included in the ‘Unit-linked’ or ‘With DPF’ columns. 3Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities. 4Present value of in-force long-term insurance business. 5‘Deferred tax’ includes the deferred tax liabilities arising on recognition of PVIF.
| | | | | | | | | | | | | | | | | | Balance sheet of insurance manufacturing subsidiaries by geographical region1,2 | | (Audited) | | | Europe | Asia | Latin
America | Total | | Footnotes | $m | $m | $m | $m | | Financial assets | | 34,768 | | 85,259 | | 1,100 | | 121,127 | | | – trading assets | | 0 | | 0 | | 0 | | 0 | | | – financial assets designated and otherwise mandatorily measured at fair value through profit or loss | | 17,184 | | 22,099 | | 270 | | 39,553 | | | – derivatives | | 107 | | 174 | | 0 | | 281 | | | – financial investments – at amortised cost | | 531 | | 57,420 | | 475 | | 58,426 | | | – financial investments – at fair value through other comprehensive income | | 13,894 | | 706 | | 321 | | 14,921 | | | – other financial assets | 3 | 3,052 | | 4,860 | | 34 | | 7,946 | | | Reinsurance assets | | 245 | | 3,521 | | 4 | | 3,770 | | | PVIF | 4 | 884 | | 8,390 | | 161 | | 9,435 | | | Other assets and investment properties | | 1,189 | | 2,332 | | 56 | | 3,577 | | | Total assets | | 37,086 | | 99,502 | | 1,321 | | 137,909 | | | Liabilities under investment contracts designated at fair value | | 1,288 | | 5,097 | | 0 | | 6,385 | | | Liabilities under insurance contracts | | 31,153 | | 74,994 | | 1,114 | | 107,261 | | | Deferred tax | 5 | 204 | | 1,348 | | 23 | | 1,575 | | | Other liabilities | | 2,426 | | 4,800 | | 18 | | 7,244 | | | Total liabilities | | 35,071 | | 86,239 | | 1,155 | | 122,465 | | | Total equity | | 2,015 | | 13,263 | | 166 | | 15,444 | | | Total liabilities and equity at 31 Dec 2020 | | 37,086 | | 99,502 | | 1,321 | | 137,909 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets | | 31,613 | | 74,237 | | 1,195 | | 107,045 | | | – trading assets | | 0 | | 0 | | 0 | | 0 | | | – financial assets designated and otherwise mandatorily measured at fair value through profit or loss | | 15,490 | | 18,562 | | 226 | | 34,278 | | | – derivatives | | 84 | | 124 | | 0 | | 208 | | | – financial investments – at amortised cost | | 100 | | 52,186 | | 543 | | 52,829 | | | – financial investments – at fair value through other comprehensive income | | 13,071 | | 582 | | 375 | | 14,028 | | | – other financial assets | 3 | 2,868 | | 2,783 | | 51 | | 5,702 | | | Reinsurance assets | | 237 | | 3,604 | | 3 | | 3,844 | | | PVIF | 4 | 945 | | 7,841 | | 159 | | 8,945 | | | Other assets and investment properties | | 1,085 | | 2,176 | | 49 | | 3,310 | | | Total assets | | 33,880 | | 87,858 | | 1,406 | | 123,144 | | | Liabilities under investment contracts designated at fair value | | 1,139 | | 4,753 | | 0 | | 5,892 | | | Liabilities under insurance contracts | | 28,437 | | 67,884 | | 1,118 | | 97,439 | | | Deferred tax | 5 | 229 | | 1,275 | | 19 | | 1,523 | | | Other liabilities | | 2,212 | | 2,172 | | 26 | | 4,410 | | | Total liabilities | | 32,017 | | 76,084 | | 1,163 | | 109,264 | | | Total equity | | 1,862 | | 11,774 | | 243 | | 13,879 | | | Total liabilities and equity at 31 Dec 2019 | | 33,879 | | 87,858 | | 1,406 | | 123,143 | |
1HSBC has no insurance manufacturing subsidiaries in the Middle East and North Africa or North America. 2Balance sheet of insurance manufacturing operations are shown before elimination of inter-company transactions with HSBC non-insurance operations. 3Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities. 4Present value of in-force long-term insurance business. 5‘Deferred tax’ includes the deferred tax liabilities arising on recognition of PVIF.
| | | | | | | | | | | | | | Balance sheet of insurance manufacturing subsidiaries by type of contract | | (Audited) | | | | | | | | | | With DPF |
| Unit-linked |
| Other contracts1 |
| Shareholder
assets and liabilities |
| Total |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| | Financial assets | | 73,929 |
| 7,333 |
| 17,514 |
| 8,269 |
| 107,045 |
| | – trading assets | | — |
| — |
| — |
| — |
| — |
| | – financial assets designated and otherwise mandatorily measured at fair value through profit or loss | | 21,652 |
| 7,119 |
| 3,081 |
| 2,426 |
| 34,278 |
| | – derivatives | | 202 |
| (6 | ) | 9 |
| 3 |
| 208 |
| | – financial investments at amortised cost | | 35,299 |
| 18 |
| 13,436 |
| 4,076 |
| 52,829 |
| | – financial investments at fair value through other comprehensive income | | 12,447 |
| — |
| 445 |
| 1,136 |
| 14,028 |
| | – other financial assets | 2 | 4,329 |
| 202 |
| 543 |
| 628 |
| 5,702 |
| | Reinsurance assets | | 2,208 |
| 72 |
| 1,563 |
| 1 |
| 3,844 |
| | PVIF | 3 | — |
| — |
| — |
| 8,945 |
| 8,945 |
| | Other assets and investment properties | | 2,495 |
| 2 |
| 211 |
| 602 |
| 3,310 |
| | Total assets | | 78,632 |
| 7,407 |
| 19,288 |
| 17,817 |
| 123,144 |
| | Liabilities under investment contracts designated at fair value | | — |
| 2,011 |
| 3,881 |
| — |
| 5,892 |
| | Liabilities under insurance contracts | | 77,147 |
| 6,151 |
| 14,141 |
| — |
| 97,439 |
| | Deferred tax | 4 | 197 |
| 23 |
| 6 |
| 1,297 |
| 1,523 |
| | Other liabilities | | — |
| — |
| — |
| 4,410 |
| 4,410 |
| | Total liabilities | | 77,344 |
| 8,185 |
| 18,028 |
| 5,707 |
| 109,264 |
| | Total equity | | — |
| — |
| — |
| 13,879 |
| 13,879 |
| | Total liabilities and equity at 31 Dec 2019 | | 77,344 |
| 8,185 |
| 18,028 |
| 19,586 |
| 123,143 |
|
| | | | | | | | | | | | | | Balance sheet of insurance manufacturing subsidiaries by type of contract (continued) | | (Audited) | | | | | | | | | | With DPF |
| Unit-linked |
| Other contracts1 |
| Shareholder
assets and liabilities |
| Total |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| $m |
| | Financial assets | | 66,735 |
| 7,337 |
| 15,552 |
| 7,120 |
| 96,744 |
| | – trading assets | | — |
| — |
| — |
| — |
| — |
| – financial assets designated and otherwise mandatorily measured at fair value through profit or loss
| | 17,855 |
| 7,099 |
| 3,024 |
| 1,264 |
| 29,242 |
| | – derivatives | | 200 |
| — |
| 33 |
| 4 |
| 237 |
| – financial investments at amortised cost
| | 33,575 |
| 70 |
| 11,597 |
| 4,171 |
| 49,413 |
| – financial investments at fair value through other comprehensive income
| | 11,499 |
| — |
| 450 |
| 1,385 |
| 13,334 |
| | – other financial assets | 2 | 3,606 |
| 168 |
| 448 |
| 296 |
| 4,518 |
| | Reinsurance assets | | 1,255 |
| 69 |
| 1,368 |
| — |
| 2,692 |
| | PVIF | 3 | — |
| — |
| — |
| 7,149 |
| 7,149 |
| | Other assets and investment properties | | 2,670 |
| 2 |
| 235 |
| 453 |
| 3,360 |
| | Total assets | | 70,660 |
| 7,408 |
| 17,155 |
| 14,722 |
| 109,945 |
| | Liabilities under investment contracts designated at fair value | | — |
| 1,574 |
| 3,884 |
| — |
| 5,458 |
| | Liabilities under insurance contracts | | 69,269 |
| 5,789 |
| 12,272 |
| — |
| 87,330 |
| | Deferred tax | 4 | 179 |
| 21 |
| 15 |
| 1,051 |
| 1,266 |
| | Other liabilities | | — |
| — |
| — |
| 3,659 |
| 3,659 |
| | Total liabilities | | 69,448 |
| 7,384 |
| 16,171 |
| 4,710 |
| 97,713 |
| | Total equity | | — |
| — |
| — |
| 12,232 |
| 12,232 |
| | Total liabilities and equity at 31 Dec 2018 | | 69,448 |
| 7,384 |
| 16,171 |
| 16,942 |
| 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. |
Report of the Directors | Risk
| | | | | | | | | | | Balance sheet of insurance manufacturing subsidiaries by geographical region1 | | (Audited) | | | | Europe |
| Asia |
| Latin
America |
| Total |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| | Financial assets | | 31,613 |
| 74,237 |
| 1,195 |
| 107,045 |
| | – trading assets | | — |
| — |
| — |
| — |
| | – financial assets designated and otherwise mandatorily measured at fair value through profit or loss | | 15,490 |
| 18,562 |
| 226 |
| 34,278 |
| | – derivatives | | 84 |
| 124 |
| — |
| 208 |
| | – financial investments – at amortised cost | | 100 |
| 52,186 |
| 543 |
| 52,829 |
| | – financial investments – at fair value through other comprehensive income | | 13,071 |
| 582 |
| 375 |
| 14,028 |
| | – other financial assets | 2 | 2,868 |
| 2,783 |
| 51 |
| 5,702 |
| | Reinsurance assets | | 237 |
| 3,604 |
| 3 |
| 3,844 |
| | PVIF | 3 | 945 |
| 7,841 |
| 159 |
| 8,945 |
| | Other assets and investment properties | | 1,085 |
| 2,176 |
| 49 |
| 3,310 |
| | Total assets | | 33,880 |
| 87,858 |
| 1,406 |
| 123,144 |
| | Liabilities under investment contracts designated at fair value | | 1,139 |
| 4,753 |
| — |
| 5,892 |
| | Liabilities under insurance contracts | | 28,437 |
| 67,884 |
| 1,118 |
| 97,439 |
| | Deferred tax | 4 | 229 |
| 1,275 |
| 19 |
| 1,523 |
| | Other liabilities | | 2,212 |
| 2,172 |
| 26 |
| 4,410 |
| | Total liabilities | | 32,017 |
| 76,084 |
| 1,163 |
| 109,264 |
| | Total equity | | 1,862 |
| 11,774 |
| 243 |
| 13,879 |
| | Total liabilities and equity at 31 Dec 2019 | | 33,879 |
| 87,858 |
| 1,406 |
| 123,143 |
| | | | | | | | Balance sheet of insurance manufacturing subsidiaries by geographical region1 (continued) | | | | Europe |
| Asia |
| Latin
America |
| Total |
| | | Footnotes | $m |
| $m |
| $m |
| $m |
| | Financial assets | | 28,631 |
| 66,793 |
| 1,320 |
| 96,744 |
| | – trading assets | | — |
| — |
| — |
| — |
| | – financial assets designated and otherwise mandatorily measured at fair value through profit or loss | | 13,142 |
| 15,744 |
| 326 |
| 29,242 |
| | – derivatives | | 121 |
| 116 |
| — |
| 237 |
| | – financial investments – at amortised cost | | 296 |
| 48,595 |
| 522 |
| 49,413 |
| | – financial investments – at fair value through other comprehensive income | | 12,453 |
| 440 |
| 441 |
| 13,334 |
| | – other financial assets | 2 | 2,619 |
| 1,868 |
| 31 |
| 4,518 |
| | Reinsurance assets | | 249 |
| 2,438 |
| 5 |
| 2,692 |
| | PVIF | 3 | 832 |
| 6,195 |
| 122 |
| 7,149 |
| | Other assets and investment properties | | 1,053 |
| 2,280 |
| 27 |
| 3,360 |
| | Total assets | | 30,765 |
| 77,706 |
| 1,474 |
| 109,945 |
| | Liabilities under investment contracts designated at fair value | | 780 |
| 4,678 |
| — |
| 5,458 |
| | Liabilities under insurance contracts | | 26,375 |
| 59,829 |
| 1,126 |
| 87,330 |
| | Deferred tax | 4 | 209 |
| 1,050 |
| 7 |
| 1,266 |
| | Other liabilities | | 1,690 |
| 1,911 |
| 58 |
| 3,659 |
| | Total liabilities | | 29,054 |
| 67,468 |
| 1,191 |
| 97,713 |
| | Total equity | | 1,711 |
| 10,238 |
| 283 |
| 12,232 |
| | Total liabilities and equity at 31 Dec 2018 | | 30,765 |
| 77,706 |
| 1,474 |
| 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 partThe cost of liabilities under insurance contracts. Any remaindersuch guarantees is accounted for as a deduction from the present value of in-force (‘PVIF’('PVIF') long-termasset, unless the cost of such guarantees is already explicitly allowed for within the insurance business oncontract liabilities under the relevant product. The
The following table shows the total reserve held for the cost of guarantees, the range of investment returns on assets supporting these products and the implied investment return that would enable the business to meet the guarantees. The cost of guarantees increased to $693m(2018: $669m)$1,105m (2019: $693m) primarily due to the reduction in swap rates in France and Hong
Kong, partly offset by the impact of modelling changes in France and 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) | | | 2020 | 2019 | | | Investment returns implied by guarantee | Long-term investment returns on relevant portfolios | Cost of guarantees | Investment returns implied by guarantee | Long-term investment returns on relevant portfolios | Cost of guarantees | | | % | % | $m | % | % | $m | | Capital | | 0.0 | | 0.7–3.2 | 277 | | 0.0 | | 1.3–3.9 | 110 | | | Nominal annual return | | 0.1–1.9 | 2.3–3.6 | 515 | | 0.1–2.0 | 3.0–4.5 | 118 | | | Nominal annual return | | 2.0-3.9 | 2.0–4.5 | 180 | | 2.0–4.0 | 2.4–4.5 | 355 | | | Nominal annual return | | 4.0–5.0 | 2.0–4.2 | 133 | | 4.1–5.0 | 2.3–4.1 | 110 | | | At 31 Dec | | | | 1,105 | | | | 693 | |
| | | | | | | | | | | | Financial return guarantees | | (Audited) | | | | 2019 | 2018 | | | | Investment returns implied by guarantee | Long-term investment returns on relevant portfolios | Cost of guarantees |
| Investment returns implied by guarantee | Long-term investment returns on relevant portfolios | Cost of guarantees |
| | | Footnotes | % | % | $m |
| % | % | $m |
| | Capital | | 0.0 | 1.3 - 3.9 | 110 |
| 0.0 | 2.2-3.0 | 100 |
| | Nominal annual return | | 0.1 - 2.0 | 3.0-4.5 | 118 |
| 0.1-2.0 | 3.6-3.7 | 78 |
| | Nominal annual return | 1 | 2.0 - 4.0 | 2.4 - 4.5 | 355 |
| 2.1-4.0 | 2.7-4.6 | 420 |
| | Nominal annual return | | 4.1 - 5.0 | 2.3 - 4.1 | 110 |
| 4.1-5.0 | 2.7-4.1 | 71 |
| | At 31 Dec | |
|
| 693 |
|
|
| 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)$102m (2019: $124m). 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.linear, particularly in a low interest-rate environment. 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) | | 2020 | 2019 | | Effect on
profit after tax | Effect on
total equity | Effect on
profit after tax | Effect on
total equity | | $m | $m | $m | $m | | +100 basis point parallel shift in yield curves | (67) | | (188) | | 43 | | (37) | | | -100 basis point parallel shift in yield curves | (68) | | 58 | | (221) | | (138) | | | 10% increase in equity prices | 332 | | 332 | | 270 | | 270 | | | 10% decrease in equity prices | (338) | | (338) | | (276) | | (276) | | | 10% increase in US dollar exchange rate compared with all currencies | 84 | | 84 | | 41 | | 41 | | | 10% decrease in US dollar exchange rate compared with all currencies | (84) | | (84) | | (41) | | (41) | |
| | | | | | | | | | | Sensitivity of HSBC’s insurance manufacturing subsidiaries to market risk factors | | (Audited) | | | 2019 | 2018 | | | Effect on profit after tax |
| Effect on total equity |
| Effect on profit after tax |
| Effect on total equity |
| | | $m |
| $m |
| $m |
| $m |
| | +100 basis point parallel shift in yield curves | 43 |
| (37 | ) | 9 |
| (61 | ) | | -100 basis point parallel shift in yield curves | (221 | ) | (138 | ) | (28 | ) | 46 |
| | 10% increase in equity prices | 270 |
| 270 |
| 213 |
| 213 |
| | 10% decrease in equity prices | (276 | ) | (276 | ) | (202 | ) | (202 | ) | | 10% increase in US dollar exchange rate compared with all currencies | 41 |
| 41 |
| 36 |
| 36 |
| | 10% decrease in US dollar exchange rate compared with all currencies | (41 | ) | (41 | ) | (36 | ) | (36 | ) |
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 184.233. The credit quality of the reinsurers’ share of liabilities under insurance contracts is assessed as ‘satisfactory’ or higher (as defined on page 121)163), with 100% of the exposure being neither past due nor impaired (2018:(2019: 100%). Credit risk on assets supporting unit-linked liabilities is predominantly borne by the policyholder. Therefore, our exposure is primarily related to liabilities under non-linked insurance and investment contracts and shareholders’ funds. The credit quality of insurance financial assets is included in the table on page 136. 180. 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 2019.2020. The liquidity risk exposure is wholly borne by the policyholder in the case of unit-
Report of the Directors | Risk
linkedunit-linked business and is shared with the policyholder for non-linked insurance.
The profile of the expected maturity of insurance contracts at 31 December 20192020 remained comparable with 2018.2019. The remaining contractual maturity of investment contract liabilities is included in Note 29 on page 329.
382.
| | | | | | | | | | | | | Expected maturity of insurance contract liabilities | | (Audited) | | | Expected cash flows (undiscounted) | | | Within 1 year |
| 1-5 years |
| 5-15 years |
| Over 15 years |
| Total |
| | | $m |
| $m |
| $m |
| $m |
| $m |
| | Unit-linked | 1,296 |
| 3,153 |
| 2,654 |
| 1,955 |
| 9,058 |
| | With DPF and Other contracts | 7,907 |
| 26,906 |
| 50,576 |
| 71,731 |
| 157,120 |
| | At 31 Dec 2019 | 9,203 |
| 30,059 |
| 53,230 |
| 73,686 |
| 166,178 |
| | | | | | | | | Unit-linked | 1,119 |
| 2,932 |
| 2,684 |
| 1,962 |
| 8,697 |
| | With DPF and Other contracts | 7,459 |
| 27,497 |
| 46,217 |
| 55,989 |
| 137,162 |
| | At 31 Dec 2018 | 8,578 |
| 30,429 |
| 48,901 |
| 57,951 |
| 145,859 |
|
| | | | | | | | | | | | | | | | | | | Expected maturity of insurance contract liabilities | | (Audited) | | Expected cash flows (undiscounted) | | Within 1 year | 1-5 years | 5-15 years | Over 15 years | Total | | $m | $m | $m | $m | $m | | Unit-linked | 1,407 | | 3,097 | | 2,976 | | 2,099 | | 9,579 | | | With DPF and Other contracts | 8,427 | | 30,156 | | 51,383 | | 75,839 | | 165,805 | | | At 31 Dec 2020 | 9,834 | | 33,253 | | 54,359 | | 77,938 | | 175,384 | | | | | | | | | Unit-linked | 1,296 | | 3,153 | | 2,654 | | 1,955 | | 9,058 | | | With DPF and Other contracts | 7,907 | | 26,906 | | 50,576 | | 71,731 | | 157,120 | | | At 31 Dec 2019 | 9,203 | | 30,059 | | 53,230 | | 73,686 | | 166,178 | |
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 184233 and 185234 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 2018.2019. Sensitivities (Audited) The following table shows the sensitivity of profit and total equity to reasonably possible changes in non-economic assumptions across all our insurance manufacturing subsidiaries. Mortality and morbidity risk is typically associated with life insurance contracts. The effect on profit of an increase in mortality or morbidity depends on the type of business being written. Our largest exposures to mortality and morbidity risk exist in Hong Kong and Singapore.Kong. Sensitivity to lapse rates depends on the type of contracts being written. For a portfolio of term assurance, an increase in lapse rates typically has a negative effect on profit due to the loss of future income on the lapsed policies. However, some contract lapses have a positive effect on profit due to the existence of policy surrender charges. We are most sensitive to a change in lapse rates on unit-linked and universal life contracts in Hong Kong and Singapore, and DPF contracts in France. Expense rate risk is the exposure to a change in the cost of administering insurance contracts. To the extent that increased expenses cannot be passed on to policyholders, an increase in expense rates will have a negative effect on our profits. | | | | | | | Sensitivity analysis | | (Audited) |
| 2019 |
| 2018 |
|
| $m |
| $m |
| | Effect on profit after tax and total equity at 31 Dec |
|
|
|
| | 10% increase in mortality and/or morbidity rates | (88 | ) | (77 | ) | | 10% decrease in mortality and/or morbidity rates | 88 |
| 82 |
| | 10% increase in lapse rates | (99 | ) | (95 | ) | | 10% decrease in lapse rates | 114 |
| 107 |
| | 10% increase in expense rates | (106 | ) | (92 | ) | | 10% decrease in expense rates | 105 |
| 93 |
|
Report of the Directors | Capital
| | | Capital | | Page | Capital overview | | Own funds | | Risk-weighted assets | | Leverage ratio | |
| | | | | | Capital ratios1 | | | At | | | 31 Dec |
| 31 Dec |
| | | 2019 |
| 2018 |
| | | % |
| % |
| | Transitional basis | | | | Common equity tier 1 ratio | 14.7 |
| 14.0 |
| | Tier 1 ratio | 17.6 |
| 17.0 |
| | Total capital ratio | 20.4 |
| 20.0 |
| | End point basis | | | | Common equity tier 1 ratio | 14.7 |
| 14.0 |
| | Tier 1 ratio | 17.2 |
| 16.6 |
| | Total capital ratio | 18.9 |
| 19.4 |
|
| | | | | | Total regulatory capital and risk-weighted assets1 | | | At | | | 31 Dec |
| 31 Dec |
| | | 2019 |
| 2018 |
| | | $m |
| $m |
| | Transitional basis | | | | Common equity tier 1 capital | 123,966 |
| 121,022 |
| | Additional tier 1 capital | 24,393 |
| 26,120 |
| | Tier 2 capital | 23,791 |
| 26,096 |
| | Total regulatory capital | 172,150 |
| 173,238 |
| | Risk-weighted assets | 843,395 |
| 865,318 |
| | End point basis | | | | Common equity tier 1 capital | 123,966 |
| 121,022 |
| | Additional tier 1 capital | 20,870 |
| 22,525 |
| | Tier 2 capital | 14,473 |
| 24,511 |
| | Total regulatory capital | 159,309 |
| 168,058 |
| | Risk-weighted assets | 843,395 |
| 865,318 |
|
| | | | | | | RWAs by risk types | | | RWAs |
| Capital required2 |
| | | $bn |
| $bn |
| | Credit risk | 676.6 |
| 54.2 |
| | Counterparty credit risk | 44.1 |
| 3.5 |
| | Market risk | 29.9 |
| 2.4 |
| | Operational risk | 92.8 |
| 7.4 |
| | At 31 Dec 2019 | 843.4 |
| 67.5 |
|
| | 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. |
| | 2 | ‘Capital required’ represents the minimum total capital charge set at 8% of risk-weighted assets by article 92 of the Capital Requirements Regulation. |
(Audited)
Our objective in the management of Group capital is to maintain appropriate levels to support our business strategy, and meet our regulatory and stress testing-related requirements.
Approach and policy
Our approach to capital management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim to maintain a strong capital base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory capital requirements at all times.
Our policy on capital management is underpinned by a capital management framework and our internal capital adequacy assessment process (‘ICAAP’), which 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.
| | | | | | | | | | Sensitivity analysis | | (Audited) |
| 2020 | 2019 |
| $m | $m | | Effect on profit after tax and total equity at 31 Dec | | | | Effect on profit after tax and total equity at 10% increase in mortality and/or morbidity rates | (93) | | (88) | | | Effect on profit after tax and total equity at 10% decrease in mortality and/or morbidity rates | 98 | | 88 | | | Effect on profit after tax and total equity at 10% increase in lapse rates | (111) | | (99) | | | Effect on profit after tax and total equity at 10% decrease in lapse rates | 128 | | 114 | | | Effect on profit after tax and total equity at 10% increase in expense rates | (117) | | (106) | | | Effect on profit after tax and total equity at 10% decrease in expense rates | 115 | | 105 | |
| | | | | | | | Own funds disclosure | | | | (Audited) | | | | | | At | | | | 31 Dec |
| 31 Dec |
| | | | 2019 |
| 2018 |
| Ref* | | $m |
| $m |
| | | Common equity tier 1 (‘CET1’) capital: instruments and reserves | | | | 1 | Capital instruments and the related share premium accounts | 22,873 |
| 22,384 |
| | | – ordinary shares | 22,873 |
| 22,384 |
| | 2 | Retained earnings | 127,188 |
| 121,180 |
| | 3 | Accumulated other comprehensive income (and other reserves) | 1,735 |
| 3,368 |
| | 5 | Minority interests (amount allowed in consolidated CET1) | 4,865 |
| 4,854 |
| | 5a | Independently reviewed interim net profits net of any foreseeable charge or dividend | (3,381 | ) | 3,697 |
| | 6 | Common equity tier 1 capital before regulatory adjustments | 153,280 |
| 155,483 |
| | 28 | Total regulatory adjustments to common equity tier 1 | (29,314 | ) | (34,461 | ) | | 29 | Common equity tier 1 capital | 123,966 |
| 121,022 |
| | 36 | Additional tier 1 capital before regulatory adjustments | 24,453 |
| 26,180 |
| | 43 | Total regulatory adjustments to additional tier 1 capital | (60 | ) | (60 | ) | | 44 | Additional tier 1 capital | 24,393 |
| 26,120 |
| | 45 | Tier 1 capital | 148,359 |
| 147,142 |
| | 51 | Tier 2 capital before regulatory adjustments | 25,192 |
| 26,729 |
| | 57 | Total regulatory adjustments to tier 2 capital | (1,401 | ) | (633 | ) | | 58 | Tier 2 capital | 23,791 |
| 26,096 |
| | 59 | Total capital | 172,150 |
| 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 (‘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’.
Report of the Directors | Capital
| | | | | | | | | | | | | | | RWAs by global business |
|
RBWM |
| CMB |
| GB&M |
| GPB |
| Corporate Centre |
| Total |
|
| $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| | Credit risk | 103.8 |
| 290.8 |
| 161.1 |
| 11.0 |
| 109.9 |
| 676.6 |
| | Counterparty credit risk | — |
| — |
| 42.7 |
| 0.2 |
| 1.2 |
| 44.1 |
| | Market risk | — |
| — |
| 23.6 |
| — |
| 6.3 |
| 29.9 |
| | Operational risk | 30.2 |
| 25.9 |
| 30.8 |
| 2.8 |
| 3.1 |
| 92.8 |
| | At 31 Dec 2019 | 134.0 |
| 316.7 |
| 258.2 |
| 14.0 |
| 120.5 |
| 843.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Credit risk | 99.6 |
| 296.9 |
| 172.0 |
| 13.8 |
| 108.8 |
| 691.1 |
| | Counterparty credit risk | — |
| — |
| 45.1 |
| 0.2 |
| 2.0 |
| 47.3 |
| | Market risk | — |
| — |
| 32.4 |
| — |
| 3.4 |
| 35.8 |
| | Operational risk | 27.3 |
| 24.3 |
| 31.5 |
| 2.8 |
| 5.2 |
| 91.1 |
| | At 31 Dec 2018 | 126.9 |
| 321.2 |
| 281.0 |
| 16.8 |
| 119.4 |
| 865.3 |
|
| | | | | | | | | | | | | | | | RWAs by geographical region | | | | Europe |
| Asia |
| MENA |
| North America |
| Latin America |
| Total |
| | | Footnotes | $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| | Credit risk | | 208.3 |
| 292.0 |
| 48.0 |
| 98.4 |
| 29.9 |
| 676.6 |
| | Counterparty credit risk | | 25.1 |
| 8.7 |
| 1.3 |
| 7.3 |
| 1.7 |
| 44.1 |
| | Market risk | 1 | 23.1 |
| 20.5 |
| 2.0 |
| 4.4 |
| 1.8 |
| 29.9 |
| | Operational risk | | 24.5 |
| 45.2 |
| 6.2 |
| 11.9 |
| 5.0 |
| 92.8 |
| | At 31 Dec 2019 | | 281.0 |
| 366.4 |
| 57.5 |
| 122.0 |
| 38.4 |
| 843.4 |
| | | | | | | | | | | Credit risk | | 219.5 |
| 291.9 |
| 47.0 |
| 103.1 |
| 29.6 |
| 691.1 |
| | Counterparty credit risk | | 27.3 |
| 9.2 |
| 1.0 |
| 8.3 |
| 1.5 |
| 47.3 |
| | Market risk | 1 | 24.0 |
| 23.3 |
| 1.9 |
| 8.5 |
| 1.4 |
| 35.8 |
| | Operational risk | | 27.3 |
| 39.5 |
| 6.8 |
| 11.7 |
| 5.8 |
| 91.1 |
| | At 31 Dec 2018 | | 298.1 |
| 363.9 |
| 56.7 |
| 131.6 |
| 38.3 |
| 865.3 |
|
| | 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 | | | Credit risk, counterparty credit risk and operational risk | | | | |
RBWM |
| CMB |
| GB&M |
| GPB |
| Corporate Centre |
| Market
risk |
| Total
RWAs |
| | | $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| | RWAs at 1 Jan 2019 | 126.9 |
| 321.2 |
| 248.6 |
| 16.8 |
| 116.0 |
| 35.8 |
| 865.3 |
| | Asset size | 7.5 |
| 9.5 |
| (1.6 | ) | — |
| (4.0 | ) | (2.4 | ) | 9.0 |
| | Asset quality | — |
| 3.3 |
| 0.6 |
| (0.3 | ) | (0.1 | ) | 0.2 |
| 3.7 |
| | Model updates | (0.6 | ) | (1.9 | ) | (2.9 | ) | (2.3 | ) | — |
| — |
| (7.7 | ) | | Methodology and policy | (0.6 | ) | (18.3 | ) | (11.0 | ) | (0.3 | ) | 1.7 |
| (3.7 | ) | (32.2 | ) | | Acquisitions and disposals | — |
| — |
| — |
| — |
| 0.3 |
| — |
| 0.3 |
| | Foreign exchange movements | 0.8 |
| 2.9 |
| 0.9 |
| 0.1 |
| 0.3 |
| — |
| 5.0 |
| | Total RWA movement | 7.1 |
| (4.5 | ) | (14.0 | ) | (2.8 | ) | (1.8 | ) | (5.9 | ) | (21.9 | ) | | RWAs at 31 Dec 2019 | 134.0 |
| 316.7 |
| 234.6 |
| 14.0 |
| 114.2 |
| 29.9 |
| 843.4 |
|
| | | | | | | | | | | | | | | | | RWA movement by geographical region by key driver | | | Credit risk, counterparty credit risk and operational risk | | | | | Europe |
| Asia |
| MENA |
| North America |
| Latin America |
| Market risk |
| Total RWAs |
| | | $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| $bn |
| | RWAs at 1 Jan 2019 | 274.1 |
| 340.6 |
| 54.8 |
| 123.1 |
| 36.9 |
| 35.8 |
| 865.3 |
| | Asset size | (2.0 | ) | 14.9 |
| 1.4 |
| (3.8 | ) | 0.9 |
| (2.4 | ) | 9.0 |
| | Asset quality | 1.9 |
| 1.6 |
| — |
| (0.5 | ) | 0.5 |
| 0.2 |
| 3.7 |
| | Model updates | (2.9 | ) | (2.4 | ) | (0.1 | ) | (2.3 | ) | — |
| — |
| (7.7 | ) | | Methodology and policy | (17.3 | ) | (9.6 | ) | (1.0 | ) | (0.2 | ) | (0.4 | ) | (3.7 | ) | (32.2 | ) | | Acquisitions and disposals | — |
| — |
| 0.3 |
| — |
| — |
| — |
| 0.3 |
| | Foreign exchange movements | 4.1 |
| 0.8 |
| 0.1 |
| 1.3 |
| (1.3 | ) | — |
| 5.0 |
| | Total RWA movement | (16.2 | ) | 5.3 |
| 0.7 |
| (5.5 | ) | (0.3 | ) | (5.9 | ) | (21.9 | ) | | RWAs at 31 Dec 2019 | 257.9 |
| 345.9 |
| 55.5 |
| 117.6 |
| 36.6 |
| 29.9 |
| 843.4 |
|
| | | | | | | | | | | | At | | | | | 31 Dec |
| 31 Dec |
| | | | | 2019 |
| 2018 |
| Ref* | | Footnotes | $bn |
| $bn |
| | 20 | Tier 1 capital | | 144.8 |
| 143.5 |
| | 21 | Total leverage ratio exposure | | 2,726.5 |
| 2,614.9 |
| | | | | % |
| % |
| | 22 | Leverage ratio | | 5.3 |
| 5.5 |
| | EU-23 | Choice of transitional arrangements for the definition of the capital measure | | Fully phased-in |
| Fully phased-in |
| | | UK leverage ratio exposure – quarterly average | 1 | 2,535.4 |
| 2,464.4 |
| | | | | % |
| % |
| | | UK leverage ratio – quarterly average | 1 | 5.8 |
| 5.8 |
| | | UK leverage ratio – quarter end | 1 | 5.7 |
| 6.0 |
|
| | * | 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.
Report of the Directors | Corporate governance report
| | | | Corporate governance report | | Page | | Group Chairman's governance statement | | | The Board | | Group Management BoardSenior management | | Board roles and responsibilities | | | How we are governed | | Board activities during 20192020 | | | | | | | | Board governancecommittees | | Board developmentDirectors' remuneration report | | Board effectiveness | | Board committees | | Directors' remuneration report | | | Share capital and other related disclosures | | | Internal control | | | | | Going concern | | | Employees | | | Statement of compliance | | | |
HSBC is committed to high standards of corporate governance. We have a comprehensive range of policies and systems in place designed to ensure that the Group is well managed, with effective oversight and control.
Report of the Directors | Corporate governance report
| | | Group Chairman's governance statement Despite the challenging environment, the Board remained informed on relevant issues, engaged with stakeholders, and oversaw the development of our new Group purpose and values.
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'The''Governance improvements will remain an area of focus for the Board setsand its subsidiaries in the toneyears ahead as the Group aims to achieve our results in a way that treats our customers fairly and helps to strengthen communities and ensure a properly functioning financial system.'its ambition of operating with world-class governance."
Mark E Tucker
Group Chairman
Dear Shareholder With the global pandemic and challenging macroeconomic and geopolitical environment, 2020 was an extraordinary year for the Board. These challenges have highlighted the importance of our governance framework and operating practices. Against this backdrop, the Board oversaw the development of the Group’s future purpose and strategy led by the Group Chief Executive. We adapted our Board and senior management engagement schedule to ensure that as a Board, we continued to deliver on our responsibilities to our key stakeholders. As Group Chairman, I am ultimately responsible for the Group’s governance arrangements and the effective operation of the Board. I am also responsible for ensuring that the Board sets the right tone from the top of the organisation and monitors the Group's culture. Given the unique challenges faced during 2020 as a result of the Covid-19 outbreak, it was important that the Board was properly informed on a regular basis on all key issues and priorities affecting the Group. To achieve this, we increased our Board communication and met more frequently during 2020, albeit remotely and with scheduling flexed to meet the challenges of Directors based in different time zones. This allowed us to share insights and receive updates on key developments, supported by the attendance of external subject matter experts. Given the restrictions on travel and large gatherings, and the guidance available to us at the time, we took the decision to hold the 2020 AGM behind closed doors. As we approach our 2021 AGM, we will continue to monitor the situation, and will prioritise the health and safety of the Board, our colleagues and of course our shareholders. Further details will be provided when our Notice of AGM is published on 24 March 2021. Board changes Following a thorough and robust search process, as more fully set out in the Nomination & Corporate Governance Committee report on page 255, the Board unanimously supported the appointment of Noel Quinn as Group Chief Executive on 17 March 2020. Noel has provided strong direction and excellent leadership to HSBC through these unprecedented times. I would like to thank Sir Jonathan Symonds and Kathleen Casey who stepped down from the Board earlier this year. We subsequently appointed three new Directors, James Forese, Steven Guggenheimer and Eileen Murray, who collectively bring strong universal banking, operational and technology expertise. While the Board and its committees have operated well in a virtual environment, I do not underestimate the value of in-person meetings. Our three new Directors underwent a successful virtual non-executive Director induction programme during the year and we look forward to welcoming them in person at an appropriate point in the future. Today we also announce that Laura Cha will step down from the Board at the conclusion of our 2021 AGM in May. On behalf of the Board, I wish to thank Laura for her outstanding dedication and the enormous contribution she has made to the success of HSBC over many years. I greatly appreciate the support and counsel that she has provided to me personally on many occasions since I became the Group Chairman. The Board initiated a search for suitable candidates to join and strengthen the expertise on the Board, and further enhance our Board diversity and knowledge of Asia. I was delighted that last week we were able to announce the appointment of Dame Carolyn Fairbairn as an independent non-executive Director. Carolyn will bring a wealth of relevant experience to our Board and her appointment will be effective from 1 September 2021. I am pleased to presentreport we are in advanced stages on other searches that will result in further strengthening the corporateBoard’s skill set. Board evaluation In line with best practice, the Board and its committees again conducted a review of the effectiveness of our operation and practices. Our 2019 review identified a number of areas for improvement in the way that the Board operated. We took a number of actions during the second half of 2019 and throughout 2020 to address the areas identified, which contributed to improved effectiveness despite the challenges posed by Covid-19 and the uncertain geopolitical environment. We took the decision to once again invite Dr Tracy Long, the independent board evaluator, to facilitate our 2020 review, provide assurance on the progress made, and identify any areas where further action was required. Further details of the process, findings and recommendations from the 2020 review can be found on page 253. Subsidiary governance During the year, the Board requested the Group Company Secretary and Chief Governance Officer to undertake a review of subsidiary governance, including a review of the composition of the principal subsidiary boards. Following this exercise, principal subsidiaries will report for 2019.to the Nomination & Corporate Governance Committee during 2021 on their future board compositions and succession plans to help ensure that they have effective and diverse skill sets that are aligned with our future strategy. Further details are set out in the Nomination & Corporate Governance Committee report on page 255. Corporate governance provides theWe enhanced our subsidiary accountability 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 valueapplies to all stakeholders. Our corporate governancesubsidiaries within the Group, by supplementing this with clear principles and provisions. The refreshed framework helps us achieve these goals.
We continued our effortsbuilds on the progress made to strengthen and simplify our governance arrangements during the year,enhance Group standards with the aim of achieving world-class governance across all our subsidiaries.
We strengthened connectivity between the HSBC Holdings Board and principal subsidiaries by increasing the frequency of the Chairman’s Forum meetings. These monthly meetings – which I chair – are attended by the chairs of the Holdings Board committees and the chairs of the principal subsidiaries' boards. Given the significant uncertainty and challenges that the Group, the industry and wider society encountered in 2020, these more effective decision making atfrequent meetings proved hugely beneficial in identifying and navigating the challenges facing the Group globally. Purpose and values As we developed our purpose and values, the Board undertook significant engagement with key stakeholders. Their input was important and influenced the outcome. It is critical that the values and associated behaviours are embedded across the Group. Senior management’s success in embedding the purpose and values will be overseen by the Board. The Board and the Group Executive
Committee set the tone from the top by adopting these refreshed values, which will inform the Board’s engagement practices and help facilitate an open and collaborative relationship with its stakeholders. The boardroom guidelines, which set out the ways of working between the Board and management levels. A key achievementand which were implemented in this respect was2020, also support the demiseengagement between the Board and management. Climate commitments Environmental, social and governance (‘ESG’) issues have been an area of significant Board focus during 2020. This has been in the form of formal consideration of our Financial System Vulnerabilities Committeestrategy and ambitions in relation to ESG and climate issues, as well as training to provide the Board with insight and an understanding of the developing landscape and stakeholder expectations. Recognising the importance of these matters to our stakeholders, investors and customers, the Board was pleased to announce our updated climate ambition in October 2020. Further information is provided on pages 24 and 44. Workforce engagement Members of the Board and subsidiary boards engaged actively with our employees during 2020 in line with the requirements of the 2018 UK Corporate Governance Code in relation to workforce engagement. Despite travel restrictions, all of the non-executive Directors engaged directly with members of the workforce across our global business lines, and through our employee resource groups. This has provided great insight into the views of the wider workforce and gave valuable context for the Directors in informing their discussions at the endBoard. Further details of Januaryour workforce engagement practices during 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 218.252. There
Looking ahead I am pleased with the progress that the Board and broader Group have been a numbermade in enhancing our governance practices during 2020. Governance improvements will remain an area of focus for the Board changes throughoutand its subsidiaries in the year. years ahead as the Group aims to achieve its ambition of operating with world-class governance. 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 experienceCovid-19 outbreak, we have had to help the Board through the next stage of the Group’s strategy. Setting our culture
We believeadjust how we do business is as important as whatengage with our shareholders and other stakeholders, with in-person meetings substituted for virtual meetings where necessary. Despite this, we do. The Board sets the tonecontinued to achieveengage fully with institutional investors. With encouraging news regarding successful vaccines, I look forward to resuming in-person engagement practices with 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 42safe to 43.
do so.
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 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 208.
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 206.
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.
Mark E Tucker Group Chairman 1823 February 2020
2021
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) (63)4C Group Chairman Appointed to the Board: September 2017 Group Chairman since: October 2017
Skills and experience: With over 30 years ofyears' 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 CityUKTheCityUK •Non-executive Chairman of Discovery Limited
•Member of Build Back Better Council
•Supporting Chair of Chapter Zero
Noel Quinn (58)(59) Group Chief Executive Appointed to the Board: August 2019
Group Chief Executive since: March 2020
Skills and experience: Noel has more than 30 years ofyears' banking and financial services experience, both in the UK and Asia, with over 2728 years at HSBC. Career: Noel was formally named Group Chief Executive in March 2020, having held the role on an interim basis since August 2019. He 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 DirectorBank.
External appointments: •Chair of HSBC Bank Canada.the Financial Services Task Force of the Sustainable Market Initiative External appointments: None
Ewen Stevenson (53) (54) Group Chief Financial Officer Appointed to the Board: January 2019 Skills and experience: Ewen has over 25 years ofyears' experience in the banking industry, both as an adviser to major banks and as an executive of a large financial institution.institutions. In addition to his existing leadership responsibilities for Group Finance, Ewen assumed responsibility for the oversight of the Group's transformation programme in February 2021 and will assume responsibility for the Group’s mergers and acquisitions activities in April 2021.
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
Board committee membership key C. Committee Chair | | 3. | Group Remuneration Committee |
| | 4. | Nomination & Corporate Governance Committee |
1.Group Audit Committee
2.Group Risk Committee
3.Group Remuneration Committee
4.Nomination & Corporate Governance Committee
For full biographical details of our Board members, see www.hsbc.com/who-we-are/leadership.
Independent non-executive Directors Kathleen Casey (53) 1,2,4
Independent non-executive Director
Appointed to the Board: March 2014
Skills and experience: Kathleen has extensive financial regulatory policy experience, including in the US Government and in cross-governmental bodies.
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 Financial Accounting Foundation
Senior Adviser to Patomak Global Partners
Non-executive Director of the Federal Home Loan Mortgage Corporation
Laura Cha, GBM (70) (71) 4 Independent non-executive Director Appointed to the Board: March 2011
Skills and experience:experience: Laura has extensive regulatory and policymaking experience in the finance and securities sector in Hong Kong and mainland China. Career: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 Silverthe Grand Bauhinia StarsMedal 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 Hongkong and Shanghai Banking Corporation Limited •Non-executive Director of The London Metal Exchange •Non-executive Director of Unilever PLC and Unilever N.V.
Henri de Castries (65) (66) 3,4 Independent non-executive Director Appointed to the Board: March 2016
Skills and experience:Henri has more than 25 years ofyears' international experience in the financial services industry, working in global insurance and asset management. 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
•Senior Independent non-executive Director of Stellantis NV
James Forese (58) 1,3,4 Independent non-executive Director Appointed to the Board: May 2020 Skills and experience: James has over 30 years' international business and management experience in the finance industry. Career: James formerly served as President of Citigroup. He began his career in securities trading with Salomon Brothers, one of Citigroup’s predecessor companies, in 1985. In addition to his most recent role as President and Chief Executive Officer of Citigroup’s Institutional Clients Group, he has been Chief Executive of its Securities and Banking division and head of its Global Markets business. On 1 January 2021, he became a non-executive Director of HSBC North America Holdings Inc.
External appointments: • Non-executive Chairman of Global Bamboo Technologies • Trustee of Colby College
Steven Guggenheimer (55) 2,4 Independent non-executive Director Appointed to the Board: May 2020 Skills and experience: Steven is an experienced technology executive with a strong track record of advising businesses on digital transformation. He brings extensive insight into technologies ranging from artificial intelligence to Cloud computing. Career: Steven has more than 25 years' experience at Microsoft, where he has held a variety of senior leadership roles. These include: Corporate Vice President for AI Business; Corporate Vice President of AI and ISV Engagement; Chief Evangelist; and Corporate Vice President, Original Equipment Manufacturer.
External appointments: •Non-executive Director of Forrit Technologies Limited •Advisor to Tensility Venture Fund •Advisory Board Member of 5G Open Innovation Lab
Report of the Directors | Corporate governance report Irene Lee (66) (67) 3,4 Independent non-executive Director Appointed to the Board: July 2015 Skills and experience:Irene has more than 40 years ofyears' 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
•Chair of Hang Seng Bank Limited (from the conclusion of its 2021 AGM)
Report of the Directors | Corporate governance report
Dr José Antonio Meade Kuribreña (50) (51)2,4 Independent non-executive Director Appointed to the Board: March 2019 Skills and experience:José has extensive experience across a number of industries, including in public administration, banking, financial policy and foreign affairs. 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.
Heidi Miller (66) (67) 2,4 Independent non-executive Director Appointed to the Board: September 2014 Skills and experience:Heidi has more than 30 years ofyears' senior management experience in international banking and finance. 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. 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.
She is currently Chair of HSBC North America Holdings Inc.
External appointments: •Non-executive Director of Fiserv Inc.
•Chair of the Audit Committee of Fiserv, Inc.
Eileen Murray (62) 1,2,4 Independent non-executive Director Appointed to the Board: July 2020 Skills and experience:Eileen is an accomplished executive with extensive knowledge in financial technology and corporate strategy from a career spanning more than 40 years. Career:Eileen most recently served as co-Chief Executive Officer of Bridgewater Associates, LP. Prior to joining Bridgewater, she was Chief Executive Officer for Investment Risk Management LLC and President and co-Chief Executive Officer of Duff Capital Advisors. She started her professional career in 1984 at Morgan Stanley, where she held several senior positions including Controller, Treasurer, and Global Head of Technology and Operations, as well as Chief Operating Officer for its Institutional Securities Group. From 2002 to 2005, she was Head of Global Technology, Operations and Product Control at Credit Suisse and served on its management and executive board.
External appointments: •Chair of the Financial Industry Regulatory Authority •Non-executive Director of Compass •Non-executive Director of Guardian Life Insurance Company of America •Director of HumanityCorp •Non-executive Director of Atlas Crest Investment Corp.
David Nish (59) 1,2,3,4 (60)1C,2,3,4 Independent non-executive Director Appointed to the Board: May 2016 Senior Independent non-executive Director since February 2020 Skills and experience:David has substantial international experience of financial services, corporate governance, financial accounting and operational transformation. 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
Sir Jonathan Symonds, CBE (60) 1C,2,4
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.
Jackson Tai (69) (70) 1,2C,4 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. 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 ana managing director and senior officer for Asia-Pacific, and executive director and Head of Japan Capital Markets in the investment banker atbanking division of 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
Pauline van der Meer Mohr (59) 2,3C,4(61) 1,2,3C,4 Independent non-executive Director Appointed to the Board: September 2015
Skills and experience:Pauline has extensive legal, corporate governance and human resources experience across a number of different sectors. 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 ABN AMRO Bank N.V. and 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
•Non-executive Director of Viatris, Inc.
Aileen Taylor (47)(48) Group Company Secretary and Chief Governance Officer Appointed: November 2019
Skills and experience:Aileen has significant governance and regulatory experience across various roles in the banking industry. She is a solicitor and a member of the European Corporate Governance Council, the GC100 and the Financial Conduct Authority's Listing Authority Advisory Panel. 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. | | | | | Board attendance in 2019 | | | AGM | Board1 | | Number of meetings held | 1 | 8 | | Group Chairman | | | | Mark Tucker | 1 | 8/8 | | Executive Directors | | | | Marc Moses | 1 | 8/8 | Noel Quinn2 | 1 | 2/2 | Ewen Stevenson3 | 1 | 8/8 | John Flint4 | 1 | 5/6 | | Non-executive Directors | | | | Kathleen Casey | 1 | 8/8 | Laura Cha5 | 1 | 7/8 | Henri de Castries5 | 1 | 6/8 | Lord Evans of Weardale6 | 1 | 3/3 | | Irene Lee | 1 | 8/8 | José Antonio Meade Kuribreña7 | | 6/6 | | Heidi Miller | 1 | 8/8 | | David Nish | 1 | 8/8 | | Sir Jonathan Symonds | 1 | 8/8 | Jackson Tai5 | 1 | 7/8 | | Pauline van der Meer Mohr | 1 | 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.
Former Directors who served for part of the year Lord Evans of WeardaleSir Jonathan Symonds
Lord EvansSir Jonathan Symonds retired from the Board on 12 April 2019.18 February 2020.
John FlintKathleen Casey
John Flint stepped down from the Board on 5 August 2019.
Marc Moses
Marc MosesKathleen Casey retired from the Board on 31 December 2019.24 April 2020.
For full biographical details of our Board members, see www.hsbc.com/who-we-are/leadership.
Report of the Directors| Corporate governance report
| | | Group Management BoardSenior management |
TheSenior management, which includes the Group Management Board comprises senior executives who supportExecutive Committee, supports the Group Chief Executive in the day-to-day management of the business and the implementation of strategy.
| | | Elaine Arden,5152 Group Chief Human Resources Officer |
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. Development and a fellow of the Chartered Banker Institute. | | | Samir Assaf,59Colin Bell, 53
Chief Executive Officer, Global BankingHSBC Bank plc and Markets |
Samir joined HSBC in 1994 and became a Group Managing Director in 2011. He is Chairman and a non-executive Director of HSBC France; 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
|
Colin joined HSBC in July 2016 and was appointed aChief Executive Officer, HSBC Bank plc and HSBC Europe on 22 February 2021. He previously held the role of Group Managing Director in March 2017. HeChief Compliance Officer, and also led the Group transformation oversight programme. Colin previously worked at UBS, which he joined in 2007, 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 Calvert-Davies,5152 Group Head of Internal Audit |
Jonathan joined HSBC as a Group Managing Director and Group Head of Internal Audit in October 2019.2019 and is a standing attendee of the Group Executive Committee. 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. | | | Georges Elhedery, 46 Co-Chief Executive Officer, Global Banking and Markets |
| | | Kirsty Everett, 44 Interim Group Chief Compliance Officer |
Kirsty was appointed as Interim Group Chief Compliance Officer on 22 February 2021. She took on this role in addition to her existing responsibilities as the Global Chief Operating Officer for the Compliance function. She joined HSBC in March 2019 as the Chief of Staff and Head of Digital Transformation for Compliance. Prior to joining HSBC, Kirsty was the designated Chief Compliance Officer, Head of Conduct Risk and Operational Risk, Head of Monitoring and Oversight at UBS, having originally joined from Deloitte in 2012.
| | | Greg Guyett, 57 Co-Chief Executive Officer, Global Banking and Markets |
Greg joined HSBC in October 2018 as Head of Global Banking and became co-Chief Executive Officer of Global Banking and Markets in March 2020. Prior to joining HSBC, he was President and Chief Operating Officer of East West Bank. Greg began his career as an investment banker at J.P. Morgan, where positions included: Chief Executive Officer for Greater China; Chief Executive Officer, Global Corporate Bank; Head of Investment Banking for Asia-Pacific; and Co-Head of Banking Asia-Pacific. | | | John Hinshaw,49 50 Group Chief Operating Officer |
John joined HSBC in December 2019 and became a Group Managing Director and Group Chief Operating Officer in February 2020.2020, having joined HSBC in December 2019. 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 2012He also held senior roles at Boeing and 2019, heVerizon and served on the Board of Directors of BNY MellonMellon. | | | Bob Hoyt, 56 Group Chief Legal Officer |
Bob joined HSBC as Group Chief Legal Officer in January 2021. He was most recently Group General Counsel at Barclays from 2013 to 2020. Prior to that he was General Counsel and chaired its Technology Committee.Chief Regulatory Affairs Officer for The PNC Financial Services Group. Bob has served as General Counsel to the US Department of the Treasury under Secretary Paulson, and as Special Assistant and Associate Counsel to the White House under President George W. Bush.
| | | Pam Kaur,5657 Group Chief Risk Officer |
Pam was appointed Group Chief Risk Officer in January 2020, having been a Group Managing Director since joiningjoined HSBC in 2013. In April 2019, sheShe was appointedpreviously Head of Wholesale Market and Credit Risk and Chair of the enterprise-wide non-financial risk forum. Pam was previouslyhas also served as 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 Levey,56
Chief Legal Officer
|
Stuart joined HSBC and became a Group Managing Director in 2012. Former appointments include: Under Secretary for Terrorism and Financial Intelligence in the US Department of the Treasury; senior fellow for National Security and Financial Integrity at the Council on Foreign Relations; Principal Associate Deputy Attorney General at the US Department of Justice; and a partner at Miller, Cassidy, Larroca & Lewin LLP and at Baker Botts LLP.
| | Paulo Maia,61Nuno Matos, 53
Chief Executive Officer, Latin AmericaWealth and Personal Banking |
PauloNuno joined HSBC in 1993 and became a Group Managing Director in February 2016. He has been CEO, Latin America since July 2015 and also holdswas appointed Chief Executive Officer of Wealth and Personal Banking on 22 February 2021. He was previously 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 Canadaplc and HSBC Bank Australia Limited.
Europe, a role he held from March 2020. He has also served as Chief Executive Officer of HSBC Mexico, and as regional head of Retail Banking and Wealth Management in Latin America. Prior to joining HSBC, he held senior positions at Santander Group.
| | Stephen Moss, 53 54 GroupRegional Chief of StaffExecutive
|
Stephen who joined HSBC in 1992, became a Group Managing Director1992. He was named Regional Chief Executive in 2018. AsMarch 2020, with responsibility for overseeing the Group's businesses in Europe (apart from HSBC UK); the Middle East, North Africa and Turkey (‘MENAT’); Latin America; and Canada. He previously held the role of Chief of Staff to the Group Chief Executive and oversaw the Group’s mergers and acquisitions and strategy and planning activities. Stephen leads Group Strategy and Planning, Group Mergers and Acquisitions, Global Communications, Global Events, Group Public Affairs and Group Corporate Sustainability. will be appointed as CEO, MENAT, in April 2021 subject to regulatory approval. Stephen is a non-executive Director of The Saudi British Bank, HSBC Bank Middle East Limited, HSBC Middle East Holdings B.V.B.V, HSBC Latin America Holdings (UK) Limited and HSBC Global Asset Management Limited.Bank Canada. | | | Charlie Nunn,48
Chief Executive Officer, Retail Banking and Wealth Management
|
Charlie joined HSBC in 2011 and became a Group Managing Director and CEO, Retail Banking and Wealth Management in January 2018. Charlie was previously Head of Group Retail Banking and Wealth Management, leading the teams supporting HSBC’s retail and wealth businesses globally. Prior to this, he was Group Head of Wealth Management and before that Global Chief Operating Officer for Retail Banking and Wealth Management. Charlie has extensive financial services experience and was formerly a partner at Accenture and a Senior Partner at McKinsey & Co. | | Barry O'Byrne,4445 Chief Executive Officer, Global Commercial Banking |
Barry joined HSBC in April 2017 and became interim CEO,was appointed Chief Executive of Global Commercial Banking in February 2020, having served in the role on an interim basis since August 2019. He was previously Chief Operating Officer for Global Commercial Banking and priorBanking. 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 Roberts,59 60 President and Chief Executive Officer, HSBC USA |
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. Michael will assume executive responsibility for the Group’s Canadian and Latin American businesses, in addition to his existing responsibilities in relation to the US. His expanded role as CEO, US and Americas will take effect from April 2021. 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
|
António joined HSBC in 2007 and became a Group Managing Director in February 2016. He became CEO, Global Private Banking in 2019, having previously servedJohn David Stuart (known 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 Stuart,56
Stuart),57
Chief Executive Officer, HSBC UK Bank plc |
Ian has been a Group Managing Director and Chief Executive Officer of HSBC UK Bank plc since April 2017. Ian2017 and has worked in financial services for almostover four decades. He joined HSBC as Group General Manager and Head of Commercial Banking Europe in 2014, having previously led the corporate andbusiness 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.of the Economic Crime Strategic Board. | | | Peter Wong,6869 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 MemberChairman of the Chongqing Mayor’s International Economic Advisory Council.Hong Kong General Chamber of Commerce.
Additional members of the Group Management BoardExecutive Committee Noel Quinn Ewen Stevenson Aileen Taylor
Biographies are provided on pages 194240 and 197.243.
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 194 to 197.
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.
Corporate governance
We are committed to high standards of corporate governance. The Group has a comprehensive range of policies and systemsprocedures in place designed 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 applicable requirements of the Hong Kong Corporate Governance Code. The BoardBoard’s role, Directors’ responsibilities and its role attendance
The Board, aims to promoteled by the Group Chairman, is responsible among other matters for: •promoting the Group’s long-term success and deliverdelivering sustainable value to investorsshareholders; •establishing and other stakeholders, as well as encouraging a culture of risk awareness, openness and debate. Led by the Group Chairman, the Board setsapproving the Group’s strategy and objectives and monitoring the alignment of the Group’s purpose, strategy and values with the desired culture; •setting the Group’s risk appetite. It also approvesappetite and monitoring the Group’s risk profile; •approving and monitoring capital and operating plans for achieving strategic objectivesobjectives; and •approving material transactions. The Board's terms of reference are available on the recommendationour website at www.hsbc.com/who-we-are/leadership-and-governance/board-responsibilities. The Board's powers are subject to relevant laws, regulations and HSBC’s articles of management. association. The role of the independent non-executive Directors is to support the development of proposals on strategy, hold management accountableto account and ensure the executive Directors are discharging their responsibilities properly. The majority of Board members are independent non-executive Directors. Bothproperly, while creating the Group Chief Executive and the Group Chief Financial Officer are requiredright culture 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-executiveencourage constructive challenge. 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 objectivesobjectives. The Group Chairman meets with the non-executive Directors without the executive Directors in attendance after Board meetings and otherwise, as well as monitornecessary.
The roles of Group Chairman and Group Chief Executive are separate. There is a clear division of responsibilities between the Group’s risk profile. Powersleadership of the Board by the Group Chairman, and the executive responsibility for day-to-day management of HSBC’s business, which is undertaken by the Group Chief Executive.
In exercising its duty to promoteThe majority of Board members are independent non-executive Directors. At 31 December 2020, the successBoard comprised the Group Chairman, 11 non-executive Directors, and two executive Directors who are the Group Chief Executive and the Group Chief Financial Officer. With effect from 1 January 2020, the role of the Group the Board is responsible for overseeing the management of HSBC globally and, in so doing, may exercise its powers, subjectChief Risk Officer ceased 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 172be a member of the Companies Act 2006. Board.
Additional non-financial disclosures detailingFor further details of the policies pursued by HSBC in relationBoard’s career background, skills, experience and external appointments, see pages 240 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 2019.243.
