SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the month of February 2016

Commission File Number: 001-14930

 

 

HSBC Holdings plc

 

 

42nd Floor, 8 Canada Square, London E14 5HQ, England

 

 

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F).

Form 20-F  x    Form 40-F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨

(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934).

Yes  ¨    No   x

(If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-        ).

The Registrant hereby incorporates by reference into its Registration Statement on Form F-3ASR (File No. 333-202420) (i) the consolidated financial statements of HSBC Holdings plc and its subsidiaries as at 31 December 2014 and 2015 and for each of the years in the three-year period ended 31 December 2015 and notes thereon on attached pages 336 to 469, (ii) the disclosures marked ‘audited’ within the ‘Report of the Directors: Risk’ section on attached pages 120 to 225 and the ‘Report of the Directors: Capital’ section on attached pages 233 to 244, (iii) management’s report on the effectiveness of internal control over financial reporting on attached page 98a, (iv) the auditors’ reports thereon and (v) the Exhibits attached hereto.

 

 

 

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This document includes Audited consolidated financial statements of HSBC, related disclosures and auditors’ reports thereon

 

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Report of the Independent Registered Public Accounting

Firm to the Board of Directors and Shareholders of

HSBC Holdings plc

In our opinion, the accompanying consolidated balance sheet as of 31 December 2015 and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended present fairly, in all material respects, the financial position of HSBC Holdings plc and its subsidiaries as of 31 December 2015 and the results of their operations and their cash flows for the year then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited the adjustments to the 2014 and 2013 financial statements to retrospectively apply the changes in disclosure as described in Note 1A. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2014 or 2013 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2014 or 2013 financial statements taken as a whole.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of 31 December 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s assessment of internal controls over financial reporting appearing on page 98a. Our responsibility is to express an opinion on these financial statements and on the Company’s internal control over financial reporting based on our integrated audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

London, United Kingdom

22 February 2016

 

HSBC HOLDINGS PLC   323

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Report of the Independent Registered Public Accounting

Firm to the Board of Directors and Shareholders of

HSBC Holdings plc

We have audited the accompanying consolidated financial statements of HSBC Holdings plc and its subsidiaries (together “HSBC”) on pages 337 to 469, before the effects of certain adjustments as described in Note 1A, which comprise the consolidated balance sheet as of 31 December 2014, and the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of changes in equity for each of the years in the two-year period ended 31 December 2014, including the disclosures marked ‘audited’ within the ‘Report of the Directors: Risk’ section on pages 101 to 226 and the ‘Report of the Directors: Capital’ section on pages 227 to 248. HSBC’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above, before the effects of certain adjustments as described in Note 1A, present fairly, in all material respects, the financial position of HSBC as of 31 December 2014, and the results of its operations and its cash flows for each of the years in the two-year period ended 31 December 2014, in conformity with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union (‘EU’) and IFRSs as issued by the International Accounting Standards Board (‘IASB’).

We were not engaged to audit, review, or apply any procedures to the adjustments of certain information as described in Note 1A, and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by a successor auditor.

KPMG Audit Plc

London, England

23 February 2015

 

HSBC HOLDINGS PLC   335

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Report of the Directors: Other Information (page 98a)

 

HSBC HOLDINGS PLC

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Report of the Directors: Financial Review (continued)

    

    

    

    

 

Disclosure controls

The Group Chief Executive and Group Finance Director, 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 2015. Based upon that evaluation, the Group Chief Executive and Group Finance Director concluded that our disclosure controls and procedures as at 31 December 2015 were effective to provide reasonable assurance that information required to be disclosed in the reports which 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.

During the year it was determined that the control environment associated with IT privileged access required significant improvement. Deficiencies were noted in the design and operation of controls for the granting, release and monitoring of privileged access in a number of systems. For the identified deficiencies, management responded by implementing a programme to determine the scale and nature of the deficiencies, remediate identified control deficiencies and determine if privileged access had been misused during 2015. Management also identified and assessed the effectiveness of relevant IT, business, monitoring and period-end mitigating controls. Please see ‘Effectiveness of Internal Controls’ on page 277.

There have been no changes in HSBC Holdings’ internal control over financial reporting during the year ended 31 December 2015, 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 2015. 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 Organisations 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 2015, 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 2015, 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 323 and 335.

 

HSBC HOLDINGS PLC   98a

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Financial statements and notes on the financial statements (pages 336 – 469)

 

HSBC HOLDINGS PLC

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Financial Statements

Financial Statement/Notes on the Financial Statements

    

    

    

 

 

HSBC HOLDINGS PLC   336

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Consolidated income statement

for the year ended 31 December 2015

 

						2015						2014						2013
		Notes				$m						$m						$m
Interest income							47,189						50,955						51,192
Interest expense							(14,658	)					(16,250	)					(15,653	)
Net interest income							32,531						34,705						35,539
Fee income							18,016						19,545						19,973
Fee expense							(3,311	)					(3,588	)					(3,539	)
Net fee income							14,705						15,957						16,434
Trading income excluding net interest income							6,948						4,853						6,643
Net interest income on trading activities							1,775						1,907						2,047
Net trading income							8,723						6,760						8,690
Changes in fair value of long-term debt issued and related derivatives							863						508						(1,228	)
Net income from other financial instruments designated at fair value							669						1,965						1,996
Net income from financial instruments designated at fair value		2					1,532						2,473						768
Gains less losses from financial investments							2,068						1,335						2,012
Dividend income							123						311						322
Net insurance premium income		3					10,355						11,921						11,940
Other operating income							1,055						1,131						2,632
Total operating income							71,092						74,593						78,337
Net insurance claims and benefits paid and movement in liabilities to policyholders		4					(11,292	)					(13,345	)					(13,692	)
Net operating income before loan impairment charges and other credit risk provisions							59,800						61,248						64,645
Loan impairment charges and other credit risk provisions		5					(3,721	)					(3,851	)					(5,849	)
Net operating income							56,079						57,397						58,796
Employee compensation and benefits		6					(19,900	)					(20,366	)					(19,196	)
General and administrative expenses							(17,662	)					(18,565	)					(17,065	)
Depreciation and impairment of property, plant and equipment							(1,269	)					(1,382	)					(1,364	)
Amortisation and impairment of intangible assets		20					(937	)					(936	)					(931	)
Total operating expenses							(39,768	)					(41,249	)					(38,556	)
Operating profit		5					16,311						16,148						20,240
Share of profit in associates and joint ventures		19					2,556						2,532						2,325
Profit before tax							18,867						18,680						22,565
Tax expense		8					(3,771	)					(3,975	)					(4,765	)
Profit for the year							15,096						14,705						17,800
Profit attributable to shareholders of the parent company							13,522						13,688						16,204
Profit attributable to non-controlling interests							1,574						1,017						1,596
						$						$						$
Basic earnings per ordinary share		10					0.65						0.69						0.84
Diluted earnings per ordinary share		10					0.64						0.69						0.84

The accompanying notes on pages 347 to 469 form an integral part of these financial statements¹.

For footnote, see page 346.

 

HSBC HOLDINGS PLC   337

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Financial Statement (continued)

Consolidated statement of comprehensive income / Consolidated balance sheet

    

    

    

 

Consolidated statement of comprehensive income

for the year ended 31 December 2015

 

				2015						2014						2013
				$m						$m						$m
Profit for the year					15,096						14,705						17,800
Other comprehensive income/(expense)
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
Available-for-sale investments					(3,072	)					2,972						(1,718	)
– fair value gains/(losses)					(1,231	)					4,794						(1,787	)
– fair value gains reclassified to the income statement					(2,437	)					(1,672	)					(1,277	)
– amounts reclassified to the income statement in respect of impairment losses					127						374						286
– income taxes					469						(524	)					1,060
Cash flow hedges					(24	)					188						(128	)
– fair value gains					704						1,512						776
– fair value gains reclassified to the income statement					(705	)					(1,244	)					(894	)
– income taxes					(23	)					(80	)					(10	)
Share of other comprehensive income/(expense) of associates and joint ventures					(9	)					80						(71	)
– share for the year					(9	)					78						(35	)
– reclassified to income statement on disposal					–						2						(36	)
Exchange differences					(10,945	)					(8,903	)					(1,372	)
– foreign exchange gains reclassified to income statement on disposal of a foreign operation					–						(21	)					(290	)
– other exchange differences					(11,112	)					(8,917	)					(1,154	)
– Income tax attributable to exchange differences					167						35						72
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit asset/liability					101						1,985						(458	)
– before income taxes					130						2,419						(601	)
– income taxes					(29	)					(434	)					143
Other comprehensive income for the year, net of tax					(13,949	)					(3,678	)					(3,747	)
Total comprehensive income for the year					1,147						11,027						14,053
Attributable to:
– shareholders of the parent company					460						9,245						12,644
– non-controlling interests					687						1,782						1,409
Total comprehensive income for the year					1,147						11,027						14,053

The accompanying notes on pages 347 to 469 form an integral part of these financial statements¹.

For footnote, see page 346.

 

HSBC HOLDINGS PLC   338

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Consolidated balance sheet

at 31 December 2015

								2015						2014
		Notes						$m						$m
Assets
Cash and balances at central banks									98,934						129,957
Items in the course of collection from other banks									5,768						4,927
Hong Kong Government certificates of indebtedness									28,410						27,674
Trading assets			12						224,837						304,193
Financial assets designated at fair value			15						23,852						29,037
Derivatives			16						288,476						345,008
Loans and advances to banks									90,401						112,149
Loans and advances to customers									924,454						974,660
Reverse repurchase agreements – non-trading									146,255						161,713
Financial investments			17						428,955						415,467
Assets held for sale			23						43,900						7,647
Prepayments, accrued income and other assets			22						54,398						67,529
Current tax assets									1,221						1,309
Interests in associates and joint ventures			19						19,139						18,181
Goodwill and intangible assets			20						24,605						27,577
Deferred tax assets			8						6,051						7,111
Total assets at 31 December									2,409,656						2,634,139
Liabilities and equity
Liabilities
Hong Kong currency notes in circulation									28,410						27,674
Deposits by banks									54,371						77,426
Customer accounts									1,289,586						1,350,642
Repurchase agreements – non-trading									80,400						107,432
Items in the course of transmission to other banks									5,638						5,990
Trading liabilities			24						141,614						190,572
Financial liabilities designated at fair value			25						66,408						76,153
Derivatives			16						281,071						340,669
Debt securities in issue			26						88,949						95,947
Liabilities of disposal groups held for sale			23						36,840						6,934
Accruals, deferred income and other liabilities			27						38,116						46,462
Current tax liabilities									783						1,213
Liabilities under insurance contracts			28						69,938						73,861
Provisions			29						5,552						4,998
Deferred tax liabilities			8						1,760						1,524
Subordinated liabilities			30						22,702						26,664
Total liabilities at 31 December									2,212,138						2,434,161
Equity
Called up share capital			35						9,842						9,609
Share premium account									12,421						11,918
Other equity instruments									15,112						11,532
Other reserves									7,109						20,244
Retained earnings									143,976						137,144
Total shareholders’ equity									188,460						190,447
Non-controlling interests			34						9,058						9,531
Total equity at 31 December									197,518						199,978
Total liabilities and equity at 31 December									2,409,656						2,634,139

The accompanying notes on pages 347 to 469 form an integral part of these financial statements¹.

For footnote, see page 346.

 

Douglas Flint, Group Chairman		Iain Mackay, Group Finance Director

 

HSBC HOLDINGS PLC   339

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Financial Statements (continued)

Consolidated statement of cash flows / Consolidated statement of changes in equity

    

    

    

 

Consolidated statement of cash flows

for the year ended 31 December 2015

 

								2015						2014						2013
		Notes						$m						$m						$m
Cash flows from operating activities
Profit before tax									18,867						18,680						22,565
Adjustments for:
– net gain from investing activities									(1,935	)					(1,928	)					(1,458	)
– share of profits in associates and joint ventures									(2,556	)					(2,532	)					(2,325	)
– (gain)/loss on disposal of associates, joint ventures, subsidiaries and businesses									–						9						(1,173	)
– other non-cash items included in profit before tax			36						10,765						11,262						11,995
– change in operating assets			36						65,828						25,877						(148,899	)
– change in operating liabilities			36						(106,762	)					(93,814	)					164,757
– elimination of exchange differences3									18,308						24,571						4,479
– dividends received from associates									879						757						694
– contributions paid to defined benefit plans									(664	)					(681	)					(962	)
– tax paid									(3,852	)					(3,573	)					(4,696	)
Net cash generated from/(used in) operating activities									(1,122	)					(21,372	)					44,977
Cash flows from investing activities
Purchase of financial investments									(438,376	)					(384,199	)					(363,979	)
Proceeds from the sale and maturity of financial investments									399,636						382,837						342,539
Purchase of property, plant and equipment									(1,352	)					(1,477	)					(1,952	)
Proceeds from the sale of property, plant and equipment									103						88						441
Net cash inflow/(outflow) from disposal of customer and loan portfolios									2,023						(1,035	)					6,518
Net investment in intangible assets									(954	)					(903	)					(834	)
Proceeds from disposal of Ping An									–						–						7,413
Net cash inflow/(outflow) from disposal of other subsidiaries, businesses, associates and joint ventures									8						(272	)					3,269
Net cash generated from/(used in) investing activities									(38,912	)					(4,961	)					(6,585	)
Cash flows from financing activities
Issue of ordinary share capital									147						267						297
Net sales/(purchases) of own shares for market-making and investment purposes									331						(96	)					(32	)
Issue of other equity instruments									3,580						5,681						–
Redemption of preference shares and other equity instruments									(463	)					(234	)					–
Subordinated loan capital issued									3,180						3,500						1,989
Subordinated loan capital repaid									(2,157	)					(3,163	)					(1,662	)
Dividends paid to shareholders of the parent company									(6,548	)					(6,611	)					(6,414	)
Dividends paid to non-controlling interests									(697	)					(639	)					(586	)
Dividends paid to holders of other equity instruments									(950	)					(573	)					(573	)
Net cash used in financing activities									(3,577	)					(1,868	)					(6,981	)
Net increase/(decrease) in cash and cash equivalents									(43,611	)					(28,201	)					31,411
Cash and cash equivalents at 1 January									301,301						346,281						315,308
Exchange differences in respect of cash and cash equivalents									(13,827	)					(16,779	)					(438	)
Cash and cash equivalents at 31 December			36						243,863						301,301						346,281

The accompanying notes on pages 347 to 469 form an integral part of these financial statements¹.

For footnotes, see page 346.

 

HSBC HOLDINGS PLC   340

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Consolidated statement of changes in equity

for the year ended 31 December 2015

    

    

    

 

 

 

																												Other reserves
					Called up share capital						Share premium						Other equity instru- ments	2					Retained Earnings	4,6					Available- for-sale fair value reserve	5					Cash flow hedging reserve	5					Foreign exchange reserve	5					Merger reserve	6,7					Total share- holders’ equity						Non- controlling interests						Total equity
				$m						$m						$m						$m						$m						$m						$m						$m						$m						$m						$m
At 1 January 2015					9,609						11,918						11,532						137,144						2,143						58						(9,265	)					27,308						190,447						9,531						199,978
Profit for the year					–						–						–						13,522						–						–						–						–						13,522						1,574						15,096
Other comprehensive income (net of tax)					–						–						–						73						(2,332	)					(24	)					(10,779	)					–						(13,062	)					(887	)					(13,949	)
– available-for-sale investments					–						–						–						–						(2,332	)					–						–						–						(2,332	)					(740	)					(3,072	)
– cash flow hedges					–						–						–						–						–						(24	)					–						–						(24	)					–						(24	)
– remeasurement of defined benefit asset/liability					–						–						–						82						–						–						–						–						82						19						101
– share of other comprehensive income of associates and joint ventures					–						–						–						(9	)					–						–						–						–						(9	)					–						(9	)
– exchange differences					–						–						–						–						–						–						(10,779	)					–						(10,779	)					(166	)					(10,945	)
Total comprehensive income for the year					–						–						–						13,595						(2,332	)					(24	)					(10,779	)					–						460						687						1,147
Shares issued under employee remuneration and share plans					45						691						–						(589	)					–						–						–						–						147						–						147
Shares issued in lieu of dividends and amounts arising thereon					188						(188	)					–						3,162						–						–						–						–						3,162						–						3,162
Capital securities issued					–						–						3,580						–						–						–						–						–						3,580						–						3,580
Dividends to shareholders					–						–						–						(10,660	)					–						–						–						–						(10,660	)					(697	)					(11,357	)
Cost of share-based payment arrangements					–						–						–						757						–						–						–						–						757						–						757
Other movements					–						–						–						567						–						–						–						–						567						(463	)					104
At 31 December 2015					9,842						12,421						15,112						143,976						(189	)					34						(20,044	)					27,308						188,460						9,058						197,518
At 1 January 2014					9,415						11,135						5,851						128,728						97						(121	)					(542	)					27,308						181,871						8,588						190,459
Profit for the year					–						–						–						13,688						–						–						–						–						13,688						1,017						14,705
Other comprehensive income (net of tax)					–						–						–						2,066						2,025						189						(8,723	)					–						(4,443	)					765						(3,678	)
– available-for-sale investments					–						–						–						–						2,025						–						–						–						2,025						947						2,972
– cash flow hedges					–						–						–						–						–						189						–						–						189						(1	)					188
– remeasurement of defined benefit asset/liability					–						–						–						1,986						–						–						–						–						1,986						(1	)					1,985
– share of other comprehensive income of associates and joint ventures					–						–						–						80						–						–						–						–						80						–						80
– exchange differences					–						–						–						–						–						–						(8,723	)					–						(8,723	)					(180	)					(8,903	)
Total comprehensive income for the year					–						–						–						15,754						2,025						189						(8,723	)					–						9,245						1,782						11,027
Shares issued under employee remuneration and share plans					60						917						–						(710	)					–						–						–						–						267						–						267
Shares issued in lieu of dividends and amounts arising thereon					134						(134	)					–						2,709						–						–						–						–						2,709						–						2,709
Capital securities issued					–						–						5,681						–						–						–						–						–						5,681						–						5,681
Dividends to shareholders					–						–						–						(9,893	)					–						–						–						–						(9,893	)					(712	)					(10,605	)
Cost of share-based payment arrangements					–						–						–						732						–						–						–						–						732						–						732
Other movements					–						–						–						(176	)					21						(10	)					–						–						(165	)					(127	)					(292	)
At 31 December 2014					9,609						11,918						11,532						137,144						2,143						58						(9,265	)					27,308						190,447						9,531						199,978

 

HSBC HOLDINGS PLC   341

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Financial Statements (continued)

Consolidated statement of changes in equity / HSBC Holdings balance sheet

    

    

    

 

Consolidated statement of changes in equity (continued)

 

																												Other reserves
					Called up share capital						Share premium						Other equity instru- ments						Retained Earnings	4,6					Available- for-sale fair value reserve						Cash flow hedging reserve						Foreign exchange reserve						Merger reserve	6,7					Total share- holders’ equity						Non- controlling interests						Total equity
				$m						$m						$m						$m						$m						$m						$m						$m						$m						$m						$m
At 1 January 2013					9,238						10,084						5,851						120,347						1,649						13						752						27,308						175,242						7,887						183,129
Profit for the year					–						–						–						16,204						–						–						–						–						16,204						1,596						17,800
Other comprehensive income (net of tax)					–						–						–						(561	)					(1,577	)					(128	)					(1,294	)					–						(3,560	)					(187	)					(3,747	)
– available-for-sale investments					–						–						–						–						(1,577	)					–						–						–						(1,577	)					(141	)					(1,718	)
– cash flow hedges					–						–						–						–						–						(128	)					–						–						(128	)					–						(128	)
– remeasurement of defined benefit asset/liability					–						–						–						(490	)					–						–						–						–						(490	)					32						(458	)
– share of other comprehensive income of associates and joint ventures					–						–						–						(71	)					–						–						–						–						(71	)					–						(71	)
– exchange differences					–						–						–						–						–						–						(1,294	)					–						(1,294	)					(78	)					(1,372	)
Total comprehensive income for the year					–						–						–						15,643						(1,577	)					(128	)					(1,294	)					–						12,644						1,409						14,053
Shares issued under employee remuneration and share plans					60						1,168						–						(931	)					–						–						–						–						297						–						297
Shares issued in lieu of dividends and amounts arising thereon					117						(117	)					–						2,523						–						–						–						–						2,523						–						2,523
Dividends to shareholders					–						–						–						(9,510	)					–						–						–						–						(9,510	)					(718	)					(10,228	)
Cost of share-based payment arrangements					–						–						–						630						–						–						–						–						630						–						630
Other movements					–						–						–						26						25						(6	)					–						–						45						10						55
At 31 December 2013					9,415						11,135						5,851						128,728						97						(121	)					(542	)					27,308						181,871						8,588						190,459

The accompanying notes on pages 347 to 469 form an integral part of these financial statements¹.

For footnotes, see page 346.

 

HSBC HOLDINGS PLC   342

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HSBC Holdings balance sheet

at 31 December 2015

 

						2015						2014
		Notes				$m						$m
Assets
Cash at bank and in hand:
– balances with HSBC undertakings							242						249
Derivatives		16					2,467						2,771
Loans and advances to HSBC undertakings							44,350						43,910
Financial investments in HSBC undertakings							4,285						4,073
Prepayments, accrued income and other assets							265						125
Current tax assets							723						472
Investments in subsidiaries		21					97,770						96,264
Intangible assets							75						–
Deferred tax assets							17						–
Total assets at 31 December							150,194						147,864
Liabilities and equity
Liabilities
Amounts owed to HSBC undertakings							2,152						2,892
Financial liabilities designated at fair value		25					19,853						18,679
Derivatives		16					2,278						1,169
Debt securities in issue		26					960						1,009
Accruals, deferred income and other liabilities							1,642						1,398
Deferred tax liabilities							–						17
Subordinated liabilities		30					15,895						17,255
Total liabilities							42,780						42,419
Equity
Called up share capital		35					9,842						9,609
Share premium account							12,421						11,918
Other equity instruments							15,020						11,476
Other reserves							37,907						37,456
Retained earnings							32,224						34,986
Total equity							107,414						105,445
Total liabilities and equity at 31 December							150,194						147,864

The accompanying notes on pages 347 to 469 form an integral part of these financial statements¹.

For footnote, see page 346.

 

Douglas Flint Group Chairman		Iain Mackay Group Finance Director

 

HSBC HOLDINGS PLC   343

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Financial Statements (continued)

HSBC Holdings statement of cash flows / HSBC Holdings statement of changes in equity

    

    

    

 

HSBC Holdings statement of cash flows

for the year ended 31 December 2015

 

						2015						2014
		Notes				$m						$m
Cash flows from operating activities
Profit before tax							4,282						6,228
Adjustments for:
– non-cash items included in profit before tax		36					114						52
– change in operating assets		36					543						1,854
– change in operating liabilities		36					(2,342	)					(9,914	)
– tax received							470						133
Net cash generated from/(used in) operating activities							3,067						(1,647	)
Cash flows from investing activities
Net cash outflow from acquisition of or increase in stake of subsidiaries							(2,118	)					(1,603	)
Repayment of capital from subsidiaries							790						3,505
Net investment in intangible assets							(79	)					–
Net cash generated from/(used in) investing activities							(1,407	)					1,902
Cash flows from financing activities
Issue of ordinary share capital							678						924
Issue of other equity instruments							3,538						5,635
Subordinated loan capital issued							3,180						3,500
Subordinated loan capital repaid							(1,565	)					(1,654	)
Debt securities repaid							–						(1,634	)
Dividends paid on ordinary shares							(6,548	)					(6,611	)
Dividends paid to holders of other equity instruments							(950	)					(573	)
Net cash used in financing activities							(1,667	)					(413	)
Net decrease in cash and cash equivalents							(7	)					(158	)
Cash and cash equivalents at 1 January							249						407
Cash and cash equivalents at 31 December		36					242						249

The accompanying notes on pages 347 to 469 form an integral part of these financial statements¹.

For footnote, see page 346.

 

HSBC HOLDINGS PLC   344

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HSBC Holdings statement of changes in equity

for the year ended 31 December 2015

 

Other reserves

Called up share capital

Share premium

Other equity instru- ments

Retained earnings

8

Available- for-sale fair value reserve

Other paid-in capital

9

Merger and other reserves

7

Total share- holders’ equity

$m

$m

$m

$m

$m

$m

$m

$m

At 1 January 2015

9,609

11,918

11,476

34,986

240

2,089

35,127

105,445

Profit for the year

–

–

–

4,853

–

–

–

4,853

Other comprehensive income (net of tax)

–

–

–

–

(57

)

–

–

(57

)

– available-for-sale investments

–

–

–

–

(77

)

–

–

(77

)

– income tax

–

–

–

–

20

–

–

20

Total comprehensive income for the year

–

–

–

4,853

(57

)

–

–

4,796

Shares issued under employee share plans

45

691

–

(59

)

–

–

–

677

Shares issued in lieu of dividends and amounts arising thereon

188

(188

)

–

3,162

–

–

–

3,162

Capital securities issued

–

–

3,544

–

–

–

–

3,544

Dividends to shareholders

–

–

–

(10,660

)

–

–

–

(10,660

)

Tax credit on distributions

–

–

–

157

–

–

–

157

Own shares adjustment

–

–

–

180

–

–

–

180

Exercise and lapse of share options

–

–

–

(508

)

–

508

–

–

Cost of share-based payment arrangements

–

–

–

86

–

–

–

86

Income taxes on share-based payments

–

–

–

1

–

–

–

1

Equity investments granted to employees of subsidiaries under employee share plans

–

–

–

26

–

–

–

26

At 31 December 2015

9,842

12,421

15,020

32,224

183

2,597

35,127

107,414

At 1 January 2014

9,415

11,135

5,828

35,406

124

2,052

35,127

99,087

Profit for the year

–

–

–

6,527

–

–

–

6,527

Other comprehensive income (net of tax)

–

–

–

–

116

–

–

116

– available-for-sale investments

–

–

–

–

152

–

–

152

– income tax

–

–

–

–

(36

)

–

–

(36

)

Total comprehensive income for the year

–

–

–

6,527

116

–

–

6,643

Shares issued under employee share plans

60

917

–

(53

)

–

–

–

924

Shares issued in lieu of dividends and amounts arising thereon

134

(134

)

–

2,709

–

–

–

2,709

Capital securities issued

–

–

5,648

–

–

–

–

5,648

Dividends to shareholders

–

–

–

(9,893

)

–

–

–

(9,893

)

Tax credit on distributions

–

–

–

104

–

–

–

104

Own shares adjustment

–

–

–

103

–

–

–

103

Exercise and lapse of share options

–

–

–

(37

)

–

37

–

–

Cost of share-based payment arrangements

–

–

–

74

–

–

–

74

Income taxes on share-based payments

–

–

–

(2

)

–

–

–

(2

)

Equity investments granted to employees of subsidiaries under employee share plans

–

–

–

48

–

–

–

48

At 31 December 2014

9,609

11,918

11,476

34,986

240

2,089

35,127

105,445

Dividends per ordinary share at 31 December 2015 were $0.50 (2014: $0.49; 2013: $0.48).

The accompanying notes on pages 347 to 469 form an integral part of these financial statements¹.

For footnotes, see page 346.

 

HSBC HOLDINGS PLC   345

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Financial Statements (continued)

Footnotes

    

    

    

 

Footnotes to the Financial Statements

 

1	The audited sections of ‘Risk’ on pages 101 to 226, the audited sections of ‘Capital’ on pages 227 to 248 and the audited sections of ‘Directors’ Remuneration Report’ on pages 285 to 321 are also an integral part of these financial statements.

2

During 2015, HSBC Holdings issued $2,450m and €1,000 of Perpetual Subordinated Contingent Convertible Capital Securities, on which there were $12m of external issuance costs, $25m of intra-group issuance costs and $19m of tax. In 2014, HSBC Holdings issued $2,250m, $1,500m and €1,500m of Perpetual Subordinated Contingent Convertible Capital Securities, on which there were $13m of external issuance costs and $33m of intra-group issuance costs.Under IFRSs these issuance costs and tax benefits are classified as equity.

3	Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.

4

Retained earnings include 81,580,180 ($1,604m) of own shares held within HSBC’s Insurance business, retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Markets (2014: 85,337,430 ($641m); 2013: 85,997,271 ($915m)).

5

At 31 December 2015, our operations in Brazil were classified as held for sale (see Note 23). The cumulative amount of other reserves attributable to these operations were as follows: available-for-sale fair value reserve debit of $176m, cash flow hedging reserve credit of $34m and foreign exchange reserve debit of $2.6bn.

6

Cumulative goodwill amounting to $5,138m has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including $3,469m charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of $1,669m has been charged against retained earnings.

7

Statutory share premium relief under Section 131 of the Companies Act 1985 (the ‘Act’) was taken in respect of the acquisition of HSBC Bank plc in 1992, HSBC France in 2000 and HSBC Finance Corporation in 2003 and the shares issued were recorded at their nominal value only. In HSBC’s consolidated financial statements the fair value differences of $8,290m in respect of HSBC France and $12,768m in respect of HSBC Finance Corporation were recognised in the merger reserve. The merger reserve created on the acquisition of HSBC Finance Corporation subsequently became attached to HSBC Overseas Holdings (UK) Limited (‘HOHU’), following a number of intra-group reorganisations. During 2009, pursuant to Section 131 of the Companies Act 1985, statutory share premium relief was taken in respect of the rights issue and $15,796m was recognised in the merger reserve. The merger reserve includes the deduction of $614m in respect of costs relating to the rights issue, of which $149m was subsequently transferred to the income statement. Of this $149m, $121m was a loss arising from accounting for the agreement with the underwriters as a contingent forward contract. The merger reserve excludes the loss of $344m on a forward foreign exchange contract associated with hedging the proceeds of the rights issue.

8	Retained earnings include 67,881 ($1m) (2014: 179,419 ($3m)) of own shares held to fund employee share plans.

9	Other paid-in capital arises from the exercise and lapse of share options granted to employees of HSBC Holdings subsidiaries.

 

HSBC HOLDINGS PLC   346

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Notes on the Financial Statements

1 – Basis of preparation and significant accounting policies

    

    

    

 

1    Basis of preparation and significant accounting policies

 

(a)  Compliance with International Financial Reporting Standards

International Financial Reporting Standards (‘IFRSs’) comprise accounting standards issued or adopted by the International Accounting Standards Board (‘IASB’) and interpretations issued or adopted by the IFRS Interpretations Committee (‘IFRS IC’).

The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have been prepared in accordance with IFRSs as issued by the IASB and as endorsed by the European Union (‘EU’). EU-endorsed IFRSs could differ from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs were not to be endorsed by the EU.

At 31 December 2015, there were no unendorsed standards effective for the year ended 31 December 2015 affecting these consolidated and separate financial statements, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC. Accordingly, HSBC’s financial statements for the year ended 31 December 2015 are prepared in accordance with IFRSs as issued by the IASB.

Standards adopted during the year ended 31 December 2015

There were no new standards applied during the year ended 31 December 2015.

During 2015, HSBC adopted a number of interpretations and amendments to standards which had an insignificant effect on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.

(b)  Differences between IFRSs and Hong Kong Financial Reporting Standards

There are no significant differences between IFRSs and Hong Kong Financial Reporting Standards in terms of their application to HSBC and consequently there would be no significant differences had the financial statements been prepared in accordance with Hong Kong Financial Reporting Standards. The Notes on the Financial Statements, taken together with the Report of the Directors, include the aggregate of all disclosures necessary to satisfy IFRSs and Hong Kong reporting requirements.

(c)  Future accounting developments

In addition to completing its projects on financial instrument accounting, revenue recognition and leasing, discussed below, the IASB is working on a project on insurance accounting which could represent significant changes to accounting requirements in the future.

Minor amendments to IFRSs

The IASB has published a number of minor amendments to IFRSs through the Annual Improvements to IFRSs 2012–2014 cycle and in a series of stand-alone amendments, one of which has not yet been endorsed for use in the EU. HSBC has not early applied any of the amendments effective after 31 December 2015 and it expects they will have an insignificant effect, when applied, on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.

Major new IFRSs

The IASB has published IFRS 9 ‘Financial Instruments’, IFRS 15 ‘Revenue from Contracts with Customers’ and IFRS 16 ‘Leases’. None of these IFRSs have yet been endorsed for use in the EU.

IFRS 9 ‘Financial Instruments’

In July 2014, the IASB issued IFRS 9 ‘Financial Instruments’, which is the comprehensive standard to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’, and includes requirements for classification and measurement of financial assets and liabilities, impairment of financial assets and hedge accounting.

Classification and measurement

The classification and measurement of financial assets will depend on how these are managed (the entity’s business model) and their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost, fair value through other comprehensive income (‘FVOCI’) or fair value through profit or loss (‘FVPL’). In many instances, the classification and measurement outcomes will be similar to IAS 39, although differences will arise. For example, under IFRS 9, embedded derivatives are not separated from host financial assets and equity securities are measured at FVPL or, in limited circumstances, fair value movements will be shown in OCI. The combined effect of the application of the business model and the contractual cash flow characteristics tests may result in some differences in the population of financial assets measured at amortised cost or fair value compared with IAS 39. The classification of financial liabilities is essentially unchanged. For certain liabilities measured at fair value, gains or losses relating to changes in the entity’s own credit risk are to be included in other comprehensive income.

HSBC conducted an assessment of potential classification and measurement changes to financial assets based on the composition of the balance sheet as at 31 December 2014. This may not be fully representative of the impact as at 1 January 2018 because IFRS 9 requires that business models be assessed based on the facts and circumstances from the date of initial application. In addition, the contractual terms and conditions of the financial assets assessed as at 31 December 2014 may not reflect the contractual terms and conditions of HSBC’s financial assets at transition. However, based on the assessment

 

HSBC HOLDINGS PLC   347

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Notes on the Financial Statements (continued)

1 – Basis of preparation and significant accounting policies

    

    

    

 

of financial assets as at 31 December 2014 and expectations around changes to balance sheet composition, HSBC expects that generally:

 

•

loans and advances to banks and to customers and non-trading reverse repurchase agreements that are classified as loans and receivables under IAS 39 will be measured at amortised cost under IFRS 9;

 

•

financial assets designated at FVPL will remain at FVPL, because it is required under IFRS 9 or designation will continue;

 

•

debt securities classified as available for sale will primarily be measured at amortised cost or FVOCI, with a small minority at FVPL either because of their contractual cash flow characteristics or the business model within which they are held;

 

•

debt securities classified as held to maturity will be measured at amortised cost;

 

•

Treasury and other eligible bills classified as available for sale will be measured at amortised cost or FVOCI depending upon the business model in which they are held; and

 

•

all equity securities will remain measured at fair value. A significant majority will have fair value movements shown in profit or loss, while a minority will have fair value movements presented in other comprehensive income. The equity securities for which fair value movements will be shown in other comprehensive income are business facilitation and other similar investments where HSBC holds the investments other than to generate a capital return.

Impairment

The impairment requirements apply to financial assets measured at amortised cost and FVOCI, and lease receivables and certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of commitments and guarantees) is required for expected credit losses (‘ECL’) resulting from default events that are possible within the next 12 months (’12-month ECL’). In the event of a significant increase in credit risk, allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument (‘lifetime ECL’). Financial assets where 12-month ECL is recognised are considered to be ‘stage 1’; financial assets which are considered to have experienced a significant increase in credit risk are in ‘stage 2’; and financial assets for which there is objective evidence of impairment so are considered to be in default or otherwise credit impaired are in ‘stage 3’.

The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument, rather than by considering an increase in ECL.

The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted, and should incorporate all available information which is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money. As a result, the recognition and measurement of impairment is intended to be more forward-looking than under IAS 39 and the resulting impairment charge will tend to be more volatile. It will also tend to result in an increase in the total level of impairment allowances, since all financial assets will be assessed for at least 12-month ECL and the population of financial assets to which lifetime ECL applies is likely to be larger than the population for which there is objective evidence of impairment in accordance with IAS 39.

Hedge accounting

The general hedge accounting requirements aim to simplify hedge accounting, creating a stronger link with risk management strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and risks. The standard does not explicitly address macro hedge accounting strategies, which are being considered in a separate project. To remove the risk of any conflict between existing macro hedge accounting practice and the new general hedge accounting requirements, IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting.

Based on the analysis performed to date, HSBC expects to exercise the accounting policy choice to continue IAS 39 hedge accounting and therefore is not currently planning to change hedge accounting, although it will implement the revised hedge accounting disclosures required by the related amendments to IFRS 7 ‘Financial Instruments: Disclosures’.

Transition

The classification and measurement and impairment requirements are applied retrospectively by adjusting the opening balance sheet at the date of initial application, with no requirement to restate comparative periods.

The mandatory application date for the standard as a whole is 1 January 2018, but it is possible to apply the revised presentation for certain liabilities measured at fair value from an earlier date. HSBC intends to revise the presentation of fair value gains and losses relating to the entity’s own credit risk on certain liabilities as soon as permitted by EU law. If this presentation was applied at 31 December 2015, the effect would be to decrease profit before tax with the opposite effect on other comprehensive income based on the change in fair value attributable to changes in HSBC’s credit risk for the year, with no effect on net assets. Further information on the change in fair value attributable to changes in credit risk, including HSBC’s credit risk, is disclosed in Note 25.

 

HSBC HOLDINGS PLC   348

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HSBC is assessing the impact that the financial asset classification and impairment requirements will have on the financial statements.

IFRS 9 implementation programme

Within HSBC, a joint Global Risk and Global Finance IFRS 9 Implementation Programme (‘the Programme’) has been set up to prepare for implementation of IFRS 9 since 2012 and significant preparatory and design work has taken place. The Programme is sponsored by the Group Chief Risk Officer and Group Finance Director. A Steering Committee comprising senior management from Risk, Finance and HSBC Operations, Services and Technology has been established. In common with all significant change programmes in HSBC, the Programme is managed according to the Group’s business transformation framework. Delivery of the required changes will be undertaken by individual workstreams, with Global Risk leading the work to calculate impairments and Global Finance leading the development of financial reporting systems and processes. Significant legal entities in the Group have established steering committees to manage implementation locally, within this global framework. Global businesses have been engaged but are not themselves responsible for the implementation activity.

To date, the Programme has been directed towards preliminary impact analysis, documenting Group accounting policy, developing the operating and system target operating models and developing risk modelling methodologies for the calculation of impairment. In addition, an impact assessment of the classification and measurement requirements was performed during 2015. The Programme’s focus is now on the impairment models and processes which need to be developed by the end of 2016 as HSBC intends to perform a parallel run during 2017 to gain a better understanding of the potential effect of the new standard. The Programme has a defined governance framework to operate over the impairment process once it becomes live. The framework includes dedicated committees to review, challenge and sign off the assumptions used and the results in each significant legal entity, and second-line assurance capabilities for each key step in the process. An expert panel will be established to govern the setting of forward-looking economic assumptions used in the process. Governance over the impairment process is the responsibility of the Global Risk and Global Finance functions, operating within each member company of the Group. Global businesses are consulted but are not granted decision making power.

HSBC intends to quantify the potential impact of IFRS 9 once it is practicable to provide reliable estimates, which will be no later than in the Annual Report and Accounts 2017.

Until sufficient models have been developed and tested, HSBC will not have a reliable understanding of the potential impact on its financial statements and any consequential effects on regulatory capital requirements. In the absence of information on whether there will be any changes to the regulatory requirements, assumptions will have to be made about how the existing regulatory requirements will be interpreted when IFRS 9 is adopted. For example, the relationship between specific and general credit risk adjustments in accordance with Basel requirements and the IFRS 9 stages is unclear. The Basel Committee is considering the implications of the new accounting requirements for existing regulatory requirements.

Comparison of IAS 39 accounting policies with IFRS 9

The accounting policies and critical accounting estimates and judgements for the impairment of loans and advances and available-for-sale financial assets (in accordance with IAS 39 ‘Financial Instruments’) are set out in Note 1(j). Their equivalents for financial assets at amortised cost and at FVOCI (in accordance with IFRS 9) are being developed, but the following similarities and differences are likely to be important to understanding the potential effect of the change in accounting policy resulting from the implementation of IFRS 9 ‘Financial Instruments’:

 

•

Amortised cost

The accounting policies in accordance with IAS 39 generally make a distinction between individually significant loans and homogeneous groups of loans which are assessed collectively. This distinction has less relevance in developing IFRS 9 accounting policies. However, under IFRS 9, whether the loans are managed through wholesale credit risk systems or retail credit risk systems becomes the more relevant distinction because of differences in the types of information available and the way credit risk is managed.

 

•

Stage 3

Financial assets will be included in stage 3 when there is objective evidence that the loan is credit impaired. The objective evidence that is used is the same as the criteria used by HSBC to determine whether an individually significant loan is impaired in accordance with IAS 39 and is set out on page 355. Therefore, the population included in stage 3 is expected to be consistent with impaired loans under IAS 39 which are considered individually significant.

For wholesale loans, individual discounted cash flow calculations will continue to be performed and impairment losses determined as set out on page 355. Changes may be made to these calculations to ensure the measurement requirements of IFRS 9 are met. For example, the net realisable value of security will be adjusted for expected future changes in market prices.

In accordance with IAS 39, statistical methods are used to determine impairment losses on a collective basis for homogeneous groups of loans that are not considered individually significant using either roll rate methodologies or historical loss rate experience for loans. Under these methodologies, impairment allowances are recognised at a portfolio level. However, loans are classified as impaired for presentation purposes when they are more than 90 days past due or have been renegotiated for

 

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Notes on the Financial Statements (continued)

1 – Basis of preparation and significant accounting policies

    

    

    

 

credit risk reasons. For retail loans, an exception is made for individual loans that are in arrears by more than 90 days but have been individually assessed to have no indications of impairment, and these are not classified as impaired. Under IFRS 9, HSBC expects to determine stage 3 for these populations by considering the relevant objective evidence, primarily whether contractual payments of either principal or interest are past due for more than 90 days, or a concession has been granted to the borrower for economic or legal reasons relating to the borrower’s financial condition, or the loan is otherwise considered to be in default. HSBC does not expect to rebut the presumption in IFRS 9 that loans which are 90 days past due are in default for retail loans, even where regulatory rules permit default to be defined based on 180 days past due. The impairment allowance is expected to be determined by the same calculation used for stage 2, with the probability of default set to 1. The result may, therefore, not be the same as that determined by the current statistical methods and the population disclosed as stage 3 will not necessarily correspond with that disclosed as impaired in accordance with IAS 39.

Except for retail portfolios with regulatory default definitions of 180 days, HSBC’s intention is to align the definition of default with the regulatory definition as far as possible and for stage 3 to represent all loans which are considered defaulted or otherwise credit impaired.

The policy on the write-off of loans and advances included on page 357 is expected to remain unchanged.

As described on page 197, the contractual terms of a loan may be modified for a number of reasons, which include forbearance. Only some of the forbearance strategies result in loans being ‘renegotiated’. For such modifications, the current treatment as described on pages 197-198 and 357 will remain the same under IFRS 9, except for new loans recognised as a result of the original loan being derecognised following a renegotiation. These loans will be classified as originated credit-impaired and will retain this classification until derecognition. For all other modifications, the general policy on derecognition as described on page 401 will apply.

Other than originated credit-impaired loans, all other modified loans could be transferred out of stage 3 if they no longer exhibit any evidence of being credit impaired or, in the case of renegotiated loans, there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows and there are no other indicators of impairment, as described on page 198. These loans could be transferred to stages 1 or 2 based on the mechanism as described below by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). Any amount written off as a result of the modification of contractual terms would not be reversed.

 

•

Stage 2

In accordance with IFRS 9, financial assets are considered to be in stage 2 when their credit risk has increased significantly since initial recognition so it is appropriate to recognise lifetime ECL. Since this is not a concept in IAS 39, it is likely to result in increased allowance as the result of the recognition of lifetime ECL for populations that are not considered to be credit impaired.

The analysis of credit risk is multifactor and the determination of whether a specific factor is relevant and its weight compared with other factors will depend 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. Since the concept is relative and significance in part depends on the credit risk at initial recognition, credit quality disclosures that report credit grades as at the balance sheet date may not reflect the populations in stage 2 or those that are at risk of moving to stage 2.

For wholesale portfolios and significant retail portfolios, HSBC intends to consider whether credit risk has increased significantly since initial recognition using a combination of individual and collective information, and will reflect the increase in credit risk at the individual loan level to the extent practicable.

The main factor that will be considered is a lifetime probability of default (‘PD’) or a 12-month PD where this provides a reasonable approximation of changes in the lifetime risk of default, adjusted to be consistent with the current economic conditions and the expected future economic conditions which are expected to affect credit risk. The PD will be derived from the customer risk rating for wholesale portfolios and from the credit scores for retail portfolios. The PD for wholesale is determined on an obligor level and for retail at the level of the individual facility. In situations where a 12-month PD would not be appropriate, for example, where the financial instrument only has significant payment obligations beyond the next 12 months, additional factors will be considered or adjustments made to ensure that the lifetime credit risk is appropriately considered.

The PDs will also be adjusted to incorporate the effect of economic assumptions, such as interest rates, unemployment rates and GDP forecasts that can be statistically related to changes in PD which have an impact beyond the next 12 months. These statistical relationships are expected to be established through the processes developed for stress testing. In addition, other relevant factors which may not be adequately reflected in the information used to derive PDs, including past due status and whether the financial asset is subject to additional monitoring through the watch list process for wholesale portfolios, will be taken into account.

 

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HSBC is in the process of calibrating and testing the thresholds or magnitude of change required and mechanisms for transfer from stage 1 to stage 2 (and vice versa) across different portfolios so it is not possible to provide further detail at this time. The aim is to establish the points where the change in credit risk is considered meaningful in risk management terms and to test these points against subsequent stage movements and defaults. Where less sophisticated default metrics are used or credit scores are not available, as tends to apply with the less significant retail portfolios, a consistent but simplified approach is expected to be used. In particular, for any retail portfolio, days past due will be considered in determining loans transferred to stage 2 and the more significant portfolios will supplement this information with additional mechanisms linked to PDs. HSBC expects to finalise the transfer criteria for the more significant portfolios during 2016.

 

•

Stage 1

In accordance with IAS 39 (see page 356), incurred but not yet identified impairment is recognised on individually assessed loans for which no evidence of impairment has been specifically identified by estimating a collective allowance determined after taking into account factors including the estimated period between impairment occurring and the loss being identified. This is assessed empirically on a periodic basis and may vary over time. Similarly, for homogeneous groups of loans and advances which are assessed under IAS 39 on a collective basis, the inherent loss is determined using risk factors including the period of time between loss identification and write-off which is regularly benchmarked against actual outcomes. Under IFRS 9, financial assets which are not considered to have significantly increased in credit risk have loss allowances measured at an amount equal to 12 months ECL. This 12-month time horizon is likely to be equal to or longer than the period estimated under IAS 39 (typically between 6 and 12 months), which will tend to result in IFRS 9 allowances being larger. In the absence of models able to calculate IFRS 9 allowances, it is not possible to estimate the difference.

Methodologies applied to measure 12-month and lifetime expected credit losses

ECLs are calculated using three main components, i.e. a probability of default (‘PD’), a loss given default (‘LGD’) and the exposure at default (‘EAD’). For accounting purposes, the 12-month and lifetime PDs represent the probability of a default occurring over the next 12 months or the lifetime of the financial instruments, respectively, based on conditions existing at the balance sheet date and future economic conditions that affect credit risk. The LGD represents losses expected on default, taking into account the mitigating effect of collateral, its expected value when realised and the time value of money. The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdown of a committed facility.

12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated using the lifetime PD rather than the 12-month PD.

Credit loss modelling techniques

HSBC plans to base the ECL calculations on the systems used to calculate Basel expected losses (‘EL’s). This is considered to be most efficient given the similarities in the calculations. However, certain adjustments need to be made to the Basel risk components (PD, LGD, and EAD) to meet IFRS 9 requirements.

For wholesale portfolios and material residential mortgage and fixed-term loan portfolios, ECL will be calculated at the individual loan level. The main adjustments necessary to Basel risk components are explained in the table below:

 

Model		Regulatory capital		IFRS 9
PD		•  Through the cycle (represents long-run average PD throughout a full economic cycle) •  The definition of default includes a backstop of 90+ days past due, although this has been modified to 180+ days past due for some portfolios, particularly UK and US mortgages		•  Point in time (based on current conditions, adjusted to take into account estimates of future conditions that will impact PD) •  Default backstop of 90+ days past due for all portfolios
EAD		•  Cannot be lower than current balance		•  Amortisation captured for term products
LGD		•  Downturn LGD (consistent losses expected to be suffered during a severe but plausible economic downturn) •  Regulatory floors may apply to mitigate risk of underestimating downturn LGD due to lack of historical data •  Discounted using cost of capital •  All collection costs included		•  Expected LGD (based on estimate of loss given default including the expected impact of future economic conditions such as changes in value of collateral) •  No floors •  Discounted using the original effective interest rate of the loan •  Only costs associated with obtaining/selling collateral included
Other				•  Discounted back from point of default to balance sheet date

IFRS 9 PD and LGD estimates also have to be flexed to capture the effects of forward-looking macroeconomic variables. The aim is to use existing stress testing models to measure these effects. Transferring between stages will be applied at individual loan level and will also capture the effects of forward-looking macroeconomic variables.

 

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Notes on the Financial Statements (continued)

1 – Basis of preparation and significant accounting policies

    

    

    

 

For material non-term retail loans, transfer between stages will also be applied at individual loan level. However, loans will be aggregated into segments based on PD or other risk drivers for the purpose of ECL measurement, to make the calculations more efficient. For smaller portfolios where less information is available, simplified approaches will be applied which will result in more aggregated transfers between stages and ECL calculation. Such aggregation will affect the granularity of disclosure.

A new global committee, supported by Global Risk Strategy, internal economics experts and external economic forecasting services, will be established to consider and approve the forward-looking macroeconomic assumptions that should be applied, with the objective of developing unbiased internally coherent economic scenarios for each jurisdiction. This committee will also be charged with ensuring that ECL allowance meets the IFRS 9 measurement principle for unbiased and probability-weighted amounts derived by evaluating a range of possible outcomes. The calculation methodologies to meet this principle and review and challenge structures are in the process of being developed. In addition, local risk committees will review and challenge the impairment allowances recognised in the individual legal entity’s financial statements.

Fair value through other comprehensive income

For financial assets measured at FVOCI, impairment determined in accordance with the policies and processes outlined above is recognised in profit or loss. The financial assets are recognised on the balance sheet at fair value so the amortised cost impairment allowance balance is disclosed as a memorandum item.

IFRS 15 ‘Revenue from Contracts with Customers’

In May 2014, the IASB issued IFRS 15 ‘Revenue from Contracts with Customers’. The original effective date of IFRS 15 has been delayed by one year and the standard is now effective for annual periods beginning on or after 1 January 2018 with early application permitted. IFRS 15 provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for obligations as they are satisfied. The standard should be applied retrospectively, with certain practical expedients available. HSBC has assessed the impact of IFRS 15 and it expects that the standard will have no significant effect, when applied, on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.

IFRS 16 ‘Leases’

In January 2016, the IASB issued IFRS 16 ‘Leases’ with an effective date of annual periods beginning on or after 1 January 2019. IFRS 16 results in lessees accounting for most leases within the scope of the standard in a manner similar to the way in which finance leases are currently accounted for under IAS 17 ‘Leases’. Lessees will recognise a ‘right of use’ asset and a corresponding financial liability on the balance sheet. The asset will be amortised over the length of the lease and the financial liability measured at amortised cost. Lessor accounting remains substantially the same as in IAS 17. HSBC is currently assessing the impact of IFRS 16 and it is not practicable to quantify the effect as at the date of the publication of these financial statements.

(d)  Presentation of information

Disclosures under IFRS 4 ‘Insurance Contracts’ and IFRS 7 ‘Financial Instruments: Disclosures’ concerning the nature and extent of risks relating to insurance contracts and financial instruments are included in the audited sections of the ‘Report of the Directors: Risk’ on pages 101 to 226.

Capital disclosures under IAS 1 ‘Presentation of Financial Statements’ are included in the audited sections of ‘Report of the Directors: Capital’ on pages 227 to 248.

Disclosures relating to HSBC’s securitisation activities and structured products are included in the audited section of ‘Report of the Directors: Risk’ on pages 101 to 226.

In accordance with HSBC’s policy to provide disclosures that help investors and other stakeholders understand the Group’s performance, financial position and changes thereto, the information provided in the Notes on the Financial Statements and the Report of the Directors goes beyond the minimum levels required by accounting standards, statutory and regulatory requirements and listing rules. In particular, HSBC provides additional disclosures having regard to the recommendations of the Enhanced Disclosures Task Force report ‘Enhancing the Risk Disclosures of Banks’ issued in October 2012 and ‘Impact of Expected Credit Loss Approaches on Bank Risk Disclosures’ issued in December 2015. The report aims to help financial institutions identify areas that investors had highlighted as needing better and more transparent information about banks’ risks, and how these risks relate to performance measurement and reporting. In addition, HSBC follows the British Bankers’ Association Code for Financial Reporting Disclosure (‘the BBA Code’). The BBA Code aims to increase the quality and comparability of UK banks’ disclosures and sets out five disclosure principles together with supporting guidance. In line with the principles of the BBA Code, HSBC assesses good practice recommendations issued from time to time by relevant regulators and standard setters and will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate.

In publishing the parent company financial statements together with the Group financial statements, HSBC Holdings has taken advantage of the exemption in section 408(3) of the Companies Act 2006 not to present its individual income statement and related notes.

HSBC’s consolidated financial statements are presented in US dollars because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business. The US dollar is also HSBC Holdings’ functional currency because the US dollar and currencies linked to it are the most significant currencies relevant to the underlying transactions, events and conditions of its subsidiaries, as well as representing a significant proportion of its funds generated from financing activities.

 

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(e)  Critical accounting estimates and judgements

The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items listed below, it is possible that the outcomes in the next financial year could differ from those on which management’s estimates are based, resulting in materially different conclusions from those reached by management for the purposes of the 2015 Financial Statements. Management’s selection of HSBC’s accounting policies which contain critical estimates and judgements is listed below; it reflects the materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved:

 

•

Impairment of loans and advances: Note 1(j);

 

•

Deferred tax assets: Note 8;

 

•

Valuation of financial instruments: Note 13;

 

•

Impairment of interests in associates: Note 19;

 

•

Goodwill impairment: Note 20;

 

•

Provisions: Note 29.

(f)  Going concern

The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.

(g)  Consolidation and related disclosures

HSBC controls and consequently consolidates an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Control is initially assessed based on consideration of all facts and circumstances, and is subsequently reassessed when there are significant changes to the initial setup.

Where an entity is governed by voting rights, HSBC would consolidate when it holds, directly or indirectly, the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power over relevant activities or holding the power as agent or principal.

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured at the fair value of the consideration, including contingent consideration, given at the date of exchange. Acquisition-related costs are recognised as an expense in the income statement in the period in which they are incurred. The acquired identifiable assets, liabilities and contingent liabilities are generally measured at their fair values at the date of acquisition. Goodwill is measured as the excess of the aggregate of the consideration transferred, the amount of non-controlling interest and the fair value of HSBC’s previously held equity interest, if any, over the net of the amounts of the identifiable assets acquired and the liabilities assumed. The amount of non-controlling interest is measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. For acquisitions achieved in stages, the previously held equity interest is remeasured at the acquisition-date fair value with the resulting gain or loss recognised in the income statement.

All intra-HSBC transactions are eliminated on consolidation.

The consolidated financial statements of HSBC also include the attributable share of the results and reserves of joint ventures and associates, based on either financial statements made up to 31 December or pro-rated amounts adjusted for any material transactions or events occurring between the date of financial statements available and 31 December.

(h)  Foreign currencies

Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange at the balance sheet date. Any resulting exchange differences are included in the income statement. Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated into the functional currency using the rate of exchange at the date of the initial transaction. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated into the functional currency using the rate of exchange at the date the fair value was determined. Any foreign exchange component of a gain or loss on a non-monetary item is recognised either in other comprehensive income or in the income statement depending on where the gain or loss on the underlying non-monetary item is recognised.

 

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Notes on the Financial Statements (continued)

1 - Basis of preparation and significant accounting policies

    

    

    

 

In the consolidated financial statements, the assets and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars are translated into the Group’s presentation currency at the rate of exchange at the balance sheet date, while their results are translated into US dollars at the average rates of exchange for the reporting period. Exchange differences arising from the retranslation of opening foreign currency net assets, and the retranslation of the results for the reporting period from the average rate to the exchange rate at the period end, are recognised in other comprehensive income. Exchange differences on a monetary item that is part of a net investment in a foreign operation are recognised in the income statement of the separate financial statements and in other comprehensive income in consolidated financial statements. On disposal of a foreign operation, exchange differences previously recognised in other comprehensive income are reclassified to the income statement as a reclassification adjustment.

(i)  Loans and advances to banks and customers

These include loans and advances originated by HSBC, not classified as held for trading or designated at fair value. They are recognised when cash is advanced to a borrower and are derecognised when either the borrower repays its obligations or the loans are sold or substantially all the risks and rewards of ownership are transferred. They are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest method, less impairment allowance.

Loans and advances are reclassified to ‘Assets held for sale’ when they meet the criteria presented in Note 23, though their measurement remains in accordance with this policy.

HSBC may commit to underwrite loans on fixed contractual terms for specified periods of time. When the loan arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a derivative. On drawdown, the loan is classified as held for trading. When HSBC intends to hold the loan, a provision on the loan commitment is only recorded where it is probable that HSBC will incur a loss. On inception, the loan to be held is recorded at its fair value and subsequently measured at amortised cost. For certain transactions, such as leveraged finance and syndicated lending activities, the cash advanced may not be the best evidence of the fair value of the loan. For these loans, where the initial fair value is lower than the cash amount advanced, the difference is charged to the income statement in other operating income. The write-down is recovered over the life of the loan through the recognition of interest income, unless the loan becomes impaired.

(j)  Impairment of loans and advances and available-for-sale financial assets

Critical accounting estimates and judgements

 

Impairment of loans and advances   Loan impairment allowances represent management’s best estimate of losses incurred in the loan portfolios at the balance sheet date. Management is required to exercise judgement in making assumptions and estimates when calculating loan impairment allowances on both individually and collectively assessed loans and advances. See the ‘Movement in impairment allowances by industry sector and by geographical region’ table on page 134 for a breakdown of individual and collective impairment allowances.   Collective impairment allowances are subject to estimation uncertainty, in part because it is not practicable to identify losses on an individual loan basis due to the large number of individually insignificant loans in the portfolio. The estimation methods include the use of statistical analyses of historical information, supplemented with significant management judgement, to assess whether current economic and credit conditions are such that the actual level of incurred losses is likely to be greater or less than historical experience.   Where changes in economic, regulatory or behavioural conditions result in the most recent trends in portfolio risk factors being not fully reflected in the statistical models, risk factors are taken into account by adjusting the impairment allowances derived solely from historical loss experience.   Risk factors include loan portfolio growth, product mix, unemployment rates, bankruptcy trends, geographical concentrations, loan product features, economic conditions such as national and local trends in housing markets, the level of interest rates, portfolio seasoning, account management policies and practices, changes in laws and regulations and other influences on customer payment patterns. Different factors are applied in different regions and countries to reflect local economic conditions, laws and regulations. The methodology and the assumptions used in calculating impairment losses are reviewed regularly in the light of differences between loss estimates and actual loss experience. For example, roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure they remain appropriate.

For individually assessed loans, judgement is required in determining whether there is objective evidence that a loss event has occurred and, if so, the measurement of the impairment allowance. In determining whether there is objective evidence that a loss event has occurred, judgement is exercised in evaluating all relevant information on indicators of impairment, including the consideration of whether payments are contractually past-due and the consideration of other factors indicating deterioration in the financial condition and outlook of borrowers affecting their ability to pay. A higher level of judgement is required for loans to borrowers showing signs of financial difficulty in market sectors experiencing economic stress, particularly where the likelihood of repayment is affected by the prospects for refinancing or the sale of a specified asset. For those loans where objective evidence of impairment exists, management determine the size of the allowance required based on a range of factors such as the realisable value of security, the likely dividend available on liquidation or bankruptcy, the viability of the customer’s business model and the capacity to trade successfully out of financial difficulties and generate sufficient cash flow to service debt obligations.   HSBC might provide loan forbearance to borrowers experiencing financial difficulties by agreeing to modify the contractual payment terms of loans in order to improve the management of customer relationships, maximise collection opportunities or avoid default or repossession. Where forbearance activities are significant, higher levels of judgement and estimation uncertainty are involved in determining their effects on loan impairment allowances. Judgements are involved in differentiating the credit risk characteristics of forbearance cases, including

 

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those which return to performing status following renegotiation. Where collectively assessed loan portfolios include significant levels of loan forbearance, portfolios are segmented to reflect the different credit risk characteristics of forbearance cases, and estimates are made of the incurred losses inherent within each forbearance portfolio segment. Forbearance activities take place in both retail and wholesale loan portfolios, but our largest concentration is in the US, in HSBC Finance’s CML portfolio.   The exercise of judgement requires the use of assumptions which are highly subjective and very sensitive to the risk factors, in particular to changes in economic and credit conditions across a large number of geographical areas. Many of the factors have a high degree of interdependency and there is no single factor to which our loan impairment allowances as a whole are sensitive.

Impairment of loans and advances

Losses for impaired loans are recognised when there is objective evidence that impairment of a loan or portfolio of loans has occurred. Impairment allowances that are calculated on individual loans or on groups of loans assessed collectively are recorded as charges to the income statement and are recorded against the carrying amount of impaired loans on the balance sheet. Losses which may arise from future events are not recognised.

Individually assessed loans and advances

The factors considered in determining whether a loan is individually significant for the purposes of assessing impairment include the size of the loan, the number of loans in the portfolio, the importance of the individual loan relationship and how this is managed. Loans that are determined to be individually significant based on the above and other relevant factors will be individually assessed for impairment, except when volumes of defaults and losses are sufficient to justify treatment under a collective methodology.

Loans considered as individually significant are typically to corporate and commercial customers, are for larger amounts and are managed on an individual basis. For these loans, HSBC considers on a case-by-case basis at each balance sheet date whether there is any objective evidence that a loan is impaired. The criteria used to make this assessment include:

 

•

known cash flow difficulties experienced by the borrower;

 

•

contractual payments of either principal or interest being past due for more than 90 days;

 

•

the probability that the borrower will enter bankruptcy or other financial realisation;

 

•

a concession granted to the borrower for economic or legal reasons relating to the borrower’s financial difficulty that results in forgiveness or postponement of principal, interest or fees, where the concession is not insignificant; and

 

•

there has been deterioration in the financial condition or outlook of the borrower such that its ability to repay is considered doubtful.

For loans where objective evidence of impairment exists, impairment losses are determined considering the following factors:

 

•

HSBC’s aggregate exposure to the customer;

 

•

the viability of the customer’s business model and its capacity to trade successfully out of financial difficulties and generate sufficient cash flow to service debt obligations;

 

•

the amount and timing of expected receipts and recoveries;

 

•

the likely dividend available on liquidation or bankruptcy;

 

•

the extent of other creditors’ commitments ranking ahead of, or pari passu with, HSBC and the likelihood of other creditors continuing to support the company;

 

•

the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties are evident;

 

•

the realisable value of security (or other credit mitigants) and likelihood of successful repossession;

 

•

the likely costs of obtaining and selling collateral as part of foreclosure;

 

•

the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in local currency; and

 

•

when available, the secondary market price of the debt.

The determination of the realisable value of security is based on the most recently updated market value at the time the impairment assessment is performed. The value is not adjusted for expected future changes in market prices, though adjustments are made to reflect local conditions such as forced sale discounts.

Impairment losses are calculated by discounting the expected future cash flows of a loan, which include expected future receipts of contractual interest, at the loan’s original effective interest rate or an approximation thereof, and comparing the resultant present value with the loan’s current carrying amount. The impairment allowances on individually significant accounts are reviewed at least quarterly and more regularly when circumstances require.

 

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Notes on the Financial Statements (continued)

1 - Basis of preparation and significant accounting policies

    

    

    

 

Collectively assessed loans and advances

Impairment is assessed collectively to cover losses which have been incurred but have not yet been identified on loans subject to individual assessment or for homogeneous groups of loans that are not considered individually significant. Retail lending portfolios are generally assessed for impairment collectively as the portfolios are generally large homogeneous loan pools.

Incurred but not yet identified impairment

Individually assessed loans for which no evidence of impairment has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for a collective impairment assessment. These credit risk characteristics may include country of origination, type of business involved, type of products offered, security obtained or other relevant factors. This assessment captures impairment losses that HSBC has incurred as a result of events occurring before the balance sheet date which HSBC is not able to identify on an individual loan basis, and that can be reliably estimated. When information becomes available which identifies losses on individual loans within a group, those loans are removed from the group and assessed individually.

The collective impairment allowance is determined after taking into account:

 

•

historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, loan grade or product);

 

•

the estimated period between a loss occurring and the loss being identified and evidenced by the establishment of an appropriate allowance against the individual loan; and

 

•

management’s judgement as to whether current economic and credit conditions are such that the actual level of inherent losses at the balance sheet date is likely to be greater or less than that suggested by historical experience.

The period between a loss occurring and its identification is estimated by management for each identified portfolio based on economic and market conditions, customer behaviour, portfolio management information, credit management techniques and collection and recovery experiences in the market. As it is assessed empirically on a periodic basis, the estimated period may vary over time as these factors change.

Homogeneous groups of loans and advances

Statistical methods are used to determine collective impairment losses for homogeneous groups of loans not considered individually significant. The methods that are used to calculate collective allowances are:

 

•

When appropriate empirical information is available, HSBC utilises roll-rate methodology, which employs statistical analyses of historical data and experience of delinquency and default to reliably estimate the amount of the loans that will eventually be written off as a result of the events occurring before the balance sheet date but which HSBC is not able to identify individually. Individual loans are grouped using ranges of past due days; statistical analysis is then used to estimate the likelihood that loans in each range will progress through the various stages of delinquency and become irrecoverable. Additionally, individual loans are segmented based on their credit characteristics as described above. In applying this methodology, adjustments are made to estimate the periods of time between a loss event occurring and its discovery, for example through a missed payment (known as the emergence period) and the period of time between discovery and write-off (known as the outcome period). Current economic conditions are also evaluated when calculating the appropriate level of allowance required to cover inherent loss. In certain highly-developed markets, sophisticated models also take into account behavioural and account management trends as revealed in, for example, bankruptcy and rescheduling statistics.

 

•

When the portfolio size is small or when information is insufficient or not reliable enough to adopt a roll-rate methodology, HSBC adopts a basic formulaic approach based on historical loss rate experience, or a discounted cash flow model. Where a basic formulaic approach is undertaken, the period between a loss event occurring and its identification is explicitly estimated by local management, and is typically between six and twelve months.

The inherent loss within each portfolio is assessed on the basis of statistical models using historical data observations which are updated periodically to reflect recent portfolio and economic trends. When the most recent trends arising from changes in economic, regulatory or behavioural conditions are not fully reflected in the statistical models, they are taken into account by adjusting the impairment allowances derived from the statistical models to reflect these changes as at the balance sheet date.

Write-off of loans and advances

Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.

 

HSBC HOLDINGS PLC   356

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Reversals of impairment

If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, the excess is written back by reducing the loan impairment allowance account accordingly. The write-back is recognised in the income statement.

Assets acquired in exchange for loans

Non-financial assets acquired in exchange for loans as part of an orderly realisation are recorded as ‘Assets held for sale’ and reported in ‘Other assets’ if those assets are classified as held for sale. The asset acquired is recorded at the lower of its fair value less costs to sell and the carrying amount of the loan (net of impairment allowance) at the date of exchange. No depreciation is charged in respect of assets held for sale. Write-downs of the acquired asset to fair value less cost to sell and any reversals of previous write-downs are recognised in the income statement in ‘Other operating income’, together with any realised gains or losses on disposal.

Renegotiated loans

Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered past due, but are treated as up to date loans for measurement purposes once a minimum number of payments required have been received. Where collectively assessed loan portfolios include significant levels of renegotiated loans, these loans are segregated from other parts of the loan portfolio for the purposes of collective impairment assessment to reflect their risk profile. Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired. The carrying amounts of loans that have been classified as renegotiated retain this classification until maturity or derecognition.

A loan that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement made on substantially different terms or if the terms of an existing agreement are modified such that the renegotiated loan is substantially a different financial instrument. Any new loans that arise following derecognition events will continue to be disclosed as renegotiated loans and are assessed for impairment as above.

Impairment of available-for-sale financial assets

Available-for-sale financial assets are assessed at each balance sheet date for objective evidence of impairment. If such evidence exists as a result of one or more events that occurred after the initial recognition of the financial asset (a ‘loss event’), and that loss event has an impact which can be reliably measured on the estimated future cash flows of the financial asset, an impairment loss is recognised.

If the available-for-sale financial asset is impaired, the difference between its acquisition cost (net of any principal repayments and amortisation) and its current fair value, less any previous impairment loss recognised in the income statement, is recognised in the income statement.

Impairment losses are recognised in the income statement within ‘Loan impairment charges and other credit risk provisions’ for debt instruments and within ‘Gains less losses from financial investments’ for equities. The impairment methodologies for available-for-sale financial assets are set out as follows:

 

•

Available-for-sale debt securities. In assessing objective evidence of impairment at the reporting date, HSBC considers all available evidence, including observable data or information about events specifically relating to the securities which may result in a shortfall in the recovery of future cash flows. Financial difficulties of the issuer, as well as other factors such as information about the issuers’ liquidity, business and financial risk exposures, levels of and trends in default for similar financial assets, national and local economic trends and conditions, and the fair value of collateral and guarantees may be considered individually, or in combination, to determine if there is objective evidence of impairment.

In addition, the performance of underlying collateral and the extent and depth of market price declines is relevant when assessing objective evidence of impairment of available-for-sale ABSs. The primary indicators of potential impairment are considered to be adverse fair value movements and the disappearance of an active market for a security, while changes in credit ratings are of secondary importance.

 

•

Available-for-sale equity securities. Objective evidence of impairment may include specific information about the issuer as detailed above, but may also include information about significant changes in technology, markets, economics or the law that provides evidence that the cost of the equity securities may not be recovered.

A significant or prolonged decline in the fair value of the equity below its cost is also objective evidence of impairment. In assessing whether it is significant, the decline in fair value is evaluated against the original cost of the asset at initial recognition. In assessing whether it is prolonged, the decline is evaluated against the continuous period in which the fair value of the asset has been below its original cost at initial recognition.

 

HSBC HOLDINGS PLC   357

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Notes on the Financial Statements (continued)

1 - Significant accounting policies / 2 - Net income from financial instruments at FV / 3 - Net insurance premium income

    

    

    

 

Once an impairment loss has been recognised, the subsequent accounting treatment for changes in the fair value of that asset depends on the type of asset:

 

•

for an available-for-sale debt security, a subsequent decline in the fair value of the instrument is recognised in the income statement when there is objective evidence of impairment as a result of further decreases in the estimated future cash flows of the financial asset. Where there is no further objective evidence of impairment, the decline in the fair value of the financial asset is recognised in other comprehensive income. If the fair value of a debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, or the instrument is no longer impaired, the impairment loss is reversed through the income statement;

 

•

for an available-for-sale equity security, all subsequent increases in the fair value of the instrument are treated as a revaluation and are recognised in other comprehensive income. Impairment losses recognised on the equity security are not reversed through the income statement. Subsequent decreases in the fair value of the available-for-sale equity security are recognised in the income statement to the extent that further cumulative impairment losses have been incurred.

(k)  Non-trading reverse repurchase and repurchase agreements

When securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell (‘reverse repos’) are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid.

Non-trading repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price or between the purchase and resale price is treated as interest and recognised in net interest income over the life of the agreement.

(l)  Operating income

Interest income and expense

Interest income and expense for all financial instruments except for those classified as held for trading or designated at fair value (except for debt securities issued by HSBC and derivatives managed in conjunction with those debt securities) are recognised in ‘Interest income’ and ‘Interest expense’ in the income statement using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability.

Interest on impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

Non-interest income and expense

Fee income is earned from a diverse range of services provided by HSBC to its customers. Fee income is accounted for as follows:

 

•

income earned on the execution of a significant act is recognised as revenue when the act is completed (for example, fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as an arrangement for the acquisition of shares or other securities);

 

•

income earned from the provision of services is recognised as revenue as the services are provided (for example, asset management, portfolio and other management advisory and service fees); and

 

•

income which forms an integral part of the effective interest rate of a financial instrument is recognised as an adjustment to the effective interest rate (for example, certain loan commitment fees) and recorded in ‘Interest income’.

Net trading income comprises all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading, together with the related interest income, expense and dividends.

Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders approve the dividend for unlisted equity securities.

The accounting policies for net income/(expense) from financial instruments designated at fair value and for net insurance premium income are disclosed in Note 2 and Note 3.

 

HSBC HOLDINGS PLC   358

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Report of the Directors: Financial Review

    

    

    

 

1A     Changes to comparative data

 

The following sets out changes to comparative data from those presented in our 2014 Form 20-F.

Note 11 – Segmental analysis

Net operating income by global business

In the first half of 2015, a portfolio of customers was transferred from CMB to RBWM in Latin America in order to better align the combined banking needs of the customers with our established global businesses. Comparative data have been re-presented accordingly.

As reported in 2015

 

				RBWM						CMB						GB&M						GPB						Other						Intra-HSBC items						Total
				$m						$m						$m						$m						$m						$m						$m
2014
Net operating income					25,149						15,748						17,778						2,377						6,365						(6,169	)					61,248
– external					23,202						16,369						20,055						1,980						(358	)					–						61,248
– internal					1,947						(621	)					(2,277	)					397						6,723						(6,169	)					–
2013
Net operating income					27,453						15,652						19,176						2,439						5,651						(5,726	)					64,645
– external					25,702						16,577						20,767						1,955						(356	)					–						64,645
– internal					1,751						(925	)					(1,591	)					484						6,007						(5,726	)					–
Adjustments
				RBWM						CMB						GB&M						GPB						Other						Intra- HSBC items						Total
				$m						$m						$m						$m						$m						$m						$m
2014
Net operating income					555						(555	)					–						–						–						–						–
– external					510						(510	)					–						–						–						–						–
– internal					45						(45	)					–						–						–						–						–
2013
Net operating income					713						(713	)					–						–						–						–						–
– external					664						(664	)					–						–						–						–						–
– internal					49						(49	)					–						–						–						–						–
As reported in 2014
				RBWM						CMB						GB&M						GPB						Other						Intra- HSBC items						Total
				$m						$m						$m						$m						$m						$m						$m
2014
Net operating income					24,594						16,303						17,778						2,377						6,365						(6,169	)					61,248
– external					22,692						16,879						20,055						1,980						(358	)					–						61,248
– internal					1,902						(576	)					(2,277	)					397						6,723						(6,169	)					–
2013
Net operating income					26,740						16,365						19,176						2,439						5,651						(5,726	)					64,645
– external					25,038						17,241						20,767						1,955						(356	)					–						64,645
– internal					1,702						(876	)					(1,591	)					484						6,007						(5,726	)					–

Note 32 – Offsetting of financial assets and liabilities

The disclosure has been enhanced this year with ‘Amounts not subject to enforceable netting arrangements’ being separately identified and presented. Collateral not determined to be currently enforceable has also been excluded. This resulted in a change in the basis of preparation. Prior period data have been adjusted impacting all columns other than amounts offset in the balance sheet in the disclosure. Set out below are the 2014 disclosures as reported in 2015, adjustments made to the 2014 balances, and the disclosure as reported in 2014.

 

HSBC HOLDINGS PLC   358a

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Report of the Directors: Financial Review

    

    

    

    

 

Financial assets

As reported in 2015

 

				Amounts subject to enforceable netting arrangements
																Net amounts in						Amounts not set off in the balance sheet																								Amounts not subject to
				Gross amounts						Amounts offset						the balance sheet						Financial instruments						Non-cash collateral						Cash collateral						Net amount						enforceable netting						Total
				$m						$m						$m						$m						$m						$m						$m						$m						$m
31 December 2014
Derivatives					584,359						(250,465	)					333,894						(262,856	)					(7,655	)					(41,750	)					21,633						11,114						345,008
Reverse repos, stock borrowing and similar agreements					208,893						(88,676	)					120,217						(5,117	)					(114,394	)					(249	)					457						50,762						170,979
Classified as:
– trading assets					9,341						(390	)					8,951						–						(8,951	)					–						–						315						9,266
– non-trading assets					199,552						(88,286	)					111,266						(5,117	)					(105,443	)					(249	)					457						50,447						161,713
Loans and advances to customers
– at amortised cost					99,623						(37,527	)					62,096						(55,989	)					–						–						6,107						1,597						63,693
At 31 December 2014					892,875						(376,668	)					516,207						(323,962	)					(122,049	)					(41,999	)					28,197						63,473						579,680
Adjustments
																Net amounts in						Amounts not set off in the balance sheet																								Amounts not subject to
					Gross amounts						Amounts offset						the balance sheet						Financial instruments						Non-cash collateral						Cash collateral						Net amount						enforceable netting						Total	1
				$m						$m						$m						$m						$m						$m						$m						$m						$m
Derivatives					(11,114	)					–						(11,114	)					8,184						(7,655	)					510						(10,075	)					11,114
Reverse repos, stock borrowing and similar agreements					(50,762	)					–						(50,762	)					161,841						(114,394	)					–						(3,315	)					50,762
Classified as:
– trading assets					(315	)					–						(315	)					9,256						(8,951	)					–						(10	)					315
– non-trading assets					(50,447	)					–						(50,447	)					152,585						(105,443	)					–						(3,305	)					50,447
Loans and advances to customers
– at amortised cost					(1,597	)					–						(1,597	)					–						–						310						(1,287	)					1,597
At 31 December 2014					(63,473	)					–						(63,473	)					170,025						(122,049	)					820						(14,677	)					63,473
As reported in 2014
				Gross						Gross						Amounts presented						Amounts not set off in the balance sheet
					amounts of recognised financial assets/ Gross amounts	1					amounts offset in the balance sheet/ Amounts offset	1					in the balance sheet/Net amounts in the balance sheet	1					Financial instruments						Non-cash collateral	1					Cash collateral received/ Cash collateral	1					Net amount						Amounts not subject to enforceable netting	1					Total	1
				$m						$m						$m						$m						$m						$m						$m						$m						$m
31 December 2014
Derivatives					595,473						(250,465	)					345,008						(271,040	)											(42,260	)					31,708
Reverse repos, stock borrowing and similar agreements					259,655						(88,676	)					170,979						(166,958	)											(249	)					3,772
Classified as:
– trading assets					9,656						(390	)					9,266						(9,256	)											–						10
– non-trading assets					249,999						(88,286	)					161,713						(157,702	)											(249	)					3,762
Loans and advances to customers
– at amortised cost					101,220						(37,527	)					63,693						(55,989	)											(310	)					7,394
At 31 December 2014					956,348						(376,668	)					579,680						(493,987	)											(42,819	)					42,874

 

1	Wording in italics represents column headings as presented in 2015.

Footnotes presented on page 434 have also been updated to reflect the revised presentation.

 

HSBC HOLDINGS PLC   358b

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Report of the Directors: Financial Review

    

    

    

    

 

Financial liabilities

As reported in 2015

 

				Amounts subject to enforceable netting arrangements
																Net amounts in						Amounts not set off in the balance sheet																								Amounts not subject to
				Gross   amounts						Amounts offset						the balance sheet						Financial instruments						Non-cash collateral						Cash    collateral						Net       amount						enforceable netting						Total
				$m						$m						$m						$m						$m						$m						$m						$m						$m
31 December 2014
Derivatives					580,644						(250,465	)					330,179						(262,864	)					(9,465	)					(39,571	)					18,279						10,490						340,669
Reverse repos, stock borrowing and similar agreements					165,514						(88,676	)					76,838						(8,934	)					(67,793	)					(105	)					6						46,424						123,262
Classified as:
– trading assets					16,206						(390	)					15,816						–						(15,813	)					–						3						14						15,830
– non-trading assets					149,308						(88,286	)					61,022						(8,934	)					(51,980	)					(105	)					3						46,410						107,432
Customer accounts at amortised cost					106,609						(37,527	)					69,082						(55,989	)					–						–						13,093						479						69,561
At 31 December 2014					852,767						(376,668	)					476,099						(327,787	)					(77,258	)					(39,676	)					31,378						57,393						533,492
Adjustments
																Net amounts in						Amounts not set off in the balance sheet																								Amounts not subject to
					Gross amounts						Amounts offset						the balance sheet						Financial instruments						Non-cash collateral						Cash collateral						Net amount						enforceable netting						Total	1
				$m						$m						$m						$m						$m						$m						$m						$m						$m
Derivatives					(10,490	)					–						(10,490	)					9,951						(9,465	)					720						(9,289	)					10,490
Repos, stock lending and similar agreements					(46,424	)					–						(46,424	)					112,788						(67,793	)					–						(1,429	)					46,424
Classified as:
– trading liabilities					(14	)					–						(14	)					15,828						(15,813	)					–						1						14
– non-trading liabilities					(46,410	)					–						(46,410	)					96,960						(51,980	)					–						(1,430	)					46,410
Customer accounts at amortised cost					(479	)					–						(479	)					–						–						–						(479	)					(479	)
At 31 December 2014					(57,393	)					–						(57,393	)					122,739						(77,258	)					720						(11,192	)					57,393
As reported in 2014
				Gross						Gross						Amounts presented						Amounts not set off in the balance sheet
					amounts of recognised financial liabilities/ Gross amounts	1					amounts offset in the balance sheet/ Amounts offset	1					in the balance sheet/Net amounts in the balance sheet	1					Financial instruments						Non-cash collateral	1					Cash collateral pledged/ Cash collateral	1					Net amount						Amounts not subject to enforceable netting	1					Total	1
				$m						$m						$m						$m						$m						$m						$m						$m						$m
31 December 2014
Derivatives					591,134						(250,465	)					340,669						(272,815	)											(40,291	)					27,563
Repos, stock lending and similar agreements					211,938						(88,676	)					123,262						(121,722	)											(105	)					1,435
Classified as:
– trading liabilities					16,220						(390	)					15,830						(15,828	)											–						2
– non-trading liabilities					195,718						(88,286	)					107,432						(105,894	)											(105	)					1,433
Customer accounts at amortised costs					107,088						(37,527	)					69,561						(55,989	)											–						13,572
At 31 December 2014					910,160						(376,668	)					533,492						(450,526	)											(40,396	)					42,570

 

1	Wording in italics represents column headings as presented in 2015.

Footnotes presented on page 434 have also been updated to reflect the revised presentation

 

HSBC HOLDINGS PLC   358c

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Report of the Directors: Financial Review

    

    

    

    

 

Note 41 – Related party transactions

Transactions and balances during the year with Key Management Personnel

Certain balances with Key Management Personnel were inadvertently omitted from our 2014 Form 20-F. Comparative balances have been adjusted accordingly. Advances and credits at 31 December 2014 and the highest amounts outstanding during the year have increased by $115m and $120m, respectively ($194m and $227m were previously disclosed). Guarantees at 31 December 2014 and the highest amounts outstanding during the year have increased by $78m and $79m, respectively (no amounts were previously disclosed).

 

HSBC HOLDINGS PLC   358d

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2     Net income from financial instruments designated at fair value

 

Accounting policy

 

Net income from financial instruments designated at fair value includes all gains and losses from changes in the fair value of financial assets and liabilities designated at fair value through profit or loss, including derivatives that are managed in conjunction with those financial assets and liabilities, and liabilities under investment contracts. Interest income, interest expense and dividend income in respect of those financial instruments are also included, except for interest arising from debt securities issued by HSBC and derivatives managed in conjunction with those debt securities, which is recognised in ‘Interest expense’.

Net income from financial instruments designated at fair value

 

				2015						2014						2013
				$m						$m						$m
Net income/(expense) arising on:
– financial assets held to meet liabilities under insurance and investment contracts					531						2,300						3,170
– other financial assets designated at fair value					89						131						118
– derivatives managed in conjunction with other financial assets designated at fair value					13						(19	)					(26	)
					633						2,412						3,262
– liabilities to customers under investment contracts					34						(435	)					(1,237	)
– HSBC’s long-term debt issued and related derivatives					863						508						(1,228	)
– changes in own credit spread on long-term debt					1,002						417						(1,246	)
– derivatives managed in conjunction with HSBC’s issued debt securities					(1,997	)					333						(3,743	)
– other changes in fair value					1,858						(242	)					3,761
– other financial liabilities designated at fair value					3						(23	)					(39	)
– derivatives managed in conjunction with other financial liabilities designated at fair value					(1	)					11						10
					899						61						(2,494	)
Year ended 31 December					1,532						2,473						768

HSBC Holdings

Net income/(expense) arising on HSBC Holdings long-term debt issued and related derivatives

 

				2015						2014						2013
				$m						$m						$m
Net income/(expense) arising on:
– changes in own credit spread on long-term debt					348						339						(695	)
– derivatives managed in conjunction with HSBC Holdings issued debt securities					(927	)					126						(1,558	)
– other changes in fair value					855						(27	)					1,213
Year ended 31 December					276						438						(1,040	)

3     Net insurance premium income

 

Accounting policy

 

Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums are accounted for when liabilities are established.   Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which they relate.

Net insurance premium income

 

					Non-linked insurance	1					Linked life insurance						Investment contracts with DPF	2					Total
				$m						$m						$m						$m
Gross insurance premium income					7,506						1,409						2,097						11,012
Reinsurers’ share of gross insurance premium income					(648	)					(9	)					–						(657	)
Year ended 31 December 2015					6,858						1,400						2,097						10,355

 

HSBC HOLDINGS PLC   359

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Notes on the Financial Statements (continued)

4 – Net insurance claims / 5 – Operating profit / 6 – Employee compensation and benefits

    

    

    

 

Net insurance premium income (continued)

 

					Non-linked insurance	1					Linked life insurance						Investment contracts with DPF	2					Total
				$m						$m						$m						$m
Gross insurance premium income					7,705						2,195						2,470						12,370
Reinsurers’ share of gross insurance premium income					(441	)					(8	)					–						(449	)
Year ended 31 December 2014					7,264						2,187						2,470						11,921
Gross insurance premium income					7,002						3,012						2,384						12,398
Reinsurers’ share of gross insurance premium income					(450	)					(8	)					–						(458	)
Year ended 31 December 2013					6,552						3,004						2,384						11,940

 

1	Includes non-life insurance.

2	Discretionary participation features.

4     Net insurance claims and benefits paid and movement in liabilities to policyholders

 

Accounting policy

 

Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.   Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when notified.   Reinsurance recoveries are accounted for in the same period as the related claim.