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 reportsis ordinarily scheduled to meet at least seven times a year. In 2020, due to the Covid-19 outbreak, the Board held 17 meetings. The Board agenda is agreed by the Group Chairman, working with the Group Company Secretary and Chief Governance Officer and the Group Chief Executive. For more information, see the section on performance against financial'Board activities during 2020' on page 251. The Group Chief Risk Officer and Group Chief Legal Officer are regular attendees at Board meetings, and other senior executives attend as required. Outside of Board meetings, the Board Oversight Sub-Group, established by the Group Chairman, meets in advance of each Board meeting as an informal mechanism for a smaller group of Board members and management to discuss emerging issues. This group provides regular opportunities for members of the Board to communicate with senior management to deepen understanding of, and provide input into, key issues facing the Group. For further details of how the Board engages with the workforce, see page 252. | | | | How Board governance was adapted for Covid-19 | The Board oversaw the implementation of various governance changes introduced in response to the Covid-19 outbreak. Board and committee agendas were tailored to focus on key priorities taking into account the need to hold most meetings via videoconference. The challenges that arose from communicating across three time zones were navigated by remaining agile in meeting arrangements and through increased frequency of communications during the year. In addition to substantially increasing the frequency of Board and executive committee meetings, the following changes were implemented to improve connectivity, and provide an understanding of the challenges and priorities of the management team as it led the organisation through the crisis: •The Group Chairman introduced a weekly Board update note. •Management produced a weekly Board report on its response to the Covid-19 outbreak. •A Board Oversight Sub-Group was set up to provide guidance to the executive team on emerging issues. •The chairs of our principal subsidiaries and the chairs of the Group's Board committees attended the Group Chairman’s Forum each month. |
| | | | Technology governance | In light of the increasingly significant role of technology in the Group’s strategy, operations and growth prospects, in January 2021 the Board approved the establishment of a Technology Governance Working Group for a period of 12 months. The working group has been tasked with developing recommendations to strengthen the Board’s oversight of technology strategy, governance and emerging risks and enhance connectivity with the principal subsidiaries. The working group will be jointly chaired by Eileen Murray and Steven Guggenheimer, given their expertise and experience in this area. Jackson Tai, the Group Risk Committee Chair, will be a member, along with other non-executive Directors to be nominated by each of our US, UK, European and Asian principal subsidiaries. The co-Chairs will each receive fees in respect of their leadership of the working group over the next 12 months. Details of these fees can be found on page 281. Key IT and business staff will attend the Technology Governance Working Group to provide insights on key technology issues across the Group allowing the working group to make recommendations for enhanced Board oversight of technology. The total time commitment expected of the co-chairs will be up to 30 days, reflective of the complexity and profile of the subject matter. |
| | | | Board engagement with shareholders | In 2020, the Group Chairman, Senior Independent Director and the Group Company Secretary and Chief Governance Officer engaged with a number of our large institutional investors in over 20 meetings, primarily ahead of the 2020 AGM. Topics that were raised included geopolitical tensions, primarily relating to Hong Kong, mainland China, the US and the UK, as well as Board composition, changes to the Group Executive Committee, our climate policy and the impact of the Covid-19 outbreak on the Group, its employees, customers and communities. The Group Remuneration Committee Chair also engaged with key investors and proxy advisory firms on our remuneration approach in respect of the 2020 performance year. During such engagements, the Group Remuneration Committee Chair kept investors informed on other matters including the Group’s response to the Covid-19 outbreak and the Group Chief Executive's and Group Chief Financial Officer's salary sacrifice and charitable donations. |
| | | | Board roles, responsibilities and attendance |
| | | | | | | | | | At 31 December 2020, the Board comprised the Group Chairman, 11 non-executive Directors and two executive Directors. The table below sets out their roles, responsibilities and attendance at Board meetings. For a full description of responsibilities see www.hsbc.com/who-we-are/leadership-and-governance/board-responsibilities. | | | Roles | Board attendance in 2020 | Responsibilities | | Group Chairman Mark E Tucker1,2
| 17/17 | •Provides effective leadership of the Board and promotes the highest standards of corporate governance practices. •Leads the Board in providing strong strategic oversight and setting the Board’s agenda, culture and values. •Leads the Board in challenging management’s thinking and proposals, and foster open and constructive debate among Directors. •Maintains external relationships with key stakeholders and communicates investors' views to the Board. •Evaluates the performance of the Board, Committees, non-executive Directors and Group Chief Executive. | | Executive Director Group Chief Executive Noel Quinn2 | 17/17 | •Leads and directs the implementation of the Group’s business strategy, embedding the organisation’s culture and values. •Leads the Group Executive Committee with responsibility for the day-to-day operations of the Group, under authority delegated to him from the Board. •Maintains relationships with key stakeholders including the Group Chairman and the Board. | | Executive Director Chief Financial Officer Ewen Stevenson2 | 17/17 | •Supports the Group Chief Executive in developing and implementing the Group strategy and recommends the annual budget and long-term strategic and financial plan. •Leads the Finance function and is responsible for effective financial reporting, including the effectiveness of the processes and controls, to ensure the financial control framework is robust and fit for purpose. •Maintains relationships with key stakeholders including shareholders. | | Non-executive Directors Senior Independent Director David Nish2,3 | 17/17 | •Supports the Group Chairman, acting as intermediary for non-executive Directors when necessary. •Leads the non-executive Directors in the oversight of the Group Chairman, supporting the clear division of responsibility between the Group Chairman and the Group Chief Executive. •Listens to shareholders' views if they have concerns that cannot be resolved through the normal channels. | | Laura Cha3 | 17/17 | •Develop and approve the Group strategy. •Challenge and oversee the performance of management. •Approve the Group’s risk appetite and review risk profile and performance. | | Henri de Castries3 | 17/17 | | James Forese3 | 12/12 | | Steven Guggenheimer3 | 12/12 | | Irene Lee3 | 17/17 | | Dr José Antonio Meade Kuribreña3 | 17/17 | | Heidi Miller3,4 | 16/17 | | Eileen Murray3,4 | 5/7 | | Jackson Tai3 | 17/17 | | Pauline van der Meer Mohr3 | 17/17 | | Kathleen Casey3 | 5/5 | | Sir Jonathan Symonds3 | 2/2 | | Group Company Secretary and Chief Governance Officer Aileen Taylor | | •Maintains strong and consistent governance practices at Board level and throughout the Group. •Supports the Group Chairman in ensuring effective functioning of the Board and its committees, and transparent engagement between senior management and non-executive Directors. •Facilitates induction and professional development of non-executive Directors. •Advises and supports the Board and management in ensuring effective end-to-end governance and decision making across the Group. | |
1 The non-executive Group Chairman was considered to be independent on appointment. 2 Mark Tucker, David Nish, Noel Quinn and Ewen Stevenson attended the AGM on 24 April 2020. As a consequence of the UK Government's Covid-19 guidance and prohibitions at the time of the AGM, only a limited number of Directors and essential personnel attended the AGM to ensure a quorum was present and to conduct the business of the meeting. 3 Independent non-executive Director. 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. All non-executive Directors have confirmed their independence during the year. Kathleen Casey and Sir Jonathan Symonds retired from the Board on 24 April 2020 and 18 February 2020 respectively. 4 Eileen Murray was unable to attend two Board meetings owing to prior commitments made before her appointment to the Board. Heidi Miller was unable to attend one Board meeting that was arranged at short notice owing to a pre-scheduled external commitment.
Report of the Directors | Corporate governance report Board induction and training The Group Company Secretary and Chief Governance Officer works with the Group Chairman to oversee appropriate induction and ongoing training programmes for the Board. On appointment, new Board members are provided with tailored, comprehensive induction programmes to fit with their individual experiences and needs, including the process for dealing with conflicts. The structure of the induction allows a Board member to contribute meaningfully from appointment. An early focus on induction supports good information flows within the Board and its committees and between senior management and non-executive Directors, providing a better understanding of our culture and way of operating. During 2020 we welcomed three new non-executive Directors to our Board and also facilitated the Group Chief Executive’s induction. For illustrations of the typical induction modules, see the 'Directors' induction and ongoing development in 2020' table on the following page. Although there were constraints due to the Covid-19 outbreak, virtual meetings enabled our new non-executive Directors to engage with colleagues and key external personnel in a shorter time period than would have been the case if meeting in person. When it is safe to recommence Board travel to our global locations, we will take opportunities to facilitate comprehensive face-to-face engagement. These opportunities provide invaluable insight and understanding of our business, customers, culture and people. Directors undertook routine training during 2020. They also participated in 'deep dive' sessions into specific areas of the Group’s strategic objectives,priorities, risk appetite and approach to managing certain risks. These focused on areas such as: technology and Cloud capability; climate change; financial crime; shareholder activism; and business and governance. External consultants, in conjunction with the Group Company Secretary and Chief Governance Officer, provided specific training to members of relevant boards and executive committees within scope for the Senior Managers and Certification Regime. This included practical examples of responsibility in decision making and discussion of relevant case studies. In addition, non-executive Directors discussed individual development areas with the Group Chairman during performance reviews and in conversations with the Group Company Secretary and Chief Governance Officer. The Group Company Secretary and Chief Governance Officer makes appropriate arrangements for any additional training needs identified using internal resources, or otherwise, at HSBC’s expense. Between the induction and training programmes, the Directors’ understandings of key matters and risks for the business challenges,are supported so that they provide effective, informed and insightful challenge in their leadership and oversight roles. Members of Board committees receive relevant training as appropriate. Directors may take independent professional advice at HSBC’s expense. Board Directors who serve on principal subsidiary boards also receive training relevant to those boards. Opportunities exist for the principal subsidiary and principal subsidiary committee chairs to share their understanding in specific areas with the Board Directors.
| | | | | | James Forese Non-executive Director | 'I was impressed with the smooth and thorough management of my induction at a time when the Covid-19 outbreak was otherwise creating confusion and uncertainty. Shifting quickly to a remote, video-enabled process allowed me to be introduced to other Board members and to meet a wide range of senior executives from across the global businesses, regions and functions in quick succession. Conversations with management were informative and comprehensive. Where I had questions or wanted further conversations, the team responded swiftly and engaged in additional sessions as requested. Despite the lack of the usual in-person induction meetings, the open culture at HSBC helped me to come up the learning curve quickly and made me feel immediately welcomed.' |
| | | | | | | | | | | | | | | | | | | | | | | | | Directors’ induction and ongoing development in 2020 | | Director | Induction1 | Strategy and business briefings2 | Risk and control3 | Corporate governance4 | Global mandatory training5 | ARCC, Chairs and Remco Forum | Subsidiary | | Kathleen Casey | ô | l | l | l | l | l | ô | | Laura Cha | ô | l | l | l | l | l | l | | Henri de Castries | ô | l | l | l | l | ô | ô | | James Forese | l | l | l | l | l | ô | ô | | Steven Guggenheimer | l | l | l | l | l | ô | ô | | Irene Lee | ô | l | l | l | l | l | l | | José Antonio Meade Kuribreña | ô | l | l | l | l | l | ô | | Heidi Miller | ô | l | l | l | l | l | l | | Eileen Murray | l | l | l | l | l | ô | ô | | David Nish | ô | l | l | l | l | l | ô | | Noel Quinn | l | ô | l | l | l | l | ô | | Ewen Stevenson | ô | l | l | l | l | l | ô | | Jackson Tai | ô | l | l | l | l | l | ô | | Mark Tucker | ô | l | l | l | l | l | ô | | Pauline van der Meer Mohr | ô | l | l | l | l | l | ô |
1 The induction programme is delivered through formal briefings and introductory sessions with Board members, senior management, treasury executives, legal counsel, auditors, brokers, tax advisers and regulators. Topics covered included: values, culture and leadership; governance and stakeholder management; Directors’ legal and regulatory duties; anti-money laundering and anti-bribery; technical and business briefings; and strategy. 2 Directors participated in business strategy, market development and business briefings, which are global, regional and/or market-specific. Examples of specific sessions held in 2020 included 'Asia growth: build and strengthen in Hong Kong' and 'Strategic priority: growth of UK ring-fenced bank'. 3 Directors received risk business developments, investor relationsand control training. Examples of specific sessions held in 2020 included 'Governance of climate-related risk', 'Wholesale and retail credit risk management', 'Forward-looking financial crime risk issues', ’Resolvability assessment framework’ and ‘Technology terminology’. 4 All Directors received corporate governance training including ‘Senior Managers and Certification Regime’ and ‘Climate and sustainable finance’. 5 Global mandatory training, issued to all Directors, mirrored training undertaken by all employees, including senior management. These included management of risk under the enterprise risk management framework, with a focus on operational risk; cyber risk and fraud; health, safety and well-being; data privacy and the Group’s relationshipsprotection of data of our customers and colleagues; combating financial crime, including understanding money laundering, sanctions, and bribery and corruption risks; and our values and conduct, including workplace harassment and speaking up. Board committees The Board delegates oversight of certain audit, risk, remuneration, nomination and governance matters to its committees. Each standing Board committee is chaired by a non-executive Board member and has a remit to cover specific topics in accordance with its stakeholders. It also considers presentations on strategy and performancetheir respective terms of reference. Only independent non-executive Directors are members of Board committees. Details of the work carried out by each of the global businessesBoard committees can be found in the respective committee reports from page 255. In addition, the Chairman’s Committee is convened to provide flexibility for the Board to consider ad hoc Board and acrossroutine matters between scheduled Board meetings. It meets with attendees determined by the principal geographical areas.nature of the proposed business to be discussed. All
Report of HSBC’s activities involve the measurement, evaluation, acceptanceDirectors | Corporate governance report Relationship between Board and senior management The Board delegates day-to-day management of risk or combinationsthe business and implementation of risks. The Board, advised bystrategy to 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. Chief Executive. The Group Chairman meets withChief Executive is supported in his day-to-day management of the independent non-executive Directors withoutGroup by recommendations and advice from the Group Executive Committee ('GEC'), an executive Directors in attendance after each Board meeting and otherwise, as necessary. forum that he chairs comprising members of senior management. 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-executiveNon-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 scheduledmanagement when they attend off-site Board meetings and when travelling for other reasons, although this was not possible during 2020 due 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.
| | | | | Executive governance | The Group’s executive governance is underpinned by the Group operating rhythm, which sets out the Board and executive engagement schedule. This was refreshed for 2020 to facilitate end-to-end governance flowing up from executive governance to the Board. The Group operating rhythm is characterised by three pillars: i.The GEC normally meets every week to discuss current and emerging issues. However, during 2020 it met much more frequently as a result of Covid-19. ii.On a monthly basis, the GEC reviews the performance of global businesses, principal geographical areas and legal entities. These performance reviews are supplemented by quarterly performance management review meetings between the Group Chief Executive and the Group Chief Financial Officer and each of the chief executive officers of the global businesses, principal geographical areas and legal entities on an individual basis. iii.The GEC holds a strategy and governance meeting two weeks in advance of each Board meeting. Separate committees have been established to provide specialist oversight for matters delegated to the Group Chief Executive and senior management, in keeping with their responsibilities under the Senior Managers and Certification Regime. Some of these separate committees are dedicated sub-committees of the GEC, and some operate under individual accountability. These committees support the Group Chief Executive and GEC members in areas such as capital and liquidity, risk management, disclosure and financial reporting, restructuring and investment considerations, transformation programmes, people issues, diversity and inclusion, and talent and development. In addition to our regional company secretaries supporting our principal subsidiaries, we have corporate governance officers supporting our global lines of business, digital business services and our larger global functions to assist in effective end-to-end governance, consistency and connectivity across the Group. | | | |
Subsidiary governance Subsidiaries are formally designated as principal subsidiaries by approval of the Board. The designated principal subsidiaries are: | | | | | | | Principal subsidiary | | | | | | Board | | | | | Oversight responsibility | | The Hongkong and Shanghai Banking Corporation Limited | | | | | | | | | | | | Asia-Pacific | | HSBC Bank plc | | | | | | | | | | | | | Europe, Bermuda (excluding Switzerland and UK ring-fenced activities) | Group Audit CommitteeHSBC UK Bank plc | | Group Risk Committee | | Financial System Vulnerabilities Committee | | Group Remuneration Committee | | Nomination & Corporate Governance CommitteeUK ring-fenced bank and its subsidiaries | | HSBC Middle East Holdings BV | Middle East | | HSBC North America Holdings Inc. | US | | HSBC Latin America Holdings (UK) Limited | Mexico and Latin America | | HSBC Bank Canada | Canada |
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,To strengthen accountability and information flow, each principal subsidiary takes responsibility for the Board is directly accountable to HSBC’s shareholders. Shareholders vote at each Annual General Meeting ('AGM') on whether to re-elect individual Directors.
Reportoversight of Group companies in its region through the Directors | Corporate governance report
Board, committees and subsidiary interaction
In addition toaccountability framework. The guidance underpinning the regular Board and committee meetings, there is extensive contact across the Group that complements the formal meeting and approval processes. We have definedframework principles defines how we escalate and cascade information and procedures between the HSBC Holdings Board, the principal subsidiary boards and their respective board committees.
OurDuring 2020, a subsidiary governance review was undertaken by the Group Company Secretary and Chief Governance Officer to consider the application of the framework by the principal subsidiaries and certain material subsidiaries. This resulted in recommended changes to both the subsidiary accountability framework principles and their application. All relevant boards will consider and implement any recommendations and actions arising out of this review over the course of 2021. For further details of the subsidiary governance review, see the Nomination & Corporate Governance Committee report on page 255.
The Group Chairman interacts regularly with the chairs of the principal subsidiaries, including through the Chairs'Chairman’s Forum, which takes place at various times throughoutbrings together the chairs of the principal subsidiaries and the chairs of the Group's audit, risk and remuneration committees to discuss Group-wide and regional matters. From March 2020, these meetings moved from twice a year to discuss a wide arraymonthly, in response to the complex and dynamic environment. The Group Chairman hosted nine Chairman’s Forums, which were also attended by relevant executive management, to cover sessions on strategy, the economy, regulatory matters, cyber risk and resilience, implementation of relevant issues impacting the principal subsidiaries.subsidiary accountability framework and corporate governance. The Chairschairs 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.Forum, which are held several times a year. The chairs of the principal subsidiariessubsidiaries’ 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.issues, including regulatory priorities in each of the regions. Board members are encouraged to, and do, make regional visits and attend principal subsidiary meetings as guests.guests from time to time. Similarly, regional Directorsprincipal subsidiary directors are invited regularly to attend committee meetings at a Group level.level, where relevant. 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 subsidiary250 | Oversight responsibility | The Hongkong and Shanghai Banking Corporation Limited
| Asia-Pacific | HSBC BankHoldings plc | Europe, Bermuda (excluding Switzerland and UK ring-fenced activities) | HSBC UK Bank plc | UK ring-fenced bank and its subsidiaries | HSBC Bank Middle East Limited | Middle East | HSBC North America Holdings Inc. | US | HSBC Latin America Holdings (UK) Limited | Mexico and Latin America | HSBC Bank Canada | Canada |
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 20192020 |
During 2020, the Board focused on resetting the strategic direction, supporting the Group Chief Executive and overseeing performance and risk. It considered performance against financial and other strategic objectives, key business challenges, emerging risks, business development, investor relations and the Group’s relationships with its stakeholders. The activitiesend-to-end governance framework facilitated discussion on strategy and performance by each of the Board were structured to supportglobal businesses and across the development of the Group’s strategy and to enableprincipal geographical areas, which enabled the Board to support executive management onwith 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.
The Board's key areas of focus in 2020 are set out by theme below. Strategy and business performance In February 2020, the Group’s strategic review and associated transformation programme was announced. This aimed to reshape underperforming businesses, simplify the organisation and reduce costs, to position the Group to increase returns for investors, create capacity for future investment and build a sustainable platform for growth. In contrast to 2019 when the Board reviewedheld two dedicated strategy sessions, given the evolving external landscape during 2020, the Board engaged in ongoing dialogue with management throughout the year to progress against the strategic priorities set in June 2018 and will oversee the implementationdevelopment of the new business update approved in 2020. Group strategy. As a matterpart of course,the strategy review, the Board considered organic and approved key standing itemsinorganic opportunities to grow and restructure the business, as well as disposal options. The Board announced its new climate statement with the Group's ambition to align financed emissions to net zero by 2050 and become net zero for its own operations and supply chain by 2030, its aim to support clients on the road to a net zero carbon economy and a focus on sustainable finance opportunities. For further details of our new climate ambitions, see page 44. The Board received external insights on topics 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 106 and in the ESG Update. The Board managed the process involving the departureeconomic implications of the Group Chief ExecutiveCovid-19 outbreak and ongoing geopolitical issues at regular intervals throughout the appointment of an interim Group Chief Executive on 5 August 2019. Further details can be found on page 207.year.
Financial decisions The Board has an ongoing responsibility for approvingapproved key financial decisions throughout the year. Havingyear and approved the Annual Report and Accounts 2019, the Interim Report 2020 and the first quarter and the third quarter Earnings Releases. The Board approved the annual operating plan for 2020 at the start of 2020 and since 31 December 2020 has approved the annual operating plan for 2021. The Board monitored the Group's performance against the approved 20192020 annual operating plan, – as well as the operating plans of each of the global businesses – the Board approved the Interim Report 2019, the Annual Report and Accounts 2019 and associated dividends.businesses. The Board also approved the renewal of the debt programme authorities.issuance programme. Governance, risk and regulatoryOn 31 March 2020, HSBC announced that, in response to a written request from the Bank of England through the UK's Prudential Regulation Authority ('PRA'), the Board had cancelled the fourth interim dividend for 2019. Similar requests were also made to other UK incorporated banking groups. We also announced that until the end of 2020 we would make no quarterly or interim dividend payments or accruals in respect of ordinary shares. For further details of the dividend cancellation, see page 299.
In December 2020, the PRA announced a temporary approach to shareholder distributions for 2020 in which it set out a framework for Board decisions on dividends. After considering the requirements of the temporary approach, on 23 February 2021 the Board announced an interim dividend for 2020 of $0.15 per ordinary share. The Board remained focused onhas adopted a policy designed to provide sustainable dividends going forward. We intend to transition towards a target payout ratio of between 40% and 55% of reported earnings per ordinary share (‘EPS’) for 2022 onwards, with the flexibility to adjust EPS for non-cash significant items such as goodwill or intangibles impairments. The Board believes this payout ratio approach will allow for a good level of income to shareholders and a progressive dividend, assuming good levels of economic and earnings growth. The Group will not be paying quarterly dividends during 2021 but will consider whether to announce an interim dividend at the 2021 half-year results in August. The Group will review whether to revert to paying quarterly dividends at or ahead of its 2021 results announcement in February 2022. The 2020 interim dividend will be paid in cash with no scrip alternative. The Group has decided to discontinue the scrip dividend option as it is dilutive, including to dividend per share progression over time. The dividend policy could be supplemented by buy-backs or special dividends, over time and not in the near term, should the Group find itself in an excess capital position absent compelling investment opportunities to deploy that excess. Risk, regulatory and legal considerations The Board, advised by the Group Risk Committee, promotes a strong risk governance regulatory obligationsculture that shapes the Group’s risk appetite and riskssupports the maintenance of a strong risk management framework, giving consideration to the Group's business throughoutmeasurement, evaluation, acceptance and management of risks, including emerging risks. The Board considered the year.Group’s approach to risk including its regulatory obligations. A number of key frameworks, control documents, and core processes and legal responsibilities were also reviewed and approved.approved as required. These included: •the Group's risk appetite framework and risk appetite statement; •the individual liquidity adequacy assessment process; •the internalindividual capital adequacy assessment process; •the Group’s obligations under the Modern Slavery Act and approval of the Modern Slavery Act statement; •stress testing and capabilities required to meet the PRA’s resolvability assessment framework; •the revised terms of reference for the Board and the Board committees; and 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•delegations 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 206. 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.authority.
The Board is conscious ofalso reviewed and monitored the implications of geopolitical developments during the year and actively monitored and reviewed them, including US-China relations and the trade relations,talks between the UK and the EU following the UK's General Election and departure, including no-deal contingency planning. Technology Throughout the year, the Board received regular updates on technology from the EU,Group Chief Operating Officer, including the refreshed technology strategy and restructuring of the Argentiniantechnology leadership function. The newly appointed non-executive Directors with deep technology experience have worked in collaboration with the Group Chief Operating Officer to enhance the governance of technology. The Board received technology training and Hong Kong political situations.educational sessions from both internal and external subject matter experts to understand further the evolving technology landscape. People and culture The Board is committedcontinued to its diversityspend time discussing people and inclusion agenda, which forms a key part of its focus on Group culture.culture-related topics. 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 led discussions on the Group Chief Risk Officerdevelopment of a new people strategy to support the Group’s growth and transformation.
During the Group Company Secretaryyear, the Board shaped the revision of the Group's purpose and Chief Governance Officer. As part of succession planningvalues statement, which was approved in December 2020. A sub-group of the Board was created to assist the process. It met regularly with management to provide support, guidance and constructive challenge, seeking to ensure the revised purpose and values remained aligned with the Group's culture and future strategy.
Report of the Directors |Corporate governance report Governance The Board continued to oversee the governance, smooth operation and oversight of the Group and its principal and material subsidiaries. During 2020, it undertook a review of subsidiary governance. For further details of the review and subsequent actions, see page 250. Succession planning was considered by the Board following a thorough review at the Nomination & Corporate Governance Committee. During the year, Kathleen Casey retired as independent non-executive Director and Sir Jonathan Symonds is stepping downretired as Deputy Group Chairman, Senior Independent Director and the Chair of the Group Audit Committee in February 2020.Committee. 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 consideredCommittee, and appointed James Forese, Steven Guggenheimer and Eileen Murray as part of Board succession planning in 2020. In 2019, the Board appointed Dr José Antonio Meade Kuribreña as an independent non-executive Director. ItDirectors. The Board, supported by the Nomination & Corporate Governance Committee, will continue to review the skills and experience of the Board as a whole to ensure that it comprises the correct composition.relevant skills, experiences and competencies to discharge its responsibilities effectively. TechnologyFor further details of the changes to the Board, see the Nomination & Corporate Governance Committee report on page 255.
The Board monitored its compliance with the UK Corporate Governance Code and the Companies Act 2006 throughout the year. | | | | Workforce engagement | The Board reaffirmed, in accordance with the UK Corporate Governance Code, that it would use ‘alternative arrangements’ in approaching workforce engagement. This flexible method allowed all non-executive Directors to have direct engagement across a wide network of employees in multiple geographies. The virtual working environment during the Covid-19 outbreak enabled more employees to participate in various workforce engagement activities. The programme of activities used a variety of interaction styles: more bespoke sessions with smaller groups; formal presentations; Q&A opportunities; and sessions to facilitate engagement across a breadth of experience and seniority. This enabled open dialogue and two-way discussions between non-executive Directors and employees. Non-executive Directors met with: •employees of the innovation teams in Wealth and Personal Banking, Commercial Banking and Global Banking and Markets where discussions focused on bespoke business-specific matters; •representatives of global employee resource groups where wide-ranging issues were discussed such as employee sentiment; •leaders and talent from Digital Business Services at an employee Exchange session; and •participants in the Asia talent programme. The Board received formal updates from the Group Chief Executive and the Group Chief Human Resources Officer on employee views and sentiment. These include results of employee engagement surveys, benchmarked data, and additional surveys to understand well-being throughout the Covid-19 outbreak. The Chairman’s Forum meetings also discussed employee feedback from the Group's subsidiaries. As the Board considered the Group’s strategy and strategic initiatives throughout 2020, themes emerged that directly impacted the workforce. These helped shape subsequent workforce engagement sessions. These sessions continue to give the Board valuable insight on employee perspectives when reviewing proposals. For further details of how the Board considered the views of employees and other stakeholders, see the section 172 statement on page 22. The Board looks forward to continuing its workforce engagement programme and holding in-person sessions when possible in 2021. | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Board activities in 2020 | | Main topic | Sub-topic | Meetings at which topics were discussed1 | | | Jan | Feb | Mar | Apr | May | Jun | Jul | Sep | Oct | Nov | Dec | | Strategy | Group strategy | l | l | ô | l | l | l | l | l | l | l | l | | Regional strategy/Business line strategy | l | ô | ô | ô | l | l | l | l | ô | l | ô | | Environmental, social, governance | ô | ô | ô | ô | l | l | ô | l | l | ô | ô | | Business and financial performance | Region/Business line | l | l | ô | l | l | l | l | l | l | l | l | | Financial performance | l | l | ô | l | l | ô | l | l | l | ô | l | | Financial | Results and accounts | l | l | ô | l | ô | ô | l | ô | l | ô | l | | Dividends | l | l | l | l | ô | ô | l | ô | l | l | l | | Group annual operating plan | l | l | ô | l | ô | ô | l | ô | ô | ô | l | | Risk | Risk function | l | l | ô | l | l | ô | l | l | l | ô | l | | Risk appetite | ô | l | ô | ô | l | ô | l | ô | ô | ô | l | | Capital and liquidity adequacy | l | l | ô | l | l | ô | l | l | ô | ô | l | | Regulatory | Regulatory matters (including resolvability assessment framework) | ô | l | l | l | l | l | l | l | ô | ô | l | Regulatory matters with regulators in attendance2 | ô | l | ô | ô | ô | ô | l | l | ô | ô | ô | | External | External insights | ô | ô | ô | l | ô | ô | l | ô | ô | ô | l | | Technology | Strategic and operational | l | l | ô | ô | l | l | l | l | l | ô | l | | People and culture | Purpose, values and engagement | ô | l | ô | ô | l | ô | l | l | l | ô | l | | Governance | Subsidiary governance framework | ô | l | ô | ô | ô | ô | l | ô | ô | ô | l | | Policies and terms of reference | ô | l | ô | ô | l | ô | l | l | ô | ô | l | | Board/committee effectiveness | ô | l | ô | ô | ô | ô | ô | ô | ô | ô | l | | Appointment and succession | l | l | l | ô | l | l | ô | l | ô | l | ô |
1 No formal Board meetings were held during August 2020. 2 Meetings attended by members of the Financial Conduct Authority, Prudential Regulation Authority, Monetary Authority of Singapore, Hong Kong Monetary Authority. | | | | Board and committee effectiveness, performance and accountability |
The Board and its committees are committed to regular, independent evaluation of their effectiveness at least once every three years. Following the externally facilitated review of the Board and committee effectiveness in 2019, conducted by the external service provider Dr Tracy Long of Boardroom Review Limited, the Nomination & Corporate Governance Committee again invited Dr Long to support the Board with its annual evaluation. She was invited to conduct a follow-up review on the Board's progress against the findings and recommendations from her 2019 report, and more broadly on the effectiveness of the Board's operations. Dr Long is independent and has no other connection to the Group or any individual Director. This external review was complemented by a review of the Board committees led by the Group Company Secretary and Chief Governance Officer. Details of the Board committees’ effectiveness reviews, key findings and recommendations can be found in the respective committee reports on pages 255 to 274. Dr Long acknowledged the progress that the Board had made in respect of her 2019 recommendations, with her 2020 review again focusing on the main themes from the previous review. These were: leadership, shared perspective, culture, end-to-end governance and future thinking. Qualitative feedback was gathered from one-to-one interviews held with members of the Board and regular Board attendees. At the December Board meeting, the key findings presented were: •a strong focus on vision, strategy, and balancing short-term and long-term objectives; •a culture of collegiality and inclusion with positive team dynamics and healthy dialogue; •an open and transparent communication between the Board and management and the boards of the principal subsidiaries, a shared perspective on strategy and risk between the Board and management, with a focus on clarity of objectives; •a clear focus on operational resilience and support for clients, continuous Board and employee communications, attention to employee well-being, and documented lessons learned; •a clear focus on priorities, with sessions on current and dynamic topics as required; and •a strong link between culture and remuneration. Following Dr Long’s final report, the Group Chairman led a Board discussion in January 2021, at which the Board agreed the actions and priorities to be implemented, which will be monitored and addressed on an ongoing basis. Progress against these actions will be included in the Annual Report and Accounts 2021. The following table outlines the main findings from the 2019 and 2020 reviews, progress against the 2019 findings and the actions agreed by the Board to address the areas that were identified as requiring improvement. During 2020, a review of the Group Chairman’s performance was led by the Senior Independent Director in consultation with the other independent non-executive Directors. Non-executive Directors also undergo regular individual reviews with the Group Chairman. The reviews confirmed that the Group Chairman and each Director were effective and had met their time commitments during the year. The review of executive Directors’ performance, which helps determine the level of variable pay they receive each year, is contained in the Directors’ remuneration report on page 283.
Report of the Directors |Corporate governance report | | | | | | | | | | | | | | | Summary of Board effectiveness recommendations and actions: | | | Recommendation from the 2019 and 2020 evaluations | Progress against 2019 recommendations | Agreed actions for 2020 recommendations | | | | | | | | | Leadership | | 2019 •Continue to provide strong leadership through a culture of collaboration, transparency, open communication and cooperation. 2020 •Continue to focus on Board succession planning, building on the progress made during 2020 to facilitate and manage succession for Board and committee positions, cognisant of diversity in all aspects and making full use of external advisers and skills matrix analysis. •Embed executive succession so that it translates into a stronger, more diversified talent pool for future senior leadership. | The Group Chairman enhanced his communication activities with the Board and executive management during 2020. Following the appointment of the new Group Chief Executive, the Group Chairman established a Board Oversight Sub-Group to engage further with management and provide a sounding board.
| The Nomination & Corporate Governance Committee will allocate additional time for discussion and debate of external candidates for non-executive Director succession and the internal and external talent pool for senior management roles including executive Directors. | | | | | | | | | Shared perspective | | 2019 •Build on the shared perspective by ensuring that the Board agenda allows sufficient time and visibility of longer-term strategic perspectives aligned to its appetite for business risk. 2020 •Optimise use of Board information to enhance testing of the effectiveness of the strategic and business plans with reference to the evolving external factors and competitive landscape across its key markets. | The Board adapted the Group operating rhythm and increased the frequency of meetings throughout the Covid-19 outbreak to provide the opportunity to reflect and act in real-time on the evolving external factors.
| The Board will continue to enhance the use of governance practices, such as the Board Oversight Sub-Group and the Group operating rhythm. It will also continue to use Board committees to underpin and deliver effective decision making. | | | | | | | | | Culture | | 2019 •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. 2020 •Continue to review and determine the culture and key behaviours required to support the delivery of the revised strategy with a clear focus on pace and execution. | Alongside the strategic review, the Board oversaw work on refreshing the Group’s purpose and values, driving a resetting of the culture to deliver the strategy.
| The Group Chairman and Group Chief Executive will monitor progress of strategic decision making at pace. Increased insight into organisational cultural indicators provided to the Board will support delivering the desired organisational culture in line with strategy, purpose and values. | | | | | | | | | End-to-end governance | | 2019 •Maintain focus on improving the quality of information and increased communication channels with subsidiaries and other stakeholders, including the voice of employees. | Communications with the principal subsidiary chairs was increased by holding monthly Chairman’s Forums for most of the year. The Board continued to engage with key investors and regulators, with some of the key regulators attending a session with the Board. There were additional opportunities for employees to engage throughout the year given the extreme circumstances brought about by the Covid-19 outbreak. | | | | | | | | | | Future thinking | | 2019 •Continue to develop the Board agenda to provide focus on emerging issues. 2020 •Maintain and evolve good quality papers and presentations to the Board to continue providing insight and supporting informed decision making. | The Group Chairman, Group Chief Executive and Group Company Secretary and Chief Governance Officer met regularly throughout the year to plan Board meeting agendas to focus more effectively on emerging matters and external developments.
| The Group Chairman and Group Chief Executive will sponsor a project to review Board reporting in 2021. | |
Nomination & Corporate Governance Committee | | |  "The Committee's priorities in 2021 will continue to be composition, succession and development of the Board, as well as efforts to enhance the Group’s diversity, talent and bench strength for key executive positions." |
Dear Shareholder It has been a busy year for the Nomination & Corporate Governance Committee. This report provides an overview of the work of the Committee and its activities during the year. Priorities during 2020 Succession planning for both the Board and our senior executive team remained a critical focus of the Committee in line with its responsibilities. In addition to the appointment of Noel as Group Chief Executive, we appointed three new independent non-executive Directors during the year. Details of the appointments are set out below. In line with our strategic focus on Asia, we considered proposals from management on ways to improve how we support and develop our talent under the Asia talent programme. Asian representation on the Board remains of critical importance, given the benefits that having members with deep knowledge and insight into Asian culture and business practices can bring to our discussions as a Board. Subsidiary governance has also been an area of focus for the Committee, and we have made great progress in this regard during the past couple of years. The Subsidiary Governance Review, which is summarised later in this report, has demonstrated the progress made while acknowledging there is more to do to support our ambition of achieving world-class governance across the Group. Focus for 2021 The Committee's priorities in 2021 will continue to be composition, succession and development of the Board, as well as efforts to enhance the Group’s diversity, talent and bench strength for key executive positions. In developing our talent, the Committee will continue to focus on the promotion of diverse candidates to ensure that the Group Executive Committee and other senior management are representative of the customers, communities and markets in which we operate. As our strategy develops, we know that the skills and capabilities we require will evolve and the Committee has a key role to play. Mark E Tucker Chair Nomination & Corporate Governance Committee 23 February 2021 | | | | | | | | | | Membership | | Member since | Meeting attendance in 2020 | | Mark Tucker (Chair) | Oct 2017 | 9/9 | Kathleen Casey1 | Apr 2018 | 4/4 | | Laura Cha | May 2014 | 9/9 | | Henri de Castries | Apr 2018 | 9/9 | | James Forese | May 2020 | 5/5 | | Steven Guggenheimer | May 2020 | 5/5 | | Irene Lee | Apr 2018 | 9/9 | | José Antonio Meade Kuribreña | Apr 2019 | 9/9 | Eileen Murray2 | Jul 2020 | 3/4 | | Heidi Miller | Apr 2018 | 9/9 | | David Nish | Apr 2018 | 9/9 | | Jackson Tai | Apr 2018 | 9/9 | | Pauline van der Meer Mohr | Apr 2016 | 9/9 | Sir Jonathan Symonds1 | Apr 2017 | 3/3 |
1 Sir Jonathan Symonds stepped down from the Board on 18 February 2020. Kathleen Casey stepped down from the Board on 24 April 2020. 2 Eileen Murray was unable to attend one Committee meeting owing to a prior commitment made before her appointment to the Board Group Chief Executive succession The choice of Group Chief Executive is a matter of significance, and it was therefore important that we allowed ourselves the time to fully assess our options before arriving at our decision, given the potential ramifications on the future success of the Group and our stakeholders. We conducted a thorough and robust search process with the support of an external search partner, Egon Zehnder, to identify the new Group Chief Executive. The Committee was delighted to have been able to source an internal candidate, in Noel Quinn, and believe that we identified the best candidate for the role and for the Group. Egon Zehnder provides assistance with senior recruitment at HSBC. It has no other connection with the Group or members of the Board. Following Noel’s appointment on a permanent basis in March 2020, the Committee agreed a comprehensive induction and development plan to best support him to succeed in leading the Group through the various challenges we face. The Committee monitored this throughout the year, and will continue to support Noel and his executive team in the delivery of our strategic and business priorities. Board composition The composition of both the Board and its Committee continued to be a key focus during 2020, with progress made in ensuring that the Board possesses the necessary expertise to oversee, support and monitor management performance based on the longer-term strategy and developments in the external environment. In James Forese, Steven Guggenheimer and Eileen Murray, the Board has added deep experience in the areas of banking, technology and operations, which will remain critical to the Board’s discussions in the coming years. Further details on skills and previous experience are set out in the Board biographies on pages 240 to 243. Russell Reynolds Associates supported the Board in identifying prospective non-executive Director candidates. It has also supported the Committee and the management team in senior executive succession planning, as part of an integrated approach to talent identification, assessment and development during 2020. Russell Reynolds also assists with senior recruitment at HSBC. They have no other connection with the Group or members of the Board. We refreshed our Board skills matrix in recognition of the changing context in which the Group is now operating and the
Report of the Directors | Corporate governance report strategic priorities. The revised skills matrix places greater emphasis on the need for competencies in areas such as transformation, ESG and climate given the Group’s ambitions in these areas. The skills matrix will be a key tool in ensuring that the Board has the necessary range of skills and experience to discharge its responsibilities, oversee management and respond to emerging trends. The Board remains committed to increasing its diversity, and ensuring that it is reflective of the markets and societies in which we serve. Board changes There have been a number of changes to the Board during the past year. In addition to the appointment of the three new non-executive Directors referred to above, in February 2020, we saw the departure of both Sir Jonathan Symonds and Kathleen Casey during 2020. David Nish was appointed in the role of Senior Independent Director and Chair of the Group Audit Committee in place of Sir Jonathan Symonds. Laura Cha will retire from the Board at the conclusion of our 2021 AGM at the end of May. As mentioned earlier in the report, Dame Carolyn Fairbairn will join the Board on 1 September 2021. We are in the process of concluding a search for suitable candidates to join and further strengthen the expertise and experience on the Board and its committees. We have also considered our committee membership and as a result confirm that David Nish will step down from the Group Remuneration Committee following the publication of the Annual Report and Accounts 2020. David kindly agreed to remain a member throughout 2020 following his appointment as Senior Independent Director and GAC Chair in February 2020 to provide a strong link through all committees while new Board members were onboarded. Senior executive succession and development Following Noel’s appointment as Group Chief Executive on an interim basis in August 2019, he took steps to refresh the composition of the then Group Management Board and repositioned this as the Group Executive Committee. This included the appointment of new incumbents for seven roles, meaning that we actioned a significant number of our succession plans for our most senior executive positions. The Committee has therefore focused on rebuilding this bench strength during 2020 to ensure that we have a strong cohort of potential future leaders of HSBC. We have worked in partnership with Noel and our Group Chief Human Resources Officer to support an integrated approach to our assessment, development and external market benchmarking of executive talent. The refreshed Group Executive Committee succession plan, which we discussed and approved at our meeting in December 2020, reflects the changing shape of the Group and involves greater diversity, in particular with regard to gender and ethnicity. In connection with this, and to ensure we support and develop talent from the Group’s key region, the Committee received an update on the Asia talent programme. This programme involves approximately 1,000 employees of high potential talent in the region and aims to support their development and progression both within the region and across the broader Group. Committee evaluation The annual review of the effectiveness of the Board committees, including the Committee, was internally facilitated for 2020. Overall the review concluded that the Committee continued to operate effectively. The review made certain recommendations for improvement, in particular regarding the time allocated for discussion of key items to ensure that the Committee has sufficient opportunity to discuss topics such as senior executive succession and development in the required depth. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings. The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2020. Subsidiary governance review Following the implementation of the subsidiary accountability framework in 2019, during 2020 the Committee commissioned a governance review of the Group’s seven principal subsidiaries, plus three material subsidiaries in the form of Hang Seng Bank, HSBC Global Asset Management and HSBC Private Bank (Suisse). The review was led by our Group Company Secretary and Chief Governance Officer and focused on: •Board size, skills, tenure and fees; •governance support; and •the relationship between the Group and its subsidiaries. Good boardroom practice and adherence to our Group governance expectations, including under the subsidiary accountability framework, were observed in the course of the review. A number of recommendations were identified to raise the standard and ensure consistent application of governance across the organisation, and to further improve the transparency and engagement between the Group and its subsidiaries. These included: •Subsidiary accountability framework: a review and update to the principles under the subsidiary accountability framework to clarify and provide greater guidance on the Group’s expectations; •Board composition, size and independence: clarification of the Group’s expectations on the size, composition and independence of subsidiary boards and length of board tenure, to encourage proactive refreshment of subsidiary board membership. A number of our longer-serving subsidiary Directors have announced their retirement from the Group as a result of this review; and •Board reporting and management information: the need for greater consistency in the quality of reporting and management information, with work underway to ensure that the Board and its committees, as well as individuals on subsidiary boards and other senior governance forums, receive the information they require to make informed decisions. Given the success and strong support that the review received at both Group and subsidiary level, including the Group Executive Committee, it has been agreed that a review of our governance practices in our global businesses will be undertaken in 2021. Governance Our decision to create the Chief Governance Officer role in 2019 was in recognition of the significance the Board assigns to the governance agenda and the strategic importance of having best-in-class governance at HSBC, including in the oversight of subsidiaries. This role is held by the Group Company Secretary, now designated as the Group Company Secretary and Chief Governance Officer, reporting to the Group Chairman. Despite the challenges we have faced as an organisation from a business and geopolitical perspective, we have made good progress in enhancing our overall governance arrangements during 2020, in particular the areas identified as requiring improvement in our 2019 Board effectiveness review. This has included our new governance operating rhythm, which was established to provide robust end-to-end governance and more efficient and effective governance meetings across the Board, Group Executive Committee and subsidiaries. The new Group operating rhythm has resulted in greater alignment between our Board and the Group Executive Committee, and has driven the sequencing of meetings to allow for our subsidiaries and global business to have input on key matters prior to discussion and approval at the Board. This has been particularly pertinent during 2020, given the central role that our subsidiaries hold in developing and executing our strategic priorities.
In line with the Board’s commitment at the commencement of the UK Corporate Governance Code 2018, the Committee reviewed opportunitiesthe Board’s choice of an alternative mechanism to engage with and understand the views of the wider workforce with reference to developing market practice. During 2020, the Committee confirmed that it remained confident that our preferred mechanism of 'alternative arrangements' remained effective and believed that this was most appropriate for an organisation of our scale and geographical diversity. Engagement with the workforce will continue to be a priority for the Board in 2021. Further details on the arrangements we have in place to facilitate workforce engagement can be found on page 252. Diversity The Board diversity policy sets out our approach to achieving our diversity ambitions, and helps to ensure that diversity and inclusion factors are taken into account in succession planning. In line with our ongoing commitment to diversity, we reviewed our Board diversity policy during 2020. This review included consideration of developments in best practice as well as regulatory expectations on board diversity, including those outlined by the PRA. A number of minor updates were made to the characteristics that the Board will take into account when considering candidates for future appointment as Directors. These included adding social backgrounds to the Board diversity policy as a factor for consideration, and making amendments to emphasise the link between diversity of thought with risk avoidance and improved decision making. The revised Board diversity policy is available at www.hsbc.com/who-we-are/leadership-and-governance/board-responsibilities. Our recent non-executive Director searches have prioritised diversity both in terms of gender and representation from those of Asia-Pacific heritage. These have been identified as areas where we needed to strengthen in anticipation of retirements from the Board in the coming years. At the year-end, at 35% (five out of 14), our Board gender diversity met the Hampton-Alexander Review target of 33% female representation by the end of 2020. We have also met and exceeded the Parker Review targets of at least one Director from an ethnic minority background by 2021, with four members of our Board self-identifying as 'Directors of colour' in line with the definition set by Parker. The Board is also extremely focused on diversity across the wider organisation, and believes that this is a critical component of HSBC’s future success. Further details on activities to improve diversity across senior management and the wider workforce, together with representation statistics, can be found on pages 64 to 65. Independence of non-executive Directors The Committee has delegated authority from the Board in relation to the assessment of the independence of non-executive Directors. In accordance with the UK and Hong Kong Corporate Governance Codes, the Committee has reviewed and confirmed that all non-executive Directors who have submitted themselves for election and re-election at the AGM are considered to be independent. This conclusion was reached after consideration of all relevant circumstances that are likely to impair, or could appear to impair, independence. Laura Cha, who joined the Board in 2011, will not be standing for re-election at the 2021 AGM. The Committee determined that Laura, notwithstanding her length of service, continues to be independent when taking into consideration all other relevant circumstances that are likely to impair, or could appear to impair, independence and that she will continue to be independent up to the date of the 2021 AGM when she will retire from the Board. 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. | | | | | | | | | | | | | | | | | | | | | | | | | Matters considered during 2020 | | | | | | | | | | | | Jan | Feb | Apr | May | Jul | Sep | Dec | | Board composition and succession | | | | | | | | | Board composition, including succession planning and skills matrices | l | l | l | ô | ô | l | l | | Approval of diversity and inclusion policy | ô | ô | l | ô | ô | ô | ô | | Approval of conflicts of interest policy | ô | ô | ô | ô | ô | ô | l | | Executive talent and development | | | | | | | | | Senior executive succession | ô | l | l | l | l | l | l | | Approval of executive succession plans | ô | ô | ô | ô | ô | ô | l | | Talent programmes | ô | ô | l | ô | ô | ô | ô | | Governance | | | | | | | | | Board and committee evaluation | ô | ô | l | l | ô | ô | l | | Subsidiary governance | ô | ô | ô | ô | l | ô | ô | | Subsidiary and executive appointments | l | l | l | l | l | l | l |
| | | | Appointment process – assessment of new non-executive Directors |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Step 1 | | | Step 2 | | | Step 3 | | | Step 4 | | | Step 5 | | | | | | | | The Committee agreed the desired criteria sought in the candidates for appointment to the Board. An external search partner was engaged. | | | The Committee considered a long-list of candidates and agreed which should be prioritised. Relevant candidates were approached by the external search partner to understand their interest. | | | Meetings were arranged between members of the Committee and priority non-executive Director candidates. Feedback from the non-executive Directors was discussed alongside consideration of potential conflicts and other matters identified through due diligence. | | | The Committee recommended the appointment of the non-executive Director to the Holdings Board for approval, subject to completion of outstanding due diligence. | | | Outstanding due diligence and associated procedures completed prior to announcement of appointment. Director onboarding and induction pack issued and completed. | | |
Report of the Directors | Corporate governance report | | |  "The Committee spent substantial time in understanding and assessing the effect of the Covid-19 outbreak on expected credit losses, the Group-wide transformation programme and other related accounting judgements and disclosures." |
Dear Shareholder I am pleased to present my first report to you as Chair of the Group Audit Committee (‘GAC’). The Committee had a busy year, holding 13 meetings. This report sets out some of the issues considered during 2020. The Committee has strong, but diverse, financial services experience. To strengthen our skill set further, we welcomed Pauline van der Meer Mohr, James Forese and Eileen Murray as new members. Sir Jonathan Symonds and Kathleen Casey stepped down during the year and I would like to thank them for their insightful and significant contributions to the work of the GAC. The Committee spent substantial time in understanding and assessing the effect of the Covid-19 outbreak on expected credit losses, the Group-wide transformation programme, the impact of regulatory change on the control environment, and other related accounting judgements and disclosures. Given the Committee's role in relation to whistleblowing I regularly met with the Group Chief Compliance Officer and the Group Head of Whistleblowing Oversight to discuss material whistleblowing cases, enhancements to whistleblowing arrangements and plans for periodic updates to the Committee. To develop a better understanding of the key issues and challenges at the local level, I attended a number of principal subsidiary audit committee meetings throughout the Group. These meetings were complemented by regular Audit and Risk Committee Chairs’ Forums throughout the year to ensure alignment of priorities and to strengthen our relationship with the principal subsidiaries. The Committee received regular updates from the Group Head of Audit on the progress against the audit plan. During the year the audit plan was adjusted in response to new risks arising from the Covid-19 outbreak and assurance work in relation to major change programmes throughout the Group. Our external auditor, PricewaterhouseCoopers LLP ('PwC'), has now completed its sixth audit. PwC continues to provide robust challenge to management and provide sound independent advice to the Committee on specific financial reporting judgements and the control environment. An internal evaluation concluded that the Committee continued to operate effectively in 2020, and made certain recommendations for continual improvement. David Nish Chair, Group Audit Committee,23 February 2021 | | | | | | | | | | Membership | | Member since | Meeting attendance
in 2020 | | David Nish (Chair) | May 2016 | 13/13 | Kathleen Casey1 | Mar 2014 | 5/5 | | James Forese | May 2020 | 7/7 | Eileen Murray2 | Jul 2020 | 5/6 | Sir Jonathan Symonds1 | Sep 2014 | 3/3 | | Jackson Tai | Dec 2018 | 13/13 | | Pauline van der Meer Mohr | Apr 2020 | 10/10 |
1 Sir Jonathan Symonds stepped down from the Board on 18 February 2020. Kathleen Casey stepped down from the Board on 24 April 2020. 2 Eileen Murray was unable to attend a meeting in July 2020 due to a prior commitment made before her appointment. Key responsibilities The Committee’s key responsibilities include: •monitoring and assessing 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; •reviewing the effectiveness of, and ensuring that management has appropriate internal controls over, financial reporting; •reviewing and monitoring the relationship with the external auditor and oversees its appointment, tenure, rotation, remuneration, independence and engagement for non-audit services; and •overseeing the work of Global Internal Audit and monitoring and assessing the effectiveness, performance, resourcing, independence and standing of the function. Committee governance The Committee keeps the Board informed and advises 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 Executive, Group Chief Financial Officer, Group Head of Finance, Group Chief Accounting Officer, Group Head of Audit, Group Chief Risk Officer 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, Global Internal Audit and the external auditor to discuss agenda planning and specific issues as they arose during the year outside the formal Committee process. The Committee also regularly met separately with the Group Chief Legal Officer, internal and external auditors and other senior management to discuss matters in private. The Committee Secretary regularly met with the Chair to ensure the Committee fulfilled its governance responsibilities and to consider input from stakeholders when finalising meeting agendas, tracking progress on actions and Committee priorities. Meetings of the Committee usually take place a couple of days before the Board meeting to allow the Committee to report its findings and recommendations in a timely and orderly manner. This is done through the Chair who comments on matters of particular relevance and the Board receives copies of the Committee agenda and minutes of meetings.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Matters considered during 2020 | | | | | | | | | | | | | | Jan | Feb | Apr | Jun | Jul | Sep | Oct | Dec | | Reporting | | | | | | | | | Financial reporting matters including: –Review of financial statements, ensuring that disclosures are fair, balanced and understandable –Significant accounting judgements –Going concern assumptions and viability statement –Supplementary regulatory information and the ESG Update | l | l | l | l | l | l | l | l | | Regulatory reporting-related matters | l | l | l | l | ô | l | ô | l | | Certificates from principal subsidiary audit committees | ô | l | ô | ô | l | ô | ô | ô | | Control environment | | | | | | | | | | Review of deficiencies and effectiveness of internal financial controls | l | l | l | l | l | l | l | l | | Internal audit | | | | | | | | | | Reports from Global Internal Audit | l | l | l | l | l | ô | l | l | | Annual audit plan, independence and effectiveness | l | ô | l | ô | l | ô | ô | l | | External audit | | | | | | | | | | Reports from external audit, including external audit plan | l | l | l | l | l | ô | l | l | | Appointment, remuneration, non-audit services and effectiveness | l | l | l | l | ô | ô | l | ô | | Compliance | | | | | | | | | | Accounting standards and critical accounting policies | l | l | ô | ô | ô | ô | ô | l | | Corporate governance codes and listing rules | ô | l | ô | ô | l | ô | ô | ô | | Whistleblowing | | | | | | | | | | Whistleblowing arrangements and effectiveness | ô | l | l | ô | l | ô | ô | l |
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 the Committee continues to have competence relevant to the sector in which the Group operates. The Board has determined that David Nish, Jackson Tai and Eileen Murray are all ‘financial experts’ for the purposes of section 407 of the Sarbanes-Oxley Act and 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 and the FCA. These included trilateral meetings involving the Group’s external auditor PwC. How the Committee discharged its responsibilities Connectivity with principal subsidiary audit committees During the year the GAC Chair regularly met with the chairs of the principal subsidiary audit committees and attended meetings to enable closer links and deeper understanding on judgements around key issues. In addition, there was regular interaction with committee chairs across the Group through the Audit and Risk Committee Chairs’ Forum (‘ARCC’). Appointments to the audit committees of the principal subsidiary audit committees were reviewed and endorsed by the GAC. The GAC Chair met with proposed new chairs prior to their appointment. 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. Financial reporting The Committee’s review of financial reporting during the year included the Annual Report and Accounts, Interim Report, quarterly earnings releases, analyst presentations and Pillar 3 disclosures. As part of its review, the GAC evaluated management’s application of critical accounting policies, significant accounting judgements and compliance with disclosure requirements to ensure these were consistent, appropriate and acceptable under the relevant financial reporting requirements. The Committee gave careful consideration to the key performance metrics related to strategic priorities and ensured that the performance and outlook statements were fair, balanced and reflected the risks and uncertainties appropriately. During the year, the Committee received regular updates from management on the additional guidance and disclosures made in relation to the Covid-19 outbreak. The Committee considered and was satisfied with the management response to the Financial Reporting Council’s (‘FRC') comments on HSBC’s Annual Report and Accounts 2019 regarding goodwill impairment disclosures, and the industry-wide FRC publications, including the letter to audit committee chairs. In conjunction with the Group Risk Committee (‘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 continues to adopt the going concern basis in preparing the annual and interim financial statements. Further details can be found on page 41. The Committee’s review of the long-term viability statement and the adoption of the going concern basis factored in additional guidance issued by the FRC on financial reporting in light of the Covid-19 outbreak. Following review and 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. Covid-19 impact on accounting judgements The Committee devoted significant time, including additional meetings, to the review and challenge of management’s approach and analysis of IFRS 9 expected credit losses (‘ECL’) in light of the Covid-19 outbreak and other geopolitical events. In its review, the GAC gave due regard to the interpretation and application of additional guidelines in relation to the Covid-19 outbreak and estimating ECL that were issued by various regulators. The Committee gave careful consideration to the measurement of ECL, in particular the key judgements and management adjustments made in relation to the forward economic guidance, underlying economic scenarios, reasonableness of the weightings and the impact on financial statements and disclosures. There was detailed discussion on the risks to ECL models as the unprecedented nature of the pandemic meant that the severity of the economic conditions was outside the bounds of historical data
Report of the Directors | Corporate governance report and experience used to develop IFRS 9 models. The Committee challenged management on the approach to modelling ECL, specifically the use of Credit Risk judgements and invited HSBC’s credit experts to present their views to the Committee. At the request of the GAC Chair, Global Internal Audit carried out additional verification and assurance regarding the disclosures made in quarterly reporting on the range of ECL outlook and consistency of the ECL disclosures. The Group’s external auditor regularly shared its views with the Committee on the reasonableness of management assumptions, given the significant changes made to the estimation of ECL due to the impact of the Covid-19 outbreak on the design, implementation and operation of ECL controls. Other areas of significant accounting judgements requiring in-depth review due to the Covid-19 pandemic included valuation of financial instruments, goodwill impairment, hedge accounting and investment in associates. Further details can be found in the 'Principal activities and significant issues considered during 2020' table on page 262. 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 303. In 2020 the updates provided to the Committee included the potential impacts on internal control from the Covid-19 outbreak. These impacts included both those directly relevant to operational processes and controls, such as where new or amended controls were required to administer government relief packages, and more indirect impacts such as from colleagues working under contingency arrangements. A number of additional assurance procedures were performed across the lines of defence to monitor, assess and mitigate these impacts, with results regularly reported to the Committee. External auditor The Group’s external auditor is PwC, which has held the role for six years, and the senior audit partner is Scott Berryman who has been in the role since 2019. The Committee reviewed the external auditor’s approach and strategy for the annual audit and also received regular updates on the impact on the control environment from the Covid-19 outbreak and the Group transformation programme. Principal matters discussed with PwC are set out in its report on page 311. PwC discussed the impact from the Covid-19 outbreak on the execution and delivery of the audit and the plans to deliver the audit through remote working and mitigating actions being taken. These included accelerating aspects of planning and performing a number of areas of audit earlier to factor in expected delays due to remote working. There was also discussion on additional relevant work in relation to significant accounting judgements, such as expected credit losses, and the impact of the Covid-19 outbreak on the basis for determining materiality. 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 gave particular focus to the actions being taken by PwC in response to the findings from the HSBC effectiveness review and the PwC firm-wide Audit Quality Review by the Financial Reporting Council. PwC highlighted the continuing investment in both additional resources and new technologies to improve the quality and consistency of the audit. The Committee Chair also met the PwC engagement quality control partner for HSBC privately to discuss the continuous audit improvement actions. The GAC received an update on the partner rotation and succession for the Group and its principal subsidiaries and the steps taken to ensure effective transitions. The GAC monitored the policy on hiring employees or former employees of the external auditor, and there were no breaches of the policy highlighted during the year. The external auditor attended all Committee meetings and the GAC Chair maintains regular contact with the senior audit partner and his team throughout the year. 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 2020. 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. 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 as a change in auditor would have a significant impact on the organisation, including on the Global Finance function. A change would lead to disruption and an increase in operational risk given the ongoing impact from investmentsthe Covid-19 pandemic and the significant strategic change underway through the Group transformation programme. In addition, the Committee is closely monitoring the consultations and proposals arising from the Competition and Market Authority's statutory audit market study, the Kingman Review of the Financial Reporting Council and the Brydon Review on the quality and effectiveness of audit on the future of the UK external audit market. The Committee will consider its audit tendering strategy in line with the outcomes of the UK audit reform and well in advance of re-tendering in 2025. 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 2021 will be proposed to shareholders at the 2021 AGM. Non-audit services The Committee is responsible for setting, reviewing and monitoring the appropriateness of the provision of non-audit services by the external auditor. It also applies the Group’s policy on the award of non-audit services to the external auditor. During the year, GAC reviewed changes made to the Group’s policy resulting from the implementation of ‘The Financial Reporting Council Revised Ethical Standard 2019’ (effective in 2020) and changes to internal governance. The key change in the revised standard is the introduction of a ‘whitelist of services’ that the principal accountant can provide. All services not prescribed in the whitelist are prohibited. 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 either approved by the GAC, or by Group Finance when acting within delegated limits and criteria set by the GAC. The non-audit services carried out by PwC included 45 engagements approved during the year where the fees were over $100,000 but less than $1m. Global 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; 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. Eight engagements during the year were approved where the fees exceeded $1m. These were mainly engagements required by the regulator and incremental fees related to previously approved engagements. One new engagement outside the scope of the pre-approved services related to preliminary advanced audit procedures for the adoption of IFRS 17 in 2023. | | | | | | | | | | | | | | 2020 | 2019 | | | Auditors‘ remuneration | $m | $m | | Total fees payable | 130.2 | | 110.7 | | | Fees for non-audit services | 37.3 | | 25.5 | |
Global Internal Audit 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 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. In addition to the ongoing importance of regulatory-focused work, key risk theme categories for 2020 audit coverage were strategy, governance and culture, financial crime, conduct and compliance, financial resilience and operational resilience. In April 2020, in response to the Covid-19 outbreak, Global Internal Audit completed a risk-based review to revise the 2020 annual audit plan to create capacity for real-time audits targeted at key risks arising from the pandemic. Real-time audits provide real-time, independent ongoing observations to management responding to the Covid-19 outbreak. Issues are raised for significant observations that are not addressed in a timely manner. In addition, in response to the business update in February 2020, Global Internal Audit focused on governance over the transformation programme and performed project audit activity for selected complex and high-priority business cases. 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 2021 audit planning process includes 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 the 2021 audit work continue to be strategy, governance and culture, financial crime, conduct and compliance, financial resilience, and operational resilience. During 2021, a quarterly assessment of key risk themes will form the basis of thematic reporting and plan updates and will ultimately drive the 2022 planning process. The annual audit plan and material plan updates are approved by the GAC. Based on regular internal audit reporting to the GAC, private sessions with the Group Head of Audit, the Global Professional Practices annual assessment and quarterly Quality Assurance updates, the GAC is satisfied with the effectiveness of the Global Internal Audit function and the appropriateness of its resources. 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 2020 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 common areas of responsibility were addressed appropriately with inter-committee communication or joint discussions with the Chairs. 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. This is further complemented with significant overlap in membership of the GAC and GRC to ensure deeper understanding and informed challenge at both meetings. During 2020, the GAC and GRC Chairs reviewed and challenged management’s proposals to transition the responsibility for oversight of entity level controls from the GAC to the GRC. The Chairs considered whether there was the suitable level of management seniority for ownership of entity level controls and whether there was regular and appropriate reporting to both committees to fulfil their oversight responsibilities. In 2020, five ARCC Forums were held with the chairs of principal and regional subsidiaries’ audit and risk committees, together with senior management from these subsidiaries. The purpose of these ARCC 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. The topics discussed at the ARCC Forums can be found in the GRC report on page 268. Three areas of joint focus for the GAC and GRC during 2020 were: Sustainable control environment With oversight from the GAC, the Group Executive Committee continued a programme 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. 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
Report of the Directors | Corporate governance report framework as part of the sustainable control environment programme. In 2020, the GAC and the GRC reviewed the risks arising from models used for the estimation of expected credit losses under IFRS 9, particularly given the economic backdrop of the Covid-19 outbreak. The committees challenged 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 2020, this included 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. There continues to be an increased focus on the quality of regulatory reporting by the PRA and other regulators globally. The GAC will review the steps taken by management to strengthen the controls over regulatory reporting and as we strengthen our processes and controls, there may be impacts on some of our regulatory ratios. In conjunction with the GRC, the GAC continued to oversee the progress of management’s proposals and implementation of the Basel III Reforms and the Ibor transition. The GAC focused on the operational and control environment impacts from Basel III Reforms and Ibor transition on HSBC’s financial reporting and interdependencies with other Group transformation programmes. Whistleblowing and ‘speak up’ culture Whistleblowing is a key element of ‘speak up’ culture, with the Group’s whistleblowing channel, HSBC Confidential, offering a variety of ways for our people to raise whistleblowing concerns (see page 68 for further information). The GAC is responsible for the oversight of the effectiveness of the Group’s whistleblowing arrangements. The Group’s Chief Compliance Officer provides periodic reporting to the GAC on the efficacy of the whistleblowing arrangements, providing an assessment of controls and detailing the results of internal audit assessments. The Committee is also briefed on culture and conduct risks and associated management actions arising from whistleblowing cases. The Chair of the GAC acts as the Group’s whistleblowers’ champion, with responsibility for ensuring and overseeing the integrity, independence and effectiveness of HSBC’s policies and procedures on whistleblowing and the protection of whistleblowers. The Chair met with the Group Head of Whistleblowing Oversight throughout the year for briefings on material whistleblowing cases and assessments of the whistleblowing arrangements. The Committee has requested updates on a number of key areas during 2020, including an assessment of the timeliness of whistleblowing investigations. The arrangements were subject to an internal audit review during 2020, which rated the design, control and management oversight of the arrangements as satisfactory. As part of the ongoing assessment of the end-to-end arrangements, the Committee has requested a deeper review in key markets of the employee investigation function in which the whistleblowing arrangements have a dependency. An external benchmarking assessment was presented to the GAC in December 2020. This provided an overview of the overall effectiveness of whistleblowing arrangements and investigations processes against a number of industry peers, and best practice guidance issued by external consultancy and legal firms as well as the UK charity, Protect. The assessment reflected the significant progress made during 2020 such as the implementation of a new whistleblowing platform (Navex), the enhanced global minimum standards and improvements observed in the ‘speak up’ culture. In addition, governance was improved with a particular focus on key emerging conduct themes to enable timely management action, and a mechanism was introduced for whistleblowers to provide feedback post-investigation. The assessment also identified further opportunities for 2021 as part of the Group’s fit for the future programme with updates to be provided to the whistleblowing champion and the GAC throughout 2021. | | | | | | | | | | | | | Principal activities and significant issues considered during 2020 | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Financial and regulatory reporting | | Key financial metrics and strategic priorities The GAC considered the key judgements in relation to external reporting to track the key financial metrics and strategic priorities and to review the forecast performance and outlook. | In exercising its oversight, the Committee assessed management's assurance and preparation of external financial reporting disclosures. The Committee was particularly focused on the ongoing Covid-19-related uncertainty and how management addressed and reflected the impact of the pandemic in external reporting and disclosures. The Committee reviewed the draft external reporting disclosures and provided feedback and challenge on the top sensitive disclosures, including key financial metrics and strategic priorities to ensure HSBC was consistent and transparent in its messaging. | | | | Environmental, social and governance (‘ESG’) reporting The Committee considered management's efforts to embed and enhance ESG reporting to demonstrate strong controls, operation and governance, including key performance indicators and assurance plans. | The GAC reviewed the approach to combining the ESG Update into the Annual Report and Accounts for the 2020 reporting period. This included consideration of the steps taken by management to address findings from Global Internal Audit regarding the controls and assurance processes for ESG content. The Committee will review the steps taken by management in developing the target operating model to deliver integrated reporting in 2021. | | | | Regulatory reporting assurance programme The GAC monitored the progress of the regulatory reporting assurance programme to enhance the Group’s regulatory reporting, impact on the control environment and oversee regulatory reviews and engagement. | The Committee reflected on the continued focus on the quality and reliability of regulatory reporting by the PRA and other regulators globally. The GAC reviewed management’s efforts to strengthen and simplify the end-to-end operating model, including commissioning independent external reviews of various aspects of regulatory reporting. The Committee discussed and provided management’s engagement plans with the Group’s regulators, including any potential impacts on some of our regulatory ratios such as CET1 and LCR. We continue to keep the PRA and other relevant regulators informed of our progress. | | | | | | | | | | Significant accounting judgements | | Expected credit losses The measurement of expected credit losses involves significant judgements, particularly under current economic conditions. There remains an elevated degree of uncertainty over ECL estimation under current macroeconomic, political and epidemiological uncertainties. Further details are provided in the 'Covid-19 impact on accounting judgements' section of this report. | The actions taken are summarised above in the 'Covid-19 impact on accounting judgements' section of this report. | | |
| | | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Significant accounting judgements | | Long-term viability and going concern statement During the year, the GAC has considered a wide range of information relating to present and future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios that reflect the increasing uncertainty that the global Covid-19 outbreak has had on HSBC’s operations, as well as considering potential impacts from other top and emerging risks, and the related impact on profitability, capital and liquidity. | In accordance with the UK and Hong Kong Corporate Governance Codes, 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. | | | | | | Goodwill and other non-financial assets impairment During the year, management tested for impairment goodwill and other non-financial assets. Key judgements in this area relate to long-term growth rates, discount factors and what cash flows to include for each cash-generating unit tested, both in terms of compliance with the accounting standards and reasonableness of the forecast. During the year, the Group recognised $1.3bn impairment in relation to non-financial assets, following which a detailed analysis of various balance sheet amounts was initiated. | The GAC received reports on management's approach to goodwill and other non-financial assets impairment testing and challenged the approach and models used. The GAC also challenged management's key judgements and considered the reasonableness of the outcomes as a sense check against the business forecasts and strategic objectives of HSBC. The GAC reviewed the results of management’s detailed analysis of the balance sheet and agreed with the conclusions. | | | | | | | Associates (Bank of Communications Co., Limited and The Saudi British Bank) During the year, management performed the impairment review of HSBC’s investment in Bank of Communications Co., Ltd (‘BoCom’) and The Saudi British Bank (‘SABB’). The impairment reviews are complex and require significant judgements, such as projected future cash flows, discount rate, and regulatory capital assumptions. | The GAC reviewed the judgements in relation to the impairment reviews of HSBC’s investment in BoCom and SABB, including the sensitivity of the results to estimates and key assumptions such as projected future cash flows and regulatory capital assumptions. Additionally, the GAC reviewed the models’ sensitivity to long-term assumptions including the continued appropriateness of the discount rates. | | | | Legal proceedings and regulatory matters Management has used judgement in relation to the recognition and measurement of provisions, as well as the existence of contingent liabilities for legal and regulatory matters, including, for example, 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 GAC received reports from management on the legal proceedings and regulatory matters that highlight the accounting judgements for matters where these are required. The matters requiring significant judgements were highlighted. The GAC has reviewed these reports and agree with the conclusions reached by management. | | | | Valuation of defined benefit pension obligations 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. | 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. | | | | Valuation of financial instruments Due to the volatile market conditions in 2020, management refined its approach to valuing Group’s investment portfolio. In addition, as losses were incurred on the novation of certain derivative portfolios, management considered whether fair value adjustments were required under the fair value framework. Management’s analysis provided insufficient evidence to support the introduction of these adjustments in line with IFRS. | 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 and agrees with the judgements applied by management. | | | | Tax-related judgements HSBC has recognised deferred tax assets to the extent that they are recoverable through expected future taxable profits. Significant judgement continues to be exercised in assessing the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies. | 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 Management’s judgement is used in determining the assumptions used to calculate the Group’s remediation provisions, of which the most material are PPI and a programme in relation to the collections and recoveries operations of the bank. | The GAC considered and challenged management’s assumptions and the approach for estimating potential outflows relating to the calculations of the customer remediation provisions. | | | | | | | | |
Report of the Directors | Corporate governance report | | | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Other accounting judgements | | Long-term asset return assumptions in PVIF Market volatility during 2020 resulted in further review of the long-term investment assumptions used in the measurement of the present value of in-force business ('PVIF') intangible assets recorded on the balance sheet in relation to shareholder returns expected from long-term insurance contracts. | The GAC reviewed the assumptions determined by management under existing insurance governance processes, which involve significant expert judgement, and concluded that they were supportable given internal and external benchmarks and information reviewed. | | | | Hedge accounting Significant judgements relating to hedge accounting matters under current economic conditions include the impact of Covid-19 payment deferrals on the highly probable cash flow forecasts required by macro cash flow programmes; and whether hedge accounting relationships, where hedged items include interest rate floors and the hedging instrument does not, would be highly effective over the hedged horizon. | The GAC noted that the effect of Covid-19 payment deferrals on hedge accounting was limited and no additional actions were required. Additionally the GAC was informed about the mitigation actions management has taken to reduce the risk associated with floored hedged items, such as designating new hedge accounting relationships. | | | | | | | | | | | | | | | | Group transformation | | Transformation and sustainable control environment The GAC will oversee the impact on the risk and control environment from the Group transformation programme.
| The Committee received regular updates on the Group transformation programme to review the impact on the risk and control environment and to oversee progress of the Group transformation programme.
In these updates the Committee monitored the development of management’s approach to structuring and governing the Group transformation programme and risk management processes. This oversight helped satisfy the Committee of the appropriateness of these processes and associated benefits delivery. Management kept the Committee apprised of the changes and adjustments made to the Group transformation programme in response to Covid-19, and associated impact on the financial performance.
Management’s updates were supplemented by significant focus and assurance work from Global Internal Audit where a dedicated team continuously monitored and reviewed the Group transformation programme. This included carrying out a number of targeted audit reviews, in addition to audits of significant programmes. These reviews focused on key elements of change management. | | | | | | Global Finance transformation The Committee reviewed the proposals for the Global Finance organisational design, the migration to Cloud and the impact on financial controls. | The Committee has oversight for the adequacy of resources and expertise, as well as succession planning for the Global Finance function. During 2020, the Committee dedicated significant time to the review and progress of the multi-year Global Finance transformation programme, with the overall objectives being to improve the control environment and customer outcomes and to leverage technology to increase overall efficiency. In particular, the Committee discussed the challenges to Global Finance operations, including financial reporting, from the Covid-19 pandemic and sought assurance that controls were in place to maintain standards and quality.
The Committee reviewed and challenged the key change programmes and delivery milestones and tracked the progress of the deliverables. In particular, the Committee considered the impact from the Global Finance transformation on the Group transformation programme, regulatory change programmes and where there were interdependencies and concentrations risks through key programmes such as Finance on the Cloud. There were frequent discussions with management with input from Global Internal Audit on the impact on key risks and controls, including steps taken to mitigate these risks. Management regularly updated the Committee on the approach and plans for regulatory engagement, including follow-up on the outcomes and actions to be taken post-meetings with regulators.
The Group Chief Financial Officer had private sessions with the Committee to share his perspectives on the progress of the Global Finance transformation, areas of strategic priorities and where additional focus was required. The private sessions included discussion on succession planning and resourcing and areas where GAC members could support and guide management by leveraging members’ experience. | | | | | | | | | | Regulatory change | | IFRS 17 'Insurance Contracts' The Committee will oversee the transition to IFRS 17 and consider the wider strategic implications of the change on the insurance business. | Management provided an update on the final standard amendments that were issued in June 2020 and discussed the impact on the transition programme necessitated by the one-year delay to the effective date, both from a policy implementation and model build perspective. The discussions highlighted the significant uncertainty that remained in the interpretation of key areas and the working assumptions adopted by management to enable design solutions, investment in technology and data infrastructure to proceed. The Committee discussed the impact from IFRS 17 on HSBC’s reported numbers in the financial statements and management will continue to consider how to appropriately apply the standard to HSBC’s insurance business, as well as monitoring insurance industry developments on disclosures. Management will continue to keep the Committee updated on plans for the investor narrative, taking into account the relevant disclosure requirements applicable to HSBC, and ongoing presentation of insurance results up to the time of the transition. | | |
| | | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Regulatory change | | Basel III Reform The GAC considered the implementation of the Basel III Reform and the impact on the capital requirements and RWA assurance. This was considered in the context of the strategy and structure of the balance sheet.
| The Committee received an update on the progress and impact of the Basel III Reform programme on the Group. Management discussed the uncertainty over the final definition of the rules and the actions taken to ensure sufficient flexibility to make changes and mitigate risks from legislation being finalised at a later date. The discussion highlighted the dependencies of the Basel III Reform programme with other Group transformation programmes, in particular the dependency on adoption of the Finance on the Cloud solution and the impact on data delivery and storage.
The Committee reviewed and challenged management on the findings from an audit on the programme structure, governance and the significant cost increase year on year. Management explained the actions being taken in response to the audit findings and the reasons for the increase in costs, which included delays to implementation dates caused by Covid-19. | | | | | | Interest rate benchmark replacement The financial reporting risks of interest rate benchmark transition include the potential for volatility arising from financial instruments valuation, contract modification and hedge accounting. The transitions involve significant operational complexity for financial institutions, and industry approaches to transition continue to develop. | The GAC noted management’s early adoption of ‘Interest Rate Benchmark Reform – Phase 2’ amendments to IFRSs in relation to benchmark reform, including the disclosures necessary to support adoption of the reliefs.
The Committee considered the risks and financial reporting impacts arising from the Ibor transition. Management discussed actions being taken to mitigate the risks, which included new product development and a client outreach programme to ensure readiness to migrate and explain the changes and outcomes arising from the transition to clients. Management advised about the operational challenges such as the updates to current systems and processes that were required to support the accounting for the Ibor transition and our external dependency on market and client readiness. In particular, management drew attention to the potentially material impact on hedge accounting programmes from the Ibor transition and the substantial costs and risks involved in the redocumentation of hedges.
The Committee discussed the approach being taken across the industry with management and PwC and potential impacts on the control environment relevant to financial reporting from the Ibor transition. | | | | | | | | | | | |
Committee evaluation and effectiveness The annual review of the effectiveness of the Board committees, including the GAC, was conducted internally in 2020. Overall the review concluded that the GAC continued to operate effectively, and highlighted improvements made in 2020 in relation to Committee structure and focus. The review also made certain recommendations for continuous improvement, including in relation to further enhancing the quality of information presented to the meeting through revised executive governance oversight. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings. The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2021. Focus of future activities At the beginning of each year the Committee discusses its key priorities for the year ahead. In 2021, the Committee will continue to monitor execution of the Group transformation programme and its impact on the risk and control environment. In monitoring the Group transformation programme, the Committee will consider the interdependencies between the Group transformation programme and implementation of large-scale regulatory change programmes such as Basel III Reforms, the Ibor transition and IFRS 17 'Insurance Contracts'. A major area of focus is also expected to be the GAC’s engagement with the UK Government’s consultation and proposals for the future of the UK external audit market.
Report of the Directors | Corporate governance report | | | “Geopolitical developments, civil unrest, the UK's trade negotiation with the EU and the Covid-19 outbreak introduced new challenges for our organisation, customers and people. The Group Risk Committee responded by working closely with management to understand and appropriately challenge scenario stress testing, early warning indicators and management of information."
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Dear Shareholder I am pleased to present the Group Risk Committee (‘GRC’) report. Geopolitical developments, civil unrest in Hong Kong, the UK’s trade negotiations with the EU and the Covid-19 outbreak introduced new challenges for our organisation, customers and people. The GRC responded by working closely with management to understand and appropriately challenge scenario stress testing results, early warning indicators and key management metrics. Importantly, we monitored heightened capital and liquidity risks against the prospect of greater market volatility, large customer financing needs, rapid credit deterioration and lapses in fair outcomes for our customers. We reviewed and challenged the impact of forward economic growth assumptions on our markets and credit exposures. We maintained close watch over people and operational risks arising from fatigue, the health impact of the virus, and government-imposed restrictions. The GRC continued to strengthen its composition and skills to promote proactive risk governance. During the year we welcomed seasoned technology and operations experts Steven Guggenheimer and Eileen Murray to the GRC. We also extended deep appreciation to Sir Jonathan Symonds and Kathleen Casey for their valuable insight and contribution upon their retirement from the GRC and the Board. The GRC convened eight formal meetings plus seven special sessions to review and challenge our most important responsibilities, including Group internal stress testing, internal liquidity adequacy assessment process ('ILAAP'), and internal capital adequacy assessment process ('ICAAP'). We also organised timely education sessions, including a full-day training on sanctions in Hong Kong for non-executive Directors and management in Asia-Pacific. Throughout 2020, the GRC and GAC coordinated closely our respective agendas, as evident in our five jointly organised regional Audit and Risk Committee Chairs’ Forums, which featured discussion on key audit and risk issues with our principal subsidiaries, ensuring alignment of priorities between the Group and its subsidiaries. Jackson Tai Chair Group Risk Committee 23 February 2021 | | | | | | | | | | Membership | | Member since | Meeting attendance in 2020 | | Jackson Tai (Chair) | Sep 2016 | 8/8 | Kathleen Casey1 | Jan 2020 | 3/3 | | Steven Guggenheimer | May 2020 | 4/4 | | José Antonio Meade Kuribreña | May 2019 | 8/8 | | Heidi Miller | Sep 2014 | 8/8 | | Eileen Murray | Jul 2020 | 3/3 | | David Nish | Feb 2020 | 7/7 | Sir Jonathan Symonds1 | Apr 2018 | 2/2 | | Pauline van der Meer Mohr | Apr 2018 | 8/8 |
1 Sir Jonathan Symonds stepped down from the Board on 18 February 2020. Kathleen Casey stepped down from the Board on 24 April 2020. Key responsibilities The Group Risk Committee has overall non-executive responsibility for oversight of risk-related matters and the risks impacting the Group. The GRC’s key responsibilities includes: •advising the Board on risk appetite-related matters, and key regulatory submissions, including the ICAAP and ILAAP, as well as recovery and resolution planning; •overseeing and advising the Board on all risk-related matters, including financial risks, non-financial risks and the effectiveness of the Group’s conduct framework; •undertaking a review and challenge of the Group’s stress testing exercises; and •reviewing the effectiveness of the Group’s enterprise risk management framework and internal controls systems (other than internal financial controls overseen by the GAC). Committee governance In carrying out its responsibilities, the GRC is supported by the participation of senior management, including Noel Quinn who attended six GRC meetings in 2020. The Group Chief Risk Officer, Group Chief Financial Officer, Group Head of Audit, Group Chief Compliance Officer and Global Head of Risk Strategy are standing attendees and regularly attend GRC meetings to contribute their subject matter expertise and insight. They facilitate GRC 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 also regularly meets with the Group Chief Risk Officer, the Group Head of Audit and external auditor, PwC, without management present. The Chair also has regular meetings with members of senior management to discuss specific risk matters that arise during the year outside formal meetings. The Chair consults regularly with the Committee Secretary to ensure the GRC meets its governance responsibilities and to consider input from stakeholders when finalising meeting agendas, tracking progress on actions and Committee priorities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Matters considered by the GRC in 2020 | | | | | | | | | | | | | | Jan | Feb | Mar | Apr | May | Jun | Jul | Sep | Oct | Nov | Dec | | Financial risk | ô | l | l | l | l | ô | l | l | ô | l | ô | | Credit risk | ô | ô | ô | ô | l | ô | l | l | ô | l | ô | | IT and operational risk including outsourcing, third-party risk management, cyber risk | l | l | ô | l | l | ô | l | l | ô | l | ô | | Model risk | l | ô | ô | l | ô | ô | ô | l | ô | ô | ô | | People and conduct risk | l | l | ô | ô | ô | ô | l | l | ô | l | ô | | Risk appetite | ô | l | ô | ô | ô | ô | l | ô | ô | l | ô | | Financial crime risk | l | l | ô | l | l | l | l | l | l | l | ô | | Regulatory compliance | ô | l | ô | l | ô | ô | l | l | ô | l | l | | Legal risk | l | l | ô | ô | ô | ô | l | ô | ô | l | ô |
How the GRC discharges its responsibilities During 2020, the GRC reshaped its meeting agenda to place greater emphasis on a regular review of the Group’s risk landscape and to track the management of information and desired outcomes for our most important risk areas. Each meeting now commences with a review of our enterprise risk landscape through the Group Chief Risk Officer’s update of the Group risk profile followed by a comprehensive review of critical management information, led by the Group Chief Risk Officer, and supported by the Group Chief Financial Officer, Group Chief Operating Officer, Group Chief Compliance Officer and Group Human Resources Officer. The GRC also reviewed internal and external audit reports and regular risk reports, which provided deeper reporting on the Group’s risk profile and highlighted the material current and forward-looking risks and issues, such that the GRC could effectively identify any areas that required more of the GRC's attention. A summary of coverage is set out in the table above. Throughout the year, the GRC adhered to an agenda that sought to regularly address topics and oversight responsibilities set out in the Group risk taxonomy, while being flexible to undertake informed review and appropriate challenge of timely risk issues that have economic, commercial, regulatory and reputational implications for the Group’s franchise. Three thematic risk areas are described below to illustrate the GRC’s focus during the year. Sustainable control environment During 2020, 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. The GRC reviewed model enhancements needed as a result of changes in the economy due to the Covid-19 outbreak. The GRC also continued its review of the Group’s approach to operational resilience and identified improvements from a pilot study to identify areas for further enhancements. The GRC also reviewed the effectiveness of the Group’s anti-fraud controls. At the November meeting of the Committee, it was agreed the ultimate oversight for all of the Group’s entity level controls move from the GAC to the GRC. This change supports the Committee’s responsibility for review and oversight of the risk management culture, framework and internal control systems. Financial risk The GRC provided informed review and constructive challenge to the Group’s regulatory submissions of ICAAP and ILAAP. It also monitored progress on the Group’s liquidity risk management improvement plan, including the development of the internal liquidity metric. It reviewed work by the Global Finance function on strengthening recovery planning. The GRC continued to maintain oversight of the Group’s regulatory and internal stress testing programmes, particularly in light of the impact of the Covid-19 outbreak with specific review and challenge of the key assumptions, strategic management actions and outcomes of the principal tests conducted. Through these reviews, the GRC assessed risks 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 2020, 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 operational resilience, climate risk and sanctions. The Committee received updates on regulators’ rules and guidance relating to operational resilience, which is designed to protect customers and maintain economic stability by preventing incidents leading to intolerable consumer harm, market disruption, and impact to the safety and soundness of firms. To reinforce continued emphasis and visibility on financial crime and sanctions compliance, the GRC organised a full-day training session on international sanctions early in the year in Hong Kong for our Asia-Pacific non-executive Directors and management. The GRC also considered the PRA’s latest requirements and expectations relating to evidencing of the embedding of climate risk management capabilities within regulated firms. Activities outside formal meetings The GRC organised a number of activities outside of its regular meeting cycle to facilitate more effective oversight of the risks impacting the Group. In particular, the GRC’s formal meetings continue to be supported by training and ‘walk-through’ sessions to raise the GRC’s understanding of the underlying domain issues, ensuring the GRC is well prepared in its informed review and constructive challenge. The chairs of principal subsidiary risk committees were also invited. Activities included, among others: •a Directors' education session, held in October 2020, focusing on the increasingly complex international sanctions and export control landscape, including key sanctions challenges facing the Group with the imposition of new US sanctions following the US Hong Kong Autonomy Act. This education session was attended by 27 non-executive Directors from across the Group; •a Directors' education session, held in November 2020, led by senior leaders in Group Treasury on the implementation of the internal liquidity metric, which is designed to provide an internal view of liquidity risk and to ensure the Group holds enough liquidity to meet and recover from a defined stress; •GRC Chair’s Working Sessions on a range of topics including financial crime developments, progress on FCA conduct remediation matters (May 2020), the Wealth and Personal Banking conduct programme (May 2020), progress on regulatory remediation programmes (January and December 2020), the outcomes and implications of the 2020 Group internal stress test (November 2020), and progress on the 2020 ICAAP and ILAAP submissions (November 2020); and •three cybersecurity consultation sessions and regular updates on cyber developments such as cyber-crime, legislation and technology led by the GRC’s independent cybersecurity adviser. 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 and that the risk management and internal control systems in place were operating effectively.
Report of the Directors | Corporate governance report Throughout 2020, the GRC proactively encouraged principal subsidiary risk committee chairs to participate in regular GRC meetings and special review or learning sessions, leading to improved connectivity between the Group and principal subsidiary risk committees. In addition the GRC Chair participated in the meetings of principal subsidiary risk committees for Asia, the UK, Europe, the US, Latin America, Canada and the Middle East, with the aim of ensuring strong alignment, information sharing and connectivity between the GRC and principal subsidiaries. Collaboration between the GRC and GAC 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 coordination or joint meetings where appropriate. The GRC and GAC Chairs are members of both committees to further enhance connectivity, coordination and flow of information. Audit and Risk Committee Chairs' Forum The Audit and Risk Committee Chairs' ('ARCC') Forum meetings continue to be one of the more collaborative GRC and GAC exercises. The forum meetings promote shared risk and audit subject matter expertise, align Group and subsidiary priorities, support the subsidiary accountability framework and promote two-way connectivity between the Group and principal subsidiary risk and audit committees. The meetings are jointly hosted by the GAC and GRC Chairs and attended by members of the GAC and GRC, the Group Executive Committee (more than half of whom attended at least one meeting), several Group non-executive Directors, the chairs of principal and regional subsidiary audit and risk committees, together with non-executive Directors and senior management from those subsidiaries. In May, the ARCC Forum provided updates through video calls with the Asia-Pacific region and a combined call with the Europe, Middle East and Americas regions. This was followed by three ARCC Forum calls for each of the Asia-Pacific, UK, Europe and Middle East, and Americas regions in September and November. The ARCC Forums provided an important opportunity for the GRC to understand locally-specific issues and priorities with potential read-across to other areas and regions of the Group. They also served to help the GRC hear the observations, concerns and achievements from subsidiary risk and audit chairs, with a particular focus on pressing issues or concerns (such as the Covid-19 outbreak, business restructuring, or macroeconomic issues); where Group initiatives need to be recalibrated to reflect regional constraints; cross-regional dependencies; and where the Group can progress faster. In light of the Covid-19 pandemic and highly uncertain macroeconomic environment, the ARCC Forum meetings included discussion on: •reinforcing the control environment and embedding of non-financial risk management; •sustaining operational integrity and resilience during a Covid-19 and restructuring environment; •need for even stronger risk appetite, credit, counterparty and conduct risk management during a Covid-19 and macroeconomic-sensitive environment; •strengthening model risk management and our portfolio of models at the Group level and in the regions; •subsidiaries’ role and responsibilities in our Group recovery and resolvability planning in a more macroeconomic-sensitive environment; and •understanding the perspectives and feedback from regional subsidiaries.
Focus of future activities The GRC’s focus for 2021 will include the following activities. It will: •provide oversight of the execution risk arising from the Group transformation programme; •oversee enhancements to our risk appetite statement so that it is more regular, forward-looking and risk responsive; •ensure the risk appetite statement is closely linked to our strategic goals, our annual operating plan, stress testing, ILAAP and ICAAP exercises, and our recovery and resolution planning; •monitor and appropriately challenge management’s plans to manage and mitigate the impacts of geopolitical risks on our operations and portfolios in Asia, the Middle East and the rest of the world; •monitor the impact of the Covid-19 outbreak on the Group’s customer franchise as well as on the capital and liquidity risk, credit risk, market risk, people and operational risk for the Group; •monitor continued progress in financial crime compliance, including enhancements in our transaction monitoring programme and the application of new analytical tools and applications to improve our fraud detection and prevention; •continue to monitor developments and enhancements in the Group’s management of conduct and culture, as well as people risk management; •continue to review and challenge management’s progress in developing and implementing our operational resilience strategy; •oversee the Group’s approach to climate risk management and climate risk appetite; •review plans, jointly with the GAC, to strengthen the Group’s data strategy and management so that we can better serve our customers, protect customer data as well as strengthen model risk management, credit risk management and risk appetite, including climate risk appetite; and •track progress regularly in remediating outstanding, unresolved regulatory actions across the Group and principal subsidiaries, including progress in closing-out any regulatory consent orders or matters requiring attention. Committee evaluation The GRC is committed to regular, independent evaluation of its own effectiveness. During 2020, the GRC undertook an internal GRC effectiveness exercise, which concluded that the GRC continued to operate effectively and in line with regulatory requirements. The effectiveness exercise highlighted improvements made in 2020 to anchor meetings with the regular review of the Group’s risk landscape and management information. Progress made in relation to the Committee’s operation and engagement with principal subsidiaries was acknowledged. The review also made certain recommendations for enhancement, including in relation to rebalancing the breadth of the GRC agenda, and increasing the use of alternative mechanisms to allow the GRC to efficiently exercise oversight of risk matters through additional education and supplementary sessions. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings. The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2020.
| | | | | | | | | | | Principal activities and significant issues considered during 2020 | | Areas of focus | | Key issues | Conclusions and actions | | Risk appetite | | The Group risk appetite statement defines the Group’s risk appetite and tolerance thresholds and forms the basis of the first and second lines of defence’s management of risks, our capacity and capabilities to support our customers, and the pursuit of the Group’s strategic goals | The GRC 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. It then continued to work closely with Group Risk Strategy to enhance the 2021 risk appetite statement including a climate risk qualitative statement and quantitative measures that focus on the Group's exposure and risk profile to high transition risk sectors, as well as improvements to the suite of resilience risk metrics. The GRC also raised the importance of strengthening the granularity risk appetite statements to be forward-looking and risk-responsive at GRC meetings and at regional ARCC Forums. In the process, the GRC has reinforced the importance of stronger linkage of the risk appetite statements to the Group’s annual operating plan, strategic planning, stress testing exercises, annual capital adequacy and liquidity management exercises, and to the Group’s recovery and resolution planning. | | | | | | | Geopolitical developments and risks | | Geopolitical developments and risks continue to present significant challenges for the Group’s customer franchise and for the resilience of our operations. | The GRC reviewed the Group’s readiness to address major geopolitical developments, including the short- and longer-term impact of civil unrest in Hong Kong and heightened trade tensions between the US and China on our Asia and global franchise, as well as our ability to maintain our high service levels in our multi-channels to serve our customers. The GRC also monitored the Group’s preparedness for financial market, operational and commercial disruptions arising out of protracted UK trade negotiations with the EU. | | | | | | | Managing through the Covid-19 outbreak | | Managing operational risk and counterparty credit risk to enable the Group’s support of our customers, communities and the local economy throughout the Covid-19 outbreak. | The GRC reviewed how the Group leveraged its capital and liquidity strength, robust credit standards, and digital capabilities to assist customers during the Covid-19 outbreak and to maintain market strength. In doing so, the Committee closely assessed credit trends, economic outlook and the impact on portfolio credit quality. The GRC also reviewed the operational, reputational and conduct challenges in implementing government support schemes across different geographies and regulatory jurisdictions, including associated risks, controls and oversight. | | | | | | | | | | Operational resilience | | Management’s operational resilience programme is being redesigned to enable our priority business services to continue to serve our customers in the event of unforeseen disruptions in our key markets. | The GRC maintained its focus on the Group’s policies, programmes and practices for strengthening and prioritising our ability to test, detect, resolve and recover from unforeseen operational disruptions in our key markets. With the goal of minimising harm to our customers and to the local financial markets, the GRC continued its review of the Group’s approach to operational resilience, which incorporates learnings from the Group's response to the Covid-19 outbreak across our franchise. The GRC’s oversight activities included: •the review and challenge of progress on the formulation of a comprehensive operational resilience strategy including working with the Group Chief Control Officer on the programme to comply with regulatory standards for operational resilience; •the planned 'operationalisation' of critical business services and impact tolerances, and risk and control mapping to strengthen the ability to prevent, respond to, recover, and learn from operational disruptions, such as Covid-19; •the embedding of ownership with first line business and function leaders to deliver operational resilience outcomes for customers, for the Group’s own safety and soundness, and to avoid disruptions to market integrity and financial stability; and •the review and challenge of management’s progress in managing third-party risk in the context of an increasing reliance on technology services provided by third parties and growing regulatory scrutiny. | | | | | | | Technology resilience including cybersecurity and Cloud strategy | | Technology resilience is the risk of unmanaged disruption to any IT system within HSBC, as a result of malicious acts, accidental actions or poor IT practice or IT system failure. | The GRC reviewed the Committee’s approach to governance of technology risk and Cloud adoption, which was a high priority area under regulatory scrutiny. The GRC also continued its oversight and challenge of the Group’s cybersecurity strategy and management of cyber risks. | | | | | | | | | | People, conduct and culture | | The Group promotes a culture that is effective in managing risk and leads to fair conduct outcomes.
It seeks to actively manage the risk of adverse impact due to not having the right people with the right skills doing the right thing, including risks associated with employment practices and relations. | The GRC continued to exercise oversight in the area of people risk and employee conduct, supported by the Group Chief Human Resources Officer and Group business heads, including: •regular monitoring of 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; •informed review and challenge of the alignment of risk and reward, satisfying itself that risk and compliance objectives and outcomes were reflected in the Group variable pay pool; •discussion of the people risk issues arising due to the impact of the Covid-19 outbreak; and •the review of workplace harassment data and insights, action taken and 2020 focus areas. | | | | |
Report of the Directors | Corporate governance report | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | Areas of focus | | Key issues | Conclusions and actions | | Climate risk | | Successful delivery of HSBC’s climate ambition will be determined by our ability to measure and manage all components of climate risk. | The GRC recognises the Group’s regulatory commitments due in 2021 and the Group’s own publicly stated climate risk targets, as well as the need to manage climate risk of the Group’s existing portfolios and future business. The GRC reviewed the Group’s approach to climate risk management and climate risk appetite including associated stress testing and scenario analysis. | | | | | | | | | Capital and liquidity risk
including ICAAP and ILAAP
| | The GRC oversees the Group’s management of its financial risk, particularly in the context of the challenges of the Covid-19 outbreak. | The GRC reviewed the Group’s capability to track environmental and macroeconomic headwinds through early warning indicators and scenario stress testing. It also oversaw the Group’s progress in developing a range of strategic management actions capable of timely execution and the development of recovery and resolution capabilities that meet PRA and local regulatory expectations. The GRC also maintained oversight of the Group’s liquidity risk management with particular emphasis on the outlook, lessons learned from the Covid-19 outbreak, metric development, systems and controls, and regulatory feedback.
The GRC reviewed and challenged the assessment of the Group ICAAP and ILAAP programmes and engaged with Group management in overseeing and evaluating the Group’s forward-looking capital and liquidity strategies and capabilities, including the Group’s liquidity risk management improvement programme. Additionally, the GRC Chairs participated in several subsidiary risk committees’ review of ICAAP, leading up to final GRC review, challenge and recommendation of ICAAP to the Board. | | | | | | | Financial crime risk | | The Group is committed to closely monitoring and managing the risk of knowingly or unknowingly helping parties to commit or to further potentially illegal activity, including both internal and external fraud. | Throughout 2020, the GRC reviewed the Group’s approach to managing its financial crime risk across a number of important areas. This included: •the Group’s progress in enhancing its transaction monitoring framework; •the fraud landscape, particularly against heightened Covid-19 conditions, the Group’s fraud risk profile and the impact of regulatory developments; and •the nature and scale of insider risk and the Group’s strategies for managing insider risk. The GRC also maintained oversight of the ever-changing and increasingly complex international sanctions landscape in which the Group and its customers operate, as well as the Group’s approach to managing its compliance with sanctions regimes globally. The GRC held a full-day training session on sanctions in Hong Kong in January for our Asia-Pacific non-executive Directors and management. A further education session on sanctions was held for Group-wide non-executive Directors in October to address the US government imposition of sanctions in connection with its Hong Kong Autonomy Act. Following the organisational restructuring of Financial Crime Compliance, the GRC requested the Committee’s independent financial crime advisers to examine the effectiveness of the financial crime function in the Group’s subsidiaries. | | | | | | | | | | | | | | | Model risk | | HSBC faces risk from the inappropriate or incorrect business decisions arising from the use of models that have been inadequately designed, implemented or used, or from models that do not perform in line with expectations and predictions. | The GRC raised awareness of progress and importance of models at a number of its meetings and at the regional Audit and Risk Committee Chairs’ Forums. It reviewed progress under the Group’s model risk transformation programme. The Committee oversaw the development and embedding of improved model risk management controls and oversight in the first line of defence, as well as enhancements to model risk governance. The GRC also considered the adverse impact of the Covid-19 outbreak on model uncertainty including the need for enhancements as necessary. | | | | | | | Resolvability | | HSBC is required to show how its resolution strategy could be carried out in an orderly way, including identification of any risks to successful resolution. | The GRC monitored the Group’s progress in demonstrating that it has developed capabilities to support its own resolution, in line with the Group’s resolution strategy in order to meet new requirements from the Bank of England under its resolvability assessment framework by 1 January 2022, including the requirement to comply with the valuation in resolution requirement by 1 April 2021, to submit a self-assessment to the PRA/Bank of England by 1 October 2021 and to publicly disclose HSBC’s resolvability in June 2022. Together with the Group Chief Financial Officer, the GRC and GAC programmed our five regional Audit and Risk Committee Chairs' Forums to raise the importance of Boards and management of principal subsidiaries in upgrading their awareness and compliance with new regulatory standards for recovery and resolution. | | | | |
| | | | | | | Directors’ remuneration report | | Page | | Group Remuneration Committee | | | Workforce remuneration | | | Our approach to Directors' remuneration | | | Annual report on remuneration | | | | | Additional remuneration disclosures | |
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. | | | 'The remuneration outcomes for 2020 strike the right balance between rewarding our employees for their exceptional efforts this year and being equitable in the broader context.' |
Dear Shareholder I am pleased to present our 2020 Directors’ remuneration report on behalf of the members of the Group Remuneration Committee. Making remuneration decisions in the face of the challenges presented by the Covid-19 pandemic required a delicate balancing of factors. Recognising our people for their performance is a key element of our reward strategy and helps to drive ongoing engagement, which is critically important as we navigate through the Covid-19 outbreak and the Group’s transformation. However, we must also recognise the impact of these circumstances on our stakeholders and the wider community. Actions taken in response to Covid-19 In determining the remuneration outcomes, the Committee noted the following: •We did not apply for government support packages for our employees across the countries and territories in which we operate, and put employee well-being, customer experience, and supporting the economy at the centre of our response to the pandemic. •Our front-line employees continued to serve customers in challenging circumstances. Our customer contact centres were fully operational during the period, and between 70% and 90% of branches remained open, as we continued to enhance our digital capabilities. •We worked with governments to support national schemes, granting over 720,000 payment holidays to our personal customers and 237,000 loans to our wholesale customers. We provided more than $26bn in customer relief to our personal customers during the initial stages of the pandemic and more than $52bn in lending to wholesale customers, many of whom still require our support. •In line with all other large UK-based banks and at the direct request of the Group’s lead regulator, the UK’s PRA, we cancelled the fourth interim dividend of 2019 and suspended dividend payments until the end of 2020. In December 2020, the PRA announced a temporary approach to shareholder distributions for 2020. After considering the requirements of the temporary approach, the Board announced an interim dividend for 2020 of $0.15 per ordinary share. | | | | | | | | | | Membership | | Member since | Meeting attendance in 2020 | | Pauline van der Meer Mohr (Chair) | Jan 2016 | 5/5 | | Henri de Castries | May 2017 | 5/5 | | James Forese | May 2020 | 4/4 | | Irene Lee | Apr 2018 | 5/5 | | David Nish | May 2017 | 5/5 |
Reflecting on these actions, the Committee concluded that the 2020 remuneration outcomes should strike the right balance between rewarding our employees for their exceptional efforts this year and being equitable in the broader context. Performance and pay for 2020 Financial performance The Group's financial performance deteriorated in 2020, reflecting the impact of the Covid-19 outbreak on the global economy. Adjusted profit before tax of $12bn was down 45% due to lower revenue and a higher expected credit loss charge directly linked to the impact of the pandemic. However, the Group continued to make good progress on its strategic plan, demonstrated by a $51.5bn reduction of RWAs in 2020 in low-return franchises and a 3% reduction in adjusted costs. Economic activity in Asia has proven to be resilient and is rebounding. We continue to elevate our ambition in the region by stepping up our investment. Non-financial performance We made progress in creating a simpler, more efficient organisation by combining our wholesale back office operations, and bringing our retail, wealth and private banking businesses together into a single global business. We also continue to increase investment in technology to drive improved customer experience and operational efficiency. Technology enhancements introduced in 2020 included automated lending processes for Covid-19 relief programmes, upgraded global payment systems, transformed customer onboarding processes, and use of Cloud technology for risk analytics systems. Remuneration funding approach While events such as those seen in 2020 are rare, our remuneration framework was designed with the entire economic cycle in mind, including the Cloud,possibility of exceptional years. We use a countercyclical funding methodology, with both a floor and a ceiling, to recognise that there will be times when profitability is exceptionally low or exceptionally high as a result of factors not directly linked to employee performance. In such years, factors such as applying franchise protection and limiting the risk of inappropriate behaviour need to be considered when setting the variable pay pool. Nonetheless, financial performance and affordability remain central tenets in determining the appropriateness of the variable pay pool. Group variable pay pool For 2020, the Committee reviewed and agreed the Group variable pay pool of $2,659m, taking into account performance against financial and non-financial metrics set out in the Group risk appetite statement, including conduct, and targets set out in our operating plan. This represents a 20.4% reduction in the pool compared with 2019, with the variable pay pool down approximately 15% in Global Banking and Markets, asset management and private banking, and approximately 22.5% in other areas of the Group. We also differentiated by market, with a better year-on-year outcome in Asia, reflecting the region's strategic importance and consistent contribution towards Group performance. In determining the size of the pool, the Committee took into account the fact that overall financial performance was lower than what we had targeted at the start of the year, and certain non-financial risk metrics were outside of our risk appetite. We also took into account the exceptional circumstances faced by our shareholders, including the impact of the regulatory request to
Report of the Directors | Corporate governance report cancel the final 2019 dividend and suspend dividend payments until the end of 2020. While it is appropriate that the pool is significantly lower this year, the Committee was cognisant of the extraordinary effort and performance of many of our colleagues in 2020. Equally, it is critical we retain talent for the long-term interests of our stakeholders. This is of particular importance in growth markets and our areas of strategic focus, and is most acute for our high performers who are helping us restore the business to our expected performance levels. As a result, the variable pay accrual was increased in the fourth quarter in response to financial performance and market pay challenges. Review of workforce remuneration Remuneration outcomes In allocating the pool, the Committee decided that while the variable pay outcomes for junior colleagues should reflect Group performance, they should receive better outcomes with less differentiation relative to our senior employees. Overall, total compensation for our junior members of staff was broadly flat, which we felt was important given their significant efforts in a challenging year. Higher paid employees had an overall decrease in total compensation. We also made limited fixed pay increases for 2021 and targeted these towards our junior colleagues. As part of the year-end pay review, the Committee reviewed results of remuneration outcomes to ensure they were in line with our pay principles and the approach decided by the Committee for 2020. Support for our employees Throughout 2020, the well-being of our people was our paramount concern. Many employees had to juggle personal and professional priorities, while adapting to new and unfamiliar ways of working. In March 2020, we temporarily paused the redundancy programme intended to deliver the reduction in headcount that we set out in the transformation programme announced in February 2020. The Board was conscious of the impact of proceeding with redundancies, particularly at the outset of the crisis given the significant stress for our people and communities, and the need to protect our capacity to serve our customers. The Board lifted the pause on the redundancy programme in June 2020 while continuing the freeze on the vast majority of external recruitment to make every effort to fill vacancies internally. We maintained a regular flow of communication and listened closely to our colleagues' needs, providing the support and flexibility required to help them manage their lives during the pandemic, and maintained their full pay without applying for government support packages. We ran a mid-year employee survey to determine how the Covid-19 outbreak was impacting our colleagues and how we could support them through this period. More than 50% of our total employee population responded, of which more than 89% said they were getting the information they needed from the organisation, 86% reported that they were getting the support they needed from their line manager and 86% of the respondents reported they felt confident in leadership. In addition, 75% of employees that participated in our 2020 Snapshot survey said they believed HSBC values their well-being. For our departing colleagues, we took steps to offer them support on searching and applying for jobs and preparing for interviews. We also maintained a dedicated advice website, offered virtual workshops and provided access to career development tools to set them up for success outside HSBC. Key remuneration decisions for Directors Voluntary decisions made by executive Directors Reflecting on the severity of the impact of Covid-19 at the outset, our two executive Directors made personal contributions to the fight against the pandemic by donating to charity a quarter of their base salaries for six months, and our Group Chairman donated his entire fee for 12 months to charity. Additionally, as an organisation, we provided $25m in charitable donations, which went toward immediate medical relief, access to food, and care for the most vulnerable people. Our executive Directors also decided to voluntarily forgo any annual cash bonus for 2020 due to the impact of the suspension of dividends on our shareholders. Executive Director annual performance assessment With regard to performance-based pay for 2020, the financial measures in the executive Directors’ annual scorecards were aligned to the delivery of profit before tax, our strategic priority of reducing RWAs in low-return franchises and, for the Group Chief Financial Officer, effective management of Group costs. Following careful consideration, these targets were not revised for the significant economic impact of the Covid-19 outbreak to reflect the Committee’s view that reward for our executive Directors should align with the experience of our shareholders. Non-financial performance measures were linked to customer satisfaction, employee engagement and diversity, environmental stewardship, risk and compliance, and organisational simplification. The Committee noted strong non-financial performance as our commitment to delivering responsibly for our stakeholders remained unchanged throughout the pandemic. In addition to the actions noted to support our customers and the wider economy, customer and digital satisfaction scores increased in some of our scale markets, employee engagement scores improved, we met our diversity goal of having at least 30% women in senior management roles, and we achieved carbon reduction and sustainable finance and investment targets. We were also recognised by Euromoney for ‘Global Excellence in Leadership during the Covid-19 pandemic’ in its Awards for Excellence 2020. Executive Director annual incentive scorecard outcome The above resulted in an overall outcome of 64.50% for the Group Chief Executive and 63.75% for the Group Chief Financial Officer (further details of performance are provided on page 283). The Committee reviewed this outcome in the context of a number of internal and external considerations to determine whether it should exercise its discretion to reduce the outcome, including: •overall share price performance in the year, which was significantly impacted by both the Covid-19 outbreak and the impact of the PRA’s request to suspend dividend payments; •the impact of the bonus pool reduction on the total compensation for our wider workforce; •profit before tax and return on tangible equity ('RoTE') performance; and •the positive actions taken by the Board to support our customers, colleagues and communities in these uncertain times. The Committee determined the 2020 formulaic scorecard outcomes appropriately reward the executive Directors for their performance within the context of overall stakeholder experience. With the voluntary waiver of cash bonuses by executive Directors, the Group Chief Executive's effective payout was reduced to 32.25% of its maximum, and the Group Chief Financial Officer's was reduced to 31.88%. The effective payouts are 51.43% and 58.86% below their respective outcomes compared with 2019. 2020 long-term incentive ('LTI') for executive Directors To reflect the Group’s strategy, and after listening to our shareholders, the Committee has agreed that the 2020 LTI will be based on four equally weighted measures. •RoTE: We have retained a key measure of our financial performance and how we generate returns that deliver value for our shareholders. •Capital reallocation to Asia: We have set a new metric to assess a key lever of our strategy and business transformation plan. •Environment and sustainability: We have set a new measure to align with the Group’s climate ambition to bring our own operations to net zero by 2030 and support our customers in their transition to a more sustainable future. •Relative total shareholder return: We have retained this metric, which rewards executive Directors based on comparison of the
total shareholder return performance of the Group and a relevant peer group. 2020 LTI grant size The Committee is aware of shareholders’ expectations on the need to adjust the size of LTI awards to ensure they do not result in 'windfall gains' in the event that the share price falls significantly due to the impact of the Covid-19 outbreak. While this does not impact outstanding LTI awards, the Committee agreed, in line with investor expectations, that the 2020 LTI awards should be subject to a 'windfall gain' adjustment at grant if the share price falls significantly relative to the grant price of the 2019 LTI. This is to ensure that the reward for our executive Directors aligns with the experience of our shareholders and is reflective of management performance over the performance period. While the share price to be used for the 2020 LTI award is not known at this stage, the Committee has agreed, in line with investor expectations, if the 2020 LTI grant share price experiences a greater than 30% decline since the previous grant, this would be considered a material share price fall, and an adjustment percentage equal to half the share price percentage decline would be applied to the awards to mitigate the potential for 'windfall gains'. Executive Directors' fixed pay for 2021 We have increased the base salary of our executive Directors by 1.6% in line with the average increase for our Group employees. Additionally, in an expansion to his current remit, the Group Chief Financial Officer will assume responsibility for the Group’s transformation programme, effective immediately, and its mergers and acquisitions agenda, from April. In acknowledgement of the expanded remit and responsibilities, the Committee has decided to adjust his fixed pay allowance from £950,000 to £1,085,000 in accordance with the terms of the Directors’ remuneration policy approved at the 2019 AGM. The executive Directors have made the personal decision to donate 100% of their salary and fixed pay allowance increases for 2021 to charity given the ongoing challenging external environment. Investor consultation The Committee considers that regular dialogue with our shareholders, including outside of our policy vote years and especially during these uncertain times, is important to ensure our remuneration policy operates as intended and in line with shareholder expectations. In 2020, we met with a number of our significant shareholders and proxy voting agencies to hear their views on executive and wider workforce remuneration. As ever, we found this engagement to be very helpful as we considered the implementation of our remuneration policy, including the 'windfall gain' adjustment for the 2020 LTI award, and use of ESG measures in the forward-looking scorecards. Further details of the 2020 LTI measures and targets are on page 286. The 2021 annual incentive scorecard is provided on page 292.
On behalf of the Committee, I would like to thank investors for their time during the consultations and their support for the direction of travel. The Group’s Directors’ remuneration policy is due to expire at the 2022 AGM. During the course of 2021, we will be reviewing our current approach to Directors’ remuneration and will consult with our large shareholders and proxy advisory bodies with the aim of introducing a new policy in 2022. The review will continue to be based on our following key principles: •The policy should be simple and transparent. •There should be a strong alignment between rewards and the interests of our stakeholders, including shareholders, customers and employees. •The policy should maintain a focus on long-term performance. •The total compensation package should be competitive to ensure we can retain and attract talent. •The structure should meet the expectations of investors and our regulators. The Committee is concerned that over time, HSBC’s overall remuneration opportunity has fallen behind desired levels to reflect the calibre of the executives and market positioning. While conscious of external sentiment, one of the areas of focus for the Committee will therefore be ensuring that overall remuneration levels remain appropriate in the context of the above and support delivery of our strategic priorities. Any proposed changes would be discussed with shareholders and the proxy advisory bodies as part of the wider consultation on the remuneration policy in 2021. Our annual report on remuneration As Chair of the Committee, I hope you will support the 2020 Directors' remuneration report.
Pauline van der Meer Mohr Chair Group Remuneration Committee 23 February 2021
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, the Group Chairman 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. The Committee met five times during 2020. James Forese was appointed as a member of the Committee on 1 May 2020. David Nish stepped down as a member of the Committee on 23 February 2021. The following is a summary of the Committee’s key activities during 2020. | | | | | | | | | | | | | | | | | | | Matters considered during 2020 | | | | | | | | Jan | May | Jul | Sep | Dec | | Remuneration framework and governance | | Group variable pay pool, workforce performance and pay matters, Gender Pay Gap report, and employee surveys | l | l | l | l | l | | Executive Director remuneration policy implementation, scorecards and pay proposals | l | l | l | l | l | | Remuneration for other senior executives of the Group | l | l | ô | ô | l | | Non-executive Director compensation | ô | l | ô | ô | l | | Shareholder consultation and proxy adviser views | ô | l | ô | l | l | | Directors’ remuneration report | l | ô | ô | l | l | | Regulatory, risk and audit | | Information on material risk and audit events, and performance and remuneration impacts for individuals involved | l | l | l | l | l | | Regulatory updates and filings, including approach and outcomes for the identification of Material Risk Takers | l | l | l | l | l | | Corporate governance briefings | ô | l | ô | ô | l | | Principal subsidiaries | | Matters from subsidiary committees | l | l | l | l | l |
Advisers The Committee received input and advice from different advisers on specific topics during 2020. Deloitte LLP’s engagement with the Committee was extended during 2020. The Committee’s decision reflected the quality and objectivity of the independent advice that Deloitte had provided to the Committee on remuneration matters. Deloitte provided benchmarking data on remuneration policy matters and independent advice to the Committee. 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 artificial intelligence solutions.remuneration trends for senior management. Willis Towers Watson was appointed as remuneration adviser by management after considering invited proposals from similar consultancy firms. It provides actuarial support to Global 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 2020. 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 2020, total fees of £173,900 and £68,289 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 Group Chief Executive provided regular briefings to the Committee. In addition, the Committee engaged with and received updates from the following: •Mark Tucker, Group Chairman; •Elaine Arden, Group Chief Human Resources Officer; •Alexander Lowen, Group Head of Performance Management, Reward, Human Resources Transformation and People Analytics; •Pam Kaur, Group Chief Risk Officer; •Colin Bell, Group Chief Compliance Officer; •Jonathan Calvert-Davies, Group Head of Audit; and •Aileen Taylor, Group Company Secretary and Chief Governance Officer. The Committee also received feedback and input from the Group Risk Committee and Group Audit Committee on risk, conduct and compliance-related matters relevant to remuneration. Review of workforce remuneration and related policies In light of the year's challenging circumstances, the Committee's review and approval of the workforce remuneration strategy was particularly focused on ensuring protection for our junior employees and delivering appropriate pay differentiation for those areas of the business that performed well. The Committee also reviewed the results of remuneration outcomes across the Group to ensure they were in line with our pay principles (as set out on page 275). This included details of variable remuneration adjustments and 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. We measure our employees’ sentiment on performance and pay matters through our annual pay review surveys. In the first half of 2020, the Committee reviewed the results of the most recent survey. A significant proportion of the respondents’ comments indicated improved sentiment towards our pay review process. The majority of employees believed their year-end ratings were a fair reflection of their performance and behaviour, and felt motivated to perform at their best following their performance review. Committee effectiveness The annual review of the effectiveness of the Board committees was internally facilitated during 2020. Overall, the review concluded that the Group Remuneration Committee continued to operate effectively, with a number of positive aspects of the operation and practices highlighted by the review. There were also areas of improvement identified, including the engagement dynamic with advisers. The Committee has considered and discussed the outcomes of the evaluation, and accepts the findings with a number of actions to address them already in progress. The outcomes of the evaluation have been reported to the Board and the Committee will track progress against the recommendations during 2021.
| | | | | | | | | | | | | | | | Our approach to workforce remuneration |
Remuneration principles Our performance and pay strategy aims to reward competitively the achievement of long-term sustainable performance by attracting, motivating and retaining the very best people, regardless of gender, ethnicity, age, disability or any other factor unrelated to performance or experience. It supports our people to perform their roles in the long-term interests of our stakeholders, which includes the customers and communities we serve, our shareholders and our regulators. The strategy is underpinned by: •decisions that are fair, appropriate and free from bias; •a culture supportive of continuous feedback through manager and employee empowerment; •reward and recognition of sustainable performance and values-aligned behaviour; and •a balanced, simple and transparent total reward package that supports employee well-being. Spotlight on 2020: Our response to the Covid-19 outbreak These principles were key to facilitating the agile approach we took to pay and performance in response to the Covid-19 outbreak. In response to the challenging circumstances our colleagues faced, we offered them increased practical support, recognised them for their exceptional response to our customers and each other, and helped to ensure fair and appropriate treatment. | | | Appropriate practical support for our colleagues •We took a country-based approach to our response to ensure that what we provided to our employees was appropriate for the conditions and restrictions in place in their location. •Our priority was to support the well-being of our employees using a range of initiatives focusing on: –enabling employees to work flexibly to support additional caring responsibilities; –ensuring employees could purchase the equipment they needed to work from home wherever possible; –providing financial assistance to employees who may have incurred additional costs, for example where normal commuting or onsite catering services were disrupted; and –supporting mental and physical well-being with employee assistance programmes, access to Covid-19-related private medical treatment and flu vaccination initiatives. •More than 50% of our total employee population responded to our mid-year employee survey. Of those who responded, 86% of employees reported they were getting the support they needed from their line manager, and 83% said they believed HSBC valued their well-being. | Recognising the exceptional response •We ran a ‘Spotlight’ campaign within our ‘At Our Best Recognition’ points programme that focused on recognising our Covid-19 Heroes. •There were over 169,000 colleague recognitions made over a three-month period, a threefold increase in recognitions compared with previous Spotlight campaigns that we have run. | Helping managers to make fair decisions •The majority of our people underwent a change in working pattern and/or location as a result of the Covid-19 outbreak. We wanted to ensure our people are always recognised against relevant and achievable objectives with allowance for barriers to performance outside of their control. •In response to the Covid-19 outbreak, we issued specific guidance for managing performance under some of the most common scenarios our people found themselves in, to support our managers in continuing to make performance decisions. |
Report of the Directors | Corporate governance report Our approach to performance and pay in 2020 for the broader workforce was underpinned by our remuneration principles. | | | | | | | Principle | Our approach in 2020 | Fair, appropriate and free from bias
| •Our communications to managers encouraged them to challenge their assessments by questioning whether they were objective and based on fact. Managers in similar roles then came together to complete fairness reviews of the performance and behaviour ratings of their team and make any necessary adjustments based on the review of the peer group to mitigate the risk of bias and take a broader view of team performance. •We supported managers, particularly the less experienced ones, to make informed, consistent and fair pay decisions. Managers of 96% of our junior employees are supported by simplified or guided decision making. •As part of our annual performance and pay review process, we undertook analytical reviews to check for and identify bias, and provide these reports to our senior management and Group Remuneration Committee as part of their review of annual pay review outcomes. •We made pay and performance reporting tools available to our managers for the purpose of undertaking an analytical review of pay decisions for their team. We continue to enhance these based on manager feedback to make these tools useful and increase usage. •We regularly review our pay practices and in 2020 worked 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 made adjustments. | A culture of continuous feedback through manager and employee empowerment
| •We seek to create a culture where our people can fulfil their potential, gain new skills and develop their careers for the future. •In 2020, we enhanced our continuous feedback culture, Everyday Performance and Development, which supported our people to have regular conversations with their line managers about items such as their performance, pay, development and well-being throughout the year. •We launched our Continuous Performance Management tool, including on mobile, to make it easier for our people as team members and as managers to share activities, feedback, achievements and progress regularly to drive conversations. •We encouraged colleagues to use our online career planning tools to help them with their thinking about future roles and the capabilities they require. •Line managers were 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. We were clear on the decisions that managers are empowered to own and provided them with principles to support such decision making. •Employees also received 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. | Reward and recognition of sustainable performance and values-aligned behaviour
| •We have a robust performance management process that underpins our approach to reward 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 impact the relevant pool, while the final pool also considers the external operating environment and expectation of our stakeholders. •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 to ensure performance is assessed not only on what is achieved, but also on how it is achieved. •We 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 recognise their colleagues for demonstrating our values, with an award of recognition points that can be redeemed against a wide range of goods. Over one million peer-to-peer recognitions were made globally in 2020. •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. | | Balanced, simple and transparent total reward packages, which support employee well-being | •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 are informed, but not driven, by market position and practice. •For the 2020 pay review process, we have prioritised fixed pay increases for our global career bands 6 to 8 population, where it represents a higher proportion of total compensation, and towards locations and business areas which are particularly integral to the execution of the Group’s strategy. •We are committed to employee well-being and offer employee benefits that support the mental, physical and financial health of a diverse workforce. •All HSBC employees that work in a jurisdiction with a legal minimum wage are paid at or above this amount. 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’. |
Payments on loss of office The table below sets out the basis on which payments on loss of office may be made. Other than as set out in the table, there are no further obligations which could give rise to remuneration payments or payments for loss of office. | | | | | | | Payments on loss of office | | Component of remuneration | Approach taken | | Fixed pay and benefits | Executive Directors may be entitled to payments in lieu of: •notice, which may consist of base salary, FPA, pension entitlements and other contractual benefits, or an amount in lieu of; and/or •accrued but untaken holiday entitlement. Payments may be made in instalments or a lump sum, and may be subject to mitigation, and subject to applicable tax and social security deductions. | | Annual incentive and LTI | In exceptional circumstances, as determined by the Committee, an executive Director may be eligible for the grant of annual and/or long-term incentives under the HSBC Share Plan based on the time worked in the performance year and on the individual’s contribution. | | Unvested awards | All unvested awards will be forfeited when an executive Director ceases employment voluntarily and is not deemed a good leaver. An executive Director may be considered a good leaver, under the HSBC Share Plan, if their employment ceases in specified circumstances which includes: •ill health, injury or disability, as established to the satisfaction of the Committee; •retirement with the agreement and approval of the Committee; •the employee's employer ceasing to be a member of the Group; •redundancy with the agreement and approval of the Committee; or •any other reason at the discretion of the Committee. If an executive Director is considered a good leaver, unvested awards will normally continue to vest in line with the applicable vesting dates, subject to performance conditions, the share plan rules, and malus and clawback provisions. In the event of death, unvested awards will vest and will be released to the executive Director’s estate as soon as practicable. In respect of outstanding unvested awards, the Committee may determine that good leaver status is contingent upon the Committee being satisfied that the executive has no current or future intention at the date of leaving HSBC of being employed by any competitor financial services firm. The Committee determines the list of competitor firms from time to time, and the length of time for which this restriction applies. If the Committee becomes aware of any evidence to the contrary before vesting, the award will lapse. | | Post-departure benefits | Executive Directors can be provided certain benefits for up to a maximum of seven years from date of departure for those who depart under good leaver provisions under the HSBC Share Plan, in accordance with the terms of the policy. Benefits may include, but are not limited to, medical coverage, tax return preparation assistance and legal expenses. The Committee also has the discretion to extend the post-departure benefit of medical coverage to former executive Directors, up to a maximum of seven years from their date of departure. | | Other | Where an executive Director has been relocated as part of their employment, the Committee retains the discretion to pay the repatriation costs. This may include, but is not restricted to, airfare, accommodation, shipment, storage, utilities, and any tax and social security that may be due in respect of such benefits. Except in the case of gross misconduct or resignation, an executive Director may also receive retirement gifts. | | Legal claims | The Committee retains the discretion to make payments (including professional and outplacement fees) to mitigate against legal claims, subject to any such payments being made in accordance with the terms of an appropriate settlement agreement waiving all claims against the Group. | | Change of control | In the event of a change of control, outstanding awards will be treated in line with the provisions set out in the respective plan rules. |
Report of the Directors | Corporate governance report | | | | 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 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. Remuneration policy summary – executive Directors | | | | | | | | | | Elements and objectives | Operation | Implementation in 2021 | Base salary1 | •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. | Base salary will be increased by 1.6% in line with the overall increase for Group employees. Base salary from 1 March 2021 will be as follows: •Noel Quinn: £1,291,000 •Ewen Stevenson: £753,000 | | To attract and retain key talent by being market competitive and rewarding ongoing contribution to role. | Fixed pay allowance (‘FPA’)1 | •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. | FPA for 2021 will be as follows: •Noel Quinn: £1,700,000 •Ewen Stevenson: will increase from £950,000 to £1,085,000 from 1 March 2021 | | 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. | | Cash in lieu of pension | •Cash in lieu of pension is paid on a monthly basis as 10% of base salary. •This allowance, 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. | •No change to percentage of base salary. | | To attract and retain key talent by being market competitive. | | | Annual incentive | •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 immediately vested. •On vesting, shares equivalent to the net number of shares that have vested (after those sold to cover any income tax and social 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; –increase the proportion of the award to be delivered in shares; and –defer the vesting of a portion of the award. | •See page 292 for details of performance measures. | 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') | •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 social 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. | •See page 292 for further details. | To incentivise sustainable long-term performance and alignment with shareholder interests.
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1 The executive Directors have made the personal decision to donate 100% of their increases to salaries and increases to their fixed pay allowances for 2021 to charity given the ongoing challenging external environment.
Remuneration policy summary – executive Directors | | | | | | | | | | Elements and objectives | Operation | Implementation in 2021 | | Benefits | •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). •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. | •Benefits to be provided as per policy. Details will be disclosed in the Annual Report and Accounts 2021 single figure of remuneration table.
| To provide benefits in accordance with local market practice.
| | | Shareholding guidelines | 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% | •No change to percentage of base salary. | To ensure appropriate alignment with the interest of our shareholders.
| | All-employee share plans | Executive Directors are eligible to participate in all-employee share plans, such as HSBC Sharesave, on the same basis as all other employees. | •Participation in any such plans will be disclosed in the Annual Report and Accounts 2021, as required. | | To promote share ownership by all employees. |
Illustration of release profile The following chart provides an illustrative release profile of remuneration for executive Directors. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Illustration of release profile | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | u | | | Fixed pay allowance | •Released in five equal annual instalments starting from March 2021. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | u | | | | u | | | | u | | | | u | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Annual incentive | •Paid 50% in cash and 50% in immediately vested shares subject to a retention period of one year. •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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Perform-ance period | | Retained shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | u | | | u | | u | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Clawback | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Long-term incentive | •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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performance period | | | | | | | | Vesting period | | | | | | | | | | | | | | | | | | | u | | | | | | | | | | | u | | u | | | | u | | | | u | | | | u | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retention period | u | | | | u | | | | u | | | | u | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Malus | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Clawback | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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. 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.
Report of the Directors | Corporate governance report | | | | | | | Provision | Approach | | Clarity | •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. | | Remuneration arrangements should be transparent and promote effective engagement with shareholders and the workforce. | | Simplicity | •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.
| Remuneration structures should avoid complexity and their rationale and operation should be easy to understand.
| | Risk | •In line with regulatory requirements, our remuneration practices promote sound and effective risk management while supporting our business objectives (see page 295). •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). | | 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. | | Predictability | •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. | | 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. | | Proportionality | •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.
| 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 | •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. •Annually, senior employees participate in a 360 degree survey which gathers feedback on values-aligned behaviours. | Incentive schemes should drive behaviours consistent with the Group's purpose, values and strategy.