Net insurance claims and benefits paid and movement in liabilities to policyholders

 

					Non-linked insurance	1					Linked life insurance						Investment contracts with DPF	2					Total
				$m						$m						$m						$m
Gross claims and benefits paid and movement in liabilities					7,746						1,398						2,728						11,872
– claims, benefits and surrenders paid					3,200						1,869						2,101						7,170
– movement in liabilities					4,546						(471	)					627						4,702
Reinsurers’ share of claims and benefits paid and movement in liabilities					(575	)					(5	)					–						(580	)
– claims, benefits and surrenders paid					(153	)					(64	)					–						(217	)
– movement in liabilities					(422	)					59						–						(363	)
Year ended 31 December 2015					7,171						1,393						2,728						11,292
Gross claims and benefits paid and movement in liabilities					7,770						2,765						3,188						13,723
– claims, benefits and surrenders paid					3,575						1,499						2,215						7,289
– movement in liabilities					4,195						1,266						973						6,434
Reinsurers’ share of claims and benefits paid and movement in liabilities					(411	)					33						–						(378	)
– claims, benefits and surrenders paid					(176	)					(88	)					–						(264	)
– movement in liabilities					(235	)					121						–						(114	)
Year ended 31 December 2014					7,359						2,798						3,188						13,345
Gross claims and benefits paid and movement in liabilities					6,892						3,379						3,677						13,948
– claims, benefits and surrenders paid					3,014						1,976						2,308						7,298
– movement in liabilities					3,878						1,403						1,369						6,650
Reinsurers’ share of claims and benefits paid and movement in liabilities					(367	)					111						–						(256	)
– claims, benefits and surrenders paid					(164	)					(426	)					–						(590	)
– movement in liabilities					(203	)					537						–						334
Year ended 31 December 2013					6,525						3,490						3,677						13,692

 

1	Includes non-life insurance.

2	Discretionary participation features.

 

HSBC HOLDINGS PLC   360

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5     Operating profit

 

Operating profit is stated after the following items of income, expense, gains and losses, and loan impairment charges and other credit risk provisions:

 

				2015						2014						2013
				$m						$m						$m
Income
Interest recognised on impaired financial assets					934						1,137						1,261
Fees earned on financial assets or liabilities not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities					8,736						9,438						9,799
Fees earned on trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers					3,052						3,253						3,176
Income from listed investments					5,760						6,726						5,432
Income from unlisted investments					5,581						5,874						6,860
Expense
Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at fair value					(13,680	)					(15,322	)					(14,610	)
Fees payable on financial assets or liabilities not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities					(1,251	)					(1,427	)					(1,396	)
Fees payable relating to trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers					(166	)					(185	)					(171	)
Payments under lease and sublease agreements					(1,190	)					(1,548	)					(1,425	)
– minimum lease payments					(1,058	)					(1,199	)					(1,098	)
– contingent rents and sublease payments					(132	)					(349	)					(327	)
UK bank levy					(1,421	)					(1,066	)					(916	)
Restructuring provisions					(430	)					(147	)					(179	)
Gains/(losses)
Impairment of available-for-sale equity securities					(111	)					(373	)					(175	)
Gains/(losses) recognised on assets held for sale					(244	)					220						(729	)
Gains on the partial sale of shareholding in Industrial Bank					1,372						–						–
Gains/(losses) arising from dilution of interest in Industrial Bank and other associates and joint ventures					–						(32	)					1,051
Gains on disposal of HSBC Bank (Panama) S.A.					–						–						1,107
Loan impairment charges and other credit risk provisions					(3,721	)					(3,851	)					(5,849	)
– net impairment charge on loans and advances					(3,592	)					(4,055	)					(6,048	)
– release of available-for-sale debt securities					17						319						211
– impairment in respect of other credit risk provisions					(146	)					(115	)					(12	)

6     Employee compensation and benefits

 

 

				2015						2014						2013
				$m						$m						$m
Wages and salaries					17,245						17,477						16,879
Social security costs					1,600						1,666						1,594
Post-employment benefits					1,055						1,223						723
Year ended 31 December					19,900						20,366						19,196

Average number of persons employed by HSBC during the year

 

				2015						2014						2013
Europe					73,868						74,024						75,334
Asia					121,438						116,492						114,216
Middle East and North Africa					9,007						8,616						9,181
North America					21,506						21,983						22,568
Latin America					42,614						43,652						47,496
Year ended 31 December					268,433						264,767						268,795

 

HSBC HOLDINGS PLC   361

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Notes on the Financial Statements (continued)

6 – Employee compensation and benefits

    

    

    

 

Reconciliation of total incentive awards granted to incentive awards in employee compensation and benefits

 

				2015						2014						2013
				$m						$m						$m
Total incentive awards approved and granted for the current year1					3,462						3,660						3,920
Less: deferred bonuses awarded for the current year, expected to be recognised in future periods					(387	)					(359	)					(436	)
Total incentives awarded and recognised in the current year					3,075						3,301						3,484
Current year charges for deferred bonuses from previous years					483						425						427
Other					(40	)					(114	)					(164	)
Total incentive awards for the current year included in employee compensation and benefits					3,518						3,612						3,747

 

1	This represents the amount of the Group variable pay pool that has been approved and granted. The total amount of Group variable pay pool approved by the Group Remuneration Committee is disclosed in the Directors’ Remuneration Report on page 304.

Income statement charge: deferred bonuses

 

				Current year bonus pool						Prior year bonus pools						Total
				$m						$m						$m
2015
Charge recognised in 2015					253						483						736
– deferred share awards					186						382						568
– deferred cash awards					67						101						168
Charge expected to be recognised in 2016 or later					387						346						733
– deferred share awards					260						279						539
– deferred cash awards					127						67						194
2014
Charge recognised in 2014					245						425						670
– deferred share awards					147						373						520
– deferred cash awards					98						52						150
Charge expected to be recognised in 2015 or later					359						381						740
– deferred share awards					250						334						584
– deferred cash awards					109						47						156
2013
Charge recognised in 2013					269						427						696
– deferred share awards					188						354						542
– deferred cash awards					81						73						154
Charge expected to be recognised in 2014 or later					436						306						742
– deferred share awards					356						259						615
– deferred cash awards					80						47						127

Share-based payments

Accounting policy

 

HSBC enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for services provided by employees. The cost of equity-settled share-based payment arrangements with employees is measured by reference to the fair value of equity instruments on the date they are granted and recognised as an expense on a straight-line basis over the vesting period, with a corresponding credit to ‘Retained earnings’.   For cash-settled share-based payment arrangements, the services acquired and liability incurred are measured at the fair value of the liability and recognised as the employees render service. Until settlement, the fair value of the liability is re-measured, with changes in fair value recognised in the income statement.   Fair value is determined by using appropriate valuation models. Vesting conditions include service conditions and performance conditions; any other features of the arrangement are non-vesting conditions. Market performance conditions and non-vesting conditions are taken into account when estimating the fair value of the award at the date of grant. Vesting conditions other than market performance conditions are not taken into account in the initial estimate of the fair value at the grant date. They are taken into account by adjusting the number of equity instruments included in the measurement of the transaction.   A cancellation that occurs during the vesting period is treated as an acceleration of vesting and is recognised immediately for the amount that would otherwise have been recognised for services over the vesting period.   Where HSBC Holdings enters into share-based payment arrangements involving employees of subsidiaries for which the subsidiaries are re-charged, the difference between the cost of the share-based payment arrangement and the fair value of the equity instruments expected to be issued to satisfy those arrangements is recognised as an adjustment to ‘Investment in subsidiaries’ over the vesting period.

 

HSBC HOLDINGS PLC   362

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‘Wages and salaries’ include the effect of share-based payments arrangements, of which $757m were equity settled (2014: $732m; 2013: $630m), as follows:

 

				2015						2014						2013
				$m						$m						$m
Restricted share awards					748						738						599
Savings-related and other share award option plans					43						36						63
Year ended 31 December					791						774						662

HSBC share awards

 

Award		Policy		Purpose
Restricted share awards (including annual incentive awards delivered in shares) and GPSP		•     An assessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to be granted.   •     Deferred awards generally require employees to remain in employment over the vesting period and are not subject to performance conditions after the grant date.   •     Deferred share awards generally vest over a period of three years and GPSP awards vest after five years.   •     Vested shares may be subject to a retention requirement (restriction) post-vesting. GPSP awards are retained until cessation of employment.   •     Awards granted from 2010 onwards are subject to a malus provision prior to vesting.   •     Awards granted to Material Risk Takers from 2015 onwards are subject to clawback post vesting.		•     To drive and reward performance consistent with strategy and align to shareholder interests.   •     Deferral provides an incentive for a longer-term commitment and the ability to apply malus.
International Employee Share Purchase Plan (‘ShareMatch’)		•     The plan was first introduced in Hong Kong in 2013 and now includes employees based in 25 jurisdictions.   •     Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency.   •     Matching awards are added at a ratio of one free share for every three purchased.   •     Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years and nine months.		•     To align the interests of employees with the creation of shareholder value.

Movement on HSBC share awards

 

				2015						2014
				Number (000s)						Number (000s)
Restricted share awards outstanding at 1 January					116,483						116,932
Additions during the year					80,749						82,871
Released in the year					(75,235	)					(78,224	)
Forfeited in the year					(3,332	)					(5,096	)
Restricted share awards outstanding at 31 December					118,665						116,483
Weighted average fair value of awards granted ($)					9.67						10.18

 

HSBC HOLDINGS PLC   363

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Notes on the Financial Statements (continued)

6 – Employee compensation and benefits

    

    

    

 

HSBC share option plans

 

Main plans		Policy		Purpose
Savings-related share option plans (‘Sharesave’)		•     Two plans: the UK Plan and the International Plan. The last grant of options under the International Plan was in 2012.   •     From 2014, eligible employees can save up to £500 per month with the option to use the savings to acquire shares.   •     Exercisable within six months following either the third or fifth anniversaries of the commencement of a three-year or five-year contract, respectively.   •     The exercise price is set at a 20% (2014: 20%) discount to the market value immediately preceding the date of invitation.		•     To align the interests of employees with the creation of shareholder value.
HSBC Holdings Group share option plan		•     Plan ceased in May 2005.   •     Exercisable between the third and tenth anniversaries of the date of grant.		•     Long-term incentive plan between 2000 and 2005 during which certain HSBC employees were awarded share options.

Calculation of fair values

The fair values of share options are calculated using a Black-Scholes model. The fair value of a share award is based on the share price at the date of the grant.

Movement on HSBC share option plans

 

				Savings-related share option plans												HSBC Holdings Group share option plan
					Number (000s)						WAEP £	1					Number (000s)						WAEP £	1
Outstanding at 1 January 2015					66,366						4.89						6,374						7.29
Granted during the year2					52,629						4.05						–						–
Exercised during the year3					(21,120	)					4.45						–						–
Expired during the year					(23,100	)					5.11						(6,374	)					7.29
Outstanding at 31 December 2015					74,775						4.36						–						–
Weighted average remaining contractual life (years)					3.92												–
Outstanding at 1 January 2014					93,760						4.04						55,026						7.23
Granted during the year2					28,689						5.19						–						–
Exercised during the year3					(50,393	)					3.48						(1	)					7.22
Expired during the year					(5,690	)					4.81						(48,651	)					7.22
Outstanding at 31 December 2014					66,366						4.89						6,374						7.29
Weighted average remaining contractual life (years)					2.66												0.30

 

1	Weighted average exercise price.

2	The weighted average fair value of options granted during the year was $1.09 (2014: $1.90).

3	The weighted average share price at the date the options were exercised was $8.50 (2014: $9.91) and $0 (2014: $9.49) for the savings-related share option plans and HSBC Holdings Group share option plan, respectively.

Post-employment benefit plans

Accounting policy

 

HSBC operates a number of pension and other post-employment benefit plans throughout the world. These plans include both defined benefit and defined contribution plans and various other post-employment benefits such as post-employment healthcare.   Payments to defined contribution plans and state-managed retirement benefit plans, where HSBC’s obligations under the plans are equivalent to a defined contribution plan, are charged as an expense as the employees render service.   The defined benefit pension costs and the present value of defined benefit obligations are calculated at the reporting date by the schemes’ actuaries using the projected unit credit method. The net charge to the income statement mainly comprises the service cost and the net interest on the net defined benefit asset or liability and is presented in operating expenses.   The past service cost, which is charged immediately to the income statement, is the change in the present value of the defined benefit obligation for employee service in prior periods resulting from a plan amendment (the introduction or withdrawal of, or changes to, a defined benefit plan) or curtailment (a significant reduction by the entity in the number of employees covered by a plan). A settlement is a transaction that eliminates all further legal and constructive obligations for part or all of the benefits provided under a defined benefit plan, other than a payment of benefits to, or on behalf of, employees that is set out in the terms of the plan and included in the actuarial assumptions.   Re-measurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income.

 

HSBC HOLDINGS PLC   364

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Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in actuarial assumptions.   The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan assets. Any net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan.   The cost of obligations arising from other post-employment defined benefit plans, such as defined benefit health-care plans, are accounted for on the same basis as defined benefit pension plans.

The Group operates a number of pension plans throughout the world. Some are defined benefit plans, of which the largest is the HSBC Bank (UK) Pension Scheme (‘the principal plan’). The Pension Risk section on page 189 and the Appendix to Risk on page 225 contain details about the characteristics, risks and amount, timing and uncertainty of future cash flows and policies and practices associated with the principal plan.

Income statement charge

 

				2015						2014						2013
				$m						$m						$m
Defined benefit pension plans					256						469						54
Defined contribution pension plans					793						687						597
Pension plans					1,049						1,156						651
Defined benefit and contribution healthcare plans					6						67						72
Year ended 31 December					1,055						1,223						723

Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans

 

					Fair value of plan assets						Present value of defined benefit obligations						Effect of limit on plan surpluses						Total
				$m						$m						$m						$m
Defined benefit pension plans					41,424						(38,326	)					(14	)					3,084
Defined benefit healthcare plans					141						(762	)					–						(621	)
At 31 December 2015					41,565						(39,088	)					(14	)					2,463
Total employee benefit liabilities (within ‘Accruals, deferred income and other liabilities’)																							(2,809	)
Total employee benefit assets (within ‘Prepayments, accrued income and other assets’)																							5,272
Defined benefit pension plans					44,824						(42,062	)					(17	)					2,745
Defined benefit healthcare plans					179						(1,104	)					–						(925	)
At 31 December 2014					45,003						(43,166	)					(17	)					1,820
Total employee benefit liabilities (within ‘Accruals, deferred income and other liabilities’)																							(3,208	)
Total employee benefit assets (within ‘Prepayments, accrued income and other assets’)																							5,028

Cumulative actuarial gains/(losses) recognised in other comprehensive income

 

				2015						2014						2013
				$m						$m						$m
At 1 January					(2,026	)					(4,445	)					(3,844	)
HSBC Bank (UK) Pension Scheme					121						2,764						(1,524	)
Other plans					(55	)					(274	)					796
Healthcare plans					94						(88	)					143
Change in the effect of limit on plan surpluses					(30	)					17						(16	)
Total actuarial gains/(losses) recognised in other comprehensive income					130						2,419						(601	)
At 31 December					(1,896	)					(2,026	)					(4,445	)

HSBC pension plans

 

				2015						2014						2013
				%						%						%
Percentage of HSBC employees:
– enrolled in defined contribution plans					66						66						64
– enrolled in defined benefit plans					22						22						23
– covered by HSBC pension plans					88						88						87

 

HSBC HOLDINGS PLC   365

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Notes on the Financial Statements (continued)

6 – Employee compensation and benefits

    

    

    

 

Defined benefit pension plans

Net asset/(liability) under defined benefit pension plans

 

				Fair value of plan assets												Present value of defined benefit obligations												Effect of the asset ceiling												Net defined benefit asset/(liability)
				The principal plan						Other plans						The principal plan						Other plans						The principal plan						Other plans						The principal plan						Other plans
				$m						$m						$m						$m						$m						$m						$m						$m
At 1 January 2015					35,244						9,580						(30,480	)					(11,582	)					–						(17	)					4,764						(2,019	)
Current service cost					–						–						(129	)					(268	)					–						–						(129	)					(268	)
Past service cost and gains/(losses) from settlements					–						(3	)					(53	)					71						–						–						(53	)					68
Service cost					–						(3	)					(182	)					(197	)					–						–						(182	)					(200	)
Net interest income/(cost) on the net defined benefit asset/(liability)					1,265						322						(1,088	)					(371	)					–						(2	)					177						(51	)
Re-measurement effects recognised in other comprehensive income					(1,521	)					(394	)					1,642						339						–						(30	)					121						(85	)
– return on plan assets (excluding interest income)					(1,521	)					(394	)					–						–						–						–						(1,521	)					(394	)
– actuarial gains/(losses)					–						–						1,392						339						–						(30	)					1,392						309
– other changes					–						–						250						–						–						–						250						–
Exchange differences					(1,704	)					(458	)					1,443						529						–						35						(261	)					106
Contributions by HSBC					376						279						–						–						–						–						376						279
– normal					159						227						–						–						–						–						159						227
– special					217						52						–						–						–						–						217						52
Contributions by employees					17						35						(17	)					(35	)					–						–						–						–
Benefits paid					(970	)					(590	)					970						649						–						–						–						59
Administrative costs and taxes paid by plan					(37	)					(17	)					37						17						–						–						–						–
At 31 December 2015					32,670						8,754						(27,675	)					(10,651	)					–						(14	)					4,995						(1,911	)
Present value of defined benefit obligation relating to:
– actives																	(6,310	)					(5,350	)
– deferreds																	(7,919	)					(2,239	)
– pensioners																	(13,446	)					(3,062	)
At 1 January 2014					31,665						8,957						(29,629	)					(10,838	)					–						(30	)					2,036						(1,911	)
Current service cost					–						–						(228	)					(257	)					–						–						(228	)					(257	)
Past service cost and gains/(losses) from settlements					–						(5	)					(26	)					11						–						–						(26	)					6
Service cost					–						(5	)					(254	)					(246	)					–						–						(254	)					(251	)
Net interest income/(cost) on the net defined benefit asset/(liability)					1,386						370						(1,291	)					(425	)					–						(4	)					95						(59	)
Re-measurement effects recognised in other comprehensive income					4,864						845						(2,100	)					(1,034	)					–						17						2,764						(172	)
– return on plan assets (excluding interest income)					4,864						845						–						–						–						–						4,864						845
– actuarial losses					–						–						(2,317	)					(987	)					–						–						(2,317	)					(987	)
– other changes					–						–						217						(47	)					–						17						217						(30	)
Exchange differences					(2,112	)					(316	)					1,838						357						–						–						(274	)					41
Contributions by HSBC					397						278						–						–						–						–						397						278
– normal					265						239						–						–						–						–						265						239
– special					132						39						–						–						–						–						132						39
Contributions by employees					38						17						(38	)					(17	)					–						–						–						–
Benefits paid					(954	)					(543	)					954						598						–						–						–						55
Administrative costs and taxes paid by plan					(40	)					(23	)					40						23						–						–						–						–
At 31 December 2014					35,244						9,580						(30,480	)					(11,582	)					–						(17	)					4,764						(2,019	)
Present value of defined benefit obligation relating to:
– actives																	(9,782	)					(5,605	)
– deferreds																	(8,799	)					(2,498	)
– pensioners																	(11,899	)					(3,479	)

 

HSBC HOLDINGS PLC   366

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HSBC expects to make $458m of contributions to defined benefit pension plans during 2016. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:

Benefits expected to be paid from plans

 

				2016				2017				2018				2019				2020				2021-2025
				$m				$m				$m				$m				$m				$m
The principal plan1					1,006				1,040				1,075				1,109				1,204				6,425
Other plans1					482				466				476				511				530				2,692

 

1	The duration of the defined benefit obligation is 17.0 years for the principal plan under the disclosure assumptions adopted (2014: 19.8 years) and 13.9 years for all other plans combined (2014: 14.2 years).

Fair value of plan assets by asset classes

 

				31 December 2015																								31 December 2014
					Value						Quoted market price in active market						No quoted market price in active market						Thereof HSBC	1					Value						Quoted market price in active market						No quoted market price in active market						Thereof HSBC	1
				$m						$m						$m						$m						$m						$m						$m						$m
The principal plan
Fair value of plan assets					32,670						29,370						3,300						513						35,244						31,355						3,889						930
– equities					5,730						4,990						740						–						5,502						4,557						945						–
– bonds					22,704						22,704						–						–						22,965						22,965						–						–
– derivatives					1,011						–						1,011						513						1,369						52						1,317						930
– other					3,225						1,676						1,549						–						5,408						3,781						1,627						–
Other plans
Fair value of plan assets					8,754						7,882						872						148						9,580						6,390						3,190						(13	)
– equities					2,434						1,900						534						1						2,534						1,778						756						11
– bonds					5,719						5,458						261						2						6,376						4,109						2,267						7
– derivatives					7						–						7						1						(100	)					(8	)					(92	)					(107	)
– other					594						524						70						144						770						511						259						76

 

1	The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 41.

Post-employment defined benefit plans’ principal actuarial financial assumptions

HSBC determines the discount rates to be applied to its obligations in consultation with the plans’ local actuaries, on the basis of current average yields of high quality (AA-rated or equivalent) debt instruments with maturities consistent with those of the defined benefit obligations.

Key actuarial assumptions for the principal plan

 

				Discount rate						Inflation rate						Rate of   increase for pensions						Rate of pay increase						Interest      credit rate
				%						%						%						%						%
UK
At 31 December 2015					3.70						3.20						3.00						3.70						n/a
At 31 December 2014					3.70						3.20						3.00						3.70						n/a
At 31 December 2013					4.45						3.60						3.30						4.10						n/a
Mortality tables and average life expectancy at age 65 for the principal plan
				Mortality table						Life expectancy at age 65 for a male member currently:												Life expectancy at age 65 for a female member currently:
										Aged 65						Aged 45						Aged 65						Aged 45
UK
At 31 December 2015					SAPS S1	1					23.6						25.0						24.9						26.7
At 31 December 2014					SAPS S1	1					23.6						25.2						25.0						26.9

 

1

Self-administered Pension Scheme (‘SAPS’) Light Table with a multiplier of 1.01 for male pensioners and 1.02 for female pensioners. Improvements are projected in accordance with Continuous Mortality Investigation (‘CMI’) core projection model 2015 (2014: CMI 2014) with a long-term rate of improvement of 1.25% pa.

 

HSBC HOLDINGS PLC   367

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Notes on the Financial Statements (continued)

6 – Employee compensation and benefits / 7 – Auditors’ remuneration / 8 – Tax

    

    

    

 

Actuarial assumption sensitivities

The effect of changes in key assumptions on the principal plan

 

				HSBC Bank (UK) Pension Scheme
				2015						2014
				$m						$m
Discount rate
Change in pension obligation at year-end from a 25bps increase					(1,107	)					(1,420	)
Change in pension obligation at year-end from a 25bps decrease					1,180						1,523
Change in 2016 pension cost from a 25bps increase					(58	)					(75	)
Change in 2016 pension cost from a 25bps decrease					55						73
Rate of inflation
Change in pension obligation at year-end from a 25bps increase					747						1,026
Change in pension obligation at year-end from a 25bps decrease					(855	)					(1,184	)
Change in 2016 pension cost from a 25bps increase					28						44
Change in 2016 pension cost from a 25bps decrease					(31	)					(48	)
Rate of increase for pensions in payment and deferred pensions
Change in pension obligation at year-end from a 25bps increase					990						1,188
Change in pension obligation at year-end from a 25bps decrease					(937	)					(1,127	)
Change in 2016 pension cost from a 25bps increase					37						50
Change in 2016 pension cost from a 25bps decrease					(34	)					(45	)
Rate of pay increase
Change in pension obligation at year-end from a 25bps increase					119						237
Change in pension obligation at year-end from a 25bps decrease					(119	)					(232	)
Change in 2016 pension cost from a 25bps increase					4						12
Change in 2016 pension cost from a 25bps decrease					(4	)					(11	)
Mortality
Change in pension obligation from each additional year of longevity assumed					670						768

HSBC Holdings

Employee compensation and benefit expense in respect of HSBC Holdings’ employees in 2015 amounted to $908m (2014: $681m). The average number of persons employed during 2015 was 2,656 (2014: 2,070). Employees who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC Holdings pays contributions to such plans for its own employees in accordance with the schedules of contributions determined by the trustees of the plans and recognises these contributions as an expense as they fall due. During 2015, most employees were transferred to the ServCo group (see page 242). Their remuneration and numbers have been included in the narrative above as they have been seconded back to HSBC Holdings on an interim basis.

Directors’ emoluments

Details of directors’ emoluments, pensions and their interests are disclosed in the Director’ Remuneration Report on page 318.

7     Auditors’ remuneration

 

 

				2015						2014						2013
				$m						$m						$m
Audit fees payable to PwC/KPMG1					62.0						40.6						43.4
Other audit fees payable					1.2						1.2						1.1
Year ended 31 December					63.2						41.8						44.5

 

1	PwC became the Group’s principal auditor in 2015. KPMG was the principal auditor during 2014.

The following fees were payable by HSBC to the Group’s principal auditor:

Fees payable by HSBC to PwC/KPMG¹

 

				2015						2014						2013
				$m						$m						$m
Fees for HSBC Holdings’ statutory audit2					13.1						13.4						12.9
– relating to current year					13.1						13.4						12.6
– relating to prior year					–						–						0.3
Fees for other services provided to HSBC					85.1						62.5						67.5
Audit of HSBC’s subsidiaries3					48.9						27.2						30.5
Audit-related assurance services4					16.6						22.6						27.4
Taxation-related services:
– taxation compliance services					1.0						1.5						1.3
– taxation advisory services					0.9						0.8						1.3
Other assurance services5					2.8						0.7						0.5
Other non-audit services5					14.9						9.7						6.5
Year ended 31 December					98.2						75.9						80.4

 

1	PwC became the Group’s principal auditor in 2015. KPMG was the principal auditor during 2014.

 

HSBC HOLDINGS PLC   368

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2

Fees payable to KPMG and PwC for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. They include amounts payable for services relating to the consolidation returns of HSBC Holdings’ subsidiaries which are clearly identifiable as being in support of the Group audit opinion. Excluded from fees are those payable to KPMG related to the transition of the audit to PwC of $1.2m.

3	Fees payable for the statutory audit of the financial statements of HSBC’s subsidiaries, including the 2015 changes in scope and additional procedures performed due to the technology systems and data access controls matter.

4	Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews.

5	Including other permitted services relating to advisory, corporate finance transactions, etc.

No fees were payable by HSBC to PwC or KPMG as principal auditor for the following types of services: internal audit services and services related to litigation, recruitment and remuneration.

Fees payable by HSBC’s associated pension schemes to PwC/KPMG¹

 

				2015						2014						2013
				$000						$000						$000
Audit of HSBC’s associated pension schemes					352						322						379
Audit related assurance services					5						5						5
Year ended 31 December					357						327						384

 

1	PwC became the Group’s principal auditor in 2015. KPMG was the principal auditor during 2014.

No fees were payable by HSBC’s associated pension schemes to PwC or KPMG as principal auditor for the following types of services: audit-related assurance services, internal audit services, other assurance services, services related to corporate finance transactions, valuation and actuarial services, litigation, recruitment and remuneration, and information technology.

In addition to the above, the estimated fees paid to PwC by third parties other than HSBC amount to $2.4m (KPMG 2014: $3.6m; KPMG 2013: $5.3m). In these cases, HSBC is connected with the contracting party and may therefore be involved in appointing PwC. These fees arise from services such as auditing mutual funds managed by HSBC and reviewing the financial position of corporate concerns which borrow from HSBC.

Fees payable for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a consolidated basis for the HSBC Group.

8     Tax

 

Accounting policy

 

Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in the same statement in which the related item appears.   Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted or substantively enacted by the balance sheet date, and any adjustment to tax payable in respect of previous years. HSBC provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. Current tax assets and liabilities are offset when HSBC intends to settle on a net basis and the legal right to offset exists.   Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised.   Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled, based on tax rates and laws enacted, or substantively enacted, by the balance sheet date. Deferred tax assets and liabilities are offset when they arise in the same tax reporting group and relate to income taxes levied by the same taxation authority, and when HSBC has a legal right to offset.   Deferred tax relating to actuarial gains and losses on post-employment benefits is recognised in other comprehensive income. Deferred tax relating to share-based payment transactions is recognised directly in equity to the extent that the amount of the estimated future tax deduction exceeds the amount of the related cumulative remuneration expense. Deferred tax relating to fair value re-measurements of available-for-sale investments and cash flow hedging instruments is charged or credited directly to other comprehensive income and is subsequently recognised in the income statement when the deferred fair value gain or loss is recognised in the income statement.

 

HSBC HOLDINGS PLC   369

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Notes on the Financial Statements (continued)

8 – Tax / 9 – Dividends

    

    

    

 

Critical accounting estimates and judgements

 

Deferred tax assets   The recognition of a deferred tax asset relies on an assessment of the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies. In the absence of a history of taxable profits, the most significant judgements relate to expected future profitability and to the applicability of tax planning strategies, including corporate reorganisations.   In previous years the US deferred tax recognition relied on capital support from HSBC Holdings plc due to significant losses in the past. The US has been profitable in recent years and the improved performance is expected to continue, so the US deferred tax recognition is now based on projections of future business profits.

Tax expense

 

						2015 $m						2014 $m						2013 $m
Current tax
– for this year							3,882						4,477						4,050
– adjustments in respect of prior years							(85	)					(527	)					(109	)
							3,797						3,950						3,941
Deferred tax							(26	)					25						824
– origination and reversal of temporary differences							(153	)					(477	)					739
– effect of changes in tax rates							110						83						93
– adjustments in respect of prior years							17						419						(8	)
Year ended 31 December							3,771						3,975						4,765

 

1

Current tax included Hong Kong profits tax of $1,294m (2014: $1,135m; 2013: $1,133m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2014: 16.5%; 2013: 16.5%). Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operated.

Tax reconciliation

The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the UK corporation tax rate as follows:

 

						2015												2014												2013
						$m						%						$m						%						$m						%
Profit before tax							18,867												18,680												22,565
Tax expense
Tax at 20.25% (2014: 21.5%; 2013: 23.25%)							3,821						20.25						4,016						21.5						5,246						23.25
Effect of differently taxed overseas profits							71						0.4						33						0.2						(177	)					(0.8	)
Adjustments in respect of prior period liabilities							(68	)					(0.4	)					(108	)					(0.6	)					(117	)					(0.5	)
Deferred tax temporary differences not recognised/(previously not recognised)							(205	)					(1.1	)					(154	)					(0.8	)					332						1.5
Effect of profits in associates and joint ventures							(508	)					(2.7	)					(547	)					(2.9	)					(543	)					(2.4	)
Tax effect of disposal of Ping An							–						–						–						–						(111	)					(0.5	)
Tax effect of reclassification of Industrial Bank							–						–						–						–						(317	)					(1.4	)
Non-taxable income and gains							(728	)					(3.9	)					(668	)					(3.5	)					(871	)					(3.9	)
Permanent disallowables							978						5.2						969						5.1						647						2.9
Change in tax rates							110						0.6						22						0.1						93						0.4
Local taxes and overseas withholding taxes							416						2.2						434						2.3						551						2.4
Other items							(116	)					(0.6	)					(22	)					(0.1	)					32						0.1
Year ended 31 December							3,771						20.0						3,975						21.3						4,765						21.1

The Group’s profits are taxed at different rates depending on the country in which the profits arise. The key applicable tax rates include Hong Kong (16.5%), USA (35%) and UK (20.25%). If the Group’s profits were taxed at the statutory rates of the countries in which the profits arise then the tax rate for the year would have been 20.65%. The effective tax rate for the year was 20.0% (2014: 21.3%) and is in line with expectations. We expect the effective tax rate to increase due to the introduction of the 8% surcharge on UK banking profits in 2016.

Accounting for taxes involves some estimation because the tax law is uncertain and the application requires a degree of judgement, which authorities may dispute. Liabilities are recognised based on best estimates of the probable outcome, taking into account external advice where appropriate. We do not expect significant liabilities to arise in excess of the amounts provided. HSBC only recognises current and deferred tax assets where recovery is probable.

 

HSBC HOLDINGS PLC   370

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Movement of deferred tax assets and liabilities

 

							Loan impairment provisions $m						Unused tax losses and tax credits $m						Derivatives, FVOD and other investments $m	1					Insurance business $m						Expense provisions $m						Other $m						Total $m
Assets							2,264						1,332						1,764						–						1,244						836						7,440
Liabilities							–						–						(233	)					(861	)					–						(759	)					(1,853	)
At 1 January 2015							2,264						1,332						1,531						(861	)					1,244						77						5,587
Income statement							45						379						(557	)					(143	)					418						(116	)					26
Other comprehensive income																			22												156						321						499
Equity																																					4						4
Reclassification to Assets Held for Sale							(673	)					(186	)					76						87						(386	)					(136	)					(1,218	)
Foreign exchange and other adjustments							(285	)					(137	)					98						(139	)					(161	)					17						(607	)
At 31 December 2015							1,351						1,388						1,170						(1,056	)					1,271						167						4,291
Assets							1,351						1,388						1,400						–						1,271						1,050						6,460	2
Liabilities							–						–						(230	)					(1,056	)					–						(883	)					(2,169	)2
Assets							2,837						978						1,383						–						1,398						1,748						8,344
Liabilities							–						–						(213	)					(840	)					–						(745	)					(1,798	)
At 1 January 2014							2,837						978						1,170						(840	)					1,398						1,003						6,546
Income statement							(408	)					396						361						(76	)					(86	)					(212	)					(25	)
Other comprehensive income							–						–						(12	)					–						–						(680	)					(692	)
Equity							–						–						–						–						–						(20	)					(20	)
Foreign exchange and other adjustments							(165	)					(42	)					12						55						(68	)					(14	)					(222	)
At 31 December 2014							2,264						1,332						1,531						(861	)					1,244						77						5,587
Assets							2,264						1,332						1,764						–						1,244						836						7,440	2
Liabilities							–						–						(233	)					(861	)					–						(759	)					(1,853	)2

 

1	Fair value of own debt.

2	After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets $6,051m (2014: $7,111m); and deferred tax liabilities $1,760m (2014:$1,524m).

The net deferred tax asset of $4.3bn (2014: $5.6bn) includes $4.5bn (2014: $4.1bn) deferred tax assets relating to the US. In applying judgement in recognising deferred tax assets, management has critically assessed all available information, including future business profit projections and the track record of meeting forecasts. On the basis of this assessment, management expects substantially all the US deferred tax assets to be utilised by 2021. The fall in net deferred tax assets since 31 December 2014 is mainly attributable to the reclassification of $1.2bn Brazilian net deferred tax balances to assets held for sale.

Unrecognised deferred tax

The amount of temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was $15.5bn (2014: $22.6bn). These amounts included unused state losses arising in the Group’s US operations of $11.3bn (2014: $14.1bn). Of the total amounts unrecognised, $3.1bn (2014: $4.2bn) had no expiry date, $0.9bn (2014: $0.9bn) was scheduled to expire within 10 years and the remaining is expected to expire after 10 years.

Deferred tax is not recognised in respect of the Group’s investments in subsidiaries and branches where HSBC is able to control the timing of remittance or other realisation and where remittance or realisation is not probable in the foreseeable future. The aggregate temporary differences relating to unrecognised deferred tax liabilities arising on investments in subsidiaries and branches is $9.1bn – the corresponding unrecognised deferred tax liability is $0.6bn.

9     Dividends

 

Dividends to shareholders of the parent company

 

						2015																		2014																		2013
						Per share $						Total $m						Settled in scrip $m						Per share $						Total $m						Settled in scrip $m						Per share $						Total $m						Settled in scrip $m
Dividends paid on ordinary shares
In respect of previous year:
– fourth interim dividend							0.20						3,845						2,011						0.19						3,582						1,827						0.18						3,339						540
In respect of current year:
– first interim dividend							0.10						1,951						231						0.10						1,906						284						0.10						1,861						167
– second interim dividend							0.10						1,956						160						0.10						1,914						372						0.10						1,864						952
– third interim dividend							0.10						1,958						760						0.10						1,918						226						0.10						1,873						864
Total							0.50						9,710						3,162						0.49						9,320						2,709						0.48						8,937						2,523
Total dividends on preference shares classified as equity (paid quarterly)							62.00						90												62.00						90												62.00						90

 

HSBC HOLDINGS PLC   371

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Notes on the Financial Statements (continued)

9 – Dividends / 10 – Earnings per share / 11 – Segmental analysis

    

    

    

 

Total coupons on capital securities classified as equity

 

										2015												2014						2013
				First						Per security						Total						Total						Total
				call date												$m						$m						$m
Perpetual subordinated capital securities1,3
– $2,200m					Apr 2013						$2.032						179						179						179
– $3,800m					Dec 2015						$2.000						304						304						304
Perpetual subordinated contingent convertible securities2,3
– $2,250m					Sep 2024						$63.750						143						–						–
– $1,500m					Jan 2020						$56.250						70						–						–
– €1,500m					Sep 2022						€52.500						86						–						–
– $2,450m					Mar 2025						$63.750						78						–						–
Total																	860						483						483

 

1	Discretionary coupons are paid quarterly on the perpetual subordinated capital securities, in denominations of $25 per security.

2	Discretionary coupons are paid semi-annually on the perpetual subordinated contingent convertible securities, in denominations of 1,000 per security.

3	Further details of these securities can be found in Note 35.

The Directors declared after the end of the year a fourth interim dividend in respect of the financial year ended 31 December 2015 of $0.21 per ordinary share, a distribution of approximately $4,134m. The fourth interim dividend will be payable on 20 April 2016 to holders of record on 4 March 2016 on the Principal Register in the UK, the Hong Kong or the Bermuda Overseas Branch registers. No liability was recorded in the financial statements in respect of the fourth interim dividend for 2015.

On 15 January 2016, HSBC paid a coupon on the $2,200m subordinated capital securities of $0.508 per security, a distribution of $45m. On 19 January 2016, HSBC paid a coupon on the $1,500m subordinated contingent convertible securities of $28.125 per security, a distribution of $42m. No liability was recorded in the balance sheet at 31 December 2015 in respect of these coupon payments.

In September 2015, HSBC issued a €1,000m subordinated contingent convertible securities as set out in Note 35 which is classified as equity under IFRSs. Coupons are paid semi-annually and to date no payments have fallen due.

10    Earnings per share

 

‘Basic earnings per ordinary share’ is calculated by dividing the profit attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. ‘Diluted earnings per ordinary share’ is calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares.

Profit attributable to the ordinary shareholders of the parent company

 

				2015						2014						2013
				$m						$m						$m
Profit attributable to shareholders of the parent company					13,522						13,688						16,204
Dividend payable on preference shares classified as equity					(90	)					(90	)					(90	)
Coupon payable on capital securities classified as equity					(860	)					(483	)					(483	)
Year ended 31 December					12,572						13,115						15,631

Basic and diluted earnings per share

 

				2015																		2014																		2013
				Profit $m						Number of shares (millions)						Per share $						Profit $m						Number of shares (millions)						Per share $						Profit $m						Number of shares (millions)						Per Share $
Basic1					12,572						19,380						0.65						13,115						18,960						0.69						15,631						18,530						0.84
Effect of dilutive potential ordinary shares					–						137						–						–						96						–						–						124						–
Diluted1					12,572						19,517						0.64						13,115						19,056						0.69						15,631						18,654						0.84

 

1	Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).

The weighted average number of dilutive potential ordinary shares excluded 7m employee share options that were anti-dilutive (2014: 6m; 2013: 60m).

 

HSBC HOLDINGS PLC   372

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11     Segmental analysis

 

Accounting policy

 

HSBC has a matrix management structure. HSBC’s chief operating decision-maker is the Group Management Board (‘GMB’) which operates as a general management committee under the direct authority of the Board. The GMB regularly reviews operating activity on a number of bases, including by geographical region and by global business. HSBC considers that geographical operating segments represent the most appropriate information for the users of the financial statements to best evaluate the nature and financial effects of the business activities in which HSBC engages, and the economic environments in which it operates. This reflects the importance of geographical factors on business strategy and performance, the allocation of capital resources, and the role of geographical regional management in executing strategy. As a result, HSBC’s operating segments are considered to be geographical regions.   Geographical information is classified by the location of the principal operations of the subsidiary or, for The Hongkong and Shanghai Banking Corporation, HSBC Bank plc, HSBC Bank Middle East and HSBC Bank USA, by the location of the branch responsible for reporting the results or providing funding.   Measurement of segmental assets, liabilities, income and expenses is in accordance with the Group’s accounting policies. Segmental income and expenses include transfers between segments and these transfers are conducted at arm’s length. Shared costs are included in segments on the basis of the actual recharges made. The expense of the UK bank levy is included in the Europe geographical region as HSBC regards the levy as a cost of carrying on business and being headquartered in the UK.

Products and services

HSBC provides a comprehensive range of banking and related financial services to its customers in its five geographical regions. HSBC’s operating segments are Europe, Asia, Middle East and North Africa, North America and Latin America. The products and services offered to customers are organised by global business.

 

•

Retail Banking and Wealth Management (‘RBWM’) offers a broad range of products and services to meet the personal banking and wealth management needs of individual customers. Typically, customer offerings include personal banking products (current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services) and wealth management services (insurance and investment products, global asset management services and financial planning services).

 

•

Commercial Banking (‘CMB’) offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. CMB also offers its customers access to products and services offered by other global businesses, for example Global Banking and Markets (‘GB&M’), which include foreign exchange products, raising capital on debt and equity markets and advisory services.

 

•

GB&M provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services, a markets business that provides services in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.

 

•

Global Private Banking (‘GPB’) provides a range of services to high net worth individuals and families with complex and international needs within the Group’s priority markets.

 

HSBC HOLDINGS PLC   373

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Notes on the Financial Statements (continued)

11 – Segmental analysis

    

    

    

 

Profit/(loss) for the year

 

				Europe						Asia						MENA						North      America						Latin      America						Intra- HSBC items						Total
				$m						$m						$m						$m						$m						$m						$m
2015
Net interest income					10,005						12,184						1,531						4,532						4,318						(39	)					32,531
Net fee income					4,891						6,032						633						2,018						1,131						–						14,705
Net trading income					4,060						3,090						325						545						664						39						8,723
Other income					2,102						3,997						76						562						479						(3,375	)					3,841
Net operating income1					21,058						25,303						2,565						7,657						6,592						(3,375	)					59,800
Loan impairment (charges)/recoveries and other credit risk provisions					(690	)					(693	)					(299	)					(544	)					(1,495	)					–						(3,721	)
Net operating income					20,368						24,610						2,266						7,113						5,097						(3,375	)					56,079
Employee compensation and benefits					(7,872	)					(6,105	)					(718	)					(3,113	)					(2,092	)					–						(19,900	)
General and administrative expenses					(10,849	)					(4,164	)					(478	)					(3,168	)					(2,378	)					3,375						(17,662	)
Depreciation and impairment of property, plant and equipment					(552	)					(410	)					(26	)					(165	)					(116	)					–						(1,269	)
Amortisation and impairment of intangible assets					(460	)					(210	)					(12	)					(55	)					(200	)					–						(937	)
Total operating expenses					(19,733	)					(10,889	)					(1,234	)					(6,501	)					(4,786	)					3,375						(39,768	)
Operating profit					635						13,721						1,032						612						311						–						16,311
Share of profit in associates and joint ventures					8						2,042						505						2						(1	)					–						2,556
Profit before tax					643						15,763						1,537						614						310						–						18,867
Tax expense					(1,095	)					(2,346	)					(336	)					80						(74	)					–						(3,771	)
Profit/(loss) for the year					(452	)					13,417						1,201						694						236						–						15,096
2014
Net interest income					10,611						12,273						1,519						5,015						5,310						(23	)					34,705
Net fee income					6,042						5,910						650						1,940						1,415						–						15,957
Net trading income					2,534						2,622						314						411						856						23						6,760
Other income					2,384						2,872						65						786						691						(2,972	)					3,826
Net operating income1					21,571						23,677						2,548						8,152						8,272						(2,972	)					61,248
Loan impairment (charges)/recoveries and other credit risk provisions					(764	)					(647	)					6						(322	)					(2,124	)					–						(3,851	)
Net operating income					20,807						23,030						2,554						7,830						6,148						(2,972	)					57,397
Employee compensation and benefits					(8,191	)					(5,862	)					(676	)					(3,072	)					(2,565	)					–						(20,366	)
General and administrative expenses					(11,076	)					(3,959	)					(500	)					(3,108	)					(2,894	)					2,972						(18,565	)
Depreciation and impairment of property, plant and equipment					(543	)					(389	)					(28	)					(180	)					(242	)					–						(1,382	)
Amortisation and impairment of intangible assets					(407	)					(217	)					(12	)					(69	)					(231	)					–						(936	)
Total operating expenses					(20,217	)					(10,427	)					(1,216	)					(6,429	)					(5,932	)					2,972						(41,249	)
Operating profit					590						12,603						1,338						1,401						216						–						16,148
Share of profit in associates and joint ventures					6						2,022						488						16						–						–						2,532
Profit before tax					596						14,625						1,826						1,417						216						–						18,680
Tax expense					(853	)					(2,542	)					(339	)					(195	)					(46	)					–						(3,975	)
Profit/(loss) for the year					(257	)					12,083						1,487						1,222						170						–						14,705

 

HSBC HOLDINGS PLC   374

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Profit/(loss) for the year (continued)

 

				Europe						Asia						MENA						North      America						Latin      America						Intra- HSBC items						Total
				$m						$m						$m						$m						$m						$m						$m
2013
Net interest income					10,693						11,432						1,486						5,742						6,186						–						35,539
Net fee income					6,032						5,936						622						2,143						1,701						–						16,434
Net trading income					4,423						2,026						357						948						936						–						8,690
Other income/(expense)					(181	)					5,038						38						(30	)					1,745						(2,628	)					3,982
Net operating income1					20,967						24,432						2,503						8,803						10,568						(2,628	)					64,645
Loan impairment (charges)/recoveries and other credit risk provisions					(1,530	)					(498	)					42						(1,197	)					(2,666	)					–						(5,849	)
Net operating income					19,437						23,934						2,545						7,606						7,902						(2,628	)					58,796
Employee compensation and benefits					(7,175	)					(5,666	)					(634	)					(3,098	)					(2,623	)					–						(19,196	)
General and administrative expenses					(9,479	)					(3,660	)					(607	)					(3,051	)					(2,896	)					2,628						(17,065	)
Depreciation and impairment of property, plant and equipment					(559	)					(392	)					(35	)					(176	)					(202	)					–						(1,364	)
Amortisation and impairment of intangible assets					(400	)					(218	)					(13	)					(91	)					(209	)					–						(931	)
Total operating expenses					(17,613	)					(9,936	)					(1,289	)					(6,416	)					(5,930	)					2,628						(38,556	)
Operating profit					1,824						13,998						1,256						1,190						1,972						–						20,240
Share of profit in associates and joint ventures					1						1,855						438						31						–						–						2,325
Profit before tax					1,825						15,853						1,694						1,221						1,972						–						22,565
Tax expense					(1,279	)					(2,170	)					(328	)					(313	)					(675	)					–						(4,765	)
Profit for the year					546						13,683						1,366						908						1,297						–						17,800
1    Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.   Other information about the profit/(loss) for the year
				Europe						Asia						MENA						North America						Latin America						Intra- HSBC items						Total
				$m						$m						$m						$m						$m						$m						$m
2015
Net operating income1					21,058						25,303						2,565						7,657						6,592						(3,375	)					59,800
– external					19,778						23,477						2,559						7,386						6,600						–						59,800
– inter-segment					1,280						1,826						6						271						(8	)					(3,375	)					–
Profit for the year includes the following significant non-cash items:
Depreciation, amortisation and impairment					1,013						620						38						195						315						–						2,181
Loan impairment losses gross of recoveries and other credit risk provisions					1,082						858						331						618						1,641						–						4,530
Changes in fair value of long-term debt and related derivatives					671						5						6						181						–						–						863
2014
Net operating income1					21,571						23,677						2,548						8,152						8,272						(2,972	)					61,248
– external					20,450						22,071						2,524						7,937						8,266						–						61,248
– inter-segment					1,121						1,606						24						215						6						(2,972	)					–
Profit for the year includes the following significant non-cash items:
Depreciation, amortisation and impairment					950						606						40						182						473						–						2,251
Loan impairment losses gross of recoveries and other credit risk provisions					1,066						800						37						437						2,466						–						4,806
Changes in fair value of long-term debt and related derivatives					614						(4	)					(3	)					(99	)					–						–						508
2013
Net operating income1					20,967						24,432						2,503						8,803						10,568						(2,628	)					64,645
– external					20,108						22,853						2,497						8,569						10,618						–						64,645
– inter-segment					859						1,579						6						234						(50	)					(2,628	)					–
Profit for the year includes the following significant non-cash items:
Depreciation, amortisation and impairment					957						610						48						303						412						–						2,330
Loan impairment losses gross of recoveries and other credit risk provisions					2,165						665						45						1,321						2,949						–						7,145
Changes in fair value of long-term debt and related derivatives					(936	)					(1	)					(3	)					(288	)					–						–						(1,228	)

 

1	Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.

 

 

HSBC HOLDINGS PLC   375

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Notes on the Financial Statements (continued)

11 – Segmental analysis / 12 – Trading assets

    

    

    

 

Balance sheet information

 

				Europe						Asia						MENA						North America						Latin America						Intra- HSBC items						Total
				$m						$m						$m						$m						$m						$m						$m
At 31 December 2015
Loans and advances to customers					392,041						356,375						29,894						128,851						17,293						–						924,454
Interests in associates and joint ventures					198						15,720						3,176						45						–						–						19,139
Total assets					1,129,365						889,747						59,236						393,960						86,262						(148,914	)					2,409,656
Customer accounts					497,876						598,620						36,468						135,152						21,470						–						1,289,586
Total liabilities					1,067,127						813,466						49,126						355,506						75,827						(148,914	)					2,212,138
Capital expenditure incurred1					1,182						725						34						198						187						–						2,326
At 31 December 2014
Loans and advances to customers					409,733						362,955						29,063						129,787						43,122						–						974,660
Interests in associates and joint ventures					175						14,958						2,955						83						10						–						18,181
Total assets					1,290,926						878,723						62,417						436,859						115,354						(150,140	)					2,634,139
Customer accounts					545,959						577,491						39,720						138,884						48,588						–						1,350,642
Total liabilities					1,223,371						807,998						52,569						398,356						102,007						(150,140	)					2,434,161
Capital expenditure incurred1					1,168						637						25						208						348						–						2,386
At 31 December 2013
Loans and advances to customers					456,110						336,897						27,211						127,953						43,918						–						992,089
Interests in associates and joint ventures					169						13,822						2,575						74						–						–						16,640
Total assets					1,392,959						831,791						60,810						432,035						113,999						(160,276	)					2,671,318
Customer accounts					581,933						548,483						38,683						140,809						51,389						–						1,361,297
Total liabilities					1,326,537						770,938						50,706						393,635						99,319						(160,276	)					2,480,859
Capital expenditure incurred1					907						1,236						32						265						385						–						2,825
1    Expenditure incurred on property, plant and equipment and other intangible assets. Excludes assets acquired as part of business combinations and goodwill.   Other financial information   Net operating income by global business
				RBWM3						CMB3						GB&M						GPB						Other1						Intra-HSBC items						Total
				$m						$m						$m						$m						$m						$m						$m
2015
Net operating income2					23,516						14,870						18,233						2,172						7,604						(6,595	)					59,800
– external					20,941						15,021						20,994						1,888						956						–						59,800
– internal					2,575						(151	)					(2,761	)					284						6,648						(6,595	)					–
2014
Net operating income2					25,149						15,748						17,778						2,377						6,365						(6,169	)					61,248
– external					23,202						16,369						20,055						1,980						(358	)					–						61,248
– internal					1,947						(621	)					(2,277	)					397						6,723						(6,169	)					–
2013
Net operating income2					27,453						15,652						19,176						2,439						5,651						(5,726	)					64,645
– external					25,702						16,577						20,767						1,955						(356	)					–						64,645
– internal					1,751						(925	)					(1,591	)					484						6,007						(5,726	)					–

Information by country

 

				2015												2014												2013
				External net operating income2,4						Non- current assets5						External net operating income2,4						Non- current assets5						External net operating income2,4						Non- current assets5
				$m						$m						$m						$m						$m						$m
UK					14,132						7,581						14,392						8,671						13,347						17,481
Hong Kong					14,447						10,979						12,656						12,376						12,031						12,170
USA					5,541						4,066						5,736						5,685						6,121						4,189
France					2,706						9,326						2,538						10,301						3,111						11,565
Brazil					3,546						28						4,817						1,403						5,364						1,715
Other countries					19,428						27,503						21,109						28,273						24,671						27,879
Year ended/at 31 December					59,800						59,483						61,248						66,709						64,645						74,999

 

1

The main items reported in ‘Other’ are certain property activities, unallocated investment activities, centrally held investment companies, movements in fair value of own debt and HSBC’s holding company and financing operations. ‘Other’ also includes gains and losses on the disposal of certain significant subsidiaries or business units.

2	Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.

3	In the first half of 2015, a portfolio of customers was transferred from CMB to RBWM in Latin America in order to better align the combined banking needs of the customers with our established global businesses. Comparative data have been re-presented accordingly.

4	External net operating income is attributed to countries on the basis of the location of the branch responsible for reporting the results or advancing the funds.

5	Non-current assets consist of property, plant and equipment, goodwill, other intangible assets, interests in associates and joint ventures and certain other assets expected to be recovered more than 12 months after the reporting period.

 

 

HSBC HOLDINGS PLC   376

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12     Trading assets

 

Accounting policy

 

Financial assets are classified as held for trading if they have been acquired principally for the purpose of selling in the near term, or form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. They are recognised on trade date, when HSBC enters into contractual arrangements with counterparties, and are normally derecognised when sold. They are initially measured at fair value, with transaction costs taken to the income statement. Subsequent changes in their fair values and interest are recognised in the income statement in ‘Net trading income’.

Trading assets

 

				2015						2014
				$m						$m
Trading assets:
– not subject to repledge or resale by counterparties					192,204						247,586
– which may be repledged or resold by counterparties					32,633						56,607
At 31 December					224,837						304,193
Treasury and other eligible bills					7,829						16,170
Debt securities					99,038						141,532
Equity securities					66,491						75,249
Trading securities at fair value					173,358						232,951
Loans and advances to banks1					22,303						27,581
Loans and advances to customers1					29,176						43,661
At 31 December					224,837						304,193

 

1	Loans and advances to banks and customers include settlement accounts, stock borrowing, reverse repos and other amounts.

Trading securities valued at fair value¹

 

				2015						2014
				$m						$m
US Treasury and US Government agencies2					14,833						25,880
UK Government					10,177						9,280
Hong Kong Government					6,495						6,946
Other government					48,567						78,774
Asset-backed securities3					3,135						3,494
Corporate debt and other securities					23,660						33,328
Equity securities					66,491						75,249
At 31 December					173,358						232,951

 

1	Included within these figures are debt securities issued by banks and other financial institutions of $16,403m (2014: $22,399m), of which $1,034m (2014: $2,949m) are guaranteed by various governments.

2	Includes securities that are supported by an explicit guarantee issued by the US Government.

3	Excludes asset-backed securities included under US Treasury and US Government agencies.

Trading securities listed on a recognised exchange and unlisted

 

				Treasury and other eligible bills						Debt securities						Equity securities						Total
				$m						$m						$m						$m
Fair value
Listed1					295						71,184						66,152						137,631
Unlisted2					7,534						27,854						339						35,727
At 31 December 2015					7,829						99,038						66,491						173,358
Fair value
Listed1					1,311						98,028						74,542						173,881
Unlisted2					14,859						43,504						707						59,070
At 31 December 2014					16,170						141,532						75,249						232,951

 

1	Included within listed investments are $5,722m (2014: $5,956m) of securities listed in Hong Kong.

2	Unlisted treasury and other eligible bills primarily comprise treasury bills not listed on an exchange but for which there is a liquid market.

 

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Notes on the Financial Statements (continued)

13 – Fair values of financial instruments carried at fair value

    

    

    

 

13     Fair values of financial instruments carried at fair value

 

Accounting policy

 

All financial instruments are recognised initially at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, sometimes the fair value will be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation technique whose variables include only data from observable markets, such as interest rate yield curves, option volatilities and currency rates. When such evidence exists, HSBC recognises a trading gain or loss at inception (‘day 1 gain or loss’), being the difference between the transaction price and the fair value. When significant unobservable parameters are used, the entire day 1 gain or loss is deferred and is recognised in the income statement over the life of the transaction until the transaction matures or is closed out, the valuation inputs become observable or HSBC enters into an offsetting transaction.   The fair value of financial instruments is generally measured on an individual basis. However, in cases where HSBC manages a group of financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured on a net basis but the underlying financial assets and liabilities are presented separately in the financial statements, unless they satisfy the IFRSs offsetting criteria as described in Note 32.

Critical accounting estimates and judgements

 

Valuation of financial instruments   The best evidence of fair value is a quoted price in an actively traded principal market. The fair values of financial instruments that are quoted in active markets are based on bid prices for assets held and offer prices for liabilities issued. When a financial instrument has a quoted price in an active market, the fair value of the total holding of the financial instrument is calculated as the product of the number of units and the quoted price. The judgement as to whether a market is active may include, but is not restricted to, consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads. The bid/offer spread represents the difference in prices at which a market participant would be willing to buy compared with the price at which they would be willing to sell. Valuation techniques may incorporate assumptions about factors that other market participants would use in their valuations, including:   •  the likelihood and expected timing of future cash flows on the instrument. Judgement may be required to assess the counterparty’s ability to service the instrument in accordance with its contractual terms. Future cash flows may be sensitive to changes in market rates;   •  selecting an appropriate discount rate for the instrument. Judgement is required to assess what a market participant would regard as the appropriate spread of the rate for an instrument over the appropriate risk-free rate; and   •  judgement to determine what model to use to calculate fair value in areas where the choice of valuation model is particularly subjective, for example, when valuing complex derivative products.   A range of valuation techniques is employed, dependent on the instrument type and available market data. Most valuation techniques are based upon discounted cash flow analyses, in which expected future cash flows are calculated and discounted to present value using a discounting curve. Prior to considering credit risk, the expected future cash flows may be known, as would be the case for the fixed leg of an interest rate swap, or may be uncertain and require projection, as would be the case for the floating leg of an interest rate swap. ‘Projection’ utilises market forward curves, if available. In option models, the probability of different potential future outcomes must be considered. In addition, the value of some products is dependent on more than one market factor, and in these cases it will typically be necessary to consider how movements in one market factor may affect the other market factors. The model inputs necessary to perform such calculations include interest rate yield curves, exchange rates, volatilities, correlations and prepayment and default rates. For interest rate derivatives with collateralised counterparties and in significant currencies, HSBC uses a discounting curve that reflects the overnight interest rate.   The majority of valuation techniques employ only observable market data. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them the measurement of fair value is more judgemental. An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument’s inception profit or greater than 5% of the instrument’s valuation is driven by unobservable inputs. ‘Unobservable’ in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).

Control framework

Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk taker.

For all financial instruments where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is utilised. In inactive markets HSBC will source alternative market information to validate the financial instrument’s fair value, with greater weight given to information that is considered to be more relevant and reliable. The factors that are considered in this regard are, inter alia:

 

•

the extent to which prices may be expected to represent genuine traded or tradeable prices;

•

the degree of similarity between financial instruments;

•

the degree of consistency between different sources;

•

the process followed by the pricing provider to derive the data;

•

the elapsed time between the date to which the market data relates and the balance sheet date; and

•

the manner in which the data was sourced.

 

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For fair values determined using valuation models, the control framework may include, as applicable, development or validation by independent support functions of (i) the logic within valuation models; (ii) the inputs to these models; (iii) any adjustments required outside the valuation models; and (iv) where possible, model outputs. Valuation models are subject to a process of due diligence and calibration before becoming operational and are calibrated against external market data on an ongoing basis.

Changes in fair value are generally subject to a profit and loss analysis process. This process disaggregates changes in fair value into three high level categories; (i) portfolio changes, such as new transactions or maturing transactions, (ii) market movements, such as changes in foreign exchange rates or equity prices, and (iii) other, such as changes in fair value adjustments (see further below).

The majority of financial instruments measured at fair value are in GB&M. GB&M’s fair value governance structure is illustrated below as an example:

 

Financial liabilities measured at fair value

In certain circumstances, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument concerned, where available. An example of this is where own debt in issue is hedged with interest rate derivatives. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are either based upon quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to HSBC’s liabilities. The change in fair value of issued debt securities attributable to the Group’s own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security is valued using a Libor-based discount curve. The difference in the valuations is attributable to the Group’s own credit spread. This methodology is applied consistently across all securities.

Structured notes issued and certain other hybrid instrument liabilities are included within trading liabilities and are measured at fair value. The credit spread applied to these instruments is derived from the spreads at which HSBC issues structured notes.

Gains and losses arising from changes in the credit spread of liabilities issued by HSBC reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.

Fair value hierarchy

Fair values of financial assets and liabilities are determined according to the following hierarchy:

 

•

Level 1 – valuation technique using quoted market price: financial instruments with quoted prices for identical instruments in active markets that HSBC can access at the measurement date.

 

•

Level 2 – valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.

 

•

Level 3 – valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one or more significant inputs are unobservable.

 

HSBC HOLDINGS PLC   379

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Notes on the Financial Statements (continued)

13 – Fair values of financial instruments carried at fair value

    

    

    

 

The following table sets out the financial instruments by fair value hierarchy.

Financial instruments carried at fair value and bases of valuation

 

										Valuation techniques
				Quoted market price Level 1						Using observable inputs Level 2						With significant unobservable inputs Level 3						Total
				$m						$m						$m						$m
Recurring fair value measurements at 31 December 2015
Assets
Trading assets					133,095						84,886						6,856						224,837
Financial assets designated at fair value					18,947						4,431						474						23,852
Derivatives					1,922						284,292						2,262						288,476
Financial investments: available for sale					262,929						117,197						4,727						384,853
Liabilities
Trading liabilities					41,462						95,867						4,285						141,614
Financial liabilities designated at fair value					5,260						61,145						3						66,408
Derivatives					2,243						277,618						1,210						281,071
Recurring fair value measurements at 31 December 2014
Assets
Trading assets					180,446						117,279						6,468						304,193
Financial assets designated at fair value					23,697						4,614						726						29,037
Derivatives					4,366						337,718						2,924						345,008
Financial investments: available for sale					241,464						131,264						4,988						377,716
Liabilities
Trading liabilities					62,385						122,048						6,139						190,572
Financial liabilities designated at fair value					3,792						72,361						–						76,153
Derivatives					4,649						334,113						1,907						340,669

The decrease in Level 1 and Level 2 trading assets and liabilities during the period reflects a decrease in inventory across a wide range of securities. The decrease in Level 2 derivative assets and liabilities is driven by participation in ‘portfolio compression’ exercises and market movement.

Transfers between Level 1 and Level 2 fair values

 

Assets

Liabilities

Available for sale

Held for trading

Designated at fair value through profit or loss

Derivatives

Held for trading

Designated at fair value through profit or loss

Derivatives

$m

$m

$m

$m

$m

$m

$m

At 31 December 2015

Transfers from Level 1 to Level 2

–

67

–

56

1,563

857

100

Transfers from Level 2 to Level 1

–

487

–

2

515

2

–

At 31 December 2014

Transfers from Level 1 to Level 2

2,702

18,149

–

–

22,964

–

–

Transfers from Level 2 to Level 1

–

–

–

–

–

–

–

Fair value adjustments

Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered by a market participant which are not incorporated within the valuation model. HSBC classifies fair value adjustments as either ‘risk-related’ or ‘model-related’. The majority of these adjustments relate to GB&M.

Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.

 

HSBC HOLDINGS PLC   380

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Global Banking and Markets fair value adjustments

 

				2015						2014
				$m						$m
Type of adjustment
Risk-related					1,402						1,958
– bid-offer					477						539
– uncertainty					95						357
– credit valuation adjustment					853						871
– debit valuation adjustment					(465	)					(270	)
– funding fair value adjustment					442						460
– other					0						1
Model-related					97						57
– model limitation					92						52
– other					5						5
Inception profit (Day 1 P&L reserves) (Note 16)					97						114
At 31 December					1,596						2,129

Fair value adjustments declined by $533m during the year. The most significant movement was a decline of $262m in respect of the uncertainty category, driven by the reclassification to model limitation of an adjustment relating to derivative discounting assumptions. This adjustment reduced significantly following contract renegotiations with certain counterparties. The debit valuation adjustment increased by $195m as a result of the widening of HSBC’s credit spreads.

Risk-related adjustments

Bid-offer

IFRS 13 ‘Fair value measurement’ requires use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the position.

Uncertainty

Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these circumstances, there exists a range of possible values that the financial instrument or market parameter may assume and an adjustment may be necessary to reflect the likelihood that in estimating the fair value of the financial instrument, market participants would adopt more conservative values for uncertain parameters and/or model assumptions than those used in the valuation model.

Credit valuation adjustment

The CVA is an adjustment to the valuation of over-the-counter (‘OTC’) derivative contracts to reflect within fair value the possibility that the counterparty may default and that HSBC may not receive the full market value of the transactions (see below).

Debit valuation adjustment

The DVA is an adjustment to the valuation of OTC derivative contracts to reflect within fair value the possibility that HSBC may default, and that HSBC may not pay full market value of the transactions (see below).

Funding fair value adjustment

The funding fair value adjustment (‘FFVA’) is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio. This includes the uncollateralised component of collateralised derivatives in addition to derivatives that are fully uncollateralised. The expected future funding exposure is calculated by a simulation methodology, where available. The expected future funding exposure is adjusted for events that may terminate the exposure such as the default of HSBC or the counterparty. The FFVA and DVA are calculated independently.

Model-related adjustments

Model limitation

Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all material market characteristics. Additionally, markets evolve, and models that were adequate in the past may require development to capture all material market characteristics in current market conditions. In these circumstances, model limitation adjustments are adopted. As model development progresses, model limitations are addressed within the valuation models and a model limitation adjustment is no longer needed.

 

HSBC HOLDINGS PLC   381

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Notes on the Financial Statements (continued)

13 – Fair values of financial instruments carried at fair value

    

    

    

 

Inception profit (Day 1 P&L reserves)

Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant unobservable inputs. The accounting for inception profit adjustments is discussed on page 378.

Credit valuation adjustment/debit valuation adjustment methodology

HSBC calculates a separate CVA and DVA for each HSBC legal entity, and within each entity for each counterparty to which the entity has exposure. HSBC calculates the CVA by applying the probability of default (‘PD’) of the counterparty, conditional on the non-default of HSBC, to HSBC’s expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, HSBC calculates the DVA by applying the PD of HSBC, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to HSBC and multiplying the result by the loss expected in the event of default. Both calculations are performed over the life of the potential exposure.

For most products HSBC uses a simulation methodology to calculate the expected positive exposure to a counterparty. This incorporates a range of potential exposures across the portfolio of transactions with the counterparty over the life of the portfolio. The simulation methodology includes credit mitigants such as counterparty netting agreements and collateral agreements with the counterparty.

For certain types of exotic derivatives where the products are not currently supported by the simulation, or for derivative exposures in smaller trading locations where the simulation tool is not yet available, HSBC adopts alternative methodologies.

The methodologies do not, in general, account for ‘wrong-way risk’. Wrong-way risk arises when the underlying value of the derivative prior to any CVA is positively correlated to the probability of default by the counterparty. When there is significant wrong-way risk, a trade-specific approach is applied to reflect the wrong-way risk within the valuation.

With the exception of certain central clearing parties, we include all third-party counterparties in the CVA and DVA calculations and do not net these adjustments across Group entities. We review and refine the CVA and DVA methodologies on an ongoing basis.

Fair value valuation bases

Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3

 

Assets

Liabilities

Available for sale

Held for trading

At fair value1

Deriva- tives

Total

Held for trading

At fair value1

Deriva- tives

Total

$m

$m

$m

$m

$m

$m

$m

$m

$m

Private equity including strategic investments

3,443

55

453

–

3,951

35

–

–

35

Asset-backed securities

1,053

531

–

–

1,584

–

–

–

–

Loans held for securitisation

–

30

–

–

30

–

–

–

–

Structured notes

–

4

–

–

4

4,250

–

–

4,250

Derivatives with monolines

–

–

–

196

196

–

–

–

–

Other derivatives

–

–

–

2,066

2,066

–

–

1,210

1,210

Other portfolios

231

6,236

21

–

6,488

–

3

–

3

At 31 December 2015

4,727

6,856

474

2,262

14,319

4,285

3

1,210

5,498

Private equity including strategic investments

3,120

164

432

–

3,716

47

–

–

47

Asset-backed securities

1,462

616

–

–

2,078

–

–

–

–

Loans held for securitisation

–

39

–

–

39

–

–

–

–

Structured notes

–

2

–

–

2

6,092

–

–

6,092

Derivatives with monolines

–

–

–

239

239

–

–

1

1

Other derivatives

–

–

–

2,685

2,685

–

–

1,906

1,906

Other portfolios

406

5,647

294

–

6,347

–

–

–

–

At 31 December 2014

4,988

6,468

726

2,924

15,106

6,139

–

1,907

8,046

 

1	Designated at fair value through profit or loss.

Level 3 instruments are present in both ongoing and legacy businesses. Loans held for securitisation, derivatives with monolines, certain ‘other derivatives’ and predominantly all Level 3 ABSs are legacy positions. HSBC has the capability to hold these positions.

Private equity including strategic investments

HSBC’s private equity and strategic investments are generally classified as available for sale and are not traded in active markets. In the absence of an active market, an investment’s fair value is estimated on the basis of an analysis of the investee’s financial position and results, risk profile, prospects and other factors, as well as by reference to market valuations for similar entities quoted in an active market, or the price at which similar companies have changed ownership.

 

HSBC HOLDINGS PLC   382

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Asset-backed securities

While quoted market prices are generally used to determine the fair value of these securities, valuation models are used to substantiate the reliability of the limited market data available and to identify whether any adjustments to quoted market prices are required. For ABSs including residential mortgage-backed securities, the valuation uses an industry standard model and the assumptions relating to prepayment speeds, default rates and loss severity based on collateral type, and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for securities of a similar nature.

Loans, including leveraged finance and loans held for securitisation

Loans held at fair value are valued from broker quotes and/or market data consensus providers when available. In the absence of an observable market, the fair value is determined using alternative valuation techniques. These techniques include discounted cash flow models, which incorporate assumptions regarding an appropriate credit spread for the loan, derived from other market instruments issued by the same or comparable entities.

Structured notes

The fair value of structured notes valued using a valuation technique with significant unobservable inputs is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives.

Level 3 structured notes principally comprise equity-linked notes which are issued by HSBC and provide the counterparty with a return that is linked to the performance of certain equity securities, and other portfolios. The notes are classified as Level 3 due to the unobservability of parameters such as long-dated equity volatilities and correlations between equity prices, between equity prices and interest rates and between interest rates and foreign exchange rates.

Derivatives

OTC (i.e. non-exchange traded) derivatives are valued using valuation models. Valuation models calculate the present value of expected future cash flows, based upon ‘no-arbitrage’ principles. For many vanilla derivative products, such as interest rate swaps and European options, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some differences in market practice. Inputs to valuation models are determined from observable market data wherever possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from historical data or other sources. Examples of inputs that may be unobservable include volatility surfaces, in whole or in part, for less commonly traded option products, and correlations between market factors such as foreign exchange rates, interest rates and equity prices.

Derivative products valued using valuation techniques with significant unobservable inputs include certain types of correlation products, such as foreign exchange basket options, equity basket options, foreign exchange interest rate hybrid transactions and long-dated option transactions. Examples of the latter are equity options, interest rate and foreign exchange options and certain credit derivatives. Credit derivatives include certain tranched CDS transactions.

 

HSBC HOLDINGS PLC   383

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Notes on the Financial Statements (continued)

13 – Fair values of financial instruments carried at fair value

    

    

    

 

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy

The following table provides a reconciliation of the movement between opening and closing balances of Level 3 financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:

Movement in Level 3 financial instruments

 

						Assets																								Liabilities
						Available for sale $m						Held for trading $m						Designated at fair value through profit or loss $m						Derivatives $m						Held for trading $m						Designated at fair value through profit or loss $m						Derivatives $m
At 1 January 2015							4,988						6,468						726						2,924						6,139						–						1,907
Total gains/(losses) recognised in profit or loss							(34	)					109						30						95						(573	)					(1	)					(209	)
– trading income/(expense) excluding net interest income							–						109						–						95						(573	)					–						(209	)
– net income from other financial instruments designated at fair value							–						–						30						–						–						(1	)					–
– gains less losses from financial investments							(269	)					–						–						–						–						–						–
– loan impairment charges and other credit risk provisions							235						–						–						–						–						–						–
Total gains/(losses) recognised in other comprehensive income1							226						(192	)					(11	)					(126	)					(118	)					(1	)					(64	)
– available-for-sale investments: fair value gains							393						–						–						–						–						–						–
– cash flow hedges: fair value gains/(losses)							–						–						–						(4	)					–						–						–
– exchange differences							(167	)					(192	)					(11	)					(122	)					(118	)					(1	)					(64	)
Purchases							594						1,745						250						–						2						9						–
New issuances							–						–						–						–						1,471						–						–
Sales							(757	)					(1,206	)					(50	)					–						(66	)					(4	)					–
Settlements							(32	)					(146	)					(135	)					(38	)					(1,260	)					–						(241	)
Transfers out							(1,471	)					(206	)					(336	)					(1,015	)					(1,743	)					–						(283	)
Transfers in							1,213						284						–						422						433						–						100
At 31 December 2015							4,727						6,856						474						2,262						4,285						3						1,210
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 December 2015							235						(9	)					12						89						384						(1	)					267
– trading income/(expense) excluding net interest income							–						(9	)					–						89						384						–						267
– net income/(expense) from other financial instruments designated at fair value							–						–						12						–						–						(1	)					–
– loan impairment charges and other credit risk provisions							235						–						–						–						–						–						–

 

HSBC HOLDINGS PLC   384

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						Assets																								Liabilities
						Available for sale $m						Held for trading $m						Designated at fair value through profit or loss $m						Derivatives $m						Held for trading $m						Designated at fair value through profit or loss $m						Derivatives $m
At 1 January 2014							7,245						5,347						608						2,502						7,514						–						2,335
Total gains/(losses) recognised in profit or loss							174						194						56						959						(25	)					–						(5	)
– trading income/(expense) excluding net interest income							–						194						–						959						(25	)					–						(5	)
– net income from other financial instruments designated at fair value							–						–						56						–						–						–						–
– gains less losses from financial investments							198
– loan impairment charges and other credit risk provisions							(24	)
Total gains/(losses) recognised in other comprehensive income1							126						(178	)					(16	)					(126	)					(123	)					–						54
– available-for-sale investments: fair value gains/(losses)							208						–						–						–						–						–						–
– cash flow hedges: fair value gains/(losses)							–						–						–						(9	)					–						–						34
– exchange differences							(82	)					(178	)					(16	)					(117	)					(123	)					–						20
Purchases							1,505						705						273						–						(31	)					–						–
New issuances							–						–						–						–						2,067						–						–
Sales							(1,237	)					(481	)					(149	)					–						–						–						–
Settlements							(1,255	)					(49	)					(78	)					27						(1,655	)					–						(69	)
Transfers out							(3,027	)					(112	)					–						(544	)					(1,918	)					–						(527	)
Transfers in							1,457						1,042						32						106						310						–						119
At 31 December 2014							4,988						6,468						726						2,924						6,139						–						1,907
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 December 2014							(24	)					1						46						946						(122	)					–						134
– trading income/(expense) excluding net interest income							–						1						–						946						(122	)					–						134
– net income from other financial instruments designated at fair value							–						–						46						–						–						–						–
– loan impairment charges and other credit risk provisions							(24	)					–						–						–						–						–						–

 

1	Included in ‘Available-for-sale investments: fair value gains/(losses)’ and ‘Exchange differences’ in the consolidated statement of comprehensive income.

In 2015 movement of Level 3 available-for-sale assets are driven by ABS activity, predominantly in the securities investment conduits. Transfers out of Level 3 available-for-sale assets demonstrates increased confidence in pricing and price coverage, and transfers in reflect limited availability of third-party prices. Increase in Level 3 held for trading assets is driven by an increase in recently-issued syndicated loans. The decline in Level 3 held for trading liabilities reflects a decline in the outstanding balance of Level 3 equity-linked notes, both as a result of market movement and reduced issuance. The decline in Level 3 derivative assets and liabilities reflects market movement.

 

HSBC HOLDINGS PLC   385

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Notes on the Financial Statements (continued)

13 – Fair values of financial instruments carried at fair value

    

    

    

 

Effect of changes in significant unobservable assumptions to reasonably possible alternatives

Sensitivity of Level 3 fair values to reasonably possible alternative assumptions

 

				Reflected in profit or loss												Reflected in other comprehensive income
				Favourable changes $m						Unfavourable changes $m						Favourable changes $m						Unfavourable changes $m
Derivatives, trading assets and trading liabilities1					335						(215	)					–						–
Financial assets and liabilities designated at fair value					24						(24	)					–						–
Financial investments: available for sale					35						(30	)					230						(243	)
At 31 December 2015					394						(269	)					230						(243	)
Derivatives, trading assets and trading liabilities1					296						(276	)					–						–
Financial assets and liabilities designated at fair value					37						(47	)					–						–
Financial investments: available for sale					51						(67	)					270						(350	)
At 31 December 2014					384						(390	)					270						(350	)
1    Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial instruments are risk managed.   The effect of favourable changes is broadly unchanged over the period. The decrease in the effect of unfavourable changes reflects increased price certainty in respect of private equity and certain legacy funding structures, offset by greater syndicated loan uncertainty as a result of the increased Level 3 balance.   Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type
				Reflected in profit or loss												Reflected in other comprehensive income
				Favourable changes $m						Unfavourable changes $m						Favourable changes $m						Unfavourable changes $m
Private equity including strategic investments					54						(53	)					152						(171	)
Asset-backed securities					18						(12	)					57						(51	)
Loans held for securitisation					1						(1	)					–						–
Structured notes					15						(11	)					–						–
Derivatives with monolines					11						(11	)					–						–
Other derivatives					179						(87	)					–						–
Other portfolios					116						(94	)					21						(21	)
At 31 December 2015					394						(269	)					230						(243	)
Private equity including strategic investments					77						(110	)					172						(255	)
Asset-backed securities					49						(22	)					60						(55	)
Loans held for securitisation					1						(1	)					–						–
Structured notes					14						(9	)					–						–
Derivatives with monolines					11						(11	)					–						–
Other derivatives					129						(155	)					–						–
Other portfolios					103						(82	)					38						(40	)
At 31 December 2014					384						(390	)					270						(350	)

Favourable and unfavourable changes are determined on the basis of sensitivity analysis. The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data. When the available data is not amenable to statistical analysis, the quantification of uncertainty is judgemental, but remains guided by the 95% confidence interval.

When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually.

Key unobservable inputs to Level 3 financial instruments

The table below lists key unobservable inputs to Level 3 financial instruments, and provides the range of those inputs as at 31 December 2015. The core range of inputs is the estimated range within which 90% of the inputs fall. A further description of the categories of key unobservable inputs is given below.

 

HSBC HOLDINGS PLC   386

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Quantitative information about significant unobservable inputs in Level 3 valuations

 

						Fair value														Key unobservable
						Assets						Liabilities						Valuation technique		inputs		Full range of inputs										Core range of inputs
						$m						$m										Lower				Higher						Lower				Higher
Private equity including strategic investments							3,951						35					See notes on page 389		See notes on page 389			n/a				n/a						n/a				n/a
Asset-backed securities							1,584						–
– CLO/CDO1							511						–					Model – Discounted cash flow Market proxy		Prepayment rate Bid quotes			1% 3				6% 147						1% 54				6% 117
Other ABSs							1,073						–
Loans held for securitisation							30						–
Structured notes							4						4,250
– equity-linked notes							–						3,719					Model – Option model		Equity volatility			12%				72%						19%				43%
																		Model – Option model		Equity correlation			35%				93%						43%				79%
– fund-linked notes							–						13					Model – Option model		Fund volatility			6%				8%						6%				8%
– FX-linked notes							–						166					Model – Option model		FX volatility			5%				35%						5%				20%
– other							4						352
Derivatives with monolines							196						–					Model – Discounted cash flow		Credit spread			4%				4%						4%				4%
Other derivatives							2,066						1,210
Interest rate derivatives:
– securitisation swaps							250						455					Model – Discounted cash flow		Prepayment rate			0%				90%						14%				71%
– long-dated swaptions							1,237						119					Model – Option model		IR volatility			3%				66%						20%				41%
– other							176						65
FX derivatives:
– FX options							180						186					Model – Option model		FX volatility			0.5%				35%						5%				14%
– other							10						5
Equity derivatives:
– long-dated single stock options							135						191					Model – Option model		Equity volatility			8%				104%						18%				44%
– other							39						170
Credit derivatives:
– other							39						19
Other portfolios							6,488						3
– structured certificates							4,434						–					Model – Discounted cash flow		Credit volatility			2%				4%						2%				4%
– EM corporate debt							210						–
																		Market proxy		Bid quotes			70				124						100				123
– other2							1,844						3
At 31 December 2015							14,319						5,498

 

HSBC HOLDINGS PLC   387

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Notes on the Financial Statements (continued)

13 – Fair values of financial instruments carried at fair value

    

    

    

 

Quantitative information about significant unobservable inputs in Level 3 valuations (continued)

 

				Fair value														Key unobservable
				Assets						Liabilities						Valuation technique		inputs		Full range of inputs										Core range of inputs
				$m						$m										Lower				Higher						Lower				Higher
Private equity including strategic investments					3,716						47					See notes on page 389		See notes on page 389			n/a				n/a						n/a				n/a
Asset-backed securities					2,078						–
– CLO/CDO1					1,122						–					Model – Discounted cash flow Market proxy		Prepayment rate Bid quotes			1% 0				6% 100						1% 54				6% 85
Other ABSs					956						–
Loans held for securitisation					39						–
Structured notes					2						6,092
– equity-linked notes					–						4,744					Model – Option model		Equity volatility			0.2%				65%						18%				38%
																Model – Option model		Equity correlation			27%				92%						44%				79%
– fund-linked notes					–						562					Model – Option model		Fund volatility			6%				8%						6%				8%
– FX-linked notes					2						477					Model – Option model		FX volatility			2%				70%						4%				16%
– other					–						309
Derivatives with monolines					239						1					Model – Discounted cash flow		Credit spread			3%				5%						4%				4%
Other derivatives					2,685						1,906
Interest rate derivatives:
– securitisation swaps					449						1,023					Model – Discounted cash flow		Prepayment rate			0%				50%						6%				18%
– long-dated swaptions					1,044						152					Model – Option model		IR volatility			2%				59%						16%				36%
– other					755						151
FX derivatives:
– FX options					89						95					Model – Option model		FX volatility			0.1%				70%						4%				14%
– other					7						7
Equity derivatives:
– long-dated single stock options					192						256					Model – Option model		Equity volatility			9%				65%						16%				40%
– other					34						162
Credit derivatives:
– other					115						60
Other portfolios					6,347						–
– structured certificates					4,420						–					Model – Discounted cash flow		Credit volatility			0.8%				3%						0.8%				3%
– EM corporate debt					372						–					Market proxy		Credit spread			1%				4%						1%				3%
																Market proxy		Bid quotes			58				131						106				130
– other2					1,555						–
At 31 December 2014					15,106						8,046

 

1	Collateralised loan obligation/collateralised debt obligation.

2	Includes a range of smaller asset holdings.

 

HSBC HOLDINGS PLC   388

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Private equity including strategic investments

Given the bespoke nature of the analysis in respect of each holding, it is not practical to quote a range of key unobservable inputs.

Prepayment rates

Prepayment rates are a measure of the anticipated future speed at which a loan portfolio will be repaid in advance of the due date. They are an important input into modelled values of ABSs. A modelled price may be used where insufficient observable market prices exist to enable a market price to be determined directly. Prepayment rates are also an important input into the valuation of derivatives linked to securitisations. They vary according to the nature of the loan portfolio and expectations of future market conditions, and may be estimated using a variety of evidence, such as prepayment rates implied from proxy observable security prices, current or historical prepayment rates and macroeconomic modelling.

Market proxy

Market proxy pricing may be used for an instrument for which specific market pricing is not available, but evidence is available in respect of instruments that have some characteristics in common. In some cases it might be possible to identify a specific proxy, but more generally evidence across a wider range of instruments will be used to understand the factors that influence current market pricing and the manner of that influence.

The range of prices used as inputs into a market proxy pricing methodology may therefore be wide. This range is not indicative of the uncertainty associated with the price derived for an individual security.

Volatility

Volatility is a measure of the anticipated future variability of a market price, tending to increase in stressed market conditions and decrease in calmer market conditions. It is an important input in the pricing of options. In general, the higher the volatility, the more expensive the option will be. This reflects both the higher probability of an increased return from the option and the potentially higher costs that HSBC may incur in hedging the risks associated with the option. If option prices become more expensive, this increases the value of HSBC’s long option positions (i.e. the positions in which HSBC has purchased options), while HSBC’s short option positions (i.e. the positions in which HSBC has sold options) suffer losses.

Volatility varies by underlying reference market price, and by strike and maturity of the option. Volatility also varies over time. As a result, it is difficult to make general statements regarding volatility levels.

Certain volatilities, typically those of a longer-dated nature, are unobservable. The unobservable volatility is then estimated from observable data. The range of unobservable volatilities quoted in the table on page 387 reflects the wide variation in volatility inputs by reference market price. The core range is significantly narrower than the full range because these examples with extreme volatilities occur relatively rarely within the HSBC portfolio. For any single unobservable volatility, the uncertainty in the volatility determination is significantly less than the range quoted above.

Correlation

Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one. A positive correlation implies that the two market prices tend to move in the same direction, with a correlation of one implying that they always move in the same direction. A negative correlation implies that the two market prices tend to move in opposite directions, with a correlation of minus one implying that the two market prices always move in opposite directions. Correlation is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of instruments for which correlation is an input, and consequently a wide range of both same-asset correlations (e.g. equity-equity correlation) and cross-asset correlations (e.g. foreign exchange rate-interest rate correlation) is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.

Correlation may be unobservable. Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, HSBC trade prices, proxy correlations and examination of historical price relationships.

The range of unobservable correlations quoted in the table reflects the wide variation in correlation inputs by market price pair. For any single unobservable correlation, the uncertainty in the correlation determination is likely to be less than the range quoted above.

Credit spread

Credit spread is the premium over a benchmark interest rate required by the market to accept lower credit quality. In a discounted cash flow model, the credit spread increases the discount factors applied to future cash flows, thereby reducing the value of an asset. Credit spreads may be implied from market prices. Credit spreads may not be observable in more illiquid markets.

 

HSBC HOLDINGS PLC   389

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Notes on the Financial Statements (continued)

14 – Fair values of financial instruments not carried at fair value

    

    

    

 

Inter-relationships between key unobservable inputs

Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables may be correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other events. Furthermore, the effect of changing market variables upon the HSBC portfolio will depend on HSBC’s net risk position in respect of each variable.

HSBC Holdings

The following table provides an analysis of the basis for valuing financial assets and financial liabilities measured at fair value in the financial statements:

Basis of valuing HSBC Holdings’ financial assets and liabilities measured at fair value

 

				2015						2014
				$m						$m
Valuation technique using observable inputs: Level 2
Assets at 31 December
Derivatives					2,467						2,771
Available for sale					4,285						4,073
Liabilities at 31 December
Designated at fair value					19,853						18,679
Derivatives					2,278						1,169

14 Fair values of financial instruments not carried at fair value

 

Fair values of financial instruments not carried at fair value and bases of valuation

 

										Fair value
																Valuation techniques
				Carrying amount						Quoted market price Level 1						Using observable inputs Level 2						With significant unobservable inputs Level 3						Total
				$m						$m						$m						$m						$m
Assets and liabilities not held for sale at 31 December 2015
Assets
Loans and advances to banks					90,401						–						88,156						2,255						90,411
Loans and advances to customers					924,454						–						12,412						910,057						922,469
Reverse repurchase agreements – non-trading					146,255						–						145,307						959						146,266
Financial investments: debt securities					44,102						1,163						44,076						19						45,258
Liabilities
Deposits by banks					54,371						–						54,295						76						54,371
Customer accounts					1,289,586						–						1,280,368						9,421						1,289,789
Repurchase agreements – non-trading					80,400						–						80,400						–						80,400
Debt securities in issue					88,949						–						89,023						–						89,023
Subordinated liabilities					22,702						–						24,344						649						24,993
Assets and liabilities not held for sale at 31 December 2014
Assets
Loans and advances to banks					112,149						–						109,087						3,046						112,133
Loans and advances to customers					974,660						–						13,598						959,239						972,837
Reverse repurchase agreements – non-trading					161,713						–						160,600						1,123						161,723
Financial investments: debt securities					37,751						1,418						37,671						74						39,163
Liabilities
Deposits by banks					77,426						–						77,300						98						77,398
Customer accounts					1,350,642						–						1,336,865						13,730						1,350,595
Repurchase agreements – non-trading					107,432						–						107,432						–						107,432
Debt securities in issue					95,947						146						94,325						1,932						96,403
Subordinated liabilities					26,664						–						28,806						1,248						30,054

Fair values are determined according to the hierarchy set out in Note 13.

Other financial instruments not carried at fair value are typically short-term in nature and re-price to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. This includes cash and balances at central banks, items in the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness and Hong Kong currency notes in circulation, all of which are measured at amortised cost.

 

HSBC HOLDINGS PLC   390

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Carrying amount and fair value of loans and advances to customers by industry sector

 

				Carrying amount at 31 December
				Not impaired $m						Impaired $m						Total $m
2015
Loans and advances to customers					907,698						16,756						924,454
– personal					361,716						9,487						371,203
– corporate and commercial					485,933						7,145						493,078
– financial					60,049						124						60,173
2014
Loans and advances to customers					954,710						19,950						974,660
– personal					377,154						11,800						388,954
– corporate and commercial					527,168						8,016						535,184
– financial					50,388						134						50,522
				Fair value at 31 December
				Not impaired $m						Impaired $m						Total $m
2015
Loans and advances to customers					906,696						15,773						922,469
– personal					359,559						9,024						368,583
– corporate and commercial					487,196						6,592						493,788
– financial					59,941						157						60,098
2014
Loans and advances to customers					954,347						18,490						972,837
– personal					375,615						10,721						386,336
– corporate and commercial					528,361						7,642						536,003
– financial					50,371						127						50,498

Loans and advances to customers are classified as not impaired or impaired in accordance with the criteria described on page 128.

Analysis of loans and advances to customers by geographical segment

 

				2015												2014
				Carrying amount $m						Fair value $m						Carrying amount $m						Fair value $m
Loans and advances to customers
Europe					392,041						392,540						409,733						413,373
Asia					356,375						355,249						362,955						361,412
Middle East and North Africa					29,894						29,614						29,063						28,658
North America					128,851						127,532						129,787						126,232
Latin America					17,293						17,534						43,122						43,162
At 31 December					924,454						922,469						974,660						972,837

Valuation

The fair value measurement is HSBC’s estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It does not reflect the economic benefits and costs that HSBC expects to flow from the instruments’ cash flows over their expected future lives. Other reporting entities may use different valuation methodologies and assumptions in determining fair values for which no observable market prices are available.

Fair values of the following assets and liabilities are estimated for the purpose of disclosure as described below:

Loans and advances to banks and customers

The fair value of loans and advances is based on observable market transactions, where available. In the absence of observable market transactions, fair value is estimated using valuation models that incorporate a range of input assumptions. These assumptions may include value estimates from third-party brokers which reflect over-the-counter trading activity, forward looking discounted cash flow models using assumptions which HSBC believes are consistent with those which would be used by market participants in valuing such loans, and trading inputs from other market participants which include observed primary and secondary trades.

 

HSBC HOLDINGS PLC   391

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Notes on the Financial Statements (continued)

14 – Fair values of financial instruments not carried at fair value / 15 – Financial assets designated at fair value

    

    

    

 

Loans are grouped, as far as possible, into homogeneous groups and stratified by loans with similar characteristics to improve the accuracy of estimated valuation outputs. The stratification of a loan book considers all material factors including vintage, origination period, estimates of future interest rates, prepayment speeds, delinquency rates, loan-to-value ratios, the quality of collateral, default probability, and internal credit risk ratings.

The fair value of a loan reflects both loan impairments at the balance sheet date and estimates of market participants’ expectations of credit losses over the life of the loans, and the fair value effect of re-pricing between origination and the balance sheet date.

The fair value of loans and advances to customers in North America was lower than the carrying amount, primarily in the US, reflecting the market conditions at the balance sheet date. This was due to the challenging economic conditions during the past number of years, including house price depreciation, rising unemployment, changes in consumer behaviour, changes in discount rates and the lack of financing options available to support the purchase of loans and advances. The relative fair values increased during 2015, largely due to improved conditions in the housing industry driven by increased property values and, to a lesser extent, lower required market yields and increased investor demand for these types of loans and advances.

The fair value of loans and advances to customers in Europe is now broadly in line with carrying value, as new business from both new and existing customers reflects the current low interest rate environment.

Financial investments

The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that take into consideration the prices and future earnings streams of equivalent quoted securities.

Deposits by banks and customer accounts

Fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. The fair value of a deposit repayable on demand is approximated by its carrying value.

Debt securities in issue and subordinated liabilities

Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.

Repurchase and reverse repurchase agreements – non-trading

Fair values are estimated by using discounted cash flows, applying current rates. Fair values approximate carrying amounts as their balances are generally short dated.

HSBC Holdings

The methods used by HSBC Holdings to determine fair values of financial instruments for the purpose of measurement and disclosure are described above.

Fair values of HSBC Holdings’ financial instruments not carried at fair value on the balance sheet

 

				2015												2014
					Carrying amount						Fair         value	1					Carrying amount						Fair         value	1
				$m						$m						$m						$m
Assets at 31 December
Loans and advances to HSBC undertakings					44,350						45,180						43,910						45,091
Liabilities at 31 December
Amounts owed to HSBC undertakings					2,152						2,152						2,892						2,906
Debt securities in issue					960						1,224						1,009						1,357
Subordinated liabilities					15,895						18,297						17,255						20,501

 

1	Fair values were determined using valuation techniques with observable inputs (Level 2).

 

HSBC HOLDINGS PLC   392

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15 Financial assets designated at fair value

 

Accounting policy

 

Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below, and are so designated irrevocably at inception. HSBC may designate financial instruments at fair value when the designation:   •     eliminates or significantly reduces measurement or recognition inconsistencies that would otherwise arise from measuring financial instruments or recognising gains and losses on different bases from related positions. Under this criterion, the main class of financial assets designated by HSBC are financial assets under unit-linked insurance and unit-linked investment contracts. Liabilities to customers under linked contracts are determined based on the fair value of the assets held in the linked funds. If no fair value designation was made for the related assets, the assets would be classified as available for sale, with changes in fair value recorded in other comprehensive income. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows the changes in fair values to be recorded in the income statement and presented in the same line;   •     applies to groups of financial instruments that are managed, and their performance evaluated, on a fair value basis in accordance with a documented risk management or investment strategy, and where information about the groups of financial instruments is reported to management on that basis. For example, certain financial assets are held to meet liabilities under non-linked insurance contracts. HSBC has documented risk management and investment strategies designed to manage and monitor the market risk of those assets on a net basis, after considering non-linked liabilities. Fair value measurement is also consistent with the regulatory reporting requirements under the appropriate regulations for those insurance operations; and   •     relates to financial instruments containing one or more non-closely related embedded derivatives.   Designated financial assets are recognised at fair value when HSBC enters into contracts with counterparties, which is generally on trade date, and are normally derecognised when sold. Subsequent changes in fair values are recognised in the income statement in ‘Net income from financial instruments designated at fair value’.

Financial assets designated at fair value

 

				2015						2014
				$m						$m
Financial assets designated at fair value:
– not subject to repledge or resale by counterparties					23,852						28,357
– which may be repledged or resold by counterparties					–						680
At 31 December					23,852						29,037
Treasury and other eligible bills					396						56
Debt securities					4,341						8,891
Equity securities					18,995						20,006
Securities designated at fair value					23,732						28,953
Loans and advances to banks and customers					120						84
At 31 December					23,852						29,037

Securities designated at fair value¹

 

				2015						2014
				$m						$m
US Treasury and US Government agencies2					145						8
UK Government					103						140
Hong Kong Government					33						40
Other government					1,020						4,088
Asset-backed securities3					25						18
Corporate debt and other securities					3,411						4,653
Equities					18,995						20,006
At 31 December					23,732						28,953

 

1	Included within these figures are debt securities issued by banks and other financial institutions of $1,536m (2014: $1,388m), of which $35m (2014: $24m) are guaranteed by various governments.

2	Includes securities that are supported by an explicit guarantee issued by the US Government.

3	Excludes asset-backed securities included under US Treasury and US Government agencies.

Securities listed on a recognised exchange and unlisted

 

				Treasury and other         eligible bills						Debt         securities						Equity         securities						Total
				$m						$m						$m						$m
Fair value
Listed1					–						2,458						11,690						14,148
Unlisted					396						1,883						7,305						9,584
At 31 December 2015					396						4,341						18,995						23,732

 

HSBC HOLDINGS PLC   393

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Notes on the Financial Statements (continued)

16 – Derivatives

    

    

    

 

Securities listed on a recognised exchange and unlisted (continued)

 

				Treasury and other eligible bills $m						Debt securities $m						Equity securities $m						Total $m
Fair value
Listed1					5						2,731						13,837						16,573
Unlisted					51						6,160						6,169						12,380
At 31 December 2014					56						8,891						20,006						28,953

 

1	Included within listed investments are $1,181m of investments listed on a recognised exchange in Hong Kong (2014: $1,361m).

16 Derivatives

 

Accounting policy

 

Derivatives   Derivatives are financial instruments that derive their value from the price of underlying items such as equities, bonds, interest rates, foreign exchange, credit spreads, commodities and equity or other indices. Derivatives are recognised initially, and are subsequently measured, at fair value. Fair values of derivatives are obtained either from quoted market prices or by using valuation techniques. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative.   Embedded derivatives are bifurcated from the host contract when their economic characteristics and risks are not clearly and closely related to those of the host non-derivative contract, their terms would otherwise meet the definition of a stand-alone derivative and the combined contract is not held for trading or designated at fair value. The bifurcated embedded derivatives are measured at fair value with changes therein recognised in the income statement.   Derivative assets and liabilities arising from different transactions are only offset for accounting purposes if the offsetting criteria presented in Note 32 are met.   Gains and losses from changes in the fair value of derivatives, that do not qualify for hedge accounting are reported in ‘Net trading income’. Gains and losses on derivatives managed in conjunction with financial instruments designated at fair value are reported in ‘Net income from financial instruments designated at fair value’ together with the gains and losses on the economically hedged items. Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value, the contractual interest is shown in ‘Interest expense’ together with the interest payable on the issued debt.   Hedge accounting   When derivatives are designated in hedge relationships, HSBC classifies them as either: (i) hedges of the change in fair value of recognised assets or liabilities or firm commitments (‘fair value hedges’); (ii) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (‘cash flow hedges’); or (iii) a hedge of a net investment in a foreign operation (‘net investment hedges’).   HSBC formally designates and documents each hedge relationship from inception, setting out the risk management objective and strategy for undertaking the hedge along with the specifically identified hedging instrument, hedged item or transaction, the nature of the risk being hedged and the method for assessing hedge effectiveness. The method selected to assess hedge effectiveness will depend on the risk management strategy.   To qualify for hedge accounting, HSBC requires that a hedge must be expected to be highly effective at inception and on an ongoing basis for the duration of the hedge relationship with each hedge relationship subject to an ongoing retrospective and prospective hedge effectiveness assessment.   Fair value hedge   Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, along with changes in the fair value of the hedged assets or liabilities attributable to the hedged risk.   If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued; the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate over the residual period to maturity, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.   Cash flow hedge   The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income; the ineffective portion of the change in fair value is recognised immediately in the income statement within ‘Net trading income’.   The accumulated gains and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. In hedges of forecast transactions that result in recognition of a non-financial asset or liability, previous gains and losses recognised in other comprehensive income are included in the initial measurement of the asset or liability.   When a hedge relationship is discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement.

 

HSBC HOLDINGS PLC   394

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Net investment hedge   Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain or loss on the effective portion of the hedging instrument is recognised in other comprehensive income; the residual change in fair value is recognised immediately in the income statement. Gains and losses previously recognised in other comprehensive income are reclassified to the income statement on the disposal, or part disposal, of the foreign operation.   Derivatives that do not qualify for hedge accounting   Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied.

Fair values of derivatives by product contract type held by HSBC

 

				Assets																		Liabilities
				Trading						Hedging						Total						Trading						Hedging						Total
				$m						$m						$m						$m						$m						$m
Foreign exchange					95,201						1,140						96,341						94,843						755						95,598
Interest rate					277,496						1,658						279,154						267,609						3,758						271,367
Equities					8,732						–						8,732						10,383						–						10,383
Credit					6,961						–						6,961						6,884						–						6,884
Commodity and other					3,148						–						3,148						2,699						–						2,699
Gross total fair values					391,538						2,798						394,336						382,418						4,513						386,931
Offset (Note 32)																	(105,860	)																	(105,860	)
At 31 December 2015																	288,476																		281,071
Foreign exchange					95,584						1,728						97,312						95,187						572						95,759
Interest rate					471,379						1,864						473,243						463,456						4,696						468,152
Equities					11,694						–						11,694						13,654						–						13,654
Credit					9,340						–						9,340						10,061						–						10,061
Commodity and other					3,884						–						3,884						3,508						–						3,508
Gross total fair values					591,881						3,592						595,473						585,866						5,268						591,134
Offset (Note 32)																	(250,465	)																	(250,465	)
At 31 December 2014																	345,008																		340,669

Derivative assets and liabilities decreased during 2015, primarily driven by ‘portfolio compression’ exercises, with a corresponding decrease in the offset amount.

Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries

 

				Assets																		Liabilities
				Trading						Hedging						Total						Trading						Hedging						Total
				$m						$m						$m						$m						$m						$m
Foreign exchange					390						–						390						2,065						213						2,278
Interest rate					1,600						477						2,077						–						–						–
At 31 December 2015					1,990						477						2,467						2,065						213						2,278
Foreign exchange					680						–						680						1,066						103						1,169
Interest rate					1,607						484						2,091						–						–						–
At 31 December 2014					2,287						484						2,771						1,066						103						1,169

Use of derivatives

For details regarding use of derivatives, see page 171 under Market Risk.

Trading derivatives

Most of HSBC’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.

Substantially all of HSBC Holdings’ derivatives entered into with subsidiaries are managed in conjunction with financial liabilities designated at fair value.

The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

 

HSBC HOLDINGS PLC   395

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Notes on the Financial Statements (continued)

16 – Derivatives

    

    

    

    

 

Notional contract amounts of derivatives held for trading purposes by product type

 

				HSBC												HSBC Holdings
				2015						2014						2015						2014
				$m						$m						$m						$m
Foreign exchange					5,658,030						5,548,075						19,036						15,595
Interest rate					14,462,113						22,047,278						10,150						8,650
Equities					501,834						568,932						–						–
Credit					463,344						550,197						–						–
Commodity and other					51,683						77,565						–						–
At 31 December					21,137,004						28,792,047						29,186						24,245

Credit derivatives

HSBC trades credit derivatives through its principal dealing operations and acts as a principal counterparty to a broad range of users, structuring transactions to produce risk management products for its customers or making markets in certain products. Risk is typically controlled through entering into offsetting credit derivative contracts with other counterparties.

HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure for the relevant counterparty. Trading of credit derivatives is restricted to a small number of offices within the major centres which have the control infrastructure and market skills to manage effectively the credit risk inherent in the products.

Credit derivatives are also deployed to a limited extent for the risk management of the Group’s loan portfolios. The notional contract amount of credit derivatives of $463bn (2014: $550bn) consisted of protection bought of $237bn (2014: $272bn) and protection sold of $226bn (2014: $278bn). The credit derivative business operates within the market risk management framework described on page 211.

Derivatives valued using models with unobservable inputs

The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:

Unamortised balance of derivatives valued using models with significant unobservable inputs

 

				2015						2014
				$m						$m
Unamortised balance at 1 January					114						167
Deferral on new transactions					196						177
Recognised in the income statement during the year:					(207	)					(234	)
– amortisation					(121	)					(114	)
– subsequent to unobservable inputs becoming observable					(2	)					(13	)
– maturity, termination or offsetting derivative					(84	)					(107	)
– risk hedged					–						–
Exchange differences					(6	)					4
Unamortised balance at 31 December1					97						114

 

1	This amount is yet to be recognised in the consolidated income statement.

Hedge accounting derivatives

HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its asset and liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities.

The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

 

HSBC HOLDINGS PLC   396

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Notional contract amounts of derivatives designated in qualifying hedge accounting relationships by product type

 

				HSBC																								HSBC Holdings
				2015												2014												2015						2014
				Cash flow hedge						Fair value hedge						Cash flow hedge						Fair value hedge						Fair value hedge						Fair value hedge
				$m						$m						$m						$m						$m						$m
Foreign exchange					32,128						196						25,340						–						1,120						1,120
Interest rate					107,796						105,127						190,902						90,338						5,132						5,477
At 31 December					139,924						105,323						216,242						90,338						6,252						6,597

Fair value hedges

HSBC’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates.

Fair values of derivatives designated as fair value hedges

 

				2015												2014
				Assets						Liabilities						Assets						Liabilities
				$m						$m						$m						$m
HSBC
Foreign exchange					2						–						–						–
Interest rate					672						3,395						387						4,012
At 31 December					674						3,395						387						4,012
HSBC Holdings
Foreign exchange					–						213						–						103
Interest rate					477						–						484						–
At 31 December					477						213						484						103

Gains or losses arising from fair value hedges

 

				2015						2014						2013
				$m						$m						$m
HSBC
Gains/(losses):
– on hedging instruments					40						(2,542	)					1,997
– on the hedged items attributable to the hedged risk					(51	)					2,561						(1,932	)
Year ended 31 December					(11	)					19						65
HSBC Holdings
Gains/(losses):
– on hedging instruments					(4	)					423						14
– on the hedged items attributable to the hedged risk					6						(422	)					(21	)
Year ended 31 December					2						1						(7	)

Cash flow hedges

HSBC’s cash flow hedges consist principally of interest rate swaps, futures and cross-currency swaps that are used to protect against exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast transactions.

Fair values of derivatives designated as cash flow hedges

 

				2015												2014
				Assets						Liabilities						Assets						Liabilities
				$m						$m						$m						$m
Foreign exchange					1,027						748						1,673						572
Interest rate					986						363						1,477						684
At 31 December					2,013						1,111						3,150						1,256

 

HSBC HOLDINGS PLC   397

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Notes on the Financial Statements (continued)

16 – Derivatives / 17 – Financial investments

    

    

    

 

Forecast principal balances on which interest cash flows are expected to arise

 

				3 months or less $m						More than 3 months but less than 1 year $m						5 years or less but more than 1 year $m						More than 5 years $m
Net cash inflows/(outflows) exposure
Assets					94,256						93,528						62,664						971
Liabilities					(16,241	)					(17,179	)					(11,681	)					(3,326	)
At 31 December 2015					78,015						76,349						50,983						(2,355	)
Net cash inflows/(outflows) exposure
Assets					131,694						122,728						79,529						959
Liabilities					(60,814	)					(46,582	)					(36,371	)					(8,169	)
At 31 December 2014					70,880						76,146						43,158						(7,210	)

This table reflects the interest rate repricing profile of the underlying hedged items.

During the year to 31 December 2015 a gain of $15m (2014: gain of $34m; 2013: gain of $22m) was recognised due to hedge ineffectiveness.

Hedges of net investments in foreign operations

The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using forward foreign exchange contracts or by financing with foreign currency borrowings.

At 31 December 2015, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were assets of $111m (2014: $55m), liabilities of $12m (2014: $1m) and notional contract values of $4,210m (2014: $3,525m).

Ineffectiveness recognised in ‘Net trading income’ in the year ended 31 December 2015 was nil (2014 and 2013: nil).

17 Financial investments

 

Accounting policy

 

Treasury bills, debt securities and equity securities intended to be held on a continuing basis, other than those designated at fair value, are classified as available for sale or held to maturity. They are recognised on the trade date when HSBC enters into contractual arrangements to purchase those instruments, and are normally derecognised when either the securities are sold or redeemed.   (i)    Available-for-sale financial assets are initially measured at fair value plus direct and incremental transaction costs. They are subsequently remeasured at fair value, and changes therein are recognised in other comprehensive income until the assets are either sold or become impaired. When available-for-sale financial assets are sold, cumulative gains or losses previously recognised in other comprehensive income are recognised in the income statement as ‘Gains less losses from financial investments’.   Interest income is recognised over a debt security’s expected life. Premiums and/or discounts arising on the purchase of dated debt securities are included in the interest recognised. Dividends from equity assets are recognised in the income statement when the right to receive payment is established.   (ii)    Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that HSBC positively intends and is able to hold to maturity. Held-to-maturity investments are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently measured at amortised cost, less any impairment losses.   The accounting policy relating to impairments of available-for-sale securities is presented in Note 1.   Available-for-sale financial assets are reclassified to held to maturity if there is a change in intention or ability to hold those assets to maturity due to a change in the way they are managed. The fair value on reclassification becomes the new amortised cost and the assets are subsequently carried at amortised cost rather than fair value.

Financial investments

 

				2015 $m						2014 $m
Financial investments:
– not subject to repledge or resale by counterparties					420,905						380,419
– which may be repledged or resold by counterparties					8,050						35,048
At 31 December					428,955						415,467

 

HSBC HOLDINGS PLC   398

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Carrying amount and fair value of financial investments

 

				2015												2014
				Carrying amount						Fair value						Carrying amount						Fair value
				$m						$m						$m						$m
Treasury and other eligible bills					104,551						104,551						81,517						81,517
– available for sale					104,551						104,551						81,517						81,517
Debt securities					318,569						319,725						323,256						324,668
– available for sale					274,467						274,467						285,505						285,505
– held to maturity					44,102						45,258						37,751						39,163
Equity securities					5,835						5,835						10,694						10,694
– available for sale					5,835						5,835						10,694						10,694
At 31 December					428,955						430,111						415,467						416,879

Financial investments at amortised cost and fair value

 

					Amortised cost	1					Fair value	2
				$m						$m
US Treasury					61,585						61,779
US Government agencies3					22,910						22,843
US Government sponsored entities3					10,365						10,627
UK Government					27,250						27,316
Hong Kong Government					53,676						53,674
Other government					141,329						143,370
Asset-backed securities4					14,239						13,375
Corporate debt and other securities					89,860						91,292
Equities					4,057						5,835
At 31 December 2015					425,271						430,111
US Treasury					33,931						34,745
US Government agencies3					18,326						18,516
US Government sponsored entities3					9,339						9,761
UK Government					28,680						29,758
Hong Kong Government					43,573						43,574
Other government					159,846						163,402
Asset-backed securities4					20,911						19,177
Corporate debt and other securities					84,387						87,252
Equities					7,421						10,694
At 31 December 2014					406,414						416,879
US Treasury					50,369						50,421
US Government agencies3					19,211						18,771
US Government sponsored entities3					5,263						5,445
UK Government					23,565						23,580
Hong Kong Government					49,570						49,579
Other government					153,619						156,208
Asset-backed securities4					25,961						24,115
Corporate debt and other securities					87,469						88,999
Equities					8,081						9,140
At 31 December 2013					423,108						426,258

 

1	Represents the amortised cost or cost basis of the financial investment.

2	Included within ‘Fair value’ figures are debt securities issued by banks and other financial institutions of $61bn (2014: $54bn; 2013: $55bn), of which $18bn (2014: $9bn; 2013: $9bn) are guaranteed by various governments.

3	Includes securities that are supported by an explicit guarantee issued by the US Government.

4	Excludes asset-backed securities included under US Government agencies and sponsored entities.

 

HSBC HOLDINGS PLC   399

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Notes on the Financial Statements (continued)

17 – Financial investments / 18 – Assets charges as security and collateral accepted

    

    

    

 

Financial investments listed and unlisted

 

				Treasury and other eligible bills available for sale						Debt securities available for sale						Debt securities held to maturity						Equity securities available for sale						Total
				$m						$m						$m						$m						$m
Carrying amount
Listed1					6,151						170,271						9,565						842						186,829
Unlisted2					98,400						104,196						34,537						4,993						242,126
At 31 December 2015					104,551						274,467						44,102						5,835						428,955
Carrying amount
Listed1					4,101						168,879						6,037						5,928						184,945
Unlisted2					77,416						116,626						31,714						4,766						230,522
At 31 December 2014					81,517						285,505						37,751						10,694						415,467

 

1	The fair value of listed held-to-maturity debt securities as at 31 December 2015 was $10bn (2014: $6bn). Included within listed investments were $5bn (2014: $4bn) of investments listed on a recognised exchange in Hong Kong.

2	Unlisted treasury and other eligible bills available for sale primarily comprise treasury bills not listed on an exchange but for which there is a liquid market.

Maturities of investments in debt securities at their carrying amount

 

				1 year or less						5 years or less but over 1 year						10 years or less but over 5 years						Over 10 years						Total
				$m						$m						$m						$m						$m
Available for sale					61,664						131,023						42,140						39,640						274,467
Held to maturity					2,428						10,242						8,881						22,551						44,102
At 31 December 2015					64,092						141,265						51,021						62,191						318,569
Available for sale					68,344						134,815						44,938						37,408						285,505
Held to maturity					1,396						9,622						7,087						19,646						37,751
At 31 December 2014					69,740						144,437						52,025						57,054						323,256

Contractual maturities and weighted average yields of investment debt securities

 

				Within one year												After one year but within five years												After five years but within ten years												After ten years
				Amount						Yield						Amount						Yield						Amount						Yield						Amount						Yield
				$m						%						$m						%						$m						%						$m						%
Available for sale
US Treasury					9,316						0.5						20,352						1.2						12,805						2.1						3,594						3.3
US Government agencies					–						–						6						4.2						33						3.9						13,575						2.5
US Government-sponsored agencies					8						5.3						3,029						3.0						911						2.2						1,716						3.0
UK Government					2,479						1.7						8,005						1.3						8,518						1.4						1,215						0.1
Hong Kong Government					674						0.5						1,408						1.1						–						–						–						–
Other governments					37,197						2.0						60,899						2.4						10,312						2.9						2,543						3.0
Asset-backed securities					18						1.4						657						1.4						2,530						1.3						11,027						1.3
Corporate debt and other securities					12,285						1.5						35,210						1.4						5,937						1.9						6,287						3.0
Total amortised cost at 31 December 2015					61,977												129,566												41,046												39,957
Total carrying value					61,664												131,023												42,140												39,640
Held to maturity
US Treasury					2						0.9						76						4.9						46						4.8						119						4.2
US Government agencies					–						–						13						1.4						30						4.0						9,254						2.4
US Government-sponsored agencies					–						–						112						1.3						597						2.7						3,991						2.9
Hong Kong Government					4						0.7						44						1.4						16						1.8						9						1.4
Other governments					59						5.5						217						4.7						184						5.3						725						4.6
Asset-backed securities					–						–						–						–						–						–						7						6.5
Corporate debt and other securities					2,363						3.0						9,780						3.5						8,008						3.7						8,446						4.1
Total amortised cost at 31 December 2015					2,428												10,242												8,881												22,551
Total carrying value					2,428												10,242												8,881												22,551

The maturity distributions of ABSs are presented in the above table on the basis of contractual maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2015 by the book amount of available-for-sale debt securities at that date. The yields do not include the effect of related derivatives.

 

HSBC HOLDINGS PLC   400

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18 Assets charged as security for liabilities, assets transferred and collateral accepted as security for assets

 

Financial assets pledged to secure liabilities

 

				2015 $m						2014 $m
Treasury bills and other eligible securities					5,941						5,170
Loans and advances to banks					15,582						17,294
Loans and advances to customers					88,927						77,960
Debt securities					69,470						138,991
Equity securities					4,644						11,373
Other					213						6,079
Assets pledged at 31 December					184,777						256,867

The above table shows assets over which a charge has been granted to secure liabilities on a legal and contractual basis. The total amount may be greater than the book value of assets utilised as collateral for funding purposes or to cover liabilities, for example, in the case of securitisations and covered bonds where the amount of liabilities issued plus any mandatory over-collateralisation is less than the book value of financial assets available for funding or collateral purposes in the relevant pool of assets. This is also the case where financial assets are placed with a custodian or a settlement agent which has a floating charge over all the financial assets placed to secure any liabilities under settlement accounts.

These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard securities lending, repurchase agreements and derivative margining. HSBC places both cash and non-cash collateral in relation to derivative transactions.

Assets transferred

Accounting policy

 

Derecognition of financial assets   Financial assets are derecognised when the contractual rights to receive cash flows from the assets have expired; or when HSBC has transferred its contractual right to receive the cash flows of the financial assets, and either:   •  substantially all the risks and rewards of ownership have been transferred; or   •  HSBC has neither retained nor transferred substantially all the risks and rewards, but has not retained control.

The financial assets shown above include amounts transferred to third parties that do not qualify for derecognition, notably debt securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending agreements. As the substance of these transactions is secured borrowings, the asset collateral continues to be recognised in full and the related liability reflecting the Group’s obligation to repurchase the transferred assets for a fixed price at a future date is also recognised on the balance sheet. As a result of these transactions, the Group is unable to use, sell or pledge the transferred assets for the duration of the transaction. The Group remains exposed to interest rate risk and credit risk on these pledged instruments. The counterparty’s recourse is not limited to the transferred assets.

Transferred financial assets not qualifying for full derecognition and associated financial liabilities

 

		Carrying amount of assets before transfer				Carrying amount of transferred assets				Carrying amount of associated liabilities				Fair value of transferred assets				Fair value of associated liabilities				Net position
		$m				$m				$m				$m				$m				$m
At 31 December 2015
Repurchase agreements							36,153				35,913
Securities lending agreements							5,275				5,704
Other sales (recourse to transferred asset only)							2,717				2,768				2,720				2,726				(6	)
Securitisations recognised to the extent of continuing involvement			17,427				5				2				5				2				3
At 31 December 2014
Repurchase agreements							78,541				79,141
Securities lending agreements							13,177				10,643
Other sales (recourse to transferred asset only)							3,775				4,049				4,007				4,018				(11	)
Securitisations recognised to the extent of continuing involvement			17,427				11				5				11				5				6

 

HSBC HOLDINGS PLC   401

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Notes on the Financial Statements (continued)

19 – Interests in associates and joint ventures

    

    

    

 

Collateral accepted as security for assets

The fair value of assets accepted as collateral in relation to reverse repo, securities borrowing and derivative margining that HSBC is permitted to sell or repledge in the absence of default was $222,065m (2014: $269,019m). The fair value of any such collateral sold or repledged was $139,532m (2014: $163,342m). HSBC is obliged to return equivalent securities.

These transactions are conducted under terms that are usual and customary to standard securities borrowing, reverse repurchase agreements and derivative margining.

19 Interests in associates and joint ventures

 

Accounting policy

 

Investments in which HSBC, together with one or more parties, has joint control of an arrangement set up to undertake an economic activity are classified as joint ventures. HSBC classifies investments in entities over which it has significant influence, and that are neither subsidiaries (Note 21) nor joint ventures, as associates.   Investments in associates and interests in joint ventures are recognised using the equity method. Under this method, such investments are initially stated at cost, including attributable goodwill, and are adjusted thereafter for the post-acquisition change in HSBC’s share of net assets. Goodwill arises on the acquisition of interests in joint ventures and associates when the cost of investment exceeds HSBC’s share of the net fair value of the associate’s or joint venture’s identifiable assets and liabilities.   Investments in associates and joint ventures are tested for impairment when there is an indication that the investment may be impaired. Goodwill on acquisitions of interests in joint ventures and associates is not tested separately for impairment.   Profits on transactions between HSBC and its associates and joint ventures are eliminated to the extent of HSBC’s interest in the respective associates or joint ventures. Losses are also eliminated to the extent of HSBC’s interest in the associates or joint ventures unless the transaction provides evidence of an impairment of the asset transferred.

Critical accounting estimates and judgements

 

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.   The most significant judgements relate to the impairment testing of our investment in Bank of Communications (‘BoCom’). Key assumptions used in estimating BoCom’s value in use, the sensitivity of the value in use calculation to different assumptions and a sensitivity analysis that shows the changes in key assumptions that would reduce the excess of value in use over the carrying amount (the ‘headroom’) to nil are described below.

Associates

At 31 December 2015, the carrying amount of HSBC’s interests in associates was $18,900m (2014: $17,940m).

Principal associates of HSBC

 

				2015												2014
				Carrying amount $m						Fair value1 $m						Carrying amount $m						Fair value1 $m
Listed
Bank of Communications Co., Limited					15,344						9,940						14,590						13,140
The Saudi British Bank					3,021						3,957						2,811						6,220
At 31 December					18,365						13,897						17,401						19,360

 

1	Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy).

 

At 31 December 2015

Country of incorporation and principal place of business

Principal activity

HSBC’s interest in equity capital

Issued equity capital

Bank of Communications Co., Limited

PRC

1

Banking services

19.03

%

RMB74,263m

The Saudi British Bank

Saudi Arabia

Banking services

40.00

%

SR15,000m

 

1	People’s Republic of China.

Details of all HSBC associates and joint ventures, as required under Section 409 of the Companies Act 2006, are set out on pages 468 to 469.

HSBC had $15,344m (2014: $14,590m) of interests in associates listed in Hong Kong.

 

HSBC HOLDINGS PLC   402

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Bank of Communications Co., Limited

HSBC’s investment in BoCom was equity accounted with effect from August 2004. Its significant influence in BoCom was established as a result of representation on the Board of Directors and, in accordance with the Technical Cooperation and Exchange Programme, HSBC is assisting in the maintenance of financial and operating policies and a number of staff have been seconded to assist in this process.

Impairment testing

At 31 December 2015, the fair value of HSBC’s investment in BoCom had been below the carrying amount for approximately 44 months, apart from a short period in 2013 and briefly during the first half of 2015. As a result, the Group performed an impairment test on the carrying amount of the investment in BoCom. The test confirmed that there was no impairment at 31 December 2015.

 

At 31 December 2015

At 31 December 2014

VIU

Carrying value

Fair value

VIU

Carrying value

Fair value

$bn

$bn

$bn

$bn

$bn

$bn

Bank of Communications Co., Limited

17.0

15.3

9.9

15.7

14.6

13.1

Basis of recoverable amount

The impairment test was performed by comparing the recoverable amount of BoCom, determined by a value in use (‘VIU’) calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management’s estimates of earnings. Cash flows beyond the short- to medium-term are then extrapolated in perpetuity using a long-term growth rate. An imputed capital maintenance charge (‘CMC’) is calculated to reflect the expected regulatory capital requirements, and is calculated as a deduction from forecast cash flows. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets, and the expected regulatory capital requirements. Management judgement is required in estimating the future cash flows of BoCom.

Key assumptions in VIU calculation

Long-term growth rate: the growth rate used was 5% (2014: 5%) for periods after 2018 and does not exceed forecast GDP growth in mainland China.

Long-term asset growth rate: the growth rate used was 4% (2014: 4%) for periods after 2018 and this is the rate of growth required for an assumed 5% long-term growth rate in profit.

Discount rate: the discount rate of 13% (2014: 13%) is derived from a range of values obtained by applying a Capital Asset Pricing Model (‘CAPM’) calculation for BoCom, using market data. Management supplements this by comparing the rates derived from the CAPM with discount rates available from external sources, and HSBC’s discount rate for evaluating investments in mainland China. The discount rate used is within the range of 10.1% to 14.2% (2014: 11.4% to 14.2%) indicated by the CAPM and external sources.

Loan impairment charge as a percentage of customer advances: the ratio used ranges from 0.71% to 0.78% (2014: 0.73% to 1%) in the short- to medium-term and is based on the forecasts disclosed by external analysts. It was assumed that the long-term ratio will stabilise at a rate of 0.70% (2014: 0.65%) which is slightly higher than the historical rate of 0.65%.

Risk-weighted assets as a percentage of total assets: the ratio used was 67% for all forecast periods (2014: 70% to 72% in the short- to medium-term and 70% in the long-term). This is consistent with the forecasts disclosed by external analysts.

Cost-income ratio: the ratio used was 41% (2014: ranged from 40.0% to 42.4%) in the short- to medium-term. The ratios were consistent with the short- to medium-term range forecasts of 40.3% to 40.7% (2014: 37.2% to 44.5%) disclosed by external analysts.

Sensitivity analyses were performed on each key assumption to ascertain the impact of reasonably possible changes in assumptions. The following change to each key assumption used on its own in the VIU calculation would reduce the headroom to nil.

 

Key assumption		Changes to key assumption to reduce headroom to nil
•  Long-term growth rate •  Long-term asset growth rate •  Discount rate •  Loan impairment charge as a percentage of customer advances •  Risk-weighted assets as a percentage of total assets •  Cost-income ratio		•  Decrease by 62 basis points •  Increase by 62 basis points •  Increase by 82 basis points •  Increase by 13 basis points •  Increase by 5.4% •  Increase by 2.8%

 

HSBC HOLDINGS PLC   403

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Notes on the Financial Statements (continued)

19 – Interests in associates and joint ventures

    

    

    

 

The following table illustrates the effect on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity of VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change will occur at the same time.

 

				Favourable change										Current model				Unfavourable change
				$bn				$bn						$bn				$bn				$bn
At 31 December 2015
Carrying amount: $15.3bn
Long-term growth rate					+100bps									5%					-210bps
VIU					20.3									17.0					12.3
Increase/(decrease) in VIU					3.2														(4.7	)
Long-term asset growth rate					-50bps									4%					+100bps
VIU					18.2									17.0					14.3
Increase/(decrease) in VIU					1.2														(2.8	)
Discount rate					-150bps									13%					+110bps
VIU					21.2									17.0					14.9
Increase/(decrease) in VIU					4.2														(2.1	)
Loan impairment charge as a percentage of customer advances					70bps throughout									2015-18: 0.71% – 0.78% 2019 onwards: 0.70%					2015-18: 0.85% 2019 onwards: 0.75%
VIU					17.2									17.0					16.4
Increase/(decrease) in VIU					0.1														(0.7	)
Risk-weighted assets as a percentage of total assets					-350bps									67% throughout					+10bps
VIU					18.2									17.0					17.0
Increase/(decrease) in VIU					1.2														(0.0	)
Cost income ratio					-250bps									41% throughout					+120bps
VIU					18.5									17.0					16.35
Increase/(decrease) in VIU					1.5														(0.7	)
At 31 December 2014
Carrying amount: $14.6bn
Long-term growth rate					+50bp				+100bp					5%					-50bp				-100bp
VIU					17.0				18.6					15.7					14.5				13.4
Increase/(decrease) in VIU					1.3				2.9										(1.2	)			(2.3	)
Discount rate					-50bp				-100bp					13%					+50bp				+100bp
VIU					16.8				18.1					15.7					14.7				13.9
Increase/(decrease) in VIU					1.1				2.4										(1.0	)			(1.8	)
Loan impairment charge as a percentage of customer advances					0.65% throughout									2014-18: 0.73% – 1% 2019 onwards: 0.65%					1% from 2014-18 2019 onwards: 0.65%
VIU					16.2									15.7					14.9
Increase/(decrease) in VIU					0.5														(0.8)
Risk-weighted assets as a percentage of total assets					-100bp				-200bp					2014-18: 70% – 72% 2019 onwards: 70.0%					+100bp				+200bp
VIU					16.0				16.3					15.7					15.4				15.1
Increase/(decrease) in VIU					0.3				0.6										(0.3	)			(0.6	)
Cost income ratio					-50bp				-100bp					2014-18: 40.0% – 42.4% 2019 onwards: 42.4%					+50bp				+100bp
VIU					16.0				16.3					15.7					15.4				15.1
Increase/(decrease) in VIU					0.3				0.6										(0.3	)			(0.6	)

Based on the forecasts disclosed by external analysts, management estimates that the reasonably possible range of VIU is $12.4bn to $22.7bn.

Selected financial information of BoCom

The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2015, HSBC included the associate’s results on the basis of financial statements made up for the 12 months ended 30 September 2015, taking into account changes in the subsequent period from 1 October 2015 to 31 December 2015 that would have materially affected the results.

 

HSBC HOLDINGS PLC   404

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Selected balance sheet information of BoCom

 

				At 30 September
				2015						2014
				$m						$m
Cash and balances at central banks					144,702						150,306
Loans and advances to banks and other financial institutions					110,915						79,960
Loans and advances to customers					560,503						547,706
Other financial assets					244,722						178,883
Other assets					49,246						45,140
Total assets					1,110,088						1,001,995
Deposits by banks and other financial institutions					261,211						209,935
Customer accounts					691,959						663,745
Other financial liabilities					46,932						28,860
Other liabilities					29,329						25,361
Total liabilities					1,029,431						927,901
Total equity					80,657						74,094

Reconciliation of BoCom’s total shareholders’ equity to the carrying amount in HSBC’s consolidated financial statements as at 31 December

 

				At 30 September
				2015						2014
				$m						$m
HSBC’s share of total shareholders’ equity					14,824						14,040
Add: Goodwill and other intangible assets					520						550
Carrying amount					15,344						14,590

Selected income statement information of BoCom

 

				For the 12 months ended 30 September
				2015						2014
				$m						$m
Net interest income					22,397						22,030
Net fee and commission income					5,432						4,792
Loan impairment charges					(3,772	)					(3,509	)
Depreciation and amortisation					(1,012	)					(920	)
Tax expense					(2,976	)					(3,102	)
Profit for the year					10,634						10,626
Other comprehensive income					377						217
Total comprehensive income					11,011						10,843
Dividends received from BoCom					624						597

Summarised aggregate financial information in respect of all associates excluding BoCom

 

				2015						2014
				$m						$m
Carrying amount					3,556						3,350
HSBC’s share of:
– total assets					21,645						20,099
– total liabilities					18,166						16,837
– revenues					821						801
– profit or loss from continuing operations					508						519
– other comprehensive income					–						2
– total comprehensive income					508						521

Joint ventures

At 31 December 2015, the carrying amount of HSBC’s interests in joint ventures was $239m (2014: $241m).

Associates and joint ventures

For the year ended 31 December 2015, HSBC’s share of associates and joint ventures’ tax on profit was $575m (2014: $600m). This is included within ‘Share of profit in associates and joint ventures’ in the income statement.

 

HSBC HOLDINGS PLC   405

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Notes on the Financial Statements (continued)

20 – Goodwill and intangible assets

    

    

    

 

Movements in interests in associates and joint ventures

 

				2015						2014
				$m						$m
At 1 January					18,181						16,640
Additions					3						30
Disposals					(8	)					(133	)
Share of results					2,556						2,532
Dividends					(879	)					(757	)
Exchange differences					(718	)					(212	)
Share of other comprehensive income of associates and joint ventures					(9	)					78
Other movements					13						3
At 31 December1					19,139						18,181

 

1	Includes goodwill of $593m (2014: $621m).

20 Goodwill and intangible assets

 

 

				2015						2014
				$m						$m
Goodwill					16,294						19,169
Present value of in-force long-term insurance business					5,685						5,307
Other intangible assets					2,626						3,101
At 31 December					24,605						27,577

Goodwill

Accounting policy

 

Goodwill arises on the acquisition of subsidiaries, when the aggregate of the fair value of the consideration transferred, the amount of any non-controlling interest and the fair value of any previously held equity interest in the acquiree exceed the amount of the identifiable assets acquired and liabilities assumed. If the amount of the identifiable assets and liabilities acquired is greater, the difference is recognised immediately in the income statement.   Goodwill is allocated to cash-generating units (‘CGU’s) for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management purposes. HSBC’s CGU’s are based on geographical regions subdivided by global business. Impairment testing is performed at least annually, or whenever there is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount. The carrying amount of a CGU is based on its assets and liabilities, including attributable goodwill. The recoverable amount of a CGU is the higher of its fair value less cost to sell and its value in use. VIU is the present value of the expected future CGU cash flows. If the recoverable amount is less than the carrying value, an impairment loss is charged to the income statement. Goodwill is carried on the balance sheet at cost less accumulated impairment losses.   Goodwill is included in a disposal group if the disposal group is a CGU to which goodwill has been allocated or it is an operation within such a CGU. The amount of goodwill included in a disposal group is measured on the basis of the relative values of the operation disposed of and the portion of the CGU retained.   At the date of disposal of a business, attributable goodwill is included in HSBC’s share of net assets in the calculation of the gain or loss on disposal.

Critical accounting estimates and judgements

 

Goodwill impairment   The review of goodwill for impairment reflects management’s best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows:   •  the future cash flows of the CGUs are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management’s view of future business prospects at the time of the assessment; and   •  the rates used to discount future expected cash flows can have a significant effect on their valuation and are based on the costs of capital assigned to individual CGUs. The cost of capital percentage is generally derived from a CAPM, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management’s control, are subject to uncertainty and require the exercise of significant judgement.   The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. In such circumstances, management retests goodwill for impairment more frequently than annually when indicators of impairment exist to ensure that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management’s best estimate of future business prospects.

 

HSBC HOLDINGS PLC   406

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Movement analysis of goodwill

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Gross amount
At 1 January 2015					13,207						1,009						54						7,815						3,007						25,092
Exchange differences					(1,237	)					(73	)					(4	)					4						(300	)					(1,610	)
Reclassified to held for sale1					–						–						–						–						(1,319	)					(1,319	)
Other					1						59						(5	)					(30	)					(1	)					24
At 31 December 2015					11,971						995						45						7,789						1,387						22,187
Accumulated impairment losses
At 1 January 2015					–						–						–						(5,923	)					–						(5,923	)
Other					–						–						–						30						–						30
At 31 December 2015					–						–						–						(5,893	)					–						(5,893	)
Net carrying amount at 31 December 2015					11,971						995						45						1,896						1,387						16,294
Gross amount
At 1 January 2014					14,977						1,016						55						7,861						3,241						27,150
Disposals					(168	)					–						–						–						–						(168	)
Exchange differences					(1,594	)					(30	)					(1	)					1						(240	)					(1,864	)
Reclassified to held for sale					(8	)					–						–						–						24						16
Other					–						23						–						(47	)					(18	)					(42	)
At 31 December 2014					13,207						1,009						54						7,815						3,007						25,092
Accumulated impairment losses
At 1 January 2014					–						–						–						(5,971	)					–						(5,971	)
Exchange differences					–						–						–						1						–						1
Other					–						–						–						47						–						47
At 31 December 2014					–						–						–						(5,923	)					–						(5,923	)
Net carrying amount at 31 December 2014					13,207						1,009						54						1,892						3,007						19,169

 

1	During 2015, $1.3bn of goodwill was reclassified to held for sale following the decision to sell our Brazilian operations. Goodwill was allocated based on the relative carrying value of the operations in Brazil to the cash generating units in Latin America. See Note 23 for further details.

Impairment testing

HSBC’s impairment test in respect of goodwill allocated to each CGU is performed as at 1 July each year. A review for indicators of impairment is undertaken at each subsequent quarter end and, as at 31 December 2015, this review identified indicators of impairment for two CGUs, recognised as sensitive in the annual test performed as at 1 July. As a result, an impairment test has been performed for Global Private Banking – Europe and Global Banking and Markets – North America as at 31 December 2015 and the goodwill balances, key assumptions and results of this test are included in the disclosures below. For all other CGUs the annual test performed as at 1 July remains the latest impairment test and the disclosures given are as at 1 July. The testing at both 1 July and 31 December resulted in no impairment of goodwill.

Basis of the recoverable amount

The recoverable amount of all CGUs to which goodwill has been allocated was equal to its VIU at each respective testing date for 2014 and 2015.

For each significant CGU, the VIU is calculated by discounting management’s cash flow projections for the CGU. The discount rate used is based on the cost of capital HSBC allocates to investments in the countries within which the CGU operates. The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term perspective within the Group of the business units making up the CGUs. For the goodwill impairment test conducted at 1 July 2015, management’s cash flow projections until the end of 2019 were used. For the goodwill impairment test conducted at 31 December 2015, management’s cash flow projections until the end of 2020 were used.

 

HSBC HOLDINGS PLC   407

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Notes on the Financial Statements (continued)

20 – Goodwill and intangible assets

    

    

    

 

Key assumptions in VIU calculation

 

				Goodwill at:												Discount						Nominal growth rate beyond initial cash
				1 Jul 2015						31 Dec 2015						rate						flow projections
				$m						$m						%						%
Cash-generating unit
Retail Banking and Wealth Management – Europe					3,562												6.9						3.3
Global Private Banking – Europe					3,414						3,343						8.4						2.5
Global Banking and Markets – Europe					2,690												9.9						3.5
Commercial Banking – Europe					2,603												9.0						3.6
Global Banking and Markets – North America					929						931						10.0						4.3
Retail Banking and Wealth Management – Latin America					792												11.0						6.9
				1 Jul 2014
				$m
Cash-generating unit
Retail Banking and Wealth Management – Europe					4,298												9.1						4.5
Global Private Banking – Europe					3,808												7.1						3.4
Global Banking and Markets – Europe					3,296												11.0						4.2
Commercial Banking – Europe					3,214												10.1						4.2
Global Banking and Markets – North America					917												9.8						4.6
Retail Banking and Wealth Management – Latin America					1,762												12.8						7.9

At 1 July 2015, aggregate goodwill of $2,787m (1 July 2014: $3,610m) had been allocated to CGUs that were not considered individually significant. The Group’s CGUs do not carry on their balance sheets any significant intangible assets with indefinite useful lives, other than goodwill.

Management’s judgement in estimating the cash flows of a CGU: the cash flow projections for each CGU are based on plans approved by the GMB.

Nominal long-term growth rate: this growth rate reflects GDP and inflation for the countries within which the CGU operates or derives revenue from. The rates are based on IMF forecast growth rates as they represent an objective estimate of likely future trends. The rates used for 2014 and 2015 do not exceed the long-term growth rates for the countries within which the CGUs operate or derive revenue from.

Discount rate: the discount rate used to discount the cash flows is based on the cost of capital assigned to each CGU, which is derived using a CAPM. The CAPM depends on inputs reflecting a number of financial and economic variables including the risk-free rate and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market’s assessment of the economic variables and management’s judgement. The discount rates for each CGU are refined to reflect the rates of inflation for the countries within which the CGU operates. In addition, for the purposes of testing goodwill for impairment, management supplements this process by comparing the discount rates derived using the internally generated CAPM with cost of capital rates produced by external sources for businesses operating in similar markets. For 2014 and 2015, internal cost of capital rates were consistent with externally sourced rates. For the purpose of goodwill testing during 2015, internal rates were adjusted to reflect the uncertainty of the cash flows used in the test.

Sensitivities of key assumptions in calculating VIU

At 1 July 2015 Global Banking and Markets – Europe, and as at 31 December Global Banking and Markets – North America and Global Private Banking – Europe, were all sensitive to reasonably possible changes in the key assumptions supporting the recoverable amount. In making an estimate of reasonably possible changes to assumptions management considers the available evidence in respect of each input to the model such as: the external range of discount rates observable; historical performance against forecast; and risks attaching to the key assumptions underlying cash flow projections.

For Global Banking and Markets – North America, a reasonably possible adverse change in any one of the discount rate, growth rate or management’s projections of cash flows could cause an impairment to be recognised. For Global Private Banking – Europe, a reasonably possible adverse change in management’s projections of cash flows, or changes in more than one assumption, could cause an impairment to be recognised. Global Banking and Markets – Europe, would require reasonably possible adverse changes in more than one assumption to cause an impairment.

The following table presents a summary of the key assumptions underlying the most sensitive inputs to the model for each CGU; the key risks attaching to each; and details of a reasonably possible change to assumptions where, in the opinion of management, these could result in an impairment.

 

HSBC HOLDINGS PLC   408

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Reasonably possible changes in key assumptions

 

				Input		Key assumptions		Associated risks		Reasonably possible change
		Cash-generating unit
		Retail Banking and Wealth Management – Europe and Commercial Banking – Europe		Cash flow projections		•     Level of interest rates; •     Competitors’ positions within the market; and •     Level and change in unemployment rates.		•     Uncertain regulatory environment; and •     Customer remediation and regulatory actions.		•     Management has determined that a reasonably possible change in any of the key assumptions would not cause an impairment to be recognised.
		Global Private Banking – Europe		Cash flow projections		•     Achievement of planned strategic repositioning; •     Level of assets under management; •     Return on assets; •     Central bank interest rate rises; and •     Cost savings from recent investment in new platforms.		•     Challenges achieving strategic repositioning; •     Deferral or non-occurrence of forecast interest rate rises; and •     Slower than expected growth in assets under management.		•     Cash flow projections decrease by 20%.
				Discount rate		•     Discount rate used is a reasonable estimate of a suitable market rate for the profile of the business.		•     External evidence arises to suggest that the rate used is not appropriate to the business.		•     Discount rate increases by 60bps based on observable broker estimates for private banking focused institutions.
				Long-term growth rates		•     Business growth will reflect GDP growth rates in the long term.		•     Growth does not match GDP or GDP forecasts fall.		•     Real GDP growth does not occur or is not reflected in performance.
		Global Banking and Markets – Europe		Cash flow projections		•     Level of interest rates; and •     Recovery of European markets over the forecast period.		•     Deferral or non-occurrence of forecast interest rate rises; •     Lower than expected growth in key markets; and •     The impact of regulatory changes, including the ring fencing of the UK retail bank.		•     Cash flow projections decrease by 20%.
				Discount rate		•     Discount rate used is a reasonable estimate of a suitable market rate for the profile of the business.		•     External evidence arises to suggest that the rate used is not appropriate to the business.		•     Discount rate increases by 110 basis points, based on the high end of the range of broker estimates for comparator European banks with significant investment banking operations.
				Long-term growth rates		•     Business growth will reflect GDP growth rates in the long term.		•     Growth does not match GDP or GDP forecasts fall.		•     Real GDP growth does not occur or is not reflected in performance.
		Global Banking and Markets – North America		Cash flow projections		•     Level of interest rates; •     Growth in NAFTA, China, and other major trade corridors; •     Product and sales enhancements to increase market share; and •     Increased collaboration with the CMB business to capture further opportunities from existing clients.		•     Deferral or non-occurrence of forecast interest rate rises; and •     Lower than expected growth in key markets.		•     Cash flow projections decrease by 20%.
				Discount rate		•     Discount rate used is a reasonable estimate of a suitable market rate for the profile of the business.		•     External evidence arises to suggest that the rate used is not appropriate to the business.		•     Discount rate increases by 100 basis points, based on the high end of the range of broker estimates for comparator US banks with significant investment banking operations.
				Long-term growth rates		•     Business growth will reflect GDP growth rates in the long term.		•     Growth does not match GDP or GDP forecasts fall.		•     Real GDP growth does not occur or is not reflected in performance.
		Retail Banking and Wealth Management – Latin America		Cash flow projections		•     Growth in lending and deposit volumes; and •     Credit quality of loan portfolios.		•     Unfavourable economic conditions; and •     Competitive pricing constraining margins.		•     Management has determined that a reasonably possible change in any of the key assumptions would not cause an impairment to be recognised.

 

HSBC HOLDINGS PLC   409

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Notes on the Financial Statements (continued)

20 – Goodwill and intangible assets

    

    

    

 

The following table presents the sensitivities of the VIU for each sensitive CGU to the reasonably possible adverse changes in the assumptions set out above:

Sensitivity of VIU to reasonably possible changes in key assumptions

 

												Reasonably possible change in key assumptions and impact on VIU
				Carrying amount $bn				Value in use $bn				Discount rate bps				Impact on VIU $bn				Cash flows %				Impact on VIU $bn				Long-term growth rate bps				Impact on VIU $bn				Cumulative impact of all changes $bn
Cash-generating unit
Global Private Banking
– Europe1					4.6				5.2				60				(0.5	)			(20	)			(1.0	)			(76	)			(0.5	)			(1.8	)
Global Banking and Markets
– Europe2					20.9				27.1				110				(3.9	)			(20	)			(5.4	)			(213	)			(5.6	)			(11.9	)
Global Banking and Markets
– North America1					13.8				14.8				100				(2.2	)			(20	)			(3.0	)			(215	)			(3.3	)			(6.6	)

 

1	As at 31 December 2015.

2	As at 1 July 2015.

The following table presents for each sensitive CGU, the change required to individual current assumptions to reduce headroom to nil (breakeven).

Changes to current assumptions to achieve nil headroom

 

				Increase/(decrease)
				Discount rate bps				Cash flow %				Long-term growth rate bps
Cash-generating unit
Global Private Banking – Europe1					69				(11.2	)			(86	)
Global Banking and Markets – Europe2					193				(23.0	)			(245	)
Global Banking and Markets – North America1					41				(6.7	)			(50	)

 

1	As at 31 December 2015.

2	As at 1 July 2015.

Intangible assets

Accounting policy

 

Intangible assets are recognised, and those that are acquired in a business combination are distinguished from goodwill, when they are separable or arise from contractual or other legal rights, and it is probable that future economic benefits will flow to HSBC, the cost of which can be measured reliably.   Intangible assets include the present value of in-force long-term insurance business and long-term investment contracts with discretionary participating features (‘PVIF’), computer software, trade names, mortgage servicing rights, customer lists, core deposit relationships, credit card customer relationships and merchant or other loan relationships. Computer software includes both purchased and internally generated software. The cost of internally generated software comprises all directly attributable costs necessary to create, produce and prepare the software to be capable of operating in the manner intended by management. Costs incurred in the ongoing maintenance of software are expensed immediately as incurred.   Intangible assets are subject to impairment review if there are events or changes in circumstances that indicate that the carrying amount may not be recoverable. Where:   •  intangible assets have an indefinite useful life, or are not yet ready for use, they are tested for impairment annually. An intangible asset recognised during the current period is tested before the end of the current year; and where   •  intangible assets have a finite useful life, except for PVIF, they are stated at cost less amortisation and accumulated impairment losses and are amortised over their estimated useful lives. Estimated useful life is the lower of legal duration and expected useful life.   Intangible assets with finite useful lives are generally amortised, on a straight-line basis, over their useful lives as follows:
Trade names		10 years
Mortgage servicing rights		between 5 and 12 years
Internally generated software		between 3 and 5 years
Purchased software		between 3 and 5 years
Customer/merchant relationships		between 3 and 10 years
Other		10 years

 

HSBC HOLDINGS PLC   410

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Present value of in-force long-term insurance business   The value placed on insurance contracts that are classified as long-term insurance business or long-term investment contracts with discretionary participating features (‘DPF’) and are in force at the balance sheet date is recognised as an asset. The asset represents the present value of the equity holders’ interest in the issuing insurance companies’ profits expected to emerge from these contracts written at the balance sheet date. The PVIF is determined by discounting the equity holders’ interest in future profits expected to emerge from business currently in force using appropriate assumptions in assessing factors such as future mortality, lapse rates and levels of expenses, and a risk discount rate that reflects the risk premium attributable to the respective contracts. The PVIF incorporates allowances for both non-market risk and the value of financial options and guarantees. The PVIF asset is presented gross of attributable tax in the balance sheet and movements in the PVIF asset are included in ‘Other operating income’ on a gross of tax basis.

Present value of in-force long-term insurance business

Movements in PVIF

 

				2015						2014
				$m						$m
PVIF at 1 January					5,307						5,335
Change in PVIF of long-term insurance business					799						261
Value of new business written during the year1					809						870
Movements arising from in-force business:
– expected return					(552	)					(545	)
– experience variances2					15						62
– changes in operating assumptions					129						(69	)
Investment return variances					222						(34	)
Changes in investment assumptions					138						(75	)
Other adjustments					38						52
Transfer of assets classified as held for sale3					(219	)					(122	)
Exchange differences and other					(202	)					(167	)
PVIF at 31 December					5,685						5,307

 

1	‘Value of new business written during the year’ is the present value of the projected stream of profits from the business.

2	‘Experience variances’ includes the effect of the difference between demographic, expense and persistency assumptions used in the previous PVIF calculation and actual experience observed during the year to the extent this affects profits on future business.

3	Relates to the Brazilian insurance operations and the UK pensions business which were classified as held for sale in the first half of 2015 and 2014 respectively. See page 180 for further details.

In the PVIF calculation, expected cash flows are projected after adjusting for a variety of assumptions made by each insurance operation to reflect local market conditions and management’s judgement of future trends, and after applying risk margins to reflect any uncertainty in the underlying assumptions. Variations in actual experience and changes to assumptions can contribute to volatility in the results of the insurance business.

The key drivers of the movement in the value of the PVIF asset are the expected cash flows from:

 

•

new business adjusted for anticipated maturities and assumptions relating to policyholder behaviour (‘value of new business written during the year’);

 

•

unwind of the discount rate less the reversal of expected cash flows for the period (‘expected return’);

 

•

changes in non-economic operating assumptions such as mortality or lapse rates (‘changes in operating assumptions’);

 

•

the effects of changes in projected future cash flows associated with operating assumption experience variances compared with those assumed at the start of the period (‘experience variances’);

 

•

changes related to future investment returns (‘changes in investment assumptions’); and

 

•

the effect of actual investment experience on existing assets compared with the assumptions at the start of the period (‘investment return variances’).

The valuation of the PVIF asset includes explicit risk margins for non-economic risks in the projection assumptions and explicit allowances for financial options and guarantees using stochastic methods. Risk discount rates are set on an active basis with reference to market risk-free yields.

 

HSBC HOLDINGS PLC   411

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Notes on the Financial Statements (continued)

20 – Goodwill and intangible assets

    

    

    

 

Key assumptions used in the computation of PVIF for main life insurance operations

Economic assumptions are either set in a way that is consistent with observable market values or, in certain markets (including those where the risk free curve is not observable at tenors matching the duration of our insurance contract liabilities) use is made of long-term economic assumptions. Setting such assumptions involves the projection of long-term interest rates and the time horizon over which observable rates tend towards these long-term assumptions. The assumptions are informed by relevant historical data and by research and analysis performed by the Group’s Economic Research team and external experts, including regulatory bodies. The valuation of PVIF will be sensitive to any changes in these long-term assumptions in the same way that it is sensitive to observed market movements, and the impact of such changes is included in the sensitivities presented below.

 

				2015														2014
				UK				Hong Kong				France1						UK				Hong Kong				France1
				%				%				%						%				%				%
Weighted average risk free rate					1.75				1.82				1.57						1.65				1.86				1.21
Weighted average risk discount rate					2.25				6.81				2.55						2.15				7.42				1.73
Expense inflation					4.56				3.00				1.70						4.67				3.00				2.00

 

1	For 2015, the calculation of France’s PVIF assumes a risk discount rate of 2.55% (2014: 1.73%) plus a risk margin of $51m (2014: $63m).

Sensitivity to changes in economic assumptions

The Group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding explicit allowances for risks not reflected in the best estimate cash flow modelling. Where shareholders provide options and guarantees to policyholders the cost of these options and guarantees is an explicit reduction to PVIF, unless it is already allowed for as an explicit addition to the technical provisions required by regulators. See page 184 for further details of these guarantees.

The following table shows the effect on the PVIF of reasonably possible changes in the main economic assumption, risk-free rates, across all insurance manufacturing subsidiaries. Due to certain characteristics of the contracts, the relationships are non-linear and the results of the sensitivity testing should not be extrapolated to higher levels of stress. For the same reason, the impact of the stress is not symmetrical on the upside and downside. The sensitivities shown are before actions that could be taken by management to mitigate effects and allow for adverse changes in policyholder behaviour. The sensitivities have decreased from 2014 to 2015, driven mainly by rising yields and updates to interest rate parameters in France during 2015. In a low yield environment the PVIF asset is particularly sensitive to yield curve movements driven by the projected cost of options and guarantees described on page 184.

 

				2015						2014
				$m						$m
Effect on PVIF at 31 December of:
+100 basis point shift in risk-free rate					(3	)					320
–100 basis point shift in risk-free rate1					(139	)					(589	)

 

1	Where a –100 basis point parallel shift in the risk-free rate would result in a negative rate, the effect on PVIF has been calculated using a minimum rate of 0%.

Sensitivity to changes in non-economic assumptions

Policyholder liabilities and PVIF for life manufacturers are determined by reference to non-economic assumptions including mortality and/or morbidity, lapse rates and expense rates. The table below shows the sensitivity of PVIF to reasonably possible changes in these non-economic assumptions at 31 December across all our insurance manufacturing subsidiaries.

 

				2015						2014
				$m						$m
Effect on PVIF at 31 December of:
10% increase in mortality and/or morbidity rates					(73	)					(66	)
10% decrease in mortality and/or morbidity rates					77						70
10% increase in lapse rates					(127	)					(146	)
10% decrease in lapse rates					144						165
10% increase in expense rates					(83	)					(93	)
10% decrease in expense rates					83						94

 

HSBC HOLDINGS PLC   412

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Other intangible assets

Movement of intangible assets excluding goodwill and the PVIF

 

				Internally     generated software						Other						Total
				$m						$m						$m
Cost
At 1 January 2015					6,413						2,863						9,276
Additions					857						114						971
Disposals					(134	)					(159	)					(293	)
Amount written off					(238	)					(2	)					(240	)
Reclassified to held for sale					(239	)					(452	)					(691	)
Other changes					(292	)					(184	)					(476	)
At 31 December 2015					6,367						2,180						8,547
Accumulated amortisation
At 1 January 2015					(4,286	)					(1,889	)					(6,175	)
Charge for the year1					(686	)					(142	)					(828	)
Impairment					(149	)					15						(134	)
Disposals					128						147						275
Amount written off					238						2						240
Reclassified to held for sale					141						250						391
Other changes					181						120						301
At 31 December 2015					(4,433	)					(1,497	)					(5,930	)
Net carrying amount at 31 December 2015					1,934						683						2,617
Cost
At 1 January 2014					5,999						2,975						8,974
Additions					732						177						909
Disposals					(35	)					(80	)					(115	)
Amount written off					(24	)					(53	)					(77	)
Other changes					(259	)					(156	)					(415	)
At 31 December 2014					6,413						2,863						9,276
Accumulated amortisation
At 1 January 2014					(3,809	)					(1,761	)					(5,570	)
Charge for the year1					(677	)					(261	)					(938	)
Impairment					(11	)					(54	)					(65	)
Disposals					32						77						109
Amount written off					24						53						77
Other changes					155						57						212
At 31 December 2014					(4,286	)					(1,889	)					(6,175	)
Net carrying amount at 31 December 2014					2,127						974						3,101

 

1

The amortisation charge for the year is recognised within the income statement under ‘Amortisation and impairment of intangible assets’, with the exception of the amortisation of mortgage servicing rights which is recognised in ‘Net fee income’. The revaluation net of amortisation charge for mortgage servicing rights was $25m in 2015 (2014: charge of $67m).

 

HSBC HOLDINGS PLC   413

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Notes on the Financial Statements (continued)

21 – Investments in subsidiaries

    

    

    

 

21   Investments in subsidiaries

 

Accounting policy

 

HSBC classifies investments in entities which it controls as subsidiaries. HSBC’s consolidation policy is described in Note 1(g). Subsidiaries which are structured entities are covered in Note 39.   HSBC Holdings’ investments in subsidiaries are stated at cost less impairment losses. Impairment losses recognised in prior periods are reversed through the income statement if there has been a change in the estimates used to determine the investment’s recoverable amount since the last impairment loss was recognised.

Principal subsidiaries of HSBC Holdings

 

At 31 December 2015

Country of incorporation or registration

HSBC’s interest in equity capital %

Issued equity capital

Share class

Europe

HSBC Bank plc

England

100

£797m

Ordinary £1 Preferred Ordinary £1 Series 2 Third Dollar Preference $0.01 Third Dollar Preference $0.01

HSBC France

France

99.99

€337m

Shares €5.00

HSBC Private Banking Holdings (Suisse) SA

Switzerland

100

CHF1,363m

Ordinary CHF1,000

HSBC Trinkaus & Burkhardt AG

Germany

80.65

€75.4m

Shares of no par value

Asia

Hang Seng Bank Limited1

Hong Kong

62.14

HK$9,658m

Ordinary no par value

HSBC Bank Australia Limited

Australia

100

A$811m

Ordinary no par value

HSBC Bank (China) Company Limited

PRC

5

100

RMB15,400m

Ordinary CNY1.00

HSBC Bank Malaysia Berhad

Malaysia

100

RM115m

Ordinary RM0.50

HSBC Bank (Taiwan) Limited

Taiwan

100

TWD34,800m

Ordinary TWD10.00

HSBC Life (International) Limited

Bermuda

100

HK$4,178m

Ordinary HK$1.00

The Hongkong and Shanghai Banking Corporation Limited

Hong Kong

100

HK$96,052m

Ordinary no par value CIP2 $1.00 CRP3 $1.00 NIP4 $1.00

Middle East and North Africa

HSBC Bank Middle East Limited

Jersey

100

$931m

Ordinary $1.00 CRP3 $1.00

HSBC Bank Egypt S.A.E.

Egypt

94.53

EGP2,796m

Ordinary EGP84.00

North America

HSBC Bank Canada

Canada

100

C$1,225m

Common shares of no par value

C$500m

Preference shares of no par value

HSBC Bank USA, N.A.

USA

100

$2m

Common $100

HSBC Finance Corporation

USA

100

–

6

Common $0.01

HSBC Securities (USA) Inc.

USA

100

–

6

Common $0.05

Latin America

HSBC Bank Brasil S.A. – Banco Múltiplo

Brazil

100

BRL6,402m

Shares of no par value

HSBC Mexico, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC

Mexico

99.99

MXN5,681m

Ordinary MXN2.00

 

1    Listed in Hong Kong.		3    Cumulative Redeemable Preference shares.		5    People’s Republic of China.
2    Cumulative Irredeemable Preference shares.		4    Non-cumulative Irredeemable Preference shares.		6    Issued equity capital is less than $1m.

Details of the debt, subordinated debt and preference shares issued by the principal subsidiaries to parties external to the Group are included in Notes 26 ‘Debt securities in issue’, 30 ‘Subordinated liabilities’ and 34 ‘Non-controlling interests’, respectively.

All the above subsidiaries are included in the HSBC consolidated financial statements.

 

HSBC HOLDINGS PLC   414

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Details of all HSBC subsidiaries, as required under Section 409 of the Companies Act 2006, are set out on pages 458 to 469. The principal countries of operation are the same as the countries of incorporation except for HSBC Bank Middle East Limited, which operates mainly in the Middle East and North Africa, and HSBC Life (International) Limited, which operates mainly in Hong Kong.

HSBC is structured as a network of regional banks and locally incorporated regulated banking entities. Each bank is separately capitalised in accordance with applicable prudential requirements and maintains a capital buffer consistent with the Group’s risk appetite for the relevant country or region. HSBC’s capital management process culminates in the annual Group capital plan, which is approved by the Board.

HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings’ issuance of equity and non-equity capital and by profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a balance between the composition of its capital and its investment in subsidiaries. Subject to this, there is no current or foreseen impediment to HSBC Holdings’ ability to provide funding for such investments. The ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial and operating performance. During 2015, none of the Group’s subsidiaries experienced significant restrictions on paying dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged by our subsidiaries, with the exception of HSBC North America Holdings Inc., on paying dividends or repaying loans and advances.

The amount of guarantees by HSBC Holdings in favour of other HSBC Group entities is set out in Note 37.

Structured entities consolidated by HSBC where HSBC owns less than 50% of the voting rights

 

				Carrying value of total consolidated assets												Nature of SPE
				2015						2014
				$bn						$bn
Solitaire Funding Ltd					7.3						9.0					Securities investment conduit
Mazarin Funding Limited					1.9						3.9					Securities investment conduit
Barion Funding Limited					1.1						2.0					Securities investment conduit
Malachite Funding Limited					0.4						1.4					Securities investment conduit
HSBC Home Equity Loan Corporation I					–						1.9					Securitisation
HSBC Home Equity Loan Corporation II					1.6						0.9					Securitisation
Regency Assets Limited					15.2						11.0					Conduit

In addition to the above, HSBC consolidates a number of individually insignificant structured entities with total assets of $17.9bn (2014: $22.9bn). For further details, see Note 39.

In each of the above cases, HSBC controls and consolidates an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

Subsidiaries with significant non-controlling interests

 

				2015						2014
Hang Seng Bank Limited
Proportion of ownership interests and voting rights held by non-controlling interests					37.86	%					37.86	%
Place of business					Hong Kong						Hong Kong
				$m						$m
Profit attributable to non-controlling interests					1,364						760
Accumulated non-controlling interests of the subsidiary					5,866						5,765
Dividends paid to non-controlling interests					523						513
Summarised financial information:
– total assets					169,813						160,769
– total liabilities					153,458						144,642
– net operating income before loan impairment					5,411						3,687
– profit for the year					3,604						2,007
– total comprehensive income for the year					1,636						4,460

 

HSBC HOLDINGS PLC   415

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Notes on the Financial Statements (continued)

22 – Prepayments / 23 – Assets held for sale and disposal groups / 24 – Trading liabilities

    

    

    

 

22 Prepayments, accrued income and other assets

 

 

				2015						2014
				$m						$m
Prepayments and accrued income					7,765						10,554
Bullion					11,501						15,726
Endorsements and acceptances					9,149						10,775
Reinsurers’ share of liabilities under insurance contracts (Note 28)					1,378						1,032
Employee benefit assets (Note 6)					5,272						5,028
Other accounts					9,410						13,882
Property, plant and equipment					9,923						10,532
At 31 December					54,398						67,529

Prepayments, accrued income and other assets included $25,310m (2014: $33,889m) of financial assets, the majority of which were measured at amortised cost.

23 Assets held for sale and liabilities of disposal groups held for sale

 

Accounting policy

 

Assets held for sale   Assets and liabilities of disposal groups and non-current assets are classified as held for sale when their carrying amounts will be recovered principally through sale rather than through continuing use. Held-for-sale assets and liabilities are measured at the lower of their carrying amount and fair value less cost to sell, except for those assets and liabilities that are not within the scope of the measurement requirements of IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’.   Immediately before the initial classification as held for sale, the carrying amounts of the relevant assets and liabilities are measured in accordance with applicable IFRSs. On subsequent remeasurement of a disposal group, the carrying amounts of any assets and liabilities that are not within the scope of the measurement requirements of IFRS 5, but are included in a disposal group classified as held for sale, are remeasured under applicable IFRSs before the fair value less costs to sell of the disposal group is determined.

 

				2015						2014
				$m						$m
Held for sale at 31 December
Disposal groups					41,715						6,883
Non-current assets held for sale					2,185						764
Total assets					43,900						7,647
Liabilities of disposal groups					36,840						6,934

Disposal groups

Brazil

In the first half of 2015, we announced the plan to sell our operations in Brazil. At 31 December 2015, the sale was considered highly probable and therefore the assets and liabilities of the disposal group were classified as held for sale. The disposal group includes the assets and liabilities expected to be sold plus allocated goodwill as set out in the table on page 417.

The disposal group is measured at its carrying amount at 31 December 2015, which is lower than its fair value less cost to sell. The carrying amount includes a $1.3bn deferred tax asset and $1.3bn of allocated goodwill (see Note 20). The assets and liabilities of the disposal group have been reclassified from their individual lines in the consolidated balance sheet and are presented in separate ‘Held for sale’ lines at 31 December 2015. There is no change to the comparative balance sheet presentation and there is no separate presentation in the income statement.

At 31 December 2015, there were no significant accounting implications in respect of the planned sale although this may evolve as it progresses. The disposal group represents a foreign operation and when the disposal completes the cumulative amount of associated exchange differences previously recognised in other comprehensive income will be reclassified to the income statement. At 31 December 2015, there was a cumulative loss of $2.6bn in the Group’s foreign exchange reserve attributable to the Brazilian operations.

 

HSBC HOLDINGS PLC   416

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The major classes of assets and associated liabilities of disposal groups held for sale are as follows:

 

				Brazil						Other						Total
				$m						$m						$m
Assets of disposal groups held for sale
Trading assets					55						–						55
Fair value of financial assets designated at fair value					3,123						–						3,123
Loans and advances to banks					4,068						–						4,068
Loans and advances to customers					17,001						40						17,041
Reverse repurchase agreements					3,511						–						3,511
Financial investments					6,238						–						6,238
Goodwill and intangible assets					1,680						–						1,680
Deferred tax asset1					1,325						–						1,325
Prepayments, accrued income and other assets					4,674						–						4,674
Total assets at 31 December 2015					41,675						40						41,715
Liabilities of disposal groups held for sale
Deposits by banks					1,521						–						1,521
Customer accounts					15,094						1,588						16,682
Debt securities in issue					7,957						–						7,957
Liabilities under insurance contracts					3,338						–						3,338
Accruals, deferred income and other liabilities					7,335						7						7,342
Total liabilities at 31 December 2015					35,245						1,595						36,840
Expected date of completion					First Half of 2016						First Half of 2016
Operating segment					Latin America						North America
Fair value of selected financial instruments which are not carried at fair value on the balance sheet at 31 December 2015
Loans and advances to banks and customers					20,912						40						20,952
Customer accounts					15,094						1,588						16,682

 

1

The recognition of deferred tax assets relies on an assessment of the probability and sufficiency of future taxable profits and future reversals of existing taxable temporary differences. In recognising the deferred tax asset management has critically assessed all available information, including sufficiency of future taxable profits using internal and external benchmarks, and historical performance.

24 Trading liabilities

 

Accounting policy

 

Financial liabilities are classified as held for trading if they have been acquired or incurred principally for the purpose of selling or repurchasing in the near term, or form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. They are recognised on trade date, when HSBC enters into contractual arrangements with counterparties, and are normally derecognised when extinguished. They are initially measured at fair value, with transaction costs taken to the income statement. Subsequent changes in fair value and interest are recognised in the income statement in ‘Net trading income’.   Liabilities arising from the sale of borrowed securities are classified as held for trading.

Trading liabilities

 

				2015 $m						2014 $m
Deposits by banks1					27,054						41,453
Customer accounts1,2					40,208						50,600
Other debt securities in issue (Note 26)3					30,525						33,602
Other liabilities – net short positions in securities					43,827						64,917
At 31 December					141,614						190,572

 

1	‘Deposits by banks’ and ‘Customer accounts’ include repos, settlement accounts, stock lending and other amounts.

2	Structured deposits placed at HSBC Bank USA and HSBC Trust Company (Delaware) National Association are insured by the Federal Deposit Insurance Corporation, a US government agency, up to $250,000 per depositor.

3	‘Other debt securities in issue’ comprises structured notes issued by HSBC for which market risks are actively managed as part of trading portfolios.

At 31 December 2015, the cumulative amount of change in fair value attributable to changes in HSBC’s credit risk was a gain of $122m (2014: loss of $79m).

 

HSBC HOLDINGS PLC   417

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Notes on the Financial Statements (continued)

25 – Financial liabilities at FV / 26 – Debt securities / 27 – Accruals / 28 – Liabilities under insurance contracts

    

    

    

 

25 Financial liabilities designated at fair value

 

Accounting policy

 

The criteria for designating instruments at fair value and their measurement are described in Note 15. The fair value designation, once made, is irrevocable. Designated financial liabilities are recognised when HSBC enters into contracts with counterparties and are normally derecognised when extinguished. Examples of such designations include:   Long-term debt issues   The interest and/or foreign exchange exposure on certain fixed rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain swaps as part of a documented risk management strategy. An accounting mismatch would arise if the debt securities issued were accounted for at amortised cost, and this mismatch is eliminated through the fair value designation.   Financial liabilities under unit-linked and non-linked investment contracts   HSBC issues contracts to customers that contain insurance risk, financial risk or a combination thereof. A contract under which HSBC accepts insignificant insurance risk from another party is not classified as an insurance contract, but is accounted for as a financial liability. See Note 28 for contracts where HSBC accepts significant insurance risk.   Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries and the corresponding financial assets are designated at fair value. Liabilities are at least equivalent to the surrender or transfer value which is calculated by reference to the value of the relevant underlying funds or indices. Premiums receivable and amounts withdrawn are accounted for as increases or decreases in the liability recorded in respect of investment contracts. The incremental costs directly related to the acquisition of new investment contracts or renewing existing investment contracts are deferred and amortised over the period during which the investment management services are provided.

Financial liabilities designated at fair value – HSBC

 

				2015						2014
				$m						$m
Deposits by banks and customer accounts					193						160
Liabilities to customers under investment contracts					6,027						6,312
Debt securities in issue (Note 26)					37,678						46,364
Subordinated liabilities (Note 30)					21,168						21,822
Preferred securities (Note 30)					1,342						1,495
At 31 December					66,408						76,153

The carrying amount at 31 December 2015 of financial liabilities designated at fair value was $4,147m more than the contractual amount at maturity (2014: $5,813m more). The cumulative amount of the change in fair value attributable to changes in credit risk was a gain of $158m (2014: loss of $870m).

Financial liabilities designated at fair value – HSBC Holdings

 

				2015						2014
				$m						$m
Debt securities in issue (Note 26):
– owed to third parties					7,897						8,185
Subordinated liabilities (Note 30):
– owed to third parties					11,100						9,513
– owed to HSBC undertakings					856						981
At 31 December					19,853						18,679

The carrying amount at 31 December 2015 of financial liabilities designated at fair value was $2,127m more than the contractual amount at maturity (2014: $2,694m more). The cumulative amount of the change in fair value attributable to changes in credit risk was a loss of $172m (2014: loss of $520m).

26 Debt securities in issue

 

Accounting policy

 

Financial liabilities for debt securities issued are recognised when HSBC enters into contractual arrangements with counterparties and are initially measured at fair value, which is normally the consideration received, net of directly attributable transaction costs incurred. The subsequent measurement of financial liabilities, other than those measured at fair value through profit or loss and financial guarantees, is at amortised cost, using the effective interest method to amortise the difference between proceeds received, net of directly attributable transaction costs incurred, and the redemption amount over their expected life.

 

HSBC HOLDINGS PLC   418

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Debt securities in issue – HSBC

 

				2015						2014
				$m						$m
Bonds and medium-term notes					128,348						132,539
Other debt securities in issue					28,804						43,374
					157,152						175,913
Of which debt securities in issue reported as:
– trading liabilities (Note 24)					(30,525	)					(33,602	)
– financial liabilities designated at fair value (Note 25)					(37,678	)					(46,364	)
At 31 December					88,949						95,947

Debt securities in issue – HSBC Holdings

 

				2015						2014
				$m						$m
Debt securities					8,857						9,194
Of which debt securities in issue reported as:
– financial liabilities designated at fair value (Note 25)					(7,897	)					(8,185	)
At 31 December					960						1,009

27 Accruals, deferred income and other liabilities

 

 

				2015						2014
				$m						$m
Accruals and deferred income					11,129						15,075
Amounts due to investors in funds consolidated by HSBC					474						782
Obligations under finance leases					37						67
Endorsements and acceptances					9,135						10,760
Employee benefit liabilities (Note 6)					2,809						3,208
Other liabilities					14,532						16,570
At 31 December					38,116						46,462

Accruals, deferred income and other liabilities include $29,358m (2014: $39,846m) of financial liabilities, the majority of which are measured at amortised cost.

28 Liabilities under insurance contracts

 

Accounting policy

 

HSBC issues contracts to customers that contain insurance risk, financial risk or a combination thereof. A contract under which HSBC accepts significant insurance risk from another party by agreeing to compensate that party on the occurrence of a specified uncertain future event, is classified as an insurance contract. An insurance contract may also transfer financial risk, but is accounted for as an insurance contract if the insurance risk is significant.   Liabilities under insurance contracts   Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, which is calculated by reference to the value of the relevant underlying funds or indices.   A liability adequacy test is carried out on insurance liabilities to ensure that the carrying amount of the liabilities is sufficient in the light of current estimates of future cash flows. When performing the liability adequacy test, all contractual cash flows are discounted and compared with the carrying value of the liability. When a shortfall is identified it is charged immediately to the income statement.   Future profit participation on insurance contracts with DPF   Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for the future discretionary benefits to policyholders. These provisions reflect the actual performance of the investment portfolio to date and management’s expectation of the future performance of the assets backing the contracts, as well as other experience factors such as mortality, lapses and operational efficiency, where appropriate. This benefit may arise from the contractual terms, regulation, or past distribution policy.   Investment contracts with DPF   While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as permitted by IFRS 4 ‘Insurance Contracts’. The Group therefore recognises the premiums for those contracts as revenue and recognises as an expense the resulting increase in the carrying amount of the liability.   In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or other comprehensive income, following the treatment of the unrealised gains on the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and losses on relevant assets are recognised in the income statement.

 

HSBC HOLDINGS PLC   419

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Notes on the Financial Statements (continued)

28 – Liabilities under insurance contracts / 29 – Provisions

    

    

    

 

Liabilities under insurance contracts

 

				Gross						Reinsurers’ share						Net
				$m						$m						$m
Non-linked insurance contracts1
At 1 January 2015					36,973						(772	)					36,201
Claims and benefits paid					(3,200	)					153						(3,047	)
Increase in liabilities to policyholders					7,746						(575	)					7,171
Disposals/transfers to held-for-sale					(443	)					6						(437	)
Exchange differences and other movements					(538	)					73						(465	)
At 31 December 2015					40,538						(1,115	)					39,423
Investment contracts with DPF
At 1 January 2015					25,068						–						25,068
Claims and benefits paid					(2,101	)					–						(2,101	)
Increase in liabilities to policyholders					2,728						–						2,728
Exchange differences and other movements2					(3,086	)					–						(3,086	)
At 31 December 2015					22,609						–						22,609
Linked life insurance contracts
At 1 January 2015					11,820						(260	)					11,560
Claims and benefits paid					(1,869	)					64						(1,805	)
Increase in liabilities to policyholders					1,398						(5	)					1,393
Disposals/transfers to held-for-sale					(4,594	)					–						(4,594	)
Exchange differences and other movements3					36						(62	)					(26	)
At 31 December 2015					6,791						(263	)					6,528
Total liabilities to policyholders at 31 December 2015					69,938						(1,378	)					68,560
Non-linked insurance contracts1
At 1 January 2014					33,950						(1,118	)					32,832
Claims and benefits paid					(3,575	)					175						(3,400	)
Increase in liabilities to policyholders					7,764						(409	)					7,355
Disposals/transfers to held-for-sale					(589	)					527						(62	)
Exchange differences and other movements					(577	)					53						(524	)
At 31 December 2014					36,973						(772	)					36,201
Investment contracts with DPF
At 1 January 2014					26,427						–						26,427
Claims and benefits paid					(2,175	)					–						(2,175	)
Increase in liabilities to policyholders					3,188						–						3,188
Exchange differences and other movements2					(2,372	)					–						(2,372	)
At 31 December 2014					25,068						–						25,068
Linked life insurance contracts
At 1 January 2014					13,804						(290	)					13,514
Claims and benefits paid					(1,499	)					88						(1,411	)
Increase in liabilities to policyholders					2,762						33						2,795
Disposals/transfers to held-for-sale					(2,547	)					74						(2,473	)
Exchange differences and other movements3					(700	)					(165	)					(865	)
At 31 December 2014					11,820						(260	)					11,560
Total liabilities to policyholders at 31 December 2014					73,861						(1,032	)					72,829

 

1	‘Non-linked insurance contracts’ includes liabilities under non-life insurance contracts.

2	‘Exchange differences and other movements’ includes movement in liabilities relating to discretionary profit participation benefits due to policyholders arising from net unrealised investment gains recognised in other comprehensive income.

3	‘Exchange differences and other movements’ includes amounts arising under reinsurance agreements.

The increase in liabilities to policyholders represents the aggregate of all events giving rise to additional liabilities to policyholders in the year. The key factors contributing to the movement in liabilities to policyholders included death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the declaration of bonuses and other amounts attributable to policyholders.

 

HSBC HOLDINGS PLC   420

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29 Provisions

 

Accounting policy

 

		Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation which has arisen as a result of past events and for which a reliable estimate can be made.

Critical accounting estimates and judgements

 

		Provisions   Judgement is involved in determining whether a present obligation exists and in estimating the probability, timing and amount of any outflows. Professional expert advice is taken on the assessment of litigation, property (including onerous contracts) and similar obligations.   Provisions for legal proceedings and regulatory matters typically require a higher degree of judgement than other types of provisions. When matters are at an early stage, accounting judgements can be difficult because of the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. As matters progress, management and legal advisers evaluate on an ongoing basis whether provisions should be recognised, revising previous judgements and estimates as appropriate. At more advanced stages, it is typically easier to make judgements and estimates around a better defined set of possible outcomes. However, the amount provisioned can remain very sensitive to the assumptions used. There could be a wide range of possible outcomes for any pending legal proceedings, investigations or inquiries. As a result, it is often not practicable to quantify a range of possible outcomes for individual matters. It is also not practicable to meaningfully quantify ranges of potential outcomes in aggregate for these types of provisions because of the diverse nature and circumstances of such matters and the wide range of uncertainties involved.   Provisions for customer remediation also require significant levels of estimation and judgement. The amounts of provisions recognised depend on a number of different assumptions, for example, the volume of inbound complaints, the projected period of inbound complaint volumes, the decay rate of complaint volumes, the population identified as systemically mis-sold and the number of policies per customer complaint.