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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, with the exception of a revised fee for the Senior Independent Director. This change was approved by the Committee following Sir Jonathan Symonds' retirement from the Board and as Deputy Group Chairman and Senior Independent Director in February 2020, when David Nish was appointed as Senior Independent Director. In addition, and in light of the increasingly significant role of technology in the Group’s strategy, operations and growth prospects, the Board approved the establishment of a Technology Governance Working Group for a period of 12 months. The working group has been tasked with developing recommendations to strengthen the Board’s oversight of technology strategy, governance and emerging risks. The working group will be jointly chaired by Eileen Murray and Steven Guggenheimer, given their expertise and experience in this area. Jackson Tai, the Group Risk Committee Chair, will be a member, with other non-executive Directors members from our US, UK, European and Asian principal subsidiaries. The time commitment expected of the co-Chairs will be up to 30 days, reflective of the complexity and profile of the subject matter. As a result, the Group Remuneration Committee have determined a fee of £60,000. Members will not receive fees. Accordingly, the following table sets out the fees for 2021. | | | | | | | | | | | 2021 fees | | Position | | £ | Non-executive Group Chairman1 | | 1,500,000 | | Non-executive Director (base fee) | | 127,000 | Senior Independent Director2 | | 200,000 | | Group Risk Committee | Chair | 150,000 | | Member | 40,000 | | Group Audit Committee and Group Remuneration Committee | Chair | 75,000 | | Member | 40,000 | | Nomination & Corporate Governance Committee | Chair | –– | | Member | 33,000 | | Technology Governance Working Group | Co-Chair | 60,000 |
1 The Group Chairman does not receive a base fee or any other fee in respect of chairing of the Nomination & Corporate Governance 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. 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. | | | | | | | | | | Contract date (rolling) | Notice period
(Director and HSBC) | | Noel Quinn | 18 March 2020 | 12 months | | Ewen Stevenson | 1 December 2018 | 12 months |
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 240 to 245, 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:
| | | | | | | | | | 2021 AGM | 2022 AGM | 2023 AGM | | Mark Tucker | Irene Lee | David Nish | | Heidi Miller | José Antonio Meade Kuribreña | Jackson Tai | | Laura Cha | Pauline van der Meer Mohr | | James Forese1 | Henri de Castries | | Steven Guggenheimer1 | | | Eileen Murray1 | | | | | | | | |
1James Forese, Steven Guggenheimer and Eileen Murray were appointed following the 2020 AGM and therefore their initial three-year appointment terms are subject to approval of their election by shareholders at the 2021 AGM. Their initial three-year term of appointment will end at the conclusion of the 2024 AGM, subject to shareholders' approval at the relevant AGMs.
Report of the Directors | Corporate governance report | | | | Annual report on remuneration |
This section sets out how our approved Directors’ remuneration policy was implemented during 2020. Single figure of remuneration (Audited) The following table shows the single figure of total remuneration of each executive Director for 2020, together with comparative figures. | | | | | | | | | | | | | | | | Single figure of remuneration | | Noel Quinn1 | Ewen Stevenson | | (£000) | 2020 | 2019 | 2020 | 2019 | Base salary2 | 1,266 | 503 | 738 | 719 | | Fixed pay allowance | 1,700 | 695 | 950 | 950 | | Cash in lieu of pension | 127 | 50 | 74 | 107 | Taxable benefits3 | 186 | 41 | 12 | 16 | Non-taxable benefits3 | 59 | 23 | 32 | 28 | | Total fixed | 3,338 | 1,312 | 1,806 | 1,820 | Annual incentive4 | 799 | 665 | 450 | 1,082 | Notional returns5 | 17 | 0 | 0 | 0 | Replacement award6 | 0 | | 0 | 1,431 | 1,974 | | Total variable | 816 | 665 | 1,881 | 3,056 | | Total fixed and variable | 4,154 | 1,977 | 3,687 | 4,876 |
1 Noel Quinn succeeded John Flint as interim Group Chief Executive with effect from 5 August 2019 and was appointed permanently into the role on 17 March 2020. The remuneration included in the single figure table above for 2019 is in respect of his services provided as an executive Director for that year. 2 As outlined on page 272, the executive Directors each donated a quarter of their base salary for six months in 2020. The base salary shown in the single figure of remuneration is the gross salary before charitable donations. 3 Taxable benefits include the provision of medical insurance, accommodation, 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. 4 Under the policy approved by shareholders, executive Directors can receive 50% of their annual incentive award in cash and the remaining 50% in immediately vested shares subject to a one-year retention period. As the executive Directors each decided not to take an annual cash bonus, the 2020 annual incentive is the amount after this waiver and will be delivered in immediately vested shares subject to a one-year retention period. The total annual incentives waived by the Group Chief Executive and Group Chief Financial Officer were £799,000 and £450,000, respectively. 5 '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 the grant date and vesting date, which is determined by reference to a rate of return specified at the time of grant. A payment of notional return is made annually and the amount is disclosed on a paid basis in the year in which the payment is made. 6 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 for 2019 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. Values in the table for 2020 relate to his 2017 LTI award granted by RBS for performance year 2016, which was determined by applying the performance assessment outcome of 56.25% as disclosed in RBS's Annual Report and Accounts 2019 (page 91) to the maximum number of shares subject to performance conditions. This resulted in a payout equivalent to 78.09% of the RBS award shares that were forfeited and replaced with HSBC shares. A total of 313,608 shares were granted in respect of his 2017 LTI replacement award at a share price of £6.643. The HSBC share price was £5.845 when the awards ceased to be subject to performance conditions, with no value attributable to share price appreciation. Benefits The values of the significant benefits in the single figure tableare set out in the following table1. | | | | | | | | | | Noel Quinn | | (£000) | 2020 | 2019 | | Insurance benefit (non-taxable) | 51 | 0 | | Car and driver (UK and Hong Kong) | 139 | 0 |
1 The value of benefits provided to Noel Quinn in 2019 were not deemed significant. The insurance and car benefits for Ewen Stevenson are not included in the above table as they were not deemed significant.
Determining executive Directors’ performance (Audited) Awards made to executive Directors reflected the Committee’s assessment of performance against scorecard objectives which were developed with consideration for the Group’s strategic priorities and risk appetite. The targets for financial measures were set at the start of the financial year. They were not revised for the significant economic impact of the Covid-19 outbreak due to the Committee’s desire that reward for our executive Directors should reflect the experience of our shareholders in the year. For non-financial objectives, the performance assessment involved considering targets set in line with our disclosed commitments, such as carbon emissions reduction, diversity, survey results for employee experience and customer satisfaction measures, as detailed in the non-financial performance assessment table. Performance achieved against each measure was applied to the weighting of each objective to determine the outcome percentage. As part of this assessment, the Committee consulted the Group Risk Committee and took into consideration its feedback in determining outcomes for the executive Directors' risk and compliance measures. It also considered whether any discretion should be exercised with respect to the risk and compliance underpin. As set out in the scorecard assessment table below, the target for profit before tax was not met. However, good progress was made against the targets set for RWA optimisation and cost-savings measures, and strong progress was made on the non-financial metrics, as our commitment to delivering responsibly for our stakeholders remained unchanged throughout the pandemic. Overall, this level of performance resulted in a payout of 64.50% of the maximum for the Group Chief Executive and 63.75% for the Group Chief Financial Officer. The Committee reviewed these outcomes in the context of a number of internal and external considerations to determine whether it should exercise its discretion to reduce the outcome, including: •overall share price performance in the year, which was significantly impacted by both the Covid-19 outbreak and the impact of the regulator’s request to suspend dividend payments; •the impact of the bonus pool reduction on the total compensation for our wider workforce; •profit before tax and RoTE performance; and •the positive actions taken by the Board to support our customers, colleagues and communities in these difficult and uncertain times. Taking the above into account, the Committee determined that the 2020 formulaic scorecard outcome appropriately rewards the executive Directors for their performance within the context of overall stakeholder experience. With the voluntary waiver of cash bonuses by the executive Directors, the effective payout was reduced to 32.25% of the maximum for the Group Chief Executive (2019: 66.40%) and 31.88% for the Group Chief Financial Officer (2019: 77.50%). In order for any annual incentive award to be made, each executive Director must achieve a minimum behaviour rating, which is assessed by reference to the HSBC Values. For 2020, both executive Directors met this requirement. The maximum 2020 annual incentive opportunity for Noel Quinn was set at 195% of salary and for Ewen Stevenson at 191% of salary.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Annual assessment | | | Group Chief Executive | Group Chief Financial Officer | | Minimum (25% payout) | Maximum (100% payout) | Performance | Weighting (%) | Assessment (%) | Outcome
(%) | Weighting (%) | Assessment (%) | Outcome (%) | Grow profit before tax1 ($bn) | 19.91 | 23.38 | 14.77 | 30.0 | | 0 | | 0 | | 20.0 | | 0 | | 0 | | RWA optimisation2 ($bn) | 35.00 | 44.90 | 51.50 | 20.0 | | 100.0 | | 20.00 | | 20.0 | | 100.0 | | 20.00 | | | Cost savings ($bn) | 1.00 | 1.60 | 1.04 | 0 | | 0 | | 0 | | 10.0 | | 30.0 | | 3.00 | | | Customer satisfaction | See following section for non-financial performance commentary | 10.0 | | 80.0 | | 8.00 | | 10.0 | | 80.0 | | 8.00 | | | Employee experience | 10.0 | | 95.0 | | 9.50 | | 10.0 | | 95.0 | | 9.50 | | | Environment | 10.0 | | 85.0 | | 8.50 | | 10.0 | | 85.0 | | 8.50 | | | Risk and compliance | 10.0 | | 85.0 | | 8.50 | | 10.0 | | 85.0 | | 8.50 | | | Personal objectives | 10.0 | | 100.0 | | 10.00 | | 10.0 | | 62.5 | | 6.25 | | | Total | | | | 100.0 | | | 64.50 | | 100.0 | | | 63.75 | | | Maximum annual incentive opportunity (£000) | | | | | | £2,478 | | | £1,412 | Annual incentive pre-cash waiver
(£000) | | | | | | £1,598 | | | £900 | | Annual incentive post-cash waiver (£000) | | | | | | £799 | | | £450 |
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 As set out in our February 2020 business update, our objective is to reduce RWAs in low-return franchises (in particular the US and the non-ring-fenced bank in Europe and the UK) and redeploy capital in areas of faster growth and higher returns. Our target is to achieve a $100bn reduction by 2022, with a $35bn RWA reduction target for 2020. We achieved a reduction of $51.5bn during 2020, which included a reduction of $37.4bn in GBM, mainly in our non-ring-fenced bank and in the US, and $12.9bn in CMB, primarily in our ring-fenced bank.
Report of the Directors | Corporate governance report Non-financial performance | | | | | | | | Shared objectives for the Group Chief Executive and Group Chief Financial Officer | | | Objectives | Performance | | Customer satisfaction Re-engineer the business with digital technology to improve customer service
| •In our Wealth and Personal Banking business, our retail customer satisfaction scores in six of seven scale markets (excluding SABB) were ranked in the top three or improved at least two ranks against the benchmark, and three markets improved their digital satisfaction scores. Our private banking business did not meet either of its improvement targets. •In our Commercial Banking business, four of seven scale markets (excluding SABB) improved their customer satisfaction scores and six improved their digital satisfaction scores. •Our Global Banking and Markets business met the target of improving on its 2019 net promoter score of 38, with a global net promoter score of 48 (compared with a global competitor score of 40). The global digital satisfaction score of 64% also exceeded the global competitor digital satisfaction score of 36%. •In Hong Kong, we launched a fully remote, digital account opening solution for business customers, while in the UK, we launched HSBC Kinetic, our new app-only digital banking offering for small and medium-sized business customers. In China, we launched Pinnacle, our new digital platform for wealth planning and insurance services. •During the Covid-19 outbreak, we enhanced our digital capabilities to serve more customers remotely, with faster access and improved security. We also engaged with regulators to help customers gain better access to a broad range of banking products and services from their homes, including through remote consultations and sales. •We maintained a high level of business continuity and customer support with 85% of colleagues equipped to work from home, all of our customer contact centres fully operational, and between 70% and 90% of our branches open for business. •We worked with governments to support national schemes, granting over 720,000 payment holidays to our personal customers and 237,000 loans to our wholesale customers. We provided more than $26bn in customer relief to our personal customers during the initial stages of the pandemic and more than $52bn in lending to wholesale customers, many of whom still require our support. •We helped our clients raise over $1.89tn in capital markets financing, and we retained a top-three position in green, social and sustainable finance bonds, according to Dealogic’s rankings. Our Global Banking and Markets business helped arrange more than $125bn of financing for our clients through social and Covid-19 relief bonds. | | Employee experience Improve engagement, diversity and succession | Employee engagement •Our Employee Engagement Index, which measures employee survey sentiment on pride, advocacy, intent to stay, motivation and feeling of accomplishment questions, increased by five percentage points to 72%, meeting our target to improve the metric. •During the Covid-19 outbreak, extra steps were undertaken to maintain a healthy culture, including: a regular dialogue with our colleagues through regular leadership calls and communications; listening closely to their needs; and providing the support and flexibility to manage their lives during the pandemic. A culture of ‘looking out for each other’ was encouraged and employee networks held regular support calls for employees, specifically those experiencing mental health challenges and those with caring responsibilities. •We ran a mid-year employee survey to determine how the Covid-19 outbreak was impacting our colleagues and how we could support them through this period. More than 50% of our total employee population responded, of which more than 89% said they were getting the information they needed from the organisation, 86% reported that they were getting the support they needed from their line manager, and 86% of the respondents reported they felt confident in leadership. In addition, 75% of employees that participated in our 2020 Snapshot survey said they believed HSBC values their well-being. Diversity and inclusion •We met our aspirational target of achieving at least 30% women holding senior leadership positions by 2020. •Several components of the global diversity and inclusion strategy were reprioritised throughout 2020 in direct response to the Black Lives Matter movement and the Covid-19 outbreak. Good progress was made, with key achievements including the design and launch of the global ethnicity inclusion programme, progression of the global disability confidence programme and the appointment of new executive sponsors for the ‘Embrace’ and ‘Balance’ employee resource groups. •We delivered phase one of the global diversity data project, which collected and reported employee ethnicity data in 21 countries and territories through a self-identification campaign. Group Executive Committee succession planning •Succession plans have been updated for all Group Executive Committee roles and approved by the Group Nomination & Corporate Governance Committee. •The Group also identified a number of enterprise critical roles across the organisation and succession plans have also been updated for these roles with approval from the Group Executive Committee. •The majority of ‘ready now’ and ‘develop in role’ successors on these plans have undergone leadership assessments with our third-party specialist provider, with all development plans documented. A global executive coaching panel is utilised and executive development solutions have been designed to be implemented in 2021. | | Environment Sustainable operations and sustainable finance
| •We reduced our carbon emission tonnes to 1.76 per full-time equivalent employee (‘FTE’), beating the target of 2.0 tonnes per FTE we had set for 2020. It was recognised that reduced travel and increased working from home due to the Covid-19 outbreak impacted this outcome, and as a result, the performance assessment for this metric was revised down. •We exceeded our sustainable finance and investment target of $24bn by facilitating, financing and investing in the development of clean energy, lower-carbon technologies and projects that contribute to the delivery of the Paris Agreement and the UN Sustainable Development Goals. •We were recognised as 'The World's Best Bank for Sustainable Finance’ by Euromoney in its Awards for Excellence 2020. •Awareness of climate change impacts across the organisation continued to increase, with 93% of relationship managers completing their required sustainability training modules. | | Risk and compliance Achieve effective management of non-financial risk Group-wide and fulfilment of regulatory obligations. Achieve sustained delivery against the Global Conduct framework and effective financial crime risk management. | •In spite of the additional stress due to the operational challenges of the Covid-19 outbreak, enabled by the non-financial risk optimisation programme outcomes, the organisation maintained fair customer outcomes and a stable non-financial risk profile while implementing new products and adapting to significantly different ways of working. •In 2020, we completed our financial crime risk operational effectiveness exercise programme, with all countries having passed the Global Standards exit criteria and assurance. While there was year-on-year improvement in performance against a number of specific financial crime risk metrics, it was recognised that some further work is still required. The executive Directors demonstrated strong commitment to the conduct framework, maintaining focus on fair outcomes for our customers and market integrity. In 2020, this included initiatives to minimise the impact of the Covid-19 crisis and protect the business with rapid introduction of initiatives and mitigation against unacceptable levels of conduct risk. | |
| | | | | | | Personal measures for the Group Chief Executive and Group Chief Financial Officer | | Objectives | Performance | Group Chief Executive Simplify the Group operating model | •As part of the Group transformation programme, we commenced work on 'organisation simplification and design' by defining roles with clear accountabilities and decision rights, simplifying and minimising matrix reporting and realising transformation objectives through the redesign of certain structures across businesses and functions. •The programme successfully delivered all key milestones in 2020, including: the establishment of design principles to shape the future organisation model and structures; the creation of the Group Organisational Design Authority to drive consistent design thinking; the simplification of the Group Executive Committee and the introduction of a clear operating rhythm to increase discipline and focus on strategy and performance delivery; the redesign of the majority of top leadership structures; the definition of a consistent role taxonomy across business and functions; and the identification of reductions in FTEs and cost, principally at senior levels. | Group Chief Financial Officer •Deploy Cloud technologies in Global Finance function •Reduce Finance function costs and number of full-time equivalents | •The Finance on the Cloud programme will transform the way the Global Finance function operates by rationalising operational processes, automation of data production and providing faster delivery of comprehensive data to our internal and external stakeholders. The programme has progressed into the execution phase in 2020, with the programme design, scope and implementation approach approved. •The first phase of implementation, which relates to the risk-weighted assets reporting process for our UK entities, was successfully implemented in November 2020. Execution plans are in place for the further extension of Cloud technologies within the UK pilot in 2021, followed by a global deployment. •The target of reducing Finance function costs to $0.8bn was met, but the target number of full-time equivalent staff in the function was not achieved. |
2017 long-term incentive performance The 2017 LTI award was granted to Marc Moses (former Group Chief Risk Officer) and Iain Mackay (former Group Finance Director)1. | | | | | | | | | | | | | | | | | | | | | | Assessment of the LTI award in respect of 2017 (granted in 2018) | | Measures (with weighting) | Minimum (25% payout) | Target (50% payout) | Maximum (100% payout) | Actual | Assessment | Outcome | Average return on equity (with CET1 underpin)2 (20%) | 9.0% | 10.0% | 11.0% | 7.3% | 0.0% | 0.00% | | Cost-efficiency ratio (20%) | 60.0% | 58.0% | 55.5% | 62.4% | 0.0% | 0.00% | Relative total shareholder return3 (20%) | At median of
peer group | Straight-line vesting between minimum and maximum | At upper quartile of
peer group | Rank 11th | 0.0% | 0.00% | Risk and compliance4 (25%) •Achieve and sustain compliance with Global Financial Crime Compliance policies and procedures. •Achieve a sustainable adoption of Group operation risk management framework, along with its policies and practices. •Achieve and sustain delivery of global conduct outcomes and compliance with conduct of business regulatory obligations. | Performance assessed by the Committee based on a number of qualitative and quantitative inputs such as Group Financial Crime Risk assessment against Financial Crime Compliance objectives, outcome of assurance and audit reviews, and achievement of long-term Group objectives and priorities during the performance period, with input and approval from the Group Risk Committee. | 65.0% | 65.0% | 16.25% | | Strategy (15%) | | | | | Sustainable finance ($bn)5 | 30.0 | 34.0 | 37.0 | 93.0 | 100.0% | 5.00% | Employee confidence6 | 65.0% | 67.0% | 70.0% | 62.0% | 0.0% | 0.00% | Customer
(based on customer recommendation in
top five markets by revenue) | Improvement in
recommendation in
three of top five markets for WPB, CMB and GBM. | Improvement in
recommendation in four of top five markets for WPB, CMB and GBM. | Improvement in
recommendation in all of top five markets for
WPB, CMB and GBM. | Improvement in three of top five markets | 25.0% | 1.25% | Total7 | | | | | | 22.50% |
1 Based on the scorecard outcome, 29,655 shares will vest with Iain Mackay and 86,491 shares will vest with Marc Moses (determined by pro-rating their awards for time in employment during the performance period of 1 January 2018 to 31 December 2020). The awards will vest in five equal annual instalments commencing in March 2021. Using the average daily closing share prices over the three months to 31 December 2020 of £3.604 the value of awards to vest with Iain Mackay and Marc Moses is £106,877 and £311,714, respectively. 2 Significant items are excluded from the profit attributable to ordinary shareholders of the company for the purpose of computing adjusted return on equity. 3 The peer group for the 2017 award is: Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse Group, DBS Group Holdings, Deutsche Bank, JPMorgan Chase & Co., Lloyds Banking Group, Standard Chartered and UBS Group. 4 The performance outcome was reviewed and approved by the Group Risk Committee taking into account evidence of progress made during the three-year performance period. Specifically, it noted a steady improvement in financial crime risk related audit outcomes, a significant reduction of overdue and re-opened high and medium risk assurance issues and stabilisation of the global residual risk for anti-money laundering, sanctions, and anti-bribery and corruption. The non-financial risk optimisation programme made significant progress during 2020 to demonstrate operational risk management maturity in areas of focus. There was also a steady improvement in conduct ratings with significant improvement seen in Global Banking and Markets since 2018. The Group Risk Committee also noted the need for ongoing enhancements in certain areas and the need for further improvement in approach to conduct management. 5 Assessed based on cumulative financing and investment made to develop clean energy, lower-carbon technologies and projects that contribute to the delivery of the Paris Agreement and the UN Sustainable Development Goals. 6 Assessed based on results of the latest employee Snapshot survey question, ‘I am seeing the positive impact of our strategy’. 7 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 the scorecard outcomes reflected the performance achieved.
Report of the Directors | Corporate governance report Long-term incentive awards (Audited) Long-term incentive in respect of 2020 After taking into account performance for 2020, the Committee decided to grant Noel Quinn and Ewen Stevenson LTI awards of £3,718,000 and £2,118,000, respectively. These awards will be subject to 'windfall gain' adjustments, as set out below. As the awards are not entitled to dividend equivalents in accordance with 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 2020 LTI awards will have a three-year performance period starting 1 January 2021. During this period, performance will be assessed based on the 2020 LTI scorecard comprising four equally-weighted measures: two financial measures to incentivise value creation for our shareholders; a measure linked to our climate ambitions; and a measure for relative total shareholder return ('TSR'). RoTE was retained as a metric as it remains a key measure of our financial performance and how we generate returns that deliver value for our shareholders. Given the uncertainty from the economic impact of the Covid-19 outbreak, the Committee determined it was most appropriate to assess RoTE at the end of the performance period. This element of the award will continue to be subject to a CET1 underpin. Capital reallocation to Asia was added as a new metric as this is one of the key levers of our strategy and business transformation plan. This measure will be assessed based on the share of Group tangible equity allocated to Asia at the end of the performance period and is also subject to the CET1 underpin. The environment and sustainability scorecard measure was added to align to our new climate ambition. Announced in October 2020, we set out how we aim to bring carbon emissions in our own operations to net zero by 2030 and support our customers in the transition to a more sustainable future with financing, facilitation and investments of $750bn to $1tn over the same time period. Scorecard targets are linked to this climate ambition and performance will be assessed based on the reduction in our carbon footprint and the financing we provide to our clients in their net zero transition. Relative TSR was retained as a metric in the scorecard as it rewards executive Directors based on comparison of the total shareholder return performance of the Group and a relevant peer group. No changes were made to the peer group used for this purpose. Given the planned strategic shifts in our geographical and business mix, notably future growth investment in Asia and wealth business, we will review our peer group for any relative TSR measure to be used for the 2021 LTI scorecard. The updated peer group will be set out in the Annual Report and Accounts 2021. The LTI continues to be subject to a risk and compliance modifier, which gives the Committee the discretion to adjust down the overall scorecard outcome to ensure that the Group operates soundly when achieving its financial targets. For this purpose, the Committee will receive information including any risk metrics 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. 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 social security payable) will be held for a retention period of up to one year, or such period as required by regulators. | | | | | | | | | | | | | | | | | | | Performance conditions for LTI awards in respect of 2020 | | Measures | Minimum (25% payout) | Target (50% payout) | Maximum (100% payout) | Weighting % | RoTE (with CET1 underpin)1 | 8.0% | 9.0% | 10.0% | 25.0 | Capital reallocation to Asia (with CET1 underpin)2 | 45.0% | 47.0% | 50.0% | 25.0 | Environment and sustainability3 | Carbon reduction | 42.0% | 48.0% | 51.0% | 25.0 | | Sustainable finance and investment $bn | 200.0 | 240.0 | 260.0 | Relative TSR4 | | At median of the peer group | Straight-line vesting between minimum and maximum | At upper quartile of peer group | 25.0 |
1To be assessed based on RoTE at the end of the performance period. The measure will also be subject to a CET1 underpin. If the CET1 ratio at the end of the 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 share of Group tangible equity (on a constant currency basis and excluding associates) allocated to Asia by 31 December 2023. This metric will be measured on an organic basis and will exclude changes in Group tangible equity allocation resulting from acquisitions and disposals (and also part-acquisitions or part-disposals) of businesses and is subject to the CET1 underpin outlined above. 3 Carbon reduction will be measured based on percentage reduction in total energy and travel emissions achieved by 31 December 2023 using 2019 as the baseline. A sustainable finance and investment metric will assess cumulative financing provided over the period commencing on
1 January 2020 and ending on 31 December 2023. 4 The peer group for the 2020 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. 5 Awards will vest on a straight-line basis for performance between the minimum, target and maximum levels of performance set in this table. 2020 LTI grant size The Committee is conscious of the external commentary on 'windfall gains' from LTI awards given the impact of the Covid-19 outbreak. The Committee is also aware that a number of investors have expressed their preference that, where executives may benefit from 'windfall gains', the Committee is proactive in considering award levels at the time of grant. Based on the above and discussions with investors and proxy voting agencies, the Committee agreed that the 2020 LTI awards should be subject to a 'windfall gain' adjustment at grant if the share price falls significantly relative to the grant price of the 2019 LTI. This is to ensure reward for our executive Directors aligns with the experience of our shareholders and is reflective of management performance over the performance period. While the share price to be used for the 2020 LTI award is not known at this stage, the Committee agreed that, in line with investor expectations, if the 2020 LTI grant share price experiences a greater than 30% decline since the previous grant, this would be considered a material fall in share price (based on review of historical share price volatility and the impact of significant external macroeconomic events). In such an event, an adjustment percentage equal to half the share price percentage decline will be applied to the awards to mitigate the potential for 'windfall gains'. This approach will apply to the 2020 LTI award to be granted in 2021.
2018 long-term incentive award The LTI granted in respect of 2018 included an ESG measure based on our objective disclosed in the Strategy Update in June 2018 to achieve an 'Outperformer' rating from ratings provider Sustainalytics. Our 2018 Directors' remuneration report noted that in the event Sustainalytics changed its rating approach, the Committee retained the discretion to review and modify the assessment approach and targets to ensure the assessment approach achieved its original purpose. Sustainalytics has since revised its methodology and replaced 'performer' ratings with low, medium and high risk ratings. In 2020, the Committee approved a revised assessment approach and targets that aim for HSBC to 'outperform' a set of peers using Sustainalytics' revised risk-based rating as detailed in the table below. The Committee is comfortable that the proposed targets are no more or less difficult to achieve than the original proposed targets.
| | | | | | | | | | | | | | | | Performance conditions for LTI awards in respect of 2018 | | Measures | Minimum (25% payout) | Target (50% payout) | Maximum (100% payout) | Weighting % | Average RoTE (with CET1 underpin)1 | 10.0% | 11.0% | 12.0% | 75.0 | | Employer advocacy2 | 65.0% | 70.0% | 75.0% | 12.5 | | Environmental, social and governance rank3 | At median of the peer group | Straight-line vesting between minimum and maximum | At upper quartile of peer group | 12.5 | |
1If 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 Peer group (in line with TSR peer group for the 2017 LTI, including three additional peers): Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse Group, Deutsche Bank, DBS Group Holdings, J.P. Morgan Chase & Co., Lloyds Banking Group, Standard Chartered, UBS Group, ICBC, Itau and Santander. Scheme interests awarded during 2020 (Audited) The table below sets out the scheme interests awarded to Directors in 2020, as disclosed in the 2019 Directors’ remuneration report. No non-executive Directors received scheme interests during the financial year.
| | | | | | | | | | | | | | | | | | | | | | | | | Scheme awards in 2020 | | (Audited) | | Type of interest awarded | Basis on which
award made | Date of award | Face value awarded1 £000 | Percentage receivable for minimum performance | Number of
shares
awarded | End of performance period | | Ewen Stevenson | LTI deferred shares2 | % of salary 2 | 24 February 2020 | 2,680 | | 25 | | 476,757 | 31 December 2022 | | Noel Quinn | Deferred shares 3 | Annual incentive | 24 February 2020 | 1,134 | | 0 | | 201,702 | 31 December 2019 | Deferred cash 3 | Annual incentive | 24 February 2020 | 886 | | 0 | | N/A | 31 December 2019 |
1The face value of the award has been computed using HSBC's closing share price of £5.622 taken on 21 February 2020. LTI awards are subject to a three-year forward-looking performance period and vest in five equal annual instalments, between the third and seventh anniversary of the award date, subject to performance achieved. On vesting, awards will be subject to a one-year retention period. Awards are subject to malus during the vesting period and clawback for a maximum period of 10 years from the date of the award. 2 In line with regulatory requirements, scheme interests awarded during 2020 were not eligible for dividend equivalents. In accordance with the remuneration policy approved by shareholders at the 2019 AGM, the LTI award was determined at 290% of salary for Ewen Stevenson 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. £4.393). Noel Quinn did not receive the 2019 LTI award that was granted on 24 February 2020, as he was in the Group Chief Executive role in an interim capacity during 2019. 3 2019 annual incentive award received by Noel Quinn for his role as Chief Executive Officer of Commercial Banking and interim Group Chief Executive. As noted in the Annual Report and Accounts 2019, 60% of his annual incentive award was deferred and in line with regulatory requirements split between cash and shares. 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. £4.393). The above table does not include details of shares issued as part of the fixed pay allowance and shares issued as part of the 2020 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 2019 are set out on the following page.
Report of the Directors | Corporate governance report | | | | | | | | | | | | | | | | Performance conditions for LTI awards in respect of 2019 | | Measures | Minimum (25% payout) | Target (50% payout) | Maximum (100% payout) | Weighting % | RoTE (with CET1 underpin)1, 2 | 10.0% | 11.0% | 12.0% | 33.3 | Relative TSR3 | At median of the peer group | Straight-line vesting between minimum and maximum | At upper quartile of peer group | 33.3 | | Customers | 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. | 33.3 |
1To 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. Executive Directors’ interests in shares (Audited) The shareholdings of all persons who were executive Directors in 2020, including the shareholdings of their connected persons, at 31 December 2020 (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 2020 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. 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.
| | | | | | | | | | | | | | | | | | | | | | Shares | | (Audited) | | Shareholding guidelines
(% of salary) | Shareholding at 31 Dec 20202 (% of salary) | At 31 Dec 2020 | | | Scheme interests | | Share
interests
(number
of shares) | Share options3 | Shares awarded subject to deferral1 | | without performance conditions4 | with performance conditions5 | | Executive Directors | | | | | | Noel Quinn6 | 400% | 221 | % | 778,958 | | 0 | | 554,556 | | 0 | | Ewen Stevenson6 | 300% | 265 | % | 545,731 | | 0 | | 728,790 | | 476,757 | | Group Managing Directors6 | 250% | n/a | n/a | n/a | n/a | n/a |
1The 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 2020 (£3.604). 3 As at 31 December 2020, Noel Quinn and Ewen Stevenson did not hold any options under the HSBC Holdings Savings-Related Share Option Plan (UK). 4 The amount for Ewen Stevenson reflects the award granted in May 2019, replacing the 2015 to 2018 LTIs forfeited by the Royal Bank of Scotland Group plc (‘RBS’) and is subject to any performance adjustments assessed and disclosed in the relevant Annual Report and Accountsof RBS. 5 LTI awards granted in February 2020 are subject to the performance conditions as set out on page 287. 6 All Group Managing Directors and executive Directors are expected to meet their shareholding guidelines within five years of the date of their appointment (Noel Quinn and Ewen Stevenson were appointed on 5 August 2019 and 1 January 2019 respectively).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.
Summary of shareholder return and Group Chief Executive remuneration The following graph shows HSBC TSR performance (based on the daily spot Return Index in sterling) against the FTSE 100 Total Return Index for the 10-year period ended 31 December 2020. The FTSE 100 Total Return Index has been chosen as 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 LTI awards, are presented in the following table. | | | | HSBC TSR and FTSE 100 Total Return Index |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | | Group Chief Executive | | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | John Flint | John Flint | Noel Quinn | Noel Quinn | | Total single figure £000 | | 8,047 | 7,532 | 8,033 | 7,619 | 7,340 | 5,675 | 6,086 | 2,387 | 4,582 | 2,922 | 1,977 | 4,154 | Annual incentive1 (% of maximum) | | 58% | 52% | 49% | 54% | 45% | 64% | 80% | 76% | 76% | 61% | 66% | 32% | Long-term incentive1,2,3 (% of maximum) | | 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 Group Performance Share Plan ('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. 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. Noel Quinn did not receive the 2017 LTI award that had a performance period ended on 31 December 2020. Comparison of Directors' and employees' pay The following table compares the changes in each Director's pay with changes in employee pay between 2019 and 2020. | | | | | | | | | | | | | Annual percentage change in remuneration | | 2020 | | Director/employees | Base salary/fees | Benefits | Annual incentive | Executive Directors1 | Noel Quinn1 | 151.7% | 353.7% | 20.2% | | Ewen Stevenson | 2.6% | -25.0% | -58.4% | Non-executive Directors2 | | Kathleen Casey (retired on 24 April 2020) | -65.0% | 200.0% | - | | Laura Cha | 97.0% | - | - | | Henri de Castries | 4.1% | -75.0% | - | | James Forese | - | - | - | | Steven Guggenheimer | - | - | - | | Irene Lee | 20.3% | -100.0% | - | | José Antonio Meade Kuribreña | 28.7% | 100.0% | - | | Heidi Miller | 1.1% | -100.0% | - | | Eileen Murray | - | - | - | | David Nish | 108.7% | -50.0% | - | | Sir Jonathan Symonds (retired on 18 February 2020) | -86.5% | -4.8% | - | | Jackson Tai | -10.8% | -78.9% | - | | Mark Tucker | —% | -77.5% | - | | Pauline van der Meer Mohr | 17.7% | -75.0% | - | Employee group3 | 2.0% | 2.3% | -20.0% |
1 Noel Quinn succeeded John Flint as interim Group Chief Executive with effect from 5 August 2019 and was appointed permanently into the role on 17 March 2020. The annual percentage change for Noel Quinn is based on remuneration reported in his 2019 single figure of remuneration (for the period 5 August 2019 to 31 December 2019) and his 2020 single figure of remuneration (for the period 1 January 2020 to 31 December 2020). Based on his annualised 2019 compensation as an executive Director, his percentage change in salary, benefits and annual incentive is 2.1%, 85.2% and -50.9%, respectively. 2 In some instances, non-executive Directors may have served only part of the year resulting in large year-on-year percentage changes in fees and/or benefits. Page 291 provides the underlying single figure of remuneration for non-executive Directors used to calculate the figures above. 3 Employee group consists of individuals employed by HSBC Group Management Services Ltd, the employing entity of the executive Directors, as no individuals are employed directly by HSBC Holdings.
Report of the Directors | Corporate governance report 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 | | Method | Lower quartile | Median | Upper quartile | | 2020 | A | 139:1 | 85:1 | 43:1 | | 2019 | A | 169:1 | 105:1 | 52:1 |
| | | | | | | | | | | | | | | | | | | | | | | | | Total pay and benefits amounts used to calculate the ratio | | (£) | Method | Lower quartile | Median | Upper quartile | | Total pay and benefits | Total salary | Total pay and benefits | Total salary | Total pay and benefits | Total salary | | 2020 | A | 29,833 | 23,264 | 48,703 | 36,972 | 96,386 | 75,000 | | 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 2020. 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 individual 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 2020; •variable pay awards for 2020, including notional returns paid during 2020; •gains realised from exercising awards from taxable employee 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 2020. 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 technology advisory boardUK have not been included in calculating the ratios above as these are not permanent in nature and its interactionin some cases, depending on individual circumstances, may not truly reflect a benefit to the employee. Total pay and benefits for the Group Chief Executive used for this purpose is the total remuneration for Noel Quinn as reported in the single figure of remuneration table. Total remuneration does not include an LTI as he has not received an LTI award with a performance period that ended during 2020. 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. The decrease in median ratio is primarily driven by the lower annual incentive award for the Group Chief Executive, reflecting the lower scorecard outcome and the voluntary waiver of the cash portion of the award. Without this waiver, the median ratio is 102:1. While total compensation for the Group Chief Executive declined compared with 2019, total pay and benefits for the median employee for 2020 was 5% higher at £48,703 compared with 2019. 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 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 Group. We are satisfied that the median pay ratio is consistent with the Board.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. Relative importance of spend on pay The following chart shows the change in: •total staff pay between 2019 and 2020; and •dividends in respect of 2019 and 2020. In 2019, we returned a total of $1bn to ordinary shareholders through share buy-backs. | | | | Relative importance of spend on pay |
| | | | | | | | | | | | | | | | | | | Return to shareholder | Employee pay | | | Dividends | | | | | Board governance | | Share buy-back | | | |
Appointment1 The fourth interim dividend of 2020, of $0.15 per ordinary share, is an approximation of the amount payable on 29 April 2021.
Appointments2 The fourth interim dividend of 2019, of $0.21 per ordinary share, was cancelled in response to a written request from the UK’s Prudential Regulation Authority (‘PRA’). The 2019 dividends have been re-presented accordingly.
Non-executive Directors (Audited) The following table shows the total fees and benefits of non-executive Directors for 2020, together with comparative figures for 2019. | | | | | | | | | | | | | | | | | | | | | | | | | Fees and benefits | | (Audited) | | Fees1 | Benefits2 | Total | | (£000) | Footnotes | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | | Kathleen Casey (retired on 24 April 2020) | 3,4 | 78 | | 223 | | 27 | | 9 | | 105 | | 232 | | | Laura Cha | 5 | 587 | | 298 | | 0 | | 0 | | 587 | | 298 | | | Henri de Castries | | 202 | | 194 | | 1 | | 4 | | 203 | | 198 | | | James Forese | 6 | 160 | | 0 | | 0 | | 0 | | 160 | | 0 | | | Steven Guggenheimer | 7 | 134 | | 0 | | 0 | | 0 | | 134 | | 0 | | | Irene Lee | 8 | 546 | | 454 | | 0 | | 3 | | 546 | | 457 | | | José Antonio Meade Kuribreña | | 202 | | 157 | | 4 | | 2 | | 206 | | 159 | | | Heidi Miller | 9 | 632 | | 625 | | 7 | | 2 | | 639 | | 627 | | | Eileen Murray | 10 | 120 | | 0 | | 0 | | 0 | | 120 | | 0 | | | David Nish | 11 | 480 | | 230 | | 8 | | 16 | | 488 | | 246 | | | Sir Jonathan Symonds (retired on 18 February 2020) | | 86 | | 638 | | 20 | | 21 | | 106 | | 659 | | | Jackson Tai | 12 | 355 | | 398 | | 12 | | 57 | | 367 | | 455 | | | Mark Tucker | 13 | 1,500 | | 1,500 | | 52 | | 231 | | 1,552 | | 1,731 | | | Pauline van der Meer Mohr | 14 | 312 | | 265 | | 2 | | 8 | | 314 | | 273 | | | Total (£000) | | 5,394 | | 4,982 | | 133 | | 353 | | 5,527 | | 5,335 | | | Total ($000) | | 6,919 | 6,390 | 171 | 453 | 7,090 | 6,843 |
1The Directors' 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. Given the travel restrictions in place, the Board was unable to travel to attend meetings in person. Therefore, the travel allowance available to all non-executive Directors was pro-rated to reflect the travel required of the Board during 2020. 2 Benefits include taxable expenses such as accommodation, travel and subsistence relating to attendance at Board and other meetings at HSBC Holdings' registered offices. Amounts disclosed have been grossed up using a tax rate of 45%, where relevant. 3 Appointed as a member of the Group Risk Committee on 17 January 2020. 4 Stepped down as a member of the Financial System Vulnerabilities Committee on 17 January 2020 when the Committee was demised. 5 Includes fees of £423,800 (2019: £104,000) for her role as non-executive Chair and member of the Nomination Committee of The Hongkong and Shanghai Banking Corporation. Following approval of the non-executive Chair fee by the Group Remuneration Committee in 2020, Laura also received a pro-rated additional Chair fee of HK$201,639 paid in respect of the period from 6 December to 31 December 2019. 6 Appointed to the Board and a member of the Group Audit Committee, Group Remuneration Committee and Nomination & Corporate Governance Committee on 1 May 2020. 7 Appointed to the Board and as a member of the Group Risk Committee and Nomination & Corporate Governance Committee on 1 May 2020. 8 Includes fees of £344,000 (2019: £260,000) in relation to her roles as a Director, Remuneration Committee Chair, Audit Committee member and Risk Committee member of The Hongkong and Shanghai Banking Corporation Limited. Fees in relation to her role as a Director, Risk Committee Chair and Audit Committee member, and from 28 December 2020 as a member of the Nomination Committee, of Hang Seng Bank Limited. 9 Includes fees of £430,000 (2019: £431,000) in relation to her role as Chair of HSBC North America Holdings Inc. 10 Appointed to the Board and as member of the Group Audit Committee, Group Risk Committee and Nomination & Corporate Governance Committee on 1 July 2020. 11 Appointed as Senior Independent Director, Chair of the Group Audit Committee and member of the Group Risk Committee on 18 February 2020. 12 Stepped down as Chair of the Financial System Vulnerabilities Committee on 17 January 2020 when the Committee was demised. 13 The Group Chairman donated 100% of his 2020 fee to charities in the UK and Hong Kong supporting vulnerable people and in the local response to Covid-19. 14 Appointed as a member of the Group Audit Committee on 19 February 2020. Non-executive Directors’ interests in shares (Audited) The shareholdings of persons who were non-executive Directors in 2020, including the shareholdings of their connected persons, at
31 December 2020, 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 2020 met the guidelines except Irene Lee, who has committed to acquiring the remaining shares as soon as possible, and no later than the conclusion of the 2021 AGM. | | | | | | | | | | Shares | | Shareholding guidelines (number of shares) | Share interests (number of shares) | | Kathleen Casey (retired on 24 April 2020) | 15,000 | 15,125 | | | Laura Cha | 15,000 | 16,200 | | | Henri de Castries | 15,000 | 19,251 | | | James Forese (appointed to the Board on 1 May 2020) | 15,000 | 115,000 | | | Steven Guggenheimer (appointed to the Board on 1 May 2020) | 15,000 | 15,000 | | | Irene Lee | 15,000 | 11,904 | | | José Antonio Meade Kuribreña | 15,000 | 15,000 | | | Heidi Miller | 15,000 | 15,700 | | | Eileen Murray (appointed to the Board on 1 July 2020) | 15,000 | 75,000 | | | David Nish | 15,000 | 50,000 | | | Sir Jonathan Symonds (retired on 18 February 2020) | 15,000 | 43,821 | | | Jackson Tai | 15,000 | 66,515 | | | Mark Tucker | 15,000 | 307,352 | | | Pauline van der Meer Mohr | 15,000 | 15,000 | |
Report of the Directors | Corporate governance report Voting results from Annual General Meeting | | | | | | | | | | | | | 2020 Annual General Meeting voting results | | For | Against | Withheld | Remuneration report
(votes cast) | 96.47 | % | 3.53 | % | –– | | 8,842,653,970 | 323,238,790 | 36,605,397 | Remuneration policy (2019)
(votes cast) | 97.36% | 2.64% | –– | | 9,525,856,097 | 258,383,075 | 47,468,297 |
2021 annual incentive scorecards The 2021 annual incentive scorecard measures for our executive Directors have been set against the backdrop of the continuing impact of the Covid-19 outbreak on the global economy; geopolitical risks, particularly those relating to trade and other tensions; and expectations that global interest rates will remain lower for longer. In this context, the Committee determined the scorecard measures should incentivise adapting our business model to a protracted, low interest-rate environment; reducing our operating costs; and transforming the Group. Therefore, the 2021 annual incentive scorecard includes financial measures linked to the reduction of the Group's cost base, the reduction of assets in low-return areas and the creation of opportunities in our high-growth areas. The scorecard also includes non-financial measures linked to delivering against our customer and employee objectives. The Committee will continue to retain discretion to adjust down the formulaic outcomes of scorecards, taking into account factors such as Group profits, wider business performance and stakeholder experience, to ensure alignment between executive reward and the broader stakeholder experience. The weightings and performance measures for the 2021 annual incentive award for executive Directors are disclosed below. The performance targets are commercially sensitive and it would be detrimental to the Group’s interests to disclose them at the start of the financial year. Subject to commercial sensitivity, we will disclose the targets for a given year in the Annual Report and Accounts for that year in the Directors‘ remuneration report. Executive Directors will be eligible for an annual incentive award of up to 215% of base salary. The 2021 annual incentive scorecards for our Group Managing Directors include similar measures as the executive Directors to drive performance in each of our businesses, functions and regions that contribute to the overall success of the Group. Their annual incentive scorecards will also include RoTE and environmental measures, which are aligned with achieving the three-year forward-looking performance targets in the 2020 LTI. | | | | | | | | | | 2021 annual incentive scorecards measures and weightings | | Group Chief
Executive | Group Chief
Financial Officer | | Measures | % | % | | Adjusted costs | 20.0 | | 20.0 | | | Revenue growth in Asia | 20.0 | | 15.0 | | | RWA reduction in legacy assets/low-return areas | 20.0 | | 15.0 | | | Customer satisfaction | 15.0 | | 15.0 | | | Employee experience | 15.0 | | 15.0 | | Personal objectives1 | 10.0 | | 20.0 | | | Total | 100.0 | | 100.0 | |
1 For the Group Chief Executive, this includes the launch of our refreshed purpose and values, and the delivery of strategy at pace (equally weighted at 5% each). For the Group Chief Financial Officer, this includes Finance Cloud deployment, resolvability assessment framework attestation, climate stress tests, and Group Finance costs and FTE (equally weighted at 5% each). The 2021 annual incentive scorecard is subject to a risk and compliance modifier, which allows the Committee the discretion to adjust down the overall scorecard outcome to ensure that the Group operates soundly 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. 2021 long-term incentives Details of the performance measures and targets for LTI awards to be made in 2021, in respect of 2020, are provided on page 286. The performance measures and targets for awards to be made in respect of 2021, granted in 2022, will be provided in the Annual Report and Accounts 2021. Total pension entitlements (Audited) NaN 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 the 2017 LTI outcome, in which Marc Moses (former Group Chief Risk Officer) and Iain Mackay (former Group Finance Director) participated, are outlined on page 285. NaN 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 (Audited) NaN payments for loss of office were made to, or in respect of, former or current Directors in the year.
External appointments During 2020, executive Directors did not receive any fees from external appointments.
Remuneration structure for our Group employees 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. | •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 Provided in accordance with local market practice. | •Benefits may include, but are not limited to, the provision of a pension, medical insurance, life insurance, health assessment and relocation support. | 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. | •All employees are eligible to be considered for a discretionary variable pay award. Individual awards are determined against a balanced scorecard for performance in excess of that required to fulfil an employee's job description. •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 Material Risk Takers ('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 to eight years. | Deferral Alignment with the medium- to long-term strategy, stakeholder interests and adherence to the HSBC Values. | •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. | | | | Deferral instruments Alignment with the medium- to long-term strategy, stakeholder interests and adherence to the HSBC Values.
| •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, for local MRTs in Brazil and Oman 100% of the deferred amount is delivered in shares or linked to the value of shares. •For some employees in our asset management business, where required by the regulations applicable to asset management entities within the Group, at least 50% of the deferred award 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. |
Report of the Directors | Corporate governance report | | | | | | | 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. | •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 Support recruitment of talent. | •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. | Severance payments Adhere to contractual agreements with involuntary leavers.
| •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 not considered as variable pay for the purpose of application of the deferral and variable pay cap rules under the PRA and FCA remuneration rules 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 278. 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 not used the EBA discount rate for the purpose of computing the ratio between fixed and variable components of 2020 total remuneration. 3 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.
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 | Application | | Variable pay pool and individual performance scorecard | 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, including capital requirements; •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. Objectives included in the performance scorecards of senior management take into account appropriate measures linked to sustainability risks, such as: reduction in carbon footprint; facilitating financing to help clients with their transition to net zero; employee diversity targets; and risk and compliance measures. 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 | •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 | 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 | 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. | | Sales incentives | •We generally do not operate commission-based sales plans. | | Identification of MRTs | •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 include 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. |
Report of the Directors | Corporate governance report | | | | 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 Executive Committee 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 2020 variable pay information included in the following tables is based on the market value of awards. 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) | | | Fixed ($m) | Variable2 ($m) | Total ($m) | | Number of MRTs | Cash-based1 | Share-based | Total | Cash-based | Of which: deferred | Share-based3 | Of which: deferred | Other forms | Of which: deferred | Total | | Executive Directors | 2 | | 2.8 | | 3.4 | | 6.2 | | — | | — | | 11.2 | | 9.6 | | — | | — | | 11.2 | | 17.4 | | | Non-executive Directors | 12 | | 7.0 | | — | | 7.0 | | — | | — | | — | | — | | — | | — | | — | | 7.0 | | | Senior management | 15 | | 32.9 | | — | | 32.9 | | 17.1 | | 10.3 | | 19.6 | | 12.8 | | — | | — | | 36.7 | | 69.6 | | | Investment banking | 541 | | 342.4 | | — | | 342.4 | | 130.6 | | 65.7 | | 138.6 | | 74.6 | | — | | — | | 269.2 | | 611.6 | | | Retail banking | 194 | | 104.2 | | — | | 104.2 | | 34.8 | | 15.2 | | 34.8 | | 17.5 | | — | | — | | 69.6 | | 173.8 | | | Asset management | 33 | | 20.5 | | — | | 20.5 | | 8.1 | | 3.8 | | 5.7 | | 3.0 | | 2.7 | | 1.8 | | 16.5 | | 37.0 | | | Corporate functions | 124 | | 69.9 | | — | | 69.9 | | 22.5 | | 10.4 | | 23.2 | | 11.9 | | — | | — | | 45.7 | | 115.6 | | | Independent control functions | 145 | | 67.6 | | 1.2 | | 68.8 | | 18.0 | | 6.1 | | 14.9 | | 7.6 | | — | | — | | 32.9 | | 101.7 | | | All other | 83 | | 64.3 | | 1.3 | | 65.6 | | 17.7 | | 9.0 | | 18.5 | | 10.3 | | — | | — | | 36.2 | | 101.8 | | | Total | 1,149 | | 711.6 | | 5.9 | | 717.5 | | 248.8 | | 120.5 | | 266.5 | | 147.3 | | 2.7 | | 1.8 | | 518.0 | | 1,235.5 |
1 Cash-based fixed remuneration is paid immediately. 2 Variable pay awarded in respect of 2020. 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 In general, 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) | | 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 | | Executive Directors | — | | — | | — | | — | | — | | — | | — | | | Senior management | — | | — | | — | | — | | — | | — | | — | | | Investment banking | 0.5 | | 1 | | 36.6 | | 38 | | 7.3 | | 35.0 | | 37 | | | Retail banking | 0.9 | | 1 | | 5.3 | | 11 | | 1.8 | | 4.6 | | 11 | | | Asset management | — | | — | | 1.9 | | 4 | | 1.0 | | 1.9 | | 4 | | | Corporate functions | 1.0 | | 1 | | 5.8 | | 12 | | 2.0 | | 5.8 | | 12 | | | Independent control functions | — | | — | | 4.2 | | 10 | | 0.7 | | 3.6 | | 9 | | | All other | — | | — | | 4.4 | | 6 | | 1.3 | | 4.4 | | 6 | | | Total | 2.4 | | 3 | | 58.2 | | 81 | | – | 55.3 | | 79 | |
1 No sign-on payments were made in 2020. 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. 2 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).
| | | | | | | | | | | | | | | | | | | | | Deferred remuneration at 31 December1 (REM3) | | $m | 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 | | Cash | | | | | | | | Executive Directors | 3.6 | | 3.6 | | 3.6 | | — | | — | | 0.1 | | | Senior management | 27.4 | | 27.4 | | 27.4 | | — | | — | | 5.1 | | | Investment banking | 195.0 | | 195.0 | | 195.0 | | — | | — | | 62.7 | | | Retail banking | 41.9 | | 41.9 | | 41.9 | | — | | — | | 10.2 | | | Asset management | 8.1 | | 8.1 | | 8.1 | | — | | — | | 3.4 | | | Corporate functions | 35.0 | | 35.0 | | 35.0 | | — | | — | | 9.7 | | | Independent control functions | 23.6 | | 23.6 | | 23.6 | | — | | — | | 4.5 | | | All other | 30.2 | | 30.2 | | 30.2 | | — | | — | | 8.7 | | | Shares | | | | | | | | Executive Directors | 9.7 | | 9.1 | | 9.7 | | (5.4) | | — | | 2.5 | | | Senior management | 25.7 | | 22.4 | | 25.7 | | (12.7) | | — | | 11.6 | | | Investment banking | 183.3 | | 146.0 | | 183.3 | | (90.5) | | — | | 130.6 | | | Retail banking | 45.9 | | 38.1 | | 45.9 | | (22.6) | | — | | 29.1 | | | Asset management | 5.6 | | 4.2 | | 5.6 | | (2.7) | | — | | 4.3 | | | Corporate functions | 39.5 | | 31.5 | | 39.5 | | (19.6) | | — | | 26.5 | | | Independent control functions | 28.8 | | 26.2 | | 28.8 | | (14.5) | | — | | 18.0 | | | All other | 35.2 | | 27.7 | | 35.2 | | (17.4) | | — | | 20.4 | | | Other forms | | | | | | | | Executive Directors | — | | — | | — | | — | | — | | — | | | Senior management | — | | — | | — | | — | | — | | — | | | Investment banking | — | | — | | — | | — | | — | | — | | | Retail banking | — | | — | | — | | — | | — | | — | | | Asset management | 7.0 | | 5.6 | | 7.0 | | 0.3 | | — | | 1.7 | | | Corporate functions | 0.8 | | 0.7 | | 0.8 | | 0.1 | | — | | 0.3 | | | Independent control functions | 0.2 | | 0.1 | | 0.2 | | — | | — | | 0.1 | | | All other | — | | — | | — | | — | | — | | — | |
1 This table provides details of balances and movements during performance year 2020. For details of variable pay awards granted for 2020, refer to the 'Remuneration – fixed and variable amounts' table. Deferred remuneration is made in cash and/or shares. Share-based awards are made in HSBC shares. 2 Includes unvested deferred awards and vested deferred awards subject to retention period at 31 December 2020. 3 Includes any amendments due to malus or clawback. 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 | | Management body | All other | Total | | €0 – 1,000,000 | 11 | | 814 | | 825 | | | €1,000,000 – 1,500,000 | — | | 179 | | 179 | | | €1,500,000 – 2,000,000 | 1 | | 76 | | 77 | | | €2,000,000 – 2,500,000 | — | | 27 | | 27 | | | €2,500,000 – 3,000,000 | — | | 13 | | 13 | | | €3,000,000 – 3,500,000 | — | | 11 | | 11 | | | €3,500,000 – 4,000,000 | — | | 7 | | 7 | | | €4,000,000 – 4,500,000 | — | | 1 | | 1 | | | €4,500,000 – 5,000,000 | — | | 1 | | 1 | | | €5,000,000 – 6,000,000 | 1 | | 3 | | 4 | | | €6,000,000 – 7,000,000 | — | | 3 | | 3 | | | €7,000,000 – 8,000,000 | — | | — | | — | | | €8,000,000 – 9,000,000 | — | | — | | — | | | €9,000,000 – 10,000,000 | 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.
Report of the Directors | Corporate governance report Directors’ emoluments The details of compensation paid to executive and non-executive Directors for the year ended 31 December 2020 are set out below. | | | | | | | | | | | | | | | | | | | | | | Emoluments | | | | | | | | Noel Quinn | Ewen Stevenson | Non-executive Directors | | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | | £000 | £000 | £000 | £000 | £000 | £000 | | Basic salaries, allowances and benefits in kind | 3,338 | | 1,312 | | 1,806 | | 1,820 | | 5,527 | | 5,335 | | | Pension contributions | — | | — | | — | | — | | — | | — | | Performance-related pay paid or receivable1 | 4,517 | | 665 | | 2,568 | | 3,176 | | — | | — | | | Inducements to join paid or receivable | — | | — | | 1,431 | | 1,974 | | — | | — | | | Compensation for loss of office | — | | — | | — | | — | | — | | — | | | Notional return on deferred cash | 17 | | — | | — | | — | | — | | — | | | Total | 7,872 | | 1,977 | | 5,805 | | 6,970 | | 5,527 | | 5,335 | | | | | | | | | | Total ($000) | 10,097 | | 2,522 | | 7,446 | | 8,890 | | 7,090 | | 6,843 |
1Includes 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 2020 was $24,624,520. 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, provision of company owned-accommodation 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 £5,859 ($7,515), Stuart Gulliver valued at £5,859 ($7,515) and John Flint valued at £4,784 ($6,136). Tax support fees of £460 ($590) were also provided to Stuart Gulliver, giving a total aggregate value of £16,962 ($21,756) for benefits provided to past directors. 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 two former Directors of $413,160. The provision at 31 December 2020 in respect of unfunded pension obligations to former Directors amounted to $7,821,639. Emoluments of senior management and five highest paid employees The following tables set out the details of emoluments paid to senior management, which in this case comprises executive Directors and members of the Group Executive Committee, for the year ended 31 December 2020, or for the period of appointment in 2020 as a Director or member of the Group Executive Committee. 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 2020, are also presented. | | | | | | | | | | Emoluments | | | £000s | Five highest paid employees | Senior management | | Basic salaries, allowances and benefits in kind | 13,319 | | 36,831 | | | Pension contributions | 15 | | 57 | | Performance-related pay paid or receivable1 | 17,310 | | 34,431 | | | Inducements to join paid or receivable | — | | 1,308 | | | Compensation for loss of office | — | | 848 | | | Total | 30,644 | | 73,475 | | | Total ($000) | 39,307 | | 94,247 | |
1Includes the value of deferred shares awards at grant. | | | | | | | | | | | | | Emoluments by bands | | Hong Kong dollars | US dollars | Number of highest paid employees | Number of senior management | | $1,500,001 – $2,000,000 | $193,397 – $257,863 | — | | 1 | | | $4,500,001 – $5,000,000 | $580,191 – $644,657 | — | | 1 | | | $9,000,001 – $9,500,000 | $1,160,382 – $1,224,848 | — | | 1 | | | $9,500,001 – $10,000,000 | $1,224,848 – $1,289,313 | — | | 1 | | | $10,000,001 – $10,500,000 | $1,289,314 – $1,353,779 | — | | 1 | | | $13,500,001 – $14,000,000 | $1,740,573 – $1,805,039 | — | | 1 | | | $15,000,001 – $15,500,000 | $1,933,970 – $1,998,436 | — | | 1 | | | $24,500,001 – $25,000,000 | $3,158,818 – $3,223,284 | — | | 1 | | | $27,000,001 – $27,500,000 | $3,481,146 – $3,545,612 | — | | 1 | | | $28,000,001 – $28,500,000 | $3,610,078 – $3,674,543 | — | | 1 | | | $28,500,001 – $29,000,000 | $3,674,543 – $3,739,009 | — | | 1 | | | $29,000,001 – $29,500,000 | $3,739,009 – $3,803,475 | — | | 2 | | | $30,000,001 – $30,500,000 | $3,867,940 – $3,932,406 | — | | 1 | | | $41,000,001 – $41,500,000 | $5,286,185 – $5,350,651 | — | | 1 | | | $43,500,001 – $44,000,000 | $5,608,514 – $5,672,979 | — | | 1 | | | $44,000,001 – $44,500,000 | $5,672,979 – $5,737,445 | — | | 1 | | | $44,500,001 – $45,000,000 | $5,737,445 – $5,801,910 | — | | 1 | | | $48,500,001 – $49,000,000 | $6,253,170 – $6,317,636 | — | | 1 | | | $49,000,001 – $49,500,000 | $6,317,636 – $6,382,101 | — | | 1 | | | $50,500,001 – $51,000,000 | $6,511,033 – $6,575,499 | 1 | | 1 | | | $54,500,001 – $55,000,000 | $7,026,758 – $7,091,224 | 2 | | — | | | $66,500,001 – $67,000,000 | $8,573,934 – $8,638,400 | 1 | | 1 | | | $78,000,001 – $78,500,000 | $10,056,645 – $10,121,110 | 1 | | 1 | |
| | | | Share capital and other related disclosures |
Share buy-back programme HSBC Holdings did not announce a share buy-back to purchase its ordinary shares of $0.50 each during the year. Dividends Dividends for 2020 On 31 March 2020, HSBC announced that, in response to a written request from the Bank of England through the Prudential Regulation Authority ('PRA'), the Board had cancelled the fourth interim dividend for 2019. Similar requests were also made to other UK incorporated banking groups. We also announced that until the end of 2020 we would make no quarterly or interim dividend payments or accruals in respect of ordinary shares. In December 2020, the PRA announced a temporary approach to shareholder distributions for 2020 in which it set out a framework for board decisions on dividends. On 23 February 2021, after considering the requirements of the temporary approach, the Directors approved an interim dividend for 2020 of $0.15 per ordinary share. The interim dividend will be payable on 29 April 2021 in cash in US dollars, or in sterling or Hong Kong dollars at exchange rates to be determined on 19 April 2021. The 2020 interim dividend will be paid in cash with no scrip alternative. The Group has decided to discontinue the scrip dividend option as it is dilutive, including to dividend per share progression over time. As the interim dividend for 2020 was approved after 31 December 2020, it has not been included in the balance sheet of HSBC as a liability. The distributable reserves of HSBC Holdings at
31 December 2020 were $31.3bn. 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 16 March, 16 June, 15 September and 15 December 2020. The Series A dollar preference shares were redeemed on 13 January 2021. Dividends for 2021 In December 2020, the PRA also announced that it intends to transition back to its standard approach to capital setting and shareholder distributions through 2021. In the meantime, for 2021 dividends the PRA is content for appropriately prudent dividends to be accrued but not paid out. The PRA aims to provide a further update ahead of the 2021 half-year results of large UK banks. The Group will not pay quarterly dividends during 2021 but will consider whether to announce an interim dividend at the 2021 half-year results in August. The Group will review whether to revert to paying quarterly dividends at or ahead of its 2021 results announcement in February 2022. A dividend of £0.01 per Series A sterling preference share was approved on 23 February 2021 for payment on 15 March 2021. Share capital Issued share capital The nominal value of HSBC Holdings’ issued share capital paid up at 31 December 2020 was $10,346,810,550 divided into 20,693,621,100 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 100.00%, 0.00%, and 0.00% respectively of the nominal value of HSBC Holdings’ total issued share capital paid up at 31 December 2020. The 1,450,000 non-cumulative preference shares of $0.01 each were redeemed on 13 January 2021.