Provisions

 

				Restructuring costs						Contractual commitments						Legal proceedings and regulatory matters						Customer     remediation						Other       provisions						Total
				$m						$m						$m						$m						$m						$m
At 1 January 2015					197						234						2,184						1,831						552						4,998
Additional provisions/increase in provisions					430						120						2,153						765						138						3,606
Provisions utilised					(95	)					(2	)					(619	)					(856	)					(159	)					(1,731	)
Amounts reversed					(29	)					(15	)					(95	)					(170	)					(133	)					(442	)
Unwinding of discounts					–						–						40						6						–						46
Exchange differences and other movements					(40	)					(97	)					(489	)					(236	)					(63	)					(925	)
At 31 December 2015					463						240						3,174						1,340						335						5,552
At 1 January 2014					271						177						1,832						2,382						555						5,217
Additional provisions/increase in provisions					147						136						1,752						1,440						154						3,629
Provisions utilised					(143	)					(2	)					(1,109	)					(1,769	)					(112	)					(3,135	)
Amounts reversed					(43	)					(46	)					(281	)					(184	)					(66	)					(620	)
Unwinding of discounts					–						1						43						10						11						65
Exchange differences and other movements					(35	)					(32	)					(53	)					(48	)					10						(158	)
At 31 December 2014					197						234						2,184						1,831						552						4,998

Further details of ‘Legal proceedings and regulatory matters’ are set out in Note 40. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim) or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC.

Further details of ‘Customer remediation’ are set out in this note. ‘Customer remediation’ refers to activities (root cause analysis, customer contact, case reviews, decision making and redress calculations) carried out by HSBC to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is often initiated by HSBC in response to customer complaints and/or industry developments in sales practices, and is not necessarily initiated by regulatory action.

Payment protection insurance

At 31 December 2015, a provision of $1,039m (2014: $1,079m) was held relating to the estimated liability for redress in respect of the possible mis-selling of payment protection insurance (‘PPI’) policies in previous years. An increase in provisions of $549m was recognised during the year, primarily reflecting an increase in inbound complaints by claims management

 

HSBC HOLDINGS PLC   421

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Notes on the Financial Statements (continued)

29 – Provisions / 30 – Subordinated liabilities

    

    

    

 

companies compared with previous forecasts and management’s current best estimate of the impact on provisions of the FCA consultation on the introduction of a time bar and the 2014 decision of the UK Supreme Court (‘Plevin’). The current projected trend of inbound complaint volumes implies that the redress programme will be completed by the first half of 2018 taking into account the likely impact of a time bar. (2014 assumption: first quarter of 2018). Cumulative provisions made since the Judicial Review ruling in the first half of 2011 amounted to $4.7bn of which $3.6bn had been paid as at 31 December 2015.

The estimated liability for redress is calculated on the basis of total premiums paid by the customer plus simple interest of 8% per annum (or the rate inherent in the related loan product where higher). The basis for calculating the redress liability is the same for single premium and regular premium policies. Future estimated redress levels are based on historically observed redress per policy.

A total of 5.4m PPI policies have been sold by HSBC since 2000, generating estimated revenues of approximately $4.0bn at 2015 average exchange rates. The gross written premiums on these policies was approximately $5.2bn. At 31 December 2015, the estimated total complaints expected to be received was 1.9m, representing 35% of total policies sold. It is estimated that contact will be made with regard to 2.3m policies, representing 42% of total policies sold. This estimate includes inbound complaints as well as HSBC’s proactive contact exercise on certain policies (‘outbound contact’).

The cumulative number of PPI complaints received to 31 December 2015 and the number of future claims expected

 

				Cumulative to 31 December 2015						Future     expected
Inbound complaints1 (000s of policies)					1,215						336
Outbound contact (000s of policies)					624						101
Response rate to outbound contact					44%						52%
Average uphold rate per claim2					74%						81%
Average redress per claim ($)					3,058						2,844
Complaints to FOS (000s of policies)					121						51
Average uphold rate per FOS claim					36%						53%

 

1	Excludes invalid claims where the complainant has not held a PPI policy.

2	Claims include inbound and responses to outbound contact.

The main assumptions involved in calculating the redress liability are the volume of inbound complaints, the projected period of inbound complaints, the decay rate of complaint volumes, the population identified as systemically mis-sold and the number of policies per customer complaint. The main assumptions are likely to evolve over time as root cause analysis continues, more experience is available regarding customer-initiated complaint volumes received, and we handle responses to our ongoing outbound contact.

A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately $221m at 2015 average exchange rates. Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by approximately $15m.

The decision under Plevin held that, judged on its own facts, non-disclosure of the amount of commissions payable in connection with the sale of PPI to a customer created an unfair relationship under the provisions of the UK Consumer Credit Act (‘CCA’). The FCA has issued a consultation on proposed rules and guidelines in relation to the application of this ruling, together with a proposal for the introduction of a time bar. HSBC has reflected its current best estimate of the impact of these matters in the provision held as at 31 December 2015. There remains uncertainty as to what the eventual outcome of the consultation will be: HSBC will continue to review provisioning levels as further facts become known.

In addition to these factors and assumptions, the extent of the required redress will also depend on the facts and circumstances of each individual customer’s case. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress.

Interest rate derivatives

At 31 December 2015, a provision of $87m (2014: $312m) was held relating to the estimated liability for redress in respect of the possible mis-selling of interest rate derivatives in the UK. The provision relates to the estimated redress payable to customers in respect of historical payments under derivative contracts. A release to the provision of $38m (2014: $288m increase) was recorded during the year.

UK Consumer Credit Act

HSBC has undertaken a review of compliance with the fixed-sum unsecured loan agreement requirements of the CCA. $167m was recognised at 31 December 2015 within ‘Accruals, deferred income and other liabilities’ for the repayment of interest to customers (2014: $379m), primarily where annual statements did not remind them of their right to partially prepay the loan, notwithstanding that the customer loan documentation did refer to this right. The cumulative liability to date was $569m (2014: $591m), of which payments of $414m (2014: $212m) have been made to customers. There is uncertainty as to whether other technical requirements of the CCA have been met.

 

HSBC HOLDINGS PLC   422

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Brazilian labour, civil and fiscal claims

Brazilian labour, civil and fiscal litigation provisions were $363m (2014: $501m) as at 31 December 2015. Of these provisions, $168m (2014: $246m) was in respect of labour and overtime litigation claims brought by past employees against HSBC operations in Brazil following their departure from the bank. The main assumptions involved in estimating the liability are the expected number of departing employees, individual salary levels and the facts and circumstances of each individual case. These provisions form part of the Brazilian disposal group and were classified as ‘held for sale’ at 31 December 2015 (see Note 23).

30 Subordinated liabilities

 

HSBC

 

				2015						2014
				$m						$m
Subordinated liabilities
At amortised cost					22,702						26,664
– subordinated liabilities					20,773						22,355
– preferred securities					1,929						4,309
Designated at fair value (Note 25)					22,510						23,317
– subordinated liabilities					21,168						21,822
– preferred securities					1,342						1,495
At 31 December					45,212						49,981
HSBC Holdings					26,062						25,277
Other HSBC					19,150						24,704
At 31 December					45,212						49,981

HSBC’s subordinated liabilities

Subordinated liabilities rank behind senior obligations and generally count towards the capital base of HSBC. Where applicable, capital securities may be called and redeemed by HSBC subject to prior notification to the PRA and, where relevant, the consent of the local banking regulator. If not redeemed at the first call date, coupons payable may step-up or become floating rate based on interbank rates.

Interest rates on the floating rate capital securities are generally related to interbank offered rates. On the remaining capital securities, interest is payable at fixed rates of up to 10.176%.

The balance sheet amounts disclosed below are presented on an IFRSs basis and do not reflect the amount that the instruments contribute to regulatory capital due to the inclusion of issuance costs, regulatory amortisation and regulatory eligibility limits prescribed in the grandfathering provisions under CRD IV.

HSBC’s subordinated liabilities in issue

 

First call date

Maturity date

2015 $m

2014 $m

Additional tier 1 capital securities guaranteed by HSBC Holdings plc1

£500m

8.208% non-cumulative step-up perpetual preferred securities2

Jun 2015

–

779

€750m

5.13% non-cumulative step-up perpetual preferred securities3

Mar 2016

856

979

$900m

10.176% non-cumulative step-up perpetual preferred securities, series 2

Jun 2030

891

891

1,747

2,649

Additional tier 1 capital securities guaranteed by HSBC Bank plc1

£300m

5.862% non-cumulative step-up perpetual preferred securities

Apr 2020

488

515

£700m

5.844% non-cumulative step-up perpetual preferred securities

Nov 2031

1,038

1,091

1,526

1,606

Tier 2 securities issued by HSBC Bank plc

£500m

4.75% callable subordinated notes4

Sep 2015

Sep 2020

–

802

£350m

5.00% callable subordinated notes5

Mar 2018

Mar 2023

562

605

£300m

6.50% subordinated notes

–

Jul 2023

444

466

£350m

5.375% callable subordinated step-up notes6

Nov 2025

Nov 2030

569

620

£500m

5.375% subordinated notes

–

Aug 2033

846

905

£225m

6.25% subordinated notes

–

Jan 2041

332

349

£600m

4.75% subordinated notes

–

Mar 2046

879

924

€500m

Callable subordinated floating rate notes4

Sep 2015

Sep 2020

–

588

$300m

7.65% subordinated notes

–

May 2025

386

400

$750m

Undated floating rate primary capital notes

Jun 1990

750

750

$500m

Undated floating rate primary capital notes

Sep 1990

500

500

$300m

Undated floating rate primary capital notes, series 3

Jun 1992

300

300

5,568

7,209

 

HSBC HOLDINGS PLC   423

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Notes on the Financial Statements (continued)

30 – Subordinated liabilities

    

    

    

 

First call date

Maturity date

2015 $m

2014 $m

Tier 2 securities issued by The Hongkong and Shanghai Banking Corporation Ltd

$400m

Primary capital undated floating rate notes7

Aug 1990

401

403

$400m

Primary capital undated floating rate notes (second series)8

Dec 1990

–

401

$400m

Primary capital undated floating rate notes (third series)

Jul 1991

400

400

801

1,204

Tier 2 securities issued by HSBC Bank Australia Limited

AUD200m

Callable subordinated floating rate notes9

Nov 2015

Nov 2020

–

164

–

164

Tier 2 securities issued by HSBC Bank Malaysia Berhad

MYR500m

4.35% subordinated bonds

Jun 2017

Jun 2022

116

143

MYR500m

5.05% subordinated bonds

Nov 2022

Nov 2027

116

144

232

287

Tier 2 securities issued by HSBC USA Inc.

$200m

7.808% capital securities10

Dec 2006

Dec 2026

–

200

$200m

8.38% capital securities10

May 2007

May 2027

–

200

$150m

7.75% Capital Trust pass through securities10

Nov 2006

Nov 2026

–

150

$750m

5.00% subordinated notes

–

Sep 2020

747

738

$250m

7.20% subordinated debentures

–

Jul 2097

220

216

Other subordinated liabilities each less than $150m11

299

297

1,266

1,801

Tier 2 securities issued by HSBC Bank USA, N.A.

$500m

6.00% subordinated notes

–

Aug 2017

502

508

$1,250m

4.875% subordinated notes

–

Aug 2020

1,258

1,210

$1,000m

5.875% subordinated notes

–

Nov 2034

1,142

1,245

$750m

5.625% subordinated notes

–

Aug 2035

850

934

$700m

7.00% subordinated notes

–

Jan 2039

691

676

4,443

4,573

Tier 2 securities issued by HSBC Finance Corporation

$1,000m

5.911% trust preferred securities9

Nov 2015

Nov 2035

–

998

$2,939m

6.676% senior subordinated notes12

–

Jan 2021

2,188

2,185

2,188

3,183

Tier 2 securities issued by HSBC Bank Brazil S.A.13

BRL383m

Subordinated certificates of deposit

–

Feb 2015

–

144

BRL500m

Subordinated floating rate certificates of deposit

–

Dec 2016

–

188

Other subordinated liabilities each less than $150m11

–

81

–

413

Tier 2 securities issued by HSBC Bank Canada

CAD400m

4.80% subordinated debentures

Apr 2017

Apr 2022

298

367

CAD200m

4.94% subordinated debentures7

Mar 2016

Mar 2021

144

172

CAD39m

Floating rate debentures

Oct 1996

Nov 2083

29

34

471

573

Securities issued by HSBC Mexico, S.A.

MXN1,818m

Non-convertible subordinated obligations14

Sep 2013

Sep 2018

105

124

MXN2,273m

Non-convertible subordinated obligations14

Dec 2013

Dec 2018

131

154

$300m

Non-convertible subordinated obligations14,15

Jun 2014

Jun 2019

240

240

476

518

Securities issued by other HSBC subsidiaries

Other subordinated liabilities each less than $200m11

432

524

Subordinated liabilities issued by HSBC subsidiaries at 31 December

19,150

24,704

 

1	See paragraph below, ‘Guaranteed by HSBC Holdings or HSBC Bank plc’.

2	In June 2015, HSBC called and redeemed £500m 8.208% non-cumulative step-up perpetual preferred securities at par.

3	In February 2016, HSBC gave notice that it will call and redeem the €750m 5.13% non-cumulative step-up perpetual preferred securities.

4	In September 2015, HSBC called and redeemed £500m 4.75% callable subordinated notes and €500m callable subordinated floating rate notes at par.

5	The interest rate payable after March 2018 is the sum of the gross redemption yield of the then prevailing five-year UK gilt plus 1.80%.

6	The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.50%.

7	In January 2016, HSBC gave notice that it will call and redeem the $400m Primary capital undated floating rate notes and CAD200m 4.94% subordinated debentures.

8	In December 2015, HSBC called and redeemed $400m Primary capital undated floating rate notes at par.

9	In November 2015, HSBC called and redeemed $1,000m 5.911% trust preferred securities and AUD 200m callable subordinated floating rate notes at par.

10	In June 2015, HSBC called and redeemed $200m 7.808% capital securities, $200m 8.38% capital securities, and $150m 7.75% Capital Trust pass through securities at par.

11	Some securities included here are ineligible for inclusion in the capital base of HSBC in accordance with CRD IV rules.

12	Approximately $731m of the senior subordinated notes are held by HSBC Holdings.

13	Included in Note 23, Assets held for sale and liabilities of disposal groups held for sale.

 

HSBC HOLDINGS PLC   424

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14	These securities are ineligible for inclusion in the capital base of HSBC in accordance with CRD IV rules.

15	Approximately $60m of the subordinated obligations are held by HSBC Holdings.

HSBC Holdings

 

				2015						2014
				$m						$m
Subordinated liabilities:
– at amortised cost					15,895						17,255
– designated at fair value (Note 25)					11,956						10,494
At 31 December					27,851						27,749

HSBC Holdings’ subordinated liabilities

 

First call date

Maturity date

2015 $m

2014 $m

Tier 2 securities issued by HSBC Holdings plc

Amounts owed to third parties

$488m

7.625% subordinated notes1

–

May 2032

531

538

$222m

7.35% subordinated notes1

–

Nov 2032

278

278

$2,000m

6.5% subordinated notes1

–

May 2036

2,029

2,029

$2,500m

6.5% subordinated notes1

–

Sep 2037

3,085

3,278

$1,500m

6.8% subordinated notes1

–

Jun 2038

1,487

1,487

$2,000m

4.25% subordinated notes2,5

–

Mar 2024

2,078

2,069

$1,500m

5.25% subordinated notes2,5

–

Mar 2044

1,735

1,735

$1,500m

4.25% subordinated notes2

–

Aug 2025

1,529

–

£900m

6.375% callable subordinated notes1,3

Oct 2017

Oct 2022

1,432

1,558

£650m

5.75% subordinated notes2

–

Dec 2027

1,079

1,176

£650m

6.75% subordinated notes2

–

Sep 2028

955

1,005

£750m

7.0% subordinated notes2

–

Apr 2038

1,159

1,217

£900m

6.0% subordinated notes2

–

Mar 2040

1,310

1,379

€1,600m

6.25% subordinated notes2

–

Mar 2018

1,748

1,950

€1,750m

6.0% subordinated notes2

–

Jun 2019

2,284

2,623

€700m

3.625% callable subordinated notes1,4

Jun 2015

Jun 2020

–

878

€1,500m

3.375% callable subordinated notes2,5

Jan 2019

Jan 2024

1,694

1,898

€1,500m

3.0% subordinated notes2

–

Jun 2025

1,691

–

26,104

25,098

Amounts owed to HSBC undertakings

£500m

8.208% subordinated step-up cumulative notes4

Jun 2015

Jun 2040

–

779

€750m

5.13% fixed/floating subordinated notes

Mar 2016

Dec 2044

856

981

$900m

10.176% subordinated step-up cumulative notes

Jun 2030

Jun 2040

891

891

1,747

2,651

At 31 December

27,851

27,749

 

1	Amounts owed to third parties represent securities included in the capital base of HSBC as tier 2 securities in accordance with the grandfathering provisions under CRD IV rules.

2	These securities are included in the capital base of HSBC as fully CRD IV compliant tier 2 securities on an end point basis.

3	The interest rate payable after October 2017 is the sum of the three-month sterling Libor plus 1.3%.

4	In June 2015, HSBC Holdings called and redeemed the €700m 3.625% callable subordinated notes and £500m 8.208% non-cumulative step-up perpetual preferred securities at par.

5	These subordinated notes are measured at amortised cost in HSBC Holdings, where the interest rate risk is hedged using a fair value hedge, while they are measured at fair value in the Group.

Additional tier 1 capital securities

HSBC has included three types of additional tier 1 capital securities in its tier 1 capital. Additional tier 1 capital securities are perpetual subordinated securities on which coupon payments may be deferred or cancelled at the discretion of HSBC Holdings. The securities presented in this Note are accounted for as liabilities because HSBC has an obligation to pay dividends in perpetuity. See Note 35 for the other two types of additional tier 1 capital securities accounted for as equity.

The additional tier 1 securities presented in this section do not meet the identifying criteria in full for recognition as tier 1 capital under CRD IV but are eligible as regulatory capital subject to grandfathering limits and progressive phase-out.

Guaranteed by HSBC Holdings or HSBC Bank plc

The five capital securities above that are guaranteed on a subordinated basis by HSBC Holdings or HSBC Bank plc (‘HSBC Bank’) and are non-cumulative step-up perpetual preferred securities issued by Jersey limited partnerships. The proceeds of the issues were on-lent to the respective guarantors by the limited partnerships in the form of subordinated notes. These preferred securities qualify as additional tier 1 capital for HSBC under CRD IV by virtue of the application of grandfathering provisions, and the two capital securities guaranteed by HSBC Bank also qualify as additional tier 1 capital for HSBC Bank (on a solo and a consolidated basis) under CRD IV by virtue of the same grandfathering process.

 

HSBC HOLDINGS PLC   425

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Notes on the Financial Statements (continued)

30 – Subordinated liabilities / 31 – Maturity analysis

    

    

    

 

These preferred securities, together with the guarantee, are intended to provide investors with economic rights equivalent to the rights that they would have had if they had purchased non-cumulative perpetual preference shares of the relevant issuer. There are limitations on the payment of distributions if such payments are prohibited under UK banking regulations or other requirements, if a payment would cause a breach of HSBC’s capital adequacy requirements or if HSBC Holdings or HSBC Bank have insufficient distributable reserves (as defined).

HSBC Holdings and HSBC Bank have individually covenanted that if prevented under certain circumstances from paying distributions on the preferred securities in full, they will not pay dividends or other distributions in respect of their ordinary shares, or effect repurchases or redemptions of their ordinary shares, until the distribution on the preferred securities has been paid in full.

With respect to preferred securities guaranteed by HSBC Holdings, if (i) HSBC’s total capital ratio falls below the regulatory minimum ratio required or (ii) the Directors expect, in view of the deteriorating financial condition of HSBC Holdings, that (i) will occur in the near term, then the preferred securities will be substituted by preference shares of HSBC Holdings which have economic terms which are in all material respects equivalent to those of the preferred securities and the guarantee taken together.

With respect to preferred securities guaranteed by HSBC Bank, if (i) any of the two issues of preferred securities are outstanding in April 2049 or November 2048, respectively, or (ii) the total capital ratio of HSBC Bank on a solo and consolidated basis falls below the regulatory minimum ratio required or (iii) in view of the deteriorating financial condition of HSBC Bank, the Directors expect (ii) to occur in the near term, then the preferred securities will be substituted by preference shares of HSBC Bank having economic terms which are in all material respects equivalent to those of the preferred securities and the guarantee taken together.

Tier 2 capital securities

These capital securities are included within HSBC’s regulatory capital base as tier 2 capital under CRD IV by virtue of the application of grandfathering provisions (with the exception of identified HSBC Holding securities which are compliant with CRD IV end point rules). Tier 2 capital securities are either perpetual subordinated securities or dated securities on which there is an obligation to pay coupons. In accordance with CRD IV, the capital contribution of all tier 2 securities is amortised for regulatory purposes in their final five years before maturity.

31 Maturity analysis of assets, liabilities and off-balance sheet commitments

 

The table on page 427 provides an analysis of consolidated total assets, liabilities and off-balance sheet commitments by residual contractual maturity at the balance sheet date. Asset and liability balances are included in the maturity analysis as follows:

 

•

except for reverse repos, repos and debt securities in issue, trading assets and liabilities (including trading derivatives) are included in the ‘Due not more than 1 month’ time bucket, and not by contractual maturity because trading balances are typically held for short periods of time;

 

•

financial assets and liabilities with no contractual maturity (such as equity securities) are included in the ‘Due over 5 years’ time bucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the ‘Due over 5 years’ time bucket;

 

•

non-financial assets and liabilities with no contractual maturity (such as property, plant and equipment, goodwill and intangible assets, current and deferred tax assets and liabilities and retirement benefit liabilities) are included in the ‘Due over 5 years’ time bucket;

 

•

financial instruments included within assets and liabilities of disposal groups held for sale are classified on the basis of the contractual maturity of the underlying instruments and not on the basis of the disposal transaction; and

 

•

liabilities under insurance contracts are included in the ‘Due over 5 years’ time bucket. Liabilities under investment contracts are classified in accordance with their contractual maturity. Undated investment contracts are classified based on the contractual notice period investors are entitled to give. Where there is no contractual notice period, undated contracts are included in the ‘Due over 5 years’ time bucket.

Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down.

 

HSBC HOLDINGS PLC   426

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HSBC

Maturity analysis of assets and liabilities

 

				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
Financial assets
Cash and balances at central banks					98,934						–						–						–						–						–						–						–						98,934
Items in the course of collection from other banks					5,768						–						–						–						–						–						–						–						5,768
Hong Kong Government certificates of indebtedness					28,410						–						–						–						–						–						–						–						28,410
Trading assets					224,691						34						–						–						–						112						–						–						224,837
– reverse repos					292						34						–						–						–						112						–						–						438
– other trading assets					224,399						–						–						–						–						–						–						–						224,399
Financial assets designated at fair value					429						194						222						83						390						896						2,603						19,035						23,852
Derivatives					285,797						215						223						198						33						499						841						670						288,476
– trading					285,678						–						–						–						–						–						–						–						285,678
– non-trading					119						215						223						198						33						499						841						670						2,798
Loans and advances to banks					57,296						14,530						4,063						1,964						2,499						5,134						3,274						1,641						90,401
Loans and advances to customers					176,862						69,638						54,730						33,095						34,774						81,560						201,253						272,542						924,454
– personal					39,191						8,328						8,510						7,457						9,350						22,438						57,283						218,646						371,203
– corporate and commercial					123,901						54,711						40,489						21,081						21,811						50,355						131,166						49,564						493,078
– financial					13,770						6,599						5,731						4,557						3,613						8,767						12,804						4,332						60,173
Reverse repurchase agreements – non-trading					110,478						21,978						7,220						2,786						580						2,985						228						–						146,255
Financial investments					35,104						59,098						36,897						19,102						17,293						48,634						94,549						118,278						428,955
Assets held for sale					15,816						2,628						2,544						1,218						2,611						4,675						6,365						4,422						40,279
Accrued income and other financial assets					12,732						6,682						1,995						483						395						463						445						2,115						25,310
Financial assets at 31 December 2015					1,052,317						174,997						107,894						58,929						58,575						144,958						309,558						418,703						2,325,931
Non-financial assets					–						–						–						–						–						–						–						83,725						83,725
Total assets at 31 December 2015					1,052,317						174,997						107,894						58,929						58,575						144,958						309,558						502,428						2,409,656

 

HSBC HOLDINGS PLC   427

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Notes on the Financial Statements (continued)

31 – Maturity analysis

    

    

    

 

Maturity analysis of assets and liabilities (continued)

 

				Due not more than 1 month						Due over 1 month but not more than 3 months						Due over 3 months but not more than 6 months						Due over 6 months but not more than 9 months						Due over 9 months but not more than 1 year						Due over 1 year but not more than 2 years						Due over 2 years but not more than 5 years						Due over 5 years						Total
				$m						$m						$m						$m						$m						$m						$m						$m						$m
Financial liabilities
Hong Kong currency notes in circulation					28,410						–						–						–						–						–						–						–						28,410
Deposits by banks					46,693						2,225						1,049						325						116						712						3,182						69						54,371
Customer accounts1					1,185,091						50,831						21,397						10,421						10,869						6,596						3,852						529						1,289,586
– personal					574,468						27,646						13,032						7,371						7,990						3,566						2,920						354						637,347
– corporate and commercial					459,813						18,802						7,314						2,479						2,495						2,926						828						156						494,813
– financial					150,810						4,383						1,051						571						384						104						104						19						157,426
Repurchase agreements – non-trading					73,478						3,788						1,816						164						154						–						500						500						80,400
Items in the course of transmission to other banks					5,638						–						–						–						–						–						–						–						5,638
Trading liabilities					111,691						1,471						1,529						882						2,184						4,344						10,105						9,408						141,614
– repos					77						365						–						–						–						–						–						–						442
– debt securities in issue					967						1,106						1,529						882						2,184						4,344						10,105						9,408						30,525
– other trading liabilities					110,647						–						–						–						–						–						–						–						110,647
Financial liabilities designated at fair value					2,036						1,822						2,943						342						1,900						4,930						14,316						38,119						66,408
– debt securities in issue: covered bonds					–						–						–						–						–						2,012						1,608						2,577						6,197
– debt securities in issue: otherwise secured					–						–						–						–						–						–						–						–						–
– debt securities in issue: unsecured					1,972						973						2,926						342						1,786						2,918						9,819						10,745						31,481
– subordinated liabilities and preferred securities					–						848						–						–						–						–						2,773						18,889						22,510
– other					64						1						17						–						114						–						116						5,908						6,220
Derivatives					276,765						34						251						213						52						524						1,063						2,169						281,071
– trading					276,558						–						–						–						–						–						–						–						276,558
– non-trading					207						34						251						213						52						524						1,063						2,169						4,513
Debt securities in issue					16,536						9,326						16,295						5,542						1,365						10,754						22,866						6,265						88,949
– covered bonds					–						–						1						–						1						83						17						33						135
– otherwise secured					8,436						173						195						206						173						2,082						4,354						1,118						16,737
– unsecured					8,100						9,153						16,099						5,336						1,191						8,589						18,495						5,114						72,077
Liabilities of disposal groups held for sale					20,350						1,416						1,548						1,344						1,246						5,050						1,484						115						32,553
Accruals and other financial liabilities					14,802						7,965						2,467						659						421						925						1,454						665						29,358
Subordinated liabilities					–						401						–						–						34						650						4,579						17,038						22,702
Total financial liabilities at 31 December 2015					1,781,490						79,279						49,295						19,892						18,341						34,485						63,401						74,877						2,121,060
Non-financial liabilities					–						–						–						–						–						–						–						91,078						91,078
Total liabilities at 31 December 2015					1,781,490						79,279						49,295						19,892						18,341						34,485						63,401						165,955						2,212,138

 

HSBC HOLDINGS PLC   428

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				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
Financial assets
Cash and balances at central banks					129,957						–						–						–						–						–						–						–						129,957
Items in the course of collection from other banks					4,927						–						–						–						–						–						–						–						4,927
Hong Kong Government certificates of indebtedness					27,674						–						–						–						–						–						–						–						27,674
Trading assets					303,463						–						–						–						–						–						730						–						304,193
– reverse repos					567						–						–						–						–						–						730						–						1,297
– other trading assets					302,896						–						–						–						–						–						–						–						302,896
Financial assets designated at fair value					244						399						417						346						208						1,825						4,634						20,964						29,037
Derivatives					341,558						56						463						220						32						1,003						1,033						643						345,008
– trading					341,416						–						–						–						–						–						–						–						341,416
– non-trading					142						56						463						220						32						1,003						1,033						643						3,592
Loans and advances to banks					73,758						17,649						5,682						1,934						1,850						7,371						1,981						1,924						112,149
Loans and advances to customers					203,130						76,236						55,018						35,347						37,674						91,300						187,728						288,227						974,660
– personal					42,170						9,673						8,911						7,486						8,672						27,305						54,439						230,298						388,954
– corporate and commercial					146,250						61,809						41,924						23,720						23,697						56,398						124,796						56,590						535,184
– financial					14,710						4,754						4,183						4,141						5,305						7,597						8,493						1,339						50,522
Reverse repurchase agreements – non-trading					116,002						30,490						9,076						2,230						582						868						2,465						–						161,713
Financial investments					28,237						50,445						41,503						14,577						17,011						48,392						96,891						118,411						415,467
Assets held for sale					114						186						13						18						10						41						126						6,224						6,732
Accrued income and other financial assets					17,756						7,386						2,402						587						317						707						1,156						3,579						33,890
Financial assets at 31 December 2014					1,246,820						182,847						114,574						55,259						57,684						151,507						296,744						439,972						2,545,407
Non-financial assets					–						–						–						–						–						–						–						88,732						88,732
Total assets at 31 December 2014					1,246,820						182,847						114,574						55,259						57,684						151,507						296,744						528,704						2,634,139

 

HSBC HOLDINGS PLC   429

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Notes on the Financial Statements (continued)

31 – Maturity analysis

    

    

    

 

Maturity analysis of assets and liabilities (continued)

 

				Due not more than 1 month						Due over 1 month but not more than 3 months						Due over 3 months but not more than 6 months						Due over 6 months but not more than 9 months						Due over 9 months but not more than 1 year						Due over 1 year but not more than 2 years						Due over 2 years but not more than 5 years						Due over 5 years						Total
				$m						$m						$m						$m						$m						$m						$m						$m						$m
Financial liabilities
Hong Kong currency notes in circulation					27,674						–						–						–						–						–						–						–						27,674
Deposits by banks					66,829						2,890						2,539						511						810						621						2,963						263						77,426
Customer accounts1					1,216,574						57,127						32,925						15,023						13,586						9,278						5,819						310						1,350,642
– personal					572,459						28,580						16,728						10,609						9,625						7,220						3,967						125						649,313
– corporate and commercial					465,990						21,841						10,688						3,716						2,894						1,615						1,316						150						508,210
– financial					178,125						6,706						5,509						698						1,067						443						536						35						193,119
Repurchase agreements – non-trading					95,243						5,029						4,054						1,392						714						–						–						1,000						107,432
Items in the course of transmission to other banks					5,990						–						–						–						–						–						–						–						5,990
Trading liabilities					155,604						2,041						2,636						1,439						2,918						5,744						9,603						10,587						190,572
– repos					746						909						224						264						1,249						406						–						–						3,798
– debt securities in issue					1,686						1,132						2,412						1,175						1,669						5,338						9,603						10,587						33,602
– other trading liabilities					153,172						–						–						–						–						–						–						–						153,172
Financial liabilities designated at fair value					981						912						4,264						972						1,557						8,500						15,037						43,930						76,153
– debt securities in issue: covered bonds					–						–						–						205						–						–						2,705						2,942						5,852
– debt securities in issue: otherwise secured					–						–						–						–						–						–						–						–						–
– debt securities in issue: unsecured					942						868						4,242						742						1,409						8,500						9,576						14,233						40,512
– subordinated liabilities and preferred securities					–						36						–						–						18						–						2,623						20,640						23,317
– other					39						8						22						25						130						–						133						6,115						6,472
Derivatives					335,802						23						86						223						54						621						1,121						2,739						340,669
– trading					335,400						–						–						–						–						–						–						–						335,400
– non-trading					402						23						86						223						54						621						1,121						2,739						5,269
Debt securities in issue					14,741						15,424						13,027						7,854						6,050						14,209						19,481						5,161						95,947
– covered bonds					–						–						–						–						–						–						81						–						81
– otherwise secured					8,807						1,063						60						283						272						912						1,562						1,008						13,967
– unsecured					5,934						14,361						12,967						7,571						5,778						13,297						17,838						4,153						81,899
Liabilities of disposal groups held for sale					191						28						56						55						63						213						551						2,837						3,994
Accruals and other financial liabilities					20,893						9,170						3,013						1,166						1,757						1,355						1,674						818						39,846
Subordinated liabilities					–						150						–						3						167						113						3,607						22,624						26,664
Total financial liabilities at 31 December 2014					1,940,522						92,794						62,600						28,638						27,676						40,654						59,856						90,269						2,343,009
Non-financial liabilities					–						–						–						–						–						–						–						91,152						91,152
Total liabilities at 31 December 2014					1,940,522						92,794						62,600						28,638						27,676						40,654						59,856						181,421						2,434,161

 

1	‘Customer accounts’ includes $342,908m (2014: $342,927m) insured by guarantee schemes.

 

HSBC HOLDINGS PLC   430

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Maturity analysis of off-balance sheet commitments received

 

				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
At 31 December 2015
Loan and other credit-related commitments					3,472						–						2,149						–						–						111						–						–						5,732
At 31 December 2014
Loan and other credit-related commitments					3,313						–						4,312						607						–						–						–						–						8,232
Maturity analysis of off-balance sheet commitments given
				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
At 31 December 2015
Loan and other credit-related commitments					472,277						45,792						16,271						9,798						47,122						11,325						48,756						15,089						666,430
Of which:
– personal					161,843						11,547						6,333						963						19,607						1,207						425						1,018						202,943
– corporate and commercial					272,044						32,764						9,126						8,372						23,984						8,227						38,838						12,558						405,913
– financial					38,390						1,481						812						463						3,531						1,891						9,493						1,513						57,574
At 31 December 2014
Loan and other credit-related commitments					455,319						52,398						8,919						14,163						41,500						13,979						48,333						16,769						651,380
Of which:
– personal					179,088						15,784						452						305						14,036						1,432						1,003						955						213,055
– corporate and commercial					239,646						34,657						7,595						12,556						23,519						9,926						36,918						12,185						377,002
– financial					36,585						1,957						872						1,302						3,945						2,621						10,412						3,629						61,323

 

HSBC HOLDINGS PLC   431

---

Notes on the Financial Statements (continued)

31 – Maturity analysis

    

    

    

 

HSBC Holdings

Maturity analysis of assets, liabilities and off-balance sheet commitments

 

Due not more than 1 month

Due over 1 month but not more than 3 months

Due over 3 months but not more than 6 months

Due over 6 months but not more than 9 months

Due over 9 months but not more than 1 year

Due over 1 year but not more than 2 years

Due over 2 years but not more than 5 years

Due over 5 years

Total

$m

$m

$m

$m

$m

$m

$m

$m

$m

Financial assets

Cash at bank and in hand:

– balances with HSBC undertakings

242

–

–

–

–

–

–

–

242

Derivatives

1,990

–

–

–

–

–

109

368

2,467

– trading

1,990

–

–

–

–

–

–

–

1,990

– non-trading

–

–

–

–

–

–

109

368

477

Loans and advances to HSBC undertakings

7,805

2,629

4,618

–

–

–

–

29,298

44,350

Financial investments in HSBC undertakings

40

6

–

–

–

–

–

4,239

4,285

Accrued income and other financial assets

7

–

–

–

–

–

–

109

116

Total financial assets at 31 December 2015

10,084

2,635

4,618

–

–

–

109

34,014

51,460

Non-financial assets

–

–

–

–

–

–

–

98,734

98,734

Total assets at 31 December 2015

10,084

2,635

4,618

–

–

–

109

132,748

150,194

Financial liabilities

Amounts owed to HSBC undertakings

1,629

–

–

–

–

415

–

108

2,152

Financial liabilities designated at fair value

–

960

–

–

–

–

2,285

16,608

19,853

– debt securities in issue

–

960

–

–

–

–

–

6,937

7,897

– subordinated liabilities and preferred securities

–

–

–

–

–

–

2,285

9,671

11,956

Derivatives

2,065

–

–

–

–

–

213

–

2,278

– trading

2,065

–

–

–

–

–

–

–

2,065

– non-trading

–

–

–

–

–

–

213

–

213

Debt securities in issue

–

–

–

–

–

–

–

960

960

Accruals and other financial liabilities

1,231

195

132

20

–

–

–

–

1,578

Subordinated liabilities

–

–

–

–

–

–

1,749

14,146

15,895

Total financial liabilities at 31 December 2015

4,925

1,155

132

20

–

415

4,247

31,822

42,716

Non-financial liabilities

–

–

–

–

–

–

–

64

64

Total liabilities at 31 December 2015

4,925

1,155

132

20

–

415

4,247

31,886

42,780

Off-balance sheet commitments given

Undrawn formal standby facilities, credit lines and other commitments to lend

–

–

–

–

–

–

–

–

–

 

HSBC HOLDINGS PLC   432

---

    

    

    

    

    

 

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

Financial assets

Cash at bank and in hand:

– balances with HSBC undertakings

249

–

–

–

–

–

–

–

249

Derivatives

2,287

–

–

–

–

–

127

357

2,771

– trading

2,287

–

–

–

–

–

–

–

2,287

– non-trading

–

–

–

–

–

–

127

357

484

Loans and advances to HSBC undertakings

7,007

858

7,676

–

14

–

–

28,355

43,910

Financial investments in HSBC undertakings

26

6

–

–

–

–

–

4,041

4,073

Accrued income and other financial assets

8

–

–

–

–

–

–

–

8

Total financial assets at 31 December 2014

9,577

864

7,676

–

14

–

127

32,753

51,011

Non-financial assets

–

–

–

–

–

–

–

96,853

96,853

Total assets at 31 December 2014

9,577

864

7,676

–

14

–

127

129,606

147,864

Financial liabilities

Amounts owed to HSBC undertakings

2,423

–

32

–

1

436

–

–

2,892

Financial liabilities designated at fair value

–

–

–

–

–

1,110

2,623

14,946

18,679

– debt securities in issue

–

–

–

–

–

1,110

–

7,075

8,185

– subordinated liabilities and preferred securities

–

–

–

–

–

–

2,623

7,871

10,494

Derivatives

1,066

–

–

–

–

–

103

–

1,169

– trading

1,066

–

–

–

–

–

–

–

1,066

– non-trading

–

–

–

–

–

–

103

–

103

Debt securities in issue

–

–

–

–

–

–

–

1,009

1,009

Accruals and other financial liabilities

924

208

137

21

–

–

–

–

1,290

Subordinated liabilities

–

–

–

–

–

–

1,951

15,304

17,255

Total financial liabilities at 31 December 2014

4,413

208

169

21

1

1,546

4,677

31,259

42,294

Non-financial liabilities

–

–

–

–

–

–

–

125

125

Total liabilities at 31 December 2014

4,413

208

169

21

1

1,546

4,677

31,384

42,419

Off-balance sheet commitments given

Undrawn formal standby facilities, credit lines and other commitments to lend

16

–

–

–

–

–

–

–

16

 

 

HSBC HOLDINGS PLC   433

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Notes on the Financial Statements (continued)

32 – Offsetting of financial assets and financial liabilities

    

    

    

 

32 Offsetting of financial assets and financial liabilities

 

Accounting policy

 

 

Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously (‘the offset criteria’).

The disclosure below has been enhanced this year with the inclusion of ‘Amounts not subject to enforceable netting arrangements’ resulting in a change in the basis of preparation from the prior period. Prior period data have been represented accordingly.

The ‘Amounts not set off in the balance sheet’ in the following table for derivatives and reverse repurchase/repurchase, stock borrowing/lending and similar agreements include transactions where:

 

•

the counterparty has an offsetting exposure with HSBC and a master netting or similar arrangement is in place with a right of set off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and

 

•

cash and non-cash collateral has been received/pledged in respect of the transactions described above.

For loans and advances to customers and customer accounts at amortised cost the amounts included in the table below typically relate to transactions entered into with corporate and commercial customers for working capital management purposes. The ‘Amounts not set off in the balance sheet’ relate to transactions where the customer has an offsetting exposure with HSBC and an agreement is in place with the right of offset but the offset criteria are otherwise not satisfied. For risk management purposes, the net amounts of such exposures are subject to limits which are monitored and the relevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right of offset remains appropriate.

Footnotes to the table on page 435 are set out below:

 

1	At 31 December 2015, the amount of cash margin received that has been offset against the gross derivatives assets is $4,135m (2014: $606m). The amount of cash margin paid that has been offset against the gross derivatives liabilities is $4,224m (2014: $190m).

2

For the amount of reverse repos, stock borrowing and similar agreements recognised in the balance sheet, see the ‘Funding sources and uses; table on page 160. In the analysis below, the $7,556m (2014: $9,266m) of trading assets presented in the balance sheet comprised $438m of reverse repos (2014: $1,297m) and $7,118m of stock borrowing (2014: $7,969m).

3

At 31 December 2015, the total amount of loans and advances to customers at amortised cost was $924,454m (2014: $974,660m) of which $45,904m (2014: $62,096m) was subject to offsetting. For the amount of loans and advances to customers at amortised cost recognised in the balance sheet, see the ‘Funding sources and uses’ table on page 160.

4

For the amount of repos, stock lending and similar agreements recognised in the balance sheet, see the ‘Funding sources and uses’ table on page 160. In the analysis below, the $9,301m (2014: $15,830m) of trading liabilities presented in the balance sheet comprised $442m of repos (2014: $3,798m) and $8,859m of stock lending (2014: $12,032m).

5

At 31 December 2015, the total amount of customer accounts at amortised cost was $1,289,586m (2014: $1,350,642m) of which $51,442m (2014: $69,082m) was subject to offsetting. For the amount of customer accounts at amortised cost recognised in the balance sheet, see the ‘Funding sources and uses’ table on page 160.

6	These exposures continue to be secured by financial collateral, but we may not have sought or been able to obtain a legal opinion evidencing enforceability of the right of offset.

 

HSBC HOLDINGS PLC   434

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Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements

 

				Amounts subject to enforceable netting arrangements																																										Amounts not
																						Amounts not set off in the balance sheet																								subject to
					Gross amounts						Amounts offset						Net amounts in the balance sheet						Financial instruments						Non-cash collateral						Cash collateral						Net amount						enforceable netting arrangements	6					Total
				$m						$m						$m						$m						$m						$m						$m						$m						$m
Financial assets
Derivatives (Note 16)1					385,682						(105,860	)					279,822						(215,531	)					(8,621	)					(34,040	)					21,630						8,654						288,476
Reverse repos, stock borrowing and similar agreements2					208,417						(77,925	)					130,492						(544	)					(129,476	)					(270	)					202						23,319						153,811
Classified as:
– trading assets					7,496						–						7,496						–						(7,495	)					–						1						60						7,556
– non-trading assets					200,921						(77,925	)					122,996						(544	)					(121,981	)					(270	)					201						23,259						146,255
Loans and advances to customers at amortised cost3					77,547						(31,643	)					45,904						(40,790	)					–						–						5,114						1,487						47,391
At 31 December 2015					671,646						(215,428	)					456,218						(256,865	)					(138,097	)					(34,310	)					26,946						33,460						489,678
Derivatives (Note 16)1					584,359						(250,465	)					333,894						(262,856	)					(7,655	)					(41,750	)					21,633						11,114						345,008
Reverse repos, stock borrowing and similar agreements2					208,893						(88,676	)					120,217						(5,117	)					(114,394	)					(249	)					457						50,762						170,979
Classified as:
– trading assets					9,341						(390	)					8,951						–						(8,951	)					–						–						315						9,266
– non-trading assets					199,552						(88,286	)					111,266						(5,117	)					(105,443	)					(249	)					457						50,447						161,713
Loans and advances to customers at amortised cost3					99,623						(37,527	)					62,096						(55,989	)					–						–						6,107						1,597						63,693
At 31 December 2014					892,875						(376,668	)					516,207						(323,962	)					(122,049	)					(41,999	)					28,197						63,473						579,680
Financial liabilities
Derivatives (Note 16)1					377,930						(105,860	)					272,070						(215,508	)					(13,629	)					(30,063	)					12,870						9,001						281,071
Repos, stock lending and similar agreements4					136,040						(77,925	)					58,115						(2,034	)					(56,030	)					(26	)					25						31,586						89,701
Classified as:
– trading liabilities					9,300						–						9,300						–						(9,299	)					–						1						1						9,301
– non-trading liabilities					126,740						(77,925	)					48,815						(2,034	)					(46,731	)					(26	)					24						31,585						80,400
Customer accounts at amortised cost5					83,085						(31,643	)					51,442						(40,790	)					–						(1	)					10,651						729						52,171
At 31 December 2015					597,055						(215,428	)					381,627						(258,332	)					(69,659	)					(30,090	)					23,546						41,316						422,943
Derivatives (Note 16)1					580,644						(250,465	)					330,179						(262,864	)					(9,465	)					(39,571	)					18,279						10,490						340,669
Repos, stock lending and similar agreements4					165,514						(88,676	)					76,838						(8,934	)					(67,793	)					(105	)					6						46,424						123,262
Classified as:
– trading liabilities					16,206						(390	)					15,816						–						(15,813	)					–						3						14						15,830
– non-trading liabilities					149,308						(88,286	)					61,022						(8,934	)					(51,980	)					(105	)					3						46,410						107,432
Customer accounts at amortised cost5					106,609						(37,527	)					69,082						(55,989	)					–						–						13,093						479						69,561
At 31 December 2014					852,767						(376,668	)					476,099						(327,787	)					(77,258	)					(39,676	)					31,378						57,393						533,492

For footnotes, see page 434.

 

HSBC HOLDINGS PLC   435

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Notes on the Financial Statements (continued)

33 – Foreign exchange exposures / 34 – Non-controlling interests / 35 – Share capital

    

    

    

 

33 Foreign exchange exposures

 

Structural foreign exchange exposures

HSBC’s structural foreign exchange exposures are represented by the net asset value of its foreign exchange equity and subordinated debt investments in subsidiaries, branches, joint ventures and associates with non-US dollar functional currencies. Gains or losses on structural foreign exchange exposures are recognised in other comprehensive income. HSBC’s management of its structural foreign exchange exposures is discussed on page 171.

Net structural foreign exchange exposures

 

				2015						2014
				$m						$m
Currency of structural exposure
Pound sterling1					32,701						30,071
Hong Kong dollars					28,270						24,028
Chinese renminbi					24,117						24,578
Euros					19,966						20,378
Mexican pesos					4,228						5,249
Indian rupees					3,645						3,466
Canadian dollars					3,595						4,187
Saudi riyals					3,109						2,910
Brazilian real					2,865						4,910
Swiss francs					2,642						1,864
Malaysian ringgit					1,994						2,219
UAE dirhams					1,898						2,199
Taiwanese dollars					1,702						1,721
Singapore dollars					1,454						1,185
Australian dollars					1,396						1,516
Indonesian rupiah					1,303						1,352
Korean won					1,296						1,360
Turkish lira					1,006						1,366
Egyptian pounds					925						868
Argentine pesos					875						1,059
Others, each less than $700m					5,775						5,918
At 31 December					144,762						142,404

 

1	During 2015, we entered into new forward exchange contracts amounting to $2.6bn (2014: $1.6bn) in order to manage our sterling structural foreign exchange exposure.

Shareholders’ equity would decrease by $2,633m (2014: $2,522m) if euro and sterling foreign currency exchange rates weakened by 5% relative to the US dollar.

34 Non-controlling interests

 

 

				2015						2014
				$m						$m
Non-controlling interests attributable to holders of ordinary shares in subsidiaries					6,981						7,104
Preferred securities issued by subsidiaries					2,077						2,427
At 31 December					9,058						9,531

Preferred securities issued by subsidiaries

Preferred securities are securities for which there is no obligation to pay a dividend and, if the dividend is not paid, it may not be cumulative. Such securities do not generally carry voting rights but rank higher than ordinary shares for dividend payments and in the event of a winding-up. These securities have no stated maturity date but may be called and redeemed by the issuer, subject to prior notification to the PRA and, where relevant, the consent of the local banking regulator. Dividends on floating rate preferred securities are generally related to interbank offer rates.

Included in the capital base of HSBC are non-cumulative preferred securities classified as additional tier 1 capital and cumulative preferred securities classified as tier 2 capital in accordance with CRD IV rules, by virtue of the application of grandfathering provisions.

 

 

HSBC HOLDINGS PLC   436

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Preferred securities issued by HSBC’s subsidiaries

 

First call date

2015 $m

2014 $m

HSBC USA Inc.

$150m1

Depositary shares each representing 25% interest in a share of adjustable-rate cumulative preferred stock, series D

Jul 1999

–

150

$150m2

Cumulative preferred stock

Oct 2007

–

150

$518m

Floating rate non-cumulative preferred stock, series F

Apr 2010

518

518

$374m

Floating rate non-cumulative preferred stock, series G

Jan 2011

374

374

$374m

6.50% non-cumulative preferred stock, series H

Jul 2011

374

374

HSBC Finance Corporation

$575m

6.36% non-cumulative preferred stock, series B

Jun 2010

559

559

HSBC Bank Canada

CAD175m

Non-cumulative redeemable class 1 preferred shares, series C

Jun 2010

126

151

CAD175m

Non-cumulative class 1 preferred shares, series D

Dec 2010

126

151

At 31 December

2,077

2,427

 

1	In May 2015, HSBC redeemed its depositary shares representing 25% interest in a share of adjustable-rate cumulative preferred stock, series D for $152m.

2	In May 2015, HSBC redeemed its cumulative preferred stock for $152m.

35 Called up share capital and other equity instruments

 

Accounting policy

 

Financial instruments issued are classified as equity when there is no contractual obligation to transfer cash or other financial assets or issue a variable number of own equity instruments. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax.   HSBC Holdings equity instruments held by HSBC are recognised in equity as a deduction from retained earnings until they are cancelled. When such instruments are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity, net of any directly attributable incremental transaction costs and related income tax effects.

Issued and fully paid

HSBC Holdings ordinary shares of $0.50 each

 

HSBC Holdings ordinary shares1 at 31 December				2015 $m   9,842						2014 $m   9,609
				Number						$m
At 1 January 2015					19,217,874,260						9,609
Shares issued under HSBC employee share plans					91,265,909						45
Shares issued in lieu of dividends					375,956,765						188
At 31 December 2015					19,685,096,934						9,842
At 1 January 2014					18,830,007,039						9,415
Shares issued under HSBC employee share plans					119,391,238						60
Shares issued in lieu of dividends					268,475,983						134
At 31 December 2014					19,217,874,260						9,609

HSBC Holdings non-cumulative preference shares of $0.01 each

 

Number

$m

At 1 January 2015 and 31 December 20152

1,450,000

–

At 1 January 2014 and 31 December 2014

1,450,000

–

 

1	All HSBC Holdings ordinary shares in issue confer identical rights, including in respect of capital, dividends and voting.

2	Included in the capital base of HSBC as additional tier 1 capital in accordance with the CRD IV rules, by virtue of the application of grandfathering provisions.

Dividends on the HSBC Holdings non-cumulative dollar preference shares in issue (‘dollar preference shares’) are paid quarterly at the sole and absolute discretion of the Board of Directors. The Board of Directors will not declare a dividend on the dollar preference shares if payment of the dividend would cause HSBC Holdings not to meet the applicable capital adequacy requirements of the PRA or the profit of HSBC Holdings available for distribution as dividends is not sufficient to enable HSBC Holdings to pay in full both dividends on the dollar preference shares and dividends on any other shares that are scheduled to be paid on the same date and that have an equal right to dividends. HSBC Holdings may not declare or pay dividends on any class of its shares ranking lower in the right to dividends than the dollar preference shares nor redeem nor purchase in any manner any of its other shares ranking equal with or lower than the dollar preference shares unless it has paid in full, or set aside an amount to provide for payment in full, the dividends on the dollar preference shares for the then current dividend

 

HSBC HOLDINGS PLC   437

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Notes on the Financial Statements (continued)

35 – Share capital / 36 – Notes on the statement of cash flows

    

    

    

 

period. The dollar preference shares carry no rights to conversion into ordinary shares of HSBC Holdings. Holders of the dollar preference shares will only be entitled to attend and vote at general meetings of shareholders of HSBC Holdings if the dividend payable on the dollar preference shares has not been paid in full for four consecutive dividend payment dates. In such circumstances, holders of the dollar preference shares will be entitled to vote on all matters put to general meetings until such time as HSBC Holdings has paid a full dividend on the dollar preference shares. HSBC Holdings may redeem the dollar preference shares in whole at any time on or after 16 December 2010, subject to prior notification to the PRA.

HSBC Holdings non-cumulative preference share of £0.01

The one non-cumulative sterling preference share of £0.01 in issue (‘sterling preference share’) has been in issue since 29 December 2010 and is held by a subsidiary of HSBC Holdings. Dividends on the sterling preference share are paid quarterly at the sole and absolute discretion of the Board. The sterling preference share carries no rights of conversion into ordinary shares of HSBC Holdings and no rights to attend and vote at general meetings of shareholders of HSBC Holdings. HSBC Holdings may redeem it in whole at any time at the option of the Company.

Other equity instruments

HSBC has included three types of additional tier 1 capital securities in its tier 1 capital. The two types of additional tier 1 securities presented in this Note are accounted for as equity because HSBC does not have an obligation to transfer cash or a variable number of its own ordinary shares to holders under any circumstances outside its control. See Note 30 for additional tier 1 securities accounted for as liabilities.

Other equity instruments which have been included in the regulatory capital base of HSBC comprise additional tier 1 capital securities and additional tier 1 contingent convertible securities.

Additional tier 1 capital securities

Additional tier 1 capital securities are perpetual subordinated securities on which coupon payments may be deferred at the discretion of HSBC Holdings. While any coupon payments are unpaid or deferred, HSBC Holdings will not declare, pay dividends or make distributions or similar periodic payments in respect of, or repurchase, redeem or otherwise acquire any securities of lower or equal rank. Such securities do not generally carry voting rights but rank higher than ordinary shares for coupon payments and in the event of a winding-up. These securities do not meet the identifying criteria in full for recognition as tier 1 capital under CRD IV but are eligible as regulatory capital subject to grandfathering limits and progressive phase-out.

At HSBC Holdings’ discretion, and subject to certain conditions being satisfied, the capital securities may be exchanged on any coupon payment date for non-cumulative preference shares to be issued by HSBC Holdings and ranking pari passu with the dollar and sterling preference shares in issue. The preference shares would be issued at a nominal value of $0.01 per share and a premium of $24.99 per share, with both such amounts being subscribed and fully paid. These securities may be called and redeemed by HSBC subject to prior notification to the PRA.

HSBC’s additional tier 1 capital securities in issue which are accounted for in equity

 

First call date

2015 $m

2014 $m

$2,200m

8.125% perpetual subordinated capital securities

Apr 2013

2,133

2,133

$3,800m

8.00% perpetual subordinated capital securities, Series 2

Dec 2015

3,718

3,718

At 31 December

5,851

5,851

Additional tier 1 capital – contingent convertible securities

During 2015, HSBC continued to issue contingent convertible securities that are included in HSBC’s capital base as fully CRD IV compliant additional tier 1 capital securities on an end point basis. The net proceeds of the issuances will be used for general corporate purposes and to further strengthen the capital base pursuant to requirements under CRD IV. These securities bear a fixed rate of interest until their initial call dates. After the initial call dates, in the event they are not redeemed, the securities will bear interest at rates which are fixed periodically in advance for five-year periods based on prevailing market rates. Interest on the contingent convertible securities will be due and payable only at the sole discretion of HSBC, and HSBC has sole and absolute discretion at all times and for any reason to cancel (in whole or in part) any interest payment that would otherwise be payable on any interest payment date. There are limitations on the payment of distributions if such payments are prohibited under UK banking regulations, or other requirements, if HSBC Holdings has insufficient reserves available for distribution or if HSBC fails to satisfy the solvency condition as defined in the securities’ terms.

The contingent convertible securities are undated and are repayable, at the option of HSBC, in whole at the initial call date, or on any fifth anniversary after the initial call date. In addition, the securities are repayable at the option of HSBC in whole for certain regulatory or tax reasons. Any repayments require the prior consent of the PRA. These securities rank pari passu with HSBC’s dollar and sterling preference shares and are therefore ahead of ordinary shares. The contingent convertible securities will be converted into fully paid ordinary shares of HSBC at a pre-determined price should HSBC’s consolidated end point CET1 ratio fall below 7.0%. Therefore, in accordance with the terms of the securities, if the end point CET1 ratio breaches the 7.0% trigger the securities will convert into ordinary shares at fixed contractual conversion prices in the issuance currencies of the

 

HSBC HOLDINGS PLC   438

---

    

    

    

    

    

 

relevant securities equivalent to £2.70 at the prevailing rate of exchange on the issuance date subject to certain anti-dilution adjustments.

HSBC’s additional tier 1 capital – contingent convertible securities in issue which are accounted for in equity

 

First call date

2015 $m

2014 $m

$2,250m

6.375% perpetual subordinated contingent convertible securities

Sep 2024

2,244

2,244

$1,500m

5.625% perpetual subordinated contingent convertible securities

Jan 2020

1,494

1,494

€1,500m

5.25% perpetual subordinated contingent convertible securities

Sep 2022

1,943

1,943

$2,450m

6.375% perpetual subordinated contingent convertible securities

Mar 2025

2,459

–

€1,000m

6.000% perpetual subordinated contingent convertible securities

Sep 2023

1,121

–

At 31 December

9,261

5,681

Shares under option

For details of the options outstanding to subscribe for HSBC Holdings ordinary shares under the HSBC Holdings savings-related share option plans, see Note 6.

Aggregate options outstanding under these plans

 

Number of         HSBC Holdings ordinary shares

Period of exercise

Exercise price

31 December 2015

72,840,810

2015 to 2021

£4.0472 – 5.4738

1,114,830

2015 to 2018

HK$55.4701 – 63.9864

153,610

2015 to 2018

€5.3532 – 6.0657

665,445

2015 to 2018

$7.1456 – 8.2094

31 December 2014

63,918,042

2014 to 2020

£3.3116 – 7.9911

6,468,782

2014 to 2018

HK$37.8797 – 63.9864

571,502

2014 to 2018

€3.6361 – 6.0657

1,867,328

2014 to 2018

$4.8876 – 8.2094

31 December 2013

119,085,250

2013 to 2019

£3.3116 – 7.9911

24,215,341

2013 to 2018

HK$37.8797 – 92.5881

1,574,652

2013 to 2018

€3.6361 – 7.5571

3,997,069

2013 to 2018

$4.8876 – 11.8824

Maximum obligation to deliver HSBC Holdings ordinary shares

At 31 December 2015, the maximum obligation to deliver HSBC Holdings ordinary shares under all of the above option arrangements and the HSBC International Employee Share Purchase Plan, together with GPSP awards and restricted share awards granted under the HSBC Share Plan and/or the HSBC Share Plan 2011, was 193,178,906 (2014: 193,154,512). The total number of shares at 31 December 2015 held by employee benefit trusts that may be used to satisfy such obligations to deliver HSBC Holdings ordinary shares was 4,753,747 (2014: 7,943,191).

36 Notes on the statement of cash flows

 

Other non-cash items included in profit before tax

 

		HSBC																		HSBC Holdings
					2015						2014						2013						2015						2014
					$m						$m						$m						$m						$m
Depreciation, amortisation and impairment					2,181						2,251						2,330						30						39
(Gains)/losses arising from dilution of interests in associates					–						32						(1,051)						–						–
Revaluations on investment property					(61	)					(120	)					(113)						–						–
Share-based payment expense					757						732						630						86						74
Loan impairment losses gross of recoveries and other credit risk provisions					4,546						5,125						7,356						–						–
Provisions					3,210						3,074						2,578						–						–
Impairment/(release of impairment) of financial investments					94						54						(36)						–						–
Charge for defined benefit plans					262						535						121						–						–
Accretion of discounts and amortisation of premiums					(224	)					(421	)					180						(2	)					(61)
Year ended 31 December					10,765						11,262						11,995						114						52

 

HSBC HOLDINGS PLC   439

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Notes on the Financial Statements (continued)

36 – Notes on the statement of cash flows / 37 – Contingent liabilities

    

    

    

 

Change in operating assets

 

				HSBC																		HSBC Holdings
				2015						2014						2013						2015						2014
				$m						$m						$m						$m						$m
Change in loans to HSBC undertakings					–						–						–						(729	)					1,364
Change in net trading securities and net derivatives					24,384						(18,498	)					(24,870	)					1,413						483
Change in loans and advances to banks					1,218						5,147						(4,739	)					–						–
Change in loans and advances to customers					31,753						12,666						(46,551	)					–						–
Change in reverse repurchase agreements – non-trading					(3,011	)					18,900						(70,403	)					–						–
Change in financial assets designated at fair value					2,394						3,269						(4,922	)					–						–
Change in other assets					9,090						4,393						2,586						(141	)					7
Year ended 31 December					65,828						25,877						(148,899	)					543						1,854
Change in operating liabilities
				HSBC																		HSBC Holdings
				2015						2014						2013						2015						2014
				$m						$m						$m						$m						$m
Change in deposits by banks					(21,534	)					(9,081	)					(7,781	)					–						–
Change in customer accounts					(44,373	)					(8,362	)					57,365						–						–
Change in repurchase agreements – non-trading					(26,481	)					(56,788	)					123,653						–						–
Change in debt securities in issue					960						(8,133	)					(15,381	)					(49	)					(149	)
Change in financial liabilities designated at fair value					(10,785	)					(10,734	)					994						(1,228	)					(694	)
Change in other liabilities					(4,549	)					(716	)					5,907						(1,065	)					(9,071	)
Year ended 31 December					(106,762	)					(93,814	)					164,757						(2,342	)					(9,914	)
Interest and dividends
				HSBC																		HSBC Holdings
				2015						2014						2013						2015						2014
				$m						$m						$m						$m						$m
Interest paid					(14,559	)					(15,633	)					(17,262	)					(2,309	)					(2,463	)
Interest received					47,623						51,522						50,823						2,026						1,945
Dividends received					914						1,199						1,133						8,469						9,077

Cash and cash equivalents

Accounting policy

 

Cash and cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months’ maturity from the date of acquisition.

Cash and cash equivalents

 

				HSBC																		HSBC Holdings
				2015						2014						2013						2015						2014
				$m						$m						$m						$m						$m
Cash at bank with HSBC undertakings					–						–						–						242						249
Cash and balances at central banks					98,934						129,957						166,599						–						–
Items in the course of collection from other banks					5,768						4,927						6,021						–						–
Loans and advances to banks of one month or less					70,985						89,285						96,584						–						–
Reverse repurchase agreements with banks of one month or less					53,971						68,930						68,007						–						–
Treasury bills, other bills and certificates of deposit less than three months					19,843						14,192						15,980						–						–
Less: items in the course of transmission to other banks					(5,638	)					(5,990	)					(6,910	)					–						–
At 31 December					243,863						301,301						346,281						242						249

The amount of cash and cash equivalents not available for use by HSBC at 31 December 2015 was $33,744m (2014: $43,738m), of which $21,773m (2014: $29,883m) related to mandatory deposits at central banks.

Disposal of subsidiaries and businesses

During 2014, we completed the disposals of HSBC Bank Middle East Limited’s banking business in Jordan and operations in Pakistan. This resulted in a net $303m outflow of cash and cash equivalents which is included under ‘Cash flow from investing activities’ in the consolidated statement of cash flows on page 340.

In October 2013, we completed the disposal of HSBC Bank (Panama) S.A., receiving total cash consideration of $2,210m which is included under ‘Cash flow from investing activities’ in the consolidated statement of cash flows on page 340.

 

HSBC HOLDINGS PLC   440

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37 Contingent liabilities, contractual commitments and guarantees

 

Accounting policy

 

Contingent liabilities   Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security and contingent liabilities related to legal proceedings or regulatory matters (see Note 40), are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the control of HSBC; or are present obligations that have arisen from past events but are not recognised because it is not probable that settlement will require the outflow of economic benefits, or because the amount of the obligations cannot be reliably measured. Contingent liabilities are not recognised in the financial statements but are disclosed unless the probability of settlement is remote.   Financial guarantee contracts   Financial guarantee contracts are contracts that require HSBC to make specified payments to reimburse the holder for a loss incurred because a specified debtor fails to make payment when due. Liabilities under financial guarantee contracts which are not classified as insurance contracts are recorded initially at their fair value, which is generally the fee received or present value of the fee receivable. Subsequently, financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure required to settle the obligations.   HSBC Holdings has issued financial guarantees and similar contracts to other Group entities. HSBC elects to account for certain guarantees as insurance contracts in HSBC Holdings’ financial statements, in which case they are measured and recognised as insurance liabilities. This election is made on a contract by contract basis, and is irrevocable.

Contingent liabilities, contractual commitments and guarantees

				HSBC												HSBC Holdings
				2015						2014						2015						2014
				$m						$m						$m						$m
Guarantees and contingent liabilities
Guarantees					85,855						86,385						68,333						52,023
Other contingent liabilities					490						346						–						–
At 31 December					86,345						86,731						68,333						52,023
Commitments
Documentary credits and short-term trade-related transactions					10,168						12,082						–						–
Forward asset purchases and forward forward deposits placed					981						823						–						–
Undrawn formal standby facilities, credit lines and other commitments to lend					655,281						638,475						–						16
At 31 December					666,430						651,380						–						16

The above table discloses the nominal principal amounts of commitments, guarantees and other contingent liabilities. Contingent liabilities arising from legal proceedings, regulatory and other matters against Group companies are disclosed in Notes 29 and 40. Nominal principal amounts represent the amounts at risk should the contracts be fully drawn upon and clients default. As a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements.

Guarantees

 

				2015												2014
				Guarantees in favour of third parties						Guarantees by HSBC Holdings in favour of other Group entities						Guarantees in favour of third parties						Guarantees by HSBC Holdings in favour of other Group entities
				$m						$m						$m						$m
Guarantee type
Financial guarantees					27,643						55,000						30,406						36,800
Credit-related guarantees1					18,473						13,333						16,672						15,223
Other guarantees					39,739						–						39,307						–
At 31 December					85,855						68,333						86,385						52,023

 

1	Credit-related guarantees are contracts that have similar features to financial guarantee contracts but fail to meet the definition of a financial guarantee contract under IAS 39.

The amounts disclosed in the above table are nominal principal amounts and reflect HSBC’s maximum exposure under a large number of individual guarantee undertakings. The risks and exposures arising from guarantees are captured and managed in accordance with HSBC’s overall credit risk management policies and procedures. Approximately half the above guarantees have a term of less than one year. Guarantees with terms of more than one year are subject to HSBC’s annual credit review process.

 

HSBC HOLDINGS PLC   441

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Notes on the Financial Statements (continued)

38 – Lease commitments / 39 – Structured entities

    

    

    

 

Financial Services Compensation Scheme

The Financial Services Compensation Scheme (‘FSCS’) has provided compensation to consumers following the collapse of a number of deposit takers. The compensation paid out to consumers is currently funded through loans from HM Treasury which at 31 December 2015 stood at approximately £16bn ($23.7bn).

The Group could be liable to pay a proportion of the outstanding amount that the FSCS has borrowed from HM Treasury. The ultimate FSCS levy to the industry as a result of the collapses cannot currently be estimated reliably as it is dependent on various uncertain factors including the potential recoveries of assets by the FSCS and changes in the level of protected deposits and the population of FSCS members at the time.

Capital commitments

In addition to the commitments disclosed on page 441, at 31 December 2015 HSBC had $468m (2014: $656m) of capital commitments contracted but not provided for and $100m (2014: $101m) of capital commitments authorised but not contracted for.

Associates

HSBC’s share of associates’ contingent liabilities amounted to $39,222m at 31 December 2015 (2014: $47,593m). No  matters arose where HSBC was severally liable.

38 Lease commitments

 

Accounting policy

 

Agreements which transfer substantially all the risks and rewards incidental to the ownership of assets are classified as finance leases. As a lessor under finance leases, HSBC presents the amounts due under the leases after deduction of unearned charges in ‘Loans and advances to banks’ or ‘Loans and advances to customers’. As a lessee under finance leases, HSBC presents the leased assets in ‘Property, plant and equipment’ with the corresponding liability included in ‘Other liabilities’. A finance lease asset and its corresponding liability are recognised initially at the fair value of the asset or, if lower, the present value of the minimum lease payments.   All other leases are classified as operating leases. As lessor, HSBC presents assets subject to operating leases in ‘Property, plant and equipment’. Impairment losses are recognised to the extent that carrying values are not fully recoverable. As a lessee, leased assets are not recognised on the balance sheet.   Finance income or charges on finance leases are recognised in ‘Net interest income’ over the lease periods so as to give a constant rate of return. Rentals payable or receivable under operating leases are spread on a straight-line basis over the lease periods and are recognised in ‘General and administrative expenses’ or in ‘Other operating income’.

Operating lease commitments

At 31 December 2015, future minimum lease payments under non-cancellable operating leases for land, buildings and equipment were $5,333m (2014: $5,372m).

Finance lease receivables

HSBC leases a variety of assets to third parties under finance leases, including transport assets (such as aircraft), property and general plant and machinery. At the end of lease terms, assets may be sold to third parties or leased for further terms. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income.

 

				2015																		2014
				Total future minimum payments						Unearned finance income						Present value						Total future minimum payments						Unearned finance income						Present value
				$m						$m						$m						$m						$m						$m
Lease receivables:
– no later than one year					3,382						(332	)					3,050						3,383						(374	)					3,009
– later than one year and no later than five years					7,219						(837	)					6,382						8,089						(980	)					7,109
– later than five years					4,897						(702	)					4,195						5,013						(744	)					4,269
At 31 December					15,498						(1,871	)					13,627						16,485						(2,098	)					14,387

39 Structured entities

 

Accounting policy

 

A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, for example when any voting rights relate to administrative tasks only, and key activities are directed by contractual arrangements. Structured entities often have restricted activities and a narrow and well defined objective.   Structured entities are assessed for consolidation in accordance with the accounting policy set out in Note 1.

HSBC is mainly involved with structured entities through the securitisation of financial assets, conduits and investment funds.

 

HSBC HOLDINGS PLC   442

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HSBC’s arrangements that involve structured entities are authorised centrally when they are established to ensure appropriate purpose and governance. The activities of structured entities administered by HSBC are closely monitored by senior management. The Group is involved with both consolidated and unconsolidated structured entities which are established either by HSBC or a third party, as detailed below.

Consolidated structured entities

Total assets of HSBC’s consolidated structured entities, split by entity type

 

				Conduits						Securitisations						HSBC         managed funds						Other						Total
				$bn						$bn						$bn						$bn						$bn
At 31 December 2015					25.9						5.6						8.2						5.7						45.4
At 31 December 2014					27.2						7.9						11.2						6.7						53.0

Conduits

HSBC has established and manages two types of conduits: securities investment conduits (‘SIC’s) and multi-seller conduits. These entities have been designed so that voting or similar rights are not the dominant factor in deciding who has control: in such cases, the relevant activities are directed by means of contractual arrangement. The conduits are consolidated as HSBC is exposed to or has the right to variable returns from its involvement with the entity and has the ability to affect its returns through its power over the entity.

Securities investment conduits

Solitaire, HSBC’s principal SIC, purchases highly rated ABSs to facilitate tailored investment opportunities. At 31 December 2015, Solitaire held $6.2bn of ABSs (2014: $8.0bn). These are included within the disclosures of ABSs ‘held through consolidated structured entities’ on page 153. HSBC’s other SICs, Mazarin, Barion and Malachite, evolved from the restructuring of the Group’s structured investment vehicles in 2008.

 

•

Solitaire – Solitaire is currently funded entirely by commercial paper (‘CP’) issued to HSBC. Although HSBC continues to provide a liquidity facility, Solitaire has no need to draw on it as long as HSBC purchases its issued CP, which HSBC intends to do for the foreseeable future. At 31 December 2015, HSBC held $8bn of CP (2014: $9.5bn).

 

•

Mazarin – HSBC is exposed to the par value of Mazarin’s assets through the provision of a liquidity facility equal to the lesser of the amortised cost of issued senior debt and the amortised cost of non-defaulted assets. At 31 December 2015, this amounted to $1.8bn (2014: $3.9bn). First loss protection is provided through the capital notes issued by Mazarin, which are substantially all held by third parties.

At 31 December 2015, HSBC held 2.7% of Mazarin’s capital notes (2014: 1.2%) with a par value of $13m (2014: $10m) and a carrying amount of $4m (2014: $1.4m).

 

•

Barion and Malachite – HSBC’s primary exposure to these SICs is represented by the amortised cost of the debt required to support the non-cash assets of the vehicles. At 31 December 2015, this amounted to $1.4bn (2014: $3.0bn). First loss protection is provided through the capital notes issued by these vehicles, which are substantially all held by third parties.

At 31 December 2015, HSBC held 13.7% of the capital notes (2014: 9.9%) issued by these vehicles with a par value of $42.2m (2014: $54.8m) and a carrying amount of $20.3m (2014: $10.1m).

Multi-seller conduits

Multi-seller conduits were established for the purpose of providing access to flexible market-based sources of finance for HSBC’s clients. HSBC bears risk equal to the transaction-specific liquidity facilities offered to the multi-seller conduits amounting to $19.8bn at 31 December 2015 (2014: $15.4bn). First loss protection is provided by the originator of the assets, and not by HSBC, through transaction-specific credit enhancements. A layer of secondary loss protection is provided by HSBC in the form of programme-wide enhancement facilities.

Securitisations

HSBC uses structured entities to securitise customer loans and advances that it has originated in order to diversify its sources of funding for asset origination and capital efficiency purposes. The loans and advances are transferred by HSBC to the structured entities for cash or synthetically through credit default swaps, and the structured entities issue debt securities to investors.

HSBC managed funds

HSBC has established a number of money market and non-money market funds. Where it is deemed to be acting as principal rather than agent in its role as investment manager, HSBC controls and hence consolidates these funds.

 

HSBC HOLDINGS PLC   443

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Notes on the Financial Statements (continued)

39 – Structured entities / 40 – Legal proceedings and regulatory matters

    

    

    

 

Other

HSBC has also entered into a number of transactions in the normal course of business which include asset and structured finance transactions where it has control of the structured entity. In addition, HSBC is deemed to control a number of third-party managed funds through its involvement as a principal in the funds.

Unconsolidated structured entities

The term ‘unconsolidated structured entities’ refers to all structured entities that are not controlled by HSBC. The Group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities.

The table below shows the total assets of unconsolidated structured entities in which HSBC had an interest at the reporting date and its maximum exposure to loss in relation to those interests.

Nature and risks associated with HSBC interests in unconsolidated structured entities

 

				Securitisations						HSBC             managed funds						Non-HSBC             managed funds						Other						Total
				$bn						$bn						$bn						$bn						$bn
Total assets of the entities					12.9						227.9						2,003.1						139.9						2,383.8
Total assets in relation to HSBC’s interests in the unconsolidated structured entities					1.4						5.6						8.0						9.8						24.8
– trading assets					–						0.1						0.2						2.6						2.9
– financial assets designated at fair value					–						5.3						6.6						–						11.9
– derivatives					–						–						–						3.8						3.8
– loans and advances to banks					–						–						–						0.1						0.1
– loans and advances to customers					1.1						–						0.1						2.9						4.1
– financial investments					0.3						0.2						1.1						0.2						1.8
– other assets					–						–						–						0.2						0.2
Total liabilities in relation to HSBC’s interests in the unconsolidated structured entities					–						–						–						(0.1	)					(0.1	)
Other liabilities					–						–						–						(0.1	)					(0.1	)
HSBC’s maximum exposure at 31 December 2015					3.5						5.6						8.0						14.6						31.7
Total assets of the entities					11.0						308.5						2,899.9						32.8						3,252.2
Total assets in relation to HSBC’s interests in the unconsolidated structured entities					0.8						7.8						8.3						7.7						24.6
– trading assets					–						0.1						0.1						4.6						4.8
– financial assets designated at fair value					–						5.2						2.3						–						7.5
– derivatives					–						–						–						1.3						1.3
– loans and advances to banks					–						–						–						0.1						0.1
– loans and advances to customers					0.8						–						–						1.5						2.3
– financial investments					–						2.5						5.9						0.1						8.5
– other assets					–						–						–						0.1						0.1
Total liabilities in relation to HSBC’s interests in the unconsolidated structured entities					–						–						–						0.1						0.1
Other liabilities					–						–						–						0.1						0.1
HSBC’s maximum exposure at 31 December 2014					0.8						7.8						8.3						11.1						28.0

The maximum exposure to loss from HSBC’s interests in unconsolidated structured entities represents the maximum loss that HSBC could incur as a result of its involvement with unconsolidated structured entities regardless of the probability of the loss being incurred.

 

•

For commitments, guarantees and written credit default swaps, the maximum exposure to loss is the notional amount of potential future losses.

 

•

For retained and purchased investments in and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying value of these interests at the balance sheet reporting date.

The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements entered into to mitigate HSBC’s exposure to loss.

Securitisations

HSBC has interests in unconsolidated securitisation vehicles through holding notes issued by these entities. In addition, HSBC has investments in ABSs issued by third party structured entities as set out on page 153.

 

HSBC HOLDINGS PLC   444

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HSBC managed funds

HSBC establishes and manages money market funds and non-money market investment funds to provide customers with investment opportunities. Further information on funds under management is provided on page 96.

HSBC, as fund manager, may be entitled to receive management and performance fees based on the assets under management. HSBC may also retain units in these funds.

Non-HSBC managed funds

HSBC purchases and holds units of third-party managed funds in order to facilitate both business and customer needs. In addition, HSBC enters into derivative contracts to facilitate risk management solutions for non-HSBC managed funds. Note 16 provides information on derivatives entered into by HSBC.

Other

HSBC has established structured entities in the normal course of business, such as structured credit transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions.

HSBC sponsored structured entities

Accounting policy

 

HSBC is considered to sponsor another entity if, in addition to ongoing involvement with the entity, it had a key role in establishing that entity or in bringing together the relevant counterparties so that the transaction which is the purpose of the entity could occur. HSBC is generally not considered a sponsor if the only involvement with the entity is merely administrative in nature.

The amount of assets transferred to and income received from such sponsored entities during 2015 and 2014 was not significant.

40 Legal proceedings and regulatory matters

 

HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, HSBC considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in Note 29. While the outcome of legal proceedings and regulatory matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 31 December 2015 (see Note 29). Where an individual provision is material, the fact that a provision has been made is stated and quantified, except to the extent doing so would be seriously prejudicial. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.

Securities litigation

As a result of an August 2002 restatement of previously reported consolidated financial statements and other corporate events, including the 2002 settlement with 46 states and the District of Columbia relating to real estate lending practices, Household International, Inc. (‘Household International’) and certain former officers were named as defendants in a class action lawsuit, Jaffe v. Household International, Inc., et al., filed in August 2002 in the US District Court for the Northern District of Illinois (the ‘Illinois District Court’). The complaint asserted claims under the US Securities Exchange Act and alleged that the defendants knowingly or recklessly made false and misleading statements of material fact relating to Household International’s Consumer Lending operations, including collections, sales and lending practices, some of which ultimately led to the 2002 state settlement agreement, and facts relating to accounting practices evidenced by the financial restatement. Ultimately, a class was certified on behalf of all persons who acquired and disposed of Household International common stock between July 1999 and October 2002.

A jury trial concluded in April 2009, which was decided partly in favour of the plaintiffs. Various legal challenges to the verdict were raised in post-trial briefing.

In December 2011, following the submission of claim forms by class members, the court-appointed claims administrator reported to the Illinois District Court that the total number of claims that generated an allowed loss was 45,921, and that the aggregate amount of those claims was approximately $2.2bn. The Illinois District Court directed further proceedings before a court-appointed Special Master to address certain issues and objections regarding the remaining claims.

In October 2013, the Illinois District Court entered a partial final judgement against the defendants in the amount of approximately $2.5bn (including pre-judgement interest). The defendants appealed that partial final judgement.

In addition to the partial judgement that has been entered, there are also approximately $625m in remaining claims, prior to the imposition of pre-judgement interest, that are still subject to objections that have not yet been ruled upon by the Illinois District Court.

 

HSBC HOLDINGS PLC   445

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Notes on the Financial Statements (continued)

40 – Legal proceedings and regulatory matters

    

    

    

 

In May 2015, the US Court of Appeals for the Seventh Circuit issued a decision reversing the partial final judgement of the Illinois District Court and remanding the case for a new trial on loss causation, which may entail a reassessment of the quantum of damages. On remand to the Illinois District Court, the case was reassigned to a different judge, who has issued various rulings on certain preliminary issues and has entered a scheduling order that includes a trial date in June 2016.

The timing and ultimate resolution of this matter remains highly uncertain, and given the complexity and uncertainties associated with a new trial on loss causation and a reassessment of the quantum of damages, there continues to be a wide range of possible outcomes. Depending on whether and to what extent the plaintiffs are able to demonstrate loss causation, the amount of damages, based upon the claims included in the reversed partial final judgement and the other remaining claims, as well as the application of pre-judgement interest, may be up to or exceeding $3.6bn. A provision has been recognised based on management’s best estimate of probable outflows, but the amount of such provision is not disclosed as it would seriously prejudice the position of HSBC in the resolution of this matter.

Bernard L. Madoff Investment Securities LLC

Bernard L. Madoff (‘Madoff’) was arrested in December 2008 and later pleaded guilty to running a Ponzi scheme. He has acknowledged, in essence, that while purporting to invest his customers’ money in securities, he in fact never invested in securities and used other customers’ money to fulfil requests to return investments. His firm, Bernard L. Madoff Investment Securities LLC (‘Madoff Securities’), is being liquidated in the US by a trustee (the ‘Trustee’).

Various non-US HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008, the purported aggregate value of these funds was $8.4bn, an amount that includes fictitious profits reported by Madoff. Based on information available to HSBC, we have estimated that the funds’ actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time that HSBC serviced the funds totalled approximately $4bn. Various HSBC companies have been named as defendants in lawsuits arising out of Madoff Securities’ fraud.

US/UK litigation: The Trustee has brought lawsuits against various HSBC companies in the US Bankruptcy Court and in the English High Court. The Trustee’s ongoing US claims seek recovery of prepetition transfers pursuant to US bankruptcy law. The amount of these claims has not been pleaded or determined as against HSBC. The Trustee’s English action seeks recovery of unspecified transfers from Madoff Securities to or through HSBC. HSBC has not yet been served with the Trustee’s English action. The Trustee’s deadline for serving the claim has been extended through the third quarter of 2016.

Alpha Prime Fund Ltd (‘Alpha Prime’) and Senator Fund SPC (‘Senator’), co-defendants in the Trustee’s US actions, have each brought cross-claims against HSBC. These funds have also sued HSBC in Luxembourg (discussed below). In June 2015, the US Bankruptcy Court heard HSBC’s motion to dismiss Alpha Prime and Senator’s cross-claims and a decision on that motion is pending.

Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together, ‘Fairfield’), funds whose assets were invested with Madoff Securities, commenced multiple lawsuits in the US and the British Virgin Islands (‘BVI’) against fund shareholders, including various HSBC companies that acted as nominees for HSBC clients, seeking restitution of payments made in connection with share redemptions. Fairfield’s US actions are stayed pending the outcome of the cases in the BVI (discussed below).

In September 2013, the US Court of Appeals for the Second Circuit affirmed the dismissal of purported class action claims against HSBC and others brought by investors in three Madoff-invested funds on grounds of forum non conveniens. In May 2015, plaintiffs filed a motion asking the Court of Appeals to restore their class action claims on the basis of an alleged change of law. Plaintiffs’ motion was denied by the Court of Appeals in June 2015.

In December 2014, three additional actions were filed in the US. The first is a purported class action brought in the United States District Court for the Southern District of New York (the ‘New York District Court’) by direct investors in Madoff Securities who were holding their investments as of December 2008, asserting various common law claims and seeking to recover damages lost to Madoff Securities’ fraud on account of HSBC’s purported knowledge and alleged furtherance of the fraud. HSBC moved to dismiss this action in November 2015 and a decision on that motion is pending. The other two actions were both filed by SPV Optimal SUS Ltd (‘SPV OSUS’), the purported assignee of the Madoff-invested company, Optimal Strategic US Equity Ltd. One of these actions was filed in New York state court and the other in New York District Court. In January 2015, SPV OSUS dismissed its federal lawsuit against HSBC. The state court action against HSBC remains pending.

In May 2015, an action was filed in New York District Court by two investors in the Madoff-invested fund Hermes International Fund Limited (‘Hermes’), asserting various common law claims against HSBC and seeking to recover damages lost to Madoff Securities’ fraud. HSBC’s motion to dismiss the action was filed in January 2016 and a decision on that motion is pending.

BVI litigation: Beginning in October 2009, Fairfield commenced multiple lawsuits in the BVI against numerous fund shareholders, including various HSBC companies that acted as nominees for clients of HSBC’s private banking business and other clients who invested in Fairfield. Fairfield is seeking restitution of redemption payments made by the funds to defendants on the grounds that they were mistakenly based on inflated net asset values. In April 2014, the UK Privy Council issued a ruling in favour of other defendants in the BVI actions, and issued its order in October 2014. The Privy Council ruling found in effect that Fairfield should not be entitled to recover share redemptions that were calculated on a net asset value per

 

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share based on fictitious profits, and were paid to shareholders prior to the collapse of Madoff Securities. Separately, a motion was brought by defendants before the BVI court challenging the authorisation of the Fairfield liquidator (appointed in July 2009) to pursue its claims in the US. That motion was heard in March 2015 and a decision is pending.

Bermuda litigation: In January 2009, Kingate Global Fund Limited and Kingate Euro Fund Limited (together, ‘Kingate’), funds whose assets were invested with Madoff Securities, commenced an action in Bermuda against HSBC Bank Bermuda Limited for recovery of funds held in Kingate’s accounts, fees and dividends. This action is currently pending, but is not expected to move forward until there is a resolution as to the Trustee’s separate US actions against Kingate and HSBC Bank Bermuda Limited.

Thema Fund Limited (‘Thema’) and Hermes, funds whose assets were invested with Madoff Securities, each also brought three actions in Bermuda in 2009. The first set of actions was brought against HSBC Institutional Trust Services (Bermuda) Limited and seeks recovery of funds in frozen accounts held at HSBC. The second set of actions asserts liability against HSBC Institutional Trust Services (Bermuda) Limited in relation to claims for mistake, recovery of fees and damages for breach of contract. The third set of actions seeks return of fees from HSBC Bank Bermuda Limited and HSBC Securities Services (Bermuda). There has been little progress in these actions for several years, although in January 2015, Thema and Hermes served notice of intent to proceed in respect of the second set of actions referred to above.

Cayman Islands litigation: In February 2013, Primeo Fund (in official liquidation since April 2009), a Cayman Islands-based fund whose assets were invested with Madoff Securities, brought an action against the fund administrator, Bank of Bermuda (Cayman), and the fund custodian, HSBC Securities Services (Luxembourg) (‘HSSL’), alleging breach of contract by the defendants and breach of fiduciary duty by HSSL. Primeo Fund claims damages from defendants (and equitable compensation from HSSL) to compensate it for alleged losses, including loss of profit. Trial is scheduled to begin in November 2016.

Luxembourg litigation: In April 2009, Herald Fund SPC (‘Herald’) (in official liquidation since July 2013) commenced action against HSSL before the Luxembourg District Court seeking restitution of all cash and securities Herald purportedly lost because of Madoff Securities’ fraud, or in the alternative, money damages in the same amount. In March 2013, the Luxembourg District Court dismissed Herald’s restitution claim for the return of the securities, although Herald’s restitution claim for return of the cash and its claim for money damages were reserved. Herald appealed this judgement in May 2013. Written submissions on the merits are due to be filed by the parties in March 2016.

In October 2009, Alpha Prime commenced an action against HSSL before the Luxembourg District Court, alleging breach of contract and negligence in the appointment of Madoff Securities as a sub-custodian of Alpha Prime’s assets. Alpha Prime requested a stay of these proceedings pending its negotiations with the Trustee in the US proceedings. The matter has been temporarily suspended at Alpha Prime’s request.

In March 2010, Herald (Lux) SICAV (‘Herald (Lux)’) (in official liquidation since April 2009) commenced an action against HSSL before the Luxembourg District Court seeking restitution of securities, or the cash equivalent, or money damages in the alternative. Herald (Lux) has also requested the restitution of fees paid to HSSL as custodian and service agent of the fund. Written submissions on the merits are due to be filed by Herald (Lux) in March 2016.

In December 2014, Senator commenced a separate action against HSSL before the Luxembourg District Court, seeking the restitution of securities held as of the latest net asset value statement from November 2008, or in the alternative, money damages. The matter has been temporarily suspended at Senator’s request.

In April 2015, Senator commenced a separate action against the Luxembourg branch of HSBC Bank plc before the Luxembourg District Court asserting identical claims to those asserted in Senator’s action against HSSL. This action remains ongoing.

HSSL has been sued in various actions by shareholders in the Primeo Select Fund, Herald, Herald (Lux), and Hermes. These actions are in different stages, most of which have been dismissed, suspended or postponed.

Ireland litigation: In November 2013, Defender Limited, a fund whose assets were invested with Madoff Securities, commenced an action against HSBC Institutional Trust Services (Ireland) Limited (‘HTIE’) and others, alleging breach of the custodian agreement and claiming damages and indemnification for fund losses. A trial date has not yet been scheduled.

In May 2013 and November 2013, settlements were reached in respect of claims filed against HTIE in the Irish High Court by Thema International Fund plc (‘Thema International’) and Alternative Advantage Plc (‘AA’), respectively. Only two actions by individual Thema International shareholders against HTIE and Thema International remain active. An application to dismiss the two remaining shareholder claims was heard in December 2015 and a decision is pending.

In December 2014, a new proceeding against HTIE and HSBC Securities Services (Ireland) Limited was brought by SPV OSUS, alleging breach of the custodian agreement and claiming damages and indemnification for fund losses. In July 2015, HTIE brought a preliminary application to challenge the standing of SPV OSUS to bring proceedings against its service providers. Judgement was rendered in favour of HTIE in October 2015, resulting in the dismissal of the action. SPV OSUS filed an appeal, which is scheduled for hearing in January 2017.

There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings described above, including but not limited to the multiple jurisdictions in which the proceedings have been brought and the number of different plaintiffs and defendants in such proceedings. Based upon the information currently available, management’s estimate of possible aggregate damages that might arise as a result of all claims in the various Madoff-related proceedings is up to or exceeding $800m. Due to uncertainties and limitations of this estimate, the ultimate damages could differ significantly from this amount.

 

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US mortgage-related investigations

In April 2011, following completion of a broad horizontal review of industry foreclosure practices, HSBC Bank USA N.A. (‘HSBC Bank USA’) entered into a consent cease-and-desist order with the Office of the Comptroller of the Currency (‘OCC’), and HSBC Finance Corporation (‘HSBC Finance’) and HSBC North America Holdings Inc. (‘HNAH’) entered into a similar consent order with the Federal Reserve Board (‘FRB’) (together with the OCC order, the ‘Servicing Consent Orders’). The Servicing Consent Orders require prescribed actions to address the foreclosure practice deficiencies noted in the joint examination and described in the Servicing Consent Orders. HSBC Bank USA, HSBC Finance and HNAH continue to work with the OCC and the FRB to align their processes with the requirements of the Servicing Consent Orders and to implement operational changes as required; however, as set forth in a June 2015 amended consent order between HSBC Bank USA and the OCC (the ‘Amended Consent Order’), HSBC Bank USA is not yet in compliance with all of the requirements of the OCC order. A failure to satisfy all requirements of the OCC order may result in a variety of regulatory consequences for HSBC Bank USA, including the imposition of civil money penalties. The Amended Consent Order includes business restrictions related to residential mortgage servicing that will remain in place until the OCC order is terminated. The restrictions include a prohibition against the bulk acquisition of residential mortgage servicing or residential mortgage servicing rights and a requirement to seek OCC supervisory non-objection to outsource any residential mortgage servicing activities that are not already outsourced as of the date of the Amended Consent Order.

The Servicing Consent Orders required an independent review of foreclosures pending or completed between January 2009 and December 2010 to determine if any borrower was financially injured as a result of an error in the foreclosure process (the ‘Independent Foreclosure Review’). As required by the Servicing Consent Orders, an independent consultant was retained to conduct that review. In February 2013, HSBC Bank USA entered into an agreement with the OCC, and HSBC Finance and HNAH entered into an agreement with the FRB (together, the ‘IFR Settlement Agreements’), pursuant to which the Independent Foreclosure Review ceased and was replaced by a broader framework under which HSBC and 12 other participating servicers agreed to provide, in the aggregate, over $9.3bn in cash payments and other assistance to help eligible borrowers. Pursuant to the IFR Settlement Agreements, HNAH made a cash payment of $96m into a fund used to make payments to borrowers that were in active foreclosure during 2009 and 2010 and is also providing other assistance, such as loan modifications, to help eligible borrowers. Borrowers who receive compensation will not be required to execute a release or waiver of rights and will not be precluded from pursuing litigation concerning foreclosure or other mortgage servicing practices. For participating servicers, including HSBC Bank USA and HSBC Finance, fulfilment of the terms of the IFR Settlement Agreements will satisfy the Independent Foreclosure Review requirements of the Servicing Consent Orders, including the wind-down of the Independent Foreclosure Review.

The Servicing Consent Orders do not preclude additional enforcement actions against HSBC Bank USA, HSBC Finance or HNAH by regulatory, governmental or law enforcement agencies, such as the DoJ or state Attorneys General, which could include the imposition of civil money penalties and other sanctions relating to the activities that are the subject of the Servicing Consent Orders. In addition, the IFR Settlement Agreements do not preclude future private litigation concerning these practices.

Separate from the Servicing Consent Orders and the settlement related to the Independent Foreclosure Review discussed above, in February 2016, HSBC Bank USA, HSBC Finance, HSBC Mortgage Services Inc. and HNAH entered into an agreement with the DoJ, the US Department of Housing and Urban Development, the Consumer Financial Protection Bureau, other federal agencies (the ‘Federal Parties’) and the Attorneys General of 49 states and the District of Columbia (the ‘State Parties’) to resolve civil claims related to past residential mortgage loan origination and servicing practices (the ‘National Mortgage Settlement Agreement’). The National Mortgage Settlement Agreement is similar to prior settlements reached with other US mortgage servicers and includes payment of $100m to be allocated among participating Federal and State Parties, and $370m in consumer relief provided through HSBC’s loan modification programmes. The National Mortgage Settlement Agreement also sets forth national mortgage servicing standards to which HSBC will adhere.

In addition, in February 2016, the FRB announced the imposition against HSBC Finance and HNAH of a $131m civil money penalty in connection with the FRB’s Servicing Consent Order of April 2011. Pursuant to the terms of the FRB order, the penalty will be satisfied by the cash payments made to the Federal Parties and the consumer relief provided pursuant to the National Mortgage Settlement Agreement.

The National Mortgage Settlement Agreement and the FRB order do not completely preclude other enforcement actions by regulatory, governmental or law enforcement agencies related to foreclosure and other mortgage servicing practices, including, but not limited to, matters relating to the securitisation of mortgages for investors, which could include the imposition of civil money penalties, criminal fines or other sanctions. In addition, these practices have in the past resulted in private litigation, and the National Mortgage Settlement Agreement would not preclude further private litigation concerning these practices.

US mortgage securitisation activity and litigation

HSBC Bank USA was a sponsor/seller of loans used to facilitate whole loan securitisations underwritten by HSBC Securities (USA) Inc. (‘HSI’). From 2005 to 2007, HSBC Bank USA purchased and sold $24bn of such loans to HSI, which were subsequently securitised and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $5.2bn as at 31 December 2015.

 

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Participants in the US mortgage securitisation market that purchased and repackaged whole loans have been the subject of lawsuits and governmental and regulatory inquiries, which have been directed at groups within the US mortgage market such as servicers, originators, underwriters, trustees or sponsors of securitisations, and at particular participants within these groups. As the industry’s residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to an increasing number of foreclosed homes as trustee on behalf of various mortgage securitisation trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws regarding property upkeep and tenants’ rights. While HSBC believes and continues to maintain that the obligations at issue and any related liabilities are properly those of the servicer of each trust, HSBC continues to receive significant adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of ‘HSBC, as trustee’.

Between June and December 2014, a number of lawsuits were filed in state and federal court in New York and Ohio against HSBC Bank USA as trustee of over 280 mortgage securitisation trusts. These lawsuits are brought on behalf of the trusts by a putative class of investors including, amongst others, BlackRock and PIMCO funds. Similar lawsuits were filed simultaneously against other non-HSBC financial institutions that served as mortgage securitisation pool trustees. The complaints against HSBC Bank USA allege that the trusts have sustained losses in collateral value of approximately $38bn. The lawsuits seek unspecified damages resulting from alleged breaches of the US Trust Indenture Act, breach of fiduciary duties, negligence, breach of contract and breach of the common law duty of trust. HSBC filed motions to dismiss in several of these lawsuits, which were, for the most part, denied. In December 2015, three new actions containing similar allegations were filed in state and federal court in New York against HSBC Bank USA as trustee of over 40 mortgage securitisation trusts, many of which are at issue in the previously filed trustee cases. The complaints in the new actions against HSBC Bank USA allege that the trusts have sustained losses in collateral value of approximately $285m.

Various HSBC companies have also been named as defendants in a number of actions in connection with residential mortgage-backed security (‘RMBS’) offerings, which generally allege that the offering documents for securities issued by mortgage securitisation trusts contained material misstatements and omissions, including statements regarding the underwriting standards governing the underlying mortgage loans.

HSBC Bank USA, HSBC Finance and Decision One Mortgage Company LLC (an indirect subsidiary of HSBC Finance) have been named as defendants in various mortgage loan repurchase actions brought by trustees of mortgage securitisation trusts. In the aggregate, these actions seek to have the HSBC defendants repurchase mortgage loans, or pay compensatory damages in lieu of repurchase, totalling at least $1bn.

In addition to actions brought by trustees of securitisation trusts, HSBC Mortgage Corporation (USA) Inc. and Decision One Mortgage Company LLC have been named as defendants in two separate actions filed by Residential Funding Company LLC (‘RFC’), a mortgage loan purchase counterparty. These actions seek unspecified damages in relation to alleged losses suffered by RFC as a result of approximately 25,000 mortgage loans purchased from HSBC between 1986 and 2007. Discovery is in progress in both of these actions.

Since 2010, various HSBC entities have received subpoenas and requests for information from the DoJ and the Massachusetts state Attorney General seeking the production of documents and information regarding HSBC’s involvement in specific private-label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. In November 2014, HNAH, on behalf of itself and various subsidiaries including, but not limited to, HSBC Bank USA, HSI Asset Securitization Corp., HSI, HSBC Mortgage Corporation (USA), HSBC Finance and Decision One Mortgage Company LLC, received a subpoena from the US Attorney’s Office for the District of Colorado, pursuant to the Financial Industry Reform, Recovery and Enforcement Act (‘FIRREA’), concerning the origination, financing, purchase, securitisation and servicing of subprime and non-subprime residential mortgages. Five non-HSBC banks have previously reported settlements with the DoJ of FIRREA and other mortgage-backed securities-related matters. HSBC is cooperating with the US authorities and is continuing to produce documents and information responsive to their requests.

HSBC expects the focus on mortgage securitisations to continue. As a result, HSBC companies may be subject to additional claims, litigation and governmental or regulatory scrutiny relating to its participation in the US mortgage securitisation market.

There are many factors that may affect the range of possible outcomes, and the resulting financial impact of these matters. Based upon the information currently available, it is possible that any liabilities that might arise as a result of these matters could be significant.

Anti-money laundering and sanctions-related matters

In October 2010, HSBC Bank USA entered into a consent cease-and-desist order with the OCC, and HNAH entered into a consent cease-and-desist order with the FRB (the ‘Orders’). These Orders required improvements to establish an effective compliance risk management programme across HSBC’s US businesses, including risk management related to the Bank Secrecy Act (‘BSA’) and AML compliance. Steps continue to be taken to address the requirements of the Orders.

 

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In December 2012, HSBC Holdings, HNAH and HSBC Bank USA entered into agreements with US and UK government agencies regarding past inadequate compliance with the BSA, AML and sanctions laws. Among those agreements, HSBC Holdings and HSBC Bank USA entered into a five-year deferred prosecution agreement with the DoJ, the US Attorney’s Office for the Eastern District of New York, and the US Attorney’s Office for the Northern District of West Virginia (the ‘US DPA’); and HSBC Holdings consented to a cease-and-desist order, and HSBC Holdings and HNAH consented to a civil money penalty order with the FRB. HSBC Holdings also entered into an agreement with the Office of Foreign Assets Control (‘OFAC’) regarding historical transactions involving parties subject to OFAC sanctions, as well as an undertaking with the UK FCA to comply with certain forward-looking AML and sanctions-related obligations. In addition, HSBC Bank USA entered into a civil money penalty order with the Financial Crimes Enforcement Network (‘FinCEN’) of the US Treasury Department and a separate civil money penalty order with the OCC.

Under these agreements, HSBC Holdings and HSBC Bank USA made payments totalling $1.9bn to US authorities. In July 2013, the US District Court for the Eastern District of New York approved the US DPA and retained authority to oversee implementation of that agreement. An independent compliance monitor (the ‘Monitor’) was appointed in 2013 under the agreements entered into with the DoJ and the FCA to produce annual assessments of the effectiveness of HSBC’s AML and sanctions compliance programme. Additionally, the Monitor is serving as HSBC’s independent consultant under the consent order of the FRB. In January 2016, the Monitor delivered his second annual follow-up review report as required by the US DPA. The Monitor’s report is discussed on page 116.

Under the terms of the US DPA, upon notice and an opportunity to be heard, the DoJ has sole discretion to determine whether HSBC has breached the US DPA. Potential consequences of breaching the US DPA could include the imposition of additional terms and conditions on HSBC, an extension of the agreement, including its monitorship, or the criminal prosecution of HSBC, which could, in turn, entail further financial penalties and collateral consequences.

HSBC Bank USA also entered into a separate consent order with the OCC, requiring it to correct the circumstances and conditions as noted in the OCC’s then-most recent report of examination, and imposing certain restrictions on HSBC Bank USA directly or indirectly acquiring control of, or holding an interest in, any new financial subsidiary, or commencing a new activity in its existing financial subsidiary, unless it receives prior approval from the OCC. HSBC Bank USA also entered into a separate consent order with the OCC requiring it to adopt an enterprise-wide compliance programme.

These settlements with US and UK authorities have led to private litigation, and do not preclude further private litigation related to HSBC’s compliance with applicable BSA, AML and sanctions laws or other regulatory or law enforcement actions for BSA, AML, sanctions or other matters not covered by the various agreements.

In May 2014, a shareholder derivative action was filed by a shareholder of HSBC Holdings purportedly on behalf of HSBC Holdings, HSBC Bank USA, HNAH and HSBC USA Inc. (the ‘Nominal Corporate Defendants’) in New York state court against certain current and former directors and officers of those HSBC companies (the ‘Individual Defendants’). The complaint alleges that the Individual Defendants breached their fiduciary duties to the Nominal Corporate Defendants and caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the US DPA. In March 2015, the Nominal Corporate Defendants moved to dismiss the action, and the Individual Defendants who had been served also responded to the complaint. In November 2015, the New York state court granted the motion to dismiss. The plaintiff has appealed that decision.

In July 2014, a claim was filed in the Ontario Superior Court of Justice against HSBC Holdings and a former employee purportedly on behalf of a class of persons who purchased HSBC common shares and American Depositary Shares between July 2006 and July 2012. The complaint, which seeks monetary damages of up to CA$20bn, alleges that the defendants made statutory and common law misrepresentations in documents released by HSBC Holdings and its wholly owned subsidiary, HSBC Bank Canada, relating to HSBC’s compliance with BSA, AML, sanctions and other laws.

In November 2014, a complaint was filed in the US District Court for the Eastern District of New York on behalf of representatives of US persons alleged to have been killed or injured in Iraq between April 2004 and November 2011. The complaint was filed against HSBC Holdings, HSBC Bank plc, HSBC Bank USA and HSBC Bank Middle East, as well as other non-HSBC banks and the Islamic Republic of Iran. The plaintiffs allege that defendants violated the US Anti-Terrorism Act (‘US ATA’) by altering or falsifying payment messages involving Iran, Iranian parties and Iranian banks for transactions processed through the US. Defendants filed a motion to dismiss in May 2015, and a decision on that motion is pending.

In November 2015, a complaint was filed in the US District Court for the Northern District of Illinois on behalf of representatives of four US persons alleged to have been killed or injured in terrorist attacks on three hotels in Amman, Jordan in 2005. The complaint was filed against HSBC Holdings, HSBC Bank USA, HNAH, HSI, HSBC Finance, HSBC USA Inc. and HSBC Bank Middle East, as well as a non-HSBC bank. The plaintiffs allege that the HSBC defendants violated the US ATA by failing to enforce due diligence methods to prevent its financial services from being used to support the terrorist attacks.

In February 2016, a complaint was filed in the US District Court for the Southern District of Texas by representatives of US persons alleged to have been killed or injured in Mexico by Mexican drug cartels. The complaint was filed against HSBC Holdings, HSBC Bank USA, HSBC México SA, and Grupo Financiero HSBC. The plaintiffs allege that defendants violated the US ATA by providing financial services to individuals and entities associated with the Mexican drug cartels. Defendants have not yet been served with process.

 

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Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these lawsuits, including the timing or any possible impact on HSBC, which could be significant.

Tax-related investigations

HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding whether certain HSBC companies and employees, including those associated with HSBC Private Bank (Suisse) SA (‘HSBC Swiss Private Bank’) and an HSBC company in India, acted appropriately in relation to certain customers who had US tax reporting obligations. In connection with these investigations, HSBC Swiss Private Bank, with due regard for Swiss law, has produced records and other documents to the DoJ. In August 2013, the DoJ informed HSBC Swiss Private Bank that it was not eligible for the ‘Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks’ since a formal investigation had previously been authorised.

In addition, various tax administration, regulatory and law enforcement authorities around the world, including in Belgium, France, Argentina and India, are conducting investigations and reviews of HSBC Swiss Private Bank and other HSBC entities in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation. HSBC Swiss Private Bank has been placed under formal criminal examination by magistrates in both Belgium and France. In February 2015, HSBC was informed that the French magistrates are of the view that they have completed their investigation with respect to HSBC Swiss Private Bank and have referred the matter to the public prosecutor for a recommendation on any potential charges to be brought, whilst reserving the right to continue investigating other conduct at HSBC. In April 2015, HSBC Holdings was informed that it has been placed under formal criminal investigation by the French magistrates in connection with the conduct of HSBC Swiss Private Bank in 2006 and 2007 for alleged tax offences, and a €1bn bail was imposed. HSBC Holdings appealed the magistrates’ decision and, in June 2015, bail was reduced to €100m. The ultimate financial impact of this matter could differ significantly, however, from the bail amount of €100m.

In Argentina, in November 2014, the Argentine tax authority filed a complaint against various individuals, including current and former HSBC employees, alleging tax evasion and an unlawful association amongst HSBC Swiss Private Bank, HSBC Bank Argentina, HSBC Bank USA and certain HSBC employees, which allegedly enabled numerous HSBC customers to evade their Argentine tax obligations. In addition, the Argentine Congress convened a special committee to investigate similar allegations, as well as issues related to allegations of Argentine income tax evasion more broadly. The committee issued its final report in December 2015.

In India, in February 2015, the Indian tax authority issued a summons and request for information to an HSBC company in India. In August 2015 and November 2015, HSBC entities received notices issued by two offices of the Indian tax authority, alleging that the Indian tax authority had sufficient evidence to initiate prosecution against HSBC Swiss Private Bank and its Dubai entity for abetting tax evasion of four different Indian individuals and/or families and requesting that the HSBC entities show why such prosecution should not be initiated.

With respect to each of these ongoing matters, HSBC is cooperating with the relevant authorities in a manner consistent with relevant laws. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these investigations and reviews, which could be significant.

In light of the media attention regarding these matters, it is possible that other tax administration, regulatory or law enforcement authorities will also initiate or enlarge similar investigations or regulatory proceedings.

London interbank offered rates, European interbank offered rates and other benchmark interest rate investigations and litigation

Various regulators and competition and law enforcement authorities around the world, including in the UK, the US, the EU, Switzerland, South Korea and elsewhere, are conducting investigations and reviews related to certain past submissions made by panel banks and the processes for making submissions in connection with the setting of Libor, Euribor and other benchmark interest rates. As certain HSBC companies are members of such panels, HSBC has been the subject of regulatory demands for information and is cooperating with those investigations and reviews.

In May 2014, HSBC received a Statement of Objections from the European Commission (the ‘Commission’), alleging anti-competitive practices in connection with the pricing of euro interest rate derivatives. The Statement of Objections sets out the Commission’s preliminary views and does not prejudge the final outcome of its investigation. HSBC responded to the Commission’s Statement of Objections in March 2015, and a hearing before the Commission took place in June 2015. A decision by the Commission is pending.

In addition, HSBC and other US dollar Libor panel banks have been named as defendants in a number of private lawsuits filed in the US with respect to the setting of US dollar Libor. The complaints assert claims under various US laws, including US antitrust and racketeering laws, the US Commodity Exchange Act (‘CEA’), and state law. The lawsuits include individual and putative class actions, most of which have been transferred and/or consolidated for pre-trial purposes before the United States District Court for the Southern District of New York (the ‘New York District Court’).

In March 2013, the New York District Court overseeing the consolidated proceedings related to US dollar Libor issued a decision in the six oldest actions, dismissing the plaintiffs’ federal and state antitrust claims, racketeering claims, and unjust enrichment claims in their entirety, but allowing certain of their CEA claims that were not barred by the applicable statute of

 

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40 – Legal proceedings and regulatory matters

    

    

    

 

limitations to proceed. Some of those plaintiffs appealed the New York District Court’s decision to the US Court of Appeals for the Second Circuit, which later dismissed those appeals as premature. In January 2015, the US Supreme Court reversed the Court of Appeals’ decision and remanded the case to the Court of Appeals for consideration on the merits of the plaintiffs’ appeal. Oral argument in the Court of Appeals was held in November 2015, and the parties are awaiting a decision.

Other plaintiffs sought to file amended complaints in the New York District Court to assert additional allegations. In June 2014, the New York District Court issued a decision that, amongst other things, denied the plaintiffs’ request for leave to amend their complaints to assert additional theories of Libor manipulation against HSBC and certain non-HSBC banks, but granted leave to assert such manipulation claims against two other banks; and granted defendants’ motion to dismiss certain additional claims under the CEA as barred by the applicable statute of limitations. Proceedings with respect to all other actions in the consolidated proceedings were stayed pending this decision. The stay was lifted in September 2014, and amended complaints were filed in certain other individual and class actions thereafter. The defendants filed motions to dismiss, and in August 2015 and November 2015, the court issued decisions granting the motions in part, although it has not yet entered an order specifying which particular claims are dismissed against which defendants.

Separately, HSBC and other panel banks have also been named as defendants in two putative class actions filed in the New York District Court on behalf of persons who transacted in financial instruments allegedly related to the euroyen Tokyo interbank offered rate (‘Tibor’) and/or Japanese yen Libor. The complaints allege, amongst other things, misconduct related to euroyen Tibor, although HSBC is not a member of the Japanese Bankers Association’s euroyen Tibor panel, as well as Japanese yen Libor, in violation of US antitrust laws, the CEA, and state law.

The first of the two actions was filed in April 2012, and HSBC responded by filing a motion to dismiss. In March 2014, the New York District Court dismissed the plaintiffs’ claims under US antitrust law and state law, but sustained their claims under the CEA. In June 2014, the plaintiffs then moved for leave to file an amended complaint adding new claims and parties. That motion was denied in March 2015, except insofar as it granted leave to add certain defendants not affiliated with HSBC and reserving on the question of whether the California State Teachers Retirement System (‘CALSTRS’) may intervene and be added as a plaintiff. In October 2015, the New York District Court denied the motion of CALSTRS to intervene. In November 2015, CALSTRS filed an appeal of that ruling to the United States Court of Appeals for the Second Circuit, which remains pending.

The second action was filed in July 2015. In February 2016, HSBC and the other banks named in the complaint filed a motion to dismiss the action, and a decision on that motion is pending.

In November 2013, HSBC and other panel banks were also named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in euro futures contracts and other financial instruments allegedly related to Euribor. The complaint alleges, amongst other things, misconduct related to Euribor in violation of US antitrust laws, the CEA and state law. The court previously stayed proceedings until May 2015. After the stay expired, the plaintiffs filed an amended complaint. In October 2015, HSBC filed a motion to dismiss the action, which remains pending.

In September and October 2014, HSBC Bank plc and other panel banks were named as defendants in a number of putative class actions that were filed and consolidated in the New York District Court on behalf of persons who transacted in interest rate derivatives or purchased or sold financial instruments that were either tied to US dollar International Swaps and Derivatives Association fix (‘ISDAfix’) rates or were executed shortly before, during, or after the time of the daily ISDAfix setting window. The complaint alleges, amongst other things, misconduct related to these activities in violation of US antitrust laws, the CEA and state law. In February 2015, plaintiffs filed a second consolidated amended complaint replacing HSBC Bank plc with HSBC Bank USA. A motion to dismiss that complaint was filed in April 2015, and a decision is pending.

There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of these lawsuits. Based upon the information currently available, it is possible that any liabilities that might arise as a result of the claims in these actions could be significant.

Foreign exchange rate investigations and litigation

Various regulators and competition and law enforcement authorities around the world, including in the US, the EU, Brazil, South Korea and elsewhere, are conducting investigations and reviews into trading by HSBC and others on the foreign exchange markets. HSBC has been cooperating with these ongoing investigations and reviews.

In May 2015, the DoJ resolved its investigations with respect to five non-HSBC financial institutions, four of whom agreed to plead guilty to criminal charges of conspiring to manipulate prices in the foreign exchange spot market, and resulting in the imposition of criminal fines in the aggregate of more than $2.5bn. Additional penalties were imposed at the same time by the FRB and other banking regulators. HSBC was not a party to these resolutions, and investigations into HSBC by the DoJ, FRB and others around the world continue.

In addition, in late 2013 and early 2014, HSBC Holdings, HSBC Bank plc, HNAH and HSBC Bank USA were named as defendants, amongst other banks, in various putative class actions filed in the New York District Court. In March 2014, the plaintiffs filed a consolidated amended complaint alleging, amongst other things, that defendants conspired to manipulate the WM/Reuters foreign exchange benchmark rates (the ‘Consolidated Action’). Separate putative class actions were also brought on behalf of non-US plaintiffs (the ‘Foreign Actions’). Defendants moved to dismiss all actions. In January 2015, the court denied defendants’

 

HSBC HOLDINGS PLC   452

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motion to dismiss the Consolidated Action, but granted defendants’ motion to dismiss the Foreign Actions. Five additional putative class actions were subsequently filed in the New York District Court making similar allegations on behalf of persons who engaged in foreign exchange futures transactions on a US exchange, and those additional actions were subsequently consolidated with the Consolidated Action. In July 2015, the plaintiffs in the Consolidated Action filed a further amended complaint that, amongst other things, added new claims and parties, including HSBC Securities (USA), Inc. In September 2015, HSBC reached an agreement with plaintiffs to resolve the Consolidated Action, subject to court approval. In December 2015, the court granted preliminary approval of the settlement, and HSBC made payment of the agreed settlement amount into an escrow account. The court has not yet set a date for the final approval hearing.

In addition to the above actions, a putative class action was filed in the New York District Court in June 2015 making similar allegations on behalf of Employee Retirement Income Security Act of 1974 (‘ERISA’) plan participants, and another complaint was filed in the US District Court for the Northern District of California in May 2015. HSBC filed a motion to transfer the California action to New York, which was granted in November 2015.

In September 2015, two additional putative class actions making similar allegations under Canadian law were issued in Canada against various HSBC entities, including HSBC Bank Canada, and numerous other financial institutions.

As at 31 December 2015, HSBC has recognised a provision in the amount of $1.2bn. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters. Due to uncertainties and limitations of these estimates, the ultimate penalties could differ significantly from the amount provided.

Precious metals fix-related litigation and investigations

Beginning in March 2014, numerous putative class actions were filed in the US District Courts for the Southern District of New York, the District of New Jersey and the Northern District of California, naming HSBC and other members of The London Gold Market Fixing Limited as defendants. The complaints allege that, from January 2004 to the present, defendants conspired to manipulate the price of gold and gold derivatives during the afternoon London gold fix for their collective benefit in violation of US antitrust laws, the CEA and New York state law. The actions were subsequently consolidated in the New York District Court. An amended complaint was filed in March 2015, which defendants moved to dismiss. A hearing has been scheduled for March 2016.

Beginning in July 2014, numerous putative class actions were filed in the US District Courts for the Southern and Eastern Districts of New York, naming HSBC and other members of The London Silver Market Fixing Ltd as defendants. The complaints allege that, from January 1999 to the present, defendants conspired to manipulate the price of silver and silver derivatives for their collective benefit in violation of US antitrust laws, the CEA and New York state law. The actions were subsequently consolidated in the New York District Court. An amended complaint was filed in April 2015, which defendants moved to dismiss. A hearing has been scheduled for March 2016.

Between late 2014 and early 2015, numerous putative class actions were filed in the US District Court for the Southern District of New York, naming HSBC, and other members of The London Platinum and Palladium Fixing Company Limited as defendants. The complaints allege that, from January 2008 to the present, defendants conspired to manipulate the price of platinum group metals (‘PGM’) and PGM-based financial products for their collective benefit in violation of US antitrust laws and the CEA. An amended complaint was filed in August 2015, which defendants moved to dismiss.

Additionally, in December 2015, a putative class action under Canadian law was filed in the Ontario Superior Court of Justice against various HSBC entities, including HSBC Bank Canada, and other financial institutions. Plaintiffs allege that, from January 2004 to March 2014, defendants conspired to manipulate the price of gold and gold-related investment instruments in violation of the Canadian Competition Act and common law.

Various regulators and competition and law enforcement authorities, including in the US and the EU, are conducting investigations and reviews relating to HSBC’s precious metals operations. HSBC has been cooperating with these ongoing investigations. In November 2014, the Antitrust Division and Criminal Fraud Section of the DoJ issued a document request to HSBC Holdings, seeking the voluntary production of certain documents in connection with a criminal investigation that the DoJ is conducting of alleged anti-competitive and manipulative conduct in precious metals trading. In January 2016, the Antitrust Division of the DoJ informed HSBC that it was closing its investigation; however, the Criminal Fraud Section’s investigation remains ongoing.

Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.

Credit default swap regulatory investigation and litigation

In July 2013, HSBC received a Statement of Objections from the Commission relating to its ongoing investigation of alleged anti-competitive activity by a number of banks and other market participants in the credit derivatives market between 2006 and 2009. The Statement of Objections sets out the Commission’s preliminary views and does not prejudge the final outcome of its investigation. HSBC submitted a response and attended a hearing in May 2014. Following the hearing, the Commission decided in December 2015 to close the case against all 13 banks, including all of the HSBC entities; however, the Commission’s investigation relating to Markit and ISDA is ongoing.

 

HSBC HOLDINGS PLC   453

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Notes on the Financial Statements (continued)

40 – Legal proceedings and regulatory matters / 41 – Related party transactions

    

    

    

 

In addition, HSBC Holdings, HSBC Bank plc and HSBC Bank USA were named as defendants, amongst others, in numerous putative class actions filed in the New York District Court and the Illinois District Court. These class actions allege that the defendants, which include ISDA, Markit and several other financial institutions, conspired to restrain trade in violation of US antitrust laws by, amongst other things, restricting access to credit default swap pricing exchanges and blocking new entrants into the exchange market. The plaintiffs in these suits purport to represent a class of all persons who purchased credit default swaps from or sold credit default swaps to defendants primarily in the US.

In October 2013, these cases were consolidated in the New York District Court (the ‘Consolidated Action’). In September 2015, the HSBC defendants reached an agreement with plaintiffs to resolve the Consolidated Action, subject to court approval. In October 2015, the court granted preliminary approval of the settlement. The final settlement approval hearing is scheduled for April 2016.

Economic plans: HSBC Bank Brasil S.A.

In the mid-1980s and early 1990s, certain economic plans were introduced by the government of Brazil to reduce escalating inflation. The implementation of these plans adversely impacted savings account holders, thousands of which consequently commenced legal proceedings against financial institutions in Brazil, including HSBC Bank Brasil S.A. (‘HSBC Brazil’), alleging, amongst other things, that savings account balances were adjusted by a different price index than that contractually agreed, which caused them a loss of income. Certain of these cases have reached the Brazilian Supreme Court. The Supreme Court has suspended all cases pending before lower courts until it delivers a final judgement on the constitutionality of the changes resulting from the economic plans. It is anticipated that the outcome of the Supreme Court’s final judgement will set a precedent for all cases pending before the lower courts. Separately, the Brazilian Superior Civil Court is considering matters relating to, amongst other things, contractual and punitive interest rates to be applied to calculate any loss of income.

There is a high degree of uncertainty as to the terms on which the proceedings in the Supreme Court and Superior Civil Court will be resolved and the timing of such resolutions, including the amount of losses that HSBC Brazil may be liable to pay in the event of an unfavourable judgement. Such losses may lie in a range from a relatively insignificant amount to an amount up to $564m (based on the exchange rate between the USD and the BRL as at 31 December 2015), although the upper end of this range is considered unlikely.

Regulatory review of consumer ‘enhancement services products’

HSBC Finance, through its legacy Cards and Retail Services business, offered or participated in the marketing, distribution, or servicing of products, such as identity theft protection and credit monitoring products, that were ancillary to the provision of credit to the consumer. HSBC Finance ceased offering these products by May 2012. The offering and administration of these and other enhancement services products, such as debt protection products, has been the subject of enforcement actions against other institutions by regulators, including the Consumer Financial Protection Bureau, the OCC, and the Federal Deposit Insurance Corporation. Such enforcement actions have resulted in orders to pay restitution to customers and the assessment of penalties in substantial amounts. We have made restitution to certain customers in connection with certain enhancement services products, and we continue to cooperate with our regulators in connection with their ongoing review. In light of the actions that regulators have taken in relation to other non-HSBC credit card issuers regarding their enhancement services products, one or more regulators may order us to pay additional restitution to customers and/or impose civil money penalties or other relief arising from the prior offering and administration of such enhancement services products by HSBC Finance; however, management no longer expects the resulting financial impact to be material.

Fédération Internationale de Football Association (‘FIFA’) related investigations

HSBC has received inquiries from the DoJ regarding its banking relationships with certain individuals and entities that are or may be associated with FIFA. The DoJ is investigating whether multiple financial institutions, including HSBC, permitted the processing of suspicious or otherwise improper transactions, or failed to observe applicable AML laws and regulations. HSBC is cooperating with the DoJ’s investigation.

Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.

Hiring practices investigation

The US Securities and Exchange Commission (the ‘SEC’) is investigating multiple financial institutions, including HSBC, in relation to hiring practices of candidates referred by or related to government officials or employees of state-owned enterprises in Asia-Pacific. HSBC has received various requests for information and is cooperating with the SEC’s investigation.

Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.

41    Related party transactions

 

Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures, post-employment benefit plans for HSBC employees, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled or jointly controlled by Key Management Personnel or their close family members.

 

HSBC HOLDINGS PLC   454

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Particulars of transactions with related parties, disclosed pursuant to the requirements of IAS 24 ‘Related Party Disclosures’, are tabulated below. The disclosure of the year-end balance and the highest amounts outstanding during the year is considered to be the most meaningful information to represent the amount of the transactions and the amount of outstanding balances during the year.

Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of HSBC Holdings, being the Directors and Group Managing Directors of HSBC Holdings.

Key Management Personnel

Compensation of Key Management Personnel

 

				2015						2014						2013
				$m						$m						$m
Short-term employee benefits					40						41						38
Post-employment benefits					1						1						2
Other long-term employee benefits					9						7						10
Share-based payments					51						54						35
Year ended 31 December					101						103						85

Transactions, arrangements and agreements involving related parties

Particulars of advances (loans and quasi-loans), credits and guarantees entered into by subsidiaries of HSBC Holdings during 2015 with Directors, disclosed pursuant to section 413 of the Companies Act 2006, are shown below:

 

				2015						2014
				$m						$m
Advances and credits at 31 December					4						5

Transactions and balances during the year with Key Management Personnel

 

				2015										2014
				Balance at 31 December				Highest amounts outstanding during year						Balance at 31 December				Highest amounts outstanding during year
				$m				$m						$m				$m
Key Management Personnel1
Advances and credits2					218				411						309				347
Guarantees3					67				91						78				79

 

1	Includes Key Management Personnel, close family members of Key Management Personnel and entities which are controlled or jointly controlled by Key Management Personnel or their close family members.

2	The 2014 year-end balance has been restated from $194m to $309m and the 2014 highest amount outstanding during the year has been restated from $227m to $347m.

3	The 2014 year-end balance has been restated from nil to $78m and the 2014 highest amount outstanding during the year has been restated from nil to $79m.

Some of the transactions were connected transactions as defined by the Rules Governing The Listing of Securities on The Stock Exchange of Hong Kong Limited, but were exempt from any disclosure requirements under the provisions of those rules. The above transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features.

 

HSBC HOLDINGS PLC   455

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Notes on the Financial Statements (continued)

41 – Related party transactions / 42 – Events after the balance sheet date / 43 – HSBC’s subsidiaries

    

    

    

 

Shareholdings, options and other securities of Key Management Personnel

 

				2015 (000s)						2014 (000s)
Number of options held over HSBC Holdings ordinary shares under employee share plans					29						28
Number of HSBC Holdings ordinary shares held beneficially and non-beneficially					18,961						17,533
Number of HSBC Bank 2.875% Notes 2015 due 30 April 2015 held beneficially and non-beneficially					–						5
At 31 December					18,990						17,566

Associates and joint ventures

The Group provides certain banking and financial services to associates and joint ventures including loans, overdrafts, interest and non-interest bearing deposits and current accounts. Details of the interests in associates and joint ventures are given in Note 19.

Transactions and balances during the year with associates and joint ventures

 

				2015												2014
				Highest balance during the year						Balance at 31 December						Highest balance during the year						Balance at 31 December
				$m						$m						$m						$m
Amounts due from joint ventures:
– unsubordinated					195						151						205						205
Amounts due from associates:
– subordinated					–						–						58						–
– unsubordinated					4,209						2,035						5,451						4,273
					4,404						2,186						5,714						4,478
Amounts due to associates					1,047						92						650						162
Guarantees					905						904						952						952
Commitments					–						–						17						–

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.

Post-employment benefit plans

At 31 December 2015, $4.3bn (2014: $4.5bn) of HSBC post-employment benefit plan assets were under management by HSBC companies, earning management fees of $8m in 2015 (2014: $12m). At 31 December 2015 HSBC’s post-employment benefit plans had placed deposits of $811m (2014: $223m) with its banking subsidiaries, earning interest payable to the schemes of nil (2014: $6m). The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.

HSBC Bank (UK) Pension Scheme enters into swap transactions with HSBC to help manage inflation and interest rate sensitivity of its liabilities. At 31 December 2015 the gross notional value of these swaps was $13.3bn (2014: $24bn), the swaps had a positive fair value to the scheme of $0.5bn (2014: $0.9bn positive); and HSBC had delivered collateral of $1.1bn (2014: $2.0bn) to the scheme in respect of these arrangements. This earned HSBC interest of nil (2014: $5m). All swaps were executed at prevailing market rates and within standard market bid/offer spreads. Over the year, the scheme reduced its level of swap transactions with HSBC.

The International Staff Retirement Benefit Scheme enters into swap transactions with HSBC to manage the inflation and interest rate sensitivity of its liabilities and selected assets. At 31 December 2015, the gross notional value of the swaps was $1.7bn (2014: $1.9bn) and the swaps had a net negative fair value to the scheme of $96m (2014: $107m negative). All swaps were executed at prevailing market rates and within standard market bid/offer spreads.

HSBC Holdings

Details of HSBC Holdings’ subsidiaries are shown in Note 43.

 

HSBC HOLDINGS PLC   456

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Transactions and balances during the year with subsidiaries

 

				2015												2014
				Highest balance during the year						Balance at 31 December						Highest balance during the year						Balance at 31 December
				$m						$m						$m						$m
Assets
Cash at bank					620						242						436						249
Derivatives					3,409						2,466						3,179						2,771
Loans and advances					47,229						44,350						55,026						43,910
Financial investments					4,427						4,285						4,073						4,073
Investments in subsidiaries					97,770						97,770						96,264						96,264
Total related party assets at 31 December					153,455						149,113						158,978						147,267
Liabilities
Amounts owed to HSBC undertakings					2,892						2,152						12,046						2,892
Derivatives					2,459						2,277						1,169						1,169
Subordinated liabilities:
– at amortised cost					1,670						891						1,743						1,670
– designated at fair value					982						855						3,186						981
Total related party liabilities at 31 December					8,003						6,175						18,144						6,712
Guarantees					68,333						68,333						53,180						52,023
Commitments					16						–						1,245						16

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.

Some employees of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme, which is sponsored by a separate Group company. HSBC Holdings incurs a charge for these employees equal to the contributions paid into the scheme on their behalf. Disclosure in relation to the scheme is made in Note 6.

42 Events after the balance sheet date

 

A fourth interim dividend for 2015 of $0.21 per ordinary share (a distribution of approximately $4,134m) was declared by the Directors after 31 December 2015.

These accounts were approved by the Board of Directors on 22 February 2016 and authorised for issue.

43 HSBC Holdings’ subsidiaries, joint ventures and associates

 

In accordance with Section 409 of the Companies Act 2006 a list of HSBC Holdings plc’s subsidiaries, joint ventures and associates, the country of incorporation and the effective percentage of equity owned at 31 December 2015 is disclosed below.

 

Subsidiaries		Country		Security		Direct (%)		Total (%)
0866101 B.C. Ltd		Canada		C$ Common shares					100
0866102 B.C. Ltd		Canada		C$ Common shares					100
ACN 087 652 113 Pty Limited		Australia		A$0.16667 Ordinary shares					100
Albouys Nominees Limited		England and Wales		£1.00 Ordinary shares					100
Allblack Investments Limited		Jersey		£0.0037 Ordinary and £0.0037 Preference shares					100
AMP Client HSBC Custody Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance December (A) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance December (E) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance December (F) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance December (H) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance December (M) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance December (P) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance December (R) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance December (W) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance June (A) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance June (D) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance June (E) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance March (B) Limited		Northern Ireland		£1.00 Ordinary shares					100
Assetfinance March (D) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance March (F) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance September (F) Limited		England and Wales		£1.00 Ordinary shares					100
Assetfinance September (G) Limited		England and Wales		£1.00 Ordinary shares					100
B&Q Financial Services Limited		England and Wales		£1.00 Ordinary shares					100

 

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Notes on the Financial Statements (continued)

43 – HSBC Holdings’ subsidiaries, joint ventures and associates

    

    

    

 

Subsidiaries (continued)		Country		Security		Direct (%)		Total (%)
Banco Losango S.A Banco Multiplo		Brazil		BRL Ordinary shares					100
Banco Nominees (Guernsey) Limited		Guernsey		£1.00 Ordinary shares					100
Banco Nominees 2 (Guernsey) Limited		Guernsey		£1.00 Ordinary shares					100
Banco Nominees Limited		Bermuda		BMD2.40 Ordinary shares					100
Bank of Bermuda (Cayman) Limited		Cayman Islands		$1.00 Ordinary shares					100
Bank of Bermuda (Insurance Brokers) Limited		Bermuda		BMD1.00 Common shares					100
Beijing Miyun HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares					100
Beneficial Commercial Holding Corporation		United States		$100.00 Common shares					100
Beneficial Company LLC		United States		Limited liability company – no shares					100
Beneficial Consumer Discount Company		United States		$100.00 Common shares					100
Beneficial Direct, Inc.		United States		$100.00 Ordinary shares					100
Beneficial Financial I Inc.		United States		$1.00 Common shares					100
Beneficial Florida Inc.		United States		$100.00 Common shares					100
Beneficial Kentucky Inc.		United States		$100.00 Common shares					100
Beneficial Loan & Thrift Co.		United States		$25.00 Common shares					100
Beneficial Louisiana Inc.		United States		$100.00 Common shares					100
Beneficial Maine Inc.		United States		$100.00 Common shares					100
Beneficial Management Corporation of America		United States		$10.00 Common shares					100
Beneficial Massachusetts Inc.		United States		$100.00 Common shares					100
Beneficial Michigan Inc.		United States		$ Common shares					100
Beneficial Mortgage Corporation		United States		$100.00 Common shares					100
Beneficial New Hampshire Inc.		United States		$100.00 Common shares					100
Beneficial New York Inc.		United States		$100.00 Common shares					100
Beneficial Oregon Inc.		United States		$100.00 Common shares					100
Beneficial Rhode Island Inc.		United States		$100.00 Common shares					100
Beneficial South Dakota Inc.		United States		$ Common shares					100
Beneficial Tennessee Inc.		United States		$100.00 Common shares					100
Beneficial West Virginia, Inc.		United States		$1.00 Common shares					100
Beneficial Wyoming Inc.		United States		$100.00 Common shares					100
BerCay Holdings Limited		Cayman Islands		$20.00 Ordinary shares					100
Bermuda Asia Pacific Holdings Limited		Cook Islands		$1.00 Ordinary shares					100
Bermuda International Securities Limited		Bermuda		BMD1.00 Ordinary shares					100
Bermuda Trust (St Helier) Limited		Jersey		$1.00 Ordinary shares					100
Bermuda Trust Company Limited		Bermuda		BMD1.00 Common shares					100
Bermuda Trust Executors (Jersey) Limited		Jersey		£1.00 Shares					100
BFC Insurance Agency of Nevada		United States		$ Ordinary shares					100
Billingsgate City Securities Public Limited Company		England and Wales		£0.01 Ordinary shares					100
Billingsgate Nominees Limited		England and Wales		£1.00 Issued shares					100
Cabot Park Holdings, Inc.		United States		$1.00 Common shares					100
Cal-Pacific Services, Inc.		United States		$100.00 Ordinary shares					100
Canada Crescent Nominees (UK) Limited		England and Wales		£1.00 Ordinary shares					100
Canada Square Nominees (UK) Limited		England and Wales		£1.00 Ordinary shares					100
Canada Square Property Participations Limited		England and Wales		£1.00 Ordinary shares					100
Canada Water Nominees (UK) Limited		England and Wales		£1.00 Ordinary shares					100
Capco/Cove, Inc.		United States		$1.00 Common shares					100
Capital Financial Services Inc.		United States		$1.00 Common shares					100
Card-Flo #1, Inc.		United States		$1.00 Common shares					100
Card-Flo #3, Inc.		United States		$0.01 Common shares					100
Castlewood Limited		Cook Islands		$ Ordinary shares					100
Cayman International Finance Limited		Cayman Islands		$1.20 Ordinary shares					100
Cayman Nominees Limited		Cayman Islands		KYD2.00 Ordinary shares					100
CBS/Holdings, Inc.		United States		$1.00 Common shares					100
CC&H Holdings LLC		United States		Limited liability company – no shares					100
CCF & Partners Asset Management Limited		England and Wales		£1.00 Ordinary shares					100
CCF Charterhouse GmbH		Germany		€1.00 Actions shares					100
CCF Charterhouse GmbH & Co Asset Leasing KG		Germany		Limited partnership – no shares					100
Charterhouse Administrators (D.T.) Limited		England and Wales		£1.00 Ordinary shares					100
Charterhouse Development Limited		England and Wales		£1.00 Ordinary shares					100
Charterhouse Finance Corporation Limited		Scotland		£1.00 Ordinary shares					100
Charterhouse Management Services Limited		England and Wales		£1.00 Ordinary shares					100
Charterhouse Pensions Limited		England and Wales		£1.00 Ordinary shares					100
Chemi and Cotex Industries Limited		Tanzania, United Rep. of		TZS1.00 Ordinary shares					100
Chongqing Dazu HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares					100
Chongqing Fengdu HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares					100
Chongqing Rongchang HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares					100
CL Residential Limited		England and Wales		£1.00 Ordinary shares					100
Compass Nominees Limited		Bermuda		BMD1.00 Common shares					100
Compass Services Limited		Bermuda		$1.00 Ordinary shares					100
Cordico Management AG		Switzerland		CHF1,000.00 Ordinary shares					100
Corhold Limited		Virgin Islands, British		$1.00 Bearer shares					100
Credival Participacoes Administracao e Assessoria Ltda		Brazil		BRL0.01 Quota shares					100
Crewfleet Limited		England and Wales		£1.00 Ordinary shares					100
Dalian Pulandian HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares					100

 

HSBC HOLDINGS PLC   458

---

    

    

    

 

Subsidiaries (continued)		Country		Security		Direct (%)		Total (%)
Decision One Mortgage Company, LLC		United States		Limited liability company – no shares					100
Dem 25		France		€1.00 Actions shares					100
Dem 5		France		€16.00 Actions shares					100
Dem 9		France		€8.50 Actions shares					100
Dempar 1		France		Actions shares no par value					100
Dempar 4		France		Actions shares no par value					100
Eagle Rock Holdings, Inc.		United States		$1.00 Common shares					100
Ellenville Holdings, Inc.		United States		$1.00 Common shares					100
Elysees GmbH		Germany		€ Ordinary shares					100
Elysées Immo Invest		France		€16.00 Actions shares					100
Emerging Growth Real Estate II GP Limited		Guernsey		£ Ordinary shares					100
EMTT Limited		England and Wales		£1.00 Ordinary shares					100
Endeavour Personal Finance Limited		England and Wales		£1.00 Ordinary shares					100
Equator Holdings Limited		England and Wales		$1.00 Ordinary shares					100
Eton Corporate Services Limited		Guernsey		$1.00 Ordinary shares					100
Eton Management Ltd		Virgin Islands, British		$1.00 Ordinary shares					100
Far East Leasing SA		Panama		$1,000.00 Ordinary shares					100
Fdm 5 SAS		France		€10.00 Actions shares					100
Fdm 6 SAS		France		€10.00 Actions shares					100
FEPC Leasing Ltd.		Cayman Islands		$0.001 Ordinary and $0.001 Preference shares					100
Finanpar 2		France		Actions shares no par value					100
Finanpar 7		France		Actions shares no par value					100
First Corporate Director Inc.		Virgin Islands, British		$1.00 Ordinary shares					100
First Direct Investments (UK) Limited		England and Wales		£1.00 Ordinary shares					100
Flandres Contentieux S.A.		France		€0.16 Actions shares					100
Foncière Elysées		France		€77.00 Actions shares					100
Forward Trust Rail Services Limited		England and Wales		£0.1 Ordinary shares					100
F-Street Holdings, Inc.		United States		$1.00 Common shares					100
Fujian Yongan HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares					100
Fundo de Investimento Multimercado Credito Privado Investimento no Exterior Orion1		Brazil		BRL1.14267 Redeemable Preference shares					100
Fundo de Investimento Multimercado Credito Privado Sirius1		Brazil		BRL Ordinary shares					100
Fundo de Investimento Multimercado Investimento no Exterior Tellus1		Brazil		BRL1.07374 Redeemable Preference shares					100
G.M. Gilt-Edged Nominees Limited		England and Wales		£1.00 Ordinary shares					100
Gesellschaft fur Industrielle Beteiligungen und Finanzierung mbH		Germany		€1.00 Common shares					100
Giller Ltd.		United States		$1.00 Common shares					100
GPIF-I Equity Co., Ltd.1		Cayman Islands		KYD0.001 Liquidating Share Class shares					100
GPIF-I Finance Co., Ltd.1		Cayman Islands		$0.001 Liquidating Share Class shares					100
Griffin International Limited		England and Wales		£1.00 Ordinary shares					100
Grundstuecksgesellschaft Trinkausstrasse Kommanditgesellschaft		Germany		DEM1.00 Common shares					100
Grupo Financiero HSBC, S. A. de C. V.		Mexico		MXN2.00 Ordinary shares					100
Guangdong Enping HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares					100
GWML Holdings, Inc.		United States		$1.00 Common shares					100
GZ Trust Corporation		Virgin Islands, British		$1.00 Ordinary shares					100
HBL Nominees Limited		England and Wales		£1.00 Ordinary shares					100
HDSAP GP Limited		Guernsey		£ Ordinary shares					100
Henderson Limited		Cook Islands		$1.00 Ordinary shares					100
HFC Bank Limited		England and Wales		£1.00 Ordinary and £1.00 Ordinary-A shares					100
HFC Commercial Realty, Inc.		United States		$100.00 Common shares					100
HFC Company LLC		United States		Limited liability company – no shares					100
HFC Leasing Inc.		United States		$100.00 Ordinary shares					100
High Meadow Management, Inc.		United States		$1.00 Common shares					100
Hilaga Investments Limited		England and Wales		£1.00 Issued shares					100
HITG Administration GmbH		Germany		€25,000.00 Ordinary shares					100
HITG, Inc.		United States		$1.00 Common shares					100
Honey Green Enterprises Ltd.		Virgin Islands, British		$1.00 Ordinary shares					100
Hongkong International Trade Finance (Holdings) Limited		England and Wales		£1.00 Ordinary ‘A’ and £1.00 Ordinary ‘B’ shares					100
Hongkong International Trade Finance (U.S.A.) Inc.		United States		$1.00 Common shares					100
Household Capital Markets LLC		United States		Limited liability company – no shares					100
Household Commercial Financial Services, Inc.		United States		$100.00 Ordinary shares					100
Household Finance Consumer Discount Company		United States		$100.00 Common shares					100
Household Finance Corporation II		United States		$100.00 Common shares					100
Household Finance Corporation III		United States		$100.00 Common shares					100
Household Finance Corporation of Alabama		United States		$100.00 Common shares					100
Household Finance Corporation of California		United States		$100.00 Common shares					100
Household Finance Corporation of Nevada		United States		$100.00 Common shares					100
Household Finance Corporation of West Virginia		United States		$100.00 Common shares					100
Household Finance Industrial Loan Company of Iowa		United States		$100.00 Common shares					100
Household Finance Realty Corporation of Nevada		United States		$100.00 Common shares					100
Household Finance Realty Corporation of New York		United States		$100.00 Ordinary shares					100

 

HSBC HOLDINGS PLC   459

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Notes on the Financial Statements (continued)

43 – HSBC Holdings’ subsidiaries, joint ventures and associates

    

    

    

 

Subsidiaries (continued)		Country		Security		Direct (%)		Total (%)
Household Financial Center Inc.		United States		$100.00 Common shares					100
Household Industrial Finance Company		United States		$25.00 Common shares					100
Household Industrial Loan Company of Kentucky		United States		$100.00 Common shares					100
Household Insurance Group Holding Company		United States		$1.00 Ordinary shares					100
Household International Europe Limited		England and Wales		£1 Ordinary, £1 Red Vot Preference & £1 Red Vot shares					100
Household Pooling Corporation		United States		$1.00 Common shares					100
Household Realty Corporation		United States		$100.00 Common shares					100
HPUT A Limited		England and Wales		£1.00 Ordinary shares					100
HPUT B Limited		England and Wales		£1.00 Ordinary shares					100
HRMG Nominees Limited		Guernsey		£1.00 Ordinary shares					100
HSBC (BGF) Investments Limited		England and Wales		£1.00 Ordinary shares					100
HSBC (Brasil) Administradora de Consorcio Ltda.		Brazil		BRL Ordinary shares					100
HSBC (General Partner) Limited		Jersey		£1.00 Ordinary shares		100			100
HSBC (Kuala Lumpur) Nominees Sdn Bhd		Malaysia		RM10.00 Ordinary shares					100
HSBC (Malaysia) Trustee Berhad		Malaysia		RM10.00 Ordinary shares					100
HSBC (Singapore) Nominees Pte Ltd		Singapore		SGD Ordinary shares					100
HSBC Administracao de Servicos para Fundos de Pensao (Brasil) Ltda		Brazil		BRL0.01 and BRL1.00 Quota shares					100
HSBC Administradora de Inversiones S.A.		Argentina		ARS Ordinary shares					100
HSBC AFS (USA) LLC		United States		Limited liability company – no shares					100
HSBC Agency (India) Private Limited		India		INR1,000,000.00 Ordinary shares					100
HSBC Alpha Funding (UK) Holdings		Cayman Islands		$0.001 Limited and Unlimited. Liability shares					100
HSBC Alternative Investments Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Amanah Malaysia Berhad		Malaysia		RM0.50 Ordinary shares					100
HSBC Americas Corporation (Delaware)		United States		$1.00 Common shares					100
HSBC Argentina Holdings S.A.		Argentina		ARS1.00 Ordinary shares					100
HSBC Asia Holdings (UK) Limited		England and Wales		$1.00 Ordinary shares					100
HSBC Asia Holdings B.V.		Netherlands		€1,000 A, B, C, D, E, F. G & H Preference shares					100
				€50.00 Ordinary shares
HSBC Asia Pacific Holdings (UK) Limited		England and Wales		£1.00 Ordinary and $100.00 Red Preference shares					100
HSBC Asset Finance (UK) Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Asset Finance Holdings Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Asset Finance M.O.G. Holdings (UK) Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Asset Management (India) Private Limited		India		INR10.00 Equity shares					100
HSBC Assistencia Previdenciaria		Brazil		BRL0.01 Quota shares					100
HSBC Assurances Vie (France)		France		€287.50 Actions shares					100
HSBC Australia Holdings Pty Limited		Australia		A$ Ordinary and A$ Preference shares					100
HSBC Bank (Chile)		Chile		CLP Ordinary shares					100
HSBC Bank (China) Company Limited		China		CNY1.00 Registered Capital shares					100
HSBC Bank (General Partner) Limited		Jersey		£1.00 Ordinary shares					100
HSBC Bank (RR) (Limited Liability Company)		Russian Federation		Russian limited liability company shares NPV					100
HSBC Bank (Singapore) Limited		Singapore		SGD Ordinary shares					100
HSBC Bank (Taiwan) Limited		Taiwan		TWD10.00 Ordinary shares					100
HSBC Bank (Uruguay) S.A.		Uruguay		UYU1.00 Ordinary shares					100
HSBC Bank (Vietnam) Ltd.		Vietnam		VND1.00 Ordinary shares					100
HSBC Bank A.S.		Turkey		TRL1.00 A and TRL1.00B Common shares					100
HSBC Bank Australia Limited		Australia		A$ Ordinary shares					100
HSBC Bank Bermuda Limited		Bermuda		BMD1.00 Common shares					100
HSBC Bank Brasil S.A. - Banco Multiplo		Brazil		BRL Ordinary shares					100
HSBC Bank Canada		Canada		C$ Common and Class 1 Preferred Shares					100
HSBC Bank Capital Funding (Sterling 1) LP1		Jersey		Limited partnership – no shares					100
HSBC Bank Capital Funding (Sterling 2) LP1		Jersey		Limited partnership – no shares					100
HSBC Bank International Limited		Jersey		£1.00 Ordinary shares					100
HSBC Bank Malaysia Berhad		Malaysia		RM0.50 Ordinary shares					100
HSBC Bank Middle East Limited		Jersey		$1 Ordinary and $1 Cum Red Preference shares					100
HSBC Bank Nominee (Jersey) Limited		Jersey		£1.00 Ordinary shares					100
HSBC Bank Pension Trust (UK) Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Bank plc		England and Wales		£1.00 Ordinary and Preference Ordinary shares $0.01 Third Dollar and Series 2 Preference shares		100			100
HSBC Bank Polska S.A.		Poland		PLN1.00 Ordinary and PLN1.00 Preference shares					100
HSBC Bank USA, National Association		United States		$100 Common and $0.01 Preference shares					100
HSBC Branch Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Brasil Holding S.A.		Brazil		BRL Ordinary shares					100
HSBC Brasil S.A. Banco de Investmento		Brazil		BRL Ordinary shares					100

 

HSBC HOLDINGS PLC   460

---

    

    

    

 

Subsidiaries (continued)		Country		Security		Direct (%)		Total (%)
HSBC Broking Forex (Asia) Limited		Hong Kong		HK$10.00 Ordinary shares					100
HSBC Broking Futures (Asia) Limited		Hong Kong		HK$10.00 Ordinary and $2.00 Deferred shares					100
HSBC Broking Futures (Hong Kong) Limited		Hong Kong		HK$10.00 Ordinary shares					100
HSBC Broking Nominees (Asia) Limited		Hong Kong		HK$10.00 Ordinary shares					100
HSBC Broking Securities (Asia) Limited		Hong Kong		HK$10.00 Ordinary shares					100
HSBC Broking Securities (Hong Kong) Limited		Hong Kong		HK$10.00 Ordinary shares					100
HSBC Broking Services (Asia) Limited		Hong Kong		HK$10.00 Ordinary shares					100
HSBC Canada Holdings (UK) Limited		England and Wales		$1.00 Ordinary shares					100
HSBC Capital (Canada) Inc.		Canada		C$ Common shares					100
HSBC Capital (USA), Inc.		United States		$1.00 Common shares					100
HSBC Capital Funding (Dollar 1) L.P.		Jersey		Limited partnership – no shares					100
HSBC Capital Funding (Euro 3) L.P.		Jersey		Limited partnership – no shares					100
HSBC Capital Funding (Sterling 1) L.P.		Jersey		Limited partnership – no shares					100
HSBC Capital Limited		Hong Kong		HK$10.00 Ordinary shares					100
HSBC Capital Services Inc.		Canada		C$ Common shares					100
HSBC Card Services Inc.		United States		$100.00 Common shares					100
HSBC Casa de Bolsa, S.A. de C.V., Grupo Financiero HSBC		Mexico		MXN Share Class 1 and Class 2 shares					100
HSBC Cayman Services Limited		Cayman Islands		$1.00 Ordinary shares					100
HSBC City Funding Holdings		England and Wales		£1.00 Ordinary shares					100
HSBC Client Holdings Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Client Share Offer Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Columbia Funding, LLC		United States		Limited liability company – no shares					100
HSBC Consumer Lending (USA) Inc.		United States		$1.00 Common shares					100
HSBC Corporate Advisory (Malaysia) Sdn Bhd		Malaysia		RM1.00 Ordinary shares					100
HSBC Corporate Finance (Hong Kong) Limited		Hong Kong		HK$10.00 Ordinary shares					100
HSBC Corporate Trustee Company (UK) Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Credit Center, Inc.		United States		$1,000.00 Common shares					100
HSBC Custody Nominees (Australia) Limited		Australia		AUD1.00 Ordinary shares					100
HSBC Custody Services (Guernsey) Limited		Guernsey		£1.00 Ordinary shares					100
HSBC Daisy Investments (Mauritius) Limited		Mauritius		$10.00 Ordinary shares					100
HSBC Diamond (USA) LP		United States		Limited partnership – no shares					100
HSBC Electronic Data Processing (Guangdong) Limited		China		HK$1.00 Registered Capital shares					100
HSBC Electronic Data Processing (Malaysia) Sdn Bhd		Malaysia		RM1.00 Ordinary shares					100
HSBC Electronic Data Processing (Philippines), Inc.		Philippines		PHP100.00 Ordinary and Red Preference shares					100
HSBC Electronic Data Processing India Private Limited		India		INR100.00 Equity shares					100
HSBC Electronic Data Processing Lanka (Private) Limited		Sri Lanka		LKR10.00 Ordinary shares					100
HSBC Electronic Data Service Delivery (Egypt) S.A.E.		Egypt		EGP1.00 Ordinary shares					100
HSBC Enterprise Investment Company (UK) Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Epargne Entreprise (France)		France		€16.00 Actions shares					100
HSBC Equator (UK) Limited		England and Wales		$1.00 Ordinary and £1.00 Non-Vot Def shares					100
HSBC Equipment Finance (UK) Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Equities (Luxembourg) S.a r.l.		Luxembourg		€1.00 Ordinary shares					100
HSBC Equity (UK) Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Europe B.V.		Netherlands		€50.00 Ordinary and €50.00 Preference A & C shares					100
HSBC European Clients Depositary Receipts Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Executor & Trustee Company (UK) Limited		England and Wales		£1.00 Ordinary (£0.40 paid) shares					100
HSBC Factoring (France)		France		€16.00 Actions shares					100
HSBC Finance (Brunei) Berhad		Brunei Darussalam		BND1,000.00 Ordinary shares					100
HSBC Finance (Netherlands)		England and Wales		£1.00 Ordinary shares and £1.00 Ordinary Red shares		100			100
HSBC Finance Corporation		United States		$0.01 Common shares					100
HSBC Finance Holdings (Australia) Pty Limited		Australia		A$1.00 Ordinary shares					100
HSBC Finance Limited		England and Wales		£1.00 Ordinary shares					100
HSBC Finance Mortgages Inc.		Canada		C$ Common shares					100
HSBC Finance Transformation (UK) Limited				£1.00 Ordinary shares		100			100
HSBC Financial Services (Middle East) Limited		United Arab Emirates		AED1,000.00 Ordinary shares					100
HSBC Fondo 1, S.A. de C.V., Sociedad de Inversion de Renta Variable1		Mexico		MXN1.00 Series A shares					100
HSBC Fondo 3, S.A. de C.V., Sociedad de Inversion de Renta Variable1		Mexico		MXN1.00 Series A shares					100
HSBC Fondo 4, S.A. de C.V., Sociedad de Inversion de Renta Variable1		Mexico		MXN1.00 Series A shares					100
HSBC Fondo 5, S.A. de C.V., Sociedad de Inversion de Renta Variable1		Mexico		MXN1.00 Series A shares					100
HSBC Fondo 6, S.A. de C.V., Sociedad de Inversion de Renta Variable1		Mexico		MXN1.00 Series A shares					100
HSBC Fondo Global 1, S.A. de C.V., Sociedad de Inversion de Renta Variable1		Mexico		MXN1.00 Series A shares					100
HSBC Fund Administration (Jersey) Limited		Jersey		£1.00 Ordinary shares					100
HSBC Funding (UK) Holdings		England and Wales		£1.00 Ordinary shares					100
HSBC Funds Nominee (Jersey) Limited		Jersey		£1.00 Ordinary shares					100
HSBC Germany Holdings GmbH		Germany		€1.00 Common shares					100
HSBC Gestao de Recursos Ltda		Brazil		BRL1.00 Quota shares					100
HSBC Global Asset Management (Bermuda) Limited		Bermuda		BMD1.00 Common and BMD1.00 Preference shares					100
HSBC Global Asset Management (Canada) Limited		Canada		C$ Common shares					100
HSBC Global Asset Management (Deutschland) GmbH		Germany		€1.00 Common shares					100
HSBC Global Asset Management (France)		France		€16.00 Actions shares					100

 

HSBC HOLDINGS PLC   461

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Notes on the Financial Statements (continued)

43 – HSBC Holdings’ subsidiaries, joint ventures and associates

    

    

    

 

Subsidiaries (continued)		Country		Security		Direct (%)		Total (%)
HSBC Global Asset Management (Hong Kong) Limited		Hong Kong		HK$100.00 Ordinary shares				100
HSBC Global Asset Management (International) Limited		Jersey		£1.00 Ordinary shares				100
HSBC Global Asset Management (Japan) K. K.		Japan		JPY Ordinary shares				100
HSBC Global Asset Management (Mexico), S.A. de C.V., Grupo Financiero HSBC		Mexico		MXN1,000.00 Ordinary shares				100
HSBC Global Asset Management (Oesterreich) GmbH		Austria		€1.00 GmbH Anteil shares				100
HSBC Global Asset Management (Singapore) Limited		Singapore		SGD Ordinary shares				100
HSBC GLOBAL ASSET MANAGEMENT (Switzerland) AG		Switzerland		CHF10.00 Actions shares				100
HSBC Global Asset Management (Taiwan) Limited		Taiwan		TWD10.00 Ordinary shares				100
HSBC Global Asset Management (UK) Limited		England and Wales		£0.25 Ordinary shares				100
HSBC Global Asset Management (USA) Inc.		United States		$1.00 Common shares				100
HSBC Global Asset Management Holdings (Bahamas) Limited		Bahamas		$1.00 Ordinary shares				100
HSBC Global Asset Management Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Global Custody Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Global Custody Proprietary Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Global Services (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Global Services Limited		England and Wales		$1.00 Ordinary shares		100		100
HSBC Global Shared Services (India) Private Limited		India		INR10.00 Ordinary shares				100
HSBC Group Management Services Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Group Nominees UK Limited		England and Wales		£1.00 Ordinary shares		100		100
HSBC Guyerzeller Trust Company		Cayman Islands		$1.00 Ordinary shares				100
HSBC Holdings B.V.		Netherlands		€453.78 Ordinary and Preference C, D, E, H & I shares				100
HSBC Home Equity Loan Corporation I		United States		$1.00 Common shares				100
HSBC Home Equity Loan Corporation II		United States		$100.00 Common shares				100
HSBC IM Pension Trust Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Infrastructure Limited		England and Wales		£1.00 Ordinary shares				100
HSBC INKA Investment-AG TGV		Germany		€1.00 Stückaktien shares				100
HSBC Institutional Trust Services (Asia) Limited		Hong Kong		HK$100.00 Ordinary shares				100
HSBC Institutional Trust Services (Bermuda) Limited		Bermuda		BMD1.00 Common shares				100
HSBC Institutional Trust Services (Ireland) Limited		Ireland		$1.00 Ordinary shares				100
HSBC Institutional Trust Services (Mauritius) Limited		Mauritius		$1.00 Ordinary shares				100
HSBC Institutional Trust Services (Singapore) Limited		Singapore		SGD Ordinary shares				100
HSBC Insurance (Asia) Limited		Hong Kong		HK$1,000.00 Ordinary shares				100
HSBC Insurance (Asia-Pacific) Holdings Limited		Hong Kong		HK$10.00 Ordinary & Cum Red Class A Preference shares				100
				HK$10.00 Cum Red Class B and C Preference shares
				HK$10.00 Cum Red Class D and E Preference shares
				HK$10.00 Cum Red Class F and G Preference shares
HSBC Insurance (Bermuda) Limited		Bermuda		$1.96345 Ordinary shares				100
HSBC Insurance (Singapore) Pte. Limited		Singapore		SGD Ordinary NPV shares				100
HSBC Insurance Agency (USA) Inc.		United States		$1.00 Common shares				100
HSBC Insurance Brokers (Philippines) Inc		Philippines		PHP1.00 Ordinary shares				100
HSBC Insurance Brokers (Taiwan) Limited		Taiwan		TWD10.00 Ordinary shares				100
HSBC Insurance Holdings Limited		England and Wales		£1.00 Ordinary shares		100		100
HSBC Insurance Services Holdings Limited		England and Wales		£0.10 Ordinary shares				100
HSBC Intermediate Leasing (UK) Limited		England and Wales		£1,000.00 Issued shares				100
HSBC International Finance Corporation (Delaware)		United States		$1.000.00 Common shares				100
HSBC International Financial Services (UK) Limited		England and Wales		£1.00 ‘A’, ‘B’, ‘C’ and £1.00 Non-Vot Red shares				100
HSBC International Holdings (Jersey) Limited		Jersey		£1.00 Ordinary shares				100
HSBC International Nominees Limited		Virgin Islands, British		$1.00 Ordinary shares				100
HSBC International Trade Finance Limited		England and Wales		£1.00 Ordinary shares				100
HSBC International Trustee (BVI) Limited		Virgin Islands, British		$0.01 Class A Non-Voting shares				100
				$6,000.00 Non-Part Voting shares
HSBC International Trustee (Holdings) Pte. Limited1		Singapore		SGD Ordinary shares				100
HSBC International Trustee Limited		Virgin Islands, British		$1.00 Ordinary shares				100
HSBC Inversiones S.A.		Chile		CLP402.14 Ordinary shares				100
HSBC Inversiones y Servicios Financieros Limitada		Chile		CLP Ordinary shares				100
HSBC InvestDirect Financial Services (India) Limited		India		INR10.00 Ordinary shares				100
HSBC InvestDirect Securities (India) Private Limited		India		INR10.00 Ordinary shares				100
HSBC Investment Asia Holdings Limited		Hong Kong		HK$10.00 Ordinary shares				100
HSBC Investment Bank Holdings B.V.		Netherlands		€50.00 Ordinary shares				100
HSBC Investment Bank Holdings Limited		England and Wales		£1.00 Ordinary shares		100		100
HSBC Investment Funds (Canada) Inc.		Canada		C$ Common and C$ Red Preference shares				100
HSBC Investment Funds (Hong Kong) Limited		Hong Kong		HK$10.00 Ordinary shares				100
HSBC Investment Funds (Luxembourg) SA		Luxembourg		£1.00 Ordinary shares				100
HSBC Investment Holdings (Guernsey) Limited		Guernsey		$1.00 Ordinary shares				100
HSBC Investment Services (Africa) (Pty) Limited		South Africa		ZAR1.00 Ordinary shares				100
HSBC Investments (Bahamas) Limited		Bahamas		BSD100.00 Ordinary shares				100
HSBC Investments (North America) Inc.		United States		$1.00 Common shares				100
HSBC Invoice Finance (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Issuer Services Common Depositary Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Issuer Services Depositary Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Jade Limited Partnership		United States		Limited partnership – no shares				100

 

HSBC HOLDINGS PLC   462

---

    

    

    

 

Subsidiaries (continued)		Country		Security		Direct (%)		Total (%)
HSBC Latin America B.V.		Netherlands		Ordinary €500 Cl-A €250 Cl-B €50 Cl-C shares				100
HSBC Latin America Holdings (UK) Limited		England and Wales		£1.00 Ordinary shares		100		100
HSBC Leasing (Asia) Limited		Hong Kong		HK$100.00 Ordinary shares				100
HSBC Leasing (France)		France		€9.57 Actions shares				100
HSBC Life (International) Limited		Bermuda		HK$1.00 Ordinary shares				100
HSBC Life (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Lodge Funding (UK) Holdings		England and Wales		£1.00 Ordinary shares				100
HSBC Logan Holdings USA, LLC		United States		Limited liability company – no shares				100
HSBC London Holdings Limited		England and Wales		£1.00 Ordinary shares		100		100
HSBC LU Nominees Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Management (Guernsey) Limited		Guernsey		£1.00 Ordinary shares				100
HSBC Markets (NY) Inc.		United States		$4.00 Common shares				100
HSBC Markets (USA) Inc.		United States		$1.00 Common shares				100
HSBC Marking Name Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Middle East Holdings B.V.		Netherlands		€500 Ordinary & €1,000 Preference – Class A shares				100
HSBC Middle East Leasing Partnership		United Arab Emirates		Partnership – no shares				100
HSBC Mortgage Corporation (Canada)		Canada		C$ Common & Class A Preferred Shares				100
HSBC Mortgage Corporation (USA)		United States		$1.00 Common shares				100
HSBC Mortgage Services Inc.		United States		$100.00 Common shares				100
HSBC Nominees (Asing) Sdn Bhd		Malaysia		RM1.00 Ordinary shares				100
HSBC Nominees (Hong Kong) Limited		Hong Kong		HK$10.00 Ordinary shares				100
HSBC Nominees (New Zealand) Limited		New Zealand		NZD1.00 Ordinary shares				100
HSBC Nominees (Tempatan) Sdn Bhd		Malaysia		RM1.00 Ordinary shares				100
HSBC North America Holdings Inc.		United States		$0.01 Common & Preferred Series B shares				100
HSBC North America Inc.		United States		$1.00 Common shares				100
HSBC Odeme Sistemleri Bilgisayar Teknolojileri Basin Yayin Ve Musteri Hizmetleri		Turkey		TRL1.00 Ordinary shares				100
HSBC Overseas Holdings (UK) Limited		England and Wales		£1.00 Ordinary shares		100		100
HSBC Overseas Investments (UK) Limited		England and Wales		£1.00 Ordinary shares		100		100
HSBC Overseas Investments Corporation (New York)		United States		$0.01 Common shares				100
HSBC Overseas Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Participaciones (Argentina) S.A.		Argentina		ARS1.00 Ordinary shares				100
HSBC Participacoes e Investimentos Ltda		Brazil		BRL0.01 Quota shares				100
HSBC PB Corporate Services 1 Limited		Jersey		£1.00 Ordinary shares				100
HSBC PB Corporate Services 2 Limited		Jersey		£1.00 Ordinary shares				100
HSBC PB Services (Suisse) SA		Switzerland		CHF1,000.00 Ordinary shares				100
HSBC Pension Trust (Ireland) Limited		Ireland		€1.26974 Ordinary shares				100
HSBC Pensiones, S.A.		Mexico		MXN Ordinary shares				100
HSBC Pensions (Jersey) Limited		Jersey		£1.00 Ordinary shares				100
HSBC PH Investments (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC PI Holdings (Mauritius) Limited		Mauritius		$1.00 Ordinary shares				100
HSBC Portfoy Yonetimi A.S.		Turkey		TRL1.00 A Common shares				100
HSBC Preferential LP (UK)		England and Wales		£1.00 Ordinary shares				100
HSBC Private Bank (C.I.) Limited		Guernsey		$1.00 Ordinary shares				100
HSBC Private Bank (Luxembourg) S.A.		Luxembourg		€1,000.00 Ordinary shares				100
HSBC Private Bank (Monaco) SA		Monaco		€155.00 Actions shares				100
HSBC Private Bank (Suisse) SA		Switzerland		CHF1,000.00 Ordinary shares				100
HSBC Private Bank (UK) Limited		England and Wales		£10.00 Issued shares				100
HSBC Private Bank International		United States		$1,000.00 Common shares				100
HSBC Private Banking Holdings (Suisse) SA		Switzerland		CHF1,000.00 Ordinary shares				100
HSBC Private Banking Nominee 1 (Jersey) Limited		Jersey		£1.00 Ordinary shares				100
HSBC Private Banking Nominee 2 (Jersey) Limited		Jersey		£1.00 Ordinary shares				100
HSBC Private Banking Nominee 3 (Jersey) Limited		Jersey		£1.00 Ordinary shares				100
HSBC Private Equity Advisors LLC		United States		Limited liability company – no shares				100
HSBC Private Equity Investments (UK) Limited		England and Wales		£1.00 Issued shares				100
HSBC Private Trustee (Hong Kong) Limited		Hong Kong		HK$10.00 Ordinary shares				100
HSBC Private Wealth Services (Canada) Inc.		Canada		C$ Common and C$ Preference shares				100
HSBC Procyon Fund Ltd		Cayman Islands		BRL2,618.38127 Red Preference shares				100
HSBC Professional Services (India) Private Limited		India		INR10.00 Ordinary shares				100
HSBC Property (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Property Funds (Holding) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Property Funds Investment Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Property Investments Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Provident Fund Trustee (Hong Kong) Limited		Hong Kong		HK$10.00 Ordinary shares				100
HSBC QUEST Trustee (UK) Limited		England and Wales		£1.00 Ordinary shares		100		100
HSBC Rail (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Real Estate Leasing (France)		France		€15.24 Actions shares				100
HSBC Realty Credit Corporation (USA)		United States		$1.00 Common & $500 Preferred shares				100
HSBC REIM (France)		France		€92.00 Actions shares				100

 

HSBC HOLDINGS PLC   463

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Notes on the Financial Statements (continued)

43 – HSBC Holdings’ subsidiaries, joint ventures and associates

    

    

    

 

Subsidiaries (continued)		Country		Security		Direct (%)		Total (%)
HSBC Representative Office (Nigeria) Limited		Nigeria		Ordinary shares no par value				100
HSBC Republic Management Services (Guernsey) Limited		Guernsey		$0.10 Ordinary shares				100
HSBC Retail Services Inc.		United States		$100.00 Common shares				100
HSBC Retirement Benefits Trustee (UK) Limited		England and Wales		£1.00 Issued shares		100		100
HSBC Savings Bank (Philippines) Inc.		Philippines		PHP10.00 Ordinary shares				100
HSBC Securities (Asia) Limited		Hong Kong		HK$10.00 Ordinary and HK$10.00 Deferred shares				100
HSBC Securities (B) Berhad		Brunei Darussalam		BND1.00 Ordinary shares				100
HSBC Securities (Canada) Inc.		Canada		Common – C$ Class A & $ Class B shares				100
HSBC Securities (Japan) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Securities (Philippines) Inc.		Philippines		PHP10.00 Nominal shares				100
HSBC Securities (Singapore) Pte Limited		Singapore		SGD Ordinary shares				100
HSBC Securities (South Africa) (Pty) Limited		South Africa		ZAR1.00 Ordinary shares				100
HSBC Securities (Taiwan) Corporation Limited		Taiwan		TWD10.00 Ordinary shares				100
HSBC Securities (USA) Inc.		United States		$0.05 Common shares				100
HSBC Securities and Capital Markets (India) Private Limited		India		INR100.00 Ordinary and INR100.00 Red Preference shares				100
HSBC Securities Asia International Nominees Limited		Virgin Islands, British		$1.00 Ordinary shares				100
HSBC Securities Asia Nominees Limited		Hong Kong		HK$1.00 Ordinary shares				100
HSBC Securities Brokers (Asia) Limited		Hong Kong		HK$10.00 Ordinary shares				100
HSBC Securities Investments (Asia) Limited		Hong Kong		HK$10.00 Ordinary shares				100
HSBC Securities Services (Bermuda) Limited		Bermuda		BMD1.00 Common shares				100
HSBC Securities Services (Guernsey) Limited		Guernsey		£1.00 Ordinary Shares				100
HSBC Securities Services (Ireland) Limited		Ireland		€1.25 and $1.00 Ordinary shares				100
HSBC Securities Services (Luxembourg) S.A.		Luxembourg		$100.00 Ordinary shares				100
HSBC Securities Services (USA) Inc.		United States		$0.001 Common shares				100
HSBC Securities Services Holding Limited		Virgin Islands, British		$1.00 Ordinary shares				100
HSBC Securities Services Holdings (Ireland) Limited		Ireland		€1.25 and $1.00 Ordinary shares				100
HSBC Seguros de Retiro (Argentina) S.A.		Argentina		ARS1.00 Ordinary A and Ordinary B shares				100
HSBC Seguros de Vida (Argentina) S.A.		Argentina		ARS1.00 Ordinary shares				100
HSBC Seguros, S.A de C.V., Grupo Financiero HSBC		Mexico		MXN Class I and Class II shares				100
HSBC Service Delivery (Polska) Sp. z o.o.		Poland		PLN500.00 Ordinary shares				100
HSBC Services (France)		France		€18.50 Actions shares				100
HSBC Services Japan Limited		Bahamas		$1.00 Ordinary shares				100
HSBC Servicios Financieros, S.A. de C.V		Mexico		MXN1.00 Share Class 1 and 2 shares				100
HSBC Servicios, S.A. DE C.V., Grupo Financiero HSBC		Mexico		MXN500 Series ‘A’ and MXN Ordinary B shares				100
HSBC Servicos e Participacoes Ltda		Brazil		BRL0.01 Ordinary shares				100
HSBC SFH (France)		France		€15.00 Actions shares				100
HSBC Software Development (Brasil) - Prestacao de Servicos Tecnologicos Ltda		Brazil		BRL1.00 Quota shares				100
HSBC Software Development (Canada) Inc		Canada		CAD1.00 Common shares				100
HSBC Software Development (Guangdong) Limited		China		$1.00 Registered Capital shares				100
HSBC Software Development (India) Private Limited		India		INR10.00 Equity shares				100
HSBC Software Development (Malaysia) Sdn Bhd		Malaysia		RM1.00 Ordinary shares				100
HSBC South Point Investments (Barbados) LLP		England and Wales		Limited liability partnership – no shares				100
HSBC Specialist Investments Limited		England and Wales		£1.00 Ordinary and £1.00 Red Preference shares				100
HSBC Stockbroker Services (Client Assets) Nominees Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Stockbrokers Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Structured Funds (Asia) Limited		Hong Kong		HK$10.00 Ordinary shares				100
HSBC Taxpayer Financial Services Inc.		United States		$100.00 Common shares				100
HSBC Technology & Services (China) Limited		China		$1.00 Registered Capital shares				100
HSBC Technology & Services (USA) Inc.		United States		$1.00 Common shares				100
HSBC TFS I 2005 LLC		United States		Limited liability company – no shares				100
HSBC TKM Limited		England and Wales		£0.01 Ordinary shares				100
HSBC Trust Company (BVI) Limited		Virgin Islands, British		$1.00 Ordinary-A shares				100
HSBC Trust Company (Canada)		Canada		C$ Common shares				100
HSBC Trust Company (Delaware), National Association		United States		$100.00 Ordinary shares				100
HSBC Trust Company (UK) Limited		England and Wales		£5.00 Ordinary shares				100
HSBC Trust Company AG		Switzerland		CHF1,000.00 Ordinary shares				100
HSBC Trustee (C.I.) Limited		Jersey		£1.00 Ordinary shares				100
HSBC Trustee (Cayman) Limited		Cayman Islands		$1,000.00 Ordinary shares				100
HSBC Trustee (Cook Islands) Limited		Cook Islands		NZD Ordinary shares				100
HSBC Trustee (Guernsey) Limited		Guernsey		$1.00 Ordinary shares				100
HSBC Trustee (Hong Kong) Limited		Hong Kong		HK$10.00 Ordinary (HK$5.00 pt pd) shares				100
HSBC Trustee (Mauritius) Limited		Mauritius		$1.00 Ordinary shares				100
HSBC Trustee (Singapore) Limited		Singapore		SGD Ordinary shares				100
HSBC Tulip Funding (UK)		England and Wales		£1.00 Ordinary shares				100
HSBC UK RFB Limited1		England and Wales		£1.00 Ordinary shares		100		100
HSBC USA Inc.		United States		$5.00 Common shares				100
HSBC Valores S.A. Sociedad de Bolsa		Argentina		ARS1.00 Ordinary shares				100
HSBC Vida e Previdencia (Brasil) SA		Brazil		BRL Ordinary shares				100

 

HSBC HOLDINGS PLC   464

---

    

    

    

 