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/who-we-are/leadership-and-governance/board-responsibilities. Ordinary shares HSBC Holdings has one class of ordinary share, which carries no right to fixed income. There are no voting restrictions on the issued ordinary shares, all of which are fully paid. On a show of hands, each member present has the right to one vote at general meetings. On a poll, each member present or voting by proxy is entitled to one vote for every $0.50 nominal value of share capital held. There are no specific restrictions on transfers of ordinary shares, which are governed by the general provisions of the Articles of Association and prevailing legislation. Information on the policy adopted by the Board for paying interim dividends on the ordinary shares may be found in the 'Shareholder information' section on page 406. 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. There were no dividends waived during 2020 as there were no dividends paid on ordinary shares during 2020. Preference shares The preference shares, which have preferential rights to income and capital, do not, in general, confer a right to attend and vote at general meetings. There are three classes of preference shares in the share capital of HSBC Holdings: non-cumulative US dollar preference shares of $0.01 each (‘dollar preference shares’); non-cumulative preference shares of £0.01 each (‘sterling preference shares’); and non-cumulative preference shares of €0.01 (‘euro preference shares’). The sterling preference share in issue is a Series A sterling preference share. There are no dollar preference shares or euro preference shares in issue. Information on dividends approved for 2020 and 2021 may be found in Note 8 on the financial statements on page 345. 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). Share capital changes in 2020 The following events occurred during the year in relation to the ordinary share capital of HSBC Holdings: Scrip dividends There were no scrip dividends issued during the year.
Report of the Directors | Corporate governance report | | | | | | | | | | | | | | | | | All-employee share plans | | Number | Aggregate
nominal
value | | Exercise price | | from | to | | | $ | | £ | £ | | HSBC Holdings Savings-Related Share Option Plan (UK) | | | | | | | HSBC ordinary shares issued in £ | 1,387,599 | | 693,800 | | | 2.6270 | | 5.9640 | | | Options over HSBC ordinary shares lapsed | 44,189,936 | | 22,094,968 | | | | | | Options over HSBC ordinary shares granted in response to approximately 29,048 applications from HSBC employees in the UK on 24 September 2020 | 111,469,393 | | 55,734.697 | | | | | | | HSBC Holdings
ordinary shares issued | Aggregate
nominal
value | | Market value per share | | | from | to | | | $ | | £ | £ | | HSBC International Employee Share Purchase Plan | 679,640 | | 339,820 | | | 3.0855 | | 5.9140 | | | | | | | |
| | | | | | | | | | | | | | | | HSBC share plans | | HSBC Holdings
ordinary shares issued | Aggregate
nominal
value | Market value per share | | from | to | | | $ | £ | £ | | Vesting of awards under the HSBC Share Plan 2011 | 53,029,316 | | 26,514,658 | | 3.2290 | | 5.6220 | |
Authorities to allot and to purchase shares and
pre-emption rights At the AGM in 2020, shareholders renewed the general authority for the Directors to allot new shares up to 13,554,626,552 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 2,033,193,983 ordinary shares, which was not exercised during the year. In addition, shareholders gave authority for the Directors to grant rights to subscribe for, or to convert any security into, no more than 4,066,387,966 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. For further details on the issue of contingent convertible securities, see Note 31 on the financial statements. Other than as disclosed in the tables above headed ‘Share capital changes in 2020’, the Directors did not allot any shares during 2020. Debt securities In 2020, HSBC Holdings issued the equivalent of $15.95bn 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 further details of capital instruments and bail-inable debt, see Notes 28 and 31 on pages 380 and 388. 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 2020, 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 2020, representing 1.57% of the shares in issue as at 31 December 2020. The nominal value of shares held in treasury was $162,636,704. Notifiable interests in share capital At 31 December 2020, 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 3 March 2020 that on
2 March 2020 it had the following: an indirect interest in HSBC Holdings ordinary shares of 1,235,558,490; qualifying financial instruments with 7,294,459 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 2,441,397 voting rights, representing 6.07%, 0.03% and 0.01%, respectively, of the total voting rights at 2 March 2020. No further notifications had been received pursuant to the requirements of Rule 5 of the Disclosure, Guidance and Transparency Rules between 31 December 2020 and 15 February 2021. At 31 December 2020, according to the register maintained by HSBC Holdings pursuant to section 336 of the Securities and Futures Ordinance of Hong Kong: •BlackRock, Inc. gave notice on 1 September 2020 that on
27 August 2020 it had the following interests in HSBC Holdings ordinary shares: a long position of 1,477,023,361 shares and a short position of 38,760,188 shares, representing 7.14% and 0.19%, respectively, of the ordinary shares in issue at that date. •Ping An Asset Management Co., Ltd, gave notice on
25 September 2020 that on 23 September 2020 it had a long position of 1,655,479,531 in HSBC Holdings ordinary shares, representing 8.00% 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 2020 and up to the date of this report. Dealings in HSBC Holdings listed securities 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 2020.
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 2020 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 31 Dec 2020 or date of cessation, if earlier | | Footnotes | At 1 Jan
2020, or date of appointment, if later | Beneficial
owner | Child
under 18
or spouse | Jointly with another person | Trustee | Total
interests | | HSBC Holdings ordinary shares | | | | | | | | | | | | | | | | | Kathleen Casey (retired on 24 April 2020) | 1 | 15,125 | | 15,125 | | — | | — | | — | | 15,125 | | | Laura Cha | | 16,200 | | 16,200 | | — | | — | | — | | 16,200 | | | Henri de Castries | | 19,251 | | 19,251 | | — | | — | | — | | 19,251 | | | James Forese (appointed to the Board on 1 May 2020) | 1 | — | | 115,000 | | — | | — | | — | | 115,000 | | | Steven Guggenheimer (appointed to the Board on 1 May 2020) | 1,4 | — | | — | | — | | 15,000 | | — | | 15,000 | | | Irene Lee | | 11,904 | | 11,904 | | — | | — | | — | | 11,904 | | | | | | | | | | | José Antonio Meade Kuribreña | 1 | — | | 15,000 | | — | | — | | — | | 15,000 | | | Heidi Miller | 1 | 15,700 | | 15,700 | | — | | — | | — | | 15,700 | | | Eileen Murray (appointed to the Board on 1 July 2020) | 1 | — | | 75,000 | | | | | 75,000 | | | David Nish | | 50,000 | | — | | 50,000 | | — | | — | | 50,000 | | | Noel Quinn | 2 | 441,925 | | 778,958 | | — | | — | | — | | 778,958 | | | Ewen Stevenson | 2 | 233,972 | | 545,731 | | — | | — | | — | | 545,731 | | | | | | | | | | | Sir Jonathan Symonds (retired on 18 February 2020) | | 43,821 | | 38,823 | | 4,998 | | | | 43,821 | | | Jackson Tai | 1, 3 | 66,515 | | 32,800 | | 11,965 | | 21,750 | | — | | 66,515 | | | Mark Tucker | | 307,352 | | 307,352 | | — | | — | | — | | 307,352 | | | Pauline van der Meer Mohr | | 15,000 | | 15,000 | | — | | — | | — | | 15,000 | |
1Kathleen Casey has an interest in 3,025, James Forese has an interest in 23,000, Steven Guggenheimer has an interest in 3,000, José Antonio Meade Kuribreña has an interest in 3,000, Heidi Miller has an interest in 3,140, Eileen Murray has an interest in 15,000 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 Plan (UK) and the HSBC Share Plan 2011 are set out in the Scheme interests in the Directors’ remuneration report on page 271. At 31 December 2020, 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 – 1,333,514; and Ewen Stevenson – 1,751,278. Each Director’s total interests represents less than 0.01% of the shares in issue and 0.01% 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. 4 On 19 May 2020, Steven Guggenheimer reported to HSBC that he had acquired 5,000 shares on 1 May 2020. Prior clearance was not obtained as required pursuant to the standards set out in the Hong Kong Model Code for Securities Transactions by Directors of Listed Issuers. Enhancements have been made to the Directors' onboarding process, along with communication throughout the year, to highlight share dealing obligations. There have been no changes in the shares or debentures of the Directors from 31 December 2020 to the date of this report. Listing Rule 9.8.4 and other disclosures This section of the Form 20-F forms part of and includes certain disclosures required in the Report of the Directors incorporated by cross-reference, including under Listing Rule 9.8.4 and otherwise as applicable by law. | | | | | | | Content | Page references | | Long-term incentives | 286 | | Dividend waivers | 299 | | Dividends | 299 | | Change of control | 303 | | Emissions | 46 | | Energy efficiency | 53, 55 | | | | Principal activities of HSBC | 12, 30, 99, 371 | | Business review and future developments | 12–41, 43, 134, 160, 397 |
Directors’ governance Appointment and re-election A rigorous selection process is followed for the appointment of Directors. Appointments 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’sAppointments are made in accordance with HSBC Holdings' Articles of Association, Association. The Nomination & Corporate Governance Committee report sets out further detail on the Board selection process. 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, allNon-executive Directors are nominatedappointed for annual re-election at the AGM by
shareholders,an initial three-year term and, subject to continued satisfactory performance based upon an assessment by the Group Chairman and the Nomination & Corporate Governance Committee. All Directors that stoodCommittee, are proposed 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, areAGM. They 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 theAnnual Report and Accounts.
Shareholders vote at each AGM on whether to elect and re-elect individual Directors. All Directors that stood for election and re-election at the 2020 AGM were elected and re-elected by shareholders. None of the Directors who retired during the year or who are not offering themselves for re-election at the 2021 AGM have raised concerns about the operation of the Board or the management of the company. No Directors areexecutive Director is involved in deciding their own remuneration.remuneration outcome.
Report of the Directors | Corporate governance report Commitments 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.Holdings. 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.committee. All non-executive Directors have confirmedconfirm that 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.have. 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.required for any non-executive Directors’ external commitments, with consideration given to time commitments and conflicts of interest.
Conflicts of interest The Board has an established a policy and a set of procedures relating to ensure that the Board’s management of the Directors’ conflicts of interest. Where conflicts of interest arise, thepolicy operates effectively. The Board has the power to authorise them. Aconflicts where they arise, in accordance with the Companies Act 2006 and HSBC Holdings' Articles of Association. Details of all Directors’ conflicts of interest are recorded in the register of conflicts, which is maintained by the Group Company Secretary and Chief Governance Officer's office. OnUpon appointment, new Directors are advised of the processpolicy and procedures for dealing with conflicts andmanaging conflicts. Directors are required to notify the process for reviewing those conflicts when they have been authorised. The termsBoard of those authorisations of conflicts are routinely undertaken by the Board. During the year noany actual or potential conflicts of interest arose.and to update the Board with any changes to the facts and circumstances surrounding such conflicts. The Board has considered, and authorised (with or without conditions) where appropriate, potential conflicts as they have arisen during the year in accordance with the said policy and procedures. IndemnityDirectors' 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, deedsby way of indemnity by deed poll, indemnities 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 purposesyear, against certain liabilities arising in connection with their position as a Director of the Companies Act 2006 and continues to be in force. The deed poll indemnifies theHSBC Holdings or of any Group company. Directors are indemnified to the maximum extent permitted by law and waslaw. The indemnities that constitute a 'qualifying third-party indemnity provision', as defined by section 234 of the Companies Act 2006, remained in force duringfor the whole of the financial year or(or, in the case of Directors appointed during 2020, from the date of appointment in respecttheir appointment). The deed poll is available for inspection at the registered office of the Directors appointed in 2019. HSBC Holdings. 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.
Report of the Directors | Corporate governance report
Contracts of significance During 2019,2020, 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. Additional non-financial disclosures Additional non-financial disclosures detailing HSBC’s policies and practices in relation to the workforce, environment, social matters, human rights, and anti-corruption and anti-bribery matters are included in other sections of the Annual Report and Accounts 2020. Shareholder engagement The Board is directly accountable to, and gives a high priority to communicating with, HSBC’s shareholders. Extensive informationInformation about HSBC and its activities is provided to shareholders in its Interim Reports and theAnnual 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 regularcontinual dialogue withbetween members of the Board and institutional investors. investors throughout the year. For examples of such engagement see the Group Chairman's letter on page 238 and the Remuneration Committee Chair's letter on page 271. 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 MeetingIndependence of non-executive Directors
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 toCommittee has delegated authority from the Board in writing viarelation to 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.assessment of the independence of non-executive Directors.
General meetings
Shareholders may require the Directors to call a general meeting other than an AGM, as provided byIn accordance with the UK Companies Act 2006. Requests to call a general meeting may be made by members representingand Hong Kong Corporate Governance Codes, the Committee has reviewed and confirmed that all non-executive Directors who have submitted themselves for election and re-election 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 businessAGM are considered to be dealt with at the meeting and may include the textindependent. This conclusion was reached after consideration of a resolutionall relevant circumstances that may properly be moved and is intendedare likely to be moved at the meeting. A request may be in hard copy formimpair, or in electronic form, and must be authenticated by the person or persons making it. A request may be made in writingcould appear 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 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.
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
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.
Subsidiariesimpair, independence.
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. | | | | | | | | Directors’ induction and ongoing development in 2019 | | Director | Induction1
| Strategy and business briefings2
| Risk and
control3
| Corporate governance4
| ARCC, Chairs and Remco Forum5
| Subsidiary6
| Mark Tucker | | X | X | X | X | | Noel Quinn | X | | X | X | X | | Ewen Stevenson | | X | X | X | X | | Marc Moses | | X | X | X | X | X | Sir Jonathan Symonds | | X | X | X | X | | David Nish | | X | X | X | X | | Irene Lee | | X | X | X | X | X | José Antonio Meade Kuribreña | X | X | X | X | X | | Kathleen Casey | | X | X | X | X | | Laura Cha | | X | X | X | X | X | Henri de Castries | | X | X | X | | | Heidi Miller | | X | X | X | X | X | Jackson Tai | | X | X | X | X | | Pauline van der Meer Mohr | | 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. |
Report of the Directors | Corporate governance report
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 preparing2011, will not be standing for future challengesre-election at the 2021 AGM. The Committee determined that Laura, notwithstanding her length of service, continues to be independent when taking into consideration all other relevant circumstances that are likely to impair, or could appear to impair, independence and that she will continue to help Directors optimise their contributionbe independent up to the successdate 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.
The findings
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;
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.
Future thinking
Continue to develop the Board agenda to provide focus on emerging issues.
The Board has approved actions designed to implement the above, which2021 AGM when she 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.
| | Nomination & Corporate Governance Committee |
| |  "Ensuring the Board is of the right size, structure and composition is critical to creating an effective Board thatdelivers 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 retiredretire 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 ChiefExecutive 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. | | | | | | | | | | | | | | | | | | | | | | | | | Matters considered during 2020 | | | | | | | | | | | | Jan | Feb | Apr | May | Jul | Sep | Dec | | Board composition and succession | | | | | | | | | Board composition, including succession planning and skills matrices | l | l | l | ô | ô | l | l | | Approval of diversity and inclusion policy | ô | ô | l | ô | ô | ô | ô | | Approval of conflicts of interest policy | ô | ô | ô | ô | ô | ô | l | | Executive talent and development | | | | | | | | | Senior executive succession | ô | l | l | l | l | l | l | | Approval of executive succession plans | ô | ô | ô | ô | ô | ô | l | | Talent programmes | ô | ô | l | ô | ô | ô | ô | | Governance | | | | | | | | | Board and committee evaluation | ô | ô | l | l | ô | ô | l | | Subsidiary governance | ô | ô | ô | ô | l | ô | ô | | Subsidiary and executive appointments | l | l | l | l | l | l | l |
| | | | Appointment process – assessment of new non-executive Directors |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Step 1 | | | Step 2 | | | Step 3 | | | Step 4 | | | Step 5 | | | | | | | | The Committee agreed the desired criteria sought in the candidates for appointment to the Board. An external search partner was engaged. | | | The Committee considered a long-list of candidates and agreed which should be prioritised. Relevant candidates were approached by the external search partner to understand their interest. | | | Meetings were arranged between members of the Committee and priority non-executive Director candidates. Feedback from the non-executive Directors was discussed alongside consideration of potential conflicts and other matters identified through due diligence. | | | The Committee recommended the appointment of the non-executive Director to the Holdings Board for approval, subject to completion of outstanding due diligence. | | | Outstanding due diligence and associated procedures completed prior to announcement of appointment. Director onboarding and induction pack issued and completed. | | |
Report of the Directors | Corporate governance report | | | "The Committee spent substantial time in understanding and assessing the effect of the Covid-19 outbreak on expected credit losses, the Group-wide transformation programme and other related accounting judgements and disclosures." |
Dear Shareholder I am pleased to present my first report to you as Chair of the Group Audit Committee (‘GAC’). The Committee had a busy year, holding 13 meetings. This report sets out some of the issues considered during 2020. The Committee has strong, but diverse, financial services experience. To strengthen our skill set further, we welcomed Pauline van der Meer Mohr, James Forese and Eileen Murray as new members. Sir Jonathan Symonds and Kathleen Casey stepped down during the year and I would like to thank them for their insightful and significant contributions to the work of the GAC. The Committee spent substantial time in understanding and assessing the effect of the Covid-19 outbreak on expected credit losses, the Group-wide transformation programme, the impact of regulatory change on the control environment, and other related accounting judgements and disclosures. Given the Committee's role in relation to whistleblowing I regularly met with the Group Chief Compliance Officer and the Group Head of Whistleblowing Oversight to discuss material whistleblowing cases, enhancements to whistleblowing arrangements and plans for periodic updates to the Committee. To develop a better understanding of the key issues and challenges at the local level, I attended a number of principal subsidiary audit committee meetings throughout the Group. These meetings were complemented by regular Audit and Risk Committee Chairs’ Forums throughout the year to ensure alignment of priorities and to strengthen our relationship with the principal subsidiaries. The Committee received regular updates from the Group Head of Audit on the progress against the audit plan. During the year the audit plan was adjusted in response to new risks arising from the Covid-19 outbreak and assurance work in relation to major change programmes throughout the Group. Our external auditor, PricewaterhouseCoopers LLP ('PwC'), has now completed its sixth audit. PwC continues to provide robust challenge to management and provide sound independent advice to the Committee on specific financial reporting judgements and the control environment. An internal evaluation concluded that the Committee continued to operate effectively in 2020, and made certain recommendations for continual improvement. David Nish Chair, Group Audit Committee,23 February 2021 | | | | | | | | | | Membership | | Member since | Meeting attendance
in 2020 | | David Nish (Chair) | May 2016 | 13/13 | Kathleen Casey1 | Mar 2014 | 5/5 | | James Forese | May 2020 | 7/7 | Eileen Murray2 | Jul 2020 | 5/6 | Sir Jonathan Symonds1 | Sep 2014 | 3/3 | | Jackson Tai | Dec 2018 | 13/13 | | Pauline van der Meer Mohr | Apr 2020 | 10/10 |
1 Sir Jonathan Symonds stepped down from the Board on 18 February 2020. Kathleen Casey stepped down from the Board on 24 April 2020. 2 Eileen Murray was unable to attend a meeting in July 2020 due to a prior commitment made before her appointment. Key responsibilities The Committee’s key responsibilities include: •monitoring and assessing 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; •reviewing the effectiveness of, and ensuring that management has appropriate internal controls over, financial reporting; •reviewing and monitoring the relationship with the external auditor and oversees its appointment, tenure, rotation, remuneration, independence and engagement for non-audit services; and •overseeing the work of Global Internal Audit and monitoring and assessing the effectiveness, performance, resourcing, independence and standing of the function. Committee governance The Committee keeps the Board informed and advises 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 Executive, Group Chief Financial Officer, Group Head of Finance, Group Chief Accounting Officer, Group Head of Audit, Group Chief Risk Officer 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, Global Internal Audit and the external auditor to discuss agenda planning and specific issues as they arose during the year outside the formal Committee process. The Committee also regularly met separately with the Group Chief Legal Officer, internal and external auditors and other senior management to discuss matters in private. The Committee Secretary regularly met with the Chair to ensure the Committee fulfilled its governance responsibilities and to consider input from stakeholders when finalising meeting agendas, tracking progress on actions and Committee priorities. Meetings of the Committee usually take place a couple of days before the Board meeting to allow the Committee to report its findings and recommendations in a timely and orderly manner. This is done through the Chair who comments on matters of particular relevance and the Board receives copies of the Committee agenda and minutes of meetings.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Matters considered during 2020 | | | | | | | | | | | | | | Jan | Feb | Apr | Jun | Jul | Sep | Oct | Dec | | Reporting | | | | | | | | | Financial reporting matters including: –Review of financial statements, ensuring that disclosures are fair, balanced and understandable –Significant accounting judgements –Going concern assumptions and viability statement –Supplementary regulatory information and the ESG Update | l | l | l | l | l | l | l | l | | Regulatory reporting-related matters | l | l | l | l | ô | l | ô | l | | Certificates from principal subsidiary audit committees | ô | l | ô | ô | l | ô | ô | ô | | Control environment | | | | | | | | | | Review of deficiencies and effectiveness of internal financial controls | l | l | l | l | l | l | l | l | | Internal audit | | | | | | | | | | Reports from Global Internal Audit | l | l | l | l | l | ô | l | l | | Annual audit plan, independence and effectiveness | l | ô | l | ô | l | ô | ô | l | | External audit | | | | | | | | | | Reports from external audit, including external audit plan | l | l | l | l | l | ô | l | l | | Appointment, remuneration, non-audit services and effectiveness | l | l | l | l | ô | ô | l | ô | | Compliance | | | | | | | | | | Accounting standards and critical accounting policies | l | l | ô | ô | ô | ô | ô | l | | Corporate governance codes and listing rules | ô | l | ô | ô | l | ô | ô | ô | | Whistleblowing | | | | | | | | | | Whistleblowing arrangements and effectiveness | ô | l | l | ô | l | ô | ô | l |
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 the Committee continues to have competence relevant to the sector in which the Group operates. The Board has determined that David Nish, Jackson Tai and Eileen Murray are all ‘financial experts’ for the purposes of section 407 of the Sarbanes-Oxley Act and 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 and the FCA. These included trilateral meetings involving the Group’s external auditor PwC. How the Committee discharged its responsibilities Connectivity with principal subsidiary audit committees During the year the GAC Chair regularly met with the chairs of the principal subsidiary audit committees and attended meetings to enable closer links and deeper understanding on judgements around key issues. In addition, there was regular interaction with committee chairs across the Group through the Audit and Risk Committee Chairs’ Forum (‘ARCC’). Appointments to the audit committees of the principal subsidiary audit committees were reviewed and endorsed by the GAC. The GAC Chair met with proposed new chairs prior to their appointment. 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. Financial reporting The Committee’s review of financial reporting during the year included the Annual Report and Accounts, Interim Report, quarterly earnings releases, analyst presentations and Pillar 3 disclosures. As part of its review, the GAC evaluated management’s application of critical accounting policies, significant accounting judgements and compliance with disclosure requirements to ensure these were consistent, appropriate and acceptable under the relevant financial reporting requirements. The Committee gave careful consideration to the key performance metrics related to strategic priorities and ensured that the performance and outlook statements were fair, balanced and reflected the risks and uncertainties appropriately. During the year, the Committee received regular updates from management on the additional guidance and disclosures made in relation to the Covid-19 outbreak. The Committee considered and was satisfied with the management response to the Financial Reporting Council’s (‘FRC') comments on HSBC’s Annual Report and Accounts 2019 regarding goodwill impairment disclosures, and the industry-wide FRC publications, including the letter to audit committee chairs. In conjunction with the Group Risk Committee (‘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 continues to adopt the going concern basis in preparing the annual and interim financial statements. Further details can be found on page 41. The Committee’s review of the long-term viability statement and the adoption of the going concern basis factored in additional guidance issued by the FRC on financial reporting in light of the Covid-19 outbreak. Following review and 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. Covid-19 impact on accounting judgements The Committee devoted significant time, including additional meetings, to the review and challenge of management’s approach and analysis of IFRS 9 expected credit losses (‘ECL’) in light of the Covid-19 outbreak and other geopolitical events. In its review, the GAC gave due regard to the interpretation and application of additional guidelines in relation to the Covid-19 outbreak and estimating ECL that were issued by various regulators. The Committee gave careful consideration to the measurement of ECL, in particular the key judgements and management adjustments made in relation to the forward economic guidance, underlying economic scenarios, reasonableness of the weightings and the impact on financial statements and disclosures. There was detailed discussion on the risks to ECL models as the unprecedented nature of the pandemic meant that the severity of the economic conditions was outside the bounds of historical data
Report of the Directors | Corporate governance report and experience used to develop IFRS 9 models. The Committee challenged management on the approach to modelling ECL, specifically the use of Credit Risk judgements and invited HSBC’s credit experts to present their views to the Committee. At the request of the GAC Chair, Global Internal Audit carried out additional verification and assurance regarding the disclosures made in quarterly reporting on the range of ECL outlook and consistency of the ECL disclosures. The Group’s external auditor regularly shared its views with the Committee on the reasonableness of management assumptions, given the significant changes made to the estimation of ECL due to the impact of the Covid-19 outbreak on the design, implementation and operation of ECL controls. Other areas of significant accounting judgements requiring in-depth review due to the Covid-19 pandemic included valuation of financial instruments, goodwill impairment, hedge accounting and investment in associates. Further details can be found in the 'Principal activities and significant issues considered during 2020' table on page 262. 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 303. In 2020 the updates provided to the Committee included the potential impacts on internal control from the Covid-19 outbreak. These impacts included both those directly relevant to operational processes and controls, such as where new or amended controls were required to administer government relief packages, and more indirect impacts such as from colleagues working under contingency arrangements. A number of additional assurance procedures were performed across the lines of defence to monitor, assess and mitigate these impacts, with results regularly reported to the Committee. External auditor The Group’s external auditor is PwC, which has held the role for six years, and the senior audit partner is Scott Berryman who has been in the role since 2019. The Committee reviewed the external auditor’s approach and strategy for the annual audit and also received regular updates on the impact on the control environment from the Covid-19 outbreak and the Group transformation programme. Principal matters discussed with PwC are set out in its report on page 311. PwC discussed the impact from the Covid-19 outbreak on the execution and delivery of the audit and the plans to deliver the audit through remote working and mitigating actions being taken. These included accelerating aspects of planning and performing a number of areas of audit earlier to factor in expected delays due to remote working. There was also discussion on additional relevant work in relation to significant accounting judgements, such as expected credit losses, and the impact of the Covid-19 outbreak on the basis for determining materiality. 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 gave particular focus to the actions being taken by PwC in response to the findings from the HSBC effectiveness review and the PwC firm-wide Audit Quality Review by the Financial Reporting Council. PwC highlighted the continuing investment in both additional resources and new technologies to improve the quality and consistency of the audit. The Committee Chair also met the PwC engagement quality control partner for HSBC privately to discuss the continuous audit improvement actions. The GAC received an update on the partner rotation and succession for the Group and its principal subsidiaries and the steps taken to ensure effective transitions. The GAC monitored the policy on hiring employees or former employees of the external auditor, and there were no breaches of the policy highlighted during the year. The external auditor attended all Committee meetings and the GAC Chair maintains regular contact with the senior audit partner and his team throughout the year. 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 2020. 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. 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 as a change in auditor would have a significant impact on the organisation, including on the Global Finance function. A change would lead to disruption and an increase in operational risk given the ongoing impact from the Covid-19 pandemic and the significant strategic change underway through the Group transformation programme. In addition, the Committee is closely monitoring the consultations and proposals arising from the Competition and Market Authority's statutory audit market study, the Kingman Review of the Financial Reporting Council and the Brydon Review on the quality and effectiveness of audit on the future of the UK external audit market. The Committee will consider its audit tendering strategy in line with the outcomes of the UK audit reform and well in advance of re-tendering in 2025. 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 2021 will be proposed to shareholders at the 2021 AGM. Non-audit services The Committee is responsible for setting, reviewing and monitoring the appropriateness of the provision of non-audit services by the external auditor. It also applies the Group’s policy on the award of non-audit services to the external auditor. During the year, GAC reviewed changes made to the Group’s policy resulting from the implementation of ‘The Financial Reporting Council Revised Ethical Standard 2019’ (effective in 2020) and changes to internal governance. The key change in the revised standard is the introduction of a ‘whitelist of services’ that the principal accountant can provide. All services not prescribed in the whitelist are prohibited. 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 either approved by the GAC, or by Group Finance when acting within delegated limits and criteria set by the GAC. The non-audit services carried out by PwC included 45 engagements approved during the year where the fees were over $100,000 but less than $1m. Global 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; 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. Eight engagements during the year were approved where the fees exceeded $1m. These were mainly engagements required by the regulator and incremental fees related to previously approved engagements. One new engagement outside the scope of the pre-approved services related to preliminary advanced audit procedures for the adoption of IFRS 17 in 2023. | | | | | | | | | | | | | | 2020 | 2019 | | | Auditors‘ remuneration | $m | $m | | Total fees payable | 130.2 | | 110.7 | | | Fees for non-audit services | 37.3 | | 25.5 | |
Global Internal Audit 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 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. In addition to the ongoing importance of regulatory-focused work, key risk theme categories for 2020 audit coverage were strategy, governance and culture, financial crime, conduct and compliance, financial resilience and operational resilience. In April 2020, in response to the Covid-19 outbreak, Global Internal Audit completed a risk-based review to revise the 2020 annual audit plan to create capacity for real-time audits targeted at key risks arising from the pandemic. Real-time audits provide real-time, independent ongoing observations to management responding to the Covid-19 outbreak. Issues are raised for significant observations that are not addressed in a timely manner. In addition, in response to the business update in February 2020, Global Internal Audit focused on governance over the transformation programme and performed project audit activity for selected complex and high-priority business cases. 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 2021 audit planning process includes 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 the 2021 audit work continue to be strategy, governance and culture, financial crime, conduct and compliance, financial resilience, and operational resilience. During 2021, a quarterly assessment of key risk themes will form the basis of thematic reporting and plan updates and will ultimately drive the 2022 planning process. The annual audit plan and material plan updates are approved by the GAC. Based on regular internal audit reporting to the GAC, private sessions with the Group Head of Audit, the Global Professional Practices annual assessment and quarterly Quality Assurance updates, the GAC is satisfied with the effectiveness of the Global Internal Audit function and the appropriateness of its resources. 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 2020 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 common areas of responsibility were addressed appropriately with inter-committee communication or joint discussions with the Chairs. 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. This is further complemented with significant overlap in membership of the GAC and GRC to ensure deeper understanding and informed challenge at both meetings. During 2020, the GAC and GRC Chairs reviewed and challenged management’s proposals to transition the responsibility for oversight of entity level controls from the GAC to the GRC. The Chairs considered whether there was the suitable level of management seniority for ownership of entity level controls and whether there was regular and appropriate reporting to both committees to fulfil their oversight responsibilities. In 2020, five ARCC Forums were held with the chairs of principal and regional subsidiaries’ audit and risk committees, together with senior management from these subsidiaries. The purpose of these ARCC 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. The topics discussed at the ARCC Forums can be found in the GRC report on page 268. Three areas of joint focus for the GAC and GRC during 2020 were: Sustainable control environment With oversight from the GAC, the Group Executive Committee continued a programme 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. 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
Report of the Directors | Corporate governance report framework as part of the sustainable control environment programme. In 2020, the GAC and the GRC reviewed the risks arising from models used for the estimation of expected credit losses under IFRS 9, particularly given the economic backdrop of the Covid-19 outbreak. The committees challenged 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 2020, this included 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. There continues to be an increased focus on the quality of regulatory reporting by the PRA and other regulators globally. The GAC will review the steps taken by management to strengthen the controls over regulatory reporting and as we strengthen our processes and controls, there may be impacts on some of our regulatory ratios. In conjunction with the GRC, the GAC continued to oversee the progress of management’s proposals and implementation of the Basel III Reforms and the Ibor transition. The GAC focused on the operational and control environment impacts from Basel III Reforms and Ibor transition on HSBC’s financial reporting and interdependencies with other Group transformation programmes. Whistleblowing and ‘speak up’ culture Whistleblowing is a key element of ‘speak up’ culture, with the Group’s whistleblowing channel, HSBC Confidential, offering a variety of ways for our people to raise whistleblowing concerns (see page 68 for further information). The GAC is responsible for the oversight of the effectiveness of the Group’s whistleblowing arrangements. The Group’s Chief Compliance Officer provides periodic reporting to the GAC on the efficacy of the whistleblowing arrangements, providing an assessment of controls and detailing the results of internal audit assessments. The Committee is also briefed on culture and conduct risks and associated management actions arising from whistleblowing cases. The Chair of the GAC acts as the Group’s whistleblowers’ champion, with responsibility for ensuring and overseeing the integrity, independence and effectiveness of HSBC’s policies and procedures on whistleblowing and the protection of whistleblowers. The Chair met with the Group Head of Whistleblowing Oversight throughout the year for briefings on material whistleblowing cases and assessments of the whistleblowing arrangements. The Committee has requested updates on a number of key areas during 2020, including an assessment of the timeliness of whistleblowing investigations. The arrangements were subject to an internal audit review during 2020, which rated the design, control and management oversight of the arrangements as satisfactory. As part of the ongoing assessment of the end-to-end arrangements, the Committee has requested a deeper review in key markets of the employee investigation function in which the whistleblowing arrangements have a dependency. An external benchmarking assessment was presented to the GAC in December 2020. This provided an overview of the overall effectiveness of whistleblowing arrangements and investigations processes against a number of industry peers, and best practice guidance issued by external consultancy and legal firms as well as the UK charity, Protect. The assessment reflected the significant progress made during 2020 such as the implementation of a new whistleblowing platform (Navex), the enhanced global minimum standards and improvements observed in the ‘speak up’ culture. In addition, governance was improved with a particular focus on key emerging conduct themes to enable timely management action, and a mechanism was introduced for whistleblowers to provide feedback post-investigation. The assessment also identified further opportunities for 2021 as part of the Group’s fit for the future programme with updates to be provided to the whistleblowing champion and the GAC throughout 2021. | | | | | | | | | | | | | Principal activities and significant issues considered during 2020 | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Financial and regulatory reporting | | Key financial metrics and strategic priorities The GAC considered the key judgements in relation to external reporting to track the key financial metrics and strategic priorities and to review the forecast performance and outlook. | In exercising its oversight, the Committee assessed management's assurance and preparation of external financial reporting disclosures. The Committee was particularly focused on the ongoing Covid-19-related uncertainty and how management addressed and reflected the impact of the pandemic in external reporting and disclosures. The Committee reviewed the draft external reporting disclosures and provided feedback and challenge on the top sensitive disclosures, including key financial metrics and strategic priorities to ensure HSBC was consistent and transparent in its messaging. | | | | Environmental, social and governance (‘ESG’) reporting The Committee considered management's efforts to embed and enhance ESG reporting to demonstrate strong controls, operation and governance, including key performance indicators and assurance plans. | The GAC reviewed the approach to combining the ESG Update into the Annual Report and Accounts for the 2020 reporting period. This included consideration of the steps taken by management to address findings from Global Internal Audit regarding the controls and assurance processes for ESG content. The Committee will review the steps taken by management in developing the target operating model to deliver integrated reporting in 2021. | | | | Regulatory reporting assurance programme The GAC monitored the progress of the regulatory reporting assurance programme to enhance the Group’s regulatory reporting, impact on the control environment and oversee regulatory reviews and engagement. | The Committee reflected on the continued focus on the quality and reliability of regulatory reporting by the PRA and other regulators globally. The GAC reviewed management’s efforts to strengthen and simplify the end-to-end operating model, including commissioning independent external reviews of various aspects of regulatory reporting. The Committee discussed and provided management’s engagement plans with the Group’s regulators, including any potential impacts on some of our regulatory ratios such as CET1 and LCR. We continue to keep the PRA and other relevant regulators informed of our progress. | | | | | | | | | | Significant accounting judgements | | Expected credit losses The measurement of expected credit losses involves significant judgements, particularly under current economic conditions. There remains an elevated degree of uncertainty over ECL estimation under current macroeconomic, political and epidemiological uncertainties. Further details are provided in the 'Covid-19 impact on accounting judgements' section of this report. | The actions taken are summarised above in the 'Covid-19 impact on accounting judgements' section of this report. | | |
| | | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Significant accounting judgements | | Long-term viability and going concern statement During the year, the GAC has considered a wide range of information relating to present and future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios that reflect the increasing uncertainty that the global Covid-19 outbreak has had on HSBC’s operations, as well as considering potential impacts from other top and emerging risks, and the related impact on profitability, capital and liquidity. | In accordance with the UK and Hong Kong Corporate Governance Codes, 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. | | | | | | Goodwill and other non-financial assets impairment During the year, management tested for impairment goodwill and other non-financial assets. Key judgements in this area relate to long-term growth rates, discount factors and what cash flows to include for each cash-generating unit tested, both in terms of compliance with the accounting standards and reasonableness of the forecast. During the year, the Group recognised $1.3bn impairment in relation to non-financial assets, following which a detailed analysis of various balance sheet amounts was initiated. | The GAC received reports on management's approach to goodwill and other non-financial assets impairment testing and challenged the approach and models used. The GAC also challenged management's key judgements and considered the reasonableness of the outcomes as a sense check against the business forecasts and strategic objectives of HSBC. The GAC reviewed the results of management’s detailed analysis of the balance sheet and agreed with the conclusions. | | | | | | Membership | Associates (Bank of Communications Co., Limited and The Saudi British Bank) During the year, management performed the impairment review of HSBC’s investment in Bank of Communications Co., Ltd (‘BoCom’) and The Saudi British Bank (‘SABB’). The impairment reviews are complex and require significant judgements, such as projected future cash flows, discount rate, and regulatory capital assumptions. | The GAC reviewed the judgements in relation to the impairment reviews of HSBC’s investment in BoCom and SABB, including the sensitivity of the results to estimates and key assumptions such as projected future cash flows and regulatory capital assumptions. Additionally, the GAC reviewed the models’ sensitivity to long-term assumptions including the continued appropriateness of the discount rates. | | | | Legal proceedings and regulatory matters Management has used judgement in relation to the recognition and measurement of provisions, as well as the existence of contingent liabilities for legal and regulatory matters, including, for example, 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 GAC received reports from management on the legal proceedings and regulatory matters that highlight the accounting judgements for matters where these are required. The matters requiring significant judgements were highlighted. The GAC has reviewed these reports and agree with the conclusions reached by management. | | | | Valuation of defined benefit pension obligations 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. | 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. | | | | Valuation of financial instruments Due to the volatile market conditions in 2020, management refined its approach to valuing Group’s investment portfolio. In addition, as losses were incurred on the novation of certain derivative portfolios, management considered whether fair value adjustments were required under the fair value framework. Management’s analysis provided insufficient evidence to support the introduction of these adjustments in line with IFRS. | 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 and agrees with the judgements applied by management. | | | | Tax-related judgements HSBC has recognised deferred tax assets to the extent that they are recoverable through expected future taxable profits. Significant judgement continues to be exercised in assessing the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies. | 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 Management’s judgement is used in determining the assumptions used to calculate the Group’s remediation provisions, of which the most material are PPI and a programme in relation to the collections and recoveries operations of the bank. | The GAC considered and challenged management’s assumptions and the approach for estimating potential outflows relating to the calculations of the customer remediation provisions. | | | | | | | | |
Report of the Directors | Corporate governance report | | | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Other accounting judgements | | Long-term asset return assumptions in PVIF Market volatility during 2020 resulted in further review of the long-term investment assumptions used in the measurement of the present value of in-force business ('PVIF') intangible assets recorded on the balance sheet in relation to shareholder returns expected from long-term insurance contracts. | The GAC reviewed the assumptions determined by management under existing insurance governance processes, which involve significant expert judgement, and concluded that they were supportable given internal and external benchmarks and information reviewed. | | | | Hedge accounting Significant judgements relating to hedge accounting matters under current economic conditions include the impact of Covid-19 payment deferrals on the highly probable cash flow forecasts required by macro cash flow programmes; and whether hedge accounting relationships, where hedged items include interest rate floors and the hedging instrument does not, would be highly effective over the hedged horizon. | The GAC noted that the effect of Covid-19 payment deferrals on hedge accounting was limited and no additional actions were required. Additionally the GAC was informed about the mitigation actions management has taken to reduce the risk associated with floored hedged items, such as designating new hedge accounting relationships. | | | | | | | | | | | | | | | | Group transformation | | Transformation and sustainable control environment The GAC will oversee the impact on the risk and control environment from the Group transformation programme.
| The Committee received regular updates on the Group transformation programme to review the impact on the risk and control environment and to oversee progress of the Group transformation programme.
In these updates the Committee monitored the development of management’s approach to structuring and governing the Group transformation programme and risk management processes. This oversight helped satisfy the Committee of the appropriateness of these processes and associated benefits delivery. Management kept the Committee apprised of the changes and adjustments made to the Group transformation programme in response to Covid-19, and associated impact on the financial performance.
Management’s updates were supplemented by significant focus and assurance work from Global Internal Audit where a dedicated team continuously monitored and reviewed the Group transformation programme. This included carrying out a number of targeted audit reviews, in addition to audits of significant programmes. These reviews focused on key elements of change management. | | | | | | Global Finance transformation The Committee reviewed the proposals for the Global Finance organisational design, the migration to Cloud and the impact on financial controls. | The Committee has oversight for the adequacy of resources and expertise, as well as succession planning for the Global Finance function. During 2020, the Committee dedicated significant time to the review and progress of the multi-year Global Finance transformation programme, with the overall objectives being to improve the control environment and customer outcomes and to leverage technology to increase overall efficiency. In particular, the Committee discussed the challenges to Global Finance operations, including financial reporting, from the Covid-19 pandemic and sought assurance that controls were in place to maintain standards and quality.
The Committee reviewed and challenged the key change programmes and delivery milestones and tracked the progress of the deliverables. In particular, the Committee considered the impact from the Global Finance transformation on the Group transformation programme, regulatory change programmes and where there were interdependencies and concentrations risks through key programmes such as Finance on the Cloud. There were frequent discussions with management with input from Global Internal Audit on the impact on key risks and controls, including steps taken to mitigate these risks. Management regularly updated the Committee on the approach and plans for regulatory engagement, including follow-up on the outcomes and actions to be taken post-meetings with regulators.
The Group Chief Financial Officer had private sessions with the Committee to share his perspectives on the progress of the Global Finance transformation, areas of strategic priorities and where additional focus was required. The private sessions included discussion on succession planning and resourcing and areas where GAC members could support and guide management by leveraging members’ experience. | | | | | | | | | | Regulatory change | | IFRS 17 'Insurance Contracts' The Committee will oversee the transition to IFRS 17 and consider the wider strategic implications of the change on the insurance business. | Management provided an update on the final standard amendments that were issued in June 2020 and discussed the impact on the transition programme necessitated by the one-year delay to the effective date, both from a policy implementation and model build perspective. The discussions highlighted the significant uncertainty that remained in the interpretation of key areas and the working assumptions adopted by management to enable design solutions, investment in technology and data infrastructure to proceed. The Committee discussed the impact from IFRS 17 on HSBC’s reported numbers in the financial statements and management will continue to consider how to appropriately apply the standard to HSBC’s insurance business, as well as monitoring insurance industry developments on disclosures. Management will continue to keep the Committee updated on plans for the investor narrative, taking into account the relevant disclosure requirements applicable to HSBC, and ongoing presentation of insurance results up to the time of the transition. | | |
| | | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Regulatory change | | Basel III Reform The GAC considered the implementation of the Basel III Reform and the impact on the capital requirements and RWA assurance. This was considered in the context of the strategy and structure of the balance sheet.
| The Committee received an update on the progress and impact of the Basel III Reform programme on the Group. Management discussed the uncertainty over the final definition of the rules and the actions taken to ensure sufficient flexibility to make changes and mitigate risks from legislation being finalised at a later date. The discussion highlighted the dependencies of the Basel III Reform programme with other Group transformation programmes, in particular the dependency on adoption of the Finance on the Cloud solution and the impact on data delivery and storage.
The Committee reviewed and challenged management on the findings from an audit on the programme structure, governance and the significant cost increase year on year. Management explained the actions being taken in response to the audit findings and the reasons for the increase in costs, which included delays to implementation dates caused by Covid-19. | | | | | | Interest rate benchmark replacement The financial reporting risks of interest rate benchmark transition include the potential for volatility arising from financial instruments valuation, contract modification and hedge accounting. The transitions involve significant operational complexity for financial institutions, and industry approaches to transition continue to develop. | The GAC noted management’s early adoption of ‘Interest Rate Benchmark Reform – Phase 2’ amendments to IFRSs in relation to benchmark reform, including the disclosures necessary to support adoption of the reliefs.
The Committee considered the risks and financial reporting impacts arising from the Ibor transition. Management discussed actions being taken to mitigate the risks, which included new product development and a client outreach programme to ensure readiness to migrate and explain the changes and outcomes arising from the transition to clients. Management advised about the operational challenges such as the updates to current systems and processes that were required to support the accounting for the Ibor transition and our external dependency on market and client readiness. In particular, management drew attention to the potentially material impact on hedge accounting programmes from the Ibor transition and the substantial costs and risks involved in the redocumentation of hedges.
The Committee discussed the approach being taken across the industry with management and PwC and potential impacts on the control environment relevant to financial reporting from the Ibor transition. | | | | | | | | | | | |
Committee evaluation and effectiveness The annual review of the effectiveness of the Board committees, including the GAC, was conducted internally in 2020. Overall the review concluded that the GAC continued to operate effectively, and highlighted improvements made in 2020 in relation to Committee structure and focus. The review also made certain recommendations for continuous improvement, including in relation to further enhancing the quality of information presented to the meeting through revised executive governance oversight. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings. The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2021. Focus of future activities At the beginning of each year the Committee discusses its key priorities for the year ahead. In 2021, the Committee will continue to monitor execution of the Group transformation programme and its impact on the risk and control environment. In monitoring the Group transformation programme, the Committee will consider the interdependencies between the Group transformation programme and implementation of large-scale regulatory change programmes such as Basel III Reforms, the Ibor transition and IFRS 17 'Insurance Contracts'. A major area of focus is also expected to be the GAC’s engagement with the UK Government’s consultation and proposals for the future of the UK external audit market.
Report of the Directors | Corporate governance report | | | “Geopolitical developments, civil unrest, the UK's trade negotiation with the EU and the Covid-19 outbreak introduced new challenges for our organisation, customers and people. The Group Risk Committee responded by working closely with management to understand and appropriately challenge scenario stress testing, early warning indicators and management of information."
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Dear Shareholder I am pleased to present the Group Risk Committee (‘GRC’) report. Geopolitical developments, civil unrest in Hong Kong, the UK’s trade negotiations with the EU and the Covid-19 outbreak introduced new challenges for our organisation, customers and people. The GRC responded by working closely with management to understand and appropriately challenge scenario stress testing results, early warning indicators and key management metrics. Importantly, we monitored heightened capital and liquidity risks against the prospect of greater market volatility, large customer financing needs, rapid credit deterioration and lapses in fair outcomes for our customers. We reviewed and challenged the impact of forward economic growth assumptions on our markets and credit exposures. We maintained close watch over people and operational risks arising from fatigue, the health impact of the virus, and government-imposed restrictions. The GRC continued to strengthen its composition and skills to promote proactive risk governance. During the year we welcomed seasoned technology and operations experts Steven Guggenheimer and Eileen Murray to the GRC. We also extended deep appreciation to Sir Jonathan Symonds and Kathleen Casey for their valuable insight and contribution upon their retirement from the GRC and the Board. The GRC convened eight formal meetings plus seven special sessions to review and challenge our most important responsibilities, including Group internal stress testing, internal liquidity adequacy assessment process ('ILAAP'), and internal capital adequacy assessment process ('ICAAP'). We also organised timely education sessions, including a full-day training on sanctions in Hong Kong for non-executive Directors and management in Asia-Pacific. Throughout 2020, the GRC and GAC coordinated closely our respective agendas, as evident in our five jointly organised regional Audit and Risk Committee Chairs’ Forums, which featured discussion on key audit and risk issues with our principal subsidiaries, ensuring alignment of priorities between the Group and its subsidiaries. Jackson Tai Chair Group Risk Committee 23 February 2021 | | | | | | | | | | Membership | | Member since | Meeting attendance in 20192020 | Mark TuckerJackson Tai (Chair) | Oct 2017Sep 2016 | 7/7 | Kathleen Casey | April 2018 | 7/7 | Laura Cha | May 2014 | 7/78/8 | Henri de CastriesKathleen Casey1
| April 2018Jan 2020 | 5/73/3 | Lord Evans of Weardale2
Steven Guggenheimer | April 2018May 2020 | 3/34/4 | Irene Lee | April 2018 | 7/7 | | José Antonio Meade Kuribreña | AprilMay 2019 | 5/58/8 | | Heidi Miller | April 2018Sep 2014 | 7/78/8 | David NishEileen Murray | April 2018Jul 2020 | 7/73/3 | | David Nish | Feb 2020 | 7/7 | Sir Jonathan Symonds1 | April 2017Apr 2018 | 7/72/2 | Jackson Tai | April 2018 | 7/7 | | Pauline van der Meer Mohr | April 2016Apr 2018 | 7/78/8 |
1 Sir Jonathan Symonds stepped down from the Board on 18 February 2020. Kathleen Casey stepped down from the Board on 24 April 2020. Key responsibilities The Group Risk Committee has overall non-executive responsibility for oversight of risk-related matters and the risks impacting the Group. The GRC’s key responsibilities includes: •advising the Board on risk appetite-related matters, and key regulatory submissions, including the ICAAP and ILAAP, as well as recovery and resolution planning; •overseeing and advising the Board on all risk-related matters, including financial risks, non-financial risks and the effectiveness of the Group’s conduct framework; •undertaking a review and challenge of the Group’s stress testing exercises; and •reviewing the effectiveness of the Group’s enterprise risk management framework and internal controls systems (other than internal financial controls overseen by the GAC). Committee governance In carrying out its responsibilities, the GRC is supported by the participation of senior management, including Noel Quinn who attended six GRC meetings in 2020. The Group Chief Risk Officer, Group Chief Financial Officer, Group Head of Audit, Group Chief Compliance Officer and Global Head of Risk Strategy are standing attendees and regularly attend GRC meetings to contribute their subject matter expertise and insight. They facilitate GRC 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 also regularly meets with the Group Chief Risk Officer, the Group Head of Audit and external auditor, PwC, without management present. The Chair also has regular meetings with members of senior management to discuss specific risk matters that arise during the year outside formal meetings. The Chair consults regularly with the Committee Secretary to ensure the GRC meets its governance responsibilities and to consider input from stakeholders when finalising meeting agendas, tracking progress on actions and Committee priorities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Matters considered by the GRC in 2020 | | | | | | | | | | | | | | Jan | Feb | Mar | Apr | May | Jun | Jul | Sep | Oct | Nov | Dec | | Financial risk | ô | l | l | l | l | ô | l | l | ô | l | ô | | Credit risk | ô | ô | ô | ô | l | ô | l | l | ô | l | ô | | IT and operational risk including outsourcing, third-party risk management, cyber risk | l | l | ô | l | l | ô | l | l | ô | l | ô | | Model risk | l | ô | ô | l | ô | ô | ô | l | ô | ô | ô | | People and conduct risk | l | l | ô | ô | ô | ô | l | l | ô | l | ô | | Risk appetite | ô | l | ô | ô | ô | ô | l | ô | ô | l | ô | | Financial crime risk | l | l | ô | l | l | l | l | l | l | l | ô | | Regulatory compliance | ô | l | ô | l | ô | ô | l | l | ô | l | l | | Legal risk | l | l | ô | ô | ô | ô | l | ô | ô | l | ô |
How the GRC discharges its responsibilities During 2020, the GRC reshaped its meeting agenda to place greater emphasis on a regular review of the Group’s risk landscape and to track the management of information and desired outcomes for our most important risk areas. Each meeting now commences with a review of our enterprise risk landscape through the Group Chief Risk Officer’s update of the Group risk profile followed by a comprehensive review of critical management information, led by the Group Chief Risk Officer, and supported by the Group Chief Financial Officer, Group Chief Operating Officer, Group Chief Compliance Officer and Group Human Resources Officer. The GRC also reviewed internal and external audit reports and regular risk reports, which provided deeper reporting on the Group’s risk profile and highlighted the material current and forward-looking risks and issues, such that the GRC could effectively identify any areas that required more of the GRC's attention. A summary of coverage is set out in the table above. Throughout the year, the GRC adhered to an agenda that sought to regularly address topics and oversight responsibilities set out in the Group risk taxonomy, while being flexible to undertake informed review and appropriate challenge of timely risk issues that have economic, commercial, regulatory and reputational implications for the Group’s franchise. Three thematic risk areas are described below to illustrate the GRC’s focus during the year. Sustainable control environment During 2020, 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. The GRC reviewed model enhancements needed as a result of changes in the economy due to the Covid-19 outbreak. The GRC also continued its review of the Group’s approach to operational resilience and identified improvements from a pilot study to identify areas for further enhancements. The GRC also reviewed the effectiveness of the Group’s anti-fraud controls. At the November meeting of the Committee, it was agreed the ultimate oversight for all of the Group’s entity level controls move from the GAC to the GRC. This change supports the Committee’s responsibility for review and oversight of the risk management culture, framework and internal control systems. Financial risk The GRC provided informed review and constructive challenge to the Group’s regulatory submissions of ICAAP and ILAAP. It also monitored progress on the Group’s liquidity risk management improvement plan, including the development of the internal liquidity metric. It reviewed work by the Global Finance function on strengthening recovery planning. The GRC continued to maintain oversight of the Group’s regulatory and internal stress testing programmes, particularly in light of the impact of the Covid-19 outbreak with specific review and challenge of the key assumptions, strategic management actions and outcomes of the principal tests conducted. Through these reviews, the GRC assessed risks 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 2020, 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 operational resilience, climate risk and sanctions. The Committee received updates on regulators’ rules and guidance relating to operational resilience, which is designed to protect customers and maintain economic stability by preventing incidents leading to intolerable consumer harm, market disruption, and impact to the safety and soundness of firms. To reinforce continued emphasis and visibility on financial crime and sanctions compliance, the GRC organised a full-day training session on international sanctions early in the year in Hong Kong for our Asia-Pacific non-executive Directors and management. The GRC also considered the PRA’s latest requirements and expectations relating to evidencing of the embedding of climate risk management capabilities within regulated firms. Activities outside formal meetings The GRC organised a number of activities outside of its regular meeting cycle to facilitate more effective oversight of the risks impacting the Group. In particular, the GRC’s formal meetings continue to be supported by training and ‘walk-through’ sessions to raise the GRC’s understanding of the underlying domain issues, ensuring the GRC is well prepared in its informed review and constructive challenge. The chairs of principal subsidiary risk committees were also invited. Activities included, among others: •a Directors' education session, held in October 2020, focusing on the increasingly complex international sanctions and export control landscape, including key sanctions challenges facing the Group with the imposition of new US sanctions following the US Hong Kong Autonomy Act. This education session was attended by 27 non-executive Directors from across the Group; •a Directors' education session, held in November 2020, led by senior leaders in Group Treasury on the implementation of the internal liquidity metric, which is designed to provide an internal view of liquidity risk and to ensure the Group holds enough liquidity to meet and recover from a defined stress; •GRC Chair’s Working Sessions on a range of topics including financial crime developments, progress on FCA conduct remediation matters (May 2020), the Wealth and Personal Banking conduct programme (May 2020), progress on regulatory remediation programmes (January and December 2020), the outcomes and implications of the 2020 Group internal stress test (November 2020), and progress on the 2020 ICAAP and ILAAP submissions (November 2020); and •three cybersecurity consultation sessions and regular updates on cyber developments such as cyber-crime, legislation and technology led by the GRC’s independent cybersecurity adviser. 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 and that the risk management and internal control systems in place were operating effectively.
Report of the Directors | Corporate governance report Throughout 2020, the GRC proactively encouraged principal subsidiary risk committee chairs to participate in regular GRC meetings and special review or learning sessions, leading to improved connectivity between the Group and principal subsidiary risk committees. In addition the GRC Chair participated in the meetings of principal subsidiary risk committees for Asia, the UK, Europe, the US, Latin America, Canada and the Middle East, with the aim of ensuring strong alignment, information sharing and connectivity between the GRC and principal subsidiaries. Collaboration between the GRC and GAC 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 coordination or joint meetings where appropriate. The GRC and GAC Chairs are members of both committees to further enhance connectivity, coordination and flow of information. Audit and Risk Committee Chairs' Forum The Audit and Risk Committee Chairs' ('ARCC') Forum meetings continue to be one of the more collaborative GRC and GAC exercises. The forum meetings promote shared risk and audit subject matter expertise, align Group and subsidiary priorities, support the subsidiary accountability framework and promote two-way connectivity between the Group and principal subsidiary risk and audit committees. The meetings are jointly hosted by the GAC and GRC Chairs and attended by members of the GAC and GRC, the Group Executive Committee (more than half of whom attended at least one meeting), several Group non-executive Directors, the chairs of principal and regional subsidiary audit and risk committees, together with non-executive Directors and senior management from those subsidiaries. In May, the ARCC Forum provided updates through video calls with the Asia-Pacific region and a combined call with the Europe, Middle East and Americas regions. This was followed by three ARCC Forum calls for each of the Asia-Pacific, UK, Europe and Middle East, and Americas regions in September and November. The ARCC Forums provided an important opportunity for the GRC to understand locally-specific issues and priorities with potential read-across to other areas and regions of the Group. They also served to help the GRC hear the observations, concerns and achievements from subsidiary risk and audit chairs, with a particular focus on pressing issues or concerns (such as the Covid-19 outbreak, business restructuring, or macroeconomic issues); where Group initiatives need to be recalibrated to reflect regional constraints; cross-regional dependencies; and where the Group can progress faster. In light of the Covid-19 pandemic and highly uncertain macroeconomic environment, the ARCC Forum meetings included discussion on: •reinforcing the control environment and embedding of non-financial risk management; •sustaining operational integrity and resilience during a Covid-19 and restructuring environment; •need for even stronger risk appetite, credit, counterparty and conduct risk management during a Covid-19 and macroeconomic-sensitive environment; •strengthening model risk management and our portfolio of models at the Group level and in the regions; •subsidiaries’ role and responsibilities in our Group recovery and resolvability planning in a more macroeconomic-sensitive environment; and •understanding the perspectives and feedback from regional subsidiaries.
Focus of future activities The GRC’s focus for 2021 will include the following activities. It will: •provide oversight of the execution risk arising from the Group transformation programme; •oversee enhancements to our risk appetite statement so that it is more regular, forward-looking and risk responsive; •ensure the risk appetite statement is closely linked to our strategic goals, our annual operating plan, stress testing, ILAAP and ICAAP exercises, and our recovery and resolution planning; •monitor and appropriately challenge management’s plans to manage and mitigate the impacts of geopolitical risks on our operations and portfolios in Asia, the Middle East and the rest of the world; •monitor the impact of the Covid-19 outbreak on the Group’s customer franchise as well as on the capital and liquidity risk, credit risk, market risk, people and operational risk for the Group; •monitor continued progress in financial crime compliance, including enhancements in our transaction monitoring programme and the application of new analytical tools and applications to improve our fraud detection and prevention; •continue to monitor developments and enhancements in the Group’s management of conduct and culture, as well as people risk management; •continue to review and challenge management’s progress in developing and implementing our operational resilience strategy; •oversee the Group’s approach to climate risk management and climate risk appetite; •review plans, jointly with the GAC, to strengthen the Group’s data strategy and management so that we can better serve our customers, protect customer data as well as strengthen model risk management, credit risk management and risk appetite, including climate risk appetite; and •track progress regularly in remediating outstanding, unresolved regulatory actions across the Group and principal subsidiaries, including progress in closing-out any regulatory consent orders or matters requiring attention. Committee evaluation The GRC is committed to regular, independent evaluation of its own effectiveness. During 2020, the GRC undertook an internal GRC effectiveness exercise, which concluded that the GRC continued to operate effectively and in line with regulatory requirements. The effectiveness exercise highlighted improvements made in 2020 to anchor meetings with the regular review of the Group’s risk landscape and management information. Progress made in relation to the Committee’s operation and engagement with principal subsidiaries was acknowledged. The review also made certain recommendations for enhancement, including in relation to rebalancing the breadth of the GRC agenda, and increasing the use of alternative mechanisms to allow the GRC to efficiently exercise oversight of risk matters through additional education and supplementary sessions. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings. The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2020.
| | | | | | | | | | | Principal activities and significant issues considered during 2020 | | Areas of focus | | Key issues | Conclusions and actions | | Risk appetite | | The Group risk appetite statement defines the Group’s risk appetite and tolerance thresholds and forms the basis of the first and second lines of defence’s management of risks, our capacity and capabilities to support our customers, and the pursuit of the Group’s strategic goals | The GRC 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. It then continued to work closely with Group Risk Strategy to enhance the 2021 risk appetite statement including a climate risk qualitative statement and quantitative measures that focus on the Group's exposure and risk profile to high transition risk sectors, as well as improvements to the suite of resilience risk metrics. The GRC also raised the importance of strengthening the granularity risk appetite statements to be forward-looking and risk-responsive at GRC meetings and at regional ARCC Forums. In the process, the GRC has reinforced the importance of stronger linkage of the risk appetite statements to the Group’s annual operating plan, strategic planning, stress testing exercises, annual capital adequacy and liquidity management exercises, and to the Group’s recovery and resolution planning. | | | | | | | Geopolitical developments and risks | | Geopolitical developments and risks continue to present significant challenges for the Group’s customer franchise and for the resilience of our operations. | The GRC reviewed the Group’s readiness to address major geopolitical developments, including the short- and longer-term impact of civil unrest in Hong Kong and heightened trade tensions between the US and China on our Asia and global franchise, as well as our ability to maintain our high service levels in our multi-channels to serve our customers. The GRC also monitored the Group’s preparedness for financial market, operational and commercial disruptions arising out of protracted UK trade negotiations with the EU. | | | | | | | Managing through the Covid-19 outbreak | | Managing operational risk and counterparty credit risk to enable the Group’s support of our customers, communities and the local economy throughout the Covid-19 outbreak. | The GRC reviewed how the Group leveraged its capital and liquidity strength, robust credit standards, and digital capabilities to assist customers during the Covid-19 outbreak and to maintain market strength. In doing so, the Committee closely assessed credit trends, economic outlook and the impact on portfolio credit quality. The GRC also reviewed the operational, reputational and conduct challenges in implementing government support schemes across different geographies and regulatory jurisdictions, including associated risks, controls and oversight. | | | | | | | | | | Operational resilience | | Management’s operational resilience programme is being redesigned to enable our priority business services to continue to serve our customers in the event of unforeseen disruptions in our key markets. | The GRC maintained its focus on the Group’s policies, programmes and practices for strengthening and prioritising our ability to test, detect, resolve and recover from unforeseen operational disruptions in our key markets. With the goal of minimising harm to our customers and to the local financial markets, the GRC continued its review of the Group’s approach to operational resilience, which incorporates learnings from the Group's response to the Covid-19 outbreak across our franchise. The GRC’s oversight activities included: •the review and challenge of progress on the formulation of a comprehensive operational resilience strategy including working with the Group Chief Control Officer on the programme to comply with regulatory standards for operational resilience; •the planned 'operationalisation' of critical business services and impact tolerances, and risk and control mapping to strengthen the ability to prevent, respond to, recover, and learn from operational disruptions, such as Covid-19; •the embedding of ownership with first line business and function leaders to deliver operational resilience outcomes for customers, for the Group’s own safety and soundness, and to avoid disruptions to market integrity and financial stability; and •the review and challenge of management’s progress in managing third-party risk in the context of an increasing reliance on technology services provided by third parties and growing regulatory scrutiny. | | | | | | | Technology resilience including cybersecurity and Cloud strategy | | Technology resilience is the risk of unmanaged disruption to any IT system within HSBC, as a result of malicious acts, accidental actions or poor IT practice or IT system failure. | The GRC reviewed the Committee’s approach to governance of technology risk and Cloud adoption, which was a high priority area under regulatory scrutiny. The GRC also continued its oversight and challenge of the Group’s cybersecurity strategy and management of cyber risks. | | | | | | | | | | People, conduct and culture | | The Group promotes a culture that is effective in managing risk and leads to fair conduct outcomes.