Subsidiaries (continued)		Country		Security		Direct (%)		Total (%)
HSBC Violet Investments (Mauritius) Limited		Mauritius		$10.00 Ordinary shares				100
HSBC Wealth Advisory Israel Ltd		Israel		ILS1.00 Ordinary shares				100
HSBC Wealth Client Nominee Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Workplace Retirement Services Fund Platform Nominee Company Limited		England and Wales		£1.00 Ordinary shares				100
HSBC Yatirim Menkul Degerler A.S.		Turkey		TRL1.00 Ordinary-A shares				100
HSBC-D1, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda1		Mexico		MXN2.00 Ordinary shares				100
HSBC-D10, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda1		Mexico		MXN1.00 Ordinary-A shares				100
HSBC-D2, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda1		Mexico		MXN1.00 Ordinary shares				100
HSBC-D7, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda1		Mexico		MXN10.00 Ordinary shares				100
HSBC-D9, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda1		Mexico		MXN1.40 Ordinary shares				100
HSBC-DE, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda1		Mexico		MXN1.098 Ordinary shares				100
HSBC-DG, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda1		Mexico		MXN10.00 Ordinary shares				100
HSBC-DH, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda1		Mexico		MXN1.00 Ordinary A shares				100
HSBC-DL, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda1		Mexico		MXN1.00 Ordinary A shares				100
HSBC-E2, S.A. de C.V., Sociedad de Inversion de Renta Variable1		Mexico		MXN1.00 Ordinary A shares				100
HSBC-E3, S.A. de C.V., Sociedad de Inversion en Instrumentos de Deuda1		Mexico		MXN1.00 Ordinary A shares				100
HSBC-FF, S.A. de C.V., Sociedad de Inversion de Renta Variable1		Mexico		MXN1.00 Ordinary shares				100
HSBC-V2, S.A. de C.V., Sociedad de Inversion de Renta Variable1		Mexico		MXN1.00 Ordinary shares				100
HSBC-V3, S.A. de C.V., Sociedad de Inversion de Renta Variable1		Mexico		MXN1.66 Ordinary shares				100
HSI Asset Securitization Corporation		United States		$0.01 Common shares				100
HSIL Investments Limited		England and Wales		£1.00 Ordinary shares				100
Hubei Macheng HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares				100
Hubei Suizhou Cengdu HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares				100
Hubei Tianmen HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares				100
Hunan Pingjiang HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares				100
Inmobiliaria Bisa, S.A. de C.V.		Mexico		MXN1.00 Serie ‘A’ and ‘B’ shares				100
Inmobiliaria Grufin, S.A. de C.V.		Mexico		MXN1.00 Serie ‘A’ and ‘B’ shares				100
Inmobiliaria Guatusi, S.A. de C.V.		Mexico		MXN10.00 Class I and II shares				100
IRERE French Offices 1		France		€0.10 Ordinary shares				100
IRERE French Offices 2		France		€0.10 Ordinary shares				100
IRERE French Offices 4		France		€0.10 Ordinary shares				100
IRERE French Offices Holdings		France		€1.00 Ordinary shares				100
IRERE French Offices Holdings 3		France		€1.00 Ordinary shares				100
IRERE Property Investments (French Offices) Sarl		Luxembourg		€25.00 Ordinary shares				100
James Capel & Co. Limited		England and Wales		£1.00 Issued shares				100
James Capel (Channel Islands) Nominees Limited		Jersey		£1.00 Ordinary shares				100
James Capel (Custodian) Nominees Limited		United Kingdom		£1.00 Issued shares				100
James Capel (Nominees) Limited		England and Wales		£1.00 Ordinary shares				100
James Capel (Second Nominees) Limited		England and Wales		£1.00 Issued shares				100
James Capel (Taiwan) Nominees Limited		England and Wales		£1.00 Issued shares				100
James Capel (Third Nominees) Limited		England and Wales		£1.00 Issued shares				100
John Lewis Financial Services Limited		England and Wales		£1.00 Ordinary shares				100
Katonah Close Corp.		United States		$1.00 Common shares				100
Keyser Ullmann Limited		England and Wales		£1.00 Ordinary shares				100
Kings Meadow Nominees Limited		England and Wales		£1.00 Ordinary shares				100
Legend Estates Limited		England and Wales		£1.00 Ordinary shares				100
Lemasco Nominees Limited		Jersey		£1.00 Ordinary shares				100
Lion Corporate Services Limited		Hong Kong		HK$10.00 Ordinary shares				100
Lion International Corporate Services Limited		Virgin Islands, British		$1.00 Ordinary shares				100
Lion International Management Limited		Virgin Islands, British		$1.00 Ordinary shares				100
Lion Management (Hong Kong) Limited		Hong Kong		HK$10.00 Ordinary shares				100
Lyndholme Limited		Hong Kong		HK$10.00 Ordinary shares				100
MAGIM Client HSBC GIS Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares				100
Marks and Spencer Financial Services plc		England and Wales		£1.00 Ordinary shares				100
Marks and Spencer Retail Financial Services Holdings Limited		England and Wales		£1.00 Ordinary shares				100
Marks and Spencer Savings and Investments Limited		England and Wales		£1.00 Ordinary shares				100
Marks and Spencer Unit Trust Management Limited		England and Wales		£1.00 Ordinary shares				100
Maxima S.A. AFJP		Argentina		ARS0.25 Ordinary shares				100
Mercantile Company Limited		England and Wales		£1.00 Ordinary and £1.00 Deferred shares				100
Midcorp Limited		England and Wales		£1.00 Ordinary and £1.00 Non-Cum Red Preference shares		100		100
Midland Australia Pty Limited		Australia		AUD1.00 Ordinary shares				100
Midland Bank (Branch Nominees) Limited		England and Wales		£1.00 Ordinary shares				100
Midland Nominees Limited		England and Wales		£1.00 Ordinary shares				100
MIL (Cayman) Limited		Cayman Islands		$1.00 Ordinary shares				100
MIL (Jersey) Limited		Jersey		£1.00 Ordinary shares				100
MIL Properties (Cook Islands) Limited		Cook Islands		NZD1.00 Ordinary shares				100
MM Mooring #2 Corp.		United States		$1.00 Common shares				100
Mortgage One Corporation		United States		$100.00 Common shares				100
Mortgage Two Corporation		United States		$100.00 Common shares				100
MW Gestion SA		Argentina		ARS12,000.00 Ordinary shares				100
Neil Corporation		United States		$1.00 Common shares				100
Neuilly Valeurs		France		€15.24 Parts shares				100
Oakwood Holdings, Inc.		United States		$1.00 Common shares				100
One Main Street, Inc.		United States		$1.00 Common shares				100

 

HSBC HOLDINGS PLC   465

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Notes on the Financial Statements (continued)

43 – HSBC Holdings’ subsidiaries, joint ventures and associates

    

    

    

 

Subsidiaries (continued)		Country		Security		Direct (%)		Total (%)
Promocion en Bienes Raices, S.A. de C.V.		Mexico		MXN1 Class ‘I’ and ‘II’ and Preference shares					100
Prudential Client HSBC GIS Nominee (UK) Limited		England and Wales		£1.00 Ordinary shares					100
PTC New LLC		United States		Limited liability company – no shares					100
R/CLIP Corp.		United States		$100.00 Common shares					100
Real Estate Collateral Management Company		United States		$10.00 Ordinary shares					100
Republic Nominees Limited		Guernsey		£1.00 Ordinary shares					100
Republic Overseas Capital Corporation		United States		$10.00 Common shares					100
S.A.P.C. – Ufipro Recouvrement		France		€46.00 Parts shares					100
Saf Baiyun		France		€10.00 Actions shares					100
Saf Chang Jiang		France		€10.00 Actions shares					100
Saf Chang Jiang Ba		France		€10.00 Actions shares					100
Saf Chang Jiang Er		France		€10.00 Actions shares					100
Saf Chang Jiang Jiu		France		€10.00 Actions shares					100
Saf Chang Jiang Liu		France		€10.00 Actions shares					100
Saf Chang Jiang Qi		France		€10.00 Actions shares					100
Saf Chang Jiang San		France		€10.00 Actions shares					100
Saf Chang Jiang Shi		France		€10.00 Actions shares					100
Saf Chang Jiang Shi Liu		France		€1.00 Actions shares					100
Saf Chang Jiang Shi Wu		France		€1.00 Actions shares					100
Saf Chang Jiang Shi’Er		France		€10.00 Actions shares					100
Saf Chang Jiang Shiyi		France		€10.00 Actions shares					100
Saf Chang Jiang Wu		France		€10.00 Actions shares					100
Saf Chang Jiang Yi		France		€10.00 Actions shares					100
Saf Guangzhou		France		€10.00 Actions shares					100
Saf Palissandre		France		€10.00 Actions shares					100
Saf Zhu Jiang		France		€10.00 Actions shares					100
Saf Zhu Jiang Ba		France		€10.00 Actions shares					100
Saf Zhu Jiang Er		France		€10.00 Actions shares					100
Saf Zhu Jiang Jiu		France		€10.00 Actions shares					100
Saf Zhu Jiang Liu		France		€10.00 Actions shares					100
Saf Zhu Jiang Qi		France		€10.00 Actions shares					100
Saf Zhu Jiang San		France		€10.00 Actions shares					100
Saf Zhu Jiang Shi		France		€10.00 Actions shares					100
Saf Zhu Jiang Shi Ba		France		€1.00 Actions shares					100
Saf Zhu Jiang Shi Er		France		€1.00 Actions shares					100
Saf Zhu Jiang Shi Jiu		France		€1.00 Actions shares					100
Saf Zhu Jiang Shi Liu		France		€1.00 Actions shares					100
Saf Zhu Jiang Shi Qi		France		€1.00 Actions shares					100
Saf Zhu Jiang Shi Wu		France		€1.00 Actions shares					100
Saf Zhu Jiang Shiyi		France		€10.00 Actions shares					100
Saf Zhu Jiang Wu		France		€10.00 Actions shares					100
Saf Zhu Jiang Yi		France		€10.00 Actions shares					100
Samada Limited		Jersey		£1.00 Ordinary shares					100
Samuel Montagu & Co. Limited		England and Wales		£1.00 Ordinary shares					100
SCI Hervet Mathurins		France		€15.24 Parts shares					100
SCI HSBC Assurances Immo		France		€152.44 Parts shares					100
Second Corporate Director Inc.		Virgin Islands, British		$1.00 Ordinary shares					100
Secondary Club Deal I GP Limited		Guernsey		£ Ordinary shares					100
Secondary Club Deal II GP Limited		Guernsey		$ Ordinary shares					100
SFSS Nominees (Pty) Limited		South Africa		ZAR1.00 Ordinary shares					100
Shandong Rongcheng HSBC Rural Bank Company Limited		China		CNY1.00 Registered Capital shares					100
Shenfield Nominees Limited		England and Wales		£1.00 Ordinary shares					100
Shuttle Developments Limited		England and Wales		£1.00 Ordinary shares					100
Sico Limited		Virgin Islands, British		$1.00 Ordinary shares					100
Silliman Associates Limited Partnership		United States		Limited partnership – no shares					100
Silliman Corporation		United States		$1.00 Common shares					100
SNC Dorique		Reunion		€1.00 Parts shares					100
SNC Kerouan		France		€1.00 Parts shares					100
SNC Les Mercuriales		France		€1.00 Parts shares					100
SNC Makala		France		€1.00 Parts shares					100
SNC Nuku-Hiva Bail		France		€0.01 Parts shares					100
SNCB/M6-2008 A		France		€1.00 Actions shares					100
SNCB/M6-2007 A		France		€10.00 Actions shares					100
SNCB/M6-2007 B		France		€10.00 Actions shares					100
Société Financière et Mobilière		France		€16.00 Actions shares					100
Société Française et Suisse		France		€1.00 Actions shares					100
Societe Immobiliere Atlas S.A.		Switzerland		CHF1,000.00 Ordinary shares					100
Société Immobilière Malesherbes-Anjou		France		€70.00 Actions shares					100
Solandra 3		France		€100.00 Actions shares					100
Somers & Co		United States		Partnership – no shares					100
Somers (U.K.) Limited		England and Wales		£1.00 Ordinary shares					100
Somers Dublin Limited		Ireland		€1.25 Ordinary shares					100
Somers Nominees (Far East) Limited		Bermuda		$1.00 Common shares					100
Sopingest		France		Ordinary shares no par value					100
South Yorkshire Light Rail Limited		England and Wales		£0.10 Ordinary shares					100
SPE 1 2005 Manager Inc.		United States		$1.00 Common shares					100

 

HSBC HOLDINGS PLC   466

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Subsidiaries (continued)		Country		Security		Direct (%)		Total (%)
St Cross Trustees Limited		England and Wales		£1.00 Ordinary shares					100
Sterling Credit Limited		England and Wales		£1.00 Ordinary shares					100
Sun Hung Kai Development (Lujiazui III) Limited		China		$1.00 Registered Capital shares					100
Swan National Leasing (Commercials) Limited		England and Wales		£1 Ordinary					100
Swan National Limited		England and Wales		£1 Ordinary					100
Tayside Holdings Limited		Bahamas		$1.00 Ordinary shares					100
Tempus Management AG		Switzerland		CHF100.00 Ordinary shares					100
Thasosfin		France		€15.00 Actions shares					100
The Hongkong and Shanghai Banking Corporation Limited		Hong Kong		HK$2.50 Ordinary and $1 Cumulative Redeemable Preference shares,					100
				$1 Cumulative and $1 Non-cumulative Irredeemable Preference shares
The Venture Catalysts Limited		England and Wales		£1.00 Ordinary shares					100
Third Corporate Director Inc.		Virgin Islands, British		$1.00 Ordinary shares					100
Timberlink Settlement Services (USA) Inc.		United States		$1.00 Common shares					100
TKM International Limited		England and Wales		£1.00 Ordinary shares					100
Tooley Street View Limited		United Kingdom		£1.00 Ordinary shares		100			100
Tower Investment Management		Cayman Islands		$1,000 Ordinary shares					100
TPBC Acquisition Corp.		United States		$1.00 Common shares					100
Trinkaus Canada 1 GP LTD		Canada		C$100 Common shares					100
Tropical Nominees Limited		Cayman Islands		KYD1.00 Ordinary shares					100
Trumball Management, Inc.		United States		$1.00 Common shares					100
Turnsonic (Nominees) Limited		England and Wales		£1.00 Ordinary shares					100
Vadep Holding AG		Switzerland		CHF1,000.00 Ordinary shares					100
Valeurs Mobilières Elysées		France		€16.00 Actions shares					100
Vintage I Secondary GP Limited		Guernsey		£ Ordinary shares					100
Vintage III Special Situations GP Limited		Guernsey		$ Ordinary shares					100
Wardley Limited		Hong Kong		HK$200.00 Ordinary shares					100
Wayfoong Credit Limited		Hong Kong		HK$100.00 Ordinary shares					100
Wayfoong Finance Limited		Hong Kong		HK$1,000.00 Ordinary shares					100
Wayfoong Nominees Limited		Hong Kong		HK$1.00 Ordinary shares					100
Westminster House, LLC		United States		Limited liability company – no shares					100
Woodex Limited		Bermuda		BMD1.00 Common shares					100
XDP, Inc.		United States		$1.00 Common shares					100
HSBC Bank Argentina S.A.		Argentina		ARS1.00 Ordinary A and Ordinary B shares					99.99
HSBC France		France		€5.00 Actions shares					99.99
HSBC Mexico, S.A., Institucion de Banca Multiple, Grupo Financiero HSBC		Mexico		MXN2.00 Ordinary shares					99.99
HSBC Empresa de Capitalizacao (Brasil) S.A.		Brazil		BRL Ordinary shares					99.97
HSBC Corretora de Titulos e Valores Mobiliarios S.A.		Brazil		BRL Ordinary shares					99.96
HSBC Inmobiliaria (Mexico), S.A. de C.V.		Mexico		MXN1,000.00 Series A and Series B shares					99.96
HSBC Seguros (Brasil) S.A.		Brazil		BRL Ordinary and BRL Preference shares					99.77
HSBC Corretora de Seguros (Brasil) S.A.		Brazil		BRL Ordinary shares					99.75
HSBC Financial Services (Lebanon) s.a.l.		Lebanon		LBP1,000,000.00 Ordinary B shares					99.65
HSBC InvestDirect (India) Limited		India		INR10.00 Ordinary shares					99.54
PT Bank Ekonomi Raharja		Indonesia		IRD100.00 and IRD1,000.00 Ordinary shares					98.81
SAS Orona		New Caledonia		Franc Pacific 10,000 Actions					94.93
HSBC Bank Egypt S.A.E.		Egypt		EGP84.00 Ordinary shares					94.53
SAS Bosquet -Audrain		New Caledonia		Franc Pacific 10,000 Actions					94.90
HSBC Securities (Egypt) S.A.E.		Egypt		EGP100.00 Ordinary shares					94.64
SAS Cyatheas Pasteur		France		€10.00 Action shares					94.00
HSBC Fund Services (Korea) Limited		Korea, Republic of		KRW5,000.00 Ordinary shares					92.96
HSBC Transaction Services GmbH		Germany		€1.00 GmbH Anteil shares					90.20
HSBC Gestion (Monaco) S.A.		Monaco		Ordinary shares					86.59
Beau Soleil Limited Partnership		Hong Kong		Limited partnership – no shares					85.00
PT HSBC Securities Indonesia		Indonesia		IDR1,000,000.00 Common shares					85.00
HSBC Trinkaus & Burkhardt (International) S.A.		Luxembourg		€1.00 Common shares					80.65
HSBC Trinkaus & Burkhardt AG		Germany		Stückaktien shares no par value					80.65
HSBC Trinkaus & Burkhardt Gesellschaft fur Bankbeteiligungen mbH		Germany		DEM1.00 Common shares					80.65
HSBC Trinkaus Consult GmbH		Germany		DEM1.00 Common shares					80.65
HSBC Trinkaus Europa Immobilien-Fonds Nr. 5 GmbH		Germany		Ordinary shares no par value					80.65
HSBC Trinkaus Family Office GmbH		Germany		€1.00 GmbH Anteil shares					80.65
HSBC Trinkaus Immobilien Beteiligungs KG		Germany		€1.00 Ordinary shares					80.65
HSBC Trinkaus Real Estate GmbH		Germany		DEM1.00 Common shares					80.65
Trinkaus Australien Immobilien Fonds Nr. 1 Brisbane GmbH & Co. KG		Germany		€1.00 Ordinary shares					80.65
Trinkaus Australien Immobilien Fonds Nr. 1 Treuhand-GmbH		Germany		€1.00 GmbH Anteil shares					80.65
Trinkaus Canada Immobilien-Fonds Nr. 1 Verwaltungs-GmbH		Germany		€1.00 Ordinary shares					80.65
Trinkaus Europa Immobilien-Fonds Nr.3 Objekt Utrecht Verwaltungs-GmbH		Germany		DEM1.00 Ordinary shares					80.65
Trinkaus Immobilien-Fonds Geschaeftsfuehrungs-GmbH		Germany		€1.00 GmbH Anteil shares					80.65
Trinkaus Immobilien-Fonds Verwaltungs-GmbH		Germany		€1.00 GmbH-Anteil shares					80.65
Trinkaus Private Equity Management GmbH		Germany		€1.00 Ordinary shares					80.65
Trinkaus Private Equity Verwaltungs GmbH		Germany		€1.00 GmbH Anteil shares					80.65

 

HSBC HOLDINGS PLC   467

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Notes on the Financial Statements (continued)

43 – HSBC Holdings’ subsidiaries, joint ventures and associates

    

    

    

 

Subsidiaries (continued)		Country		Security		Direct (%)		Total (%)
INKA Internationale Kapitalanlagegesellschaft mbH		Germany		€1.00 Common shares					80.65
GPIF Co-Investment, LLC		United States		Limited liability company – no shares					80.00
HSBC Middle East Finance Company Limited		United Arab Emirates		AED1.00 Ordinary shares					80.00
HSBC Bank (Mauritius) Limited		Mauritius		$ Ordinary No Par Value shares					72.96
HSBC Bank Malta p.l.c.		Malta		€0.30 Ordinary shares					70.03
HSBC Global Asset Management (Malta) Limited		Malta		€2.32937 Ordinary shares					70.03
HSBC Insurance Management Services (Europe) Limited		Malta		€1.00 Ordinary A and Ordinary B shares					70.03
HSBC Life Assurance (Malta) Limited		Malta		€1.16469 Ordinary shares					70.03
HSBC Bank Armenia cjsc		Armenia		AMD30,250.00 Ordinary shares					70.00
Mexanicana de Fomento S.A. de C.V.		Mexico		MXN1.00 Series A and B shares					69.80
HSBC Saudi Arabia Limited		Saudi Arabia		SAR50,000.00 Ordinary shares					69.40
Fulcher Enterprises Company Limited		Hong Kong		HK$10.00 Ordinary shares					62.14
Hang Seng (Nominee) Limited		Hong Kong		HK$100.00 Ordinary shares					62.14
Hang Seng Bank (China) Limited		China		CNY1.00 Registered Capital shares					62.14
Hang Seng Bank (Trustee) Limited		Hong Kong		HK$10.00 Ordinary shares					62.14
Hang Seng Bank Limited		Hong Kong		HK$5.00 Ordinary shares					62.14
Hang Seng Bullion Company Limited		Hong Kong		HK$100.00 Ordinary shares					62.14
Hang Seng Credit Limited		Hong Kong		HK$100.00 Ordinary shares					62.14
Hang Seng Data Services Limited		Hong Kong		HK$10.00 Ordinary shares					62.14
Hang Seng Finance Limited		Hong Kong		HK$100.00 Ordinary shares					62.14
Hang Seng Financial Information Limited		Hong Kong		HK$10.00 Ordinary shares					62.14
Hang Seng Futures Limited		Hong Kong		HK$100.00 Ordinary shares					62.14
Hang Seng Indexes Company Limited		Hong Kong		HK$10.00 Ordinary shares					62.14
Hang Seng Insurance Company Limited		Hong Kong		HK$10.00 Ordinary shares					62.14
Hang Seng Investment Management Limited		Hong Kong		HK$100.00 Ordinary shares					62.14
Hang Seng Investment Services Limited		Hong Kong		HK$100.00 Ordinary shares					62.14
Hang Seng Life Limited		Hong Kong		HK$1,000.00 Ordinary shares					62.14
Hang Seng Real Estate Management Limited		Hong Kong		HK$100.00 Ordinary shares					62.14
Hang Seng Securities Limited		Hong Kong		HK$100.00 Ordinary shares					62.14
Hang Seng Security Management Limited		Hong Kong		HK$1.00 Ordinary shares					62.14
Haseba Investment Company Limited		Hong Kong		HK$100.00 Ordinary shares					62.14
High Time Investments Limited		Hong Kong		HK$1.00 Ordinary shares					62.14
HSI International Limited		Hong Kong		HK$1.00 Ordinary shares					62.14
Imenson Limited		Hong Kong		HK$10.00 Ordinary shares					62.14
Yan Nin Development Company Limited		Hong Kong		HK$100.00 Ordinary shares					62.14
Fundacion HSBC, A.C.1		Mexico		Parts shares					60.00
SNC Les Oliviers D’Antibes		France		€15.00 Parts shares					60.00
HSBC Land Title Agency (USA) LLC		United States		Limited liability company – no shares					55.00
The Malta Development Fund Limited		Malta		€2.32937 Ordinary shares					53.07
HSBC Bank Oman S.A.O.G.		Oman		OMR0.10 Ordinary shares					51.00
Beneficial Homeowner Service Corporation		United States		$100.00 Common shares					50.00
Electronic Payment Services Company (Hong Kong) Limited		Hong Kong		HK$1.00 Ordinary shares					50.00
ProServe Bermuda Limited		Bermuda		BMD1.00 Common shares					50.00
REDUS Halifax Landing, LLC		United States		Limited liability company – no shares					50.00
Urban Solutions (Cardiff) Limited		England and Wales		£1 Ordinary shares					50.00
Vaultex Isle of Man Insurance Limited		Isle of Man		£1 Ordinary shares					50.00
Joint ventures
HCM Holdings Limited		England and Wales		£0.01 Ordinary shares					51.00
GSI Retail Property Holdings Limited		Guernsey		€1.00 Ordinary shares					50.00
HSBC Life Insurance Company Limited		China		CNY1.00 Ordinary shares					50.00
HSBC Kingdom Africa Investments (Cayman) Limited		Cayman Islands		$1.00 Ordinary shares					50.00
Urban Solutions Cardiff Holdings Limited		England and Wales		£1.00 Ordinary B shares					50.00
Urban Solutions Greenwich Holdings Limited		England and Wales		£1.00 Ordinary B shares					50.00
Urban Solutions (Greenwich) Limited		England and Wales		£1.00 Ordinary shares					50.00
Vaultex UK Limited		England and Wales		£1.00 Ordinary shares					50.00
HSBC Jintrust Fund Management Company Limited		China		CNY1.00 Registered Capital shares					49.00
Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited		India		INR10.00 Ordinary shares					26.00
Associates
HSBC Amanah Takaful (Malaysia) Berhad		Malaysia		RM50.00 Ordinary shares					49.00
HSBC Middle East Securities L.L.C		United Arab Emirates		AED1,000.00 Ordinary shares					49.00
Spire Topco Hotels Limited		England and Wales		£0.01 A and £0.01 B shares					46.79
SABB Takaful		Saudi Arabia		SAR10.00 Ordinary shares					45.50
AREIT Management Ltd		Cayman Islands		$1.00 Ordinary A shares					41.90
Rewards Management Middle East FZ LLC		United Arab Emirates		AED1,000.00 Ordinary shares					40.00
The Saudi British Bank		Saudi Arabia		SAR10.00 Ordinary shares					40.00
EPS Company (Hong Kong) Limited		Hong Kong		HK$250,000 Ordinary shares					38.66
Jeppe Star Limited		Virgin Islands, British		£1.00 Ordinary shares					34.00
Novo Star Limited		Virgin Islands, British		$100.00 Ordinary shares					34.00
Chemi & Cotex (Rwanda) Limited		Rwanda		RWF1,000 Ordinary shares					34.00
Chemi & Cotex Kenya Limited		Kenya		KES100 Ordinary shares					33.33
MENA Infrastructure Fund (GP) Ltd		United Arab Emirates		$1.00 Ordinary shares					33.33
SCI Karuvefa		Guadeloupe		€1.00 Parts shares					33.33

 

HSBC HOLDINGS PLC   468

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Associates (continued)		Country		Security		Direct (%)		Total (%)
CFAC Payment Scheme Limited		England and Wales		£1.00 Preference shares					33.33
Trinkaus Europa Immobilien-Fonds Nr. 7 Frankfurt Mertonviertel KG		Germany		Limited partnership with no shares					33.10
GZHS Research Co Ltd		China		RMB Common stock					33.00
Hampton Owners LLC		United States		Limited liability company – no shares					25.82
Trinkaus Europa Immobilien-Fonds Nr. 4 Objekte Basel Nauenstrasse KG		Germany		Limited partnership with no shares					25.11
Ashwood Energy Limited		Virgin Islands, British		US$1.00 Ordinary shares					25.00
House Network Sdn Bhd		Malaysia		RM1.00 Ordinary shares					25.00
Rosimian Limited		England and Wales		£0.01 B shares					25.00
The London Gold Market Fixing Limited		England and Wales		Limited by guarantee – no share capital					25.00
GIE GNIFI		New Caledonia		No shares					25.00
sino AG		Germany		€1.00 Common stock					25.00
Icon Brickell LLC		United States		Limited liability company – no shares					24.90
Business Growth Fund plc		England and Wales		£1.00 Ordinary shares					23.98
NAS Holding Limited		Virgin Islands, British		Ordinary share of no par value					22.13
NAS United Healthcare Services LLC		Virgin Islands, British		Ordinary share of no par value					22.13
Bank of Communications Co., Ltd		China		CNY1.00 H shares					19.03

 

1	Management has determined that these subsidiaries are excluded from consolidation in the Group accounts as these entities do not meet the definition of subsidiaries in accordance with IFRSs. HSBC’s consolidation policy is described in Note 1(g).

44 Non-statutory accounts

 

The information set out in these accounts does not constitute the Company’s statutory accounts for the years ended 31 December 2015 or 2014. Those accounts have been reported on by the Company’s auditors: their reports were unqualified and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006. The accounts for 2014 have been delivered to the Registrar of Companies and those for 2015 will be delivered in due course.

 

HSBC HOLDINGS PLC   469

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Report of the Directors: Risk (pages 120-225)

 

HSBC HOLDINGS PLC

---

Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

 

HSBC HOLDINGS PLC   120

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HSBC HOLDINGS PLC   121

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

Gross loans and impairment allowances on loans and advances to customers and banks reported in ‘Assets held for sale’

(Audited)

 

				Brazil						Other						Total
				$m						$m						$m
Gross loans
Loans and advances to customers					18,103						2,042						20,145
– personal					5,571						40						5,611
– corporate and commercial					12,532						2,002						14,534
Financial					4,399						–						4,399
– non-bank financial institutions					331						–						331
– banks					4,068						–						4,068
At 31 December 2015					22,502						2,042						24,544
Impairment allowances
Loans and advances to customers					(1,433	)					(21	)					(1,454	)
– personal					(664	)					–						(664	)
– corporate and commercial					(769	)					(21	)					(790	)
Financial					–						–						–
– non-bank financial institutions					–						–						–
– banks					–						–						–
At 31 December 2015					(1,433	)					(21	)					(1,454	)

 

 

HSBC HOLDINGS PLC   122

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Maximum exposure to credit risk

(Audited)

 

				2015																		2014
				Maximum exposure						Offset						Net						Maximum exposure						Offset						Net
				$m						$m						$m						$m						$m						$m
Cash and balances at central banks					98,934						–						98,934						129,957						–						129,957
Items in the course of collection from other banks					5,768						–						5,768						4,927						–						4,927
Hong Kong Government certificates of indebtedness					28,410						–						28,410						27,674						–						27,674
Trading assets					158,346						–						158,346						228,944						–						228,944
– Treasury and other eligible bills					7,829						–						7,829						16,170						–						16,170
– debt securities					99,038						–						99,038						141,532						–						141,532
– loans and advances to banks					22,303						–						22,303						27,581						–						27,581
– loans and advances to customers					29,176						–						29,176						43,661						–						43,661
Financial assets designated at fair value					4,857						–						4,857						9,031						–						9,031
– Treasury and other eligible bills					396						–						396						56						–						56
– debt securities					4,341						–						4,341						8,891						–						8,891
– loans and advances to banks					120						–						120						84						–						84
– loans and advances to customers					–						–						–						–						–						–
Derivatives					288,476						(258,755	)					29,721						345,008						(313,300	)					31,708
Loans and advances to customers held at amortised cost					924,454						(52,190	)					872,264						974,660						(67,094	)					907,566
– personal					371,203						(5,373	)					365,830						388,954						(4,412	)					384,542
– corporate and commercial					493,078						(44,260	)					448,818						535,184						(59,197	)					475,987
– non-bank financial institutions					60,173						(2,557	)					57,616						50,522						(3,485	)					47,037
Loans and advances to banks held at amortised cost					90,401						(53	)					90,348						112,149						(258	)					111,891
Reverse repurchase agreements – non-trading					146,255						(900	)					145,355						161,713						(5,750	)					155,963
Financial investments					423,120						–						423,120						404,773						–						404,773
– Treasury and other similar bills					104,551						–						104,551						81,517						–						81,517
– debt securities					318,569						–						318,569						323,256						–						323,256
Assets held for sale					40,078						–						40,078						1,375						–						1,375
– disposal groups					38,097						–						38,097						889						–						889
– non-current assets held for sale					1,981						–						1,981						486						–						486
Other assets					25,310						–						25,310						33,889						–						33,889
– endorsements and acceptances					9,149						–						9,149						10,775						–						10,775
– other					16,161						–						16,161						23,114						–						23,114
Total balance sheet exposure to credit risk					2,234,409						(311,898	)					1,922,511						2,434,100						(386,402	)					2,047,698
Total off-balance sheet2					712,546						–						712,546						698,458						–						698,458
– financial guarantees and similar contracts					46,116						–						46,116						47,078						–						47,078
– loan and other credit-related commitments2					666,430						–						666,430						651,380						–						651,380
At 31 December					2,946,955						(311,898	)					2,635,057						3,132,558						(386,402	)					2,746,156

For footnote, see page 191

Loan and other credit-related commitments²

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Personal					70,013						103,153						3,092						14,510						12,175						202,943
Corporate and commercial					105,303						159,947						20,139						102,369						18,155						405,913
Financial					20,230						11,619						186						24,543						996						57,574
At 31 December 2015					195,546						274,719						23,417						141,422						31,326						666,430
Personal					86,247						96,497						2,995						15,636						11,679						213,054
Corporate and commercial					98,045						138,366						20,141						102,911						17,540						377,003
Financial					26,605						9,355						711						23,559						1,093						61,323
At 31 December 2014					210,897						244,218						23,847						142,106						30,312						651,380

For footnote, see page 191.

 

 

HSBC HOLDINGS PLC   123

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

 

Gross loans and advances by industry sector and by geographical region

(Audited)

 

				Europe						Asia						MENA						North America						Latin America						Total						As a % of total
				$m						$m						$m						$m						$m						$m						gross loans
Personal					170,526						132,707						6,705						58,186						5,958						374,082						36.5
– first lien residential mortgages					125,544						94,606						2,258						50,117						1,986						274,511						26.8
– other personal3					44,982						38,101						4,447						8,069						3,972						99,571						9.7
Wholesale
Corporate and commercial					191,765						211,224						22,268						62,882						11,374						499,513						48.8
– manufacturing					39,003						34,272						2,504						17,507						2,572						95,858						9.4
– international trade and services					62,667						72,199						9,552						11,505						3,096						159,019						15.5
– commercial real estate					26,256						32,371						690						7,032						1,577						67,926						6.7
– other property-related					7,323						35,206						1,908						8,982						45						53,464						5.2
– government					3,653						1,132						1,695						203						772						7,455						0.7
– other commercial4					52,863						36,044						5,919						17,653						3,312						115,791						11.3
Financial					51,969						68,321						10,239						16,308						3,996						150,833						14.7
– non-bank financial institutions					33,621						13,969						2,321						9,822						681						60,414						5.9
– banks					18,348						54,352						7,918						6,486						3,315						90,419						8.8
Total wholesale					243,734						279,545						32,507						79,190						15,370						650,346						63.5
Total gross loans and advances at 31 December 2015					414,260						412,252						39,212						137,376						21,328						1,024,428						100.0
Percentage of total gross loans and advances					40.4%						40.3%						3.8%						13.4%						2.1%						100.0%
Personal					178,531						129,515						6,571						65,400						13,537						393,554						35.8
– first lien residential mortgages					131,000						93,147						2,647						55,577						4,153						286,524						26.0
– other personal3					47,531						36,368						3,924						9,823						9,384						107,030						9.8
Wholesale
Corporate and commercial					212,523						220,799						20,588						57,993						30,722						542,625						49.4
– manufacturing					39,456						37,767						2,413						15,299						12,051						106,986						9.7
– international trade and services					76,629						72,814						9,675						13,484						8,189						180,791						16.4
– commercial real estate					28,187						35,678						579						6,558						2,291						73,293						6.7
– other property-related					7,126						34,379						1,667						8,934						281						52,387						4.8
– government					2,264						1,195						1,552						164						968						6,143						0.6
– other commercial4					58,861						38,966						4,702						13,554						6,942						123,025						11.2
Financial					45,081						76,957						13,786						16,439						10,753						163,016						14.8
– non-bank financial institutions					23,103						13,997						3,291						9,034						1,393						50,818						4.6
– banks					21,978						62,960						10,495						7,405						9,360						112,198						10.2
Total wholesale					257,604						297,756						34,374						74,432						41,475						705,641						64.2
Total gross loans and advances at 31 December 2014					436,135						427,271						40,945						139,832						55,012						1,099,195						100.0
Percentage of total gross loans and advances					39.7%						38.9%						3.7%						12.7%						5.0%						100.0%

For footnotes, see page 191.

 

HSBC HOLDINGS PLC   124

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Distribution of financial instruments by credit quality

(Audited)

				Neither past due nor impaired																								Past due												Total
					Strong						Good						Satisfactory						Sub- standard						but not impaired						Impaired						gross amount						Impairment allowances	5					Total
				$m						$m						$m						$m						$m						$m						$m						$m						$m
Cash and balances at central banks					97,365						583						939						47						–						–						98,934												98,934
Items in the course of collection from other banks					5,318						32						416						2						–						–						5,768												5,768
Hong Kong Government certificates of indebtedness					28,410						–						–						–						–						–						28,410												28,410
Trading assets6					116,633						21,243						19,894						576																		158,346												158,346
– treasury and other eligible bills					6,749						790						190						100																		7,829												7,829
– debt securities					77,088						10,995						10,656						299																		99,038												99,038
– loans and advances:
to banks					14,546						4,391						3,239						127																		22,303												22,303
to customers					18,250						5,067						5,809						50																		29,176												29,176
Financial assets designated at fair value6					3,037						701						736						383																		4,857												4,857
– treasury and other eligible bills					139						193						–						64																		396												396
– debt securities					2,898						508						616						319																		4,341												4,341
– loans and advances:
to banks					–						–						120						–																		120												120
to customers					–						–						–						–																		–												–
Derivatives6					248,101						32,056						7,209						1,110																		288,476												288,476
Loans and advances to customers held at amortised cost7					472,691						214,152						194,393						16,836						12,179						23,758						934,009						(9,555	)					924,454
– personal					309,720						29,322						15,021						944						7,568						11,507						374,082						(2,879	)					371,203
– corporate and commercial					127,673						168,772						171,466						15,379						4,274						11,949						499,513						(6,435	)					493,078
– non-bank financial institutions					35,298						16,058						7,906						513						337						302						60,414						(241	)					60,173
Loans and advances to banks held at amortised cost					73,226						11,929						4,836						407						1						20						90,419						(18	)					90,401
Reverse repurchase agreements – non-trading					108,238						16,552						20,931						46						–						488						146,255						–						146,255
Financial investments					382,328						18,600						16,341						4,525						–						1,326						423,120												423,120
– treasury and other similar bills					93,562						3,963						4,756						2,270						–						–						104,551												104,551
– debt securities					288,766						14,637						11,585						2,255						–						1,326						318,569												318,569
Assets held for sale					10,177						9,605						17,279						1,635						703						2,133						41,532						(1,454	)					40,078
– disposal groups					10,149						8,815						16,213						1,567						701						2,085						39,530						(1,433	)					38,097
– non-current assets held for sale					28						790						1,066						68						2						48						2,002						(21	)					1,981
Other assets					8,306						5,688						10,204						632						147						333						25,310						–						25,310
– endorsements and acceptances					1,084						3,850						3,798						343						22						52						9,149												9,149
– accrued income and other					7,222						1,838						6,406						289						125						281						16,161												16,161
At 31 December 2015					1,553,830						331,141						293,178						26,199						13,030						28,058						2,245,436						(11,027	)					2,234,409
					%						%						%						%						%						%						%
Percentage of total gross amount					69.2						14.7						13.1						1.2						0.6						1.2						100.0

 

HSBC HOLDINGS PLC   125

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

Distribution of financial instruments by credit quality (continued)

 

				Neither past due nor impaired																								Past due												Total
					Strong						Good						Satisfactory						Sub- standard						but not impaired						Impaired						gross amount						Impairment allowances	5					Total
				$m						$m						$m						$m						$m						$m						$m						$m						$m
Cash and balances at central banks					127,971						1,438						195						353																		129,957												129,957
Items in the course of collection from other banks					4,515						46						365						1																		4,927												4,927
Hong Kong Government certificates of indebtedness					27,674						–						–						–																		27,674												27,674
Trading assets6					168,521						35,042						24,740						641																		228,944												228,944
– treasury and other eligible bills					13,938						1,641						559						32																		16,170												16,170
– debt securities					111,138						17,786						12,305						303																		141,532												141,532
– loans and advances:
to banks					17,492						4,961						5,016						112																		27,581												27,581
to customers					25,953						10,654						6,860						194																		43,661												43,661
Financial assets designated at fair value6					3,017						4,476						1,207						331																		9,031												9,031
– treasury and other eligible bills					5						–						–						51																		56												56
– debt securities					3,011						4,476						1,124						280																		8,891												8,891
– loans and advances:
to banks					1						–						83						–																		84												84
to customers					–						–						–						–																		–												–
Derivatives6					269,490						58,596						15,962						960																		345,008												345,008
Loans and advances to customers held at amortised cost7					487,734						239,136						196,685						20,802						13,357						29,283						986,997						(12,337	)					974,660
– personal					320,678						32,601						15,109						1,130						8,876						15,160						393,554						(4,600	)					388,954
– corporate and commercial					141,375						192,799						171,748						18,986						3,922						13,795						542,625						(7,441	)					535,184
– non-bank financial institutions					25,681						13,736						9,828						686						559						328						50,818						(296	)					50,522
Loans and advances to banks held at amortised cost					83,766						19,525						7,945						914						1						47						112,198						(49	)					112,149
Reverse repurchase agreements – non-trading					98,470						28,367						33,283						1,593						–						–						161,713						–						161,713
Financial investments					347,218						27,373						22,600						5,304						–						2,278						404,773												404,773
– treasury and other similar bills					68,966						6,294						4,431						1,826						–						–						81,517												81,517
– debt securities					278,252						21,079						18,169						3,478						–						2,278						323,256												323,256
Assets held for sale					802						43						79						–						2						465						1,391						(16	)					1,375
– disposal groups					768						43						79						–						–						–						890						–						890
– non-current assets held for sale					34						–						–						–						2						465						501						(16	)					485
Other assets					12,213						7,521						12,897						631						208						419						33,889												33,889
– endorsements and acceptances					1,507						4,644						4,281						298						34						11						10,775												10,775
– accrued income and other					10,706						2,877						8,616						333						174						408						23,114												23,114
At 31 December 2014					1,631,391						421,563						315,958						31,530						13,568						32,492						2,446,502						(12,402	)					2,434,100
					%						%						%						%						%						%						%
Percentage of total gross amount					66.7						17.2						12.9						1.3						0.6						1.3						100.0

For footnotes, see page 191.

 

HSBC HOLDINGS PLC   126

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Past due but not impaired gross financial instruments by geographical region

(Audited)

				Europe						Asia						MENA						North         America						Latin         America						Total
				$m						$m						$m						$m						$m						$m
Loans and advances to customers held at amortised cost					1,928						3,405						909						5,392						545						12,179
– personal					1,152						2,573						180						3,287						376						7,568
– corporate and commercial					762						790						710						1,843						169						4,274
– non-bank financial institutions					14						42						19						262						–						337
Assets held for sale					–						–						–						2						701						703
– disposal group					–						–						–						–						701						701
– non-current assets held for sale					–						–						–						2						–						2
Other financial instruments					10						39						15						80						4						148
At 31 December 2015					1,938						3,444						924						5,474						1,250						13,030
Loans and advances to customers held at amortised cost					2,409						4,260						704						4,634						1,350						13,357
– personal					1,159						2,880						182						3,759						896						8,876
– corporate and commercial					1,244						1,102						508						623						445						3,922
– non-bank financial institutions					6						278						14						252						9						559
Assets held for sale					–						–						–						2						–						2
– disposal group					–						–						–						–						–						–
– non-current assets held for sale					–						–						–						2						–						2
Other financial instruments					6						52						31						95						25						209
At 31 December 2014					2,415						4,312						735						4,731						1,375						13,568

Ageing analysis of days for past due but not impaired gross financial instruments

(Audited)

				Up to 29 days						30-59 days						60-89 days						90-179 days						180 days and over						Total
				$m						$m						$m						$m						$m						$m
Loans and advances to customers held at amortised cost					9,403						1,917						727						111						21						12,179
– personal					5,665						1,401						502						–						–						7,568
– corporate and commercial					3,432						505						225						93						19						4,274
– non-bank financial institutions					306						11						–						18						2						337
Assets held for sale					476						137						90						–						–						703
– disposal group					476						136						89						–						–						701
– non-current assets held for sale					–						1						1						–						–						2
Other financial instruments					80						35						14						10						9						148
At 31 December 2015					9,959						2,089						831						121						30						13,030
Loans and advances to customers held at amortised cost					10,427						2,057						801						54						18						13,357
– personal					6,477						1,717						676						5						1						8,876
– corporate and commercial					3,417						328						114						48						15						3,922
– non-bank financial institutions					533						12						11						1						2						559
Assets held for sale					–						–						–						1						1						2
– disposal group					–						–						–						–						–						–
– non-current assets held for sale					–						–						–						1						1						2
Other financial instruments					130						33						18						11						17						209
At 31 December 2014					10,557						2,090						819						66						36						13,568

 

HSBC HOLDINGS PLC   127

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

 

Movement in impaired loans by geographical region

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Impaired loans at 1 January 2015					10,242						2,048						1,981						11,694						3,365						29,330
– personal					2,544						491						242						10,826						1,057						15,160
– corporate and commercial					7,385						1,545						1,696						862						2,307						13,795
– financial					313						12						43						6						1						375
Classified as impaired during the year					3,909						1,893						338						2,986						2,434						11,560
– personal					1,257						813						178						2,245						1,502						5,995
– corporate and commercial					2,567						1,079						159						740						924						5,469
– financial					85						1						1						1						8						96
Transferred from impaired to unimpaired during the year					(964	)					(204	)					(107	)					(1,786	)					(245	)					(3,306	)
– personal					(211	)					(169	)					(82	)					(1,699	)					(185	)					(2,346	)
– corporate and commercial					(734	)					(35	)					(6	)					(87	)					(60	)					(922	)
– financial					(19	)					–						(19	)					–						–						(38	)
Amounts written off					(870	)					(595	)					(335	)					(589	)					(1,312	)					(3,701	)
– personal					(280	)					(416	)					(113	)					(493	)					(961	)					(2,263	)
– corporate and commercial					(577	)					(179	)					(222	)					(95	)					(351	)					(1,424	)
– financial					(13	)					–						–						(1	)					–						(14	)
Net repayments and other					(2,640	)					(767	)					(111	)					(3,375	)					(3,212	)					(10,105	)
– personal					(780	)					(203	)					–						(2,885	)					(1,171	)					(5,039	)
– corporate and commercial					(1,778	)					(562	)					(110	)					(486	)					(2,033	)					(4,969	)
– financial					(82	)					(2	)					(1	)					(4	)					(8	)					(97	)
Impaired loans at 31 December 2015					9,677						2,375						1,766						8,930						1,030						23,778
– personal					2,530						516						225						7,994						242						11,507
– corporate and commercial					6,863						1,848						1,517						934						787						11,949
– financial					284						11						24						2						1						322
					%						%						%						%						%						%
Impaired loans as a percentage of gross loans					2.3						0.6						4.5						6.5						4.8						2.3
– personal					1.5						0.4						3.4						13.7						4.1						3.1
– corporate and commercial					3.6						0.9						6.8						1.5						6.9						2.4
– financial					0.5						0.0						0.2						0.0						0.0						0.2

 

HSBC HOLDINGS PLC   128

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				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Impaired loans at 1 January 2014					13,228						1,623						2,285						15,123						4,244						36,503
– personal					2,938						526						317						13,669						1,348						18,798
– corporate and commercial					9,714						1,082						1,765						1,427						2,889						16,877
– financial					576						15						203						27						7						828
Classified as impaired during the year					3,367						1,970						346						4,724						3,342						13,749
– personal					1,168						857						193						4,360						1,958						8,536
– corporate and commercial					2,166						1,113						153						354						1,383						5,169
– financial					33						–						–						10						1						44
Transferred from impaired to unimpaired during the year					(1,661	)					(230	)					(320	)					(2,609	)					(730	)					(5,550	)
– personal					(282	)					(184	)					(178	)					(2,551	)					(364	)					(3,559	)
– corporate and commercial					(1,319	)					(46	)					(53	)					(57	)					(366	)					(1,841	)
– financial					(60	)					–						(89	)					(1	)					–						(150	)
Amounts written off					(2,037	)					(617	)					(111	)					(1,369	)					(2,048	)					(6,182	)
– personal					(631	)					(470	)					(77	)					(1,007	)					(1,371	)					(3,556	)
– corporate and commercial					(1,201	)					(147	)					(29	)					(356	)					(673	)					(2,406	)
– financial					(205	)					–						(5	)					(6	)					(4	)					(220	)
Net repayments and other					(2,655	)					(698	)					(219	)					(4,175	)					(1,443	)					(9,190	)
– personal					(649	)					(238	)					(13	)					(3,645	)					(514	)					(5,059	)
– corporate and commercial					(1,975	)					(457	)					(140	)					(506	)					(926	)					(4,004	)
– financial					(31	)					(3	)					(66	)					(24	)					(3	)					(127	)
Impaired loans at 31 December 2014					10,242						2,048						1,981						11,694						3,365						29,330
– personal					2,544						491						242						10,826						1,057						15,160
– corporate and commercial					7,385						1,545						1,696						862						2,307						13,795
– financial					313						12						43						6						1						375
					%						%						%						%						%						%
Impaired loans as a percentage of gross loans					2.3						0.5						4.8						8.4						6.1						2.7
– personal					1.4						0.4						3.7						16.6						7.8						3.9
– corporate and commercial					3.5						0.7						8.2						1.5						7.5						2.5
– financial					0.7						0.0						0.3						0.0						0.0						0.2

 

 

HSBC HOLDINGS PLC   129

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

Renegotiated loans and advances to customers by geographical region

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
First lien residential mortgages					1,461						68						36						10,680						37						12,282
– neither past due nor impaired					512						47						11						3,376						27						3,973
– past due but not impaired					174						5						4						1,567						3						1,753
– impaired					775						16						21						5,737						7						6,556
Other personal lending3					298						272						33						1,054						35						1,692
– neither past due nor impaired					131						141						24						410						10						716
– past due but not impaired					51						16						2						173						1						243
– impaired					116						115						7						471						24						733
Corporate and commercial					5,215						599						1,411						638						506						8,369
– neither past due nor impaired					1,467						119						343						93						130						2,152
– past due but not impaired					109						–						14						–						–						123
– impaired					3,639						480						1,054						545						376						6,094
Non-bank financial institutions					340						4						272						–						–						616
– neither past due nor impaired					143						–						248						–						–						391
– past due but not impaired					–						–						24						–						–						24
– impaired					197						4						–						–						–						201
Renegotiated loans at 31 December 2015					7,314						943						1,752						12,372						578						22,959
– neither past due nor impaired					2,253						307						626						3,879						167						7,232
– past due but not impaired					334						21						44						1,740						4						2,143
– impaired					4,727						615						1,082						6,753						407						13,584
Impairment allowances on renegotiated loans					1,402						193						575						1,014						155						3,339
– renegotiated loans as % of total gross loans					1.8%						0.3%						5.6%						9.5%						3.2%						2.5%
First lien residential mortgages					1,605						94						58						13,540						60						15,357
– neither past due nor impaired					529						63						19						3,695						32						4,338
– past due but not impaired					221						8						1						1,894						5						2,129
– impaired					855						23						38						7,951						23						8,890
Other personal lending3					324						292						27						1,267						326						2,236
– neither past due nor impaired					184						173						16						453						14						840
– past due but not impaired					40						22						5						214						1						282
– impaired					100						97						6						600						311						1,114
Corporate and commercial					5,469						501						1,439						427						1,324						9,160
– neither past due nor impaired					1,383						102						483						36						303						2,307
– past due but not impaired					68						–						31						1						1						101
– impaired					4,018						399						925						390						1,020						6,752
Non-bank financial institutions					413						4						323						1						1						742
– neither past due nor impaired					219						–						305						–						–						524
– past due but not impaired					–						–						–						–						–						–
– impaired					194						4						18						1						1						218
Renegotiated loans at 31 December 2014					7,811						891						1,847						15,235						1,711						27,495
– neither past due nor impaired					2,315						338						823						4,184						349						8,009
– past due but not impaired					329						30						37						2,109						7						2,512
– impaired					5,167						523						987						8,942						1,355						16,974
Impairment allowances on renegotiated loans					1,458						170						458						1,499						704						4,289
– renegotiated loans as % of total gross loans					1.9%						0.2%						6.1%						11.5%						3.7%						2.8%

For footnote, see page 191.

 

 

HSBC HOLDINGS PLC   130

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Movement in renegotiated loans and advances to customers by geographical region

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Renegotiated loans at 1 January 2015					7,811						891						1,847						15,235						1,711						27,495
– personal					1,929						386						85						14,807						386						17,593
– corporate and commercial					5,469						501						1,439						427						1,324						9,160
– non-bank financial institutions					413						4						323						1						1						742
Loans renegotiated in the year without derecognition					1,970						421						115						999						553						4,058
– personal					471						87						7						625						250						1,440
– corporate and commercial					1,494						334						89						374						303						2,594
– non-bank financial institutions					5						–						19						–						–						24
Loans renegotiated in the year resulting in recognition of a new loan					222						16						196						(1	)					175						608
– personal					57						–						–						(1	)					18						74
– corporate and commercial					156						16						4						–						157						333
– non-bank financial institutions					9						–						192						–						–						201
Repayments					(1,675	)					(351	)					(276	)					(1,304	)					(467	)					(4,073	)
– personal					(574	)					(88	)					(32	)					(1,166	)					(185	)					(2,045	)
– corporate and commercial					(1,054	)					(263	)					(159	)					(138	)					(282	)					(1,896	)
– non-bank financial institutions					(47	)					–						(85	)					–						–						(132	)
Amounts written off					(294	)					(52	)					(11	)					(254	)					(290	)					(901	)
– personal					(45	)					(24	)					(5	)					(241	)					(139	)					(454	)
– corporate and commercial					(249	)					(28	)					(6	)					(12	)					(150	)					(445	)
– non-bank financial institutions					–						–						–						(1	)					(1	)					(2	)
Other					(720	)					18						(119	)					(2,303	)					(1,104	)					(4,228	)
– personal					(79	)					(21	)					14						(2,290	)					(258	)					(2,634	)
– corporate and commercial					(601	)					39						44						(13	)					(846	)					(1,377	)
– non-bank financial institutions					(40	)					–						(177	)					–						–						(217	)
At 31 December 2015					7,314						943						1,752						12,372						578						22,959
– personal					1,759						340						69						11,734						72						13,974
– corporate and commercial					5,215						599						1,411						638						506						8,369
– non-bank financial institutions					340						4						272						–						–						616
Renegotiated loans at 1 January 2014					9,756						767						2,094						18,789						2,769						34,175
– personal					2,251						435						149						18,130						607						21,572
– corporate and commercial					7,270						330						1,583						658						2,161						12,002
– non-bank financial institutions					235						2						362						1						1						601
Loans renegotiated in the year without derecognition					1,543						371						296						862						725						3,797
– personal					433						83						10						774						310						1,610
– corporate and commercial					939						288						286						78						415						2,006
– non-bank financial institutions					171						–						–						10						–						181
Loans renegotiated in the year resulting in recognition of a new loan					500						5						79						–						92						676
– personal					69						2						–						–						28						99
– corporate and commercial					381						–						61						–						64						506
– non-bank financial institutions					50						3						18						–						–						71
Repayments					(2,416	)					(246	)					(562	)					(1,518	)					(1,036	)					(5,778	)
– personal					(635	)					(96	)					(47	)					(1,319	)					(288	)					(2,385	)
– corporate and commercial					(1,757	)					(149	)					(445	)					(189	)					(747	)					(3,287	)
– non-bank financial institutions					(24	)					(1	)					(70	)					(10	)					(1	)					(106	)
Amounts written off					(828	)					(42	)					(23	)					(640	)					(510	)					(2,043	)
– personal					(88	)					(28	)					(7	)					(568	)					(223	)					(914	)
– corporate and commercial					(740	)					(14	)					(16	)					(72	)					(286	)					(1,128	)
– non-bank financial institutions					–						–						–						–						(1	)					(1	)
Other					(744	)					36						(37	)					(2,258	)					(329	)					(3,332	)
– personal					(101	)					(10	)					(20	)					(2,210	)					(48	)					(2,389	)
– corporate and commercial					(624	)					46						(30	)					(48	)					(283	)					(939	)
– non-bank financial institutions					(19	)					–						13						–						2						(4	)
At 31 December 2014					7,811						891						1,847						15,235						1,711						27,495
– personal					1,929						386						85						14,807						386						17,593
– corporate and commercial					5,469						501						1,439						427						1,324						9,160
– non-bank financial institutions					413						4						323						1						1						742

 

 

HSBC HOLDINGS PLC   131

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

 

Loan impairment charge to the income statement by industry sector

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Personal					263						309						122						157						983						1,834
– first lien residential mortgages					(7	)					(1	)					49						70						41						152
– other personal3					270						310						73						87						942						1,682
Corporate and commercial					432						372						195						319						451						1,769
– manufacturing and international trade and services					158						250						107						26						305						846
– commercial real estate and other property-related					33						18						49						24						47						171
– other commercial4					241						104						39						269						99						752
Financial					14						–						(18	)					(7	)					–						(11	)
Total loan impairment charge for the year ended 31 December 2015					709						681						299						469						1,434						3,592
Personal					245						321						25						117						1,095						1,803
– first lien residential mortgages					(75	)					6						(24	)					26						15						(52	)
– other personal3					320						315						49						91						1,080						1,855
Corporate and commercial					790						327						6						196						937						2,256
– manufacturing and international trade and services					520						197						36						116						382						1,251
– commercial real estate and other property-related					78						29						(28	)					27						176						282
– other commercial4					192						101						(2	)					53						379						723
Financial					44						(4	)					(32	)					(13	)					1						(4	)
Total loan impairment charge for the year ended 31 December 2014					1,079						644						(1	)					300						2,033						4,055

For footnotes, see page 191.

Loan impairment charge to the income statement by assessment type

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Individually assessed impairment allowances					495						300						161						227						322						1,505
– new allowances					991						518						216						290						401						2,416
– release of allowances no longer required					(455	)					(179	)					(52	)					(46	)					(93	)					(825	)
– recoveries of amounts previously written off					(41	)					(39	)					(3	)					(17	)					14						(86	)
Collectively assessed impairment allowances10					214						381						138						242						1,112						2,087
– new allowances net of allowance releases					561						507						168						301						1,272						2,809
– recoveries of amounts previously written off					(347	)					(126	)					(30	)					(59	)					(160	)					(722	)
Total loan impairment charge for the year ended 31 December 2015					709						681						299						469						1,434						3,592

For footnote, see page 99.

 

HSBC HOLDINGS PLC   132

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				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Individually assessed impairment allowances					617						351						32						190						590						1,780
– new allowances					1,112						542						134						298						738						2,824
– release of allowances no longer required					(486	)					(171	)					(95	)					(88	)					(90	)					(930	)
– recoveries of amounts previously written off					(9	)					(20	)					(7	)					(20	)					(58	)					(114	)
Collectively assessed impairment allowances10					462						293						(33	)					110						1,443						2,275
– new allowances net of allowance releases					757						426						2						205						1,726						3,116
– recoveries of amounts previously written off					(295	)					(133	)					(35	)					(95	)					(283	)					(841	)
Total loan impairment charge for the year ended 31 December 2014					1,079						644						(1	)					300						2,033						4,055

For footnote, see page 191.

 

 

Charge for impairment losses as a percentage of average gross loans and advances to customers by geographical region

 

				Europe						Asia						MENA						North America						Latin America						Total
				%						%						%						%						%						%
New allowances net of allowance releases					0.31						0.23						1.07						0.41						5.37						0.48
Recoveries					(0.11	)					(0.05	)					(0.11	)					(0.06	)					(0.50	)					(0.09	)
Total charge for impairment losses at 31 December 2015					0.20						0.18						0.96						0.35						4.87						0.39
Amount written off net of recoveries					0.25						0.12						0.97						0.45						3.94						0.37
New allowances net of allowance releases					0.37						0.22						0.14						0.32						5.00						0.53
Recoveries					(0.08	)					(0.04	)					(0.14	)					(0.09	)					(0.72	)					(0.10	)
Total charge for impairment losses at 31 December 2014					0.29						0.18						–						0.23						4.28						0.43
Amount written off net of recoveries					0.49						0.13						0.58						0.97						3.59						0.58

 

HSBC HOLDINGS PLC   133

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

Movement in impairment allowances by industry sector and by geographical region

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Impairment allowances at 1 January 2015					4,455						1,356						1,406						2,640						2,529						12,386
Amounts written off Personal					(627	)					(416	)					(114	)					(554	)					(996	)					(2,707	)
– first lien residential mortgages					(12	)					(6	)					(1	)					(344	)					(24	)					(387	)
– other personal3					(615	)					(410	)					(113	)					(210	)					(972	)					(2,320	)
Corporate and commercial					(657	)					(179	)					(222	)					(106	)					(309	)					(1,473	)
– manufacturing and international trade and services					(234	)					(149	)					(214	)					(28	)					(213	)					(838	)
– commercial real estate and other property-related					(244	)					(5	)					(8	)					(57	)					(30	)					(344	)
– other commercial4					(179	)					(25	)					–						(21	)					(66	)					(291	)
Financial					(12	)					–						–						(2	)					–						(14	)
Total amounts written off					(1,296	)					(595	)					(336	)					(662	)					(1,305	)					(4,194	)
Recoveries of amounts written off in previous years Personal					340						135						30						57						119						681
– first lien residential mortgages					6						4						–						26						(17	)					19
– other personal3					334						131						30						31						136						662
Corporate and commercial					46						30						3						18						27						124
– manufacturing and international trade and services					16						20						2						8						15						61
– commercial real estate and other property-related					24						5						–						5						2						36
– other commercial4					6						5						1						5						10						27
Financial					2						–						–						1						–						3
Total recoveries of amounts written off in previous years					388						165						33						76						146						808
Charge to income statement					709						681						299						469						1,434						3,592
Exchange and other movements11					(387	)					(82	)					16						(482	)					(2,084	)					(3,019	)
Impairment allowances at 31 December 2015					3,869						1,525						1,418						2,041						720						9,573
Impairment allowances against banks:
– individually assessed					–						–						18						–						–						18
Impairment allowances against customers:
– individually assessed					2,661						908						1,068						327						438						5,402
– collectively assessed10					1,208						617						332						1,714						282						4,153
Impairment allowances at 31 December 2015					3,869						1,525						1,418						2,041						720						9,573
Impairment allowances at 1 January 2014					5,598						1,214						1,583						4,242						2,564						15,201
Amounts written off Personal					(724	)					(463	)					(157	)					(1,030	)					(1,359	)					(3,733	)
– first lien residential mortgages					(21	)					(17	)					(4	)					(731	)					(40	)					(813	)
– other personal3					(703	)					(446	)					(153	)					(299	)					(1,319	)					(2,920	)
Corporate and commercial					(1,202	)					(146	)					(47	)					(346	)					(684	)					(2,425	)
– manufacturing and international trade and services					(732	)					(86	)					(41	)					(81	)					(428	)					(1,368	)
– commercial real estate and other property-related					(342	)					(53	)					(6	)					(153	)					(39	)					(593	)
– other commercial4					(128	)					(7	)					–						(112	)					(217	)					(464	)
Financial					(203	)					–						(8	)					(6	)					(4	)					(221	)
Total amounts written off					(2,129	)					(609	)					(212	)					(1,382	)					(2,047	)					(6,379	)
Recoveries of amounts written off in previous years Personal					271						143						35						86						283						818
– first lien residential mortgages					3						3						–						40						33						79
– other personal3					268						140						35						46						250						739
Corporate and commercial					29						9						7						25						58						128
– manufacturing and international trade and services					19						7						7						6						46						85
– commercial real estate and other property-related					11						–						–						3						1						15
– other commercial4					(1	)					2						–						16						11						28
Financial					4						1						–						4						–						9
Total recoveries of amounts written off in previous years					304						153						42						115						341						955
Charge to income statement					1,079						644						(1	)					300						2,033						4,055
Exchange and other movements11					(397	)					(46	)					(6	)					(635	)					(362	)					(1,446	)
Impairment allowances at 31 December 2014					4,455						1,356						1,406						2,640						2,529						12,386
Impairment allowances against banks:
– individually assessed					31						–						18						–						–						49
Impairment allowances against customers:
– individually assessed					2,981						812						1,110						276						1,016						6,195
– collectively assessed10					1,443						544						278						2,364						1,513						6,142
Impairment allowances at 31 December 2014					4,455						1,356						1,406						2,640						2,529						12,386

For footnotes, see page 191.

 

HSBC HOLDINGS PLC   134

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Movement in impairment allowances on loans and advances to customers and banks

(Audited)

 

				Banks						Customers
					individually assessed						Individually assessed						Collectively assessed	10					Total
				$m						$m						$m						$m
At 1 January 2015					49						6,195						6,142						12,386
Amounts written off					–						(1,368	)					(2,826	)					(4,194	)
Recoveries of loans and advances previously written off					–						86						722						808
Charge to income statement					(11	)					1,516						2,087						3,592
Exchange and other movements11					(20	)					(1,027	)					(1,972	)					(3,019	)
At 31 December 2015					18						5,402						4,153						9,573
Impairment allowances:
on loans and advances to customers											5,402						4,153						9,555
– personal											426						2,453						2,879
– corporate and commercial											4,800						1,635						6,435
– non-bank financial institutions											176						65						241
				%						%						%						%
as a percentage of loans and advances					–						0.6						0.4						0.9
				$m						$m						$m						$m
At 1 January 2014					58						7,072						8,071						15,201
Amounts written off					(6	)					(2,313	)					(4,060	)					(6,379	)
Recoveries of loans and advances previously written off					–						114						841						955
Charge to income statement					4						1,776						2,275						4,055
Exchange and other movements11					(7	)					(454	)					(985	)					(1,446	)
At 31 December 2014					49						6,195						6,142						12,386
Impairment allowances:
on loans and advances to customers											6,195						6,142						12,337
– personal											468						4,132						4,600
– corporate and commercial											5,532						1,909						7,441
– non-bank financial institutions											195						101						296
				%						%						%						%
as a percentage of loans and advances					–						0.6						0.6						1.1

For footnotes, see page 191.

 

 

HSBC HOLDINGS PLC   135

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

Total wholesale lending

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Corporate and commercial (A)					191,765						211,224						22,268						62,882						11,374						499,513
– manufacturing					39,003						34,272						2,504						17,507						2,572						95,858
– international trade and services					62,667						72,199						9,552						11,505						3,096						159,019
– commercial real estate					26,256						32,371						690						7,032						1,577						67,926
– other property-related					7,323						35,206						1,908						8,982						45						53,464
– government					3,653						1,132						1,695						203						772						7,455
– other commercial4					52,863						36,044						5,919						17,653						3,312						115,791
Financial					51,969						68,321						10,239						16,308						3,996						150,833
– non-bank financial institutions (B)					33,621						13,969						2,321						9,822						681						60,414
– banks (C)					18,348						54,352						7,918						6,486						3,315						90,419
Gross loans at 31 December 2015 (D)					243,734						279,545						32,507						79,190						15,370						650,346
Impairment allowances on wholesale lending Corporate and commercial (a)					2,735						1,256						1,157						777						510						6,435
– manufacturing					528						254						135						140						49						1,106
– international trade and services					813						599						439						123						48						2,022
– commercial real estate					613						35						145						76						343						1,212
– other property-related					237						72						267						55						1						632
– government					6						–						–						–						2						8
– other commercial					538						296						171						383						67						1,455
Financial					194						13						22						30						–						259
– non-bank financial institutions (b)					194						13						4						30						–						241
– banks (c)					–						–						18						–						–						18
Impairment allowances at 31 December 2015 (d)					2,929						1,269						1,179						807						510						6,694
				%						%						%						%						%						%
(a) as a percentage of (A)					1.4						0.6						5.2						1.2						4.5						1.3
(b) as a percentage of (B)					0.6						0.1						0.2						0.3						–						0.4
(c) as a percentage of (C)					–						–						0.2						–						–						–
(d) as a percentage of (D)					1.2						0.5						3.6						1.0						3.3						1.0
				$m						$m						$m						$m						$m						$m
Corporate and commercial (E)					212,523						220,799						20,588						57,993						30,722						542,625
– manufacturing					39,456						37,767						2,413						15,299						12,051						106,986
– international trade and services					76,629						72,814						9,675						13,484						8,189						180,791
– commercial real estate					28,187						35,678						579						6,558						2,291						73,293
– other property-related					7,126						34,379						1,667						8,934						281						52,387
– government					2,264						1,195						1,552						164						968						6,143
– other commercial4					58,861						38,966						4,702						13,554						6,942						123,025
Financial					45,081						76,957						13,786						16,439						10,753						163,016
– non-bank financial institutions (F)					23,103						13,997						3,291						9,034						1,393						50,818
– banks (G)					21,978						62,960						10,495						7,405						9,360						112,198
Gross loans at 31 December 2014 (H)					257,604						297,756						34,374						74,432						41,475						705,641
Impairment allowances on wholesale lending Corporate and commercial (e)					3,112						1,089						1,171						608						1,461						7,441
– manufacturing					529						242						141						152						348						1,412
– international trade and services					877						533						536						157						237						2,340
– commercial real estate					909						44						147						101						476						1,677
– other property-related					203						55						219						57						12						546
– government					4						–						1						–						–						5
– other commercial					590						215						127						141						388						1,461
Financial					252						13						39						39						2						345
– non-bank financial institutions (f)					221						13						21						39						2						296
– banks (g)					31						–						18						–						–						49
Impairment allowances at 31 December 2014 (h)					3,364						1,102						1,210						647						1,463						7,786
				%						%						%						%						%						%
(e) as a percentage of (E)					1.5						0.5						5.7						1.0						4.8						1.4
(f) as a percentage of (F)					0.9						0.1						0.6						0.4						0.1						0.6
(g) as a percentage of (G)					0.1						–						0.2						–						–						–
(h) as a percentage of (H)					1.3						0.4						3.5						0.9						3.5						1.1

For footnote, see page 191.

 

HSBC HOLDINGS PLC   136

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Commercial real estate

Commercial real estate lending

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Neither past due nor impaired					24,533						32,182						466						6,659						1,086						64,926
Past due but not impaired					89						119						25						212						9						454
Impaired loans					1,634						70						199						161						482						2,546
Total gross loans and advances at 31 December 2015					26,256						32,371						690						7,032						1,577						67,926
Of which:
– renegotiated loans12					1,586						6						182						150						210						2,134
Impairment allowances					613						35						145						76						343						1,212
Neither past due nor impaired					25,860						35,430						333						6,136						1,535						69,294
Past due but not impaired					18						170						47						100						28						363
Impaired loans					2,309						78						199						322						728						3,636
Total gross loans and advances at 31 December 2014					28,187						35,678						579						6,558						2,291						73,293
Of which:
– renegotiated loans12					1,954						19						183						191						377						2,724
Impairment allowances					909						44						147						101						476						1,677

For footnote, see page 191.

 

 

HSBC HOLDINGS PLC   137

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

Commercial real estate loans and advances maturity analysis

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
On demand, overdrafts or revolving
< 1 year13					6,830						8,811						252						2,992						694						19,579
1-2 years					4,367						5,934						66						939						102						11,408
2-5 years					11,459						11,399						235						2,037						138						25,268
> 5 years					3,600						6,227						137						1,064						643						11,671
At 31 December 2015					26,256						32,371						690						7,032						1,577						67,926
On demand, overdrafts or revolving
< 1 year13					7,382						9,810						264						1,855						1,325						20,636
1-2 years					4,643						6,689						24						1,158						205						12,719
2-5 years					11,686						12,156						156						2,131						320						26,449
> 5 years					4,476						7,023						135						1,414						441						13,489
At 31 December 2014					28,187						35,678						579						6,558						2,291						73,293

For footnote, see page 191.

 

 

HSBC HOLDINGS PLC   138

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Commercial real estate loans and advances including loan commitments by level of collateral

(Audited)

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Rated CRR/EL 1 to 7
Not collateralised					4,498						12,329						499						8						500						17,834
Fully collateralised					25,773						26,270						36						9,997						542						62,618
Partially collateralised (A)					3,025						1,924						–						1,264						52						6,265
– collateral value on A					2,106						1,175						–						981						8						4,270
					33,296						40,523						535						11,269						1,094						86,717
Rated CRR/EL 8
Not collateralised					28						–						–						–						–						28
Fully collateralised					668						4						–						9						1						682
LTV ratio:
– less than 50%					86						–						–						5						1						92
– 51% to 75%					377						4						–						4						–						385
– 76% to 90%					174						–						–						–						–						174
– 91% to 100%					31						–						–						–						–						31
Partially collateralised (B)					120						1						–						1						–						122
– collateral value on B					87						–						–						–						–						87
					816						5						–						10						1						832
Rated CRR/EL 9 to 10
Not collateralised					65						51						5						2						299						422
Fully collateralised					900						18						7						76						123						1,124
LTV ratio:
– less than 50%					174						10						7						15						15						221
– 51% to 75%					425						2						–						27						59						513
– 76% to 90%					140						2						–						10						4						156
– 91% to 100%					161						4						–						24						45						234
Partially collateralised (C)					716						5						181						66						64						1,032
– collateral value on C					397						3						89						35						31						555
					1,681						74						193						144						486						2,578
At 31 December 2015					35,793						40,602						728						11,423						1,581						90,127
Rated CRR/EL 1 to 7
Not collateralised					5,351						16,132						361						87						1,719						23,650
Fully collateralised					25,873						26,323						23						9,093						556						61,868
Partially collateralised (D)					1,384						1,599						–						1,819						152						4,954
– collateral value on D					1,032						901						–						1,199						47						3,179
					32,608						44,054						384						10,999						2,427						90,472
Rated CRR/EL 8
Not collateralised					34						7						–						9						2						52
Fully collateralised					568						23						–						30						1						622
LTV ratio:
– less than 50%					64						–						–						16						1						81
– 51% to 75%					222						11						–						10						–						243
– 76% to 90%					132						9						–						4						–						145
– 91% to 100%					150						3						–						–						–						153
Partially collateralised (E)					365						–						–						7						–						372
– collateral value on E					296						–						–						2						–						298
					967						30						–						46						3						1,046
Rated CRR/EL 9 to 10
Not collateralised					369						48						6						1						499						923
Fully collateralised					992						15						7						166						178						1,358
LTV ratio:
– less than 50%					78						6						7						28						10						129
– 51% to 75%					593						2						–						91						43						729
– 76% to 90%					167						2						–						17						53						239
– 91% to 100%					154						5						–						30						72						261
Partially collateralised (F)					1,085						15						181						37						50						1,368
– collateral value on F					664						5						89						30						13						801
					2,446						78						194						204						727						3,649
At 31 December 2014					36,021						44,162						578						11,249						3,157						95,167

 

HSBC HOLDINGS PLC   139

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

 

Other corporate, commercial and non-bank financial institutions loans and advances including loan commitments by level of collateral rated CRR/EL 8 to 10 only

(Audited)

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
Rated CRR/EL 8
Not collateralised					1,618						164						36						609						102						2,529
Fully collateralised					434						41						–						454						1						930
LTV ratio:
– less than 50%					65						13						–						95						1						174
– 51% to 75%					337						8						–						85						–						430
– 76% to 90%					28						18						–						168						–						214
– 91% to 100%					4						2						–						106						–						112
Partially collateralised (A)					109						47						1						179						–						336
– collateral value on A					73						17						–						58						–						148
					2,161						252						37						1,242						103						3,795
Rated CRR/EL 9 to 10
Not collateralised					2,850						889						814						80						244						4,877
Fully collateralised					824						440						188						323						78						1,853
LTV ratio:
– less than 50%					283						94						46						47						44						514
– 51% to 75%					346						149						3						47						8						553
– 76% to 90%					96						74						25						27						9						231
– 91% to 100%					99						123						114						202						17						555
Partially collateralised (B)					1,702						506						441						423						7						3,079
– collateral value on B					795						236						55						283						5						1,374
					5,376						1,835						1,443						826						329						9,809
At 31 December 2015					7,537						2,087						1,480						2,068						432						13,604
Rated CRR/EL 8
Not collateralised					2,051						237						15						320						227						2,850
Fully collateralised					629						56						72						331						11						1,099
LTV ratio:
– less than 50%					120						13						–						186						5						324
– 51% to 75%					293						–						–						72						6						371
– 76% to 90%					51						9						69						46						–						175
– 91% to 100%					165						34						3						27						–						229
Partially collateralised (C)					105						44						1						148						6						304
– collateral value on C					46						17						1						68						4						136
					2,785						337						88						799						244						4,253
Rated CRR/EL 9 to 10
Not collateralised					4,185						939						813						62						1,420						7,419
Fully collateralised					615						143						147						231						124						1,260
LTV ratio:
– less than 50%					169						68						25						48						48						358
– 51% to 75%					136						27						19						39						35						256
– 76% to 90%					168						16						6						35						26						251
– 91% to 100%					142						32						97						109						15						395
Partially collateralised (D)					624						364						547						251						140						1,926
– collateral value on D					341						169						92						141						46						789
					5,424						1,446						1,507						544						1,684						10,605
At 31 December 2014					8,209						1,783						1,595						1,343						1,928						14,858

 

HSBC HOLDINGS PLC   140

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HSBC HOLDINGS PLC   141

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

Notional contract amounts and fair values of derivatives by product type

 

				2015																		2014
				Notional						Fair value												Notional						Fair value
				amount						Assets						Liabilities						amount						Assets						Liabilities
				$m						$m						$m						$m						$m						$m
Foreign exchange					5,690,354						96,341						95,598						5,573,415						97,312						95,759
– exchange traded					195,612						167						76						81,785						229						369
– central counterparty cleared OTC					29,263						406						443						18,567						321						349
– non-central counterparty cleared OTC					5,465,479						95,768						95,079						5,473,063						96,762						95,041
Interest rate					14,675,036						279,154						271,367						22,328,518						473,243						468,152
– exchange traded					1,259,888						49						8						1,432,333						112						161
– central counterparty cleared OTC					8,774,674						117,877						117,695						15,039,001						261,880						264,509
– non-central counterparty cleared OTC					4,640,474						161,228						153,664						5,857,184						211,251						203,482
Equity					501,834						8,732						10,383						568,932						11,694						13,654
– exchange traded					265,129						1,888						2,601						289,140						2,318						3,201
– non-central counterparty cleared OTC					236,705						6,844						7,782						279,792						9,376						10,453
Credit					463,344						6,961						6,884						550,197						9,340						10,061
– central counterparty cleared OTC					90,863						1,779						2,069						126,115						1,999						2,111
– non-central counterparty cleared OTC					372,481						5,182						4,815						424,082						7,341						7,950
Commodity and other					51,683						3,148						2,699						77,565						3,884						3,508
– exchange traded					8,136						38						–						7,015						80						23
– non-central counterparty cleared OTC					43,547						3,110						2,699						70,550						3,804						3,485
Total OTC derivatives					19,653,486						392,194						384,246						27,288,354						592,735						587,379
– total OTC derivatives cleared by central counterparties					8,894,800						120,062						120,207						15,183,683						264,200						266,968
– total OTC derivatives not cleared by central counterparties					10,758,686						272,132						264,039						12,104,671						328,535						320,411
Total exchange traded derivatives					1,728,765						2,142						2,685						1,810,273						2,739						3,755
Gross					21,382,251						394,336						386,931						29,098,627						595,473						591,134
Offset											(105,860	)					(105,860	)											(250,465	)					(250,465	)
Total at 31 December											288,476						281,071												345,008						340,669

 

 

HSBC HOLDINGS PLC   142

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Reverse repos – non-trading by geographical region

(Audited)

 

				Europe						Asia						MENA						North     America						Latin     America						Total
				$m						$m						$m						$m						$m						$m
With customers					28,366						5,650						–						40,316						–						74,332
With banks					15,824						21,804						779						32,034						1,482						71,923
At 31 December 2015					44,190						27,454						779						72,350						1,482						146,255
With customers					25,841						5,409						–						35,060						–						66,310
With banks					34,748						22,813						19						29,008						8,815						95,403
At 31 December 2014					60,589						28,222						19						64,068						8,815						161,713

 

 

Total personal lending

 

				Europe						Asia						MENA						North     America						Latin     America						Total
				$m						$m						$m						$m						$m						$m
First lien residential mortgages (A)					125,544						94,606						2,258						50,117						1,986						274,511
Of which:
– interest only (including offset)					40,906						936						–						180						–						42,022
– affordability including ARMs					356						3,966						–						17,041						–						21,363
Other personal lending (B)					44,982						38,101						4,447						8,069						3,972						99,571
– other					32,862						27,682						3,147						3,284						1,816						68,791
– credit cards					12,115						10,189						929						996						1,780						26,009
– second lien residential mortgages					–						33						2						3,762						–						3,797
– motor vehicle finance					5						197						369						27						376						974
Total gross loans at 31 December 2015 (C)					170,526						132,707						6,705						58,186						5,958						374,082
Impairment allowances on personal lending
First lien residential mortgages (a)					278						29						24						991						22						1,344
Other personal lending (b)					667						227						214						241						186						1,535
– other					401						104						180						31						80						796
– credit cards					265						122						29						30						102						548
– second lien residential mortgages					–						–						–						180						–						180
– motor vehicle finance					1						1						5						–						4						11
Total impairment allowances at 31 December 2015 (c)					945						256						238						1,232						208						2,879
				%						%						%						%						%						%
(a) as a percentage of A					0.2						0.0						1.1						2.0						1.1						0.5
(b) as a percentage of B					1.5						0.6						4.8						3.0						4.7						1.5
(c) as a percentage of C					0.6						0.2						3.5						2.1						3.5						0.8

 

HSBC HOLDINGS PLC   143

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

Total personal lending (continued)

 

				Europe						Asia						MENA						North America						Latin America						Total
				$m						$m						$m						$m						$m						$m
First lien residential mortgages (D)					131,000						93,147						2,647						55,577						4,153						286,524
Of which:
– interest only (including offset)					44,163						956						–						276						–						45,395
– affordability including ARMs					337						5,248						–						16,452						–						22,037
Other personal lending (E)					47,531						36,368						3,924						9,823						9,384						107,030
– other					34,567						25,695						2,633						4,328						4,846						72,069
– credit cards					12,959						10,289						897						1,050						3,322						28,517
– second lien residential mortgages					–						56						2						4,433						–						4,491
– motor vehicle finance					5						328						392						12						1,216						1,953
Total gross loans at 31 December 2014 (F)					178,531						129,515						6,571						65,400						13,537						393,554
Impairment allowances on personal lending
First lien residential mortgages (d)					306						46						97						1,644						36						2,129
Other personal lending (e)					786						208						97						350						1,030						2,471
– other					438						87						59						43						672						1,299
– credit cards					347						119						33						36						298						833
– second lien residential mortgages					–						–						–						271						–						271
– motor vehicle finance					1						2						5						–						60						68
Total impairment allowances at 31 December 2014 (f)					1,092						254						194						1,994						1,066						4,600
				%						%						%						%						%						%
(d) as a percentage of D					0.2						–						3.7						3.0						0.9						0.7
(e) as a percentage of E					1.7						0.6						2.5						3.6						11.0						2.3
(f) as a percentage of F					0.6						0.2						3.0						3.0						7.9						1.2

 

 

HSBC HOLDINGS PLC   144

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HSBC HOLDINGS PLC   145

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

Trends in two months and over contractual delinquency in the US

 

				2015						2014
				$m						$m
In personal lending in the US
First lien residential mortgages					1,954						3,271
– Consumer and Mortgage Lending					1,049						2,210
– other mortgage lending					905						1,061
Second lien residential mortgages					161						216
– Consumer and Mortgage Lending					106						154
– other mortgage lending					55						62
Credit card					16						17
Personal non-credit card					3						7
Total at 31 December					2,134						3,511
				%						%
As a percentage of the equivalent loans and receivables balances
First lien residential mortgages					5.7						8.6
Second lien residential mortgages					4.4						5.0
Credit card					2.3						2.4
Personal non-credit card					0.7						1.4
Total at 31 December					5.4						8.1

Gross loan portfolio of HSBC Finance real estate secured balances

 

					Re-aged	17			Modified and re-aged				Modified				Total renegotiated loans				Total non- renegotiated loans				Total gross loans				Total impairment allowances				Impairment allowances/ gross loans
				$m				$m				$m				$m				$m				$m				$m				%
At 31 December 2015					4,858				5,257				519				10,634				8,612				19,246				986				5.1
At 31 December 2014					6,637				6,581				587				13,805				10,619				24,424				1,679				6.9

For footnote, see page 191.

Number of renegotiated real estate secured accounts remaining in HSBC Finance’s portfolio

 

				Number of renegotiated loans (000s)																		Total number
				Re-aged				Modified and re-aged				Modified				Total						of loans (000s)
At 31 December 2015					66				54				6				126						240
At 31 December 2014					85				64				6				155						297

 

 

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Types of loan renegotiation programmes in HSBC Finance   •  A temporary modification is a change to the contractual terms of a loan that results in HSBC Finance giving up a right to contractual cash flows over a pre-defined period, typically two years. With a temporary modification the loan is expected to revert back to the original contractual terms, including the interest rate charged, after the modification period. An example is reduced interest payments.   A substantial number of HSBC Finance modifications involve interest rate reductions, which lower the amount of interest income HSBC Finance is contractually entitled to receive in future periods. Historically, modifications were granted for terms as low as six months, although more recent modifications have a minimum term of two years.   •  A permanent modification is a change to the contractual terms of a loan that results in HSBC Finance giving up a right to contractual cash flows over the life of the loan.   An example is a permanent reduction in the interest rate charged.		HSBC Finance also offers a ‘re-age’ renegotiation programme, which results in the resetting of an account’s contractual delinquency status to current (non-delinquent) upon fulfilment of certain requirements and without additional concessions. The overdue principal and/or interest is deferred and paid at a later date. Loan re-ageing enables customers who have been unable to make a small number of payments to have their loan delinquency status reset to current so that their credit score is not affected by the overdue balances. Re-aging may be offered to customers either without any modification of original loan terms, or as part of a loan modification transaction.   All renegotiation transactions described above with the exception of first time re-ages on accounts that are less than 60 days past due are classified as impaired. These remain classified as impaired until they have demonstrated a history of payment performance against their original contracted terms for at least 12 months, with the exception of permanent modifications. All modified loans with terms over two years are considered to be permanently impaired.

 

 

Residential mortgage loans including loan commitments by level of collateral

(Audited)

 

				Europe						Asia						MENA						North America						Latin America						Total						UK						Hong Kong
				$m						$m						$m						$m						$m						$m						$m						$m
Non-impaired loans and advances
Fully collateralised					128,113						100,102						2,144						41,567						1,869						273,795						122,221						61,784
LTV ratio:
– less than 50%					70,851						59,212						595						12,369						710						143,737						68,362						42,589
– 51% to 75%					47,933						33,237						985						22,071						903						105,129						45,762						15,961
– 76% to 90%					8,322						6,522						535						5,502						222						21,103						7,584						2,254
– 91% to 100%					1,007						1,131						29						1,625						34						3,826						513						980
Partially collateralised:
– greater than 100% LTV (A)					540						168						46						1,208						13						1,975						321						97
– collateral value on A					434						155						37						1,147						11						1,784						221						95
					128,653						100,270						2,190						42,775						1,882						275,770						122,542						61,881
Impaired loans and advances
Fully collateralised					1,407						222						44						6,713						109						8,495						1,191						46
LTV ratio:
– less than 50%					518						105						18						1,247						90						1,978						469						42
– 51% to 75%					619						76						13						2,819						14						3,541						540						3
– 76% to 90%					183						34						8						1,811						4						2,040						133						1
– 91% to 100%					87						7						5						836						1						936						49						–
Partially collateralised:
– greater than 100% LTV (B)					178						8						18						628						1						833						49						–
– collateral value on B					160						6						13						547						–						726						36						–
					1,585						230						62						7,341						110						9,328						1,240						46
At 31 December 2015					130,238						100,500						2,252						50,116						1,992						285,098						123,782						61,927

 

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

Residential mortgage loans including loan commitments by level of collateral (continued)

 

				Europe						Asia						MENA						North America						Latin America						Total						UK						Hong Kong
				$m						$m						$m						$m						$m						$m						$m						$m
Non-impaired loans and advances
Fully collateralised					135,875						99,257						2,431						43,317						3,759						284,639						130,333						57,703
LTV ratio:
– less than 50%					66,075						60,315						1,324						14,003						1,454						143,171						63,533						42,894
– 51% to 75%					56,178						31,142						856						20,872						1,777						110,825						54,095						12,135
– 76% to 90%					11,856						6,906						212						5,994						480						25,448						11,141						2,298
– 91% to 100%					1,766						894						39						2,448						48						5,195						1,564						376
Partially collateralised:
– greater than 100% LTV (C)					537						99						60						2,209						167						3,072						388						–
– collateral value on C					532						81						44						1,999						24						2,680						415						–
					136,412						99,356						2,491						45,526						3,926						287,711						130,721						57,703
Impaired loans and advances
Fully collateralised					906						256						122						8,618						154						10,056						781						48
LTV ratio:
– less than 50%					232						130						53						1,291						103						1,809						197						45
– 51% to 75%					417						90						29						3,462						35						4,033						376						3
– 76% to 90%					163						32						19						2,471						10						2,695						131						–
– 91% to 100%					94						4						21						1,394						6						1,519						77						–
Partially collateralised:
– greater than 100% LTV (D)					55						7						31						1,395						2						1,490						44						–
– collateral value on D					40						5						23						1,181						1						1,250						30						–
					961						263						153						10,013						156						11,546						825						48
At 31 December 2014					137,373						99,619						2,644						55,539						4,082						299,257						131,546						57,751

Supplementary information

Gross loans and advances by industry sector over five years

 

					2015						Currency translation adjustment	18					Movement						2014						2013						2012						2011
					$m						$m						$m						$m						$m						$m						$m
Personal					374,082						(20,232	)					760						393,554						410,728						415,093						393,625
– first lien residential mortgages					274,511						(13,697	)					1,684						286,524						299,875						301,862						278,963
– other personal3					99,571						(6,535	)					(924	)					107,030						110,853						113,231						114,662
Corporate and commercial					499,513						(30,496	)					(12,616	)					542,625						545,981						517,120						478,064
– manufacturing					95,858						(8,043	)					(3,085	)					106,986						113,850						112,149						96,054
– international trade and services					159,019						(10,148	)					(11,624	)					180,791						184,668						169,389						152,709
– commercial real estate					67,926						(3,483	)					(1,884	)					73,293						74,846						76,760						73,941
– other property-related					53,464						(1,256	)					2,333						52,387						44,832						40,532						39,539
– government					7,455						(354	)					1,666						6,143						7,277						10,785						11,079
– other commercial4					115,791						(7,212	)					(22	)					123,025						120,508						107,505						104,742
Financial					150,833						(9,577	)					(2,606	)					163,016						170,627						164,013						184,035
– non-bank financial institutions					60,414						(2,210	)					11,806						50,818						50,523						46,871						44,832
– banks					90,419						(7,367	)					(14,412	)					112,198						120,104						117,142						139,203
Total gross loans and advances					1,024,428						(60,305	)					(14,462	)					1,099,195						1,127,336						1,096,226						1,055,724
Impaired loans and advances to customers					23,758						(1,868	)					(3,657	)					29,283						36,428						38,671						41,584
Impairment allowances on loans and advances to customers					9,555						(1,189	)					(1,593	)					12,337						15,143						16,112						17,511
Loan impairment charge					3,592						(682	)					219						4,055						6,048						8,160						11,505
– new allowances net of allowance releases					4,400						(821	)					211						5,010						7,344						9,306						12,931
– recoveries					(808	)					139						8						(955	)					(1,296	)					(1,146	)					(1,426	)

For footnotes, see page 191.

 

 

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Reconciliation of reported and constant currency impaired loans, allowances and charges by geographical region

 

					31 December 2014 as reported						Currency translation adjustment	18					31 December 2014 at 31 December 2015 exchange rates						Movement – constant currency basis						31 December 2015 as reported						Reported change						Constant currency change
				$m						$m						$m						$m						$m						%						%
Impaired loans
Europe					10,242						(748	)					9,494						183						9,677						(5.5	)					1.9
Asia					2,048						(118	)					1,930						445						2,375						16.0						23.1
Middle East and North Africa					1,981						(19	)					1,962						(196	)					1,766						(10.9	)					(10.0	)
North America					11,694						(71	)					11,623						(2,693	)					8,930						(23.6	)					(23.2	)
Latin America					3,365						(913	)					2,452						(1,422	)					1,030						(69.4	)					(58.0	)
					29,330						(1,869	)					27,461						(3,683	)					23,778						(18.9	)					(13.4	)
Impairment allowances
Europe					4,455						(364	)					4,091						(222	)					3,869						(13.2	)					(5.4	)
Asia					1,356						(64	)					1,292						233						1,525						12.5						18.0
Middle East and North Africa					1,406						(11	)					1,395						23						1,418						0.9						1.6
North America					2,640						(51	)					2,589						(548	)					2,041						(22.7	)					(21.2	)
Latin America					2,529						(702	)					1,827						(1,107	)					720						(71.5	)					(60.6	)
					12,386						(1,192	)					11,194						(1,621	)					9,573						(22.7	)					(14.5	)
Loan impairment charge
Europe					1,079						(134	)					945						(236	)					709						(34.3	)					(25.0	)
Asia					644						(27	)					617						64						681						5.7						10.4
Middle East and North Africa					(1	)					(1	)					(2	)					301						299						–						–
North America					300						(10	)					290						179						469						56.3						61.7
Latin America					2,033						(510	)					1,523						(89	)					1,434						(29.5	)					(5.8	)
					4,055						(682	)					3,373						219						3,592						(11.4	)					6.5

For footnote, see page 191.

Reconciliation of reported and constant currency loan impairment charges to the income statement

 

					31 December 2014 as reported						Currency translation adjustment	18					31 December 2014 at 31 December 2015 exchange rates						Movement – constant currency basis						31 December 2015 as reported						Reported change						Constant currency change
				$m						$m						$m						$m						$m						%						%
Loan impairment charge
Europe					1,079						(134	)					945						(236	)					709						(34.3	)					(25.0	)
– new allowances					2,445						(303	)					2,142						(97	)					2,045						(16.4	)					(4.5	)
– releases					(1,062	)					140						(922	)					(26	)					(948	)					(10.7	)					2.8
– recoveries					(304	)					29						(275	)					(113	)					(388	)					27.6						41.1
Asia					644						(27	)					617						64						681						5.7						10.4
– new allowances					1,115						(61	)					1,054						224						1,278						14.6						21.3
– releases					(318	)					21						(297	)					(135	)					(432	)					35.8						45.5
– recoveries					(153	)					13						(140	)					(25	)					(165	)					7.8						17.9
Middle East and North Africa					(1	)					(1	)					(2	)					301						299						–						–
– new allowances					355						(7	)					348						144						492						38.6						41.4
– releases					(314	)					6						(308	)					148						(160	)					(49.0	)					(48.1	)
– recoveries					(42	)					–						(42	)					9						(33	)					(21.4	)					(21.4	)
North America					300						(10	)					290						179						469						56.3						61.7
– new allowances					908						(20	)					888						(157	)					731						(19.5	)					(17.7	)
– releases					(493	)					8						(485	)					299						(186	)					(62.3	)					(61.6	)
– recoveries					(115	)					2						(113	)					37						(76	)					(33.9	)					(32.7	)
Latin America					2,033						(510	)					1,523						(89	)					1,434						(29.5	)					(5.8	)
– new allowances					2,707						(674	)					2,033						(239	)					1,794						(33.7	)					(11.8	)
– releases					(333	)					69						(264	)					50						(214	)					(35.7	)					(18.9	)
– recoveries					(341	)					95						(246	)					100						(146	)					(57.2	)					(40.7	)
Total					4,055						(682	)					3,373						219						3,592						(11.4	)					6.5
– new allowances					7,530						(1,065	)					6,465						(125	)					6,340						(15.8	)					(1.9	)
– releases					(2,520	)					244						(2,276	)					336						(1,940	)					(23.0	)					(14.8	)
– recoveries					(955	)					139						(816	)					8						(808	)					(15.4	)					(1.0	)

For footnote, see page 191.

 

HSBC HOLDINGS PLC   149

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

Loan impairment charges by industry sector over five years

 

				2015						2014						2013						2012						2011
				$m						$m						$m						$m						$m
Loan impairment charge/(release)
Personal					1,834						1,803						3,196						5,362						9,318
Corporate and commercial					1,769						2,256						2,974						2,802						2,114
Financial					(11	)					(4	)					(122	)					(4	)					73
Year ended 31 December					3,592						4,055						6,048						8,160						11,505
Charge for impairment losses as a percentage of average gross loans and advances to customers
				2015						2014						2013						2012						2011
				%						%						%						%						%
New allowances net of allowance releases					0.48						0.53						0.81						1.00						1.34
Recoveries					(0.09	)					(0.10	)					(0.14	)					(0.12	)					(0.15	)
Total charge for impairment losses					0.39						0.43						0.67						0.88						1.19
Amount written off net of recoveries					0.37						0.58						0.59						0.93						1.14
Movement in impairment allowances over five years
				2015						2014						2013						2012						2011
				$m						$m						$m						$m						$m
Impairment allowances at 1 January					12,386						15,201						16,169						17,636						20,241
Amounts written off					(4,194	)					(6,379	)					(6,655	)					(9,812	)					(12,480	)
– personal					(2,707	)					(3,733	)					(4,367	)					(6,905	)					(10,431	)
– corporate and commercial					(1,473	)					(2,425	)					(2,229	)					(2,677	)					(2,009	)
– financial					(14	)					(221	)					(59	)					(230	)					(40	)
Recoveries of amounts written off in previous years					808						955						1,296						1,146						1,426
– personal					681						818						1,097						966						1,175
– corporate and commercial					124						128						198						172						242
– financial					3						9						1						8						9
Loan impairment charge					3,592						4,055						6,048						8,160						11,505
Exchange and other movements11					(3,019	)					(1,446	)					(1,657	)					(961	)					(3,056	)
Impairment allowances at 31 December					9,573						12,386						15,201						16,169						17,636
Impairment allowances
– individually assessed					5,420						6,244						7,130						6,629						6,662
– collectively assessed					4,153						6,142						8,071						9,540						10,974
Impairment allowances at 31 December					9,573						12,386						15,201						16,169						17,636
				%						%						%						%						%
Amount written off net of recoveries as a percentage of average gross loans and advances to customers					0.4						0.6						0.6						1.0						1.2

For footnote, see page 191.

 

HSBC HOLDINGS PLC   150

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Gross loans and advances to customers by country

 

					First lien residential mortgages $m						Other personal $m	3					Property- related $m						Commercial, international trade and other $m						Total $m
Europe					125,544						44,982						33,579						191,807						395,912
UK					117,346						20,797						25,700						149,327						313,170
France					3,606						12,130						6,070						20,380						42,186
Germany					4						203						347						7,941						8,495
Switzerland					511						8,045						224						834						9,614
Other					4,077						3,807						1,238						13,325						22,447
Asia					94,606						38,101						67,577						157,616						357,900
Hong Kong					60,943						24,389						50,825						80,609						216,766
Australia					9,297						726						1,592						6,448						18,063
India					1,248						431						637						5,728						8,044
Indonesia					56						346						71						4,965						5,438
Mainland China					5,716						1,645						6,185						23,703						37,249
Malaysia					2,792						3,113						1,993						4,947						12,845
Singapore					7,743						5,392						3,334						11,021						27,490
Taiwan					3,866						629						126						5,291						9,912
Other					2,945						1,430						2,814						14,904						22,093
Middle East and North Africa (excluding Saudi Arabia)					2,258						4,447						2,598						21,991						31,294
Egypt					1						549						104						2,097						2,751
UAE					1,854						2,286						1,833						14,199						20,172
Other					403						1,612						661						5,695						8,371
North America					50,117						8,069						16,014						56,690						130,890
US					34,382						4,813						11,435						42,439						93,069
Canada					14,418						3,029						4,315						13,490						35,252
Other					1,317						227						264						761						2,569
Latin America					1,986						3,972						1,622						10,433						18,013
Mexico					1,881						2,828						1,498						7,844						14,051
Other					105						1,144						124						2,589						3,962
At 31 December 2015					274,511						99,571						121,390						438,537						934,009
Europe					131,000						47,531						35,313						200,313						414,157
UK					123,239						21,023						25,927						156,577						326,766
France					2,914						12,820						7,341						21,834						44,909
Germany					6						212						304						7,275						7,797
Switzerland					298						8,149						225						614						9,286
Other					4,543						5,327						1,516						14,013						25,399
Asia					93,147						36,368						70,057						164,739						364,311
Hong Kong					56,656						22,891						52,208						82,362						214,117
Australia					9,154						815						2,130						6,360						18,459
India					1,235						285						613						5,099						7,232
Indonesia					64						469						202						5,476						6,211
Mainland China					4,238						1,981						6,606						24,875						37,700
Malaysia					5,201						1,750						1,988						5,217						14,156
Singapore					9,521						5,878						4,210						11,951						31,560
Taiwan					3,920						626						118						7,057						11,721
Other					3,158						1,673						1,982						16,342						23,155
Middle East and North Africa (excluding Saudi Arabia)					2,647						3,924						2,246						21,633						30,450
Egypt					1						510						98						2,272						2,881
UAE					2,263						1,782						1,545						13,814						19,404
Other					383						1,632						603						5,547						8,165
North America					55,577						9,823						15,492						51,535						132,427
US					37,937						5,482						11,461						38,632						93,512
Canada					16,236						4,085						3,708						11,825						35,854
Other					1,404						256						323						1,078						3,061
Latin America					4,153						9,384						2,572						29,543						45,652
Mexico					1,967						2,642						1,336						9,503						15,448
Other					2,186						6,742						1,236						20,040						30,204
Included in Other: Brazil					2,067						5,531						1,077						16,814						25,489
At 31 December 2014					286,524						107,030						125,680						467,763						986,997

For footnote, see page 191.

 

HSBC HOLDINGS PLC   151

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Report of the Directors: Risk (continued)

Credit risk

    

    

    

 

 

HSBC Holdings – maximum exposure to credit risk

(Audited)

 

				2015																		2014
				Maximum exposure						Offset						Exposure to credit risk (net)						Maximum exposure						Offset						Exposure to credit risk (net)
				$m						$m						$m						$m						$m						$m
Cash at bank and in hand:
– balances with HSBC undertakings					242						–						242						249						–						249
Derivatives					2,467						(2,467	)					–						2,771						(2,610	)					161
Loans and advances to HSBC undertakings					44,350						–						44,350						43,910						–						43,910
Financial investments in HSBC undertakings					4,285						–						4,285						4,073						–						4,073
Other assets					109						–						109
Financial guarantees and similar contracts					68,333						–						68,333						52,023						–						52,023
Loan and other credit-related commitments					–						–						–						16						–						16
At 31 December					119,786						(2,467	)					117,319						103,042						(2,610	)					100,432

 

 

HSBC HOLDINGS PLC   152

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Carrying amount of HSBC’s consolidated holdings of ABSs

 

				Trading						Available for sale						Held to maturity						Designated at fair value through profit or loss						Loans and receivables						Total						Of which held through consolidated SEs
				$m						$m						$m						$m						$m						$m						$m
Mortgage-related assets:
Sub-prime residential					73						2,247						–						1						132						2,453						1,075
US Alt-A residential					–						1,989						7						–						55						2,051						1,796
US Government agency and sponsored enterprises:
MBSs					166						15,082						13,997						–						–						29,245						–
Other residential					812						780						–						–						108						1,700						253
Commercial property					590						2,308						–						–						201						3,099						1,656
Leveraged finance-related assets					240						2,294						–						–						149						2,683						1,310
Student loan-related assets					236						2,991						–						–						25						3,252						2,679
Other assets					1,184						880						–						23						128						2,215						565
At 31 December 2015					3,301						28,571						14,004						24						798						46,698						9,334
Mortgage-related assets:
Sub-prime residential					122						3,081						–						–						308						3,511						2,075
US Alt-A residential					96						3,022						11						–						110						3,239						2,411
US Government agency and sponsored enterprises:
MBSs					82						10,401						13,436						–						–						23,919						–
Other residential					928						1,220						–						–						330						2,478						652
Commercial property					654						3,627						–						–						516						4,797						2,854
Leveraged finance-related assets					172						3,660						–						–						218						4,050						2,526
Student loan-related assets					242						3,545						–						–						119						3,906						3,284
Other assets					1,264						1,114						–						19						646						3,043						758
At 31 December 2014					3,560						29,670						13,447						19						2,247						48,943						14,560

 

HSBC HOLDINGS PLC   153

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HSBC HOLDINGS PLC   153a

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Report of the Directors: Financial Review (continued)

    

    

    

 

 

HSBC HOLDINGS PLC   153b

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				2015 $m						2014 $m						2013 $m						2012 $m						2011 $m
Impaired loans
Europe					9,677						10,242						13,228						11,145						11,819
Asia					2,375						2,048						1,623						1,624						1,678
Middle East and North Africa					1,766						1,981						2,285						2,474						2,445
North America					8,930						11,694						15,123						20,345						22,758
Latin America					1,030						3,365						4,244						3,188						3,039
					23,778						29,330						36,503						38,776						41,739
Unimpaired loans contractually more than 90 days past due as to principal or interest
Europe					7						6						25						33						41
Asia					2						1						33						14						24
Middle East and North Africa					96						59						56						108						214
North America					27						3						13						69						74
Latin America					–						3						–						–						10
					132						72						127						224						363
Troubled debt restructurings (not included in the classifications above)
Europe					1,495						1,652						1,427						1,306						753
Asia					284						267						277						236						230
Middle East and North Africa					584						778						406						593						444
North America					3,698						3,932						4,643						3,813						2,300
Latin America					164						353						482						1,001						1,037
					6,225						6,982						7,235						6,949						4,764
Trading loans classified as in default
North America					–						4						133						166						230
Risk elements on loans57
Europe					11,179						11,900						14,680						12,484						12,613
Asia					2,661						2,316						1,933						1,874						1,932
Middle East and North Africa					2,446						2,818						2,747						3,175						3,103
North America					12,655						15,633						19,912						24,393						25,362
Latin America					1,194						3,721						4,726						4,189						4,086
					30,135						36,388						43,998						46,115						47,096
Assets held for resale57
Europe					24						29						46						51						60
Asia					19						14						10						19						14
Middle East and North Africa					–						–						–						–						–
North America					116						186						370						319						359
Latin America					20						16						27						55						69
					179						245						453						444						502
Total risk elements56
Europe					11,203						11,929						14,726						12,535						12,673
Asia					2,680						2,330						1,943						1,893						1,946
Middle East and North Africa					2,446						2,818						2,747						3,175						3,103
North America					12,771						15,819						20,282						24,712						25,721
Latin America					1,214						3,737						4,753						4,244						4,155
At 31 December					30,314						36,633						44,451						46,559						47,598
				%						%						%						%						%
Loan impairment allowances as a percentage of risk elements on loans58					31.8						34.0						34.7						35.2						37.6

For footnotes, see page 192a.

 

HSBC HOLDINGS PLC   153c

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Report of the Directors: Financial Review (continued)

    

    

    

 

 

In-country foreign currency and cross-border amounts outstanding

 

				Banks						Government and official institutions						Other						Total
				$bn						$bn						$bn						$bn
At 31 December 2015
US					4.7						51.3						24.7						80.7
Mainland China					21.2						6.8						26.0						54.0
UK					23.1						9.2						25.3						57.6
Germany					7.0						23.1						6.9						37.0
Hong Kong					3.1						0.5						30.0						33.6
Japan					7.6						19.4						14.4						41.4
France60					4.2						7.1						13.0						24.3
Canada60					6.2						8.3						7.5						22.0
At 31 December 2014
US					6.8						30.3						32.4						69.5
Mainland China					26.5						5.7						28.5						60.7
UK					24.0						8.3						41.8						74.2
Germany					7.7						26.6						6.7						41.0
Hong Kong					8.1						0.4						29.0						37.5
Japan					9.0						15.7						12.2						36.9
France					7.3						3.1						11.6						22.1
At 31 December 2013
US					10.0						2.3						42.5						54.8
UK					5.9						34.3						24.5						64.7
Mainland China					28.8						6.9						19.3						55.0
Germany					10.0						12.9						31.9						54.8
France					12.8						21.1						5.6						39.5
Hong Kong					10.9						0.7						26.5						38.1
Japan					7.2						14.8						7.0						29.0
Ireland					6.2						8.7						11.2						26.1

For footnote, see page 192a.

 

HSBC HOLDINGS PLC   153d

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Report of the Directors: Risk (continued)

Liquidity and funding

    

    

    

 

Liquidity and funding

 

			Page				App	1		Tables			Page
Liquidity and funding			155				204
Primary sources of funding							204
Liquidity and funding in 2015			155
Wholesale senior funding markets			155
Liquidity regulation			155
Liquidity coverage ratio – EC LCR Delegated Regulation			155							Operating entities’ LCRs			156
Management of liquidity and funding risk			156				204
Forward-looking framework			156
2015 framework			156
Inherent liquidity risk categorisation							204
Core deposits							204
Advances to core funding ratio			156				205			Advances to core funding ratios			157
Stressed coverage ratios			157				205			Stressed one-month and three-month coverage ratios			157
Stressed scenario analysis							205
Liquid assets of HSBC’s principal operating entities			157				206			Liquid assets of HSBC’s principal entities			158
Net contractual cash flows			158				206			Net cash inflows/(outflows) for interbank loans and intra-Group deposits and reverse repo, repo and short positions			159
Wholesale debt monitoring							207
Liquidity behaviouralisation							207
Funds transfer pricing							207
Contingent liquidity risk arising from committed lending facilities			159							The Group’s contractual undrawn exposures monitored under the contingent liquidity risk limit structure			159
Sources of funding			159
Repos and stock lending							208			Funding sources and uses			160
Cross-border intra-Group and cross-currency liquidity and funding risk			160							Advances to core funding ratios by material currency			160
Wholesale term debt maturity profile			162							Wholesale funding cash flows payable by HSBC under financial  liabilities by remaining contractual maturities			161
Analysis of on-balance sheet encumbered and unencumbered assets and off-balance sheet collateral			162				209
On-balance sheet encumbered and unencumbered assets			162
Off-balance sheet collateral			162							Analysis of on-balance sheet encumbered and unencumbered assets			163
Additional contractual obligations			164
Contractual maturity of financial liabilities			164							Cash flows payable by HSBC under financial liabilities by remaining contractual maturities			164
Management of cross-currency liquidity and funding risk							210
HSBC Holdings			165				210			Cash flows payable by HSBC Holdings under financial liabilities  by remaining contractual maturities			165
1 Appendix to Risk – risk policies and practices.

 

HSBC HOLDINGS PLC   154

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HSBC HOLDINGS PLC   155

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Report of the Directors: Risk (continued)

Liquidity and funding

    

    

    

 

 

HSBC HOLDINGS PLC   156

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Stressed one-month and three-month coverage ratios²³

 

				Stressed one-month coverage ratios at 31 December								Stressed three-month coverage ratios at 31 December
				2015				2014				2015				2014
				%				%				%				%
HSBC UK liquidity group19
Year-end					113				117				105				109
Maximum					127				117				114				109
Minimum					112				102				105				103
Average					117				107				108				104
The Hongkong and Shanghai Banking Corporation20
Year-end					129				117				120				112
Maximum					129				119				120				114
Minimum					113				114				111				111
Average					119				116				115				112
HSBC USA21
Year-end					126				111				116				104
Maximum					126				122				116				111
Minimum					109				108				101				104
Average					117				115				108				107
Total of HSBC’s other principal entities24
Year-end					126				122				111				108
Maximum					126				126				111				120
Minimum					110				114				105				108
Average					116				118				108				111

For footnotes, see page 191.

 

 

HSBC HOLDINGS PLC   157

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Report of the Directors: Risk (continued)

Liquidity and funding

    

    

    

 

 

Liquid assets of HSBC’s principal entities

 

				Estimated liquidity value25
				31 December 2015						31 December 2014
				$m						$m
HSBC UK liquidity group19
Level 1					118,193						131,756
Level 2					4,722						4,688
Level 3					59,378						66,011
					182,293						202,455
The Hongkong and Shanghai Banking Corporation20
Level 1					132,870						109,683
Level 2					6,029						4,854
Level 3					7,346						7,043
					146,245						121,580
HSBC USA21
Level 1					42,596						51,969
Level 2					11,798						15,184
Level 3					9						197
Other					5,557						9,492
					59,960						76,842
Total of HSBC’s other principal entities24
Level 1					108,789						115,770
Level 2					10,764						7,940
Level 3					5,486						9,360
					125,039						133,070

For footnotes, see page 191.

 

 

HSBC HOLDINGS PLC   158

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Net cash inflows/(outflows) for interbank and intra-Group loans and deposits and reverse repo, repo and short positions

 

				At 31 December 2015										At 31 December 2014
				Cash flows     within 1 month				Cash flows from 1 to 3 months						Cash flows     within 1 month				Cash flows from 1 to 3 months
				$m				$m						$m				$m
Interbank and intra-Group loans and deposits
HSBC UK liquidity group19					(18,534	)			(3,712	)					(14,110	)			(2,846	)
The Hongkong and Shanghai Banking Corporation20					3,702				6,027						(1,277	)			6,862
HSBC USA21					(12,432	)			937						(18,353	)			1,648
Total of HSBC’s other principal entities24					2,875				6,123						(1,522	)			7,310
Reverse repo, repo, stock borrowing, stock lending and outright short positions (including intra-Group)
HSBC UK liquidity group19					(16,861	)			1,313						(16,070	)			11,551
The Hongkong and Shanghai Banking Corporation20					15,068				12,326						8,139				8,189
HSBC USA21					19,431				–						(4,928	)			–
Total of HSBC’s other principal entities24					(22,571	)			5,240						(33,235	)			(11,528	)

For footnotes, see page 191.

 

 

The Group’s contractual undrawn exposures at 31 December monitored under the contingent liquidity risk limit structure

(Audited)

 

				HSBC UK liquidity group19										HSBC USA21										HSBC Canada22										The Hongkong and Shanghai Banking Corporation20
				2015				2014						2015				2014						2015				2014						2015				2014
				$bn				$bn						$bn				$bn						$bn				$bn						$bn				$bn
Commitments to conduits
Consolidated multi-seller conduits
– total lines					13.4				9.8						3.3				2.3						0.2				0.2						–				–
– largest individual lines					0.4				0.9						0.5				0.5						0.1				0.2						–				–
Consolidated securities investment conduits – total lines					8.2				11.1						–				–						–				–						–				–
Third-party conduits – total lines					–				–						0.1				0.1						–				–						–				–
Commitments to customers
– five largest26					4.9				2.6						6.4				7.1						1.4				1.7						1.7				1.5
– largest market sector27					17.9				16.6						9.7				10.0						3.4				3.5						3.4				3.2

For footnotes, see page 191.

 

 

HSBC HOLDINGS PLC   159

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Report of the Directors: Risk (continued)

Liquidity and funding

    

    

    

 

 

HSBC HOLDINGS PLC   160

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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					19,447						11,803						20,565						6,712						5,274						20,150						43,463						27,398						154,812
– unsecured CDs and CP					5,830						8,426						11,250						2,944						1,224						955						108						10						30,747
– unsecured senior MTNs					4,229						2,240						7,130						2,687						1,711						10,850						27,239						18,407						74,493
– unsecured senior structured notes					883						964						1,544						875						2,166						4,158						9,741						5,262						25,593
– secured covered bonds					–						–						–						–						–						2,074						1,619						2,577						6,270
– secured asset-backed commercial paper					8,414						–						–						–						–						–						–						–						8,414
– secured ABS					20						173						195						206						173						313						1,554						114						2,748
– others					71						–						446						–						–						1,800						3,202						1,028						6,547
Subordinated liabilities					–						816						–						–						34						648						6,826						34,423						42,747
– subordinated debt securities					–						–						–						–						34						648						6,338						32,494						39,514
– preferred securities					–						816						–						–						–						–						488						1,929						3,233
At 31 December 2015					19,447						12,619						20,565						6,712						5,308						20,798						50,289						61,821						197,559
Debt securities issued					17,336						17,161						19,030						9,352						9,055						27,312						40,855						31,928						172,029
– unsecured CDs and CP					5,637						9,337						9,237						4,793						3,010						3,506						4,158						185						39,863
– unsecured senior MTNs					1,300						5,679						7,684						2,922						4,794						17,676						23,523						20,715						84,293
– unsecured senior structured notes					1,363						1,082						2,049						1,149						979						4,757						8,444						6,789						26,612
– secured covered bonds					–						–						–						205						–						–						2,765						2,942						5,912
– secured asset-backed commercial paper					8,602						–						–						–						–						–						–						–						8,602
– secured ABS					212						1,063						60						283						272						915						1,562						–						4,367
– others					222						–						–						–						–						458						403						1,297						2,380
Subordinated liabilities					–						150						–						3						185						113						5,556						40,487						46,494
– subordinated debt securities					–						150						–						3						185						113						5,556						34,750						40,757
– preferred securities					–						–						–						–						–						–						–						5,737						5,737
At 31 December 2014					17,336						17,311						19,030						9,355						9,240						27,425						46,411						72,415						218,523

 

HSBC HOLDINGS PLC   161

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Report of the Directors: Risk (continued)

Liquidity and funding

    

    

    

 

 

HSBC HOLDINGS PLC   162

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Analysis of on-balance sheet encumbered and unencumbered assets

 

				Assets encumbered as a result of transactions with counterparties other than central banks																								Unencumbered assets not positioned at central banks
				As a         result of covered bonds						As a result of  securitisations						Other						Assets positioned at central banks (i.e. pre- positioned plus encumbered)						Assets readily available for encumbrance						Other assets capable of being encumbered						Reverse repos/stock borrowing receivables  and derivative assets						Assets that cannot be   encumbered						Total
				$m						$m						$m						$m						$m						$m						$m						$m						$m
Cash and balances at central banks					–						–						–						98						95,545						350						–						2,941						98,934
Items in the course of collection from other banks					–						–						–						–						–						–						–						5,768						5,768
Hong Kong Government certificates of indebtedness					–						–						–						–						–						–						–						28,410						28,410
Trading assets					–						–						31,605						1,573						138,070						8,269						7,520						37,800						224,837
– Treasury and other eligible bills					–						–						1,099						984						5,618						128						–						–						7,829
– Debt securities					–						–						25,890						492						72,377						233						–						46						99,038
– Equity securities					–						–						4,616						–						59,430						2,445						–						–						66,491
– Loans and advances to banks					–						–						–						–						456						2,890						2,763						16,194						22,303
– Loans and advances to customers					–						–						–						97						189						2,573						4,757						21,560						29,176
Financial assets designated at fair value					–						–						–						–						1,775						1,244						–						20,833						23,852
– Treasury and other eligible bills					–						–						–						–						258						–						–						138						396
– Debt securities					–						–						–						–						1,327						265						–						2,749						4,341
– Equity securities					–						–						–						–						178						979						–						17,838						18,995
– Loans and advances to banks and customers					–						–						–						–						12						–						–						108						120
Derivatives					–						–						–						–						–						–						288,476						–						288,476
Loans and advances to banks					–						1,329						–						1,702						2,054						61,992						815						22,509						90,401
Loans and advances to customers					6,947						15,288						6,848						20,683						60,031						792,650						1,531						20,476						924,454
Reverse repurchase agreements - non-trading					–						–						–						–						–						–						146,255						–						146,255
Financial investments					–						–						25,078						8,150						325,101						14,753						–						55,873						428,955
– Treasury and other eligible bills					–						–						509						3,675						98,866						1,177						–						324						104,551
– Debt securities					–						–						24,561						4,475						224,355						11,124						–						54,054						318,569
– Equity securities					–						–						8						–						1,880						2,452						–						1,495						5,835
Prepayments, accrued income and other assets					–						–						63						–						4,685						65,190						–						28,360						98,298
Current tax assets					–						–						–						–						–						–						–						1,221						1,221
Interest in associates and joint ventures					–						–						–						–						51						18,794						–						294						19,139
Goodwill and intangible assets					–						–						–						–						–						–						–						24,605						24,605
Deferred tax					–						–						–						–						–						–						–						6,051						6,051
At 31 December 2015					6,947						16,617						63,594						32,206						627,312						963,242						444,597						255,141						2,409,656

 

HSBC HOLDINGS PLC   163

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Report of the Directors: Risk (continued)

Liquidity and funding

    

    

    

 

 

Cash flows payable by HSBC under financial liabilities by remaining contractual maturities

(Audited)

 

				On             demand $m						Due within 3 months $m						Due between 3   and 12 months $m						Due between   1 and 5 years $m						Due after 5 years $m
Deposits by banks					42,182						6,643						1,452						4,029						107
Customer accounts					1,076,595						160,368						43,289						10,964						263
Repurchase agreements – non-trading					13,181						64,109						2,144						535						543
Trading liabilities					141,614						–						–						–						–
Financial liabilities designated at fair value					327						4,077						6,149						24,642						41,365
Derivatives					276,141						255						970						1,721						1,652
Debt securities in issue					377						25,910						23,886						35,499						6,993
Subordinated liabilities					–						803						971						10,151						28,132
Other financial liabilities					59,298						17,476						7,226						10,188						1,014
					1,609,715						279,641						86,087						97,729						80,069
Loan and other credit-related commitments					425,000						93,149						73,115						60,078						15,089
Financial guarantees and similar contracts					12,579						5,727						15,091						9,915						2,805
At 31 December 2015					2,047,294						378,517						174,293						167,722						97,963
Deposits by banks					52,682						17,337						3,600						3,580						390
Customer accounts					1,088,769						187,207						61,687						15,826						390
Repurchase agreements – non-trading					8,727						91,542						6,180						23						1,057
Trading liabilities					190,572						–						–						–						–
Financial liabilities designated at fair value					365						2,201						9,192						28,260						39,397
Derivatives					335,168						375						1,257						4,231						1,517
Debt securities in issue					9						32,513						30,194						37,842						7,710
Subordinated liabilities					–						737						1,256						10,003						42,328
Other financial liabilities					41,517						23,228						4,740						1,893						988
					1,717,809						355,140						118,106						101,658						93,777
Loan and other credit-related commitments					406,561						101,156						64,582						62,312						16,769
Financial guarantees and similar contracts					13,166						6,306						13,753						9,575						4,278
At 31 December 2014					2,137,536						462,602						196,441						173,545						114,824

 

HSBC HOLDINGS PLC   164

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Cash flows payable by HSBC Holdings under financial liabilities by remaining contractual maturities

(Audited)

				On       demand						Due within 3 months						Due between 3 and 12 months						Due between 1 and 5 years						Due after 5 years
				$m						$m						$m						$m						$m
Amounts owed to HSBC undertakings					257						1,375						424						110						–
Financial liabilities designated at fair value					–						1,145						655						5,202						20,779
Derivatives					2,065						–						–						213						–
Debt securities in issue					–						15						47						250						1,176
Subordinated liabilities					–						229						699						5,149						25,474
Other financial liabilities					–						1,426						152						–						–
					2,322						4,190						1,977						10,924						47,429
Loan commitments					–						–						–						–						–
Financial guarantees and similar contracts					68,333						–						–						–						–
At 31 December 2015					70,655						4,190						1,977						10,924						47,429
Amounts owed to HSBC undertakings					1,441						985						42						449						–
Financial liabilities designated at fair value					–						210						642						6,345						19,005
Derivatives					1,066						–						–						103						–
Debt securities in issue					–						16						50						263						1,303
Subordinated liabilities					–						252						770						5,815						28,961
Other financial liabilities					–						1,132						158						–						–
					2,507						2,595						1,662						12,975						49,269
Loan commitments					16						–						–						–						–
Financial guarantees and similar contracts					52,023						–						–						–						–
At 31 December 2014					54,546						2,595						1,662						12,975						49,269

 

HSBC HOLDINGS PLC   165

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Report of the Directors: Risk (continued)

Market risk

    

    

    

 

Market risk

 

		Page				App1		Tables		Page
Market risk in 2015			167
Market risk in global businesses						211		Types of risk by global business			211
Market risk governance						211
Market risk measures						212
Monitoring and limiting market risk exposures			167			212
Sensitivity analysis			167			212
Value at risk			167			212
Stress testing			167			213		Market risk stress testing			213
Trading portfolios			167			213
Volcker Rule						213
Value at risk of the trading portfolios			167					Daily VaR (trading portfolios)			168
								Trading VaR			168
Back-testing			168			214		Back-testing of trading VaR against hypothetical profit and loss for the Group			168
Gap risk						214
De-peg risk						214
ABS/MBS exposures						214
Non-trading portfolios			169			214
Value at risk of the non-trading portfolios			169					Daily VaR (non-trading portfolios)			169
								Non-trading VaR			169
Equity securities classified as available for sale			169			215		Fair value of equity securities			169
Market risk balance sheet linkages			170					Balances included and not included in trading VaR			170
								Market risk linkages to the accounting balance sheet			171
Structural foreign exchange exposures			171			215
Non-trading interest rate risk			171			215
Interest rate risk behaviouralisation			172			215
Balance Sheet Management						216
Third-party assets in Balance Sheet Management			172					Third-party assets in Balance Sheet Management			172
Sensitivity of net interest income			172			216		Sensitivity of projected net interest income			173
Sensitivity of capital and reserves			173					Sensitivity of cash flow hedging reported reserves to interest rate movements			173
Defined benefit pension schemes			174			216
Additional market risk measures applicable only to the parent company			174			216
Foreign exchange risk			174					HSBC Holdings – foreign exchange VaR			174
Sensitivity of net interest income			174					Sensitivity of HSBC Holdings net interest income to interest  rate movements			174
Interest rate repricing gap table			175					Repricing gap analysis of HSBC Holdings			175
1 Appendix to Risk – risk policies and practices.

 

HSBC HOLDINGS PLC   166

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HSBC HOLDINGS PLC   167

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Report of the Directors: Risk (continued)

Market risk

    

    

    

 

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 day²⁹

(Audited)

 

				Foreign exchange (FX)				Interest rate				Equity				Credit spread				Portfolio
					and commodity				(IR)				(EQ)				(CS)				diversification	30			Total	31
				$m				$m				$m				$m				$m				$m
At 31 December 2015					8.0				34.9				21.4				13.9				(24.9	)			53.3
Average					14.7				46.0				19.6				15.5				(35.7	)			60.1
Maximum					25.4				57.0				29.0				23.3								77.9
Minimum					6.3				32.6				11.9				9.8								47.5
At 31 December 2014					9.8				45.4				7.3				12.5				(14.3	)			60.7
Average					16.9				39.5				6.9				13.7				(17.8	)			59.2
Maximum					34.2				50.6				15.6				20.9								77.8
Minimum					8.7				26.9				3.2				8.8								38.5

For footnotes, see page 192.

 

 

Back-testing of trading VaR against hypothetical profit and loss for the Group ($m)

 

 

HSBC HOLDINGS PLC   168

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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 (IR)				Credit Spread (CS)				Portfolio diversification				Total
				$m				$m				$m				$m
At 31 December 2015					114.1				72.7				(54.0	)			132.8
Average					97.5				65.7				(42.0	)			121.2
Maximum					131.5				89.4								156.8
Minimum					70.5				52.1								91.5
At 31 December 2014					88.2				62.5				(28.5	)			122.2
Average					103.3				73.3				(37.4	)			139.2
Maximum					147.7				91.9								189.0
Minimum					83.3				49.6								92.3

 

 

HSBC HOLDINGS PLC   169

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Report of the Directors: Risk (continued)

Market risk

    

    

    

 

Balances included and not included in trading VaR

 

				Balance sheet				Balances included in trading VaR				Balances not included in trading VaR				Primary market risk sensitivities
				$m				$m				$m
At 31 December 2015
Assets
Cash and balances at central banks					98,934								98,934				B
Trading assets					224,837				203,194				21,643				A
Financial assets designated at fair value					23,852								23,852				A
Derivatives					288,476				282,972				5,504				A
Loans and advances to banks					90,401								90,401				B
Loans and advances to customers					924,454								924,454				B
Reverse repurchase agreements – non-trading					146,255								146,255				C
Financial investments					428,955								428,955				A
Liabilities
Deposits by banks					54,371								54,371				B
Customer accounts					1,289,586								1,289,586				B
Repurchase agreements – non-trading					80,400								80,400				C
Trading liabilities					141,614				130,427				11,187				A
Financial liabilities designated at fair value					66,408								66,408				A
Derivatives					281,071				275,007				6,064				A
Debt securities in issue					88,949								88,949				C

The table represents account lines where there is some exposure to market risk according to the following asset classes:

A	Foreign exchange, interest rate, equity and credit spread.

B	Foreign exchange and interest rate.

C	Foreign exchange, interest rate and credit spread.

 

 

HSBC HOLDINGS PLC   170

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Market risk linkages to the accounting balance sheet

 

Trading assets and liabilities   The Group’s trading assets and liabilities are in almost all cases originated by GB&M. The assets and liabilities are classified as held for trading if they have been acquired or incurred principally for the purpose of selling or repurchasing in the near term, or form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. 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.   Financial assets designated at fair value   Financial assets designated at fair value within HSBC are predominantly held within the Insurance entities. The majority of these assets are linked to policyholder liabilities for either unit-linked or insurance and investment contracts with DPF. The risks of these assets largely offset the market risk on the liabilities under the policyholder contracts, and are risk managed on a non-trading basis.   Financial liabilities designated at fair value   Financial liabilities designated at fair value within HSBC are primarily fixed-rate securities issued by HSBC entities for funding purposes. An accounting mismatch would arise if the debt securities were accounted for at amortised cost because the derivatives which economically hedge market risks on the securities would be accounted for at fair value with changes recognised in the income statement. The market risks of these liabilities are treated as non-traded risk, the principal risks being interest rate and/or foreign exchange risks. We also incur liabilities to customers under investment contracts, where the liabilities on unit-linked contracts are based on the fair value of assets within the unit-linked funds. The exposures on these funds are treated as non-traded risk and the principal risks are those of the underlying assets in the funds.   Derivative assets and liabilities   We undertake derivative activity for three primary purposes; to create risk management solutions for clients, to manage the portfolio risks arising from client business and to manage and hedge our own risks. Most of our derivative exposures arise from sales and trading activities within GB&M and are treated as traded risk for market risk management purposes. Within derivative assets and liabilities there are portfolios of derivatives which are not risk managed on a trading intent basis and are treated as non-traded risk for VaR measurement		purposes. These arise when the derivative was entered into in order to manage risk arising from non-traded exposures. They include non-qualifying hedging derivatives and derivatives qualifying for fair value and cash flow hedge accounting. The use of non-qualifying hedges whose primary risks relate to interest rate and foreign exchange exposure is described on page 171. Details of derivatives in fair value and cash flow hedge accounting relationships are given in Note 16 on the Financial Statements. Our primary risks in respect of these instruments relate to interest rate and foreign exchange risks.   Loans and advances to customers   The primary risk on assets within loans and advances to customers is the credit risk of the borrower. The risk of these assets is treated as non-trading risk for market risk management purposes.   Financial investments   Financial investments include assets held on an available-for-sale and held-to-maturity basis. An analysis of the Group’s holdings of these securities by accounting classification and issuer type is provided in Note 17 on the Financial Statements and by business activity on page 398. The majority of these securities are mainly held within Balance Sheet Management in GB&M. The positions which are originated in order to manage structural interest rate and liquidity risk are treated as non-trading risk for the purposes of market risk management. Available-for-sale security holdings within insurance entities are treated as non-trading risk and are largely held to back non-linked insurance policyholder liabilities.   The other main holdings of available-for-sale assets are the ABSs within GB&M’s legacy credit business, which are treated as non-trading risk for market risk management purposes, the principal risk being the credit risk of the obligor.   The Group’s held-to-maturity securities are principally held within the Insurance business. Risks of held-to-maturity assets are treated as non-trading for risk management purposes.   Repurchase (repo) and reverse repurchase (reverse repo) agreements non-trading   Reverse repo agreements, classified as assets, are a form of collateralised lending. HSBC lends cash for the term of the reverse repo in exchange for receiving collateral (normally in the form of bonds).   Repo agreements, classified as liabilities, are the opposite of reverse repos, allowing HSBC to obtain funding by providing collateral to the lender.   Both transaction types are treated as non-trading risk for market risk management and the primary risk is counterparty credit risk.

 

 

HSBC HOLDINGS PLC   171

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Report of the Directors: Risk (continued)

Market risk

    

    

    

 

 

HSBC HOLDINGS PLC   172

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Sensitivity of net interest income³⁴

(Audited)

 

				US dollar bloc $m				Rest of Americas bloc $m				Hong Kong dollar bloc $m				Rest of Asia bloc $m				Sterling bloc $m				Euro bloc $m				Total $m
Change in 2015 net interest income arising from a shift in yield curves of:
+25 basis points at the beginning of each quarter					410				72				217				369				135				49				1,251
–25 basis points at the beginning of each quarter					(691	)			(74	)			(645	)			(290	)			(528	)			(30	)			(2,258	)
Change in 2014 net interest income arising from a shift in yield curves of:
+25 basis points at the beginning of each quarter					209				(9	)			245				265				321				(146	)			885
–25 basis points at the beginning of each quarter					(521	)			(1	)			(494	)			(259	)			(783	)			(31	)			(2,089	)

For footnote, see page 191.

 

 

Sensitivity of cash flow hedging reported reserves to interest rate movements

 

				$m				Maximum impact $m				Minimum impact $m
At 31 December 2015
+ 100 basis point parallel move in all yield curves					(1,235	)			(1,259	)			(1,137	)
As a percentage of total shareholders’ equity					(0.66%	)			(0.67%	)			(0.60%	)
– 100 basis point parallel move in all yield curves					1,224				1,232				1,133
As a percentage of total shareholders’ equity					0.65%				0.65%				0.60%
At 31 December 2014
+ 100 basis point parallel move in all yield curves					(1,260	)			(1,478	)			(1,131	)
As a percentage of total shareholders’ equity					(0.66%	)			(0.78%	)			(0.60%	)
– 100 basis point parallel move in all yield curves					1,232				1,463				1,126
As a percentage of total shareholders’ equity					0.65%				0.77%				0.59%

 

HSBC HOLDINGS PLC   173

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Report of the Directors: Risk (continued)

Market risk

    

    

    

 

 

Sensitivity of HSBC Holdings’ net interest income to interest rate movements³⁴

 

				US dollar bloc				Sterling bloc				Euro bloc				Total
				$m				$m				$m				$m
Change in projected net interest income as at 31 December arising from a shift in yield curves
2015 of + 25 basis points at the beginning of each quarter
0-1 year					57				15				–				72
2-3 years					118				43				7				168
4-5 years					(23	)			43				(12	)			8
of – 25 basis points at the beginning of each quarter
0-1 year					(57	)			(14	)			(6	)			(77	)
2-3 years					(118	)			(43	)			(22	)			(183	)
4-5 years					23				(43	)			15				(5	)
2014 of + 25 basis points at the beginning of each quarter
0-1 year					78				9				2				89
2-3 years					281				17				34				332
4-5 years					138				17				24				179
of – 25 basis points at the beginning of each quarter
0-1 year					(58	)			(9	)			(1	)			(68	)
2-3 years					(276	)			(16	)			(12	)			(304	)
4-5 years					(138	)			(17	)			(12	)			(167	)

For footnote, see page 191.

 

 

HSBC HOLDINGS PLC   174

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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
				$m						$m						$m						$m						$m						$m
Cash at bank and in hand:
– balances with HSBC undertakings					242						242						–						–						–						–
Derivatives					2,467						–						–						–						–						2,467
Loans and advances to HSBC undertakings					44,350						42,661						279						405						–						1,005
Financial investments in HSBC undertakings					4,285						2,985						–						731						–						569
Investments in subsidiaries					97,770						–						–						–						–						97,770
Other assets					1,080						–						109						–						–						971
Total assets					150,194						45,888						388						1,136												102,782
Amounts owed to HSBC undertakings					(2,152	)					(781	)					–						–						–						(1,371	)
Financial liabilities designated at fair values					(19,853	)					(1,741	)					(3,239	)					(7,032	)					(4,312	)					(3,628	)
Derivatives					(2,278	)					–						–						–						–						(2,278	)
Debt securities in issue					(960	)					–						–						(963	)					–						3
Other liabilities					(15,895	)					–						(3,374	)					(3,500	)					(9,119	)					98
Subordinated liabilities					(1,642	)					–						–						–						–						(1,642	)
Total equity					(107,414	)					–						–						–						–						(107,414	)
Total liabilities and equity					(150,194	)					(2,522	)					(6,613	)					(11,495	)					(13,332	)					(116,232	)
Off-balance sheet items attracting interest rate sensitivity					–						(22,748	)					5,351						10,722						5,763						912
Net interest rate risk gap at 31 December 2015					–						20,618						(874	)					363						(7,569	)					(12,538	)
Cumulative interest rate gap					–						20,618						19,744						20,107						12,538						–
Cash at bank and in hand:
– balances with HSBC undertakings					249						–						–						–						–						249
Derivatives					2,771						–						–						–						–						2,771
Loans and advances to HSBC undertakings					43,910						41,603						290						1,093						–						924
Financial investments in HSBC undertakings					4,073						3,010						–						731						–						332
Investments in subsidiaries					96,264						–						–						–						–						96,264
Other assets					597						–						–						–						–						597
Total assets					147,864						44,613						290						1,824						–						101,137
Amounts owed to HSBC undertakings					(2,892	)					(1,877	)					–						–						–						(1,015	)
Financial liabilities designated at fair values					(18,679	)					(850	)					(5,472	)					(5,400	)					(4,263	)					(2,694	)
Derivatives					(1,169	)					–						–						–						–						(1,169	)
Debt securities in issue					(1,009	)					–						–						(1,013	)					–						4
Other liabilities					(1,415	)					–						–						–						–						(1,415	)
Subordinated liabilities					(17,255	)					(779	)					(3,766	)					(2,000	)					(10,195	)					(515	)
Total equity					(105,445	)					–						–						–						–						(105,445	)
Total liabilities and equity					(147,864	)					(3,506	)					(9,238	)					(8,413	)					(14,458	)					(112,249	)
Off-balance sheet items attracting interest rate sensitivity					–						(21,525	)					7,295						7,400						5,763						1,067
Net interest rate risk gap at 31 December 2014					–						19,582						(1,653	)					811						(8,695	)					(10,045	)
Cumulative interest rate gap					–						19,582						17,929						18,740						10,045						–

 

HSBC HOLDINGS PLC   175

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Report of the Directors: Risk (continued)

Operational risk

    

    

    

 

Operational risk

 

		Page				App1				Tables		Page
Operational risk			176				217
Operational risk management framework			176							Key components of HSBC’s ORMF			176
Three lines of defence			177
Operational risk in 2015			177
Frequency and amount of operational risk losses			177							Frequency of operational risk incidents by risk category			178
										Distribution of operational risk losses in US dollars by risk category			178
Compliance risk			178				217
Legal risk							218
Global security and fraud risk							218
Systems risk							219
Vendor risk management							219
1 Appendix to Risk – risk policies and practices.

 

 

Key components of HSBC’s ORMF

 

 

HSBC HOLDINGS PLC   176

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HSBC HOLDINGS PLC   177

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Report of the Directors: Risk (continued)

Operational risk

    

    

    

 

 

HSBC HOLDINGS PLC   178

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HSBC HOLDINGS PLC   179

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Report of the Directors: Risk (continued)

Risk management of insurance operations

    

    

    

 

Risk management of insurance operations

 

		Page				App1				Tables		Page
HSBC’s bancassurance model			180
Overview of insurance products							219
Nature and extent of risks							220
Risk management of insurance manufacturing operations in 2015			181
Asset and liability matching			181							Balance sheet of insurance manufacturing subsidiaries by:
										– type of contract			181
										– geographical region			182
										Movement in total equity of insurance operations			183
Financial risks			183				220			Financial assets held by insurance manufacturing subsidiaries			184
Market risk			184				220			Financial return guarantees			185
										Sensitivity of HSBC’s insurance manufacturing subsidiaries to market risk factors			185
Credit risk			185				222			Treasury bills, other eligible bills and debt securities in HSBC’s insurance manufacturing subsidiaries			186
										Reinsurers’ share of liabilities under insurance contracts			187
Liquidity risk			187				222			Expected maturity of insurance contract liabilities			187
										Remaining contractual maturity of investment contract liabilities			187
Insurance risk			188				223			Analysis of insurance risk – liabilities under insurance contracts			188
Sensitivities to non-economic assumptions			188							Sensitivity analysis			188
1 Appendix to Risk – policies and practices.

 

 

HSBC HOLDINGS PLC   180

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Balance sheet of insurance manufacturing subsidiaries by type of contract

(Audited)

				Insurance contracts																								Investment contracts
					With DPF						Unit- linked						Annuities						Other	35					With DPF	36					Unit- linked						Other						Other assets and liabilities	37					Total
				$m						$m						$m						$m						$m						$m						$m						$m						$m
Financial assets					31,801						6,569						1,138						6,618						21,720						2,271						3,935						5,531						79,583
– trading assets					–						–						2						–						–						–						–						–						2
– financial assets designated at fair value					4,698						6,435						296						563						6,421						2,000						1,859						1,015						23,287
– derivatives					49						–						–						4						111						1						29						62						256
– financial investments – HTM38					22,840						–						468						2,334						–						–						1,387						3,050						30,079
– financial investments – AFS38					1,743						–						312						3,685						13,334						–						23						1,233						20,330
– other financial assets39					2,471						134						60						32						1,854						270						637						171						5,629
Reinsurance assets					202						264						–						951						–						–						–						–						1,417
PVIF40					–						–						–						–						–						–						–						5,685						5,685
Other assets and investment properties					838						1						11						105						888						6						23						4,576						6,448
Total assets					32,841						6,834						1,149						7,674						22,608						2,277						3,958						15,792						93,133
Liabilities under investment contracts					–						–						–						–						–						2,256						3,771						–						6,027
– designated at fair value					–						–						–						–						–						2,256						3,771						–						6,027
– carried at amortised cost					–						–						–						–						–						–						–						–						–
Liabilities under insurance contracts					32,414						6,791						1,082						7,042						22,609						–						–						–						69,938
Deferred tax41					11						–						11						3						–						–						–						1,056						1,081
Other liabilities					–						–						–						–						–						–						–						5,553						5,553
Total liabilities					32,425						6,791						1,093						7,045						22,609						2,256						3,771						6,609						82,599
Total equity					–						–						–						–						–						–						–						10,534						10,534
Total liabilities and equity at 31 December 201542					32,425						6,791						1,093						7,045						22,609						2,256						3,771						17,143						93,133

 

HSBC HOLDINGS PLC   181

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Report of the Directors: Risk (continued)

Risk management of insurance operations

    

    

    

 

Balance sheet of insurance manufacturing subsidiaries by type of contract (continued)

 

				Insurance contracts																								Investment contracts
					With DPF						Unit- linked						Annuities						Other	35					With DPF	36					Unit- linked						Other						Other assets and liabilities	37					Total
				$m						$m						$m						$m						$m						$m						$m						$m						$m
Financial assets					29,040						11,278						1,517						6,253						24,238						2,561						4,322						5,732						84,941
– trading assets					–						–						3						–						–						–						–						–						3
– financial assets designated at fair value					4,304						11,111						533						782						6,346						2,223						1,684						1,713						28,696
– derivatives					12						1						–						1						101						1						10						73						199
– financial investments – HTM38					18,784						–						542						1,019						–						–						1,444						2,494						24,283
– financial investments – AFS38					2,368						–						344						4,148						15,677						–						363						1,318						24,218
– other financial assets39					3,572						166						95						303						2,114						337						821						134						7,542
Reinsurance assets					190						262						–						617						–						–						–						2						1,071
PVIF40					–						–						–						–						–						–						–						5,307						5,307
Other assets and investment properties					698						328						23						107						831						7						26						7,383						9,403
Total assets					29,928						11,868						1,540						6,977						25,069						2,568						4,348						18,424						100,722
Liabilities under investment contracts					–						–						–						–						–						2,542						4,155						–						6,697
– designated at fair value					–						–						–						–						–						2,542						3,770						–						6,312
– carried at amortised cost					–						–						–						–						–						–						385						–						385
Liabilities under insurance contracts					29,479						11,820						1,473						6,021						25,068						–						–						–						73,861
Deferred tax41					12						–						11						18						–						–						–						1,180						1,221
Other liabilities					–						–						–						–						–						–						–						8,577						8,577
Total liabilities					29,491						11,820						1,484						6,039						25,068						2,542						4,155						9,757						90,356
Total equity					–						–						–						–						–						–						–						10,366						10,366
Total liabilities and equity at 31 December 201442					29,491						11,820						1,484						6,039						25,068						2,542						4,155						20,123						100,722

For footnotes, see page 191.

Balance sheet of insurance manufacturing subsidiaries by geographical region⁴³

(Audited)

 

				Europe						Asia						Latin America						Total
				$m						$m						$m						$m
Financial assets					26,897						51,087						1,599						79,583
– trading assets					–						–						2						2
– financial assets designated at fair value					9,987						12,668						632						23,287
– derivatives					163						93						–						256
– financial investments – HTM38					–						29,496						583						30,079
– financial investments – AFS38					14,525						5,503						302						20,330
– other financial assets39					2,222						3,327						80						5,629
Reinsurance assets					287						1,122						8						1,417
PVIF40					807						4,761						117						5,685
Other assets and investment properties					919						1,358						4,171						6,448
Total assets					28,910						58,328						5,895						93,133
Liabilities under investment contracts:
– designated at fair value					1,376						4,651						–						6,027
– carried at amortised cost					–						–						–						–
Liabilities under insurance contracts					24,699						43,975						1,264						69,938
Deferred tax41					274						767						40						1,081
Other liabilities					832						974						3,747						5,553
Total liabilities					27,181						50,367						5,051						82,599
Total equity					1,729						7,961						844						10,534
Total liabilities and equity at 31 December 201542					28,910						58,328						5,895						93,133

 

HSBC HOLDINGS PLC   182

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				Europe						Asia						Latin America						Total
				$m						$m						$m						$m
Financial assets					30,178						47,443						7,320						84,941
– trading assets					–						–						3						3
– financial assets designated at fair value					10,610						12,497						5,589						28,696
– derivatives					172						27						–						199
– financial investments – HTM38					—						23,546						737						24,283
– financial investments – AFS38					16,947						6,464						807						24,218
– other financial assets39					2,449						4,909						184						7,542
Reinsurance assets					308						748						15						1,071
PVIF40					711						4,175						421						5,307
Other assets and investment properties					7,650						1,145						608						9,403
Total assets					38,847						53,511						8,364						100,722
Liabilities under investment contracts:
– designated at fair value					1,585						4,727						–						6,312
– carried at amortised cost					–						–						385						385
Liabilities under insurance contracts					27,312						39,990						6,559						73,861
Deferred tax41					273						806						142						1,221
Other liabilities					7,932						460						185						8,577
Total liabilities					37,102						45,983						7,271						90,356
Total equity					1,745						7,528						1,093						10,366
Total liabilities and equity at 31 December 201442					38,847						53,511						8,364						100,722

For footnotes, see page 191.

Movement in total equity of insurance operations

(Audited)

 

				Total equity
				2015						2014
				$m						$m
At 1 January					10,366						9,700
Movements in PVIF40					799						261
Return on net assets					410						1,835
Capital transactions					(468	)					(673	)
Disposals of subsidiaries/portfolios					(13	)					1
Exchange differences and other					(560	)					(758	)
At 31 December					10,534						10,366

For footnotes, see page 191.

 

 

HSBC HOLDINGS PLC   183

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Report of the Directors: Risk (continued)

Risk management of insurance operations

    

    

    

 

Financial assets held by insurance manufacturing subsidiaries

(Audited)

 

				Unit-linked						Non-linked						Other
					contracts	44					contracts	45					assets	39					Total
				$m						$m						$m						$m
Trading assets
Debt securities					–						2						–						2
Financial assets designated at fair value					8,435						13,837						1,015						23,287
Treasury bills					–						146						56						202
Debt securities					448						3,547						228						4,223
Equity securities					7,987						10,144						731						18,862
Financial investments
Held-to-maturity: debt securities					–						27,029						3,050						30,079
Available-for-sale:					–						19,097						1,233						20,330
– debt securities					–						19,097						1,177						20,274
– equity securities					–						–						56						56
Derivatives					1						193						62						256
Other financial assets39					404						5,054						171						5,629
Total financial assets at 31 December 201542					8,840						65,212						5,531						79,583
Trading assets
Debt securities					–						3						–						3
Financial assets designated at fair value					13,334						13,649						1,713						28,696
Treasury bills					–						40						16						56
Debt securities					4,589						3,507						618						8,714
Equity securities					8,745						10,102						1,079						19,926
Financial investments
Held-to-maturity: debt securities					–						21,789						2,494						24,283
Available-for-sale:					–						22,899						1,319						24,218
– debt securities					–						22,899						1,290						24,189
– equity securities					–						–						29						29
Derivatives					2						124						73						199
Other financial assets39					503						6,905						134						7,542
Total financial assets at 31 December 201442					13,839						65,369						5,733						84,941

For footnotes, see page 191.

 

 

HSBC HOLDINGS PLC   184

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Financial return guarantees⁴²

(Audited)

 

2015

2014

Investment returns implied by guarantee

Current yields

Cost of guarantees

Investment returns implied by guarantee

Current yields

Cost of guarantees

%

%

$m

%

%

$m

Capital

0.0

0.0 – 3.8

85

0.0

0.0 – 3.5

81

Nominal annual return

0.1 – 1.9

3.9 – 3.9

4

0.1 – 2.0

3.6 – 3.6

6

Nominal annual return46

2.0 – 4.0

3.8 – 4.0

603

2.1 – 4.0

3.5 – 4.1

646

Nominal annual return

4.1 – 5.0

3.8 – 4.1

28

4.1 – 5.0

3.5 – 4.1

30

Real annual return47

0.0 – 6.0

5.9 – 6.1

28

0.0 – 6.0

4.7 – 7.5

14

At 31 December

748

777

For footnotes, see page 191.

 

 

Sensitivity of HSBC’s insurance manufacturing subsidiaries to market risk factors

(Audited)

 

				2015										2014
				Effect on profit after tax				Effect on total equity						Effect on profit after tax				Effect on total equity
				$m				$m						$m				$m
+100 basis points parallel shift in yield curves					39				(474	)					290				(345	)
–100 basis points parallel shift in yield curves48					(213	)			404						(549	)			214
10% increase in equity prices					176				176						180				180
10% decrease in equity prices					(158	)			(158	)					(153	)			(153	)
10% increase in US dollar exchange rate compared to all currencies					16				16						54				54
10% decrease in US dollar exchange rate compared to all currencies					(16	)			(16	)					(54	)			(54	)

 

 

HSBC HOLDINGS PLC   185

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Report of the Directors: Risk (continued)

Risk management of insurance operations

    

    

    

 

 

Treasury bills, other eligible bills and debt securities in HSBC’s insurance manufacturing subsidiaries

(Audited)

 

				Neither past due nor impaired
				Strong						Good						Satisfactory						Sub-standard						Total
				$m						$m						$m						$m						$m
Supporting liabilities under non-linked insurance and investment contracts
Trading assets – debt securities					–						–						2						–						2
Financial assets designated at fair value					2,719						406						300						268						3,693
– treasury and other eligible bills					130						–						–						16						146
– debt securities					2,589						406						300						252						3,547
Financial investments – debt securities					39,741						4,333						1,886						166						46,126
					42,460						4,739						2,188						434						49,821
Supporting shareholders’ funds49
Financial assets designated at fair value					138						22						20						104						284
– treasury and other eligible bills					8						–						–						48						56
– debt securities					130						22						20						56						228
Financial investments – debt securities					3,827						201						199						–						4,227
					3,965						223						219						104						4,511
Total42
Trading assets – debt securities					–						–						2						–						2
Financial assets designated at fair value					2,857						428						320						372						3,977
– treasury and other eligible bills					138						–						–						64						202
– debt securities					2,719						428						320						308						3,775
Financial investments – debt securities					43,568						4,534						2,085						166						50,353
At 31 December 2015					46,425						4,962						2,407						538						54,332
Supporting liabilities under non-linked insurance and investment contracts
Trading assets – debt securities					3						–						–						–						3
Financial assets designated at fair value					2,550						530						214						255						3,549
– treasury and other eligible bills					5						–						–						35						40
– debt securities					2,545						530						214						220						3,509
Financial investments – debt securities					38,515						4,312						1,662						200						44,689
					41,068						4,842						1,876						455						48,241
Supporting shareholders’ funds49
Financial assets designated at fair value					214						322						30						69						635
– treasury and other eligible bills					–						–						–						16						16
– debt securities					214						322						30						53						619
Financial investments – debt securities					3,378						196						154						54						3,782
					3,592						518						184						123						4,417
Total42
Trading assets – debt securities					3						–						–						–						3
Financial assets designated at fair value					2,764						852						244						324						4,184
– treasury and other eligible bills					5						–						–						51						56
– debt securities					2,759						852						244						273						4,128
Financial investments – debt securities					41,893						4,508						1,816						254						48,471
At 31 December 2014					44,660						5,360						2,060						578						52,658

For footnotes, see page 191.

 

 

HSBC HOLDINGS PLC   186

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Reinsurers’ share of liabilities under insurance contracts⁴²

(Audited)

 

				Neither past due nor impaired																								Past due but
				Strong						Good						Satisfactory						Sub-standard						not impaired						Total
				$m						$m						$m						$m						$m						$m
Unit-linked insurance					84						179						–						–						–						263
Non-linked insurance50					1,102						4						9						–						–						1,115
At 31 December 2015					1,186						183						9						–						–						1,378
Reinsurance debtors					19						3						–						–						17						39
Unit-linked insurance					75						185						–						–						–						260
Non-linked insurance50					751						11						10						–						–						772
At 31 December 2014					826						196						10						–						–						1,032
Reinsurance debtors					11						6						–						–						21						38

For footnotes, see page 191.

 

 

Expected maturity of insurance contract liabilities⁴²

(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 insurance					549						2,164						5,945						11,080						19,738
Non-linked insurance50					3,715						15,131						30,596						32,336						81,778
At 31 December 2015					4,264						17,295						36,541						43,416						101,516
Unit-linked insurance					709						3,280						9,243						14,544						27,776
Non-linked insurance50					3,504						12,718						29,905						33,108						79,235
At 31 December 2014					4,213						15,998						39,148						47,652						107,011

For footnotes, see page 191.

Remaining contractual maturity of investment contract liabilities

(Audited)

 

				Liabilities under investment contracts issued by insurance manufacturing subsidiaries
				Unit-linked investment contracts						Investment contracts with DPF						Other investment contracts						Total
				$m						$m						$m						$m
Remaining contractual maturity:
– undated51					1,160						22,609						3,747						27,516
– due within 1 year					136						–						24						160
– due over 1 year to 5 years					117						–						–						117
– due over 5 years to 10 years					170						–						–						170
– due after 10 years					673						–						–						673
At 31 December 2015					2,256						22,609						3,771						28,636
Remaining contractual maturity:
– undated51					1,298						25,068						3,765						30,131
– due within 1 year					151						–						389						540
– due over 1 year to 5 years					133						–						–						133
– due over 5 years to 10 years					194						–						–						194
– due after 10 years					766						–						–						766
At 31 December 2014					2,542						25,068						4,154						31,764

In most cases, policyholders have the option to terminate their contracts at any time and receive the surrender values of their policies. These may be significantly lower than the amounts shown.

 

HSBC HOLDINGS PLC   187

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Report of the Directors: Risk (continued)

Risk management of insurance operations / Other material risks

    

    

    

 

 

Analysis of insurance risk – liabilities under insurance contracts⁴³

(Audited)

 

				Europe						Asia						Latin   America						Total
				$m						$m						$m						$m
Non-linked insurance50					749						38,525						1,264						40,538
– insurance contracts with DPF52					343						32,071						–						32,414
– credit life					49						80						–						129
– annuities					69						108						905						1,082
– other53					288						6,266						359						6,913
Unit-linked insurance					1,341						5,450						–						6,791
Investment contracts with DPF36,52					22,609						–						–						22,609
Liabilities under insurance contracts at 31 December 2015					24,699						43,975						1,264						69,938
Non-linked insurance50					829						34,261						1,883						36,973
– insurance contracts with DPF52					367						29,112						–						29,479
– credit life					56						87						–						143
– annuities					71						127						1,275						1,473
– other53					335						4,935						608						5,878
Unit-linked insurance					1,415						5,729						4,676						11,820
Investment contracts with DPF36,52					25,068						–						–						25,068
Liabilities under insurance contracts at 31 December 2014					27,312						39,990						6,559						73,861

For footnotes, see page 191.

 

 

HSBC HOLDINGS PLC   188

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HSBC HOLDINGS PLC   189

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Report of the Directors: Risk (continued)

Other material risks / Footnotes

    

    

    

 

 

HSBC HOLDINGS PLC   190

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Footnotes to Risk

Managing risk

 

1	The sum of balances presented does not agree to consolidated amounts because inter-company eliminations are not presented here.

Credit risk

 

2

The amount of the loan commitments reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. In addition to those amounts, there is a further maximum possible exposure to credit risk of $59bn (2014: $71bn), reflecting the full take-up of loan commitments. The take-up of such offers is generally at low levels. At 31 December 2015, the credit quality of loan and other credit-related commitments was: $348bn strong, $180bn good, $129bn satisfactory, $9bn sub-standard and $1bn impaired.

3	‘Other personal lending’ includes second lien mortgages and other property-related lending.

4	‘Other commercial loans and advances’ includes advances in respect of agriculture, transport, energy utilities and ABS reclassified to ‘Loans and advances’.

5	Impairment allowances are not reported for financial instruments, for which the carrying amount is reduced directly for impairment and not through the use of an allowance account.

6

Impairment is not measured for assets held in trading portfolios or designated at fair value as assets in such portfolios are managed according to movements in fair value, and the fair value movement is taken directly to the income statement. Consequently, we report all such balances under ‘Neither past due nor impaired’.

7	Loans and advances to customers’ includes asset-backed securities that have been externally rated as strong (2015: $504m; 2014: $1.2bn), good (2015: $95m; 2014: $256m), satisfactory (2015: $107m; 2014: $332m), sub-standard (2015: $19m; 2014: $94m) and impaired (2015: $73m; 2014: $128m).

8

‘Collection re-age’ includes loans that are reset to ‘current’ and any arrears are reset but does not involve any changes to the original terms and conditions of the loan, where the account is brought up-to-date without fully paying the outstanding arrears but after the demonstration of ongoing payment ability.

9	‘Modification re-age’ includes loans where there are changes to the original terms and conditions of the loan, either temporarily or permanently, and also resets the contractual delinquency status of an account to current.

10	‘Collectively assessed impairment allowances’ are allocated to geographical segments based on the location of the office booking the allowances or provisions.

11	Included within ‘Exchange and other movements’ is $2.1bn of impairment allowances reclassified to held for sale (2014: $0.4bn).

12	Of the $2,134m (2014: $2,724m) of renegotiated loans, $477m (2014: $608m) were neither past due nor impaired, $1m (2014: $1m) was past due but not impaired and $1,656m (2014: $2,115m) were impaired.

13	Includes balances in Middle East and North Africa that are impaired and past due and therefore considered due on demand.

14	French Banking Federation Master Agreement Relating to Transactions on Forward Financial Instruments plus CSA equivalent.

15	The German Master Agreement for Financial Derivative Transactions.

16	HSBC Finance lending is on a management basis and includes loans transferred to HSBC USA Inc. which are managed by HSBC Finance.

17

Included in this category are loans of $1.2bn (2014: $1.5bn) that have been re-aged once and were less than 60 days past due at the point of re-age. These loans are not classified as impaired following re-age due to the overall expectation that these customers will perform on the original contractual terms of their borrowing in the future.

18	‘Currency translation’ is the effect of translating the results of subsidiaries and associates for the previous year at the average rates of exchange applicable in the current year.

Liquidity and funding

 

19

The HSBC UK Liquidity Group shown comprises four legal entities; HSBC Bank plc (including all overseas branches, and SPEs consolidated by HSBC Bank plc for Financial Statement purposes), Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the UK PRA.

20

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.

21	The HSBC USA principal entity shown represents the HSBC USA Inc consolidated group; predominantly HSBC USA Inc and HSBC Bank USA, NA. The HSBC USA Inc consolidated group is managed as a single operating entity.

22	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.

23	The most favourable metrics are smaller advances to core funding and larger stressed one-month and three-month coverage ratios.

24

The total shown for other principal HSBC operating entities represents the combined position of all the other operating entities overseen directly by the Risk Management Meeting of the GMB. This coverage changed during 2015 and so comparative figures for 2014 have been re-stated to enable a like-for-like comparison.

25	Estimated liquidity value represents the expected realisable value of assets prior to management assumed haircuts.

26	The undrawn balance for the five largest committed liquidity facilities provided to customers other than facilities to conduits.

27	The undrawn balance for the total of all committed liquidity facilities provided to the largest market sector, other than facilities to conduits.

28	The residual contractual maturity profile of the balance sheet is set out on in Note 31 on the Financial Statements.

 

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Report of the Directors: Risk (continued)

Footnotes / Appendix to Risk – Policies and practices

    

    

    

 

Market risk

 

29	Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.

30

Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity and foreign exchange, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.

31	The total VaR is non-additive across risk types due to diversification effects.

32

Investments in private equity are primarily made through managed funds that are subject to limits on the amount of investment. Potential new commitments are subject to risk appraisal to ensure that industry and geographical concentrations remain within acceptable levels for the portfolio as a whole. Regular reviews are performed to substantiate the valuation of the investments within the portfolio.

33	Investments held to facilitate ongoing business include holdings in government-sponsored enterprises and local stock exchanges.

34	Instead of assuming that all interest rates move together, we group our interest rate exposures into currency blocs whose rates are considered likely to move together. See ‘Cautionary statement regarding forward-looking statements’.

Risk management of insurance operations

 

35	‘Other’ includes term assurance, credit life insurance, universal life insurance and remaining non-life insurance.

36

Although investment contracts with discretionary participation features (‘DPF’) are financial investments, HSBC continues to account for them as insurance contracts as required by IFRS 4 ‘Insurance Contracts’. The corresponding liabilities are therefore recorded as ‘liabilities under insurance contracts’.

37

‘Other assets and liabilities’ shows shareholder assets as well as assets and liabilities classified as held for sale. The majority of the assets for insurance businesses classified as held for sale are reported as ‘Other assets and investment properties’ and totalled $4.1bn at 31 December 2015 (2014: $6.8bn). The majority of these assets were debt and equity securities and PVIF. All liabilities for insurance businesses classified as held for sale are reported in ‘Other liabilities’ and totalled $3.7bn at 31 December 2015 (2014: $6.8bn). The majority of these liabilities were liabilities under insurance contracts and liabilities under investment contracts.

38	Financial investments held to maturity (HTM) and available for sale (AFS).

39	Comprise mainly loans and advances to banks, cash and intercompany balances with other non-insurance legal entities.

40	Present value of in-force long-term insurance contracts and investment contracts with DPF.

41	‘Deferred tax’ includes the deferred tax liabilities arising on recognition of PVIF.

42	Does not include associated insurance company SABB Takaful Company or joint venture insurance company Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.

43	HSBC has no insurance manufacturing subsidiaries in Middle East and North Africa or North America.

44	Comprise unit-linked life insurance contracts and linked long-term investment contracts.

45	Comprise all insurance and long-term investment contracts other than those classified as unit-linked.

46	A block of contracts in France with guaranteed nominal annual returns in the range 1.25%-3.72% are reported entirely in the 2.0%-4.0% category in line with the average guaranteed return of 2.7% offered to policyholders by these contracts.

47	Real annual return guarantees provide the policyholder a guaranteed return in excess of the rate of inflation, and are supported by inflation-linked debt securities with yields that are also expressed in real terms.

48	Where a –100 basis point parallel shift in the yield curve would result in a negative interest rate, the effects on profit after tax and total equity have been calculated using a minimum rate of 0%.

49	Shareholders’ funds comprise solvency and unencumbered assets.

50	‘Non-linked insurance’ comprises all insurance contracts other than unit-linked, including remaining non-life business.

51	In most cases, policyholders have the option to terminate their contracts at any time and receive the surrender values of their policies. These may be significantly lower than the amounts shown.

52

Insurance contracts and investment contracts with DPF can give policyholders the contractual right to receive, as a supplement to their guaranteed benefits, additional benefits that may be a significant portion of the total contractual benefits, but whose amount and timing are determined by HSBC. These additional benefits are contractually based on the performance of a specified pool of contracts or assets, or the profit of the company issuing the contracts.

53	‘Other’ includes term assurance, universal life assurance and remaining non-life insurance.

Pension risk

 

54	In 2014, option overlay strategies which are expected to improve the risk/return profile of the equity allocation were implemented.

55	Alternative assets include ABSs, MBSs and infrastructure assets.

56	Whilst there is no target cash allocation, the amount of cash is expected to vary between 0%-5% depending upon the liquidity requirements of the scheme, which will affect the actual allocation of bonds correspondingly.

 

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Report of the Directors: Financial Review (continued)

    

    

    

 

Risk elements in the loan portfolio

 

57

In addition to the numbers presented there were $2.1bn of impaired loans (2014: $0.5bn); nil unimpaired loans contractually more than 90 days past due as to principal or interest (2014: $1m); and $8m of troubled debt restructurings (not included in the classifications above) (2014: nil), all relating to assets held for sale at 31 December 2015.

58	Assets held for resale represent assets obtained by taking possession of collateral held as security for financial assets.

59	Ratio excludes trading loans classified as in default.

Country distribution of outstandings and cross-border exposures

 

60	These balances were between 0.75% and 1% of total assets. All other balances were above 1%.

 

HSBC HOLDINGS PLC   192a

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Appendix to Risk

Risk policies and practices

This appendix describes the significant policies and practices employed by HSBC in managing our credit risk, liquidity and funding, market risk, operational risk (including compliance risk, legal risk and fiduciary risk), insurance risk, reputational risk, pension risk and sustainability risk.

Risk governance

Our strong risk governance reflects the importance placed by the Board and the Group Risk Committee (‘GRC’) on shaping the Group’s risk strategy and managing risks effectively. It is supported by a clear policy framework of risk ownership, a risk appetite process through which the types and levels of risk that we are prepared to accept in executing our strategy are articulated and monitored, performance scorecards cascaded from the Group Management Board (‘GMB’) that align business and risk objectives, and the accountability of all staff for identifying, assessing and managing risks within the scope of their assigned responsibilities. This personal accountability, reinforced by the governance structure, mandatory learning and our approach to remuneration, helps to foster a disciplined and constructive culture of risk management and control throughout HSBC.

The executive and non-executive risk governance structures and their interactions are set out in the following table. Each major operating subsidiary has established a board committee with non-executive responsibility for oversight of risk-related matters and an executive meeting with responsibility for risk-related matters.

Governance structure for the management of risk

 

Authority				Membership				Responsibilities include:
Board				Executive and non-executive Directors				•  Approving risk appetite, strategy and performance targets for the Group   •  Approving appointment of chief risk officers of subsidiary companies   •  Encouraging a strong risk governance culture which shapes the Group’s attitude to risk
Group Risk       Committee       (‘GRC’)				Independent non-executive Directors				•  Advising the Board on:   –  risk appetite and alignment with strategy   –  alignment of remuneration with risk appetite (through advice to the Group Remuneration Committee)   –  risks associated with proposed strategic acquisitions and disposals   •  Overseeing high-level risk related matters   •  Reviewing the effectiveness of the Group’s systems of risk management and internal controls (other than over financial reporting)   •  Overseeing the maintenance and development of a supportive culture in relation to the management of risk
Financial System       Vulnerabilities       Committee				Non-executive Directors, including the Chairman of the Group Remuneration Committee, and co-opted non-director members				•  Overseeing controls and procedures designed to identify areas of exposure to financial crime or system abuse   •  Overseeing matters relating to anti-money laundering, sanctions, terrorist financing and proliferation financing   •  Reviewing policies and procedures to ensure continuing obligations to regulatory and law enforcement agencies are met
Conduct & Values       Committee				Independent non-executive Directors				•  Ensuring that in the conduct of its business, HSBC treats all stakeholders fairly   •  Advising the Board on HSBC policies, procedures and standards to ensure that the Group conducts business responsibly and consistently adheres to the HSBC Values

 

 

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Report of the Directors: Risk (continued)

Appendix to Risk – Policies and practices

    

    

    

 

Authority				Membership				Responsibilities include:
Risk Management Meeting of the GMB (‘RMM’)				Group Chief Risk Officer   Chief Legal Officer   Group Chief Executive   Group Finance Director   All other Group Managing Directors				•      Formulating high-level global risk policy   •      Supporting the Group Chief Risk Officer in exercising delegated risk management authority   •      Overseeing implementation of risk appetite and controls   •      Monitoring all categories of risk and determining appropriate mitigating action   •      Promoting a supportive Group culture in relation to risk management and conduct   •      Implementing Global Standards throughout the Group
Global Risk Management Board				Group Chief Risk Officer   Chief Risk Officers of HSBC’s global businesses and regions   Heads of Global Risk sub-functions				•      Supporting the RMM and the Group Chief Risk Officer in providing strategic direction for the Global Risk function, setting priorities and overseeing their execution   •      Overseeing consistent approach to accountability for, and mitigation of, risk across the Global Risk function
Global Business Risk Management Committees				Global Business Chief Risk Officer   Global Business Chief Executive   Global Business Chief Financial Officer   Heads of Global Risk sub-functions, as appropriate				•      Forward looking assessment of changes in global business activities or the markets in which it operates, analysing the possible risk impact and taking appropriate action   •      Overseeing the implementation of global business risk appetite and controls   •      Monitoring all categories of risk and determining appropriate mitigating actions   •      Promoting a strong risk culture
Regional Risk Management Committees				Regional Chief Risk Officer   Regional Chief Executive Officer   Regional Chief Financial Officer   Regional Global Business Chief   Heads of Global Risk sub-functions, as appropriate				•      Formulating regional specific risk policy   •      Overseeing the implementation of regional risk appetite and controls   •      Monitoring all categories of risk and determining appropriate mitigating actions   •      Promoting a strong risk culture
Subsidiary board committees responsible for risk-related matters and global business risk committees				Independent non-executive directors and/or HSBC employees with no line or functional responsibility for the activities of the relevant subsidiary or global business, as appropriate				•      Providing reports to the GRC or intermediate risk committee on risk-related matters and internal controls (other than over financial reporting) of relevant subsidiaries or businesses, as requested

The governance framework also defines the required structure for Risk sub-functions, stress testing and other key areas at Group, global business, regional and country level.

Risk appetite

The Group’s Qualitative Risk Appetite Statement (‘RAS’) formally articulates our overarching risk appetite principles, serves as a guide in embedding our risk appetite framework and supports strategic and operational decision-making across the Group.

 

•

Strong capital position: we are to have a strong capital position defined by robust regulatory and internal capital ratios. The progression of dividends should be consistent with the growth of the Group’s profitability and is predicated on the ability to meet all capital requirements in a timely manner. Both the Group and its individual legal entities must self-capitalise with capital generation, net of dividends, exceeding the capital needed to support organic growth in the entity’s risk-weighted assets;

 

•

Liquidity and funding management: operating entities are required to manage liquidity risk on a stand-alone basis with no implicit reliance on the Group or central banks and be able to withstand a Group-defined remote liquidity stress scenario. Customer assets and other illiquid assets must be funded with reliable and stable sources of funding;

 

•

Risk return relationship: we aim to generate returns in line with the risk taken and in alignment with strategic plans, strategic business outlooks and risk management policies;

 

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•

Sustainable and diversified earnings mix: global businesses and regions must support sustainable, well diversified and non-volatile earning streams, delivering consistent returns for shareholders;

 

•

Reputation risk: we tolerate a limited degree of reputational risk arising from business activities or associations where the risk has been escalated to the appropriate level of management. We have zero tolerance for knowingly engaging in any business, activity or association where foreseeable reputational risk/damage has not been considered and/or mitigated;

 

•

Financial crime compliance: we will operate with integrity to the most effective financial crime risk management standards, address financial system vulnerability through a robust financial crime risk management framework, and ensure appropriate mitigating systems and controls are in place to prevent and detect financial crime. We have no appetite for deliberately or knowingly facilitating business that gives rise to illicit activity; and

 

•

Regulatory compliance: we have no appetite for deliberately or knowingly causing detriment to consumers arising from our products and services, or incurring a breach of the letter or spirit of regulatory requirements. We have no appetite for inappropriate market conduct by a member of staff or by any Group business.

 

 

Credit risk

Credit risk management

(Audited)

The role of independent credit control unit is fulfilled by the Global Risk function. Credit approval authorities are delegated by the Board to the Chief Executive Officer of HSBC Holdings together with the authority to sub-delegate them. Similar credit approval authorities are delegated by the boards of subsidiary companies to their respective executive officers. In each major subsidiary, a Chief Risk Officer reports to the local Chief Executive Officer on credit-related issues, while maintaining a direct functional reporting line to the Group Chief Risk Officer in Global Risk. Details of the roles and responsibilities of the credit risk management function and the policies and procedures for managing credit risk are set out below. There were no significant changes in 2015.

 

The high-level oversight and management of credit risk provided globally by the Credit Risk sub-function in Global Risk •    to formulate Group credit policy. Compliance, subject to approved dispensations, is mandatory for all operating companies which must develop local credit policies consistent with Group policies;   •    to guide operating companies on the Group’s appetite for credit risk exposure to specified market sectors, activities and banking products and controlling exposures to certain higher-risk sectors;   •    to undertake an independent review and objective assessment of risk. Global Risk assesses all commercial non-bank credit facilities and exposures over designated limits, prior to the facilities being committed to customers or transactions being undertaken;   •    to monitor the performance and management of portfolios across the Group;   •    to control exposure to sovereign entities, banks and other financial institutions, and debt securities which are not held solely for the purpose of trading;   •    to set Group policy on large credit exposures, ensuring that concentrations of exposure by counterparty, sector or geography do not become excessive in relation to our capital base, and remain within internal and regulatory limits;   •    to control our cross-border exposures;   •    to maintain and develop our risk rating framework and systems, the governance of which is under the general oversight of the Group Model Oversight Committee (‘MOC’). The Group MOC meets bi-monthly and reports to the RMM. It is chaired by the Global Risk function and its membership is drawn from Global Risk and relevant global functions or businesses;   •    to report to the RMM, the GRC and the Board on high risk portfolios, risk concentrations, country limits and cross-border exposures, large impaired accounts, impairment allowances, stress testing results and recommendations and retail portfolio performance; and   •    to act on behalf of HSBC Holdings as the primary interface, for credit-related issues, with the Bank of England, the PRA, local regulators, rating agencies, analysts and counterparts in major banks and non-bank financial institutions.

Principal objectives of our credit risk management

 

•

to maintain across HSBC a strong culture of responsible lending and a robust risk policy and control framework;

 

•

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.

 

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Report of the Directors: Risk (continued)

Appendix to Risk – Policies and practices

    

    

    

 

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 industry, country and global business. These include portfolio and counterparty limits, approval and review controls, and stress testing.

Wrong-way risk occurs when a counterparty’s exposures are adversely correlated with its credit quality. There are two types of wrong-way risk:

 

•

general wrong-way risk occurs when the probability of counterparty default is positively correlated with general risk factors such as, for example, where the counterparty is resident and/or incorporated in a higher-risk country and seeks to sell a non-domestic currency in exchange for its home currency; and

 

•

specific wrong-way risk occurs when the exposure to a particular counterparty is positively correlated with the probability of counterparty default, such as a reverse repo on the counterparty’s own bonds. It is our policy that specific wrong-way transactions are approved on a case-by-case basis.

We use a range of tools to monitor and control wrong-way risk, including requiring the business to obtain prior approval before undertaking wrong-way risk transactions outside pre-agreed guidelines.

Credit quality of financial instruments

(Audited)

Our credit risk rating systems and processes differentiate exposures in order to highlight those with greater risk factors and higher potential severity of loss. In the case of individually significant accounts that are predominantly within our wholesale businesses, risk ratings are reviewed regularly and any amendments are implemented promptly. In our retail businesses, risk is assessed and managed using a wide range of risk and pricing models to generate portfolio data.

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. Our credit quality classifications are defined below.

Special attention is paid to problem exposures in order to accelerate remedial action. When appropriate, our operating companies use specialist units to provide customers with support to help them avoid default if possible.

Group and regional Credit Review and Risk Identification teams regularly review exposures and processes in order to provide an independent, rigorous assessment of credit risk across the Group, reinforce secondary risk management controls and share best practice. Internal audit, as a third line control function, focuses on risks with a global perspective and on the design and effectiveness of primary and secondary controls, carrying out oversight audits via the sampling of global and regional control frameworks, themed audits of key or emerging risks and project audits to assess major change initiatives.

The five credit quality classifications defined below 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.

Credit quality classification

 

Debt securities                and other bills

Wholesale lending                     and derivatives

Retail  lending

External   credit rating

Internal credit rating

12 month   probability of   default %

Internal credit rating1

Expected   loss %

Quality classification

Strong

A–and above

CRR21 to CRR2

0 –0.169

EL31 to EL2

0 –0.999

Good

BBB+ to BBB–

CRR3

0.170 –0.740

EL3

1.000 –4.999

Satisfactory

BB+ to B and   unrated

CRR4 to CRR5

0.741 –4.914

EL4 to EL5

5.000 –19.999

Sub-standard

B– to C

CRR6 to CRR8

4.915 –99.999

EL6 to EL8

20.000 –99.999

Impaired

Default

CRR9 to CRR10

100

EL9 to EL10

100+ or defaulted

4

 

1

We observe the disclosure convention that, in addition to those classified as EL9 to EL10, retail accounts classified EL1 to EL8 that are delinquent by 90 days or more are considered impaired, unless individually they have been assessed as not impaired (see page 127, ‘Past due but not impaired gross financial instruments’).

2	Customer risk rating.

3	Expected loss.

4	The EL percentage is derived through a combination of PD and LGD, and may exceed 100% in circumstances where the LGD is above 100% reflecting the cost of recoveries.