It seeks to actively manage the risk of adverse impact due to not having the right people with the right skills doing the right thing, including risks associated with employment practices and relations. | The GRC continued to exercise oversight in the area of people risk and employee conduct, supported by the Group Chief Human Resources Officer and Group business heads, including: •regular monitoring of 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; •informed review and challenge of the alignment of risk and reward, satisfying itself that risk and compliance objectives and outcomes were reflected in the Group variable pay pool; •discussion of the people risk issues arising due to the impact of the Covid-19 outbreak; and •the review of workplace harassment data and insights, action taken and 2020 focus areas. | | | | |
Report of the Directors | Corporate governance report | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | Areas of focus | | Key issues | Conclusions and actions | | Climate risk | | Successful delivery of HSBC’s climate ambition will be determined by our ability to measure and manage all components of climate risk. | The GRC recognises the Group’s regulatory commitments due in 2021 and the Group’s own publicly stated climate risk targets, as well as the need to manage climate risk of the Group’s existing portfolios and future business. The GRC reviewed the Group’s approach to climate risk management and climate risk appetite including associated stress testing and scenario analysis. | | | | | | | | | Capital and liquidity risk
including ICAAP and ILAAP
| | The GRC oversees the Group’s management of its financial risk, particularly in the context of the challenges of the Covid-19 outbreak. | The GRC reviewed the Group’s capability to track environmental and macroeconomic headwinds through early warning indicators and scenario stress testing. It also oversaw the Group’s progress in developing a range of strategic management actions capable of timely execution and the development of recovery and resolution capabilities that meet PRA and local regulatory expectations. The GRC also maintained oversight of the Group’s liquidity risk management with particular emphasis on the outlook, lessons learned from the Covid-19 outbreak, metric development, systems and controls, and regulatory feedback.
The GRC reviewed and challenged the assessment of the Group ICAAP and ILAAP programmes and engaged with Group management in overseeing and evaluating the Group’s forward-looking capital and liquidity strategies and capabilities, including the Group’s liquidity risk management improvement programme. Additionally, the GRC Chairs participated in several subsidiary risk committees’ review of ICAAP, leading up to final GRC review, challenge and recommendation of ICAAP to the Board. | | | | | | | Financial crime risk | | The Group is committed to closely monitoring and managing the risk of knowingly or unknowingly helping parties to commit or to further potentially illegal activity, including both internal and external fraud. | Throughout 2020, the GRC reviewed the Group’s approach to managing its financial crime risk across a number of important areas. This included: •the Group’s progress in enhancing its transaction monitoring framework; •the fraud landscape, particularly against heightened Covid-19 conditions, the Group’s fraud risk profile and the impact of regulatory developments; and •the nature and scale of insider risk and the Group’s strategies for managing insider risk. The GRC also maintained oversight of the ever-changing and increasingly complex international sanctions landscape in which the Group and its customers operate, as well as the Group’s approach to managing its compliance with sanctions regimes globally. The GRC held a full-day training session on sanctions in Hong Kong in January for our Asia-Pacific non-executive Directors and management. A further education session on sanctions was held for Group-wide non-executive Directors in October to address the US government imposition of sanctions in connection with its Hong Kong Autonomy Act. Following the organisational restructuring of Financial Crime Compliance, the GRC requested the Committee’s independent financial crime advisers to examine the effectiveness of the financial crime function in the Group’s subsidiaries. | | | | | | | | | | | | | | | Model risk | | HSBC faces risk from the inappropriate or incorrect business decisions arising from the use of models that have been inadequately designed, implemented or used, or from models that do not perform in line with expectations and predictions. | The GRC raised awareness of progress and importance of models at a number of its meetings and at the regional Audit and Risk Committee Chairs’ Forums. It reviewed progress under the Group’s model risk transformation programme. The Committee oversaw the development and embedding of improved model risk management controls and oversight in the first line of defence, as well as enhancements to model risk governance. The GRC also considered the adverse impact of the Covid-19 outbreak on model uncertainty including the need for enhancements as necessary. | | | | | | | Resolvability | | HSBC is required to show how its resolution strategy could be carried out in an orderly way, including identification of any risks to successful resolution. | The GRC monitored the Group’s progress in demonstrating that it has developed capabilities to support its own resolution, in line with the Group’s resolution strategy in order to meet new requirements from the Bank of England under its resolvability assessment framework by 1 January 2022, including the requirement to comply with the valuation in resolution requirement by 1 April 2021, to submit a self-assessment to the PRA/Bank of England by 1 October 2021 and to publicly disclose HSBC’s resolvability in June 2022. Together with the Group Chief Financial Officer, the GRC and GAC programmed our five regional Audit and Risk Committee Chairs' Forums to raise the importance of Boards and management of principal subsidiaries in upgrading their awareness and compliance with new regulatory standards for recovery and resolution. | | | | |
| | | | | | | Directors’ remuneration report | | Page | | Group Remuneration Committee | | | Workforce remuneration | | | Our approach to Directors' remuneration | | | Annual report on remuneration | | | | 1Additional remuneration disclosures | |
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. | | | 'The remuneration outcomes for 2020 strike the right balance between rewarding our employees for their exceptional efforts this year and being equitable in the broader context.' |
Dear Shareholder I am pleased to present our 2020 Directors’ remuneration report on behalf of the members of the Group Remuneration Committee. Making remuneration decisions in the face of the challenges presented by the Covid-19 pandemic required a delicate balancing of factors. Recognising our people for their performance is a key element of our reward strategy and helps to drive ongoing engagement, which is critically important as we navigate through the Covid-19 outbreak and the Group’s transformation. However, we must also recognise the impact of these circumstances on our stakeholders and the wider community. Actions taken in response to Covid-19 In determining the remuneration outcomes, the Committee noted the following: •We did not apply for government support packages for our employees across the countries and territories in which we operate, and put employee well-being, customer experience, and supporting the economy at the centre of our response to the pandemic. •Our front-line employees continued to serve customers in challenging circumstances. Our customer contact centres were fully operational during the period, and between 70% and 90% of branches remained open, as we continued to enhance our digital capabilities. •We worked with governments to support national schemes, granting over 720,000 payment holidays to our personal customers and 237,000 loans to our wholesale customers. We provided more than $26bn in customer relief to our personal customers during the initial stages of the pandemic and more than $52bn in lending to wholesale customers, many of whom still require our support. •In line with all other large UK-based banks and at the direct request of the Group’s lead regulator, the UK’s PRA, we cancelled the fourth interim dividend of 2019 and suspended dividend payments until the end of 2020. In December 2020, the PRA announced a temporary approach to shareholder distributions for 2020. After considering the requirements of the temporary approach, the Board announced an interim dividend for 2020 of $0.15 per ordinary share. | | | | | | | | | | Membership | | Member since | Meeting attendance in 2020 | | Pauline van der Meer Mohr (Chair) | Jan 2016 | 5/5 | Henri de Castries was unable to attend two Committee meetings due to prior engagements. | May 2017 | 5/5 | | James Forese | May 2020 | 4/4 | | Irene Lee | Apr 2018 | 5/5 | | David Nish | May 2017 | 5/5 |
2 Lord Evans
Reflecting on these actions, the Committee concluded that the 2020 remuneration outcomes should strike the right balance between rewarding our employees for their exceptional efforts this year and being equitable in the broader context. Performance and pay for 2020 Financial performance The Group's financial performance deteriorated in 2020, reflecting the impact of Weardale retired from the BoardCovid-19 outbreak on the global economy. Adjusted profit before tax of $12bn was down 45% due to lower revenue and Committee on 12 April 2019. Board succession
Succession planning was centrala higher expected credit loss charge directly linked to the Committee’s agendaimpact of the pandemic.
However, the Group continued to make good progress on its strategic plan, demonstrated by a $51.5bn reduction of RWAs in 2019. It2020 in low-return franchises and a 3% reduction in adjusted costs. Economic activity in Asia has proven to be resilient and is rebounding. We continue to elevate our ambition in the region by stepping up our investment. Non-financial performance We made progress in creating a simpler, more efficient organisation by combining our wholesale back office operations, and bringing our retail, wealth and private banking businesses together into a single global business. We also continue to increase investment in technology to drive improved customer experience and operational efficiency. Technology enhancements introduced in 2020 included automated lending processes for Covid-19 relief programmes, upgraded global payment systems, transformed customer onboarding processes, and use of Cloud technology for risk analytics systems. Remuneration funding approach While events such as those seen in 2020 are rare, our remuneration framework was discusseddesigned with the entire economic cycle in mind, including the possibility of exceptional years. We use a countercyclical funding methodology, with both a floor and a ceiling, to recognise that there will be times when profitability is exceptionally low or exceptionally high as a result of factors not directly linked to employee performance. In such years, factors such as applying franchise protection and limiting the risk of inappropriate behaviour need to be considered when setting the variable pay pool. Nonetheless, financial performance and affordability remain central tenets in determining the appropriateness of the variable pay pool. Group variable pay pool For 2020, the Committee reviewed and agreed the Group variable pay pool of $2,659m, taking into account performance against financial and non-financial metrics set out in the Group risk appetite statement, including conduct, and targets set out in our operating plan. This represents a 20.4% reduction in the pool compared with 2019, with the variable pay pool down approximately 15% in Global Banking and Markets, asset management and private banking, and approximately 22.5% in other areas of the Group. We also differentiated by market, with a better year-on-year outcome in Asia, reflecting the region's strategic importance and consistent contribution towards Group performance. In determining the size of the pool, the Committee took into account the fact that overall financial performance was lower than what we had targeted at each Committee meeting throughoutthe start of the year, and certain non-financial risk metrics were outside of our risk appetite. We also took into account the discussions covered succession planningexceptional circumstances faced by our shareholders, including the impact of the regulatory request to
Report of the Directors | Corporate governance report cancel the final 2019 dividend and suspend dividend payments until the end of 2020. While it is appropriate that the pool is significantly lower this year, the Committee was cognisant of the extraordinary effort and performance of many of our colleagues in 2020. Equally, it is critical we retain talent for the long-term interests of our stakeholders. This is of particular importance in growth markets and our areas of strategic focus, and is most acute for our high performers who are helping us restore the business to our expected performance levels. As a result, the variable pay accrual was increased in the fourth quarter in response to financial performance and market pay challenges. Review of workforce remuneration Remuneration outcomes In allocating the pool, the Committee decided that while the variable pay outcomes for junior colleagues should reflect Group performance, they should receive better outcomes with less differentiation relative to our senior employees. Overall, total compensation for our junior members of staff was broadly flat, which we felt was important given their significant efforts in a challenging year. Higher paid employees had an overall decrease in total compensation. We also made limited fixed pay increases for 2021 and targeted these towards our junior colleagues. As part of the year-end pay review, the Committee reviewed results of remuneration outcomes to ensure they were in line with our pay principles and the approach decided by the Committee for 2020. Support for our employees Throughout 2020, the well-being of our people was our paramount concern. Many employees had to juggle personal and professional priorities, while adapting to new and unfamiliar ways of working. In March 2020, we temporarily paused the redundancy programme intended to deliver the reduction in headcount that we set out in the transformation programme announced in February 2020. The Board was conscious of the impact of proceeding with redundancies, particularly at the outset of the crisis given the significant stress for our people and communities, and the need to protect our capacity to serve our customers. The Board lifted the pause on the redundancy programme in June 2020 while continuing the freeze on the vast majority of external recruitment to make every effort to fill vacancies internally. We maintained a regular flow of communication and listened closely to our colleagues' needs, providing the support and flexibility required to help them manage their lives during the pandemic, and maintained their full pay without applying for government support packages. We ran a mid-year employee survey to determine how the Covid-19 outbreak was impacting our colleagues and how we could support them through this period. More than 50% of our total employee population responded, of which more than 89% said they were getting the information they needed from the organisation, 86% reported that they were getting the support they needed from their line manager and 86% of the respondents reported they felt confident in leadership. In addition, 75% of employees that participated in our 2020 Snapshot survey said they believed HSBC values their well-being. For our departing colleagues, we took steps to offer them support on searching and applying for jobs and preparing for interviews. We also maintained a dedicated advice website, offered virtual workshops and provided access to career development tools to set them up for success outside HSBC. Key remuneration decisions for Directors Voluntary decisions made by executive Directors Reflecting on the severity of the impact of Covid-19 at the outset, our two executive Directors made personal contributions to the fight against the pandemic by donating to charity a quarter of their base salaries for six months, and our Group Chairman donated his entire fee for 12 months to charity. Additionally, as an organisation, we provided $25m in charitable donations, which went toward immediate medical relief, access to food, and care for the most vulnerable people. Our executive Directors also decided to voluntarily forgo any annual cash bonus for 2020 due to the impact of the suspension of dividends on our shareholders. Executive Director annual performance assessment With regard to performance-based pay for 2020, the financial measures in the executive Directors’ annual scorecards were aligned to the delivery of profit before tax, our strategic priority of reducing RWAs in low-return franchises and, for the Group Chief Financial Officer, effective management of Group costs. Following careful consideration, these targets were not revised for the significant economic impact of the Covid-19 outbreak to reflect the Committee’s view that reward for our executive Directors should align with the experience of our shareholders. Non-financial performance measures were linked to customer satisfaction, employee engagement and diversity, environmental stewardship, risk and compliance, and organisational simplification. The Committee noted strong non-financial performance as our commitment to delivering responsibly for our stakeholders remained unchanged throughout the pandemic. In addition to the actions noted to support our customers and the wider economy, customer and digital satisfaction scores increased in some of our scale markets, employee engagement scores improved, we met our diversity goal of having at least 30% women in senior management roles, and we achieved carbon reduction and sustainable finance and investment targets. We were also recognised by Euromoney for ‘Global Excellence in Leadership during the Covid-19 pandemic’ in its Awards for Excellence 2020. Executive Director annual incentive scorecard outcome The above resulted in an overall outcome of 64.50% for the Group Chief Executive and 63.75% for the Group Chief Financial Officer (further details of performance are provided on page 283). The Committee reviewed this outcome in the context of a number of internal and external considerations to determine whether it should exercise its discretion to reduce the outcome, including: •overall share price performance in the year, which was significantly impacted by both the Covid-19 outbreak and the impact of the PRA’s request to suspend dividend payments; •the impact of the bonus pool reduction on the total compensation for our wider workforce; •profit before tax and return on tangible equity ('RoTE') performance; and •the positive actions taken by the Board to support our customers, colleagues and communities in these uncertain times. The Committee determined the 2020 formulaic scorecard outcomes appropriately reward the executive Directors for their performance within the context of overall stakeholder experience. With the voluntary waiver of cash bonuses by executive Directors, the Group Chief Executive's effective payout was reduced to 32.25% of its maximum, and the Group Chief Financial Officer's was reduced to 31.88%. The effective payouts are 51.43% and 58.86% below their respective outcomes compared with 2019. 2020 long-term incentive ('LTI') for executive Directors To reflect the Group’s strategy, and after listening to our shareholders, the Committee has agreed that the 2020 LTI will be based on four equally weighted measures. •RoTE: We have retained a key measure of our financial performance and how we generate returns that deliver value for our shareholders. •Capital reallocation to Asia: We have set a new metric to assess a key lever of our strategy and business transformation plan. •Environment and sustainability: We have set a new measure to align with the Group’s climate ambition to bring our own operations to net zero by 2030 and support our customers in their transition to a more sustainable future. •Relative total shareholder return: We have retained this metric, which rewards executive Directors based on comparison of the
total shareholder return performance of the Group and a relevant peer group. 2020 LTI grant size The Committee is aware of shareholders’ expectations on the need to adjust the size of LTI awards to ensure they do not result in 'windfall gains' in the event that the share price falls significantly due to the impact of the Covid-19 outbreak. While this does not impact outstanding LTI awards, the Committee agreed, in line with investor expectations, that the 2020 LTI awards should be subject to a 'windfall gain' adjustment at grant if the share price falls significantly relative to the grant price of the 2019 LTI. This is to ensure that the reward for our executive Directors aligns with the experience of our shareholders and is reflective of management performance over the performance period. While the share price to be used for the 2020 LTI award is not known at this stage, the Committee has agreed, in line with investor expectations, if the 2020 LTI grant share price experiences a greater than 30% decline since the previous grant, this would be considered a material share price fall, and an adjustment percentage equal to half the share price percentage decline would be applied to the awards to mitigate the potential for 'windfall gains'. Executive Directors' fixed pay for 2021 We have increased the base salary of our executive Directors by 1.6% in line with the average increase for our Group employees. Additionally, in an expansion to his current remit, the Group Chief Financial Officer will assume responsibility for the Group’s transformation programme, effective immediately, and its mergers and acquisitions agenda, from April. In acknowledgement of the expanded remit and responsibilities, the Committee has decided to adjust his fixed pay allowance from £950,000 to £1,085,000 in accordance with the terms of the Directors’ remuneration policy approved at the 2019 AGM. The executive Directors have made the personal decision to donate 100% of their salary and fixed pay allowance increases for 2021 to charity given the ongoing challenging external environment. Investor consultation The Committee considers that regular dialogue with our shareholders, including outside of our policy vote years and especially during these uncertain times, is important to ensure our remuneration policy operates as intended and in line with shareholder expectations. In 2020, we met with a number of our significant shareholders and proxy voting agencies to hear their views on executive and wider workforce remuneration. As ever, we found this engagement to be very helpful as we considered the implementation of our remuneration policy, including the 'windfall gain' adjustment for the 2020 LTI award, and use of ESG measures in the forward-looking scorecards. Further details of the 2020 LTI measures and targets are on page 286. The 2021 annual incentive scorecard is provided on page 292.
On behalf of the Committee, I would like to thank investors for their time during the consultations and their support for the direction of travel. The Group’s Directors’ remuneration policy is due to expire at the 2022 AGM. During the course of 2021, we will be reviewing our current approach to Directors’ remuneration and will consult with our large shareholders and proxy advisory bodies with the aim of introducing a new policy in 2022. The review will continue to be based on our following key principles: •The policy should be simple and transparent. •There should be a strong alignment between rewards and the interests of our stakeholders, including shareholders, customers and employees. •The policy should maintain a focus on long-term performance. •The total compensation package should be competitive to ensure we can retain and attract talent. •The structure should meet the expectations of investors and our regulators. The Committee is concerned that over time, HSBC’s overall remuneration opportunity has fallen behind desired levels to reflect the calibre of the executives and market positioning. While conscious of external sentiment, one of the areas of focus for the Committee will therefore be ensuring that overall remuneration levels remain appropriate in the context of the above and support delivery of our strategic priorities. Any proposed changes would be discussed with shareholders and the proxy advisory bodies as part of the wider consultation on the remuneration policy in 2021. Our annual report on remuneration As Chair of the Committee, I hope you will support the 2020 Directors' remuneration report.
Pauline van der Meer Mohr Chair Group Remuneration Committee 23 February 2021
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, the Group Chairman 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. The Committee met five times during 2020. James Forese was appointed as a member of the Committee on 1 May 2020. David Nish stepped down as a member of the Committee on 23 February 2021. The following is a summary of the Committee’s key activities during 2020. | | | | | | | | | | | | | | | | | | | Matters considered during 2020 | | | | | | | | Jan | May | Jul | Sep | Dec | | Remuneration framework and governance | | Group variable pay pool, workforce performance and pay matters, Gender Pay Gap report, and employee surveys | l | l | l | l | l | | Executive Director remuneration policy implementation, scorecards and pay proposals | l | l | l | l | l | | Remuneration for other senior executives of the Group | l | l | ô | ô | l | | Non-executive Director compensation | ô | l | ô | ô | l | | Shareholder consultation and proxy adviser views | ô | l | ô | l | l | | Directors’ remuneration report | l | ô | ô | l | l | | Regulatory, risk and audit | | Information on material risk and audit events, and performance and remuneration impacts for individuals involved | l | l | l | l | l | | Regulatory updates and filings, including approach and outcomes for the identification of Material Risk Takers | l | l | l | l | l | | Corporate governance briefings | ô | l | ô | ô | l | | Principal subsidiaries | | Matters from subsidiary committees | l | l | l | l | l |
Advisers The Committee received input and advice from different advisers on specific topics during 2020. Deloitte LLP’s engagement with the Committee was extended during 2020. The Committee’s decision reflected the quality and objectivity of the independent advice that Deloitte had provided to the Committee on remuneration matters. Deloitte provided benchmarking data on remuneration policy matters and independent advice to the Committee. 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 adviser by management after considering invited proposals from similar consultancy firms. It provides actuarial support to Global 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 2020. 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 2020, total fees of £173,900 and £68,289 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 Group Chief Executive provided regular briefings to the Committee. In addition, the Committee engaged with and received updates from the following: •Mark Tucker, Group Chairman; •Elaine Arden, Group Chief Human Resources Officer; •Alexander Lowen, Group Head of Performance Management, Reward, Human Resources Transformation and People Analytics; •Pam Kaur, Group Chief Risk Officer; •Colin Bell, Group Chief Compliance Officer; •Jonathan Calvert-Davies, Group Head of Audit; and •Aileen Taylor, Group Company Secretary and Chief Governance Officer. The Committee also received feedback and input from the Group Risk Committee and Group Audit Committee on risk, conduct and compliance-related matters relevant to remuneration. Review of workforce remuneration and related policies In light of the year's challenging circumstances, the Committee's review and approval of the workforce remuneration strategy was particularly focused on ensuring protection for our junior employees and delivering appropriate pay differentiation for those areas of the business that performed well. The Committee also reviewed the results of remuneration outcomes across the Group to ensure they were in line with our pay principles (as set out on page 275). This included details of variable remuneration adjustments and 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. We measure our employees’ sentiment on performance and pay matters through our annual pay review surveys. In the first half of 2020, the Committee reviewed the results of the most recent survey. A significant proportion of the respondents’ comments indicated improved sentiment towards our pay review process. The majority of employees believed their year-end ratings were a fair reflection of their performance and behaviour, and felt motivated to perform at their best following their performance review. Committee effectiveness The annual review of the effectiveness of the Board committees was internally facilitated during 2020. Overall, the review concluded that the Group Remuneration Committee continued to operate effectively, with a number of positive aspects of the operation and practices highlighted by the review. There were also areas of improvement identified, including the engagement dynamic with advisers. The Committee has considered and discussed the outcomes of the evaluation, and accepts the findings with a number of actions to address them already in progress. The outcomes of the evaluation have been reported to the Board and the Committee will track progress against the recommendations during 2021.
| | | | | | | | | | | | | | | | Our approach to workforce remuneration |
Remuneration principles Our performance and pay strategy aims to reward competitively the achievement of long-term sustainable performance by attracting, motivating and retaining the very best people, regardless of gender, ethnicity, age, disability or any other factor unrelated to performance or experience. It supports our people to perform their roles in the long-term interests of our stakeholders, which includes the 90 most senior roles acrosscustomers and communities we serve, our shareholders and our regulators. The strategy is underpinned by: •decisions that are fair, appropriate and free from bias; •a culture supportive of continuous feedback through manager and employee empowerment; •reward and recognition of sustainable performance and values-aligned behaviour; and •a balanced, simple and transparent total reward package that supports employee well-being. Spotlight on 2020: Our response to the Group.Covid-19 outbreak These principles were key to facilitating the agile approach we took to pay and performance in response to the Covid-19 outbreak. In response to the challenging circumstances our colleagues faced, we offered them increased practical support, recognised them for their exceptional response to our customers and each other, and helped to ensure fair and appropriate treatment. | | | Appropriate practical support for our colleagues •We took a country-based approach to our response to ensure that what we provided to our employees was appropriate for the conditions and restrictions in place in their location. •Our priority was to support the well-being of our employees using a range of initiatives focusing on: –enabling employees to work flexibly to support additional caring responsibilities; –ensuring employees could purchase the equipment they needed to work from home wherever possible; –providing financial assistance to employees who may have incurred additional costs, for example where normal commuting or onsite catering services were disrupted; and –supporting mental and physical well-being with employee assistance programmes, access to Covid-19-related private medical treatment and flu vaccination initiatives. •More than 50% of our total employee population responded to our mid-year employee survey. Of those who responded, 86% of employees reported they were getting the support they needed from their line manager, and 83% said they believed HSBC valued their well-being. | Recognising the exceptional response •We ran a ‘Spotlight’ campaign within our ‘At Our Best Recognition’ points programme that focused on recognising our Covid-19 Heroes. •There were over 169,000 colleague recognitions made over a three-month period, a threefold increase in recognitions compared with previous Spotlight campaigns that we have run. | Helping managers to make fair decisions •The majority of our people underwent a change in working pattern and/or location as a result of the Covid-19 outbreak. We wanted to ensure our people are always recognised against relevant and achievable objectives with allowance for barriers to performance outside of their control. •In response to the Covid-19 outbreak, we issued specific guidance for managing performance under some of the most common scenarios our people found themselves in, to support our managers in continuing to make performance decisions. |
Report of the Directors | Corporate governance report Our approach to performance and pay in 2020 for the broader workforce was underpinned by our remuneration principles. | | | | | | | Principle | Our approach in 2020 | Fair, appropriate and free from bias
| •Our communications to managers encouraged them to challenge their assessments by questioning whether they were objective and based on fact. Managers in similar roles then came together to complete fairness reviews of the performance and behaviour ratings of their team and make any necessary adjustments based on the review of the peer group to mitigate the risk of bias and take a broader view of team performance. •We supported managers, particularly the less experienced ones, to make informed, consistent and fair pay decisions. Managers of 96% of our junior employees are supported by simplified or guided decision making. •As part of our annual performance and pay review process, we undertook analytical reviews to check for and identify bias, and provide these reports to our senior management and Group Remuneration Committee as part of their review of annual pay review outcomes. •We made pay and performance reporting tools available to our managers for the purpose of undertaking an analytical review of pay decisions for their team. We continue to enhance these based on manager feedback to make these tools useful and increase usage. •We regularly review our pay practices and in 2020 worked 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 made adjustments. | A culture of continuous feedback through manager and employee empowerment
| •We seek to create a culture where our people can fulfil their potential, gain new skills and develop their careers for the future. •In 2020, we enhanced our continuous feedback culture, Everyday Performance and Development, which supported our people to have regular conversations with their line managers about items such as their performance, pay, development and well-being throughout the year. •We launched our Continuous Performance Management tool, including on mobile, to make it easier for our people as team members and as managers to share activities, feedback, achievements and progress regularly to drive conversations. •We encouraged colleagues to use our online career planning tools to help them with their thinking about future roles and the capabilities they require. •Line managers were 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. We were clear on the decisions that managers are empowered to own and provided them with principles to support such decision making. •Employees also received 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. | Reward and recognition of sustainable performance and values-aligned behaviour
| •We have a robust performance management process that underpins our approach to reward 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 impact the relevant pool, while the final pool also considers the external operating environment and expectation of our stakeholders. •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 to ensure performance is assessed not only on what is achieved, but also on how it is achieved. •We 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 recognise their colleagues for demonstrating our values, with an award of recognition points that can be redeemed against a wide range of goods. Over one million peer-to-peer recognitions were made globally in 2020. •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. | | Balanced, simple and transparent total reward packages, which support employee well-being | •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 are informed, but not driven, by market position and practice. •For the 2020 pay review process, we have prioritised fixed pay increases for our global career bands 6 to 8 population, where it represents a higher proportion of total compensation, and towards locations and business areas which are particularly integral to the execution of the Group’s strategy. •We are committed to employee well-being and offer employee benefits that support the mental, physical and financial health of a diverse workforce. •All HSBC employees that work in a jurisdiction with a legal minimum wage are paid at or above this amount. 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’. |
Payments on loss of office The Committee’s processtable below sets out the basis on which payments on loss of office may be made. Other than as set out in the table, there are no further obligations which could give rise to remuneration payments or payments for identifying – or planning for – new members to the Board considers the tenures, time commitments, skills and experienceloss of office. | | | | | | | Payments on loss of office | | Component of remuneration | Approach taken | | Fixed pay and benefits | Executive Directors may be entitled to payments in lieu of: •notice, which may consist of base salary, FPA, pension entitlements and other contractual benefits, or an amount in lieu of; and/or •accrued but untaken holiday entitlement. Payments may be made in instalments or a lump sum, and may be subject to mitigation, and subject to applicable tax and social security deductions. | | Annual incentive and LTI | In exceptional circumstances, as determined by the Committee, an executive Director may be eligible for the grant of annual and/or long-term incentives under the HSBC Share Plan based on the time worked in the performance year and on the individual’s contribution. | | Unvested awards | All unvested awards will be forfeited when an executive Director ceases employment voluntarily and is not deemed a good leaver. An executive Director may be considered a good leaver, under the HSBC Share Plan, if their employment ceases in specified circumstances which includes: •ill health, injury or disability, as established to the satisfaction of the Committee; •retirement with the agreement and approval of the Committee; •the employee's employer ceasing to be a member of the Group; •redundancy with the agreement and approval of the Committee; or •any other reason at the discretion of the Committee. If an executive Director is considered a good leaver, unvested awards will normally continue to vest in line with the applicable vesting dates, subject to performance conditions, the share plan rules, and malus and clawback provisions. In the event of death, unvested awards will vest and will be released to the executive Director’s estate as soon as practicable. In respect of outstanding unvested awards, the Committee may determine that good leaver status is contingent upon the Committee being satisfied that the executive has no current or future intention at the date of leaving HSBC of being employed by any competitor financial services firm. The Committee determines the list of competitor firms from time to time, and the length of time for which this restriction applies. If the Committee becomes aware of any evidence to the contrary before vesting, the award will lapse. | | Post-departure benefits | Executive Directors can be provided certain benefits for up to a maximum of seven years from date of departure for those who depart under good leaver provisions under the HSBC Share Plan, in accordance with the terms of the policy. Benefits may include, but are not limited to, medical coverage, tax return preparation assistance and legal expenses. The Committee also has the discretion to extend the post-departure benefit of medical coverage to former executive Directors, up to a maximum of seven years from their date of departure. | | Other | Where an executive Director has been relocated as part of their employment, the Committee retains the discretion to pay the repatriation costs. This may include, but is not restricted to, airfare, accommodation, shipment, storage, utilities, and any tax and social security that may be due in respect of such benefits. Except in the case of gross misconduct or resignation, an executive Director may also receive retirement gifts. | | Legal claims | The Committee retains the discretion to make payments (including professional and outplacement fees) to mitigate against legal claims, subject to any such payments being made in accordance with the terms of an appropriate settlement agreement waiving all claims against the Group. | | Change of control | In the event of a change of control, outstanding awards will be treated in line with the provisions set out in the respective plan rules. |
Report of the existingDirectors | Corporate governance report | | | | 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 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. Remuneration policy summary – executive Directors | | | | | | | | | | Elements and objectives | Operation | Implementation in 2021 | Base salary1 | •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. | Base salary will be increased by 1.6% in line with the overall increase for Group employees. Base salary from 1 March 2021 will be as follows: •Noel Quinn: £1,291,000 •Ewen Stevenson: £753,000 | | To attract and retain key talent by being market competitive and rewarding ongoing contribution to role. | Fixed pay allowance (‘FPA’)1 | •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. | FPA for 2021 will be as follows: •Noel Quinn: £1,700,000 •Ewen Stevenson: will increase from £950,000 to £1,085,000 from 1 March 2021 | | 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. | | Cash in lieu of pension | •Cash in lieu of pension is paid on a monthly basis as 10% of base salary. •This allowance, 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. | •No change to percentage of base salary. | | To attract and retain key talent by being market competitive. | | | Annual incentive | •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 immediately vested. •On vesting, shares equivalent to the net number of shares that have vested (after those sold to cover any income tax and social 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; –increase the proportion of the award to be delivered in shares; and –defer the vesting of a portion of the award. | •See page 292 for details of performance measures. | 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') | •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 social 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. | •See page 292 for further details. | To incentivise sustainable long-term performance and alignment with shareholder interests.
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1 The executive Directors have made the personal decision to donate 100% of their increases to salaries and increases to their fixed pay allowances for 2021 to charity given the ongoing challenging external environment.
Remuneration policy summary – executive Directors | | | | | | | | | | Elements and objectives | Operation | Implementation in 2021 | | Benefits | •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). •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. | •Benefits to be provided as per policy. Details will be disclosed in the Annual Report and Accounts 2021 single figure of remuneration table.
| To provide benefits in accordance with local market practice.
| | | Shareholding guidelines | 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% | •No change to percentage of base salary. | To ensure appropriate alignment with the interest of our shareholders.
| | All-employee share plans | Executive Directors are eligible to participate in all-employee share plans, such as HSBC Sharesave, on the same basis as all other employees. | •Participation in any such plans will be disclosed in the Annual Report and Accounts 2021, as required. | | To promote share ownership by all employees. |
Illustration of release profile The following chart provides an illustrative release profile of remuneration for executive Directors. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Illustration of release profile | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | u | | | Fixed pay allowance | •Released in five equal annual instalments starting from March 2021. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | u | | | | u | | | | u | | | | u | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Annual incentive | •Paid 50% in cash and 50% in immediately vested shares subject to a retention period of one year. •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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Perform-ance period | | Retained shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | u | | | u | | u | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Clawback | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Long-term incentive | •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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performance period | | | | | | | | Vesting period | | | | | | | | | | | | | | | | | | | u | | | | | | | | | | | u | | u | | | | u | | | | u | | | | u | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retention period | u | | | | u | | | | u | | | | u | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Malus | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Clawback | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | u | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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. The table below details how the Group Remuneration Committee remains committedaddresses the principles set out in the UK Corporate Governance Code in respect of the Directors' remuneration policy.
Report of the Directors | Corporate governance report | | | | | | | Provision | Approach | | Clarity | •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. | | Remuneration arrangements should be transparent and promote effective engagement with shareholders and the workforce. | | Simplicity | •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.
| Remuneration structures should avoid complexity and their rationale and operation should be easy to understand.
| | Risk | •In line with regulatory requirements, our remuneration practices promote sound and effective risk management while supporting our business objectives (see page 295). •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). | | 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. | | Predictability | •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. | | 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. | | Proportionality | •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.
| 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 | •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. •Annually, senior employees participate in a 360 degree survey which gathers feedback on values-aligned behaviours. | Incentive schemes should drive behaviours consistent with the Group's purpose, values and strategy.
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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 ensuringchairmanship, 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, with the exception of a revised fee for the Senior Independent Director. This change was approved by the Committee following Sir Jonathan Symonds' retirement from 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
in February
2020, when David Nish was appointed as Senior Independent Director. In addition, and in light of the increasingly significant role of technology in the Group’s strategy, operations and growth prospects, the Board approved the establishment of a Technology Governance Working Group for a period of 12 months. The working group has been tasked with developing recommendations to strengthen the Board’s oversight of technology strategy, governance and emerging risks. The working group will be jointly chaired by Eileen Murray and Steven Guggenheimer, given their expertise and experience in this area. Jackson Tai, the Group Risk Committee Chair, will be a member, with other non-executive Directors members from our US, UK, European and Asian principal subsidiaries. The time commitment expected of the co-Chairs will be up to 30 days, reflective of the complexity and profile of the subject matter. As a result, the Group Remuneration Committee have determined a fee of £60,000. Members will not receive fees. Accordingly, the following table sets out the fees for 2021. | | | | | | | | | | | 2021 fees | | Position | | £ | Non-executive Group Chairman1 | | 1,500,000 | | Non-executive Director (base fee) | | 127,000 | Senior Independent Director2 | | 200,000 | | Group Risk Committee | Chair | 150,000 | | Member | 40,000 | | Group Audit Committee and Group Remuneration Committee | Chair | 75,000 | | Member | 40,000 | | Nomination & Corporate Governance Committee | Chair | –– | | Member | 33,000 | | Technology Governance Working Group | Co-Chair | 60,000 |
1 The Group Chairman does not receive a base fee or any other fee in respect of chairing of the Nomination & Corporate Governance 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. 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. | | | | | | | | | | Contract date (rolling) | Notice period
(Director and HSBC) | | Noel Quinn | 18 March 2020 | 12 months | | Ewen Stevenson | 1 December 2018 | 12 months |
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 240 to 245, 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:
| | | | | | | | | | 2021 AGM | 2022 AGM | 2023 AGM | | Mark Tucker | Irene Lee | David Nish | | Heidi Miller | José Antonio Meade Kuribreña | Jackson Tai | | Laura Cha | Pauline van der Meer Mohr | | James Forese1 | Henri de Castries | | Steven Guggenheimer1 | | | Eileen Murray1 | | | | | | | | |
1James Forese, Steven Guggenheimer and Eileen Murray were appointed following the 2020 AGM and therefore their initial three-year appointment terms are subject to approval of their election by shareholders at the 2021 AGM. Their initial three-year term of appointment will end at the conclusion of the 2024 AGM, subject to shareholders' approval at the relevant AGMs.
Report of the Directors | Corporate governance report | | | | Annual report on remuneration |
This section sets out how our approved Directors’ remuneration policy was implemented during 2020. Single figure of remuneration (Audited) The following table shows the single figure of total remuneration of each executive Director for 2020, together with comparative figures. | | | | | | | | | | | | | | | | Single figure of remuneration | | Noel Quinn1 | Ewen Stevenson | | (£000) | 2020 | 2019 | 2020 | 2019 | Base salary2 | 1,266 | 503 | 738 | 719 | | Fixed pay allowance | 1,700 | 695 | 950 | 950 | | Cash in lieu of pension | 127 | 50 | 74 | 107 | Taxable benefits3 | 186 | 41 | 12 | 16 | Non-taxable benefits3 | 59 | 23 | 32 | 28 | | Total fixed | 3,338 | 1,312 | 1,806 | 1,820 | Annual incentive4 | 799 | 665 | 450 | 1,082 | Notional returns5 | 17 | 0 | 0 | 0 | Replacement award6 | 0 | | 0 | 1,431 | 1,974 | | Total variable | 816 | 665 | 1,881 | 3,056 | | Total fixed and variable | 4,154 | 1,977 | 3,687 | 4,876 |
1 Noel Quinn succeeded John Flint as interim Group Chief Executive with effect from 5 August 2019 and was appointed permanently into the role on 17 March 2020. JonathanThe remuneration included in the single figure table above for 2019 is in respect of his services provided as an executive Director for that year. 2 As outlined on page 272, the executive Directors each donated a quarter of their base salary for six months in 2020. The base salary shown in the single figure of remuneration is the gross salary before charitable donations. 3 Taxable benefits include the provision of medical insurance, accommodation, 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. 4 Under the policy approved by shareholders, executive Directors can receive 50% of their annual incentive award in cash and the remaining 50% in immediately vested shares subject to a one-year retention period. As the executive Directors each decided not to take an annual cash bonus, the 2020 annual incentive is the amount after this waiver and will be delivered in immediately vested shares subject to a one-year retention period. The total annual incentives waived by the Group Chief Executive and Group Chief Financial Officer were £799,000 and £450,000, respectively. 5 '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 the grant date and vesting date, which is determined by reference to a rate of return specified at the time of grant. A payment of notional return is made annually and the amount is disclosed on a paid basis in the year in which the payment is made. 6 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 for 2019 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. Values in the table for 2020 relate to his 2017 LTI award granted by RBS for performance year 2016, which was determined by applying the performance assessment outcome of 56.25% as disclosed in RBS's Annual Report and Accounts 2019 (page 91) to the maximum number of shares subject to performance conditions. This resulted in a payout equivalent to 78.09% of the RBS award shares that were forfeited and replaced with HSBC shares. A total of 313,608 shares were granted in respect of his 2017 LTI replacement award at a share price of £6.643. The HSBC share price was £5.845 when the awards ceased to be subject to performance conditions, with no value attributable to share price appreciation. Benefits The values of the significant benefits in the single figure tableare set out in the following table1. | | | | | | | | | | Noel Quinn | | (£000) | 2020 | 2019 | | Insurance benefit (non-taxable) | 51 | 0 | | Car and driver (UK and Hong Kong) | 139 | 0 |
1 The value of benefits provided to Noel Quinn in 2019 were not deemed significant. The insurance and car benefits for Ewen Stevenson are not included in the above table as they were not deemed significant.
Determining executive Directors’ performance (Audited) Awards made to executive Directors reflected the Committee’s assessment of performance against scorecard objectives which were developed with consideration for the Group’s strategic priorities and risk appetite. The targets for financial measures were set at the start of the financial year. They were not revised for the significant economic impact of the Covid-19 outbreak due to the Committee’s desire that reward for our executive Directors should reflect the experience of our shareholders in the year. For non-financial objectives, the performance assessment involved considering targets set in line with our disclosed commitments, such as carbon emissions reduction, diversity, survey results for employee experience and customer satisfaction measures, as detailed in the non-financial performance assessment table. Performance achieved against each measure was applied to the weighting of each objective to determine the outcome percentage. As part of this assessment, the Committee consulted the Group Risk Committee and took into consideration its feedback in determining outcomes for the executive Directors' risk and compliance measures. It also considered whether any discretion should be exercised with respect to the risk and compliance underpin. As set out in the scorecard assessment table below, the target for profit before tax was not met. However, good progress was made against the targets set for RWA optimisation and cost-savings measures, and strong progress was made on the non-financial metrics, as our commitment to delivering responsibly for our stakeholders remained unchanged throughout the pandemic. Overall, this level of performance resulted in a payout of 64.50% of the maximum for the Group Chief Executive and 63.75% for the Group Chief Financial Officer. The Committee reviewed these outcomes in the context of a number of internal and external considerations to determine whether it should exercise its discretion to reduce the outcome, including: •overall share price performance in the year, which was significantly impacted by both the Covid-19 outbreak and the impact of the regulator’s request to suspend dividend payments; •the impact of the bonus pool reduction on the total compensation for our wider workforce; •profit before tax and RoTE performance; and •the positive actions taken by the Board to support our customers, colleagues and communities in these difficult and uncertain times. Taking the above into account, the Committee determined that the 2020 formulaic scorecard outcome appropriately rewards the executive Directors for their performance within the context of overall stakeholder experience. With the voluntary waiver of cash bonuses by the executive Directors, the effective payout was reduced to 32.25% of the maximum for the Group Chief Executive (2019: 66.40%) and 31.88% for the Group Chief Financial Officer (2019: 77.50%). In order for any annual incentive award to be made, each executive Director must achieve a minimum behaviour rating, which is assessed by reference to the HSBC Values. For 2020, both executive Directors met this requirement. The maximum 2020 annual incentive opportunity for Noel Quinn was set at 195% of salary and for Ewen Stevenson at 191% of salary.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Annual assessment | | | Group Chief Executive | Group Chief Financial Officer | | Minimum (25% payout) | Maximum (100% payout) | Performance | Weighting (%) | Assessment (%) | Outcome
(%) | Weighting (%) | Assessment (%) | Outcome (%) | Grow profit before tax1 ($bn) | 19.91 | 23.38 | 14.77 | 30.0 | | 0 | | 0 | | 20.0 | | 0 | | 0 | | RWA optimisation2 ($bn) | 35.00 | 44.90 | 51.50 | 20.0 | | 100.0 | | 20.00 | | 20.0 | | 100.0 | | 20.00 | | | Cost savings ($bn) | 1.00 | 1.60 | 1.04 | 0 | | 0 | | 0 | | 10.0 | | 30.0 | | 3.00 | | | Customer satisfaction | See following section for non-financial performance commentary | 10.0 | | 80.0 | | 8.00 | | 10.0 | | 80.0 | | 8.00 | | | Employee experience | 10.0 | | 95.0 | | 9.50 | | 10.0 | | 95.0 | | 9.50 | | | Environment | 10.0 | | 85.0 | | 8.50 | | 10.0 | | 85.0 | | 8.50 | | | Risk and compliance | 10.0 | | 85.0 | | 8.50 | | 10.0 | | 85.0 | | 8.50 | | | Personal objectives | 10.0 | | 100.0 | | 10.00 | | 10.0 | | 62.5 | | 6.25 | | | Total | | | | 100.0 | | | 64.50 | | 100.0 | | | 63.75 | | | Maximum annual incentive opportunity (£000) | | | | | | £2,478 | | | £1,412 | Annual incentive pre-cash waiver
(£000) | | | | | | £1,598 | | | £900 | | Annual incentive post-cash waiver (£000) | | | | | | £799 | | | £450 |
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 As set out in our February 2020 business update, our objective is to reduce RWAs in low-return franchises (in particular the US and the non-ring-fenced bank in Europe and the UK) and redeploy capital in areas of faster growth and higher returns. Our target is to achieve a $100bn reduction by 2022, with a $35bn RWA reduction target for 2020. We achieved a reduction of $51.5bn during 2020, which included a reduction of $37.4bn in GBM, mainly in our non-ring-fenced bank and in the US, and $12.9bn in CMB, primarily in our ring-fenced bank.
Report of the Directors | Corporate governance report Non-financial performance | | | | | | | | Shared objectives for the Group Chief Executive and Group Chief Financial Officer | | | Objectives | Performance | | Customer satisfaction Re-engineer the business with digital technology to improve customer service
| •In our Wealth and Personal Banking business, our retail customer satisfaction scores in six of seven scale markets (excluding SABB) were ranked in the top three or improved at least two ranks against the benchmark, and three markets improved their digital satisfaction scores. Our private banking business did not meet either of its improvement targets. •In our Commercial Banking business, four of seven scale markets (excluding SABB) improved their customer satisfaction scores and six improved their digital satisfaction scores. •Our Global Banking and Markets business met the target of improving on its 2019 net promoter score of 38, with a global net promoter score of 48 (compared with a global competitor score of 40). The global digital satisfaction score of 64% also exceeded the global competitor digital satisfaction score of 36%. •In Hong Kong, we launched a fully remote, digital account opening solution for business customers, while in the UK, we launched HSBC Kinetic, our new app-only digital banking offering for small and medium-sized business customers. In China, we launched Pinnacle, our new digital platform for wealth planning and insurance services. •During the Covid-19 outbreak, we enhanced our digital capabilities to serve more customers remotely, with faster access and improved security. We also engaged with regulators to help customers gain better access to a broad range of banking products and services from their homes, including through remote consultations and sales. •We maintained a high level of business continuity and customer support with 85% of colleagues equipped to work from home, all of our customer contact centres fully operational, and between 70% and 90% of our branches open for business. •We worked with governments to support national schemes, granting over 720,000 payment holidays to our personal customers and 237,000 loans to our wholesale customers. We provided more than $26bn in customer relief to our personal customers during the initial stages of the pandemic and more than $52bn in lending to wholesale customers, many of whom still require our support. •We helped our clients raise over $1.89tn in capital markets financing, and we retained a top-three position in green, social and sustainable finance bonds, according to Dealogic’s rankings. Our Global Banking and Markets business helped arrange more than $125bn of financing for our clients through social and Covid-19 relief bonds. | | Employee experience Improve engagement, diversity and succession | Employee engagement •Our Employee Engagement Index, which measures employee survey sentiment on pride, advocacy, intent to stay, motivation and feeling of accomplishment questions, increased by five percentage points to 72%, meeting our target to improve the metric. •During the Covid-19 outbreak, extra steps were undertaken to maintain a healthy culture, including: a regular dialogue with our colleagues through regular leadership calls and communications; listening closely to their needs; and providing the support and flexibility to manage their lives during the pandemic. A culture of ‘looking out for each other’ was encouraged and employee networks held regular support calls for employees, specifically those experiencing mental health challenges and those with caring responsibilities. •We ran a mid-year employee survey to determine how the Covid-19 outbreak was impacting our colleagues and how we could support them through this period. More than 50% of our total employee population responded, of which more than 89% said they were getting the information they needed from the organisation, 86% reported that they were getting the support they needed from their line manager, and 86% of the respondents reported they felt confident in leadership. In addition, 75% of employees that participated in our 2020 Snapshot survey said they believed HSBC values their well-being. Diversity and inclusion •We met our aspirational target of achieving at least 30% women holding senior leadership positions by 2020. •Several components of the global diversity and inclusion strategy were reprioritised throughout 2020 in direct response to the Black Lives Matter movement and the Covid-19 outbreak. Good progress was made, with key achievements including the design and launch of the global ethnicity inclusion programme, progression of the global disability confidence programme and the appointment of new executive sponsors for the ‘Embrace’ and ‘Balance’ employee resource groups. •We delivered phase one of the global diversity data project, which collected and reported employee ethnicity data in 21 countries and territories through a self-identification campaign. Group Executive Committee succession planning •Succession plans have been updated for all Group Executive Committee roles and approved by the Group Nomination & Corporate Governance Committee. •The Group also identified a number of enterprise critical roles across the organisation and succession plans have also been updated for these roles with approval from the Group Executive Committee. •The majority of ‘ready now’ and ‘develop in role’ successors on these plans have undergone leadership assessments with our third-party specialist provider, with all development plans documented. A global executive coaching panel is utilised and executive development solutions have been designed to be implemented in 2021. | | Environment Sustainable operations and sustainable finance
| •We reduced our carbon emission tonnes to 1.76 per full-time equivalent employee (‘FTE’), beating the target of 2.0 tonnes per FTE we had set for 2020. It was recognised that reduced travel and increased working from home due to the Covid-19 outbreak impacted this outcome, and as a result, the performance assessment for this metric was revised down. •We exceeded our sustainable finance and investment target of $24bn by facilitating, financing and investing in the development of clean energy, lower-carbon technologies and projects that contribute to the delivery of the Paris Agreement and the UN Sustainable Development Goals. •We were recognised as 'The World's Best Bank for Sustainable Finance’ by Euromoney in its Awards for Excellence 2020. •Awareness of climate change impacts across the organisation continued to increase, with 93% of relationship managers completing their required sustainability training modules. | | Risk and compliance Achieve effective management of non-financial risk Group-wide and fulfilment of regulatory obligations. Achieve sustained delivery against the Global Conduct framework and effective financial crime risk management. | •In spite of the additional stress due to the operational challenges of the Covid-19 outbreak, enabled by the non-financial risk optimisation programme outcomes, the organisation maintained fair customer outcomes and a stable non-financial risk profile while implementing new products and adapting to significantly different ways of working. •In 2020, we completed our financial crime risk operational effectiveness exercise programme, with all countries having passed the Global Standards exit criteria and assurance. While there was year-on-year improvement in performance against a number of specific financial crime risk metrics, it was recognised that some further work is still required. The executive Directors demonstrated strong commitment to the conduct framework, maintaining focus on fair outcomes for our customers and market integrity. In 2020, this included initiatives to minimise the impact of the Covid-19 crisis and protect the business with rapid introduction of initiatives and mitigation against unacceptable levels of conduct risk. | |
| | | | | | | Personal measures for the Group Chief Executive and Group Chief Financial Officer | | Objectives | Performance | Group Chief Executive Simplify the Group operating model | •As part of the Group transformation programme, we commenced work on 'organisation simplification and design' by defining roles with clear accountabilities and decision rights, simplifying and minimising matrix reporting and realising transformation objectives through the redesign of certain structures across businesses and functions. •The programme successfully delivered all key milestones in 2020, including: the establishment of design principles to shape the future organisation model and structures; the creation of the Group Organisational Design Authority to drive consistent design thinking; the simplification of the Group Executive Committee and the introduction of a clear operating rhythm to increase discipline and focus on strategy and performance delivery; the redesign of the majority of top leadership structures; the definition of a consistent role taxonomy across business and functions; and the identification of reductions in FTEs and cost, principally at senior levels. | Group Chief Financial Officer •Deploy Cloud technologies in Global Finance function •Reduce Finance function costs and number of full-time equivalents | •The Finance on the Cloud programme will transform the way the Global Finance function operates by rationalising operational processes, automation of data production and providing faster delivery of comprehensive data to our internal and external stakeholders. The programme has progressed into the execution phase in 2020, with the programme design, scope and implementation approach approved. •The first phase of implementation, which relates to the risk-weighted assets reporting process for our UK entities, was successfully implemented in November 2020. Execution plans are in place for the further extension of Cloud technologies within the UK pilot in 2021, followed by a global deployment. •The target of reducing Finance function costs to $0.8bn was met, but the target number of full-time equivalent staff in the function was not achieved. |
2017 long-term incentive performance The 2017 LTI award was granted to Marc Moses (former Group Chief Risk Officer) and Iain Mackay (former Group Finance Director)1. | | | | | | | | | | | | | | | | | | | | | | Assessment of the LTI award in respect of 2017 (granted in 2018) | | Measures (with weighting) | Minimum (25% payout) | Target (50% payout) | Maximum (100% payout) | Actual | Assessment | Outcome | Average return on equity (with CET1 underpin)2 (20%) | 9.0% | 10.0% | 11.0% | 7.3% | 0.0% | 0.00% | | Cost-efficiency ratio (20%) | 60.0% | 58.0% | 55.5% | 62.4% | 0.0% | 0.00% | Relative total shareholder return3 (20%) | At median of
peer group | Straight-line vesting between minimum and maximum | At upper quartile of
peer group | Rank 11th | 0.0% | 0.00% | Risk and compliance4 (25%) •Achieve and sustain compliance with Global Financial Crime Compliance policies and procedures. •Achieve a sustainable adoption of Group operation risk management framework, along with its policies and practices. •Achieve and sustain delivery of global conduct outcomes and compliance with conduct of business regulatory obligations. | Performance assessed by the Committee based on a number of qualitative and quantitative inputs such as Group Financial Crime Risk assessment against Financial Crime Compliance objectives, outcome of assurance and audit reviews, and achievement of long-term Group objectives and priorities during the performance period, with input and approval from the Group Risk Committee. | 65.0% | 65.0% | 16.25% | | Strategy (15%) | | | | | Sustainable finance ($bn)5 | 30.0 | 34.0 | 37.0 | 93.0 | 100.0% | 5.00% | Employee confidence6 | 65.0% | 67.0% | 70.0% | 62.0% | 0.0% | 0.00% | Customer
(based on customer recommendation in
top five markets by revenue) | Improvement in
recommendation in
three of top five markets for WPB, CMB and GBM. | Improvement in
recommendation in four of top five markets for WPB, CMB and GBM. | Improvement in
recommendation in all of top five markets for
WPB, CMB and GBM. | Improvement in three of top five markets | 25.0% | 1.25% | Total7 | | | | | | 22.50% |
1 Based on the scorecard outcome, 29,655 shares will vest with Iain Mackay and 86,491 shares will vest with Marc Moses (determined by pro-rating their awards for time in employment during the performance period of 1 January 2018 to 31 December 2020). The awards will vest in five equal annual instalments commencing in March 2021. Using the average daily closing share prices over the three months to 31 December 2020 of £3.604 the value of awards to vest with Iain Mackay and Marc Moses is £106,877 and £311,714, respectively. 2 Significant items are excluded from the profit attributable to ordinary shareholders of the company for the purpose of computing adjusted return on equity. 3 The peer group for the 2017 award is: Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse Group, DBS Group Holdings, Deutsche Bank, JPMorgan Chase & Co., Lloyds Banking Group, Standard Chartered and UBS Group. 4 The performance outcome was reviewed and approved by the Group Risk Committee taking into account evidence of progress made during the three-year performance period. Specifically, it noted a steady improvement in financial crime risk related audit outcomes, a significant reduction of overdue and re-opened high and medium risk assurance issues and stabilisation of the global residual risk for anti-money laundering, sanctions, and anti-bribery and corruption. The non-financial risk optimisation programme made significant progress during 2020 to demonstrate operational risk management maturity in areas of focus. There was also a steady improvement in conduct ratings with significant improvement seen in Global Banking and Markets since 2018. The Group Risk Committee also noted the need for ongoing enhancements in certain areas and the need for further improvement in approach to conduct management. 5 Assessed based on cumulative financing and investment made to develop clean energy, lower-carbon technologies and projects that contribute to the delivery of the Paris Agreement and the UN Sustainable Development Goals. 6 Assessed based on results of the latest employee Snapshot survey question, ‘I am seeing the positive impact of our strategy’. 7 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 the scorecard outcomes reflected the performance achieved.
Report of the Directors | Corporate governance report Long-term incentive awards (Audited) Long-term incentive in respect of 2020 After taking into account performance for 2020, the Committee decided to grant Noel Quinn and Ewen Stevenson LTI awards of £3,718,000 and £2,118,000, respectively. These awards will be subject to 'windfall gain' adjustments, as set out below. As the awards are not entitled to dividend equivalents in accordance with 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 2020 LTI awards will have a three-year performance period starting 1 January 2021. During this period, performance will be assessed based on the 2020 LTI scorecard comprising four equally-weighted measures: two financial measures to incentivise value creation for our shareholders; a measure linked to our climate ambitions; and a measure for relative total shareholder return ('TSR'). RoTE was retained as a metric as it remains a key measure of our financial performance and how we generate returns that deliver value for our shareholders. Given the uncertainty from the economic impact of the Covid-19 outbreak, the Committee determined it was most appropriate to assess RoTE at the end of the performance period. This element of the award will continue to be subject to a CET1 underpin. Capital reallocation to Asia was added as a new metric as this is one of the key levers of our strategy and business transformation plan. This measure will be assessed based on the share of Group tangible equity allocated to Asia at the end of the performance period and is also subject to the CET1 underpin. The environment and sustainability scorecard measure was added to align to our new climate ambition. Announced in October 2020, we set out how we aim to bring carbon emissions in our own operations to net zero by 2030 and support our customers in the transition to a more sustainable future with financing, facilitation and investments of $750bn to $1tn over the same time period. Scorecard targets are linked to this climate ambition and performance will be assessed based on the reduction in our carbon footprint and the financing we provide to our clients in their net zero transition. Relative TSR was retained as a metric in the scorecard as it rewards executive Directors based on comparison of the total shareholder return performance of the Group and a relevant peer group. No changes were made to the peer group used for this purpose. Given the planned strategic shifts in our geographical and business mix, notably future growth investment in Asia and wealth business, we will review our peer group for any relative TSR measure to be used for the 2021 LTI scorecard. The updated peer group will be set out in the Annual Report and Accounts 2021. The LTI continues to be subject to a risk and compliance modifier, which gives the Committee the discretion to adjust down the overall scorecard outcome to ensure that the Group operates soundly when achieving its financial targets. For this purpose, the Committee will receive information including any risk metrics 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. 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 social security payable) will be held for a retention period of up to one year, or such period as required by regulators. | | | | | | | | | | | | | | | | | | | Performance conditions for LTI awards in respect of 2020 | | Measures | Minimum (25% payout) | Target (50% payout) | Maximum (100% payout) | Weighting % | RoTE (with CET1 underpin)1 | 8.0% | 9.0% | 10.0% | 25.0 | Capital reallocation to Asia (with CET1 underpin)2 | 45.0% | 47.0% | 50.0% | 25.0 | Environment and sustainability3 | Carbon reduction | 42.0% | 48.0% | 51.0% | 25.0 | | Sustainable finance and investment $bn | 200.0 | 240.0 | 260.0 | Relative TSR4 | | At median of the peer group | Straight-line vesting between minimum and maximum | At upper quartile of peer group | 25.0 |
1To be assessed based on RoTE at the end of the performance period. The measure will also be subject to a CET1 underpin. If the CET1 ratio at the end of the 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 share of Group tangible equity (on a constant currency basis and excluding associates) allocated to Asia by 31 December 2023. This metric will be measured on an organic basis and will exclude changes in Group tangible equity allocation resulting from acquisitions and disposals (and also part-acquisitions or part-disposals) of businesses and is subject to the CET1 underpin outlined above. 3 Carbon reduction will be measured based on percentage reduction in total energy and travel emissions achieved by 31 December 2023 using 2019 as the baseline. A sustainable finance and investment metric will assess cumulative financing provided over the period commencing on
1 January 2020 and ending on 31 December 2023. 4 The peer group for the 2020 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. 5 Awards will vest on a straight-line basis for performance between the minimum, target and maximum levels of performance set in this table. 2020 LTI grant size The Committee is conscious of the external commentary on 'windfall gains' from LTI awards given the impact of the Covid-19 outbreak. The Committee is also aware that a number of investors have expressed their preference that, where executives may benefit from 'windfall gains', the Committee is proactive in considering award levels at the time of grant. Based on the above and discussions with investors and proxy voting agencies, the Committee agreed that the 2020 LTI awards should be subject to a 'windfall gain' adjustment at grant if the share price falls significantly relative to the grant price of the 2019 LTI. This is to ensure reward for our executive Directors aligns with the experience of our shareholders and is reflective of management performance over the performance period. While the share price to be used for the 2020 LTI award is not known at this stage, the Committee agreed that, in line with investor expectations, if the 2020 LTI grant share price experiences a greater than 30% decline since the previous grant, this would be considered a material fall in share price (based on review of historical share price volatility and the impact of significant external macroeconomic events). In such an event, an adjustment percentage equal to half the share price percentage decline will be applied to the awards to mitigate the potential for 'windfall gains'. This approach will apply to the 2020 LTI award to be granted in 2021.
2018 long-term incentive award The LTI granted in respect of 2018 included an ESG measure based on our objective disclosed in the Strategy Update in June 2018 to achieve an 'Outperformer' rating from ratings provider Sustainalytics. Our 2018 Directors' remuneration report noted that in the event Sustainalytics changed its rating approach, the Committee retained the discretion to review and modify the assessment approach and targets to ensure the assessment approach achieved its original purpose. Sustainalytics has since revised its methodology and replaced 'performer' ratings with low, medium and high risk ratings. In 2020, the Committee approved a revised assessment approach and targets that aim for HSBC to 'outperform' a set of peers using Sustainalytics' revised risk-based rating as detailed in the table below. The Committee is comfortable that the proposed targets are no more or less difficult to achieve than the original proposed targets.
| | | | | | | | | | | | | | | | Performance conditions for LTI awards in respect of 2018 | | Measures | Minimum (25% payout) | Target (50% payout) | Maximum (100% payout) | Weighting % | Average RoTE (with CET1 underpin)1 | 10.0% | 11.0% | 12.0% | 75.0 | | Employer advocacy2 | 65.0% | 70.0% | 75.0% | 12.5 | | Environmental, social and governance rank3 | At median of the peer group | Straight-line vesting between minimum and maximum | At upper quartile of peer group | 12.5 | |
1If 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 Peer group (in line with TSR peer group for the 2017 LTI, including three additional peers): Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse Group, Deutsche Bank, DBS Group Holdings, J.P. Morgan Chase & Co., Lloyds Banking Group, Standard Chartered, UBS Group, ICBC, Itau and Santander. Scheme interests awarded during 2020 (Audited) The table below sets out the scheme interests awarded to Directors in 2020, as disclosed in the 2019 Directors’ remuneration report. No non-executive Directors received scheme interests during the financial year.
| | | | | | | | | | | | | | | | | | | | | | | | | Scheme awards in 2020 | | (Audited) | | Type of interest awarded | Basis on which
award made | Date of award | Face value awarded1 £000 | Percentage receivable for minimum performance | Number of
shares
awarded | End of performance period | | Ewen Stevenson | LTI deferred shares2 | % of salary 2 | 24 February 2020 | 2,680 | | 25 | | 476,757 | 31 December 2022 | | Noel Quinn | Deferred shares 3 | Annual incentive | 24 February 2020 | 1,134 | | 0 | | 201,702 | 31 December 2019 | Deferred cash 3 | Annual incentive | 24 February 2020 | 886 | | 0 | | N/A | 31 December 2019 |
1The face value of the award has been computed using HSBC's closing share price of £5.622 taken on 21 February 2020. LTI awards are subject to a three-year forward-looking performance period and vest in five equal annual instalments, between the third and seventh anniversary of the award date, subject to performance achieved. On vesting, awards will be subject to a one-year retention period. Awards are subject to malus during the vesting period and clawback for a maximum period of 10 years from the date of the award. 2 In line with regulatory requirements, scheme interests awarded during 2020 were not eligible for dividend equivalents. In accordance with the remuneration policy approved by shareholders at the 2019 AGM, the LTI award was determined at 290% of salary for Ewen Stevenson 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. £4.393). Noel Quinn did not receive the 2019 LTI award that was granted on 24 February 2020, as he was in the Group Chief Executive role in an interim capacity during 2019. 3 2019 annual incentive award received by Noel Quinn for his role as Chief Executive Officer of Commercial Banking and interim Group Chief Executive. As noted in the Annual Report and Accounts 2019, 60% of his annual incentive award was deferred and in line with regulatory requirements split between cash and shares. 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. £4.393). The above table does not include details of shares issued as part of the fixed pay allowance and shares issued as part of the 2020 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 2019 are set out on the following page.
Report of the Directors | Corporate governance report | | | | | | | | | | | | | | | | Performance conditions for LTI awards in respect of 2019 | | Measures | Minimum (25% payout) | Target (50% payout) | Maximum (100% payout) | Weighting % | RoTE (with CET1 underpin)1, 2 | 10.0% | 11.0% | 12.0% | 33.3 | Relative TSR3 | At median of the peer group | Straight-line vesting between minimum and maximum | At upper quartile of peer group | 33.3 | | Customers | 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. | 33.3 |
1To 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. Executive Directors’ interests in shares (Audited) The shareholdings of all persons who were executive Directors in 2020, including the shareholdings of their connected persons, at 31 December 2020 (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 2020 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. 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.
| | | | | | | | | | | | | | | | | | | | | | Shares | | (Audited) | | Shareholding guidelines
(% of salary) | Shareholding at 31 Dec 20202 (% of salary) | At 31 Dec 2020 | | | Scheme interests | | Share
interests
(number
of shares) | Share options3 | Shares awarded subject to deferral1 | | without performance conditions4 | with performance conditions5 | | Executive Directors | | | | | | Noel Quinn6 | 400% | 221 | % | 778,958 | | 0 | | 554,556 | | 0 | | Ewen Stevenson6 | 300% | 265 | % | 545,731 | | 0 | | 728,790 | | 476,757 | | Group Managing Directors6 | 250% | n/a | n/a | n/a | n/a | n/a |
1The 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 2020 (£3.604). 3 As at 31 December 2020, Noel Quinn and Ewen Stevenson did not hold any options under the HSBC Holdings Savings-Related Share Option Plan (UK). 4 The amount for Ewen Stevenson reflects the award granted in May 2019, replacing the 2015 to 2018 LTIs forfeited by the Royal Bank of Scotland Group plc (‘RBS’) and is subject to any performance adjustments assessed and disclosed in the relevant Annual Report and Accountsof RBS. 5 LTI awards granted in February 2020 are subject to the performance conditions as set out on page 287. 6 All Group Managing Directors and executive Directors are expected to meet their shareholding guidelines within five years of the date of their appointment (Noel Quinn and Ewen Stevenson were appointed on 5 August 2019 and 1 January 2019 respectively).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.
Summary of shareholder return and Group Chief Executive remuneration The following graph shows HSBC TSR performance (based on the daily spot Return Index in sterling) against the FTSE 100 Total Return Index for the 10-year period ended 31 December 2020. The FTSE 100 Total Return Index has been chosen as 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 LTI awards, are presented in the following table. | | | | HSBC TSR and FTSE 100 Total Return Index |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | | Group Chief Executive | | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | Stuart Gulliver | John Flint | John Flint | Noel Quinn | Noel Quinn | | Total single figure £000 | | 8,047 | 7,532 | 8,033 | 7,619 | 7,340 | 5,675 | 6,086 | 2,387 | 4,582 | 2,922 | 1,977 | 4,154 | Annual incentive1 (% of maximum) | | 58% | 52% | 49% | 54% | 45% | 64% | 80% | 76% | 76% | 61% | 66% | 32% | Long-term incentive1,2,3 (% of maximum) | | 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 Group Performance Share Plan ('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. 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. Noel Quinn did not receive the 2017 LTI award that had a performance period ended on 31 December 2020. Comparison of Directors' and employees' pay The following table compares the changes in each Director's pay with changes in employee pay between 2019 and 2020. | | | | | | | | | | | | | Annual percentage change in remuneration | | 2020 | | Director/employees | Base salary/fees | Benefits | Annual incentive | Executive Directors1 | Noel Quinn1 | 151.7% | 353.7% | 20.2% | | Ewen Stevenson | 2.6% | -25.0% | -58.4% | Non-executive Directors2 | | Kathleen Casey (retired on 24 April 2020) | -65.0% | 200.0% | - | | Laura Cha | 97.0% | - | - | | Henri de Castries | 4.1% | -75.0% | - | | James Forese | - | - | - | | Steven Guggenheimer | - | - | - | | Irene Lee | 20.3% | -100.0% | - | | José Antonio Meade Kuribreña | 28.7% | 100.0% | - | | Heidi Miller | 1.1% | -100.0% | - | | Eileen Murray | - | - | - | | David Nish | 108.7% | -50.0% | - | | Sir Jonathan Symonds (retired on 18 February 2020) | -86.5% | -4.8% | - | | Jackson Tai | -10.8% | -78.9% | - | | Mark Tucker | —% | -77.5% | - | | Pauline van der Meer Mohr | 17.7% | -75.0% | - | Employee group3 | 2.0% | 2.3% | -20.0% |
1 Noel Quinn succeeded John Flint as interim Group Chief Executive with effect from 5 August 2019 and was appointed permanently into the role on 17 March 2020. The annual percentage change for Noel Quinn is based on remuneration reported in his 2019 single figure of remuneration (for the period 5 August 2019 to 31 December 2019) and his 2020 single figure of remuneration (for the period 1 January 2020 to 31 December 2020). Based on his annualised 2019 compensation as an executive Director, his percentage change in salary, benefits and annual incentive is 2.1%, 85.2% and -50.9%, respectively. 2 In some instances, non-executive Directors may have served only part of the year resulting in large year-on-year percentage changes in fees and/or benefits. Page 291 provides the underlying single figure of remuneration for non-executive Directors used to calculate the figures above. 3 Employee group consists of individuals employed by HSBC Group Management Services Ltd, the employing entity of the executive Directors, as no individuals are employed directly by HSBC Holdings.
Report of the Directors | Corporate governance report 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 | | Method | Lower quartile | Median | Upper quartile | | 2020 | A | 139:1 | 85:1 | 43:1 | | 2019 | A | 169:1 | 105:1 | 52:1 |
| | | | | | | | | | | | | | | | | | | | | | | | | Total pay and benefits amounts used to calculate the ratio | | (£) | Method | Lower quartile | Median | Upper quartile | | Total pay and benefits | Total salary | Total pay and benefits | Total salary | Total pay and benefits | Total salary | | 2020 | A | 29,833 | 23,264 | 48,703 | 36,972 | 96,386 | 75,000 | | 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 2020. 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 individual 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 2020; •variable pay awards for 2020, including notional returns paid during 2020; •gains realised from exercising awards from taxable employee 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 2020. 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 used for this purpose is the total remuneration for Noel Quinn as reported in the single figure of remuneration table. Total remuneration does not include an LTI as he has not received an LTI award with a performance period that ended during 2020. 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. The decrease in median ratio is primarily driven by the lower annual incentive award for the Group Chief Executive, reflecting the lower scorecard outcome and the voluntary waiver of the cash portion of the award. Without this waiver, the median ratio is 102:1. While total compensation for the Group Chief Executive declined compared with 2019, total pay and benefits for the median employee for 2020 was 5% higher at £48,703 compared with 2019. 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 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 Group. 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. Relative importance of spend on pay The following chart shows the change in: •total staff pay between 2019 and 2020; and •dividends in respect of 2019 and 2020. In 2019, we returned a total of $1bn to ordinary shareholders through share buy-backs. | | | | Relative importance of spend on pay |
| | | | | | | | | | | | | | | | | | | Return to shareholder | Employee pay | | | Dividends | | | | | | | Share buy-back | | | |
1 The fourth interim dividend of 2020, of $0.15 per ordinary share, is an approximation of the amount payable on 29 April 2021. 2 The fourth interim dividend of 2019, of $0.21 per ordinary share, was cancelled in response to a written request from the UK’s Prudential Regulation Authority (‘PRA’). The 2019 dividends have been re-presented accordingly.
Non-executive Directors (Audited) The following table shows the total fees and benefits of non-executive Directors for 2020, together with comparative figures for 2019. | | | | | | | | | | | | | | | | | | | | | | | | | Fees and benefits | | (Audited) | | Fees1 | Benefits2 | Total | | (£000) | Footnotes | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | | Kathleen Casey (retired on 24 April 2020) | 3,4 | 78 | | 223 | | 27 | | 9 | | 105 | | 232 | | | Laura Cha | 5 | 587 | | 298 | | 0 | | 0 | | 587 | | 298 | | | Henri de Castries | | 202 | | 194 | | 1 | | 4 | | 203 | | 198 | | | James Forese | 6 | 160 | | 0 | | 0 | | 0 | | 160 | | 0 | | | Steven Guggenheimer | 7 | 134 | | 0 | | 0 | | 0 | | 134 | | 0 | | | Irene Lee | 8 | 546 | | 454 | | 0 | | 3 | | 546 | | 457 | | | José Antonio Meade Kuribreña | | 202 | | 157 | | 4 | | 2 | | 206 | | 159 | | | Heidi Miller | 9 | 632 | | 625 | | 7 | | 2 | | 639 | | 627 | | | Eileen Murray | 10 | 120 | | 0 | | 0 | | 0 | | 120 | | 0 | | | David Nish | 11 | 480 | | 230 | | 8 | | 16 | | 488 | | 246 | | | Sir Jonathan Symonds (retired on 18 February 2020) | | 86 | | 638 | | 20 | | 21 | | 106 | | 659 | | | Jackson Tai | 12 | 355 | | 398 | | 12 | | 57 | | 367 | | 455 | | | Mark Tucker | 13 | 1,500 | | 1,500 | | 52 | | 231 | | 1,552 | | 1,731 | | | Pauline van der Meer Mohr | 14 | 312 | | 265 | | 2 | | 8 | | 314 | | 273 | | | Total (£000) | | 5,394 | | 4,982 | | 133 | | 353 | | 5,527 | | 5,335 | | | Total ($000) | | 6,919 | 6,390 | 171 | 453 | 7,090 | 6,843 |
1The Directors' 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. Given the travel restrictions in place, the Board was unable to travel to attend meetings in person. Therefore, the travel allowance available to all non-executive Directors was pro-rated to reflect the travel required of the Board during 2020. 2 Benefits include taxable expenses such as accommodation, travel and subsistence relating to attendance at Board and other meetings at HSBC Holdings' registered offices. Amounts disclosed have been grossed up using a tax rate of 45%, where relevant. 3 Appointed as a member of the Group Risk Committee on 17 January 2020. 4 Stepped down as a member of the Financial System Vulnerabilities Committee on 17 January 2020 when the Committee was demised. 5 Includes fees of £423,800 (2019: £104,000) for her role as non-executive Chair and member of the Nomination Committee of The Hongkong and Shanghai Banking Corporation. Following approval of the non-executive Chair fee by the Group Remuneration Committee in 2020, Laura also received a pro-rated additional Chair fee of HK$201,639 paid in respect of the period from 6 December to 31 December 2019. 6 Appointed to the Board and a member of the Group Audit Committee, Group Remuneration Committee and Nomination & Corporate Governance Committee on 1 May 2020. 7 Appointed to the Board and as a member of the Group Risk Committee and Nomination & Corporate Governance Committee on 1 May 2020. 8 Includes fees of £344,000 (2019: £260,000) in relation to her roles as a Director, Remuneration Committee Chair, Audit Committee member and Risk Committee member of The Hongkong and Shanghai Banking Corporation Limited. Fees in relation to her role as a Director, Risk Committee Chair and Audit Committee member, and from 28 December 2020 as a member of the Nomination Committee, of Hang Seng Bank Limited. 9 Includes fees of £430,000 (2019: £431,000) in relation to her role as Chair of HSBC North America Holdings Inc. 10 Appointed to the Board and as member of the Group Audit Committee, Group Risk Committee and Nomination & Corporate Governance Committee on 1 July 2020. 11 Appointed as Senior Independent Director, and Chair of the Group Audit Committee by David Nish.and member of the Group Risk Committee on 18 February 2020. 12 Stepped down as Chair of the Financial System Vulnerabilities Committee on 17 January 2020 when the Committee was demised. 13 The role of Deputy Group Chairman donated 100% of his 2020 fee to charities in the UK and Hong Kong supporting vulnerable people and in the local response to Covid-19. 14 Appointed as a member of the Group Audit Committee on 19 February 2020. Non-executive Directors’ interests in shares (Audited) The shareholdings of persons who were non-executive Directors in 2020, including the shareholdings of their connected persons, at
31 December 2020, 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 2020 met the guidelines except Irene Lee, who has committed to acquiring the remaining shares as soon as possible, and no later than the conclusion of the 2021 AGM. | | | | | | | | | | Shares | | Shareholding guidelines (number of shares) | Share interests (number of shares) | | Kathleen Casey (retired on 24 April 2020) | 15,000 | 15,125 | | | Laura Cha | 15,000 | 16,200 | | | Henri de Castries | 15,000 | 19,251 | | | James Forese (appointed to the Board on 1 May 2020) | 15,000 | 115,000 | | | Steven Guggenheimer (appointed to the Board on 1 May 2020) | 15,000 | 15,000 | | | Irene Lee | 15,000 | 11,904 | | | José Antonio Meade Kuribreña | 15,000 | 15,000 | | | Heidi Miller | 15,000 | 15,700 | | | Eileen Murray (appointed to the Board on 1 July 2020) | 15,000 | 75,000 | | | David Nish | 15,000 | 50,000 | | | Sir Jonathan Symonds (retired on 18 February 2020) | 15,000 | 43,821 | | | Jackson Tai | 15,000 | 66,515 | | | Mark Tucker | 15,000 | 307,352 | | | Pauline van der Meer Mohr | 15,000 | 15,000 | |
Report of the Directors | Corporate governance report Voting results from Annual General Meeting | | | | | | | | | | | | | 2020 Annual General Meeting voting results | | For | Against | Withheld | Remuneration report
(votes cast) | 96.47 | % | 3.53 | % | –– | | 8,842,653,970 | 323,238,790 | 36,605,397 | Remuneration policy (2019)
(votes cast) | 97.36% | 2.64% | –– | | 9,525,856,097 | 258,383,075 | 47,468,297 |
2021 annual incentive scorecards The 2021 annual incentive scorecard measures for our executive Directors have been set against the backdrop of the continuing impact of the Covid-19 outbreak on the global economy; geopolitical risks, particularly those relating to trade and other tensions; and expectations that global interest rates will remain lower for longer. In this context, the Committee determined the scorecard measures should incentivise adapting our business model to a protracted, low interest-rate environment; reducing our operating costs; and transforming the Group. Therefore, the 2021 annual incentive scorecard includes financial measures linked to the reduction of the Group's cost base, the reduction of assets in low-return areas and the creation of opportunities in our high-growth areas. The scorecard also includes non-financial measures linked to delivering against our customer and employee objectives. The Committee will continue to retain discretion to adjust down the formulaic outcomes of scorecards, taking into account factors such as Group profits, wider business performance and stakeholder experience, to ensure alignment between executive reward and the broader stakeholder experience. The weightings and performance measures for the 2021 annual incentive award for executive Directors are disclosed below. The performance targets are commercially sensitive and it would be detrimental to the Group’s interests to disclose them at the start of the financial year. Subject to commercial sensitivity, we will disclose the targets for a given year in the Annual Report and Accounts for that year in the Directors‘ remuneration report. Executive Directors will be eligible for an annual incentive award of up to 215% of base salary. The 2021 annual incentive scorecards for our Group Managing Directors include similar measures as the executive Directors to drive performance in each of our businesses, functions and regions that contribute to the overall success of the Group. Their annual incentive scorecards will also include RoTE and environmental measures, which are aligned with achieving the three-year forward-looking performance targets in the 2020 LTI. | | | | | | | | | | 2021 annual incentive scorecards measures and weightings | | Group Chief
Executive | Group Chief
Financial Officer | | Measures | % | % | | Adjusted costs | 20.0 | | 20.0 | | | Revenue growth in Asia | 20.0 | | 15.0 | | | RWA reduction in legacy assets/low-return areas | 20.0 | | 15.0 | | | Customer satisfaction | 15.0 | | 15.0 | | | Employee experience | 15.0 | | 15.0 | | Personal objectives1 | 10.0 | | 20.0 | | | Total | 100.0 | | 100.0 | |
1 For the Group Chief Executive, this includes the launch of our refreshed purpose and values, and the delivery of strategy at pace (equally weighted at 5% each). For the Group Chief Financial Officer, this includes Finance Cloud deployment, resolvability assessment framework attestation, climate stress tests, and Group Finance costs and FTE (equally weighted at 5% each). The 2021 annual incentive scorecard is subject to a risk and compliance modifier, which allows the Committee the discretion to adjust down the overall scorecard outcome to ensure that the Group operates soundly 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. 2021 long-term incentives Details of the performance measures and targets for LTI awards to be made in 2021, in respect of 2020, are provided on page 286. The performance measures and targets for awards to be made in respect of 2021, granted in 2022, will be provided in the Annual Report and Accounts 2021. Total pension entitlements (Audited) NaN 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 the 2017 LTI outcome, in which Marc Moses (former Group Chief Risk Officer) and Iain Mackay (former Group Finance Director) participated, are outlined on page 285. NaN 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 (Audited) NaN payments for loss of office were made to, or in respect of, former or current Directors in the year.
External appointments During 2020, executive Directors did not receive any fees from external appointments.
Remuneration structure for our Group employees 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. | •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 Provided in accordance with local market practice. | •Benefits may include, but are not limited to, the provision of a pension, medical insurance, life insurance, health assessment and relocation support. | 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. | •All employees are eligible to be considered for a discretionary variable pay award. Individual awards are determined against a balanced scorecard for performance in excess of that required to fulfil an employee's job description. •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 Material Risk Takers ('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 to eight years. | Deferral Alignment with the medium- to long-term strategy, stakeholder interests and adherence to the HSBC Values. | •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. | | | | Deferral instruments Alignment with the medium- to long-term strategy, stakeholder interests and adherence to the HSBC Values.
| •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, for local MRTs in Brazil and Oman 100% of the deferred amount is delivered in shares or linked to the value of shares. •For some employees in our asset management business, where required by the regulations applicable to asset management entities within the Group, at least 50% of the deferred award 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. |
Report of the Directors | Corporate governance report | | | | | | | 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. | •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 Support recruitment of talent. | •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. | Severance payments Adhere to contractual agreements with involuntary leavers.
| •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 not considered as variable pay for the purpose of application of the deferral and variable pay cap rules under the PRA and FCA remuneration rules 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 278. 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 not used the EBA discount rate for the purpose of computing the ratio between fixed and variable components of 2020 total remuneration. 3 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.
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 | Application | | Variable pay pool and individual performance scorecard | 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, including capital requirements; •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. Objectives included in the performance scorecards of senior management take into account appropriate measures linked to sustainability risks, such as: reduction in carbon footprint; facilitating financing to help clients with their transition to net zero; employee diversity targets; and risk and compliance measures. 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 | •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 | 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 | 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. | | Sales incentives | •We generally do not operate commission-based sales plans. | | Identification of MRTs | •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 include 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. |
Report of the Directors | Corporate governance report | | | | 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 Executive Committee 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 2020 variable pay information included in the following tables is based on the market value of awards. 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) | | | Fixed ($m) | Variable2 ($m) | Total ($m) | | Number of MRTs | Cash-based1 | Share-based | Total | Cash-based | Of which: deferred | Share-based3 | Of which: deferred | Other forms | Of which: deferred | Total | | Executive Directors | 2 | | 2.8 | | 3.4 | | 6.2 | | — | | — | | 11.2 | | 9.6 | | — | | — | | 11.2 | | 17.4 | | | Non-executive Directors | 12 | | 7.0 | | — | | 7.0 | | — | | — | | — | | — | | — | | — | | — | | 7.0 | | | Senior management | 15 | | 32.9 | | — | | 32.9 | | 17.1 | | 10.3 | | 19.6 | | 12.8 | | — | | — | | 36.7 | | 69.6 | | | Investment banking | 541 | | 342.4 | | — | | 342.4 | | 130.6 | | 65.7 | | 138.6 | | 74.6 | | — | | — | | 269.2 | | 611.6 | | | Retail banking | 194 | | 104.2 | | — | | 104.2 | | 34.8 | | 15.2 | | 34.8 | | 17.5 | | — | | — | | 69.6 | | 173.8 | | | Asset management | 33 | | 20.5 | | — | | 20.5 | | 8.1 | | 3.8 | | 5.7 | | 3.0 | | 2.7 | | 1.8 | | 16.5 | | 37.0 | | | Corporate functions | 124 | | 69.9 | | — | | 69.9 | | 22.5 | | 10.4 | | 23.2 | | 11.9 | | — | | — | | 45.7 | | 115.6 | | | Independent control functions | 145 | | 67.6 | | 1.2 | | 68.8 | | 18.0 | | 6.1 | | 14.9 | | 7.6 | | — | | — | | 32.9 | | 101.7 | | | All other | 83 | | 64.3 | | 1.3 | | 65.6 | | 17.7 | | 9.0 | | 18.5 | | 10.3 | | — | | — | | 36.2 | | 101.8 | | | Total | 1,149 | | 711.6 | | 5.9 | | 717.5 | | 248.8 | | 120.5 | | 266.5 | | 147.3 | | 2.7 | | 1.8 | | 518.0 | | 1,235.5 |
1 Cash-based fixed remuneration is paid immediately. 2 Variable pay awarded in respect of 2020. 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 In general, 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) | | 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 | | Executive Directors | — | | — | | — | | — | | — | | — | | — | | | Senior management | — | | — | | — | | — | | — | | — | | — | | | Investment banking | 0.5 | | 1 | | 36.6 | | 38 | | 7.3 | | 35.0 | | 37 | | | Retail banking | 0.9 | | 1 | | 5.3 | | 11 | | 1.8 | | 4.6 | | 11 | | | Asset management | — | | — | | 1.9 | | 4 | | 1.0 | | 1.9 | | 4 | | | Corporate functions | 1.0 | | 1 | | 5.8 | | 12 | | 2.0 | | 5.8 | | 12 | | | Independent control functions | — | | — | | 4.2 | | 10 | | 0.7 | | 3.6 | | 9 | | | All other | — | | — | | 4.4 | | 6 | | 1.3 | | 4.4 | | 6 | | | Total | 2.4 | | 3 | | 58.2 | | 81 | | – | 55.3 | | 79 | |
1 No sign-on payments were made in 2020. 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. 2 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).
| | | | | | | | | | | | | | | | | | | | | Deferred remuneration at 31 December1 (REM3) | | $m | 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 | | Cash | | | | | | | | Executive Directors | 3.6 | | 3.6 | | 3.6 | | — | | — | | 0.1 | | | Senior management | 27.4 | | 27.4 | | 27.4 | | — | | — | | 5.1 | | | Investment banking | 195.0 | | 195.0 | | 195.0 | | — | | — | | 62.7 | | | Retail banking | 41.9 | | 41.9 | | 41.9 | | — | | — | | 10.2 | | | Asset management | 8.1 | | 8.1 | | 8.1 | | — | | — | | 3.4 | | | Corporate functions | 35.0 | | 35.0 | | 35.0 | | — | | — | | 9.7 | | | Independent control functions | 23.6 | | 23.6 | | 23.6 | | — | | — | | 4.5 | | | All other | 30.2 | | 30.2 | | 30.2 | | — | | — | | 8.7 | | | Shares | | | | | | | | Executive Directors | 9.7 | | 9.1 | | 9.7 | | (5.4) | | — | | 2.5 | | | Senior management | 25.7 | | 22.4 | | 25.7 | | (12.7) | | — | | 11.6 | | | Investment banking | 183.3 | | 146.0 | | 183.3 | | (90.5) | | — | | 130.6 | | | Retail banking | 45.9 | | 38.1 | | 45.9 | | (22.6) | | — | | 29.1 | | | Asset management | 5.6 | | 4.2 | | 5.6 | | (2.7) | | — | | 4.3 | | | Corporate functions | 39.5 | | 31.5 | | 39.5 | | (19.6) | | — | | 26.5 | | | Independent control functions | 28.8 | | 26.2 | | 28.8 | | (14.5) | | — | | 18.0 | | | All other | 35.2 | | 27.7 | | 35.2 | | (17.4) | | — | | 20.4 | | | Other forms | | | | | | | | Executive Directors | — | | — | | — | | — | | — | | — | | | Senior management | — | | — | | — | | — | | — | | — | | | Investment banking | — | | — | | — | | — | | — | | — | | | Retail banking | — | | — | | — | | — | | — | | — | | | Asset management | 7.0 | | 5.6 | | 7.0 | | 0.3 | | — | | 1.7 | | | Corporate functions | 0.8 | | 0.7 | | 0.8 | | 0.1 | | — | | 0.3 | | | Independent control functions | 0.2 | | 0.1 | | 0.2 | | — | | — | | 0.1 | | | All other | — | | — | | — | | — | | — | | — | |
1 This table provides details of balances and movements during performance year 2020. For details of variable pay awards granted for 2020, refer to the 'Remuneration – fixed and variable amounts' table. Deferred remuneration is made in cash and/or shares. Share-based awards are made in HSBC shares. 2 Includes unvested deferred awards and vested deferred awards subject to retention period at 31 December 2020. 3 Includes any amendments due to malus or clawback. 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 | | Management body | All other | Total | | €0 – 1,000,000 | 11 | | 814 | | 825 | | | €1,000,000 – 1,500,000 | — | | 179 | | 179 | | | €1,500,000 – 2,000,000 | 1 | | 76 | | 77 | | | €2,000,000 – 2,500,000 | — | | 27 | | 27 | | | €2,500,000 – 3,000,000 | — | | 13 | | 13 | | | €3,000,000 – 3,500,000 | — | | 11 | | 11 | | | €3,500,000 – 4,000,000 | — | | 7 | | 7 | | | €4,000,000 – 4,500,000 | — | | 1 | | 1 | | | €4,500,000 – 5,000,000 | — | | 1 | | 1 | | | €5,000,000 – 6,000,000 | 1 | | 3 | | 4 | | | €6,000,000 – 7,000,000 | — | | 3 | | 3 | | | €7,000,000 – 8,000,000 | — | | — | | — | | | €8,000,000 – 9,000,000 | — | | — | | — | | | €9,000,000 – 10,000,000 | 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.
Report of the Directors | Corporate governance report Directors’ emoluments The details of compensation paid to executive and non-executive Directors for the year ended 31 December 2020 are set out below. | | | | | | | | | | | | | | | | | | | | | | Emoluments | | | | | | | | Noel Quinn | Ewen Stevenson | Non-executive Directors | | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | | £000 | £000 | £000 | £000 | £000 | £000 | | Basic salaries, allowances and benefits in kind | 3,338 | | 1,312 | | 1,806 | | 1,820 | | 5,527 | | 5,335 | | | Pension contributions | — | | — | | — | | — | | — | | — | | Performance-related pay paid or receivable1 | 4,517 | | 665 | | 2,568 | | 3,176 | | — | | — | | | Inducements to join paid or receivable | — | | — | | 1,431 | | 1,974 | | — | | — | | | Compensation for loss of office | — | | — | | — | | — | | — | | — | | | Notional return on deferred cash | 17 | | — | | — | | — | | — | | — | | | Total | 7,872 | | 1,977 | | 5,805 | | 6,970 | | 5,527 | | 5,335 | | | | | | | | | | Total ($000) | 10,097 | | 2,522 | | 7,446 | | 8,890 | | 7,090 | | 6,843 |
1Includes 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 2020 was $24,624,520. 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, provision of company owned-accommodation 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 £5,859 ($7,515), Stuart Gulliver valued at £5,859 ($7,515) and John Flint valued at £4,784 ($6,136). Tax support fees of £460 ($590) were also provided to Stuart Gulliver, giving a total aggregate value of £16,962 ($21,756) for benefits provided to past directors. 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 two former Directors of $413,160. The provision at 31 December 2020 in respect of unfunded pension obligations to former Directors amounted to $7,821,639. Emoluments of senior management and five highest paid employees The following tables set out the details of emoluments paid to senior management, which in this case comprises executive Directors and members of the Group Executive Committee, for the year ended 31 December 2020, or for the period of appointment in 2020 as a Director or member of the Group Executive Committee. 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 2020, are also presented. | | | | | | | | | | Emoluments | | | £000s | Five highest paid employees | Senior management | | Basic salaries, allowances and benefits in kind | 13,319 | | 36,831 | | | Pension contributions | 15 | | 57 | | Performance-related pay paid or receivable1 | 17,310 | | 34,431 | | | Inducements to join paid or receivable | — | | 1,308 | | | Compensation for loss of office | — | | 848 | | | Total | 30,644 | | 73,475 | | | Total ($000) | 39,307 | | 94,247 | |
1Includes the value of deferred shares awards at grant. | | | | | | | | | | | | | Emoluments by bands | | Hong Kong dollars | US dollars | Number of highest paid employees | Number of senior management | | $1,500,001 – $2,000,000 | $193,397 – $257,863 | — | | 1 | | | $4,500,001 – $5,000,000 | $580,191 – $644,657 | — | | 1 | | | $9,000,001 – $9,500,000 | $1,160,382 – $1,224,848 | — | | 1 | | | $9,500,001 – $10,000,000 | $1,224,848 – $1,289,313 | — | | 1 | | | $10,000,001 – $10,500,000 | $1,289,314 – $1,353,779 | — | | 1 | | | $13,500,001 – $14,000,000 | $1,740,573 – $1,805,039 | — | | 1 | | | $15,000,001 – $15,500,000 | $1,933,970 – $1,998,436 | — | | 1 | | | $24,500,001 – $25,000,000 | $3,158,818 – $3,223,284 | — | | 1 | | | $27,000,001 – $27,500,000 | $3,481,146 – $3,545,612 | — | | 1 | | | $28,000,001 – $28,500,000 | $3,610,078 – $3,674,543 | — | | 1 | | | $28,500,001 – $29,000,000 | $3,674,543 – $3,739,009 | — | | 1 | | | $29,000,001 – $29,500,000 | $3,739,009 – $3,803,475 | — | | 2 | | | $30,000,001 – $30,500,000 | $3,867,940 – $3,932,406 | — | | 1 | | | $41,000,001 – $41,500,000 | $5,286,185 – $5,350,651 | — | | 1 | | | $43,500,001 – $44,000,000 | $5,608,514 – $5,672,979 | — | | 1 | | | $44,000,001 – $44,500,000 | $5,672,979 – $5,737,445 | — | | 1 | | | $44,500,001 – $45,000,000 | $5,737,445 – $5,801,910 | — | | 1 | | | $48,500,001 – $49,000,000 | $6,253,170 – $6,317,636 | — | | 1 | | | $49,000,001 – $49,500,000 | $6,317,636 – $6,382,101 | — | | 1 | | | $50,500,001 – $51,000,000 | $6,511,033 – $6,575,499 | 1 | | 1 | | | $54,500,001 – $55,000,000 | $7,026,758 – $7,091,224 | 2 | | — | | | $66,500,001 – $67,000,000 | $8,573,934 – $8,638,400 | 1 | | 1 | | | $78,000,001 – $78,500,000 | $10,056,645 – $10,121,110 | 1 | | 1 | |
| | | | Share capital and other related disclosures |
Share buy-back programme HSBC Holdings did not announce a share buy-back to purchase its ordinary shares of $0.50 each during the year. Dividends Dividends for 2020 On 31 March 2020, HSBC announced that, in response to a written request from the Bank of England through the Prudential Regulation Authority ('PRA'), the Board had cancelled the fourth interim dividend for 2019. Similar requests were also made to other UK incorporated banking groups. We also announced that until the end of 2020 we would make no quarterly or interim dividend payments or accruals in respect of ordinary shares. In December 2020, the PRA announced a temporary approach to shareholder distributions for 2020 in which it set out a framework for board decisions on dividends. On 23 February 2021, after considering the requirements of the temporary approach, the Directors approved an interim dividend for 2020 of $0.15 per ordinary share. The interim dividend will be payable on 29 April 2021 in cash in US dollars, or in sterling or Hong Kong dollars at exchange rates to be determined on 19 April 2021. The 2020 interim dividend will be paid in cash with no scrip alternative. The Group has decided to discontinue the scrip dividend option as it is dilutive, including to dividend per share progression over time. As the interim dividend for 2020 was approved after 31 December 2020, it has not been included in the balance sheet of HSBC as a liability. The distributable reserves of HSBC Holdings at
31 December 2020 were $31.3bn. 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 16 March, 16 June, 15 September and 15 December 2020. The Series A dollar preference shares were redeemed on 13 January 2021. Dividends for 2021 In December 2020, the PRA also announced that it intends to transition back to its standard approach to capital setting and shareholder distributions through 2021. In the meantime, for 2021 dividends the PRA is content for appropriately prudent dividends to be accrued but not paid out. The PRA aims to provide a further update ahead of the 2021 half-year results of large UK banks. The Group will not pay quarterly dividends during 2021 but will consider whether to announce an interim dividend at the 2021 half-year results in August. The Group will review whether to revert to paying quarterly dividends at or ahead of its 2021 results announcement in February 2022. A dividend of £0.01 per Series A sterling preference share was approved on 23 February 2021 for payment on 15 March 2021. Share capital Issued share capital The nominal value of HSBC Holdings’ issued share capital paid up at 31 December 2020 was $10,346,810,550 divided into 20,693,621,100 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 100.00%, 0.00%, and 0.00% respectively of the nominal value of HSBC Holdings’ total issued share capital paid up at 31 December 2020. The 1,450,000 non-cumulative preference shares of $0.01 each were redeemed on 13 January 2021.
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/who-we-are/leadership-and-governance/board-responsibilities. Ordinary shares HSBC Holdings has one class of ordinary share, which carries no right to fixed income. There are no voting restrictions on the issued ordinary shares, all of which are fully paid. On a show of hands, each member present has the right to one vote at general meetings. On a poll, each member present or voting by proxy is entitled to one vote for every $0.50 nominal value of share capital held. There are no specific restrictions on transfers of ordinary shares, which are governed by the general provisions of the Articles of Association and prevailing legislation. Information on the policy adopted by the Board for paying interim dividends on the ordinary shares may be found in the 'Shareholder information' section on page 406. 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. There were no dividends waived during 2020 as partthere were no dividends paid on ordinary shares during 2020. 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 Board succession planning. preference shares in the share capital of HSBC Holdings: non-cumulative US dollar preference shares of $0.01 each (‘dollar preference shares’); non-cumulative preference shares of £0.01 each (‘sterling preference shares’); and non-cumulative preference shares of €0.01 (‘euro preference shares’). The sterling preference share in issue is a Series A sterling preference share. There are no dollar preference shares or euro preference shares in issue. Information on dividends approved for 2020 and 2021 may be found in Note 8 on the financial statements on page 345. 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). Share capital changes in 2020 The following events occurred during the year in relation to the ordinary share capital of HSBC Holdings: Scrip dividends There were no scrip dividends issued during the year.
Report of the Directors | Corporate governance report | | | | | | | | | | | | | | | | | All-employee share plans | | Number | Aggregate
nominal
value | | Exercise price | | from | to | | | $ | | £ | £ | | HSBC Holdings Savings-Related Share Option Plan (UK) | | | | | | | HSBC ordinary shares issued in £ | 1,387,599 | | 693,800 | | | 2.6270 | | 5.9640 | | | Options over HSBC ordinary shares lapsed | 44,189,936 | | 22,094,968 | | | | | | Options over HSBC ordinary shares granted in response to approximately 29,048 applications from HSBC employees in the UK on 24 September 2020 | 111,469,393 | | 55,734.697 | | | | | | | HSBC Holdings
ordinary shares issued | Aggregate
nominal
value | | Market value per share | | | from | to | | | $ | | £ | £ | | HSBC International Employee Share Purchase Plan | 679,640 | | 339,820 | | | 3.0855 | | 5.9140 | | | | | | | |
| | | | | | | | | | | | | | | | HSBC share plans | | HSBC Holdings
ordinary shares issued | Aggregate
nominal
value | Market value per share | | from | to | | | $ | £ | £ | | Vesting of awards under the HSBC Share Plan 2011 | 53,029,316 | | 26,514,658 | | 3.2290 | | 5.6220 | |
Authorities to allot and to purchase shares and
pre-emption rights At the AGM in 2020, shareholders renewed the general authority for the Directors to allot new shares up to 13,554,626,552 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 2,033,193,983 ordinary shares, which was not exercised during the year. In addition, shareholders gave authority for the Directors to grant rights to subscribe for, or to convert any security into, no more than 4,066,387,966 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. For further details on the issue of contingent convertible securities, see Note 31 on the financial statements. Other than as disclosed in the tables above headed ‘Share capital changes in 2020’, the Directors did not allot any shares during 2020. Debt securities In 2020, HSBC Holdings issued the equivalent of $15.95bn 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 further details of capital instruments and bail-inable debt, see Notes 28 and 31 on pages 380 and 388. 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 2020, 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 2020, representing 1.57% of the shares in issue as at 31 December 2020. The nominal value of shares held in treasury was $162,636,704. Notifiable interests in share capital At 31 December 2020, 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 3 March 2020 that on
2 March 2020 it had the following: an indirect interest in HSBC Holdings ordinary shares of 1,235,558,490; qualifying financial instruments with 7,294,459 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 2,441,397 voting rights, representing 6.07%, 0.03% and 0.01%, respectively, of the total voting rights at 2 March 2020. No further notifications had been received pursuant to the requirements of Rule 5 of the Disclosure, Guidance and Transparency Rules between 31 December 2020 and 15 February 2021. At 31 December 2020, according to the register maintained by HSBC Holdings pursuant to section 336 of the Securities and Futures Ordinance of Hong Kong: •BlackRock, Inc. gave notice on 1 September 2020 that on
27 August 2020 it had the following interests in HSBC Holdings ordinary shares: a long position of 1,477,023,361 shares and a short position of 38,760,188 shares, representing 7.14% and 0.19%, respectively, of the ordinary shares in issue at that date. •Ping An Asset Management Co., Ltd, gave notice on
25 September 2020 that on 23 September 2020 it had a long position of 1,655,479,531 in HSBC Holdings ordinary shares, representing 8.00% 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 2020 and up to the date of this report. Dealings in HSBC Holdings listed securities 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 2020.
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 2020 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 31 Dec 2020 or date of cessation, if earlier | | Footnotes | At 1 Jan
2020, or date of appointment, if later | Beneficial
owner | Child
under 18
or spouse | Jointly with another person | Trustee | Total
interests | | HSBC Holdings ordinary shares | | | | | | | | | | | | | | | | | Kathleen Casey (retired on 24 April 2020) | 1 | 15,125 | | 15,125 | | — | | — | | — | | 15,125 | | | Laura Cha | | 16,200 | | 16,200 | | — | | — | | — | | 16,200 | | | Henri de Castries | | 19,251 | | 19,251 | | — | | — | | — | | 19,251 | | | James Forese (appointed to the Board on 1 May 2020) | 1 | — | | 115,000 | | — | | — | | — | | 115,000 | | | Steven Guggenheimer (appointed to the Board on 1 May 2020) | 1,4 | — | | — | | — | | 15,000 | | — | | 15,000 | | | Irene Lee | | 11,904 | | 11,904 | | — | | — | | — | | 11,904 | | | | | | | | | | | José Antonio Meade Kuribreña | 1 | — | | 15,000 | | — | | — | | — | | 15,000 | | | Heidi Miller | 1 | 15,700 | | 15,700 | | — | | — | | — | | 15,700 | | | Eileen Murray (appointed to the Board on 1 July 2020) | 1 | — | | 75,000 | | | | | 75,000 | | | David Nish | | 50,000 | | — | | 50,000 | | — | | — | | 50,000 | | | Noel Quinn | 2 | 441,925 | | 778,958 | | — | | — | | — | | 778,958 | | | Ewen Stevenson | 2 | 233,972 | | 545,731 | | — | | — | | — | | 545,731 | | | | | | | | | | | Sir Jonathan Symonds (retired on 18 February 2020) | | 43,821 | | 38,823 | | 4,998 | | | | 43,821 | | | Jackson Tai | 1, 3 | 66,515 | | 32,800 | | 11,965 | | 21,750 | | — | | 66,515 | | | Mark Tucker | | 307,352 | | 307,352 | | — | | — | | — | | 307,352 | | | Pauline van der Meer Mohr | | 15,000 | | 15,000 | | — | | — | | — | | 15,000 | |
1Kathleen Casey has indicated her intention to step downan interest in 3,025, James Forese has an interest in 23,000, Steven Guggenheimer has an interest in 3,000, José Antonio Meade Kuribreña has an interest in 3,000, Heidi Miller has an interest in 3,140, Eileen Murray has an interest in 15,000 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 Plan (UK) and the HSBC Share Plan 2011 are set out in the Scheme interests in the Directors’ remuneration report on page 271. At 31 December 2020, 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 – 1,333,514; and Ewen Stevenson – 1,751,278. Each Director’s total interests represents less than 0.01% of the shares in issue and 0.01% 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. 4 On 19 May 2020, Steven Guggenheimer reported to HSBC that he had acquired 5,000 shares on 1 May 2020. Prior clearance was not obtained as required pursuant to the standards set out in the Hong Kong Model Code for Securities Transactions by Directors of Listed Issuers. Enhancements have been made to the Directors' onboarding process, along with communication throughout the year, to highlight share dealing obligations. There have been no changes in the shares or debentures of the Directors from 31 December 2020 to the date of this report. Listing Rule 9.8.4 and other disclosures This section of the Form 20-F forms part of and includes certain disclosures required in the Report of the Directors incorporated by cross-reference, including under Listing Rule 9.8.4 and otherwise as applicable by law. | | | | | | | Content | Page references | | Long-term incentives | 286 | | Dividend waivers | 299 | | Dividends | 299 | | Change of control | 303 | | Emissions | 46 | | Energy efficiency | 53, 55 | | | | Principal activities of HSBC | 12, 30, 99, 371 | | Business review and future developments | 12–41, 43, 134, 160, 397 |
Directors’ governance Appointment and re-election A rigorous selection process is followed for the appointment of Directors. Appointments are made on merit and candidates are considered against objective criteria, having regard to the benefits of a diverse Board. Appointments are made in accordance with HSBC Holdings' Articles of Association. The Nomination & Corporate Governance Committee report sets out further detail on the Board selection process. 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. Non-executive Directors are appointed for an initial three-year term and, subject to continued satisfactory performance based upon an assessment by the Group Chairman and the Nomination & Corporate Governance Committee, are proposed for re-election by shareholders at each AGM. They typically serve two three-year terms. The Board may invite a Director to serve additional periods but any term beyond six years is subject to review with an explanation to be provided in Aprilthe Annual Report and Accounts. Shareholders vote at each AGM on whether to elect and re-elect individual Directors. All Directors that stood for election and re-election at the 2020 AGM were elected and willre-elected by shareholders. None of the Directors who retired during the year or who are not standoffering themselves for re-election at the AGM. I would like to thank Jonathan and Kathleen for their valued contribution. As part of its succession planning,2021 AGM have raised concerns about the Committee engaged Russell Reynolds Associates to support the search for new non-executive Directors. A sub-committee comprising five membersoperation of the Board or the management of the company.
No executive Director is involved in deciding their own remuneration outcome.
Report of the Directors | Corporate governance report Commitments 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. 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 supportedis expected to commit up to 150 days per year, reflecting the complexity of the role and responsibilities of this committee. All non-executive Directors confirm that they can meet this requirement, taking into account any other commitments they have. Board approval is required for any non-executive Directors’ external commitments, with consideration given to time commitments and conflicts of interest. Conflicts of interest The Board has an established policy and set of procedures to ensure that the Board’s management of the Directors’ conflicts of interest policy operates effectively. The Board has the power to authorise conflicts where they arise, in accordance with the Companies Act 2006 and HSBC Holdings' Articles of Association. Details of all Directors’ conflicts of interest are recorded in the register of conflicts, which is maintained by the Group Company Secretary and Chief Governance Officer's office. Upon appointment, new Directors are advised of the policy and procedures for managing conflicts. Directors are required to notify the Board of any actual or potential conflicts of interest and to update the Board with any changes to the facts and circumstances surrounding such conflicts. The Board has considered, and authorised (with or without conditions) where appropriate, potential conflicts as they have arisen during the year in accordance with the said policy and procedures. Directors' indemnity The Articles of Association of HSBC Holdings 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 has granted, by way of deed poll, indemnities to the Directors, including former Directors who retired during the year, against certain liabilities arising in connection with their position as a Director of HSBC Holdings or of any Group company. Directors are indemnified to the maximum extent permitted by law. The indemnities that constitute a 'qualifying third-party indemnity provision', as defined by section 234 of the Companies Act 2006, remained in force for the whole of the financial year (or, in the case of Directors appointed during 2020, from the date of their appointment). The deed poll is available for inspection at the registered office of HSBC Holdings. Additionally, Directors have the benefit of Directors’ and officers’ liability insurance. 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. Contracts of significance During 2020, 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. Additional non-financial disclosures Additional non-financial disclosures detailing HSBC’s policies and practices in relation to the workforce, environment, social matters, human rights, and anti-corruption and anti-bribery matters are included in other sections of the Annual Report and Accounts 2020. Shareholder engagement The Board is directly accountable to, and gives high priority to communicating with, HSBC’s shareholders. Information about HSBC and its activities is provided to shareholders in its Interim Reports and the Annual Report and Accounts as well as on www.hsbc.com. To complement regular publications, there is continual dialogue between members of the Board and institutional investors throughout the year. For examples of such engagement see the Group Chairman's letter on page 238 and the Remuneration Committee Chair's letter on page 271. 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 met regularly between Committee meetingsand Group Company Secretary and Chief Governance Officer. Our Senior Independent Director is also available to lead and progressshareholders if they have concerns that cannot be resolved or for which the search. In November, Aileen Taylor joinednormal channels would not be appropriate. He can be contacted via 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
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.8 Canada Square, London E14 5HQ.
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 Committee has delegated authority from the Board in relation to the assessment of the independence of non-executive Directors. In accordance with the UK and Hong Kong Corporate Governance Code requiresCodes, the Board to identify inCommittee has reviewed and confirmed that all non-executive Directors who have submitted themselves for election and re-election at the Annual Report and Accounts each non-executive Director it considersAGM are considered to be independentindependent. This conclusion was reached 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, Laura Cha, who joined 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 themselvesBoard in 2011, will not be standing 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.
2021 AGM. 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,determined that 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, includingnotwithstanding her length of service, the Board determinedcontinues to be independent when taking into consideration all other relevant circumstances that Laura Chaare likely to impair, or could appear to impair, independence and that she will continue to be independent. In making this determination, her previous role as Chairindependent up to the date of The Hongkong and Shanghai Banking Corporation Limited, wherethe 2021 AGM when she was a corporate relations adviser until 2011, was considered not to be material.
Governancewill retire from the Board.
The Committee also has continued to focus on strengtheningoversight of the composition of the boards of the Group’s corporate governance arrangements, including the operation of the subsidiary accountability frameworkregional principal subsidiaries and corporate governance framework. 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 253 to 255.
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 inapproves the appointment of Directors and overseeing certain actions arising from the evaluation. Full details can be found on page 206.
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 engagementsenior management 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
| | | | | | | | | | | | | | | | | | | | | | | | 208Matters considered during 2020 | HSBC Holdings plc | | | | | | | | | | | Jan | Feb | Apr | May | Jul | Sep | Dec | | Board composition and succession | | | | | | | | | Board composition, including succession planning and skills matrices | l | l | l | ô | ô | l | l | | Approval of diversity and inclusion policy | ô | ô | l | ô | ô | ô | ô | | Approval of conflicts of interest policy | ô | ô | ô | ô | ô | ô | l | | Executive talent and development | | | | | | | | | Senior executive succession | ô | l | l | l | l | l | l | | Approval of executive succession plans | ô | ô | ô | ô | ô | ô | l | | Talent programmes | ô | ô | l | ô | ô | ô | ô | | Governance | | | | | | | | | Board and committee evaluation | ô | ô | l | l | ô | ô | l | | Subsidiary governance | ô | ô | ô | ô | l | ô | ô | | Subsidiary and executive appointments | l | l | l | l | l | l | l |
| | | | Appointment process – assessment of new non-executive Directors |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Step 1 | | | Step 2 | | | Step 3 | | | Step 4 | | | Step 5 | | | | | | | | The Committee agreed the desired criteria sought in the candidates for appointment to the Board. An external search partner was engaged. | | | The Committee considered a long-list of candidates and agreed which should be prioritised. Relevant candidates were approached by the external search partner to understand their interest. | | | Meetings were arranged between members of the Committee and priority non-executive Director candidates. Feedback from the non-executive Directors was discussed alongside consideration of potential conflicts and other matters identified through due diligence. | | | The Committee recommended the appointment of the non-executive Director to the Holdings Board for approval, subject to completion of outstanding due diligence. | | | Outstanding due diligence and associated procedures completed prior to announcement of appointment. Director onboarding and induction pack issued and completed. | | |
Report of the Directors | Corporate governance report | | |   continuedspent substantial time in 2019 to focusunderstanding and assessing the effect of the Covid-19 outbreak on an effective end-to-end control environment,expected credit losses, the foundation of sound financial reportingGroup-wide transformation programme and consistent customer service.other related accounting judgements and disclosures."
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Dear Shareholder I am pleased to introducepresent my first report to you as Chair of the Group Audit Committee ('GAC'(‘GAC’) report.. The Committee had anothera busy year, holding 10 meetings in 2019. There were two important additions to management relevant to13 meetings. This report sets out some of 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.issues considered during 2020.
The Committee members as a whole havehas strong, but diverse, financial backgrounds relevant to the sector in whichservices experience. To strengthen our skill set further, we operate. This was a real benefit in the understanding of the financial, operationalwelcomed Pauline van der Meer Mohr, James Forese and macroeconomic challenges facing the Group, all of which require careful thought on recognitionEileen Murray as new members. Sir Jonathan Symonds 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 leavingstepped down during the Board at the AGMyear and I would like to thank herthem for her tremendous supporttheir insightful and significant contributions to the work of the Committee. I would also like to thank allGAC.
The Committee spent substantial time in understanding and assessing the GAC members for their support while serving as Chaireffect of the GAC.Covid-19 outbreak on expected credit losses, the Group-wide transformation programme, the impact of regulatory change on the control environment, and other related accounting judgements and disclosures. Even though much work still needsGiven the Committee's role in relation 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 relationshipswhistleblowing I regularly met with the Group Chief Compliance Officer and the Group Head of Whistleblowing Oversight to discuss material whistleblowing cases, enhancements to whistleblowing arrangements and plans for periodic updates to the Committee.
To develop a better understanding of the key issues and challenges at the local level, I attended a number of principal subsidiary audit committees throughcommittee meetings throughout the Group. These meetings were complemented by 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 inChairs’ Forums throughout the last few yearsyear to ensure alignment of priorities and has broughtto strengthen our relationship with the work of the subsidiary audit committees and the risk committees into much tighter alignment.principal subsidiaries. The Committee is also encouraged by management's efforts to enhance the Group’s whistleblowing arrangements, focusing on key culture and conduct-related themes emergingreceived regular updates from the analysisGroup Head of whistleblowing cases. CriticalAudit on the progress against the audit plan. During the year the audit plan was adjusted in response to sustained improvement isnew risks arising from the needed establishment of a stronger ‘speak up’ cultureCovid-19 outbreak and assurance work in relation to major change programmes throughout the Group. | | | | Membership | | Member since | Meeting attendance in 2019 | Sir Jonathan Symonds (Chair) | Sep 2014 | 10/10 | Kathleen Casey | Mar 2014 | 10/10 | David Nish | May 2016 | 10/10 | Jackson Tai1
| Dec 2018 | 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 fifthsixth 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 givenprovide sound independent advice to the Committee on specific financial reporting judgements and judgements.the control environment. Further details of PwC’s work are containedAn internal evaluation concluded that the Committee continued to operate effectively in 2020, and made certain recommendations for continual improvement.
David Nish Chair, Group Audit Committee,23 February 2021 | | | | | | | | | | Membership | | Member since | Meeting attendance
in 2020 | | David Nish (Chair) | May 2016 | 13/13 | Kathleen Casey1 | Mar 2014 | 5/5 | | James Forese | May 2020 | 7/7 | Eileen Murray2 | Jul 2020 | 5/6 | Sir Jonathan Symonds1 | Sep 2014 | 3/3 | | Jackson Tai | Dec 2018 | 13/13 | | Pauline van der Meer Mohr | Apr 2020 | 10/10 |
1 Sir Jonathan Symonds stepped down from the Board on pages 21018 February 2020. Kathleen Casey stepped down from the Board on 24 April 2020. 2 Eileen Murray was unable to 213.attend a meeting in July 2020 due to a prior commitment made before her appointment. Key responsibilities The Committee’s key responsibilities are as follows:include: The Committee monitors•monitoring and assessesassessing 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.judgements;
It reviews•reviewing the effectiveness of, and ensuresensuring that management has appropriate internal controls over, financial reporting.reporting;
The Committee reviews•reviewing and monitorsmonitoring the relationship with the external auditor and oversees its appointment, tenure, rotation, remuneration, independence and engagement for non-audit services.services; and
It oversees•overseeing the work of Global Internal Audit and monitorsmonitoring and assessesassessing the effectiveness, performance, resourcing, independence and standing of the function.
Activities in the year
In 2019, the GAC carried out the following activities:Committee governance
The Committee monitored a Group-wide programme to strengthenkeeps the control environment in a more sustainable way through improving the understanding of end-to-end processesBoard informed 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.
Report of the Directors | Corporate governance report
Committee governance
The Committee is responsible for communicating and advising the Boardadvises on matters concerning the Group’sGroup'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 Executive, Group Chief Financial Officer, Group Head of Finance, Group Chief Accounting Officer, Group Head of Internal Audit, Group Chief Risk Officer 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, Global Internal Audit and the external auditor to discuss agenda planning and specific issues as they arose during the year. Most meetings included in camera sessionsyear outside the formal Committee process. The Committee also regularly met separately with the Group Chief Legal Officer, and the internal and external auditors. The Committee, led by the Chair, who is also the Deputy Group Chairmanauditors and Senior Independent Director, oversaw the succession process and selection of the Group Head of Internal Audit.other senior management to discuss matters in private.
The Committee Secretary regularly met with the Chair to ensure the Committee fulfilled its governance responsibilities and to consider input from stakeholders including senior management, internal auditors and external auditors to finalisewhen finalising meeting agendas, and to tracktracking progress on actions and Committee priorities. To ensure thatMeetings of the Committee reportsusually take place a couple of days before the Board meeting to allow the Committee to report its findings and recommendations to the Board in a timely and orderly manner, it usually meets a couplemanner. This is done through the Chair who comments on matters of days beforeparticular relevance and the Board receives copies of the Committee agenda and minutes of meetings.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Matters considered during 2020 | | | | | | | | | | | | | | Jan | Feb | Apr | Jun | Jul | Sep | Oct | Dec | | Reporting | | | | | | | | | Financial reporting matters including: –Review of financial statements, ensuring that disclosures are fair, balanced and understandable –Significant accounting judgements –Going concern assumptions and viability statement –Supplementary regulatory information and the ESG Update | l | l | l | l | l | l | l | l | | Regulatory reporting-related matters | l | l | l | l | ô | l | ô | l | | Certificates from principal subsidiary audit committees | ô | l | ô | ô | l | ô | ô | ô | | Control environment | | | | | | | | | | Review of deficiencies and effectiveness of internal financial controls | l | l | l | l | l | l | l | l | | Internal audit | | | | | | | | | | Reports from Global Internal Audit | l | l | l | l | l | ô | l | l | | Annual audit plan, independence and effectiveness | l | ô | l | ô | l | ô | ô | l | | External audit | | | | | | | | | | Reports from external audit, including external audit plan | l | l | l | l | l | ô | l | l | | Appointment, remuneration, non-audit services and effectiveness | l | l | l | l | ô | ô | l | ô | | Compliance | | | | | | | | | | Accounting standards and critical accounting policies | l | l | ô | ô | ô | ô | ô | l | | Corporate governance codes and listing rules | ô | l | ô | ô | l | ô | ô | ô | | Whistleblowing | | | | | | | | | | Whistleblowing arrangements and effectiveness | ô | l | l | ô | l | ô | ô | l |
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 expertsthe Committee continues to have competence relevant to the sector in which the Group operates. The Board has determined that David Nish, Jackson Tai and Eileen Murray are all ‘financial experts’ for the purposes of section 407 of the Sarbanes-Oxley Act. All Committee membersAct and have recent and relevant financial experience for the purposes of the UK and Hong Kong corporate governance codes.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.FCA. 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 206.
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 the GAC members had regular formal and informal communicationChair regularly met with the memberschairs of the principal subsidiary audit committees ofand attended meetings to enable closer links and deeper understanding on judgements around key issues. In addition, there was regular interaction with committee chairs across the Group’s principal subsidiaries. Group through the Audit and Risk Committee Chairs’ Forum (‘ARCC’). Appointments to the audit committees of the principal subsidiariessubsidiary audit committees were reviewed and endorsed by the GAC. The GAC Chair met with the proposed new chairs of the principal subsidiaries’ audit committees, as appropriate.prior to their appointment. 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. Financial reporting 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 keycritical 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, theThe Committee gave careful consideration to the key performance metrics relatingrelated to strategic priorities and ensured that the performance and outlook statements were fair, balanced and reflected the risks and uncertainties appropriately. During the year, the Committee received regular updates from management on the additional guidance and disclosures made in relation to the strategic prioritiesCovid-19 outbreak. The Committee considered and was satisfied with the management response to ensure transparencythe Financial Reporting Council’s (‘FRC') comments on HSBC’s Annual Report and consistency throughoutAccounts 2019 regarding goodwill impairment disclosures, and the financial reporting disclosures.industry-wide FRC publications, including the letter to audit committee chairs. In conjunction with the GRC,Group Risk Committee (‘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 continuecontinues to adopt the going concern basis in preparing the annual and interim financial statements. Further details can be found on page 41. The Committee’s review of the long-term viability statement and the adoption of the going concern basis factored in additional guidance issued by the FRC on financial reporting in light of the Covid-19 outbreak. Following review and 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. Covid-19 impact on accounting judgements The Committee devoted significant time, including additional meetings, to the review and challenge of management’s approach and analysis of IFRS 9 expected credit losses (‘ECL’) in light of the Covid-19 outbreak and other geopolitical events. In its review, the GAC gave due regard to the interpretation and application of additional guidelines in relation to the Covid-19 outbreak and estimating ECL that were issued by various regulators. The Committee gave careful consideration to the measurement of ECL, in particular the key judgements and management adjustments made in relation to the forward economic guidance, underlying economic scenarios, reasonableness of the weightings and the impact on financial statements and disclosures. There was detailed discussion on the risks to ECL models as the unprecedented nature of the pandemic meant that the severity of the economic conditions was outside the bounds of historical data
Report of the Directors | Corporate governance report and experience used to develop IFRS 9 models. The Committee challenged management on the approach to modelling ECL, specifically the use of Credit Risk judgements and invited HSBC’s credit experts to present their views to the Committee. At the request of the GAC Chair, Global Internal Audit carried out additional verification and assurance regarding the disclosures made in quarterly reporting on the range of ECL outlook and consistency of the ECL disclosures. The Group’s external auditor regularly shared its views with the Committee on the reasonableness of management assumptions, given the significant changes made to the estimation of ECL due to the impact of the Covid-19 outbreak on the design, implementation and operation of ECL controls. Other areas of significant accounting judgements requiring in-depth review due to the Covid-19 pandemic included valuation of financial instruments, goodwill impairment, hedge accounting and investment in associates. Further details can be found in the 'Principal activities and significant issues considered during 2020' table on page 262. 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 251.303. In 2020 the updates provided to the Committee included the potential impacts on internal control from the Covid-19 outbreak. These impacts included both those directly relevant to operational processes and controls, such as where new or amended controls were required to administer government relief packages, and more indirect impacts such as from colleagues working under contingency arrangements. A number of additional assurance procedures were performed across the lines of defence to monitor, assess and mitigate these impacts, with results regularly reported to the Committee. External auditor The Group’s external auditor is PwC, which has held the role for five years. Thesix years, and the senior audit partner was rotated tois Scott Berryman who has been in 2019 and the GAC oversaw the transition.role since 2019. The Committee reviewed the external auditor’s approach and strategy for the annual audit and its findings. In 2019,also received regular updates on the Committee reviewed auditor independenceimpact on the control environment from the Covid-19 outbreak and audit quality, and GAC members routinely met audit partners in various locations of the business.Group transformation programme. Principal matters discussed with PwC are set out in its report on page 256.311. The GAC is involved in audit partner rotationPwC discussed the impact from the Covid-19 outbreak on the execution and succession for the Group and its principal subsidiaries. The GAC monitors the policy on hiring employees or former employeesdelivery of the external auditor, includingaudit and the plans to deliver the audit through remote working and mitigating actions being taken. These included accelerating aspects of planning and performing a number of areas of audit earlier to factor in expected delays due to remote working. There was also discussion on additional relevant work in relation to any breachessignificant accounting judgements, such as expected credit losses, and the impact of the policy. The external auditor attended all Committee meetings andCovid-19 outbreak on 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.basis for determining materiality.
During the year, the GAC assessed the effectiveness of PwC as the Group’sGroup's external auditor, using a questionnaire that focused on the overall audit process, its effectiveness and the quality of output. The Committee gave particular focus to the actions being taken by PwC in response to the findings from the HSBC effectiveness review and the PwC firm-wide Audit Quality Review by the Financial Reporting Council. PwC highlighted the continuing investment in both additional resources and new technologies to improve the quality and consistency of the audit. The Committee Chair also met the PwC engagement quality control partner for HSBC privately to discuss the continuous audit improvement actions. The GAC received an update on the partner rotation and succession for the Group and its principal subsidiaries and the steps taken to ensure effective transitions. The GAC monitored the policy on hiring employees or former employees of the external auditor, and there were no breaches of the policy highlighted during the year. The external auditor attended all Committee meetings and the GAC Chair maintains regular contact with the senior audit partner and his team throughout the year. 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 2019.2020. 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 undergoingas 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 haswould have a significant impact on the organisation, including on the Global Finance function,function. A change would lead to disruption and anyan increase in operational risk given the ongoing impact from the Covid-19 pandemic and the significant strategic change in auditor should be scheduled to limit operational disruption. underway through the Group transformation programme. In addition, the Committee is closely monitoring the consultations and proposals arising from the Competition and Market Authority's statutory audit market study, the Kingman Review of the Financial Reporting Council and the Brydon Review on the quality and effectiveness of audit on the future of the UK external audit market. The Committee will consider its strategy on audit tendering strategy in preparation forline with the 2025 financial year endoutcomes of the UK audit reform and well in due course.advance of re-tendering in 2025. Therefore, theThe Committee has recommended to the Board that PwC should be reappointed as auditor. Resolutions concerning the reappointment of PwC and its audit fee for 20202021 will be proposed to shareholders at the 20202021 AGM.
Non-audit services The Committee is responsible for setting, reviewing and monitoring the appropriateness of the provision of non-audit services toby the external auditor. It also applies the Group’s policy on the award of non-audit services to the external auditor. During the year, GAC reviewed changes made to the Group’s policy resulting from the implementation of ‘The Financial Reporting Council Revised Ethical Standard 2019’ (effective in 2020) and changes to internal governance. The key change in the revised standard is the introduction of a ‘whitelist of services’ that the principal accountant can provide. All services not prescribed in the whitelist are prohibited. 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 either approved by the GAC, or by Group Finance when acting within delegated limits and criteria set by the GAC. The non-audit services carried out by PwC included 3445 engagements approved during the year where the fees were over $100,000 but less than $1m. GroupGlobal 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 toEight engagements during the ones outlined above included three engagements thatyear were approved where the fees exceeded $1m. These were mainly engagements required by the Committee where the fee exceeded $1m,regulator and a further three engagementsincremental fees related to previously approved engagements. One new engagement 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 criticalrelated to preliminary advanced audit procedures for the successadoption of these engagements.IFRS 17 in 2023.
| | | | | | | | | | | | | | 2020 | 2019 | | | Auditors‘ remuneration | $m | $m | | Total fees payable | 130.2 | | 110.7 | | | Fees for non-audit services | 37.3 | | 25.5 | |
| | | | | | | | 2019 | | 2018 | | Auditors‘ remuneration | $m | | $m | | Total fees payable | 110.7 | | 119.50 | | Fees for non-audit services | 25.50 | | 32.90 |
Global Internal auditAudit 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 areasIn addition to the ongoing importance of focusregulatory-focused work, key risk theme categories for 20192020 audit coverage were prudential soundness, operational resilience, conductstrategy, governance and culture, financial crime, conduct and regulatory compliance, financial resilience and dataoperational resilience. In April 2020, in response to the Covid-19 outbreak, Global Internal Audit completed a risk-based review to revise the 2020 annual audit plan to create capacity for real-time audits targeted at key risks arising from the pandemic. Real-time audits provide real-time, independent ongoing observations to management responding to the Covid-19 outbreak. Issues are raised for significant observations that are not addressed in a timely manner. In addition, in response to the business update in February 2020, Global Internal Audit focused on governance over the transformation programme and governance. performed project audit activity for selected complex and high-priority business cases. 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 20202021 audit planning process will includeincludes 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 2020the 2021 audit work includecontinue to be strategy, governance and culture;culture, financial crime, conduct and compliance;compliance, financial resilience;resilience, and operational resilience. During 2020,2021, a quarterly assessment of key risk themes will form the basis of thematic reporting and plan updates and will ultimately drive the 20212022 planning process. The annual audit plan and material plan updates are approved by the GAC. TheBased on regular internal audit reporting to the GAC, private sessions with the Group Head of Audit, the Global Professional Practices annual assessment and quarterly Quality Assurance updates, the GAC is satisfied with the effectiveness of the Global Internal Audit function. Onfunction and the appointmentappropriateness 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.its resources. 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 20192020 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 common areas of significant overlapresponsibility were addressed appropriately addressed with inter-committee communication or joint meetings.discussions with the Chairs. 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. This is further complemented with significant overlap in membership of the GAC and GRC to ensure deeper understanding and informed challenge at both meetings. During 2020, the GAC and GRC Chairs reviewed and challenged management’s proposals to transition the responsibility for oversight of entity level controls from the GAC to the GRC. The Chairs considered whether there was the suitable level of management seniority for ownership of entity level controls and whether there was regular and appropriate reporting to both committees to fulfil their oversight responsibilities. In 2019, three Audit and Risk Committee Chair2020, five ARCC 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 ChairARCC 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.
Report of The topics discussed at the Directors | Corporate governanceARCC Forums can be found in the GRC report
on page 268.
Three areas of joint focus for the GAC and GRC during 20192020 were: Sustainable control environment With oversight from the GAC, the Group Management Board initiatedExecutive Committee continued 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
Report of the Directors | Corporate governance report framework as part of the sustainable control environment programme. ForIn 2020, the GAC and the GRC reviewed the risks arising from models used for the estimation of expected credit losses under IFRS 9, particularly given the GAC works witheconomic backdrop of the GRC in reviewing and challengingCovid-19 outbreak. The committees challenged 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 2019,2020, 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 metricsThere continues to be an increased focus on the quality of regulatory reporting by the PRA and strategic prioritiesother regulators globally. The GAC will review the steps taken by management to strengthen the controls over regulatory reporting and as we strengthen our processes and controls, there may be impacts on some of our regulatory ratios.
In exercising its oversight,conjunction with the Committee assessedGRC, the GAC continued to oversee the progress of management’s assuranceproposals and preparationimplementation of externalthe Basel III Reforms and the Ibor transition. The GAC focused on the operational and control environment impacts from Basel III Reforms and Ibor transition on HSBC’s 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.interdependencies with other Group transformation programmes.
Whistleblowing and ‘speak up’ culture Whistleblowing is a key element of ‘speak up’ culture, with the Group’s whistleblowing channel, HSBC Confidential, offering a variety of ways for our people to raise whistleblowing concerns (see page 68 for further information). The GAC received regular updates onis responsible for the statusoversight of the effectiveness of the Group’s whistleblowing arrangements. The Group’s Chief Compliance Officer provides periodic reporting to the GAC on the efficacy of the whistleblowing arrangements, how they operatedproviding an assessment of controls and how they were enhanced duringdetailing the year.results of internal audit assessments. The Committee focusedis also briefed on culture and conduct risks and associated management actions arising from whistleblowing cases. The Chair of the key culture-GAC acts as the Group’s whistleblowers’ champion, with responsibility for ensuring and conduct-related themes emerging fromoverseeing the integrity, independence and effectiveness of HSBC’s policies and procedures on whistleblowing and the protection of whistleblowers. The Chair met with the Group Head of Whistleblowing Oversight throughout the year for briefings on material whistleblowing cases and assessments of the whistleblowing arrangements. The Committee has requested updates on a number of key areas during 2020, including an assessment of the timeliness of whistleblowing investigations. The arrangements were subject to an internal audit review during 2020, which rated the design, control and management oversight of the arrangements as satisfactory. As part of the ongoing assessment of the end-to-end controlarrangements, the Committee has requested a deeper review in key markets of the employee investigation function in which the whistleblowing arrangements have a dependency. An external benchmarking assessment was presented to the GAC in December 2020. This provided an overview of the overall effectiveness of whistleblowing arrangements and investigations processes that deliver reliable, timely conclusions. This included feedback to management to driveagainst a strongernumber of industry peers, and best practice guidance issued by external consultancy and legal firms as well as the UK charity, Protect. The assessment reflected the significant progress made during 2020 such as the implementation of a new whistleblowing platform (Navex), the enhanced global minimum standards and improvements observed in the ‘speak up’ cultureculture. In addition, governance was improved with a particular focus on key emerging conduct themes to enable timely management action, and a mechanism was introduced for whistleblowers to provide feedback post-investigation. The assessment also identified further opportunities for 2021 as part of the Group’s commitmentfit for the future programme with updates 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 Groupbe provided to build greater trust between employees and leaders and to normalise the act of airing concerns openly and directly. The
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 Councilchampion 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 2020GAC throughout 2021.
| | | | | | | | | | | | | Principal activities and significant issues considered during 2020 | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Financial and regulatory reporting | | Key financial metrics and strategic priorities The GAC considered the key judgements in relation to external reporting to track the key financial metrics and strategic priorities and to review the forecast performance and outlook. | In exercising its oversight, the Committee assessed management's assurance and preparation of external financial reporting disclosures. The Committee was particularly focused on the ongoing Covid-19-related uncertainty and how management addressed and reflected the impact of the pandemic in external reporting and disclosures. The Committee reviewed the draft external reporting disclosures and provided feedback and challenge on the top sensitive disclosures, including key financial metrics and strategic priorities to ensure HSBC was consistent and transparent in its messaging. | | | | Environmental, social and governance (‘ESG’) reporting The Committee considered management's efforts to embed and enhance ESG reporting to demonstrate strong controls, operation and governance, including key performance indicators and assurance plans. | The GAC reviewed the approach to combining the ESG Update into the Annual Report and Accounts for the 2020 reporting period. This included consideration of the steps taken by management to address findings from Global Internal Audit regarding the controls and assurance processes for ESG content. The Committee will review the steps taken by management in developing the target operating model to deliver integrated reporting in 2021. | | | | Regulatory reporting assurance programme The GAC monitored the progress of the regulatory reporting assurance programme to enhance the Group’s regulatory reporting, impact on the control environment and oversee regulatory reviews and engagement. | The Committee reflected on the continued focus on the quality and reliability of regulatory reporting by the PRA and other regulators globally. The GAC reviewed management’s efforts to strengthen and simplify the end-to-end operating model, including commissioning independent external reviews of various aspects of regulatory reporting. The Committee discussed and provided management’s engagement plans with the Group’s regulators, including any potential impacts on some of our regulatory ratios such as CET1 and LCR. We continue to keep the PRA and other relevant regulators informed of our progress. | | | | | | | | | | Significant accounting judgements | | Expected credit losses The measurement of expected credit losses involves significant judgements, particularly under current economic conditions. There remains an elevated degree of uncertainty over ECL estimation under current macroeconomic, political and epidemiological uncertainties. Further details are provided in the 'Covid-19 impact on accounting judgements' section of this report. | The actions taken are summarised above in the 'Covid-19 impact on accounting judgements' section of this report. | | |
| | | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Significant accounting judgements | | Long-term viability and going concern statement During the year, the GAC has considered a wide range of information relating to present and future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios that reflect the increasing uncertainty that the global Covid-19 outbreak has had on HSBC’s operations, as well as considering potential impacts from other top and emerging risks, and the related impact on profitability, capital and liquidity. | In accordance with the UK and Hong Kong Corporate Governance Codes, 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. | | | | | 212 | HSBC Holdings plc |
| | | Significant accounting judgements considered during 2019 included: | Key area | Action taken | Goodwill | Goodwill and other non-financial assets impairment During the year, management tested for impairment goodwill and other non-financial assets. Key judgements in this area relate to long-term growth rates, discount factors and what cash flows to include for each cash-generating unit tested, both in terms of compliance with the accounting standards and reasonableness of the forecast. During the year, the Group recognised $1.3bn impairment in relation to non-financial assets, following which a detailed analysis of various balance sheet amounts was initiated. | The GAC received reports on management's approach to goodwill and other non-financial assets impairment testing and challenged the approach and modelmodels 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 planbusiness forecasts and strategic objectives of HSBC. The GAC consideredreviewed 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 onresults of management’s detailed analysis of the balance sheet.
sheet and agreed with the conclusions. | | | Expected credit loss ('ECL') impairment | 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. | | | Associates (Bank of Communications Co., Limited and The Saudi British Bank) During the year, management performed the impairment review of HSBC’s investment in Bank of Communications Co., LimitedLtd (‘BoCom’) and The Saudi British Bank (‘SABB’). The impairment testing
reviews are complex and require significant judgements, such as projected future cash flows, discount rate, and regulatory capital assumptions.
| DuringThe GAC reviewed the year,judgements in relation to the GAC considered the regular impairment reviews of HSBC’s investment in BoCom. The GAC review includedBoCom and SABB, including the sensitivity of the result of the impairment reviewresults to estimates and key assumptions ofsuch as projected future cash flows and regulatory capital assumptions andassumptions. Additionally, the model’sGAC reviewed the models’ sensitivity to long-term assumptions including the continued appropriateness of the discount rate.
rates. | | | Appropriateness of provisioning for legal | Legal proceedings and regulatory matters | The GAC received reports from management onManagement has used judgement in relation to the recognition and amountsmeasurement 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)including, for example, 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 GAC received reports from management on the legal proceedings and regulatory matters that highlight the accounting judgements for matters where these are required. The matters requiring significant judgements were highlighted. The GAC has reviewed these reports and agree with the conclusions reached by management. | | | | Valuation of defined benefit pension obligations | 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.
| | | Interest rate benchmark replacement | 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 Due to the volatile market conditions in 2020, management refined its approach to valuing Group’s investment portfolio. In addition, as losses were incurred on the novation of certain derivative portfolios, management considered whether fair value adjustments were required under the fair value framework. Management’s analysis provided insufficient evidence to support the introduction of these adjustments in line with IFRS. | 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.
topics and agrees with the judgements applied by management. | | | | Tax-related judgements HSBC has recognised deferred tax assets to the extent that they are recoverable through expected future taxable profits. Significant judgement continues to be exercised in assessing the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies. | 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 Management’s judgement is used in determining the assumptions used to calculate the Group’s remediation provisions, of which the most material are PPI and a programme in relation to the collections and recoveries operations of the bank. | The GAC considered and challenged management’s assumptions and the provisionsapproach for redress for mis-sellingestimating potential outflows relating to the calculations of PPI policiesthe customer remediation provisions. | | | | | | | | |
Report of the Directors | Corporate governance report | | | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Other accounting judgements | | Long-term asset return assumptions in PVIF Market volatility during 2020 resulted in further review of the long-term investment assumptions used in the UKmeasurement of the present value of in-force business ('PVIF') intangible assets recorded on the balance sheet in relation to shareholder returns expected from long-term insurance contracts. | The GAC reviewed the assumptions determined by management under existing insurance governance processes, which involve significant expert judgement, and concluded that they were supportable given internal and external benchmarks and information reviewed. | | | | Hedge accounting Significant judgements relating to hedge accounting matters under current economic conditions include the impact of Covid-19 payment deferrals on the highly probable cash flow forecasts required by macro cash flow programmes; and whether hedge accounting relationships, where hedged items include interest rate floors and the associated redress on PPI commissions earned under certain criteria, including management’s judgements regardinghedging instrument does not, would be highly effective over the hedged horizon. | The GAC noted that the effect of the time-bar for claims ending August 2019. In addition,Covid-19 payment deferrals on hedge accounting was limited and no additional actions were required. Additionally the GAC monitored progresswas informed about the mitigation actions management has taken to reduce the risk associated with floored hedged items, such as designating new hedge accounting relationships. | | | | | | | | | | | | | | | | Group transformation | | Transformation and sustainable control environment The GAC will oversee the impact on the remediationrisk and control environment from the Group transformation programme.
| The Committee received regular updates on the Group transformation programme to review the impact on the risk and control environment and to oversee progress of operationalthe Group transformation programme.
In these updates the Committee monitored the development of management’s approach to structuring and governing the Group transformation programme and risk management processes. This oversight helped satisfy the Committee of the appropriateness of these processes and associated customer redress.
| Adjusted profit measuresbenefits delivery. Management kept the Committee apprised of the changes and adjustments made to the Group transformation programme in response to Covid-19, and associated impact on the financial performance.
Management’s updates were supplemented by significant focus and assurance work from Global Internal Audit where a dedicated team continuously monitored and reviewed the Group transformation programme. This included carrying out a number of targeted audit reviews, in addition to audits of significant programmes. These reviews focused on key elements of change management. | Throughout the year, the GAC considered management’s non-GAAP measures for adjusted profits.
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| | | | Global Finance transformation The Committee reviewed the proposals for the Global Finance organisational design, the migration to Cloud and the impact on financial controls. | The Committee has oversight for the adequacy of resources and expertise, as well as succession planning for the Global Finance function. During 2020, the Committee dedicated significant time to the review and progress of the multi-year Global Finance transformation programme, with the overall objectives being to improve the control environment and customer outcomes and to leverage technology to increase overall efficiency. In particular, the Committee discussed the challenges to Global Finance operations, including financial reporting, from the Covid-19 pandemic and sought assurance that controls were in place to maintain standards and quality.
The Committee reviewed and challenged the key change programmes and delivery milestones and tracked the progress of the deliverables. In particular, the Committee considered the impact from the Global Finance transformation on the Group transformation programme, regulatory change programmes and where there were interdependencies and concentrations risks through key programmes such as Finance on the Cloud. There were frequent discussions with management with input from Global Internal Audit on the impact on key risks and controls, including steps taken to mitigate these risks. Management regularly updated the Committee on the approach and plans for regulatory engagement, including follow-up on the outcomes and actions to be taken post-meetings with regulators.
The Group Chief Financial Officer had private sessions with the Committee to share his perspectives on the progress of the Global Finance transformation, areas of strategic priorities and where additional focus was required. The private sessions included discussion on succession planning and resourcing and areas where GAC members could support and guide management by leveraging members’ experience. | | | | | | | | | | Regulatory change | | IFRS 17 'Insurance Contracts' The Committee will oversee the transition to IFRS 17 and consider the wider strategic implications of the change on the insurance business. | Management provided an update on the final standard amendments that were issued in June 2020 and discussed the impact on the transition programme necessitated by the one-year delay to the effective date, both from a policy implementation and model build perspective. The discussions highlighted the significant uncertainty that remained in the interpretation of key areas and the working assumptions adopted by management to enable design solutions, investment in technology and data infrastructure to proceed. The Committee discussed the impact from IFRS 17 on HSBC’s reported numbers in the financial statements and management will continue to consider how to appropriately apply the standard to HSBC’s insurance business, as well as monitoring insurance industry developments on disclosures. Management will continue to keep the Committee updated on plans for the investor narrative, taking into account the relevant disclosure requirements applicable to HSBC, and ongoing presentation of insurance results up to the time of the transition. | | |
| | | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | | | Areas of focus | | Key issues | Conclusions and actions | | | | Regulatory change | | Basel III Reform The GAC considered the implementation of the Basel III Reform and the impact on the capital requirements and RWA assurance. This was considered in the context of the strategy and structure of the balance sheet.
| 213The Committee received an update on the progress and impact of the Basel III Reform programme on the Group. Management discussed the uncertainty over the final definition of the rules and the actions taken to ensure sufficient flexibility to make changes and mitigate risks from legislation being finalised at a later date. The discussion highlighted the dependencies of the Basel III Reform programme with other Group transformation programmes, in particular the dependency on adoption of the Finance on the Cloud solution and the impact on data delivery and storage.
The Committee reviewed and challenged management on the findings from an audit on the programme structure, governance and the significant cost increase year on year. Management explained the actions being taken in response to the audit findings and the reasons for the increase in costs, which included delays to implementation dates caused by Covid-19. | | | | | | Interest rate benchmark replacement The financial reporting risks of interest rate benchmark transition include the potential for volatility arising from financial instruments valuation, contract modification and hedge accounting. The transitions involve significant operational complexity for financial institutions, and industry approaches to transition continue to develop. | The GAC noted management’s early adoption of ‘Interest Rate Benchmark Reform – Phase 2’ amendments to IFRSs in relation to benchmark reform, including the disclosures necessary to support adoption of the reliefs.
The Committee considered the risks and financial reporting impacts arising from the Ibor transition. Management discussed actions being taken to mitigate the risks, which included new product development and a client outreach programme to ensure readiness to migrate and explain the changes and outcomes arising from the transition to clients. Management advised about the operational challenges such as the updates to current systems and processes that were required to support the accounting for the Ibor transition and our external dependency on market and client readiness. In particular, management drew attention to the potentially material impact on hedge accounting programmes from the Ibor transition and the substantial costs and risks involved in the redocumentation of hedges.
The Committee discussed the approach being taken across the industry with management and PwC and potential impacts on the control environment relevant to financial reporting from the Ibor transition. | | | | | | | | | | | |
Committee evaluation and effectiveness The annual review of the effectiveness of the Board committees, including the GAC, was conducted internally in 2020. Overall the review concluded that the GAC continued to operate effectively, and highlighted improvements made in 2020 in relation to Committee structure and focus. The review also made certain recommendations for continuous improvement, including in relation to further enhancing the quality of information presented to the meeting through revised executive governance oversight. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings. The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2021. Focus of future activities At the beginning of each year the Committee discusses its key priorities for the year ahead. In 2021, the Committee will continue to monitor execution of the Group transformation programme and its impact on the risk and control environment. In monitoring the Group transformation programme, the Committee will consider the interdependencies between the Group transformation programme and implementation of large-scale regulatory change programmes such as Basel III Reforms, the Ibor transition and IFRS 17 'Insurance Contracts'. A major area of focus is also expected to be the GAC’s engagement with the UK Government’s consultation and proposals for the future of the UK external audit market.
Report of the Directors| Corporate governance report
| | | "“Geopolitical developments, civil unrest, the UK's trade negotiation with the EU and the Covid-19 outbreak introduced new challenges for our organisation, customers and people. The Group Risk Committee embraced proactive risk governance – through informed reviewresponded by working closely with management to understand and appropriateappropriately challenge – to reinforce effective risk management.scenario stress testing, early warning indicators and management of information."
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Dear Shareholder I am pleased to present the Group Risk Committee (‘GRC’) report. Geopolitical developments, civil unrest in Hong Kong, the UK’s trade negotiations with the EU and the Covid-19 outbreak introduced new challenges for our organisation, customers and people. The Committee has responsibilityGRC responded by working closely with management to understand and appropriately challenge scenario stress testing results, early warning indicators and key management metrics. Importantly, we monitored heightened capital and liquidity risks against the prospect of greater market volatility, large customer financing needs, rapid credit deterioration and lapses in fair outcomes for our customers. We reviewed and challenged the oversightimpact of enterprise risk management. Throughout 2019,forward economic growth assumptions on our markets and credit exposures. We maintained close watch over people and operational risks arising from fatigue, the health impact of the virus, and government-imposed restrictions. The GRC embraced proactive risk governance – through informed review and appropriate challenge –continued to reinforce effective risk management. During the year, theCommittee strengthenedstrengthen its composition and skills and experience to ensure that it is well positioned to promote proactive risk governance. Dr José Antonio Meade Kuribreña joinedDuring the GRC with effect from 1 June 2019year we welcomed seasoned technology and has brought a fresh perspective in multilateral governmental affairsoperations experts Steven Guggenheimer 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’)Eileen Murray to the GRC. Kathy has had a long tenure as a FSVC memberWe also extended deep appreciation to Sir Jonathan Symonds and bringsKathleen Casey for their valuable 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 engagementcontribution upon their retirement 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.Board.
| | | | Membership | | Member since | Meeting attendance in 2019 | Jackson Tai (Chair) | Sept 2016 | 11/11 | José Antonio Meade Kuribreña1
| May 2019 | 4/6 | Heidi Miller | Sept 2014 | 11/11 | Sir Jonathan Symonds | April 2018 | 11/11 | Pauline van der Meer Mohr | April 2018 | 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 continuedconvened eight formal meetings plus seven special sessions 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 reviewedimportant responsibilities, including Group internal stress testing, internal liquidity adequacy assessment process ('ILAAP'), and challenged key regulatory processes, including the Group internal capital adequacy assessment process (‘ICAAP’('ICAAP'), individual liquidity adequacy assessment process (‘ILAAP’), the Group recovery plan. We also organised timely education sessions, including a full-day training on sanctions in Hong Kong for non-executive Directors 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 progressmanagement in these regulatory processes and concluded that they were of a satisfactory standard.Asia-Pacific.
Throughout the year, we continued to advocate and support the Group’s subsidiary accountability framework. The connectivity between2020, 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 launchedGAC coordinated closely our respective agendas, as evident 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 threefive jointly organised regional Audit and Risk Committee Chairs forums held in Asia, the AmericasChairs’ Forums, which featured discussion on key audit and EMEA. Besides advancingrisk issues with our oversight over enterprise risk management, these Audit and Risk Committee Chairs Forums also ensured strongerprincipal subsidiaries, ensuring 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.
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:
TheCommittee 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.
TheCommittee 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.
TheCommitteeconducted 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.
Report of the Directors | Corporate governance report
Committee evaluation and effectiveness
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 206.
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.
Collaborative oversight by GRC and GAC
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.
Audit and Risk Committee Chairs Forum
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 theseits 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;
top risks and significant issues that were reviewed and 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 23 February 2021 | | | | | | | | | | Membership | | Member since | Meeting attendance in 2020 | | Jackson Tai (Chair) | Sep 2016 | 8/8 | Kathleen Casey1 | Jan 2020 | 3/3 | | Steven Guggenheimer | May 2020 | 4/4 | | José Antonio Meade Kuribreña | May 2019 | 8/8 | | Heidi Miller | Sep 2014 | 8/8 | | Eileen Murray | Jul 2020 | 3/3 | | David Nish | Feb 2020 | 7/7 | Sir Jonathan Symonds1 | Apr 2018 | 2/2 | | Pauline van der Meer Mohr | Apr 2018 | 8/8 |
1 Sir Jonathan Symonds stepped down from the Board on 18 February 20202020. Kathleen Casey stepped down from the Board on 24 April 2020. Key responsibilities The Group Risk Committee has overall non-executive responsibility for oversight of risk-related matters and the risks impacting the Group. The GRC’s key responsibilities includes: •advising the Board on risk appetite-related matters, and key regulatory submissions, including the ICAAP and ILAAP, as well as recovery and resolution planning; •overseeing and advising the Board on all risk-related matters, including financial risks, non-financial risks and the effectiveness of the Group’s conduct framework; •undertaking a review and challenge of the Group’s stress testing exercises; and •reviewing the effectiveness of the Group’s enterprise risk management framework and internal controls systems (other than internal financial controls overseen by the GAC). Committee governance In carrying out its responsibilities, the GRC is supported by the participation of senior management, including Noel Quinn who attended six GRC meetings in 2020. The Group Chief Risk Officer, Group Chief Financial Officer, Group Head of Audit, Group Chief Compliance Officer and Global Head of Risk Strategy are standing attendees and regularly attend GRC meetings to contribute their subject matter expertise and insight. They facilitate GRC 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 also regularly meets with the Group Chief Risk Officer, the Group Head of Audit and external auditor, PwC, without management present. The Chair also has regular meetings with members of senior management to discuss specific risk matters that arise during the year outside formal meetings. The Chair consults regularly with the Committee Secretary to ensure the GRC meets its governance responsibilities and to consider input from stakeholders when finalising meeting agendas, tracking progress on actions and Committee priorities.
Report of the Directors | Corporate governance report
| | Financial System Vulnerabilities Committee |
| | "Regulatory approval to demise the Committee reflected significant effortMatters considered by the Committee and Group to bring about a cultural changeGRC in the awareness and remediation of financial crime risk."
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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.
| 2020 | | | | Membership | | Member since | Meeting attendance in 2019 | Non-executive Directors | | | Jackson Tai (Chair)1
| Sept 2016 | 5/5 | Kathleen Casey2
| April 2019 | 4/4 | Laura Cha | April 2018 | 5/5 | Lord Evans of Weardale3
| May 2014 | 2/2 | Co-opted non-Director members4
| | | Nick Fishwick CMG | Jan 2013 | 5/5 | Dave Hartnett CB5
| Feb 2013 | 2/2 | Lord Hogan-Howe5
| Sept 2017 | 2/2 | David Irvine AO5
| Nov 2016 | 2/2 | John Raine5
| Sept 2017 | 2/2 | The Honourable Juan Zarate6
| Jan 2013 | 4/5 |
| | 1 | Jackson Tai was appointed as Chair of the FSVC on 12 April 2019. |
| Jan | Feb | Mar | Apr | May | Jun | Jul | Sep | Oct | Nov | Dec | 2Financial risk | Kathleen Casey also served on the FSVC from 1 March 2014 to
20 April 2018.ô | l | l | l | l | ô | l | l | ô | l | ô | | Credit risk | ô | ô | ô | ô | l | ô | l | l | ô | l | ô | | IT and operational risk including outsourcing, third-party risk management, cyber risk | l | l | ô | l | l | ô | l | l | ô | l | ô | | Model risk | l | ô | ô | l | ô | ô | ô | l | ô | ô | ô | | People and conduct risk | l | l | ô | ô | ô | ô | l | l | ô | l | ô | | Risk appetite | ô | l | ô | ô | ô | ô | l | ô | ô | l | ô | | Financial crime risk | l | l | ô | l | l | l | l | l | l | l | ô | | Regulatory compliance | ô | l | ô | l | ô | ô | l | l | ô | l | l | | Legal risk | l | l | ô | ô | ô | ô | l | ô | ô | l | ô |
3 Lord Evans of Weardale stepped down as Chair
How the GRC discharges its responsibilities During 2020, the GRC reshaped its meeting agenda to place greater emphasis on a regular review of the FSVCGroup’s risk landscape and to track the management of information and desired outcomes for our most important risk areas. Each meeting now commences with a review of our enterprise risk landscape through the Group Chief Risk Officer’s update of the Group risk profile followed by a comprehensive review of critical management information, led by the Group Chief Risk Officer, and supported by the Group Chief Financial Officer, Group Chief Operating Officer, Group Chief Compliance Officer and Group Human Resources Officer. The GRC also reviewed internal and external audit reports and regular risk reports, which provided deeper reporting 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 the Group’s risk profile and John Raine CMG OBEhighlighted the material current and forward-looking risks and issues, such that the GRC could effectively identify any areas that required more of the GRC's attention. A summary of coverage is set out in the table above.
Throughout the year, the GRC adhered to an agenda that sought to regularly address topics and oversight responsibilities set out in the Group risk taxonomy, while being flexible to undertake informed review and appropriate challenge of timely risk issues that have economic, commercial, regulatory and reputational implications for the Group’s franchise. Three thematic risk areas are described below to illustrate the GRC’s focus during the year. Sustainable control environment During 2020, 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. The GRC reviewed model enhancements needed as a result of changes in the economy due to the Covid-19 outbreak. The GRC also continued its review of the Group’s approach to operational resilience and identified improvements from a pilot study to identify areas for further enhancements. The GRC also reviewed the effectiveness of the Group’s anti-fraud controls. At the November meeting of the Committee, it was agreed the ultimate oversight for all stepped downof the Group’s entity level controls move 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 FSVCGAC to the GRC. On 15 JanuaryThis change supports the Committee’s responsibility for review and oversight of the risk management culture, framework and internal control systems.
Financial risk The GRC provided informed review and constructive challenge to the Group’s regulatory submissions of ICAAP and ILAAP. It also monitored progress on the Group’s liquidity risk management improvement plan, including the development of the internal liquidity metric. It reviewed work by the Global Finance function on strengthening recovery planning. The GRC continued to maintain oversight of the Group’s regulatory and internal stress testing programmes, particularly in light of the impact of the Covid-19 outbreak with specific review and challenge of the key assumptions, strategic management actions and outcomes of the principal tests conducted. Through these reviews, the GRC assessed risks 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 2020, the final FSVC meeting was held, duringGRC undertook review and challenge of a number of risk areas for 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.
Activities during the year
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.
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, whatregulatory obligations or is facing regulatory change. These included operational resilience, climate risk and sanctions. The Committee received updates on regulators’ rules and guidance relating to operational resilience, which is designed to protect customers and maintain economic stability by preventing incidents leading to intolerable consumer harm, market disruption, and impact to the safety and soundness of firms. To reinforce continued emphasis and visibility on financial crime risk controls areand sanctions compliance, the GRC organised a full-day training session on international sanctions early in placethe year in Hong Kong for our Asia-Pacific non-executive Directors and management.
The GRC also considered the PRA’s latest requirements and expectations relating to govern these relationships; financial crimeevidencing of the embedding of climate risk management and supporting governance structurescapabilities within HSBC UK, HSBC Bank plc, the Latin America region and the Asia-Pacific region;regulated firms.
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.
Activities outside formal meetings The Committee held, or facilitated,GRC organised a number of activities outside of its regular meeting cycle to provide furtherfacilitate more effective oversight of matters relatingthe risks impacting the Group. In particular, the GRC’s formal meetings continue to financial crimebe supported by training and financial system abuse.‘walk-through’ sessions to raise the GRC’s understanding of the underlying domain issues, ensuring the GRC is well prepared in its informed review and constructive challenge. The chairs of principal subsidiary risk committees were also invited. Activities included, among others: The FSVC Chair, alongside•a Directors' education session, held in October 2020, focusing on the increasingly complex international sanctions and export control landscape, including key sanctions challenges facing the Group with the imposition of new US sanctions following the US Hong Kong Autonomy Act. This education session was attended by 27 non-executive Directors from across the Group;
•a Directors' education session, held in November 2020, led by senior executives, met withleaders in Group Treasury on the implementation of the internal liquidity metric, which is designed to provide an FCA supervision teaminternal view of liquidity risk and to discuss industry-wideensure the Group holds enough liquidity to meet and recover from a defined stress; •GRC Chair’s Working Sessions on a range of topics including financial crime remediation.developments, progress on FCA conduct remediation matters (May 2020), the Wealth and Personal Banking conduct programme (May 2020), progress on regulatory remediation programmes (January and December 2020), the outcomes and implications of the 2020 Group internal stress test (November 2020), and progress on the 2020 ICAAP and ILAAP submissions (November 2020); and In May 2019,•three cybersecurity consultation sessions and regular updates on cyber developments such as cyber-crime, legislation and technology led by the Committee held joint training sessionsGRC’s independent cybersecurity adviser.
Connectivity with the GRC in preparation for the transitionprincipal subsidiary risk committees The risk committees of financial crime oversightprincipal subsidiaries provided half-yearly confirmations to the GRC. TheThese 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 and that the risk management and internal control systems in place were operating effectively.
Report of the Directors | Corporate governance report Throughout 2020, the GRC proactively encouraged principal subsidiary risk committee chairs to participate in regular GRC meetings and special review or learning sessions, leading to improved connectivity between the Group Company Secretaryand principal subsidiary risk committees. In addition the GRC Chair participated in the meetings of principal subsidiary risk committees for Asia, the UK, Europe, the US, Latin America, Canada and the Middle East, with the aim of ensuring strong alignment, information sharing and connectivity between the GRC and principal subsidiaries. Collaboration between the GRC and GAC 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 coordination or joint meetings where appropriate. The GRC and GAC Chairs are members of both committees to further enhance connectivity, coordination and flow of information. Audit and Risk Committee Chairs' Forum The Audit and Risk Committee Chairs' ('ARCC') Forum meetings continue to be one of the more collaborative GRC and GAC exercises. The forum meetings promote shared risk and audit subject matter expertise, align Group Chief Compliance Officer respectively held workshops with country CEOs and subsidiary priorities, support the chairs ofsubsidiary accountability framework and promote two-way connectivity between the Group and principal subsidiary risk and audit committees. The meetings are jointly hosted by the GAC and GRC Chairs and attended by members of the GAC and GRC, the Group Executive Committee (more than half of whom attended at least one meeting), several Group non-executive Directors, the chairs of principal and regional subsidiary audit and risk committees, together with non-executive Directors and senior management from those subsidiaries. In May, the ARCC Forum provided updates through video calls with the Asia-Pacific region and a combined call with the Europe, Middle East and Americas regions. This was followed by three ARCC Forum calls for each of the Asia-Pacific, UK, Europe and Middle East, and Americas regions in September and November. The ARCC Forums provided an important opportunity for the GRC to discussunderstand locally-specific issues and priorities with potential read-across to other areas and regions of the Group. They also served to help the GRC hear the observations, concerns and achievements from subsidiary risk and audit chairs, with a particular focus on pressing issues or concerns (such as the Covid-19 outbreak, business restructuring, or macroeconomic issues); where Group initiatives need to be recalibrated to reflect regional constraints; cross-regional dependencies; and where the Group can progress faster. In light of the Covid-19 pandemic and highly uncertain macroeconomic environment, the ARCC Forum meetings included discussion on: •reinforcing the control environment and embedding of non-financial risk management; •sustaining operational integrity and resilience during a Covid-19 and restructuring environment; •need for even stronger risk appetite, credit, counterparty and conduct risk management during a Covid-19 and macroeconomic-sensitive environment; •strengthening model risk management and our portfolio of models at the Group level and in the regions; •subsidiaries’ role and responsibilities in our Group recovery and resolvability planning in a more macroeconomic-sensitive environment; and •understanding the perspectives and feedback from regional subsidiaries.
Focus of future activities The GRC’s focus for 2021 will include the following activities. It will: •provide oversight of the execution risk arising from the Group transformation programme; •oversee enhancements to our risk appetite statement so that it is more regular, forward-looking and risk responsive; •ensure the risk appetite statement is closely linked to our strategic goals, our annual operating plan, stress testing, ILAAP and ICAAP exercises, and our recovery and resolution planning; •monitor and appropriately challenge management’s plans to manage and mitigate the impacts of geopolitical risks on our operations and portfolios in Asia, the Middle East and the rest of the world; •monitor the impact of the Covid-19 outbreak on the Group’s customer franchise as well as on the capital and liquidity risk, credit risk, market risk, people and operational risk for the Group; •monitor continued progress in financial crime compliance, including enhancements in our transaction monitoring programme and the application of new analytical tools and applications to improve our fraud detection and prevention; •continue to monitor developments and enhancements in the Group’s management of conduct behaviour and issues relating to culture.culture, as well as people risk management; 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•continue to review and challenge management’s progress in developing and implementing our operational resilience strategy;
•oversee the Group’s approach to climate risk management and climate risk appetite; •review plans, jointly with the GAC, to strengthen the Group’s data strategy and management so that we can better serve our customers, protect customer data as well as strengthen model risk management, credit risk management and risk appetite, including climate risk appetite; and •track progress regularly in remediating outstanding, unresolved regulatory actions across the Group and learnings of our financial crime remediation programme since 2012, and to share regional forward-looking initiatives on insider risks and fraud.principal subsidiaries, including progress in closing-out any regulatory consent orders or matters requiring attention. Committee evaluation The FSVC Chair visited a numberGRC is committed to regular, independent evaluation 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 Januaryits own effectiveness. During 2020, the GRC Chair (followingundertook an internal GRC effectiveness exercise, which concluded that the formal demiseGRC continued to operate effectively and in line with regulatory requirements.
The effectiveness exercise highlighted improvements made in 2020 to anchor meetings with the regular review of the FSVC on 17 January 2020) joined the Global Head of Financial Crime ComplianceGroup’s risk landscape and Group Money Laundering Reporting Officer Ralph Nash, Global Head of Sanctions Allison Mackenzie, and advisersmanagement information. Progress made in relation to the GroupCommittee’s operation and engagement with principal subsidiaries was acknowledged. The review also made certain recommendations for enhancement, including in relation to rebalancing the breadth of the GRC agenda, and increasing the use of alternative mechanisms to allow the GRC to efficiently exercise oversight of risk matters through additional education and supplementary sessions. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings. The outcomes of the evaluation have been reported to the Board and the Committee will track progress 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
the recommendations during 2020.
| | | | | | | | | | | Principal activities and significant issues considered during 2020 | | Areas of focus | | Key issues | Conclusions and actions | | Risk appetite | | The Group risk appetite statement defines the Group’s risk appetite and tolerance thresholds and forms the basis of the first and second lines of defence’s management of risks, our capacity and capabilities to support our customers, and the pursuit of the Group’s strategic goals | The GRC 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. It then continued to work closely with Group Risk Strategy to enhance the 2021 risk appetite statement including a climate risk qualitative statement and quantitative measures that focus on the Group's exposure and risk profile to high transition risk sectors, as well as improvements to the suite of resilience risk metrics. The GRC also raised the importance of strengthening the granularity risk appetite statements to be forward-looking and risk-responsive at GRC meetings and at regional ARCC Forums. In the process, the GRC has reinforced the importance of stronger linkage of the risk appetite statements to the Group’s annual operating plan, strategic planning, stress testing exercises, annual capital adequacy and liquidity management exercises, and to the Group’s recovery and resolution planning. | | | | | | | Geopolitical developments and risks | | Geopolitical developments and risks continue to present significant challenges for the Group’s customer franchise and for the resilience of our operations. | The GRC reviewed the Group’s readiness to address major geopolitical developments, including the short- and longer-term impact of civil unrest in Hong Kong and heightened trade tensions between the US and China on our Asia and global franchise, as well as our ability to maintain our high service levels in our multi-channels to serve our customers. The GRC also monitored the Group’s preparedness for financial market, operational and commercial disruptions arising out of protracted UK trade negotiations with the EU. | | | | | | | Managing through the Covid-19 outbreak | | Managing operational risk and counterparty credit risk to enable the Group’s support of our customers, communities and the local economy throughout the Covid-19 outbreak. | The GRC reviewed how the Group leveraged its capital and liquidity strength, robust credit standards, and digital capabilities to assist customers during the Covid-19 outbreak and to maintain market strength. In doing so, the Committee closely assessed credit trends, economic outlook and the impact on portfolio credit quality. The GRC also reviewed the operational, reputational and conduct challenges in implementing government support schemes across different geographies and regulatory jurisdictions, including associated risks, controls and oversight. | | | | | | | | | | Operational resilience | | Management’s operational resilience programme is being redesigned to enable our priority business services to continue to serve our customers in the event of unforeseen disruptions in our key markets. | The GRC maintained its focus on the Group’s policies, programmes and practices for strengthening and prioritising our ability to test, detect, resolve and recover from unforeseen operational disruptions in our key markets. With the goal of minimising harm to our customers and to the local financial markets, the GRC continued its review of the Group’s approach to operational resilience, which incorporates learnings from the Group's response to the Covid-19 outbreak across our franchise. The GRC’s oversight activities included: •the review and challenge of progress on the formulation of a comprehensive operational resilience strategy including working with the Group Chief Control Officer on the programme to comply with regulatory standards for operational resilience; •the planned 'operationalisation' of critical business services and impact tolerances, and risk and control mapping to strengthen the ability to prevent, respond to, recover, and learn from operational disruptions, such as Covid-19; •the embedding of ownership with first line business and function leaders to deliver operational resilience outcomes for customers, for the Group’s own safety and soundness, and to avoid disruptions to market integrity and financial stability; and •the review and challenge of management’s progress in managing third-party risk in the context of an increasing reliance on technology services provided by third parties and growing regulatory scrutiny. | | | | | | | Technology resilience including cybersecurity and Cloud strategy | | Technology resilience is the risk of unmanaged disruption to any IT system within HSBC, as a result of malicious acts, accidental actions or poor IT practice or IT system failure. | The GRC reviewed the Committee’s approach to governance of technology risk and Cloud adoption, which was a high priority area under regulatory scrutiny. The GRC also continued its oversight and challenge of the Group’s cybersecurity strategy and management of cyber risks. | | | | | | | | | | People, conduct and culture | | The Group promotes a culture that is effective in managing risk and leads to fair conduct outcomes.
It seeks to actively manage the risk of adverse impact due to not having the right people with the right skills doing the right thing, including risks associated with employment practices and relations. | The GRC continued to exercise oversight in the area of people risk and employee conduct, supported by the Group Chief Human Resources Officer and Group business heads, including: •regular monitoring of 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; •informed review and challenge of the alignment of risk and reward, satisfying itself that risk and compliance objectives and outcomes were reflected in the Group variable pay pool; •discussion of the people risk issues arising due to the impact of the Covid-19 outbreak; and •the review of workplace harassment data and insights, action taken and 2020 focus areas. | | | | |
Report of the Directors| Corporate governance report | | | | | | | | | | | Principal activities and significant issues considered during 2020 (continued) | | Areas of focus | | Key issues | Conclusions and actions | | Climate risk | | Successful delivery of HSBC’s climate ambition will be determined by our ability to measure and manage all components of climate risk. | The GRC recognises the Group’s regulatory commitments due in 2021 and the Group’s own publicly stated climate risk targets, as well as the need to manage climate risk of the Group’s existing portfolios and future business. The GRC reviewed the Group’s approach to climate risk management and climate risk appetite including associated stress testing and scenario analysis. | | | | | | | | | Capital and liquidity risk
including ICAAP and ILAAP
| | The GRC oversees the Group’s management of its financial risk, particularly in the context of the challenges of the Covid-19 outbreak. | The GRC reviewed the Group’s capability to track environmental and macroeconomic headwinds through early warning indicators and scenario stress testing. It also oversaw the Group’s progress in developing a range of strategic management actions capable of timely execution and the development of recovery and resolution capabilities that meet PRA and local regulatory expectations. The GRC also maintained oversight of the Group’s liquidity risk management with particular emphasis on the outlook, lessons learned from the Covid-19 outbreak, metric development, systems and controls, and regulatory feedback.
The GRC reviewed and challenged the assessment of the Group ICAAP and ILAAP programmes and engaged with Group management in overseeing and evaluating the Group’s forward-looking capital and liquidity strategies and capabilities, including the Group’s liquidity risk management improvement programme. Additionally, the GRC Chairs participated in several subsidiary risk committees’ review of ICAAP, leading up to final GRC review, challenge and recommendation of ICAAP to the Board. | | | | | | | Financial crime risk | | The Group is committed to closely monitoring and managing the risk of knowingly or unknowingly helping parties to commit or to further potentially illegal activity, including both internal and external fraud. | Throughout 2020, the GRC reviewed the Group’s approach to managing its financial crime risk across a number of important areas. This included: •the Group’s progress in enhancing its transaction monitoring framework; •the fraud landscape, particularly against heightened Covid-19 conditions, the Group’s fraud risk profile and the impact of regulatory developments; and •the nature and scale of insider risk and the Group’s strategies for managing insider risk. The GRC also maintained oversight of the ever-changing and increasingly complex international sanctions landscape in which the Group and its customers operate, as well as the Group’s approach to managing its compliance with sanctions regimes globally. The GRC held a full-day training session on sanctions in Hong Kong in January for our Asia-Pacific non-executive Directors and management. A further education session on sanctions was held for Group-wide non-executive Directors in October to address the US government imposition of sanctions in connection with its Hong Kong Autonomy Act. Following the organisational restructuring of Financial Crime Compliance, the GRC requested the Committee’s independent financial crime advisers to examine the effectiveness of the financial crime function in the Group’s subsidiaries. | | | | | | | | | | | | | | | Model risk | | HSBC faces risk from the inappropriate or incorrect business decisions arising from the use of models that have been inadequately designed, implemented or used, or from models that do not perform in line with expectations and predictions. | The GRC raised awareness of progress and importance of models at a number of its meetings and at the regional Audit and Risk Committee Chairs’ Forums. It reviewed progress under the Group’s model risk transformation programme. The Committee oversaw the development and embedding of improved model risk management controls and oversight in the first line of defence, as well as enhancements to model risk governance. The GRC also considered the adverse impact of the Covid-19 outbreak on model uncertainty including the need for enhancements as necessary. | | | | | | | Resolvability | | HSBC is required to show how its resolution strategy could be carried out in an orderly way, including identification of any risks to successful resolution. | The GRC monitored the Group’s progress in demonstrating that it has developed capabilities to support its own resolution, in line with the Group’s resolution strategy in order to meet new requirements from the Bank of England under its resolvability assessment framework by 1 January 2022, including the requirement to comply with the valuation in resolution requirement by 1 April 2021, to submit a self-assessment to the PRA/Bank of England by 1 October 2021 and to publicly disclose HSBC’s resolvability in June 2022. Together with the Group Chief Financial Officer, the GRC and GAC programmed our five regional Audit and Risk Committee Chairs' Forums to raise the importance of Boards and management of principal subsidiaries in upgrading their awareness and compliance with new regulatory standards for recovery and resolution. | | | | |
| | | | | | | Directors’ remuneration report | | Page | | Group Remuneration Committee | | | Workforce remuneration | | | Our approach to Directors' remuneration | | | Annual report on remuneration | | Workforce remuneration | | | Additional remuneration disclosures | |
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. | | | | Membership | | Member since | Meeting attendance'The remuneration outcomes for 2020 strike the right balance between rewarding our employees for their exceptional efforts this year and being equitable in 2019 | Pauline van der Meer Mohr (Chair) | 1 January 2016 | 7/7 | Henri de Castries1the broader context.'
| 26 May 2017 | 6/7 | David Nish | 26 May 2017 | 7/7 | Irene Lee | 20 April 2018 | 7/7 |
| | 1 | Henri de Castries was unable to attend the April meeting due to prior commitments. |
Dear Shareholder I am pleased to present our 20192020 Directors’ remuneration report on behalf of the members of the Group Remuneration Committee. Our newMaking remuneration policy received strongdecisions in the face of the challenges presented by the Covid-19 pandemic required a delicate balancing of factors. Recognising our people for their performance is a key element of our reward strategy and helps to drive ongoing engagement, which is critically important as we navigate through the Covid-19 outbreak and the Group’s transformation. However, we must also recognise the impact of these circumstances on our stakeholders and the wider community.
Actions taken in response to Covid-19 In determining the remuneration outcomes, the Committee noted the following: •We did not apply for government support packages for our employees across the countries and territories in which we operate, and put employee well-being, customer experience, and supporting the economy at the 2019 AGM,centre of our response to the pandemic. •Our front-line employees continued to serve customers in challenging circumstances. Our customer contact centres were fully operational during the period, and between 70% and 90% of branches remained open, as we continued to enhance our digital capabilities. •We worked with governments to support national schemes, granting over 720,000 payment holidays to our personal customers and 237,000 loans to our wholesale customers. We provided more than 97%$26bn in customer relief to our personal customers during the initial stages of the votes castpandemic and more than $52bn in favourlending to wholesale customers, many of whom still require our support. •In line with all other large UK-based banks and at the direct request of the policy. The first yearGroup’s lead regulator, the UK’s PRA, we cancelled the fourth interim dividend of implementation2019 and suspended dividend payments until the end of this policy was in 2019.2020. In December 2020, the PRA announced a temporary approach to shareholder distributions for 2020. After considering the requirements of the temporary approach, the Board announced an interim dividend for 2020 of $0.15 per ordinary share. I have set out below a summary of our 2019 performance, key decisions made by
| | | | | | | | | | Membership | | Member since | Meeting attendance in 2020 | | Pauline van der Meer Mohr (Chair) | Jan 2016 | 5/5 | | Henri de Castries | May 2017 | 5/5 | | James Forese | May 2020 | 4/4 | | Irene Lee | Apr 2018 | 5/5 | | David Nish | May 2017 | 5/5 |
Reflecting on these actions, the Committee concluded that the 2020 remuneration outcomes should strike the right balance between rewarding our employees for their exceptional efforts this year and howbeing equitable in the Committee has applied the new policy.broader context. Performance and pay for 20192020 In 2019, we faced a challenging business environment, with revenue growth softer than we anticipated atFinancial performance
The Group's financial performance deteriorated in 2020, reflecting the startimpact of the year. Our reported profit before tax of $13.3bn was down 33%, which included a $7.3bn goodwill impairment.Covid-19 outbreak on the global economy. Adjusted profit before tax of $22.2bn increased by 5%. Reported revenue of $56.1bn increased by 4%, while adjusted revenue of $55.4bn$12bn was 6% higher, with strong performances in our RBWM and CMB businesses, partly offset bydown 45% due to lower revenue in GB&M. Adjusted operating expenses increasedand a higher expected credit loss charge directly linked to the impact of the pandemic. However, the Group continued to make good progress on its strategic plan, demonstrated 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$51.5bn reduction of 20 basis points comparedRWAs in 2020 in low-return franchises and a 3% reduction in adjusted costs. Economic activity in Asia has proven to be resilient and is rebounding. We continue to elevate our ambition in the region by stepping up our investment. Non-financial performance We made progress in creating a simpler, more efficient organisation by combining our wholesale back office operations, and bringing our retail, wealth and private banking businesses together into a single global business. We also continue to increase investment in technology to drive improved customer experience and operational efficiency. Technology enhancements introduced in 2020 included automated lending processes for Covid-19 relief programmes, upgraded global payment systems, transformed customer onboarding processes, and use of Cloud technology for risk analytics systems. Remuneration funding approach While events such as those seen in 2020 are rare, our remuneration framework was designed with 2018.the entire economic cycle in mind, including the possibility of exceptional years. We use a countercyclical funding methodology, with both a floor and a ceiling, to recognise that there will be times when profitability is exceptionally low or exceptionally high as a result of factors not directly linked to employee performance. In such years, factors such as applying franchise protection and limiting the risk of inappropriate behaviour need to be considered when setting the variable pay pool. Nonetheless, financial performance and affordability remain central tenets in determining the appropriateness of the variable pay pool. 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.variable pay pool
The Group RemunerationFor 2020, the Committee reviewed and agreed the Group variable pay pool of $3,341m,$2,659m, taking into account performance against financial and non-financial metrics set out in the Group risk appetite statement, including conduct, and targets
set out in our annual operating plan. This represents a 3.8% decrease on20.4% reduction in the 2018pool compared with 2019, with the variable pay pool.pool down approximately 15% in Global Banking and Markets, asset management and private banking, and approximately 22.5% in other areas of the Group. We also differentiated by market, with a better year-on-year outcome in Asia, reflecting the region's strategic importance and consistent contribution towards Group performance. In settingdetermining the size of the pool, the Committee applied: a reduction of $206m fortook into account the fines, penalties and cost of customer redress faced by the Group; and
a discretionary reduction of $999m taking into considerationfact that overall financial performance beingwas lower than the targetswhat we had settargeted at the start of the year, and certain non-financial risk metrics where performance waswere outside of our risk appetite. We also took into account the exceptional circumstances faced by our shareholders, including the impact of the regulatory request to
Report of the Directors | Corporate governance report cancel the final 2019 dividend and suspend dividend payments until the end of 2020. While it is appropriate that the pool is significantly lower this year, the Committee was cognisant of the extraordinary effort and performance of many of our peoplecolleagues in 2020. Equally, it is critical we retain talent for the long-term interests of our stakeholders. This is of particular importance in growth markets and our areas of strategic focus, and is most acute for our high performers who are helping us restore the business to reflect our valuesexpected performance levels. As a result, the variable pay accrual was increased in how they behavethe fourth quarter in response to financial performance and conduct business. We are committed to delivering fairmarket pay challenges. Review of workforce remuneration Remuneration outcomes In allocating the pool, the Committee decided that while the variable pay outcomes for junior colleagues should reflect Group performance, they should receive better outcomes with less differentiation relative to our customers,senior employees. Overall, total compensation for our junior members of staff was broadly flat, which we felt was important given their significant efforts in a challenging year. Higher paid employees had an overall decrease in total compensation. We also made limited fixed pay increases for 2021 and targeted these towards our junior colleagues. As part of the year-end pay review, the Committee reviewed results of remuneration outcomes to ensuring we actensure they were in line with integrity. The personal conductour pay principles and the approach decided by the Committee for 2020. Support for our employees Throughout 2020, the well-being of our people is criticalwas our paramount concern. Many employees had to juggle personal and professional priorities, while adapting to new and unfamiliar ways of working. In March 2020, we temporarily paused the redundancy programme intended to deliver the reduction in headcount that we set out in the transformation programme announced in February 2020. The Board was conscious of the impact of proceeding with redundancies, particularly at the outset of the crisis given the significant stress for our people and communities, and the need to protect our capacity to serve our customers. The Board lifted the pause on the redundancy programme in June 2020 while continuing the freeze on the vast majority of external recruitment to make every effort to fill vacancies internally. We maintained a regular flow of communication and listened closely to our abilitycolleagues' needs, providing the support and flexibility required to live uphelp them manage their lives during the pandemic, and maintained their full pay without applying for government support packages. We ran a mid-year employee survey to these commitments. We recognisedetermine how the Covid-19 outbreak was impacting our colleagues and reward exceptional conduct demonstrated byhow we could support them through this period. More than 50% of our employees.total employee population responded, of which more than 89% said they were getting the information they needed from the organisation, 86% reported that they were getting the support they needed from their line manager and 86% of the respondents reported they felt confident in leadership. In addition, 75% of employees that participated in our 2020 Snapshot survey said they believed HSBC values their well-being. For our departing colleagues, we took steps to offer them support on searching and applying for jobs and preparing for interviews. We also discourage poor conductmaintained a dedicated advice website, offered virtual workshops and inappropriate behaviour that is not in keeping with our values, or which exposes usprovided access to financial, regulatory and reputational risk. We do this through:career development tools to set them up for success outside HSBC. 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).
Executive Director changes
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.
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 234.
Key remuneration decisions for Directors Voluntary decisions made by executive Directors In March 2019,Reflecting on the Committeeseverity of the impact of Covid-19 at the outset, our two executive Directors made personal contributions to the fight against the pandemic by donating to charity a quarter of their base salaries for six months, and our Group Chairman donated his entire fee for 12 months to charity. Additionally, as an organisation, we provided $25m in charitable donations, which went toward immediate medical relief, access to food, and care
for the most vulnerable people. Our executive Directors also decided to reducevoluntarily forgo any annual cash bonus for 2020 due to 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 membersimpact of the HSBC Bank (UK) Pension Scheme. The current executive Directors also
voluntarily agreed to have their allowance reduced to 10%suspension of salary with effect from 1 April 2019. This change has been positively received bydividends on our shareholders.
TheExecutive Director annual scorecards of ourperformance assessment
With regard to performance-based pay for 2020, the financial measures in the executive DirectorsDirectors’ annual scorecards were aligned to the delivery of profit before tax, our strategic priorities, as set out on page 228. As we didpriority of reducing RWAs in low-return franchises and, for the Group Chief Financial Officer, effective management of Group costs. Following careful consideration, these targets were not achieve allrevised for the significant economic impact of the Covid-19 outbreak to reflect the Committee’s view that reward for our executive Directors should align with the experience of our 2019 financialshareholders. Non-financial performance measures were linked to customer satisfaction, employee engagement and strategic targets,diversity, environmental stewardship, risk and compliance, and organisational simplification. The Committee noted strong non-financial performance as our commitment to delivering responsibly for our stakeholders remained unchanged throughout the 2019pandemic. In addition to the actions noted to support our customers and the wider economy, customer and digital satisfaction scores increased in some of our scale markets, employee engagement scores improved, we met our diversity goal of having at least 30% women in senior management roles, and we achieved carbon reduction and sustainable finance and investment targets. We were also recognised by Euromoney for ‘Global Excellence in Leadership during the Covid-19 pandemic’ in its Awards for Excellence 2020. Executive Director annual incentive scorecard outcomes for our Group Chief Executive and Group Chief Risk Officer were lower than the 2018 scorecard outcomes. outcome 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 objectivesabove resulted in the first half of 2019. The annual incentive awards for Noel Quinn and John Flint were determined based on thean overall outcome of the 2019 scorecard measures set64.50% for the Group Chief Executive and then pro-rated63.75% for time spent by them asthe Group Chief Executive during 2019. FurtherFinancial Officer (further details of performance are provided on page 228. 283). The three-year performance period forCommittee reviewed this outcome in the 2016 LTI award ended on 31 December 2019. The scorecard outcome for this award was assessed at 72.7%, which included assessmentcontext of performance against return on equity, adjusted jaws and relativetotal 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 considerations to determine whether it should exercise its discretion to reduce the outcome, including:
•overall share price performance in the year, which was significantly impacted by both the Covid-19 outbreak and the impact of the PRA’s request to suspend dividend payments; •the impact of the bonus pool reduction on the total compensation for our wider workforce; •profit before tax RoTE, share price and TSR,return on tangible equity ('RoTE') performance; and •the positive actions taken by the Board to consider if any adjustments should be made to the formulaic scorecard outcomes. support our customers, colleagues and communities in these uncertain times. The Committee determined that the 2020 formulaic scorecard outcomes appropriately reflectedreward the executive Directors for their performance within the context of overall stakeholder experience. With the voluntary waiver of cash bonuses by executive Directors, the Group Chief Executive's effective payout was reduced to 32.25% of its maximum, and the Group Chief Financial Officer's was reduced to 31.88%. The effective payouts are 51.43% and 58.86% below their respective outcomes compared with 2019. 2020 long-term incentive ('LTI') for executive Directors To reflect the Group’s strategy, and after listening to our shareholders, the Committee has agreed that the 2020 LTI will be based on four equally weighted measures. •RoTE: We have retained a key measure of our financial resultsperformance and determined no discretionary adjustments were required.how we generate returns that deliver value for our shareholders. •Capital reallocation to Asia: We have set a new metric to assess a key lever of our strategy and business transformation plan. •Environment and sustainability: We have set a new measure to align with the Group’s climate ambition to bring our own operations to net zero by 2030 and support our customers in their transition to a more sustainable future. •Relative total shareholder return: We have retained this metric, which rewards executive Directors based on comparison of the
total shareholder return performance of the Group and a relevant peer group. 2020 LTI grant size The Committee also granted Ewen Stevenson anis aware of shareholders’ expectations on the need to adjust the size of LTI award for 2019, taking into consideration his 2019 performance. This award will alsoawards to ensure they do not result in 'windfall gains' in the event that the share price falls significantly due to the impact of the Covid-19 outbreak. While this does not impact outstanding LTI awards, the Committee agreed, in line with investor expectations, that the 2020 LTI awards should 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'windfall gain' adjustment at grant if the share price falls significantly relative TSR measure. Theto the grant price of the 2019 LTI scorecard will consist of RoTE, relative TSR and customer measures with each given equal weighting. We believe these measures alignLTI. This is to ensure that the reward for our executive Directors aligns with the experience of our executives with our financialshareholders and is reflective of management performance andover the interest of our shareholders. Details ofperformance period. While the share price to be used for the 2020 LTI award are set out on page 231. Theis not known at this stage, the Committee has not grantedagreed, in line with investor expectations, if the 2020 LTI grant share price experiences a greater than 30% decline since the previous grant, this would be considered a material share price fall, and an LTI awardadjustment percentage equal to Noel Quinn given he has been in an interim capacity inhalf the Group Chief share price percentage decline would be applied to the awards to mitigate the potential for 'windfall gains'. Executive role. To meet regulatory requirements, 60% of his variableDirectors' fixed 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.for 2021 We have increased the base salary of our executive Directors by 2.5%,1.6% in line with the average increase for our Group employees. Additionally, in an expansion to his current remit, the Group Chief Financial Officer will assume responsibility for the Group’s transformation programme, effective immediately, and its mergers and acquisitions agenda, from April. In acknowledgement of the expanded remit and responsibilities, the Committee has decided to adjust his fixed pay allowance from £950,000 to £1,085,000 in accordance with the terms of the Directors’ remuneration policy approved at the 2019 AGM. The executive Directors have made the personal decision to donate 100% of their salary and fixed pay allowance increases for 2021 to charity given the ongoing challenging external environment. Investor consultation RegularThe Committee considers that regular dialogue with our shareholders, evenincluding outside of our policy vote years and especially during these uncertain times, is important to ensure our remuneration policy operates as intended.intended and in line with shareholder expectations. In 2019,2020, we met with a number of our significant shareholders and proxy voting agencies to hear their views on executive and wider workforce remuneration. As ever, we found this engagement to be very helpful as we considered the implementation of our new policy. We found this engagement useful. There was a preference towardsremuneration policy, including the 'windfall gain' adjustment for the 2020 LTI award, and use of a relative measureESG measures in the LTI scorecard and the useforward-looking scorecards. Further details of firm-specific environmental targets in executive Directors’ scorecards. Based on this feedback, the 2019 LTI includes a TSR measure and the 2020 LTI measures and targets are on page 286. The 2021 annual incentive scorecards of executive Directors include an environment measure linked to our commitment to reducing carbon emissions.scorecard is provided on page 292.
Review of workforce remuneration matters
Under the PRA’s Senior Managers Regime, as the ChairOn behalf of the Committee, I have prescribed responsibilitieswould like to thank investors for overseeingtheir time during the developmentconsultations and implementationtheir support for the direction of travel.
The Group’s Directors’ remuneration policy is due to expire at the 2022 AGM. During the course of 2021, we will be reviewing our current approach to Directors’ remuneration and will consult with our large shareholders and proxy advisory bodies with the aim of introducing a new policy in 2022. The review will continue to be based on our following key principles: •The policy should be simple and transparent. •There should be a strong alignment between rewards and the interests of our stakeholders, including shareholders, customers and employees. •The policy should maintain a focus on long-term performance. •The total compensation package should be competitive to ensure we can retain and attract talent. •The structure should meet the expectations of investors and our regulators. The Committee is concerned that over time, HSBC’s overall remuneration opportunity has fallen behind desired levels to reflect the calibre of the Group’sexecutives and market positioning. While conscious of external sentiment, one of the areas of focus for the Committee will therefore be ensuring that overall remuneration framework. In linelevels remain appropriate in the context of the above and support delivery of our strategic priorities. Any proposed changes would be discussed with these prescribed responsibilitiesshareholders 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 behaviourproxy advisory bodies 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 Committeewider consultation 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 240.
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.2021.
Our annual report on remuneration As Chair of the Committee, I hope you will support the 20192020 Directors' remuneration report.
Non-executive Directors Senior Independent Director David Nish2,3 | 17/17 | •Supports the Group Chairman, acting as intermediary for non-executive Directors when necessary. •Leads the non-executive Directors in the oversight of the Group Chairman, supporting the clear division of responsibility between the Group Chairman and the Group Chief Executive. •Listens to shareholders' views if they have concerns that cannot be resolved through the normal channels. | |