 

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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. Retail accounts operate within product parameters and only exceptionally show any period of delinquency.   •    ‘Good’ exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minimal following the adoption of recovery processes.   •    ‘Satisfactory’ exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with moderate default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minor following the adoption of recovery processes.   •    ‘Sub-standard’ exposures require varying degrees of special attention and default risk is of greater concern. Retail portfolio segments show longer delinquency periods of generally up to 90 days past due and/or expected losses are higher due to a reduced ability to mitigate these through security realisation or other recovery processes.   •    ‘Impaired’ exposures have been assessed as impaired. These include wholesale exposures where the bank considers that either the customer is unlikely to pay its credit obligations in full, without recourse by the bank to the actions such as realising security if held, or the customer is past due more than 90 days on any material credit obligation; retail accounts include loans and advances classified as EL9 to EL10, and for those classified EL1 to EL8 they are greater than 90 days past due unless individually they have been assessed as not impaired; and renegotiated loans that have met the requirements to be disclosed as impaired and have not yet met the criteria to be returned to the unimpaired portfolio (see below).

The customer risk rating (‘CRR’) 10-grade scale summarises a more granular underlying 23-grade scale of obligor probability of default (‘PD’). All HSBC customers are rated using the 10- or 23-grade scale, depending on the degree of sophistication of the Basel II approach adopted for the exposure.

Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by the average of issuer-weighted historical default rates. This mapping between internal and external ratings is indicative and may vary over time.

The expected loss (‘EL’) 10-grade scale for retail business summarises a more granular underlying EL scale for this customer segment; this combines obligor and facility/product risk factors in a composite measure.

For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications based upon the mapping of related CRR to external credit grade.

Renegotiated loans and forbearance

(Audited)

A range of forbearance strategies is employed in order to improve the management of customer relationships, maximise collection opportunities and, if possible, avoid default, foreclosure or repossession. They include extended payment terms, a reduction in interest or principal repayments, approved external debt management plans, debt consolidations, the deferral of foreclosures and other forms of loan modifications and re-ageing.

Our policies and practices are based on criteria which enable local management to judge whether repayment is likely to continue. These typically provide a customer with terms and conditions that are more favourable than those provided initially. Loan forbearance is only granted in situations where the customer has showed a willingness to repay their loan and is expected to be able to meet the revised obligations.

Identifying renegotiated loans

The contractual terms of a loan may be modified for a number of reasons including changing market conditions, customer retention and other factors not related to the current or potential credit deterioration of a customer. When the contractual payment terms of a loan are modified because we have significant concerns about the borrower’s ability to meet contractual payments when due, these loans are classified as ‘renegotiated loans’.

For retail lending our credit risk management policy sets out restrictions on the number and frequency of renegotiations, the minimum period an account must have been opened before any renegotiation can be considered and the number of qualifying payments that must be received. The application of this policy varies according to the nature of the market, the product and the management of customer relationships through the occurrence of exceptional events. When considering whether there is significant concern regarding a customer’s ability to meet contractual loan repayments when due, we assess the customer’s delinquency status, account behaviour, repayment history, current financial situation and continued ability to repay. If the customer is not meeting contractual repayments or it is evident that they will be unable to do so without the renegotiation, there will be a significant concern regarding their ability to meet contractual payments, and the loan will be disclosed as impaired, unless the concession granted is insignificant as discussed below.

 

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Report of the Directors: Risk (continued)

Appendix to Risk – Policies and practices

    

    

    

 

For loan restructurings in wholesale lending, indicators of significant concerns regarding a borrower’s ability to pay include:

 

•

the debtor is currently in default on any of its debt;

 

•

the debtor has declared or is in the process of declaring bankruptcy or entering into a similar process;

 

•

there is significant doubt as to whether the debtor will continue to be a going concern;

 

•

currently, the debtor has securities that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange as a result of trading or financial difficulties;

 

•

based on estimates and projections that only encompass current business capabilities, the Group forecasts that the debtor’s entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through maturity. In this instance, actual payment default may not yet have occurred; and

 

•

absent the modification, the debtor cannot obtain funds from sources other than its existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a non-distressed debtor.

Where the modification of a loan’s contractual payment terms represents a concession for economic or legal reasons relating to the borrower’s financial difficulty, and is a concession that we would not otherwise consider, then the renegotiated loan is disclosed as impaired in accordance with our impaired loan disclosure convention described in more detail on page 354, unless the concession is insignificant and there are no other indicators of impairment. Insignificant concessions are primarily restricted to our CML portfolio in HSBC Finance, where loans which are in the early stages of delinquency (less than 60 days delinquent) and typically have the equivalent of two payments deferred for the first time, are excluded from our impaired loan classification, as the contractual payment deferrals are deemed to be insignificant compared with payments due on the loan as a whole. For details of HSBC Finance’s loan renegotiation programmes and portfolios, see pages 129 and 145.

Credit quality classification of renegotiated loans

(Audited)

Under IFRSs, an entity is required to assess whether there is objective evidence that financial assets are impaired at the end of each reporting period. 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 which can be reliably estimated. Granting a concession to a customer that we would not otherwise consider, as a result of their financial difficulty, is objective evidence of impairment and impairment losses are measured accordingly.

A renegotiated loan is presented as impaired when:

 

•

there has been a change in contractual cash flows as a result of a concession which 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-payment of future cash flows, and there are no other indicators of impairment. For loans that are assessed for impairment on a collective 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.

For corporate and commercial loans, which are individually assessed for impairment and where non-monthly payments are more commonly agreed, the history of payment performance will depend on the underlying structure of payments agreed as part of the restructuring.

For retail lending the minimum period of payment performance required depends on the nature of loans in the portfolio, but is typically between six and twelve months. Where portfolios have more significant levels of forbearance activity, such as that undertaken by HSBC Finance, the minimum repayment performance period required may be substantially more (for further details on HSBC Finance see page 145). Payment performance periods are monitored to ensure they remain appropriate to the levels of recidivism observed within the portfolio. These performance periods are in addition to a minimum of two payments which must be received within a 60-day period (in the case of HSBC Finance, in certain circumstances, for example where debt has been restructured in bankruptcy proceedings, fewer or no qualifying payments may be required). The qualifying payments are required in order to demonstrate that the renegotiated terms are sustainable for the borrower.

Renegotiated loans are classified as unimpaired where the renegotiation has resulted from significant concern about a borrower’s ability to meet their contractual payment terms but the concession is not significant and the contractual cash flows are expected to be collected in full following the renegotiation.

 

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Derecognition of renegotiated loans

(Audited)

Loans that have been identified as renegotiated retain this designation until maturity or derecognition. When a loan is restructured as part of a forbearance strategy and the restructuring results in derecognition of the existing loan, the new loan is disclosed as renegotiated.

When determining whether a loan that is restructured should be derecognised and a new loan recognised, we consider the extent to which the changes to the original contractual terms result in the renegotiated loan, considered as a whole, being a substantially different financial instrument. The following are examples of circumstances that individually are likely to result in this test being met and derecognition accounting being applied:

 

•

an uncollateralised loan becomes fully collateralised or vice versa;

 

•

removal or addition of debt-to-equity conversion features attached to the loan agreement that have substance;

 

•

a change in the currency in which the principal or interest is denominated, other than a conversion at a current market rate; or

 

•

a change in the obligor.

The following are examples of factors that we consider may indicate that the revised loan is a substantially different financial instrument, but are unlikely to be conclusive in themselves:

 

•

conditions added to the contract that substantially alter the credit risk of the loan (e.g. conditions on how the customer’s business will be conducted in order to meet the revised terms of the loan);

 

•

guarantees are put in place that are expected to substantially change the source of repayment and it is fully expected that the guarantees have value;

 

•

rate structure changes (that are not existing contractual features) or debt consolidation where these changes are not purely a concession to allow the obligor to pay a monthly amount that is affordable given its credit distressed circumstances;

 

•

a change in the liquidation preference or ranking of the instrument that is not a debt-to-equity conversion; or

 

•

the collateral level (as a % of the loan) has doubled and the resulting coverage is more than 50%.

Renegotiated loans and recognition of impairment allowances

(Audited)

For retail lending, renegotiated loans are segregated from other parts of the loan portfolio for collective impairment assessment to reflect the higher rates of losses often encountered in these segments. When empirical evidence indicates an increased propensity to default and higher losses on such accounts, such as for re-aged loans in the US, the use of roll-rate (or discounted cash flow) methodology ensures these factors are taken into account when calculating impairment allowances by applying roll rates specifically calculated on the pool of loans subject to forbearance. When the portfolio size is small or when information is insufficient or not reliable enough to adopt a roll-rate (or discounted cash flow) methodology, a basic formulaic approach based on historical loss rate experience is used. As a result of our collective impairment methodology, we recognise collective impairment allowances on homogeneous groups of loans, including renegotiated loans, where there is historical evidence that there is a likelihood that loans in these groups will progress through the various stages of delinquency, and ultimately prove irrecoverable as a result of events occurring before the balance sheet date. This treatment applies irrespective of whether or not those loans are presented as impaired in accordance with our impaired loans disclosure convention.

In the corporate and commercial sectors, renegotiated loans are typically assessed individually. Credit risk ratings are intrinsic to the impairment assessment. A distressed restructuring is classified as an impaired loan. The individual impairment assessment takes into account the higher risk of the non-payment of future cash flows inherent in renegotiated loans.

Corporate and commercial forbearance

In the corporate and commercial sectors, forbearance activity is undertaken selectively where it has been identified that repayment difficulties against the original terms have already materialised, or are very likely to materialise. These cases are treated as impaired loans where:

 

•

the customer is experiencing, or is very likely to experience, difficulty in meeting a payment obligation to the Group (i.e. due to current credit distress); and

 

•

the Group is offering to the customer revised payment arrangements which constitute a concession (i.e. it is offering terms it would not normally be prepared to offer).

These cases are described as distressed restructurings. The agreement of a restructuring which meets the criteria above requires all loans, advances and counterparty exposures to the customer to be treated as impaired. Against the background of this requirement, as a customer approaches the point at which it becomes clear that there is an increasing risk that a restructuring of this kind might be necessary, the exposures will typically be regarded as sub-standard to reflect the

 

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deteriorating credit risk profile and will be graded as impaired when the restructure is proposed for approval, or sooner if there is sufficient concern regarding the customer’s likeliness to pay.

For the purposes of determining whether changes to a customer’s agreement should be treated as a distressed restructuring the following types of modification are regarded as concessionary:

 

•

transfers from the customer of receivables from third parties, real estate, or other assets to satisfy fully or partially a debt;

 

•

issuance or other granting of an equity interest to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt into an equity interest; and

 

•

modification of the terms of a debt, such as one or more of the following:

 

–

reduction (absolute or contingent) of the stated interest rate for the remaining original life of the debt;

 

–

extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk;

 

–

reduction (absolute or contingent) of the face amount or maturity amount of the debt; and

 

–

reduction (absolute or contingent) of accrued interest.

Modifications that are unrelated to payment arrangements, such as the restructuring of collateral or security arrangements or the waiver of rights under covenants within documentation, are not regarded by themselves to be evidence of credit distress affecting payment capacity. Typically, covenants are in place to give the Group rights of repricing or acceleration, but they are frequently set at levels where payment capacity has yet to be affected, providing rights of action at earlier stages of credit deterioration. Such concessions do not directly affect the customer’s ability to service the original contractual debt and are not reported as renegotiated loans. However, where a customer requests a non-payment related covenant waiver, the significance of the underlying breach of covenant will be considered together with any other indicators of impairment, and where there is a degree of severity of credit distress indicating uncertainty of payment, all available evidence will be considered in determining whether a loss event has occurred. The waiver will not, however, trigger classification as a renegotiated loan as payment terms have not been modified.

When both payment-related and non-payment related modifications are made together as a result of significant concerns regarding the payment of contractual cash flows, the loan is treated as a distressed restructuring and disclosed as a renegotiated loan.

Where clauses are built into the contract in advance which allow for payment-related modifications, and are exercised under conditions of credit distress at a point where the modification provides a concession to the customer, these cases are treated as meeting the definition of a distressed restructuring.

In assessing whether payment-related forbearance is a satisfactory and sustainable strategy, the customer’s entire exposure and facilities will be reviewed and their ability to meet the terms of both the revised obligation and other credit facilities not amended in the renegotiation is assessed. Should this assessment identify that a renegotiation will not deal with a customer’s payment capacity issues satisfactorily, other special management options may be applied. This process may identify the need to provide assistance to a customer specifically to restructure their business operations and activities so as to restore satisfactory payment capacity.

When considering acceptable restructuring terms we consider the ability of the customer to be able to service the revised interest payments as a necessity. When principal payment modifications are considered, again we require the customer to be able to comply with the revised terms as a necessary pre-condition for the restructuring to proceed. When principal payments are modified resulting in permanent forgiveness, or when it is otherwise considered that there is no longer a realistic prospect of recovery of outstanding principal, the affected balances are written off. When principal repayments are postponed, it is expected that the customer will be capable of paying in line with the renegotiated terms, including instances when the postponed principal repayment is expected from refinancing. In all cases, a loan renegotiation is only granted when the customer is expected to be able to meet the revised terms.

Modifications may be made on a temporary basis when time is needed for the customer to make arrangements for payment, when deterioration in payment capacity is expected to be acute but short lived, or when more time is needed to accommodate discussions regarding a more permanent accommodation with other bankers, for example in syndicated facilities where multilateral negotiation commonly features.

If a restructuring proceeds and the customer demonstrates satisfactory performance over a period of time, the case may be returned to a non-impaired grade (CRR1-8) provided no other indicators of impairment remain. Such a case cannot be returned to a non-impaired grade when a specific impairment allowance remains against any of the customer’s credit facilities. The period of performance will vary depending on the underlying structure of payments to be made by the customer under the amended agreement and the extent to which the customer’s financial position is considered to have improved.

 

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Impairment assessment

(Audited)

It is our policy that each operating company in HSBC creates impairment allowances for impaired loans promptly and appropriately, when there is objective evidence that impairment of a loan or portfolio of loans has occurred.

For details of our impairment policies on loans and advances and financial investments, see Note 1j on the Financial Statements.

Impairment and credit risk mitigation

The existence of collateral has an effect when calculating impairment on individually assessed impaired loans. When we no longer expect to recover the principal and interest due on a loan in full or in accordance with the original terms and conditions, it is assessed for impairment. If exposures are secured, the current net realisable value of the collateral is taken into account when assessing the need for an impairment allowance. No impairment allowance is recognised in cases where all amounts due are expected to be settled in full on realisation of the security.

Personal lending portfolios are generally assessed for impairment on a collective basis as the portfolios typically consist of large groups of homogeneous loans. Two methods are used to calculate allowances on a collective basis: a roll-rate methodology or a more basic formulaic approach based on historical losses. On a yearly basis, we review the impairment allowance methodology used for retail banking and small business portfolios across the Group to ensure that the assumptions used in our collective assessment models continued to appropriately reflect the period of time between a loss event occurring and the account proceeding to delinquency and eventual write-off.

 

•

The historical loss methodology is typically used to calculate collective impairment allowances for secured or low default portfolios such as mortgages until the point at which they are individually identified and assessed as impaired. For loans that are collectively assessed using historical loss methodology, the historical loss rate is derived from the average contractual write-off net of recoveries over a defined period. The net contractual write-off rate is the actual amount of loss experienced after the realisation of collateral and receipt of recoveries.

 

•

A roll-rate methodology is more commonly adopted for unsecured portfolios when there are sufficient volumes of empirical data to develop robust statistical models. In certain circumstances mortgage portfolios have a statistically significant number of defaults and losses available, enabling reliable roll rates to be generated. In these cases a roll-rate methodology is applied until the point at which the loans are individually identified and assessed as impaired, and the average gross loss rates by delinquency bucket are adjusted to reflect the future expected cash flows after collateral and other recovery realisation.

The nature of the collective allowance assessment prevents individual collateral values or loan-to-value (‘LTV’) ratios from being included within the calculation. However, the loss rates used in the collective assessment are adjusted for the collateral realisation experiences which will vary depending on the LTV composition of the portfolio. For example, mortgage portfolios under a historical loss rate methodology with lower LTV ratios will typically experience lower loss history and consequently a lesser net contractual write-off rate.

For wholesale collectively assessed loans, historical loss methodologies are applied to measure loss event impairments which have been incurred but not reported. Loss rates are derived from the historical impairment charges or losses recognised on impaired loans net of recoveries over a defined period, typically no less than 60 months. These historical loss rates are adjusted by an economic factor which amends the historical averages to better represent current economic conditions affecting the portfolio. In order to reflect the likelihood of a loss event not being identified and assessed an emergence period assumption is applied which reflects the period between a loss occurring and its identification. The emergence period is estimated by management for each identified portfolio. The factors that may influence this estimation include economic and market conditions, customer behaviour, portfolio management information, credit management techniques and collection and recovery experiences in the market. The emergence period is assessed empirically on a periodic basis and may vary over time as these factors change.

Write-off of loans and advances

(Audited)

For details of our policy on the write-off of loans and advances, see Note 1j on the Financial Statements.

In HSBC Finance, the carrying amounts of residential mortgage and second lien loans in excess of net realisable value are written off at or before the time foreclosure is completed or settlement is reached with the borrower. If there is no reasonable expectation of recovery, and foreclosure is pursued, the loan is normally written off no later than the end of the month in which the loan becomes 180 days contractually past due. We regularly obtain new appraisals for these collateral dependent loans (every 180 days) and adjust carrying values to the most recent appraisal if they have improved or deteriorated as the best estimate of the cash flows that will be received on the disposal of the collateral.

Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due, the standard period being 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 but, in very exceptional circumstances, to longer than that figure in a few countries where local regulation or legislation constrain earlier write-off or where the realisation of

 

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collateral for secured real estate lending takes this time.

For secured personal facilities, final write-off should generally occur within 60 months of the default at the latest.

In the event of bankruptcy or analogous proceedings, write-off may occur earlier than at the periods stated above. Collections procedures may continue after write-off.

Impairment methodologies

(Audited)

To identify objective evidence of impairment for available-for-sale ABSs, an industry standard valuation model is normally applied which uses data with reference to the underlying asset pools and models their projected future cash flows. The estimated future cash flows of the securities are assessed at the specific financial asset level to determine whether any of them are unlikely to be recovered as a result of loss events occurring on or before the reporting date.

The principal assumptions and inputs to the models are typically the delinquency status of the underlying loans, the probability of delinquent loans progressing to default, the prepayment profiles of the underlying assets and the loss severity in the event of default. However, the models utilise other variables relevant to specific classes of collateral to forecast future defaults and recovery rates. Management uses externally available data and applies judgement when determining the appropriate assumptions in respect of these factors. We use a modelling approach which incorporates historically observed progression rates to default to determine if the decline in aggregate projected cash flows from the underlying collateral will lead to a shortfall in contractual cash flows. In such cases, the security is considered to be impaired.

In respect of collateralised debt obligations (‘CDO’s), expected future cash flows for the underlying collateral are assessed to determine whether there is likely to be a shortfall in the contractual cash flows of the CDO.

When a security benefits from a contract provided by a monoline insurer that insures payments of principal and interest, the expected recovery on the contract is assessed in determining the total expected credit support available to the ABS.

Loan management unit

The HSBC Loan Management Unit (‘LMU’) is a front line customer contact department within Wholesale Credit and Market Risk that assumes responsibility for managing business customer relationships requiring intensive and close control where the bank’s lending is at risk. LMU operates on a regional basis across the Group and is independent of the originating business management units. It reports locally to the Regional Head of Wholesale Credit and Market Risk. Customers are identified and transferred to LMU by business management or the Wholesale Credit and Market Risk approval teams.

Customers managed by LMU are normally operating outside the Group’s risk appetite. They typically show symptoms of significant financial difficulty, the management team displays limited experience of managing a business in distress and the management and financial information provided to the Group is insufficient and unreliable.

The levels of customer exposure under management and the size of the LMU team varies between countries depending on the breadth of business undertaken locally but LMU will always manage highly distressed situations where individual customer exposure exceeds $1.5m.

The primary focus of LMU is to protect the bank’s capital and minimise losses by working consensually with customers to promote and support viable recovery strategies wherever achievable, with the ultimate intention of returning the customer to front line relationship management. In some cases, rehabilitation is not possible and LMU will consider a range of options to protect the bank’s exposure and solvency of the customer. On occasion, it is not possible to find a satisfactory solution and the customer may file for insolvency or local equivalent. In all outcomes, LMU seeks to treat customers fairly, sympathetically and positively, in a professional way with transparent processes and procedures.

Remediation and restructuring strategies available in the business and LMU include granting a customer various types of concessions while seeking to enhance the ability of the customer to ultimately repay the Group which could include enhancing the overall security available to the Group. Any decision to approve a concession will be a function of the regions specific country and sector appetite, the key metrics of the customer, the market environment, the loan structure and security. Internal reviews on customers managed directly by LMU are performed on a scheduled basis in accordance with relevant accounting guidelines, credit policies and national banking regulations. Under certain circumstances, concessions granted may result in the loan being classified as a renegotiated loan.

Collateral and other credit enhancements held

(Audited)

Loans and advances held at amortised cost

The Group’s practice is to lend on the basis of customers’ ability to meet their obligations out of cash flow resources rather than rely on the value of security offered. Depending on a customer’s standing and the type of product, facilities may be provided without security. For other lending, a charge over collateral is obtained and considered in determining the credit decision and pricing. In the event of default, the bank 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.

 

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Additionally, risk may be managed by employing other types of collateral and credit risk enhancements such as second charges, other liens and unsupported guarantees, but the valuation of such mitigants is less certain and their financial effect has not been quantified.

Refinance risk

Many types of lending require the repayment of a significant proportion of the principal at maturity. Typically, the mechanism of repayment for the customer is through the acquisition of a new loan to settle the existing debt. Refinance risk arises where a customer is unable to repay such term debt on maturity, or to refinance debt at commercial rates. When there is evidence that this risk may apply to a specific contract, HSBC may need to refinance the loan on concessionary terms that we would not otherwise have considered, in order to recoup the maximum possible cash flows from the contract and potentially avoid the customer defaulting on the repayment of principal. When there is sufficient evidence that borrowers, based on their current financial capabilities, may fail at maturity to repay or refinance their loans, these loans are disclosed as impaired with recognition of a corresponding impairment allowance where appropriate.

Nature of HSBC’s securitisation and other structured exposures

Mortgage-backed securities (‘MBS’s) are securities that represent interests in groups of mortgages and provide investors with the right to receive cash from future mortgage payments (interest and/or principal). An MBS which references mortgages with different risk profiles is classified according to the highest risk class.

Collateralised debt obligations (‘CDO’s) are securities backed by a pool of bonds, loans or other assets such as asset-backed securities (‘ABS’s). CDOs may include exposure to sub-prime or Alt-A mortgage assets where these are part of the underlying assets or reference assets. As there is often uncertainty surrounding the precise nature of the underlying collateral supporting CDOs, all CDOs supported by residential mortgage-related assets are classified as sub-prime. Our holdings of ABSs and CDOs and direct lending positions, and the categories of mortgage collateral and lending activity, are described below.

Our exposure to non-residential mortgage-related ABSs includes securities with collateral relating to commercial property mortgages, leveraged finance loans, student loans, and other assets such as securities with other receivable-related collateral.

Definitions and classifications of ABSs and CDOs

 

Categories of   ABSs and CDOs		Definition		Classification
Sub-prime		Loans to customers who have limited credit histories, modest incomes or high debt-to-income ratios or have experienced credit problems caused by occasional delinquencies, prior charge-offs, bankruptcy or other credit-related actions.		For US mortgages, a FICO score of 620 or less has primarily been used to determine whether a loan is sub-prime. For non-US mortgages, management judgement is used.
US Home Equity Lines of Credit (‘HELoC’s) (categorised within ‘Sub-prime’)		A form of revolving credit facility provided to customers, which is supported in the majority of circumstances by a second lien or lower ranking charge over residential property.		Holdings of HELoCs are classified as sub-prime.
US Alt-A		Lower risk loans than sub-prime, but they share higher risk characteristics than lending under fully conforming standard criteria.		US credit scores and the completeness of documentation held (such as proof of income), are considered when determining whether an Alt-A classification is appropriate. Non sub-prime mortgages in the US are classified as Alt-A if they are not eligible for sale to the major US Government mortgage agencies or sponsored entities.
US Government agency and sponsored enterprises mortgage-related assets		Securities that are guaranteed by US Government agencies such as the Government National Mortgage Association (‘Ginnie Mae’), or by US Government sponsored entities including Fannie Mae and Freddie Mac.		Holdings of US Government agency and US Government sponsored enterprises’ mortgage-related assets are classified as prime exposures.

 

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Categories of ABSs and CDOs		Definition		Classification
UK non-conforming mortgages (categorised within ‘Sub-prime’)		UK mortgages that do not meet normal lending criteria. Examples include mortgages where the expected level of documentation is not provided (such as income with self-certification), or where poor credit history increases risk and results in pricing at a higher than normal lending rate.		UK non-conforming mortgages are treated as sub-prime exposures.
Other residential mortgages		Residential mortgages, including prime mortgages, that do not meet any of the classifications described above.		Prime residential mortgage-related assets are included in this category.

 

 

Liquidity and funding

The management of liquidity and funding is primarily undertaken locally (by country) in our operating entities in compliance with the Group’s Liquidity and Funding Risk Management Framework (the ‘LFRF’), and with practices and limits set by the GMB through the RMM and approved by the Board. These limits vary according to the depth and the liquidity of the markets in which the entities operate. Our general policy is that each defined operating entity should be self-sufficient in funding its own activities. Where transactions exist between operating entities, they are reflected symmetrically in both entities.

As part of our Asset, Liability and Capital Management (‘ALCM’) structure, we have established ALCOs at Group level, in the regions and in operating entities. The terms of reference of all ALCOs include the monitoring and control of liquidity and funding.

The primary responsibility for managing liquidity and funding within the Group’s framework and risk appetite resides with the local operating entities’ ALCOs. Our most significant operating entities are overseen by regional ALCOs, Group ALCO and the RMM. The remaining smaller operating entities are overseen by regional ALCOs, with appropriate escalation of significant issues to Group ALCO and the RMM.

Operating entities are predominately defined on a country basis to reflect our local management of liquidity and funding. Typically, an operating entity will be defined as a single legal entity. However, to take account of the situation where operations in a country are booked across multiple subsidiaries or branches:

 

•

an operating entity may be defined as a wider sub-consolidated group of legal entities if they are incorporated in the same country, liquidity and funding are freely fungible between the entities and permitted by local regulation, and the definition reflects how liquidity and funding are managed locally; or

 

•

an operating entity may be defined more narrowly as a principal office (branch) of a wider legal entity operating in multiple countries, reflecting the local country management of liquidity and funding.

The RMM reviews and agrees annually the list of entities it directly oversees and the composition of these entities.

Primary sources of funding

Customer deposits in the form of 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 maintaining depositor confidence in our capital strength and liquidity, and on competitive and transparent pricing.

We also access wholesale funding markets by issuing senior secured and unsecured debt securities (publically and privately) and borrowing from the secured repo markets against high quality collateral, in order to obtain funding for non-banking subsidiaries that do not accept deposits, to align asset and liability maturities and currencies and to maintain a presence in local wholesale markets.

The management of liquidity and funding risk

Inherent liquidity risk categorisation

We place our operating entities into one of two categories (low and medium) to reflect our assessment of their inherent liquidity risk considering political, economic and regulatory factors within the host country and factors specific to the operating entities themselves, such as their local market, market share and balance sheet strength. The categorisation involves management judgement and is based on the perceived liquidity risk of an operating entity relative to other entities in the Group. The categorisation is intended to reflect the possible impact of a liquidity event, not the probability of an event, and forms part of our risk appetite. It is used to determine the prescribed stress scenario that we require our operating entities to be able to withstand and manage to.

Core deposits

A key element of our internal framework is the classification of customer deposits into core and non-core based on our expectation of their behaviour during periods of liquidity stress. This characterisation takes into account the inherent liquidity

 

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risk categorisation of the operating entity originating the deposit, the nature of the customer and the size and pricing of the deposit. No deposit is considered to be core in its entirety unless it is contractually collateralising a loan. The core deposit base in each operating entity is considered to be a long-term source of funding and therefore is assumed not to be withdrawn in the liquidity stress scenario that we use to calculate our principal liquidity risk metrics.

The three filters considered in assessing whether a deposit in any operating entity is core are:

 

•

price: any deposit priced significantly above market or benchmark rates is generally treated as entirely non-core;

 

•

size: depositors with total funds above certain monetary thresholds are excluded. Thresholds are established by considering the business line and inherent liquidity risk categorisation; and

 

•

line of business: the element of any deposit remaining after the application of the price and size filters is assessed on the basis of the line of business with which the deposit is associated. The proportion of any customer deposit that can be considered core under this filter is between 35% and 90%.

Repo transactions and bank deposits cannot be classified as core deposits.

Advances to core funding ratio

Core customer deposits are an important source of funding to finance lending to customers, and mitigate against reliance on short-term wholesale funding. Limits are placed on operating entities to restrict their ability to increase loans and advances to customers without corresponding growth in core customer deposits or long-term debt funding with a residual maturity beyond one year; this measure is referred to as the ‘advances to core funding’ ratio.

Advances to core funding ratio limits are set by the RMM for the most significant operating entities, and by regional ALCOs for smaller operating entities, and are monitored by ALCM teams. The ratio describes loans and advances to customers as a percentage of the total of core customer deposits and term funding with a remaining term to maturity in excess of one year. In general, customer loans are assumed to be renewed and are included in the numerator of the ratio, irrespective of the contractual maturity date. Reverse repo arrangements are excluded from the advances to core funding ratio.

Stressed coverage ratios

Stressed coverage ratios are derived from stressed cash flow scenario analyses and express stressed cash inflows as a percentage of stressed cash outflows over one-month and three-month time horizons.

The stressed cash inflows include:

 

•

inflows (net of assumed haircuts) expected to be generated from the realisation of liquid assets; and

 

•

contractual cash inflows from maturing assets that are not already reflected as a utilisation of liquid assets.

In line with the approach adopted for the advances to core funding ratio, customer loans are generally assumed not to generate any cash inflows under stress scenarios and are therefore excluded from the numerator of the stressed coverage ratio, irrespective of the contractual maturity date.

A stressed coverage ratio of 100% or higher reflects a positive cumulative cash flow under the stress scenario being monitored. Group operating entities are required to maintain a ratio of 100% or more out to three months under the combined market-wide and HSBC-specific stress scenario defined by the inherent liquidity risk categorisation of the operating entity concerned.

Compliance with operating entity limits is monitored by ALCM teams and reported monthly to the RMM for the main operating entities and to regional ALCOs for the smaller operating entities.

Stressed scenario analysis

We use a number of standard Group stress scenarios designed to model:

 

•

combined market-wide and HSBC-specific liquidity crisis scenarios; and

 

•

market-wide liquidity crisis scenario.

These scenarios are modelled by all operating entities. The appropriateness of the assumptions for each scenario is reviewed by ALCM regularly and formally approved by the RMM and the Board annually as part of the liquidity and funding risk appetite approval process.

Stressed cash outflows are determined by applying a standard set of prescribed stress assumptions to the Group’s cash flow model. Our framework prescribes the use of two market-wide scenarios and two further combined market-wide and HSBC-specific stress scenarios of increasing severity. In addition to our standard stress scenarios, individual operating entities are required to design their own scenarios to reflect specific local market conditions, products and funding bases.

The two combined market-wide and HSBC-specific scenarios model a more severe scenario than the market-wide scenario. The relevant combined market-wide and HSBC-specific stress scenario that an operating entity manages to is based upon its inherent liquidity risk categorisation. The key assumptions factored into the two combined market-wide and HSBC-specific stress scenarios are summarised as follows:

 

•

all non-core deposits are deemed to be withdrawn within three months (80% within one month), with the level of non-core deposits dependent on the operating entity’s inherent liquidity risk categorisation;

 

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•

the ability to access interbank funding and unsecured term debt markets ceases for the duration of the scenario;

 

•

the ability to generate funds from illiquid asset portfolios (securitisation and secured borrowing) is restricted to 25-75% of the lower of issues in the last six months or expected issues in the next six months. The restriction is based on current market conditions and is dependent on the operating entity’s inherent liquidity risk categorisation;

 

•

the ability to access repo funding ceases for any asset not classified as liquid under our liquid asset policy for the duration of the scenario;

 

•

drawdowns on committed lending facilities must be consistent with the severity of the market stress being modelled and dependent on the inherent liquidity risk categorisation of the operating entity;

 

•

outflows are triggered by a defined downgrade in long-term ratings. We maintain an ongoing assessment of the appropriate number of notches to reflect;

 

•

customer loans are assumed to be renewed at contractual maturity;

 

•

interbank loans and reverse repos are assumed to run off contractually; and

 

•

assets defined as liquid assets are assumed to be realised in cash ahead of their contractual maturity, after applying a defined stressed haircut of up to 20%.

Liquid assets of HSBC’s principal operating entities

Stressed scenario analysis and the numerator of the coverage ratio include the assumed cash inflows that would be generated from the realisation of liquid assets, after applying the appropriate stressed haircut. These assumptions are made on the basis of management’s expectation of when an asset is deemed to be realisable.

Liquid assets are unencumbered assets that meet the Group’s definition of liquid assets and are either held outright or as a consequence of a reverse repo transaction with a residual contractual maturity beyond the time horizon of the stressed coverage ratio being monitored. Any unencumbered asset held as a result of reverse repo transactions with a contractual maturity within the time horizon of the stressed coverage ratio being monitored is excluded from the stock of liquid assets and is instead reflected as a contractual cash inflow.

Our framework defines the asset classes that can be assessed locally as high quality and realisable within one month and between one month and three months. Each local ALCO has to be satisfied that any asset which may be treated as liquid in accordance with the Group’s liquid asset policy will remain liquid under the stress scenario being managed to.

Inflows from the utilisation of liquid assets within one month can generally only be based on confirmed withdrawable central bank deposits or the sale or repo of government and quasi-government exposures generally restricted to those denominated in the sovereign’s domestic currency. High quality ABSs (predominantly US MBSs) and covered bonds are also included but inflows assumed for these assets are capped.

Inflows after one month are also reflected for high quality non-financial and non-structured corporate bonds and equities within the most liquid indices.

 

Internal categorisation		Cash inflow recognised		Asset classes
Level 1		Within one month		• Central government   • Central bank (including confirmed withdrawable reserves)   • Supranationals   • Multilateral development banks   • Coins and banknotes
Level 2		Within one month but capped		• Local and regional government   • Public sector entities   • Secured covered bonds and pass-through ABSs   • Gold
Level 3		From one to three months		• Unsecured non-financial entity securities   • Equities listed on recognised exchanges and within liquid indices

Any entity owned and controlled by central or local/regional government but not explicitly guaranteed is treated as a public sector entity.

Any exposure explicitly guaranteed is reflected as an exposure to the ultimate guarantor.

In terms of the criteria used to ensure liquid assets are of a high quality, the Group’s liquid asset policy sets out the following additional criteria:

 

1.	Central bank and central government exposures:

 

•

denominated in the domestic currency of the related sovereign and held:

 

–

onshore in the domestic banking system, qualify as Level 1 liquid assets.

 

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–

offshore, must be risk weighted 20% or lower under the Basel standardised risk weighting methodology to qualify as Level 1 liquid assets.

 

•

denominated in a currency other than the currency of the related sovereign (i.e. foreign currency) must be risk weighted 20% or lower under the Basel standardised risk weighting methodology and issued in a limited number of major currencies to qualify as Level 1 liquid assets.

The treatment of eurozone countries using the euro as their domestic currency depends on whether the exposures are held onshore in the domestic banking system or offshore. Central bank and central government exposures held onshore in the domestic banking system qualify as Level 1 liquid assets under criteria 1, but central bank and central government exposures held offshore are considered to be denominated in a foreign currency under criteria 3.

 

2.	Local/regional government exposures held onshore and considered by the local regulator to be the same risk as central government exposures can be considered central government exposures.

 

3.	Supranationals and multilateral development banks must be 0% risk weighted under the Basel standardised risk-weighting methodology to qualify as Level 1 liquid assets.

 

4.	To qualify as a level 2 liquid asset, the exposure must be risk weighted 20% or lower under the Basel standardised risk-weighting methodology.

 

5.	To qualify as a Level 3 liquid asset, an unsecured non-financial corporate debt exposure must satisfy a minimum internal rating requirement.

On a case-by-case basis, operating entities are permitted to treat other assets as liquid if these assets are realistically assessed to be liquid under stress. These liquid assets are reported as ‘Other’, separately from Level 1, Level 2 and Level 3 liquid assets.

Net cash flow arising from interbank and intragroup loans and deposits

Under the LFRF, a net cash inflow within three months arising from interbank and intra-Group loans and deposits will give rise to a lower liquid asset requirement. Conversely, a net cash outflow within three months arising from interbank and intra-Group loans and deposits will give rise to a higher liquid assets requirement.

Net cash flow arising from reverse repo, repo, stock borrowing, stock lending and outright short positions (including intra-Group)

A net cash inflow represents liquid resources in addition to liquid assets because any unencumbered asset held as a consequence of a reverse repo transaction with a residual contractual maturity within the stressed coverage ratio time period is not reflected as a liquid asset.

The impact of net cash outflow depends on whether the underlying collateral encumbered as a result will qualify as a liquid asset when released at the maturity of the repo. The majority of the Group’s repo transactions are collateralised by liquid assets and, as such, any net cash outflow shown is offset by the return of liquid assets, which are excluded from the liquid asset table above.

Wholesale debt monitoring

Where wholesale debt term markets are accessed to raise funding, ALCO is required to establish cumulative rolling three-month and 12-month debt maturity limits to ensure no concentration of maturities within these timeframes.

Liquidity behaviouralisation

Liquidity behaviouralisation is applied to reflect our assessment of the expected period for which we are confident that we will have access to our liabilities, even under a severe liquidity stress scenario, and the expected period for which we must assume that we will need to fund our assets. Behaviouralisation is applied when the contractual terms do not reflect the expected behaviour. Liquidity behaviouralisation is reviewed and approved by local ALCO in compliance with policies set by the RMM. Our approach to liquidity risk management will often mean different approaches are applied to assets and liabilities. For example, management may assume a shorter life for liabilities and a longer-term funding requirement for assets. All core deposits are assumed under the Group’s core/non-core and advances to core funding frameworks to have a liquidity behaviouralised life beyond one year and to represent a homogeneous source of core funding. The behaviouralisation of assets is far more granular and seeks to differentiate the period for which we must assume that we will need to fund the asset.

Funds transfer pricing

Our funds transfer pricing policies give rise to a two-stage funds transfer pricing approach, reflecting the fact that we separately manage interest rate risk and liquidity and funding risk under different assumptions. They have been developed to be consistent with our risk management frameworks. Each operating entity is required to apply the Group’s transfer pricing policy framework to determine for each material currency the most appropriate interest rate risk transfer pricing curve, a liquidity premium curve (which is the spread over the interest rate risk transfer pricing curve) and a liquidity recharge assessment (which is the spread under or over the interest rate risk transfer pricing curve).

 

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The interest rate risk transfer pricing policy seeks to ensure that all market interest rate risk arising structurally from non-trading (banking book) assets and liabilities which is capable of being neutralised externally in the market or neutralised internally by off-setting transfers, is transferred to BSM to be managed centrally as non-trading market risk. For each material currency each operating entity employs a single interest rate risk transfer pricing curve. The transfer price curve used for this purpose reflects how BSM in each operating entity is best able to neutralise the interest rate risk in the market at the point of transfer. Where basis risk can be identified between the re-pricing basis of an external asset or external liability and the re-pricing basis of the interest rate risk transfer pricing curve, this basis risk may be transferred to BSM provided it can neutralise the basis risk in the market.

Liquidity and funding risk is transfer priced independently from interest rate risk because the liquidity and funding risk of an operating entity is transferred to ALCO to be managed centrally. ALCO monitors and manages the advances to core funding ratio and delegates the management of the liquid asset portfolio and execution of the wholesale term debt funding plan to BSM. This assists ALCO in ensuring the Group’s stressed coverage ratios remain above 100% out to three months.

The liquidity and funding risk transfer price consists of two components:

 

•

Liquidity recharge: the cost of holding the benchmark liquid asset (the yield under the transfer price) to meet stressed cash outflows. The benchmark liquid asset is decided by ALCO and based on the weighted average duration that can be achieved by investing in level 1 liquid assets, with a residual duration of up to one year.

 

•

Liquidity premium: the assessed cost/value of term funding (the yield over the transfer price) to pay for term debt and core deposits.

The assessed cost of holding liquid assets is allocated to the outflows modelled by the Group’s internal stressed coverage ratio framework.

Liquidity premium is charged to any asset that affects our three-month stressed coverage ratios based on the assessed behaviouralised liquidity life of the asset, with any asset affecting the Group’s advances to core funding metric required to have a minimum behaviouralised life of at least one year, and the prevailing liquidity premium curve rate set by ALCO and calibrated in line with Group’s calibration principles. Core deposits therefore share equally in the liquidity premiums charged to the assets they support, after deducting the cost of any term funding.

Repos and stock lending

GB&M provides collateralised security financing services to its clients, providing them with cash financing or specific securities. When cash is provided to clients against collateral in the form of securities, the cash provided is recognised on the balance sheet as a reverse repo. When securities are provided to clients against cash collateral the cash received is recognised on the balance sheet as a repo or, if the securities are equity securities, as stock lending.

Each operating entity manages its collateral through a central collateral pool, in line with the LFRF. When specific securities need to be delivered and the entity does not have them currently available within the central collateral pool, the securities are borrowed on a collateralised basis. When securities are borrowed against cash collateral the cash provided is recognised on the balance sheet as a reverse repo or, if the securities are equity securities, as stock borrowing.

Operating entities may also borrow cash against collateral in the form of securities, using the securities available in the central collateral pool. Repos and stock lending can be used in this way to fund the cash requirement arising from securities owned outright by Markets to facilitate client business, and the net cash requirement arising from financing client securities activity.

Reverse repos, stock borrowing, repos and stock lending are reported net when the IFRSs offsetting criteria are met. In some cases transactions to borrow or lend securities are collateralised using securities. These transactions are off-balance sheet.

Any security accepted as collateral for a reverse repo or stock borrowing transaction must be of very high quality and its value subject to an appropriate haircut. Securities borrowed under reverse repo or stock borrowing transactions can only be recognised as part of the liquidity asset buffer for the duration of the transactions and only if the security received is eligible under the liquid asset policy within the LFRF.

Credit controls are in place to ensure that the fair value of any collateral received remains appropriate to collateralise the cash or fair value of securities given.

 

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The effect of active collateral management

Collateral is managed on an operating entity basis, consistent with the approach adopted in managing liquidity and funding. Available collateral held by each operating entity is managed as a single collateral pool. In deciding which collateral to pledge, each operating entity seeks to optimise the use of the available collateral pool within the confines of the LFRF, irrespective of whether the collateral pledged is recognised on-balance sheet or was received in respect of reverse repo, stock borrowing or derivative transactions.

Managing collateral in this manner affects the presentation of asset encumbrance in that we may encumber on-balance sheet holdings while maintaining available unencumbered off-balance sheet holdings, even though we are not seeking to directly finance the on-balance sheet holdings pledged.

In quantifying the level of encumbrance of negotiable securities, the encumbrance is analysed by individual security. When a particular security is encumbered and we hold the security both on-balance sheet and off-balance sheet with the right to repledge, we assume for the purpose of this disclosure that the off-balance sheet holding received from the third party is encumbered ahead of the on-balance sheet holding.

An on-balance sheet encumbered and off-balance sheet unencumbered asset will occur, for example, if we receive a specific security as a result of a reverse repo/stock borrowing transaction, but finance the cash lent by pledging a generic collateral basket, even if the security received is eligible for the collateral basket pledged. It will also occur if we receive a generic collateral basket as a result of a reverse repo transaction but finance the cash lent by pledging specific securities, even if the securities pledged are eligible for the collateral basket.

Encumbered and unencumbered assets

 

Definitions of the categories included in the table ‘Analysis of on-balance sheet encumbered and unencumbered assets’:   •  Assets encumbered as a result of transactions with counterparties other than central banks as a result of covered bonds are any assets on our balance sheet pledged against our covered bonds issuance with a counterparty which is not central bank and as a result the assets are unavailable to the bank to secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements.   •  Assets encumbered as a result of transactions with counterparties other than central banks as a result of securitisation are any assets on our balance sheet pledged against securitisations with a counterparty which is not central bank including asset-backed commercial paper, CDOs, residential mortgage-backed securities, or structured investment vehicles paper and as a result the assets are unavailable to the bank to secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements.   •  Assets encumbered as a result of transactions with counterparties other than central banks – Other are assets on our balance sheet (other than covered bonds and securitisation above) which have been pledged with a counterparty which is not central bank as a collateral against an existing liability, and as a result are assets which are unavailable to the bank to secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements. Examples include assets pledged for sale and repurchase and stock lending transactions and certain property assets.   •  Assets positioned at central banks (i.e. pre-positioned plus encumbered) are any assets that are eligible for emergency central bank liquidity/funding or under central bank pre-existing arrangements for funding without further due diligence work required. Any transferable customer loan that is central bank eligible such as pre-positioned central bank UK mortgages and US mortgages accepted by FHLB and assets on our balance sheet which have been pledged with central bank as collateral against an existing liability, and as a result are assets which are unavailable to the bank to secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements.   •  Unencumbered – readily available assets are assets regarded by the bank to be readily available in the normal course of business to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for these purposes.   •  Unencumbered – other assets capable of being encumbered are assets where there are no restrictions on their use to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, but they are not readily realisable in the normal course of business in their current form.   •  Unencumbered – reverse repo/stock borrowing receivables and derivative assets are assets related specifically to reverse repo, stock borrowing and derivative transactions. They are shown separately as these on-balance sheet assets cannot be pledged but often give rise to the receipt of non-cash assets which are not recognised on the balance sheet, and can additionally be used to raise secured funding, meet additional collateral requirements or be sold.   •  Unencumbered – cannot be encumbered are assets that have not been pledged and which we have assessed could not be pledged and therefore could not be used to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements. An example is assets held by the Group’s insurance subsidiaries that back liabilities to policyholders and support the solvency of these entities.   Historically, the Group has not recognised any contingent liquidity value for assets other than those assets defined under the LFRF as being liquid assets, and any other negotiable instruments that under stress are assumed to be realisable after three months, even though they may currently be realisable. This approach has generally been driven by our risk appetite not to place any reliance on central banks. In a few cases, we have recognised the contingent value of discrete pools of assets, but the amounts involved are insignificant. As a result, we have reported the majority of our loans and advances to customers and banks in the category ‘Other realisable assets’ as management would need to perform additional actions in order to make the assets transferable and readily realisable.

 

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Additional information

The amount of assets pledged to secure liabilities reported in Note 18 on the Financial Statements may be greater than the book value of assets reported as being encumbered in the table on page 163. Examples of where such differences occur are:

 

•

ABSs and covered bonds, where the amount of liabilities issued plus the required mandatory over-collateralisation is lower than the book value of assets pledged to the pool. Any difference is categorised in the table above as ‘Unencumbered – readily realisable assets’;

 

•

negotiable securities held by custodians or settlement agents, where a floating charge has been given over the entire holding to secure intra-day settlement liabilities, are only reported as encumbered to the extent that we have a liability to the custodian or settlement agent at the reporting date, with the balance reported as ‘Unencumbered – readily realisable assets’; and

 

•

assets pre-positioned with central banks or government agencies are only reported as encumbered to the extent that we have secured funding with the collateral. The unutilised pre-positioned collateral is reported as ‘Unencumbered – readily realisable assets’.

Securities reflected on the balance sheet that are pledged as collateral against an existing liability or lent are reflected as encumbered for the duration of the transaction. When securities are received as collateral or borrowed, and when we have the right to sell or re-pledge these securities, they are reflected as available and unencumbered for the duration of the transaction, unless re-pledged or sold. Further analysis regarding the encumbrance of securities resulting from repos and stock lending and available unencumbered assets arising from reverse repos and stock borrowing is provided under the heading ‘Encumbered and unencumbered assets’ on page 162.

In the normal course of business we do not seek to utilise repo financing as a source of funding to finance customer assets, beyond the collateralised security financing activities within Markets described above.

The original contractual maturity of reverse repo, stock borrowing, repo and stock lending is short term with the vast majority of transactions being for less than 90 days.

Management of cross-currency liquidity and funding risk

Our liquidity and funding risk framework also considers the ability of each entity to continue to access foreign exchange markets under stress when a surplus in one currency is used to meet a deficit in another currency, for example, by the use of the foreign currency swap markets. Where appropriate, operating entities are required to monitor stressed coverage ratios and advances to core funding ratios for non-local currencies.

HSBC Holdings

HSBC Holdings’ primary sources of cash are dividends received from subsidiaries, interest on and repayment of intra-group loans and securities with interest earned on its own liquid funds. HSBC Holdings also raises ancillary funds in the debt capital markets through subordinated and senior debt issuance. Cash is primarily used for the provision of capital and TLAC funding to subsidiaries, interest payments to debt holders and dividend payments to shareholders.

HSBC Holdings is also subject to contingent liquidity risk by virtue of credit-related commitments and guarantees and similar contracts issued. Such commitments and guarantees are only issued after due consideration of HSBC Holdings’ ability to finance the commitments and guarantees and the likelihood of the need arising.

HSBC Holdings actively manages the cash flows from its subsidiaries to optimise the amount of cash held at the holding company level. The ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial and operating performance. During 2015, none of the Group’s subsidiaries experienced significant restrictions on paying dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged by our subsidiaries on paying dividends or repaying loans and advances, with the exception of HSBC North America Holdings Inc. None of the subsidiaries which are excluded from our regulatory consolidation has capital resources below its minimum regulatory requirement.

 

 

Market risk

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.

 

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Market risk in global businesses

The diagram below summarises the main business areas where trading and non-trading market risks reside and the market risk measures used to monitor and limit exposures.

 

 

1	The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included in the Group VaR. The management of this risk is described on page 171.

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 in order to optimise return on risk while maintaining a market profile consistent with our status as one of the world’s largest banking and financial services organisations.

The nature of the hedging and risk mitigation strategies performed across the Group corresponds to the market risk management instruments available within each operating jurisdiction. These strategies range from the use of traditional market instruments, such as interest rate swaps, to more sophisticated hedging strategies to address a combination of risk factors arising at portfolio level.

Market risk governance

(Audited)

Market risk is managed and controlled through limits approved by the RMM for HSBC Holdings and our various global businesses. These limits are allocated across business lines and to the Group’s legal entities.

 

		The management of market risk is principally undertaken in GB&M, where 94% of the total value at risk of HSBC (excluding insurance) and almost all trading VaR resides, using risk limits approved by the GMB. VaR limits are set for portfolios, products and risk types, with market liquidity being a primary factor in determining the level of limits set.   Global Risk is responsible for setting market risk management policies and measurement techniques. Each major operating entity has an independent market risk management and control sub-function which is responsible for measuring market risk exposures in accordance with the policies defined by Global Risk, and monitoring and reporting these exposures against the prescribed limits on a daily basis. The market risk limits are governed according to the framework illustrated to the left.   Each operating entity is required to assess the market risks arising on each product in its business and to transfer them to either its local GB&M unit for management, or to separate books managed under the supervision of the local ALCO.   Our aim is to ensure that all market risks are consolidated within operations that have the necessary skills, tools, management and governance to manage them. In certain cases where the market risks cannot be fully transferred, we identify the effect of varying scenarios on valuations or on net interest income resulting from any residual risk positions. Further details on the control and management process for residual risks are provided on page 212.

Model risk is governed through Model Oversight Committees (‘MOC’s) at the regional and global Wholesale Credit and Market Risk levels. They have direct oversight and approval responsibility for all traded risk models utilised for risk measurement and management and stress testing. The MOCs prioritise the development of models, methodologies and practices used for traded risk management within the Group and ensure that they remain within our risk appetite and business plans. The Markets MOC reports into the Group MOC, which oversees all model risk types at Group level. Group MOC informs the RMM about material issues at least on a bi-annual basis. The RMM is the Group’s ‘Designated Committee’ according to regulatory rules and has delegated day-to-day governance of all traded risk models to the Markets MOC.

Our control of market risk in the trading and non-trading portfolios is based on a policy of restricting individual operations to trading within a list of permissible instruments authorised for each site by Global Risk, of enforcing new product approval

 

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procedures, and of restricting trading in the more complex derivative products only to offices with appropriate levels of product expertise and robust control systems.

Market risk measures

Monitoring and limiting market risk exposures

Our objective is to manage and control market risk exposures while maintaining a market profile consistent with our risk appetite.

We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, value at risk and stress testing.

Sensitivity analysis

Sensitivity analysis measures the impact of individual market factor movements on specific instruments or portfolios, including interest rates, foreign exchange rates and equity prices, such as the effect of a one basis point change in yield. We use sensitivity measures to monitor the market risk positions within each risk type. Sensitivity limits are set for portfolios, products and risk types, with the depth of the market being one of the principal factors in determining the level of limits set.

Value at risk

(Audited)

Value at risk (‘VaR’) is a technique that estimates the 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 is calculated for all trading positions regardless of how we capitalise those exposures. Where there is not an approved internal model, we use the appropriate local rules to capitalise exposures.

In addition, we calculate VaR for non-trading portfolios to have a complete picture of risk. Our models are predominantly based on historical simulation. VaR is calculated at a 99% confidence level for a one-day holding period. Where we do not calculate VaR explicitly, we use alternative tools as summarised in the Market Risk Stress Testing table on page 213.

Our VaR models derive plausible future scenarios from past series of recorded market rates and prices, taking into account inter-relationships between different markets and rates such as interest rates and foreign exchange rates. The models also incorporate the effect of option features on the underlying exposures.

The historical simulation models used incorporate the following features:

 

•

historical market rates and prices are calculated with reference to foreign exchange rates and commodity prices, interest rates, equity prices and the associated volatilities;

 

•

potential market movements utilised for VaR are calculated with reference to data from the past two years; and

 

•

VaR measures are calculated to a 99% confidence level and use a one-day holding period.

The 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.

We are committed to the ongoing development of our in-house risk models.

VaR model limitations

Although a valuable guide to risk, VaR should always be viewed in the context of its limitations. For example:

 

•

the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature;

 

•

the use of a holding period assumes that all positions can be liquidated or the risks offset during that period. This may not fully reflect the market risk arising at times of severe illiquidity, when the holding period may be insufficient to liquidate or hedge all positions fully;

 

•

the use of a 99% confidence level, by definition, does not take into account losses that might occur beyond this level of confidence;

 

•

VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intra-day exposures; and

 

•

VaR is unlikely to reflect loss potential on exposures that only arise under conditions of significant market movement.

Risk not in VaR framework

Our VaR model is designed to capture significant basis risks such as CDS versus bond, asset swap spreads and cross-currency basis. Other basis risks which are not completely covered in VaR, such as the Libor tenor basis, are complemented by our risk not in VaR (‘RNIV’) calculations, and are integrated into our capital framework.

 

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The RNIV framework therefore aims to capture and capitalise material market risks that are not adequately covered in the VaR model. An example of this is Libor-overnight index swap basis risk for minor currencies. In such instances the RNIV framework uses stress tests to quantify the capital requirement. On average in 2015, the capital requirement derived from these stress tests represented 2.3% of the total internal model-based market risk requirement.

Risks covered by RNIV represented 19% of market risk RWAs for models with regulatory approval and included those resulting from underlying risk factors which are not observable on a daily basis across asset classes and products, such as dividend risk and implied correlation risks.

Risk factors are reviewed on a regular basis and either incorporated directly in the VaR models, where possible, or quantified through the VaR-based RNIV approach or a stress test approach within the RNIV framework. The severity of the scenarios is calibrated to be in line with the capital adequacy requirements. The outcome of the VaR-based RNIV is included in the VaR calculation and back-testing; a stressed VaR RNIV is also computed for the risk factors considered in the VaR-based RNIV approach.

Level 3 assets

The fair values of Level 3 assets and liabilities in trading portfolios are disclosed on page 382, and represent only a small proportion of the overall trading portfolio. Market risk arising from Level 3 instruments is managed by various market risk techniques such as stress testing and notional limits. The table on page 384 shows the movement in Level 3 financial instruments.

Stress testing

Stress testing is an important procedure that is integrated into our market risk management tool 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 standard set of scenarios is utilised consistently across all regions within the Group. Scenarios are tailored to capture the relevant events or market movements at each level. The risk appetite around potential stress losses for the Group is set and monitored against referral limits.

Market risk reverse stress tests are undertaken on the premise that there is a fixed loss. The stress testing process identifies which scenarios lead to this loss. The rationale behind the reverse stress test is to understand scenarios which are beyond normal business settings that could have contagion and systemic implications.

Stressed VaR and stress testing, together with reverse stress testing and the management of gap risk, provide management with insights regarding the ‘tail risk’ beyond VaR for which HSBC’s appetite is limited.

Trading portfolios

Volcker Rule

In 2013, US regulators finalised the Volcker Rule. Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and its final implementing rules (collectively referred to as the ‘Volcker Rule’) imposes broad restrictions on HSBC’s ability to engage in ‘proprietary trading’ or to own, sponsor, or have certain relationships with hedge funds, private equity funds, and certain other collective investment vehicles (broadly defined as ‘covered funds’). These restrictions are subject to a number of exemptions or exclusions, including market making, underwriting and risk-mitigating hedging, organising covered funds for customers and issuers of asset-backed securities, and underwriting or market making in covered fund interests.

The Volcker Rule broadly went into effect on 22 July 2015, with the exception of certain legacy fund activities that are able to rely on an extension of the conformance date.

HSBC has implemented a programme to comply with the Volcker Rule, including policies and procedures, internal controls, corporate governance, independent testing, training, and record keeping and, eventually, calculation and reporting of quantitative metrics for certain trading activities.

HSBC has completed training for all affected front office and control personnel, has conformance plans for those covered funds to which the extension applies, and believes that it is compliant in all material respects with the Volcker Rule.

 

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Back-testing

We routinely validate the accuracy of our VaR models by back-testing them against both actual, which replaced clean profit and loss from 1 August 2015, and hypothetical profit and loss against the corresponding VaR numbers. Hypothetical profit and loss excludes non-modelled items such as fees, commissions and revenues of intra-day transactions.

We would expect on average to see two or three profits and two or three losses in excess of VaR at the 99% confidence level over a one-year period. The actual number of profits or losses in excess of VaR over this period can therefore be used to gauge how well the models are performing.

We back-test our Group VaR at various levels which reflect a full legal entity scope of HSBC, including entities that do not have local permission to  use VaR for regulatory purposes.

Gap risk

Certain products, such as non-recourse margin loans, are not exposed to small day-to-day moves in market rates or prices, but are exposed large discontinuous moves. Such movements may occur, for example, when, in reaction to an adverse event or unexpected news announcement, some parts of the market move far beyond their normal volatility range and become temporarily illiquid. Products which exhibit exposure only to large discontinuous moves (gap risk) are not well captured by VaR measures or traditional market risk sensitivity measures. HSBC has implemented additional stress measurement and controls over such products.

In 2015, gap risk exposure was primarily due to non-recourse loan transactions, mostly for corporate clients, where the collateral against the loan is limited to the posted assets. Upon occurrence of a gap event, the value of the collateral could fall below the outstanding loan amount.

We did not incur any notable gap loss in 2015.

De-peg risk

For certain currencies (pegged or managed) the spot exchange rate is pegged at a fixed-rate (typically to US dollars or euros), or managed within a predefined band around a pegged rate. De-peg risk is the risk of the peg or managed band changing or being abolished, and moving to a floating regime.

HSBC has extensive experience in managing fixed and managed currency regimes. Using stressed scenarios on spot rates, we are able to analyse how de-peg events would affect the positions held by HSBC. We monitor such scenarios to pegged or managed currencies, such as the Hong Kong dollar, renminbi and Middle Eastern currencies, and limit any potential losses that would occur. This historical VaR measures, which may not fully capture the risk involved in holding positions in pegged or managed currencies, as such currencies may not have experienced a de-peg event during the historical timeframe being considered.

ABS/MBS exposures

The ABS/MBS (asset and mortgage-backed securities) exposures within the trading portfolios are managed within sensitivity and VaR limits as described on page 167, and are included within the stress testing scenarios described above.

Non-trading portfolios

(Audited)

Most of the Group’s non-trading VaR relates to Balance Sheet Management (‘BSM’) or local treasury management functions. Contributions to Group non-trading VaR are driven by interest rates and credit spread risks arising from all global businesses. There is no commodity market risk in the non-trading portfolios.

Non-trading VaR also includes the interest rate risk of non-trading financial instruments held by the global businesses and transferred into portfolios managed by BSM or local treasuries. In measuring, monitoring and managing risk in our non-trading portfolios, VaR is just one of the tools used. The management of interest rate risk in the banking book is described further in ‘Non-trading interest rate risk’ below, including the role of BSM.

Non-trading VaR excludes equity risk on available-for-sale securities, structural foreign exchange risk, and interest rate risk on fixed-rate securities issued by HSBC Holdings, the scope and management of which are described in the relevant sections below.

Our control of market risk in the non-trading portfolios is based on transferring the assessed market risk of non-trading assets and liabilities created outside BSM or Markets, to the books managed by BSM, provided the market risk can be neutralised. The net exposure is typically managed by BSM through the use of fixed-rate government bonds (liquid assets held in available-for-sale books) and interest rate swaps. The interest rate risk arising from fixed-rate government bonds held within available-for-sale portfolios is reflected within the Group’s non-traded VaR. Interest rate swaps used by BSM are typically classified as either a fair value hedge or a cash flow hedge and are included within the Group’s non-traded VaR. Any market risk that cannot be neutralised in the market is managed by local ALCOs in segregated ALCO books.

 

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Equity securities classified as available for sale

Potential new commitments are subject to risk appraisal to ensure that industry and geographical concentrations remain within acceptable levels for the portfolio. Regular reviews are performed to substantiate the valuation of the investments within the portfolio and investments held to facilitate ongoing business, such as holdings in government-sponsored enterprises and local stock exchanges.

Structural foreign exchange exposures

Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates, the functional currencies of which are currencies other than the US dollar. An entity’s functional currency is that of the primary economic environment in which the entity operates.

Exchange differences on structural exposures are recognised in ‘Other comprehensive income’. We use the US dollar as our presentation currency in our consolidated financial statements because the US dollar and currencies linked to it form the major currency bloc in which we transact and fund our business. Our consolidated balance sheet is, therefore, affected by exchange differences between the US dollar and all the non-US dollar functional currencies of underlying subsidiaries.

We hedge structural foreign exchange exposures only in limited circumstances. Our structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that our consolidated capital ratios and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange rates. This is usually achieved by ensuring that, for each subsidiary bank, the ratio of structural exposures in a given currency to RWAs denominated in that currency is broadly equal to the capital ratio of the subsidiary in question.

We may also transact hedges where a currency in which we have structural exposures is considered likely to revalue adversely, and it is possible in practice to transact a hedge. Any hedging is undertaken using forward foreign exchange contracts which are accounted for under IFRSs as hedges of a net investment in a foreign operation, or by financing with borrowings in the same currencies as the functional currencies involved. We evaluate residual structural foreign exchange exposures using an expected shortfall method.

Non-trading interest rate risk

Non-trading book interest rate risk arises principally from mismatches between the future yield on assets and their funding cost, as a result of interest rate changes. Analysis of this risk is complicated by making assumptions on embedded optionality within certain product areas such as the incidence of mortgage prepayments, and from behavioural assumptions regarding the economic duration of liabilities which are contractually repayable on demand such as current accounts, and the re-pricing behaviour of managed rate products. These assumptions around behavioural features are captured in our interest rate risk behaviouralisation framework, which is described below.

We aim, through our management of market risk in non-trading portfolios, to mitigate the effect of prospective interest rate movements which could reduce future net interest income, while balancing the cost of such hedging activities on the current net revenue stream.

Our funds transfer pricing policies give rise to a two stage funds transfer pricing approach. For details see page 207.

Interest rate risk behaviouralisation

Unlike liquidity risk, which is assessed on the basis of a very severe stress scenario, non-trading interest rate risk is assessed and managed according to ‘business-as-usual’ conditions. In many cases the contractual profile of non-trading assets/liabilities arising from assets/liabilities created outside Markets or BSM does not reflect the behaviour observed.

Behaviouralisation is therefore used to assess the market interest rate risk of non-trading assets/liabilities and this assessed market risk is transferred to BSM, in accordance with the rules governing the transfer of interest rate risk from the global businesses to BSM.

Behaviouralisation is applied in three key areas:

 

•

the assessed re-pricing frequency of managed rate balances;

 

•

the assessed duration of non-interest bearing balances, typically capital and current accounts; and

 

•

the base case expected prepayment behaviour or pipeline take-up rate for fixed-rate balances with embedded optionality.

Interest rate behaviouralisation policies have to be formulated in line with the Group’s behaviouralisation policies and approved at least annually by local ALCOs and regional ALCMs, in conjunction with local, regional and Group market risk monitoring teams.

The extent to which balances can be behaviouralised is driven by:

 

•

the amount of the current balance that can be assessed as ‘stable’ under business-as-usual conditions; and

 

•

for managed rate balances, the historical market interest rate re-pricing behaviour observed; or

 

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•

for non-interest bearing balances, the duration for which the balance is expected to remain under business-as-usual conditions. This assessment is often driven by the re-investment tenors available to BSM to neutralise the risk through the use of fixed-rate government bonds or interest rate derivatives, and for derivatives the availability of cash flow hedging capacity.

Balance Sheet Management

Effective governance across BSM is supported by the dual reporting lines it has to the CEO of GB&M and to the Group Treasurer. In each operating entity, BSM is responsible for managing liquidity and funding under the supervision of the local ALCO (which usually meets on a monthly basis). It also manages the non-trading interest rate positions transferred to it within a Markets limit structure.

In executing the management of the liquidity risk on behalf of ALCO, and managing the non-trading interest rate positions transferred to it, BSM invests in highly-rated liquid assets in line with the Group’s liquid asset policy. The majority of the liquidity is invested in central bank deposits and government, supranational and agency securities with most of the remainder held in short-term interbank and central bank loans.

Withdrawable central bank deposits are accounted for as cash balances. Interbank loans, statutory central bank reserves and loans to central banks are accounted for as loans and advances to banks. BSM’s holdings of securities are accounted for as available-for-sale or, to a lesser extent, held-to-maturity assets.

Statutory central bank reserves are not recognised as liquid assets. The statutory reserves that would be released in line with the Group’s stressed customer deposit outflow assumptions are reflected as stressed inflows.

BSM is permitted to use derivatives as part of its mandate to manage interest rate risk. Derivative activity is predominantly through the use of vanilla interest rate swaps which are part of cash flow hedging and fair value hedging relationships.

Credit risk in BSM is predominantly limited to short-term bank exposure created by interbank lending, exposure to central banks and high quality sovereigns, supranationals or agencies which constitute the majority of BSM’s liquidity portfolio. BSM does not manage the structural credit risk of any Group entity balance sheets.

BSM is permitted to enter into single name and index credit derivatives activity, but it does so to manage credit risk on the exposure specific to its securities portfolio in limited circumstances only. The risk limits are extremely limited and closely monitored. At 31 December 2015, BSM had no open credit derivative index risk.

VaR is calculated on both trading and non-trading positions held in BSM. It is calculated by applying the same methodology used for the Markets business and utilised as a tool for market risk control purposes.

BSM holds trading portfolio instruments in only very limited circumstances. Positions and the associated VaR were not significant during 2015.

Sensitivity of net interest income

A principal part of our management of market risk in non-trading portfolios is to monitor the sensitivity of expected net interest income under varying interest rate scenarios (simulation modelling). This monitoring is undertaken at an entity level by local ALCOs.

Entities apply a combination of scenarios and assumptions relevant to their local businesses, and standard scenarios which are required throughout HSBC. The latter are consolidated to illustrate the combined pro forma effect on our consolidated net interest income.

Projected net interest income sensitivity figures represent the effect of the pro forma movements in net interest income based on the projected yield curve scenarios and the Group’s current interest rate risk profile. This effect, however, does not incorporate actions which would probably be taken by BSM or in the business units to mitigate the effect of interest rate risk. In reality, BSM seeks proactively to change the interest rate risk profile to minimise losses and optimise net revenues. The net interest income sensitivity calculations assume that interest rates of all maturities move by the same amount in the ‘up-shock’ scenario. Rates are not assumed to become negative in the ‘down-shock’ scenario which may, in certain currencies, effectively result in non-parallel shock. In addition, the net interest income sensitivity calculations take account of the effect on net interest income of anticipated differences in changes between interbank interest rates and interest rates over which the entity has discretion in terms of the timing and extent of rate changes.

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. See ‘Pension risk’ on page 225 for additional information.

HSBC Holdings

As a financial services holding company, HSBC Holdings has limited market risk activity. Its activities predominantly involve maintaining sufficient capital resources to support the Group’s diverse activities; allocating these capital resources across our businesses; earning dividend and interest income on its investments in our businesses; providing dividend payments to its

 

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equity shareholders and interest payments to providers of debt capital; and maintaining a supply of short-term capital resources for deployment under extraordinary circumstances. It does not take proprietary trading positions.

The main market risks to which HSBC Holdings is exposed are non-trading interest rate risk and foreign currency risk. Exposure to these risks arises from short-term cash balances, funding positions held, loans to subsidiaries, investments in long-term financial assets and financial liabilities including debt capital issued. The objective of HSBC Holdings’ market risk management strategy is to reduce exposure to these risks and minimise volatility in capital resources, cash flows and distributable reserves. Market risk for HSBC Holdings is monitored by HSBC Holdings ALCO in accordance with its risk appetite statement.

HSBC Holdings uses interest rate swaps and cross currency interest rate swaps to manage the interest rate risk and foreign currency risk arising from its long-term debt issues.

 

 

Operational risk

The objective of our operational risk management is to manage and control operational risk in a cost effective manner within targeted levels of operational risk consistent with our risk appetite, as defined by the GMB.

Operational risk is organised as a specific risk discipline within Global Risk, and a formal governance structure provides oversight over its management. The Global Operational Risk sub-function supports the Group Chief Risk Officer and the Global Operational Risk Committee. It is responsible for establishing and maintaining the Operational Risk Management Framework (‘ORMF’) and monitoring the level of operational losses and the effectiveness of the control environment. It is also responsible for operational risk reporting at Group level, including the preparation of reports for consideration by the RMM and the Group Risk Committee. The Global Operational Risk Committee meets at least quarterly to discuss key risk issues and review the effective implementation of the ORMF.

The ORMF defines minimum standards and processes and the governance structure for the management of operational risk and internal control in our geographical regions, global businesses and global functions. The ORMF has been codified in a high level standards manual supplemented with detailed policies which describes our approach to identifying, assessing, monitoring and controlling operational risk and gives guidance on mitigating action to be taken when weaknesses are identified.

Business managers throughout the Group are responsible for maintaining an acceptable level of internal control commensurate with the scale and nature of operations, and for identifying and assessing risks, designing controls and monitoring the effectiveness of these controls. The ORMF helps managers to fulfil these responsibilities by defining a standard risk assessment methodology and providing a tool for the systematic reporting of operational loss data.

A centralised database is used to record the results of the operational risk management process. Operational risk and control self-assessments are input and maintained by business units. Business and functional management and business risk and control managers monitor the progress of documented action plans to address shortcomings. To ensure that operational risk losses are consistently reported and monitored at Group level, all Group companies are required to report individual losses when the net loss is expected to exceed $10,000, and to aggregate all other operational risk losses under $10,000. Losses are entered into the Group Operational Risk database and are reported to the RMM on a monthly basis.

For further details, see the Pillar 3 Disclosures 2015 report.

 

 

Compliance risk

Compliance risk falls within the definition of operational risk. All Group companies are required to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice. These rules, regulations, Group policies and formal standards include those relating to AML, counter-terrorist and proliferation financing, sanctions compliance, anti-bribery and corruption, conduct of business and other regulations.

The two Compliance sub-functions: Financial Crime Compliance (‘FCC’) and Regulatory Compliance (‘RC’), are appropriately supported by a shared Compliance Operating Office and Reputational Risk Management teams. The Global Head of Financial Crime Compliance and the Global Head of Regulatory Compliance both report to the Group Chief Risk Officer.

There are compliance teams in each of the countries where we operate and in all global businesses. These compliance teams are principally overseen by Heads of Financial Crime Compliance and Regulatory Compliance located in Europe, the US, Canada, Latin America, Asia and the Middle East and North Africa. The effectiveness of the regional and global business compliance teams are reviewed by the respective FCC and RC Assurance teams.

Global policies and procedures require the prompt identification and escalation to Financial Crime Compliance or Regulatory Compliance of all actual or suspected breaches of any law, rule, regulation, policy or other relevant requirement. Reportable events are reported to the relevant Risk Management Committees and those of Group significance are escalated to the RMM, the Group Risk Committee and the Board, as appropriate. They are disclosed in the Annual Report and Accounts and Interim Report, as appropriate.

We published a new Global Conduct Policy in 2015 (following the approval and implementation of the global conduct approach and framework in 2014) for the management of conduct designed to ensure that we meet our strategic commitment to deliver fair outcomes for our customers, and not to disrupt the orderly and transparent operation of financial markets. It defines

 

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responsibilities and ensures that business activity and decisions are underpinned by a robust consideration and management of associated risks supporting delivery of the required fair outcomes for customers and maintenance of market integrity. Our focus on compliance and conduct issues is further reinforced by the Financial System Vulnerabilities Committee, which reports to the Board on matters relating to financial crime and financial system abuse and provides a forward-looking perspective on financial crime risk. In addition, the Conduct & Values Committee reports to the Board on matters relating to delivery of the required global conduct outcomes for customers and the orderly and transparent operation of financial markets, together with adherence to HSBC’s Values.

 

 

Legal risk

Each legal department is required to have processes and procedures in place to manage legal risk that conform to Group standards.

Legal risk falls within the definition of operational risk and includes:

 

•

contractual risk, which is the risk of a member of HSBC suffering financial loss, legal or regulatory action or reputational damage because its rights and/or obligations under a contract to which it is a party are technically defective;

 

•

dispute adjudication risk, which is the risk of a member of HSBC suffering financial loss or reputational damage due to an adverse dispute environment or a failure to take appropriate steps to defend, prosecute and/or resolve actual or threatened legal claims brought against or by a Group member, including for the avoidance of doubt, regulatory matters;

 

•

legislative risk, which is the risk that a Group member fails to or is unable to identify, analyse, track, assess or correctly interpret applicable legislation, case law or regulation, or new regulatory, legislative or doctrinal interpretations of existing laws or regulations, or decisions in the Courts or regulatory bodies; and

 

•

non-contractual rights risk, which is the risk that a Group member’s assets are not properly owned or protected or are infringed by others, or a Group member infringes another party’s rights.

There are legal departments in 47 of the countries in which we operate. In addition to the Group Legal function, there are regional legal sub-functions in each of Europe, North America, Latin America, the Middle East and North Africa and Asia headed by Regional General Counsels, and a Global General Counsel responsible for each of the global businesses.

 

 

Global security and fraud risk

Security and fraud risk issues are managed at Group level by Global Security and Fraud Risk. This unit, which has responsibility for information, fraud, contingency, financial intelligence, physical and geopolitical risks is fully integrated within the central Global Risk function. This enables management to identify and mitigate the permutations of these and other non-financial risks to its business lines across the jurisdictions in which we operate.

 

•

The Information Security Risk sub-function is responsible for defining the strategy and policy by which the organisation protects its information assets and services from compromise, corruption or loss, whether caused deliberately or inadvertently by internal or external parties. It provides independent advice, guidance and oversight to the business about the effectiveness of information security controls and practices in place or being proposed.

 

•

The Fraud Risk sub-function is responsible for ensuring that effective prevention, detection and investigation measures are in place against all forms of fraudulent activity, whether initiated internally or externally, and is available to support any part of the business. To achieve that and to attain the level of integration needed to face the threat, the management of all types of fraud (e.g. card fraud, non-card fraud and internal fraud, including investigations) is established within one management structure and is part of the Global Risk function. We use technology extensively to prevent and detect fraud. For example, customers’ credit and debit card spending is monitored continuously and suspicious transactions are highlighted for verification, internet banking sessions are reviewed and transactions monitored in a similar way and all new account applications are screened for fraud. We have a fraud systems strategy which is designed to provide minimum standards and allow easier sharing of best practices to detect fraud and minimise false alerts. We have developed a holistic and effective anti-fraud strategy which, in addition to the use of advanced technology, includes fraud prevention policies and practices, the implementation of strong internal controls, investigations response teams and liaison with law enforcement where appropriate.

 

•

The Contingency Risk sub-function is responsible for ensuring that the group’s critical systems, processes and functions have the resilience to maintain continuity in the face of major disruptive events. Within this wider risk, business continuity management covers the pre-planning for recovery, seeking to minimise the adverse effects of major business disruption, either globally, regionally or within country, against a range of actual or emerging risks. The pre-planning concentrates on the protection of customer services, our staff, revenue generation, the integrity of data and documents and meeting regulatory requirements. Each business has its own recovery plan, which is developed following the completion of a business impact analysis. This determines how much time the business could sustain an outage before the level of losses becomes unacceptable, i.e. its criticality. These plans are reviewed and tested every year. The planning is undertaken against Group policy and standards and each business confirms in an annual compliance certificate that all have been met. Should there be exceptions, these are raised and their short-term resolution is overseen by Group and regional business

 

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continuity teams. It is important that plans are dynamic and meet all risks, particularly those of an emerging nature such as possible pandemics and cyber attacks. The ORMF is used to measure our resilience to these risks, and is confirmed to Group and regional risk committees. Resilience is managed through various risk mitigation measures. These include agreeing with IT acceptable recovery times of systems, ensuring our critical buildings have the correct infrastructure to enable ongoing operations, requiring critical vendors to have their own recovery plans and arranging with Group Insurance appropriate cover for business interruption costs.

 

•

The Financial Intelligence Unit is jointly administered by Security and Fraud Risk and Financial Crime Compliance. It uses advanced analytics and subject matter expertise to detect indicators of financial crime in the Group’s clients and counter-parties.

 

•

The Physical Security sub-function develops practical physical, electronic and operational counter-measures to ensure that the people, property and assets managed by the Group are protected from crime, theft, attack and groups hostile to HSBC’s interests.

 

•

The Geopolitical Risk Unit provides both regular and ad hoc reporting to business executives and senior security and fraud risk management on geopolitical risk profiles and evolving threats in countries in which the Group operates. This both enhances strategic business planning and provides an early view into developing security risks. Security travel controls and guidance are also maintained.

 

 

Systems risk

Systems risk is the risk of failure or malfunction in the automated platforms that support the Group’s daily execution (application systems) and the systems infrastructure on which they reside (data centres, networks and distributed computers).

The management of systems risk is overseen globally by the HSBC Operations, Services and Technology (‘HOST’) organisation. Oversight is provided through monthly risk management committee meetings that provide a comprehensive overview of existing and emerging top risks.

HOST manages the control environment over systems risks using risk and control assessments and scenario analysis. Material risks are monitored through the periodic testing of associated key controls.

Business-critical services have been identified. Quantitative scorecards called risk appetite statements are used for monitoring performance, and have been established for each of these services.

Global availability monitoring (24x7) is in place to assist in determining systems health. Our incident management processes are linked to business and geographical major incident groups for recovery decision-making and communication to customers and regulators.

 

 

Vendor risk management

Our vendor risk management (‘VRM’) programme is a global framework for managing risk with third party vendors, especially where we are reliant on outsourced agreements to provide critical services to our customers. VRM contains a rigorous process to identify material contracts and their key risks and ensure controls are in place to manage and mitigate these risks. Global and regional governance structures have been implemented to oversee vendor third party service providers.

 

 

Risk management of insurance operations

Overview of insurance products

(Audited)

HSBC manufactures the following main classes of contract:

 

•

life insurance contracts with discretionary participation features (‘DPF’);

 

•

credit life insurance business;

 

•

annuities;

 

•

term assurance and critical illness policies;

 

•

linked life insurance;

 

•

investment contracts with DPF;

 

•

unit-linked investment contracts; and

 

•

other investment contracts (including pension contracts written in Hong Kong).

We additionally write a small amount of non-life insurance business primarily covering personal and commercial property.

Nature and extent of risks

(Audited)

The majority of the risks in our Insurance business derive from manufacturing activities and can be categorised between financial risks and insurance risk; financial risks include market risk, credit risk and liquidity risk. Operational and sustainability risks are also present and are covered by the Group’s respective overall risk management processes.

The following sections describe how financial risks and insurance risk are managed.

 

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HSBC subsidiaries that manufacture insurance products establish control procedures complying with the guidelines and requirements issued by Group Insurance and local regulatory requirements. Country level oversight is exercised by local insurance risk management committees. Country Chief Risk Officers (‘CRO’s) have reporting lines locally and functional reporting lines into the Group Insurance CRO, who has overall accountability for risk management in insurance operations globally. The Group Insurance Risk Management Committee oversees the control framework globally and is accountable to the RBWM Risk Management Committee on risk matters.

In addition, local ALCOs monitor and review the duration and cash flow matching of insurance assets and liabilities.

All insurance products, whether manufactured internally or by a third party, are subjected to a product approval process prior to introduction.

Financial risks

(Audited)

Our insurance businesses are exposed to a range of financial risks, including market risk, credit risk and liquidity risk. Market risk includes interest rate, equity and foreign exchange risks. The nature and management of these risks is described below.

Manufacturing subsidiaries are exposed to financial risks when, for example, the proceeds from financial assets are not sufficient to fund the obligations arising from insurance and investment contracts. In many jurisdictions, local regulatory requirements prescribe the type, quality and concentration of assets that these subsidiaries must maintain to meet insurance liabilities. These requirements complement Group-wide policies.

Market risk

(Audited)

 

		Market risk is managed through limits approved by the RMM for HSBC Holdings. An allocation of the Group-wide market risk appetite is provided to the Insurance business by Group Traded Risk. These limits are then apportioned between different Insurance entities to support the strategic aims of the business.   The market risk team supporting insurance within Wholesale Market Risk and the Group Insurance CRO are responsible for setting market risk management policies and measurement techniques applied to the Insurance activities of HSBC.   At entity level the appetite for market risk is expressed through detailed market risk mandates. Investment Officers hold day-to-day responsibility for managing assets so as to remain within the mandates and are answerable to the local ALCOs. ALCOs hold wider responsibility over longer-term actions related to liabilities that are necessary to remain within the agreed mandates.   ALCOs act to implement the strategy of the Executive Committee which, in turn, is answerable to the Board. The Board holds ultimate accountability over the risk profile held and targeted within each company.   Description of market risk   The main features and exposures of products manufactured by our insurance manufacturing subsidiaries which generate market risk, and the market risk to which these features expose the Group, are discussed below.

Interest rate risk arises from a mismatch between asset yields and the investment returns implied by the guarantees payable to policyholders by insurance manufacturing subsidiaries. When asset yields are below guaranteed yields, products may be closed to new business, repriced or restructured. A list of the different types of guarantees within our insurance contracts is outlined below.

 

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Categories of guaranteed benefits   •  implicit interest rate guarantees: when future policyholder benefits are defined as fixed monetary amounts, e.g. annuities in payment and endowment savings contracts;   •  annual return: the annual return is guaranteed to be no lower than a specified rate. This may be the return credited to the policyholder every year, or the average annual return credited to the policyholder over the life of the policy, which may occur on the maturity date or the surrender date of the contract; and   •  capital: policyholders are guaranteed to receive no less than the premiums paid plus declared bonuses less expenses.

The proceeds from insurance and investment products with DPF are primarily invested in bonds with a proportion allocated to other asset classes in order to provide customers with the potential for enhanced returns. Subsidiaries with portfolios of such products are exposed to the risk of falls in market prices which cannot be fully reflected in the discretionary bonuses. An increase in market volatility could also result in an increase in the value of the guarantee to the policyholder.

Long-term insurance and investment products typically permit the policyholder to surrender the policy or let it lapse at any time. When the surrender value is not linked to the value realised from the sale of the associated supporting assets, the subsidiary is exposed to market risk. In particular, when customers seek to surrender their policies when asset values are falling, assets may have to be sold at a loss to fund redemptions.

A subsidiary holding a portfolio of long-term insurance and investment products, especially with DPF, may attempt to reduce exposure to its local market by investing in assets in countries other than that in which it is based. These assets may be denominated in currencies other than the subsidiary’s local currency. Where the foreign exchange exposure associated with these assets is not hedged, for example because it is not cost effective to do so, this exposes the subsidiary to the risk of its local currency strengthening against the currency of the related assets.

For unit-linked contracts, market risk is substantially borne by the policyholder, but market risk exposure typically remains as fees earned for management are related to the market value of the linked assets.

Asset and liability matching

It is not always possible to match asset and liability durations, partly because there is uncertainty over policyholder behaviour which introduces uncertainty over the receipt of all future premiums and the timing of claims, and partly 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 to best structure asset holdings to support liabilities. The scenarios include stresses applied to factors which affect insurance risk such as mortality and lapse rates. Of particular importance is assessing the expected pattern of cash inflows against the benefits payable on the underlying contracts, which can extend for many years.

How market risk is managed

All our insurance manufacturing subsidiaries have market risk mandates which specify the investment instruments in which they are permitted to invest and the maximum quantum of market risk which they may retain. They manage market risk by using some or all of the techniques listed below, depending on the nature of the contracts they write.

 

Techniques for managing market risk   •  for products with DPF, adjusting bonus rates to manage the liabilities to policyholders. The effect is that a significant portion of the market risk is borne by the policyholder;   •  structuring asset portfolios to support projected liability cash flows;   •  using derivatives to protect against adverse market movements or better match liability cash flows;   •  for new products with investment guarantees, considering the cost when determining the level of premiums or the price structure;   •  periodically reviewing products identified as higher risk, which contain investment guarantees and embedded optionality features linked to savings and investment products;   •  designing new products to mitigate market risk, such as changing the investment return sharing portion between policyholders and the shareholder;   •  exiting, to the extent possible, investment portfolios whose risk is considered unacceptable; and   •  repricing premiums charged to policyholders.

In the product approval process, the risks embedded in new products are identified and assessed. When, for example, options and guarantees are embedded in new products, the due diligence process ensures that complete and appropriate risk management procedures are in place. Management reviews certain exposures more frequently when markets are more volatile to ensure that any matters arising are dealt with in a timely fashion.

 

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How the exposure to market risk is measured

Our insurance manufacturing subsidiaries monitor exposures against mandated limits regularly and report them to Group Insurance.

In addition, large insurance manufacturing subsidiaries perform a high-level monthly assessment of market risk exposure against risk appetite. This is submitted to Group Insurance and a global assessment presented to the RBWM Risk Management Committee. Risk measures include statistics relating to IFRSs, regulatory solvency and economic capital.

 

Standard measures for quantifying market risks   •  for interest rate risk, the sensitivities of the net present values of asset and expected liability cash flows, in total and by currency, to a one basis point parallel shift in the discount curves used to calculate the net present values;   •  for equity price risk, the total market value of equity holdings and the market value of equity holdings by region and country; and   •  for foreign exchange risk, the total net short foreign exchange position and the net foreign exchange positions by currency.

The standard measures are relatively straightforward to calculate and aggregate, but they have limitations. The most significant one is that a parallel shift in yield curves of one basis point does not capture the non-linear relationships between the values of certain assets and liabilities and interest rates. Non-linearity arises, for example, from investment guarantees and product features which enable policyholders to surrender their policies. We bear the shortfall if the yields on investments held to support contracts with guaranteed benefits are less than the investment returns implied by the guaranteed benefits.

We recognise these limitations and augment our standard measures with stress tests which examine the effect of a range of market rate scenarios on the aggregate annual profits and total equity of our insurance manufacturing subsidiaries, after taking into consideration tax and accounting treatments where material and relevant. The results of these tests are reported to Group Insurance and risk committees every quarter.

Similarly economic capital statistics are produced monthly, with a more detailed exercise undertaken on a quarterly basis. Economic capital measures estimate, on a market consistent economic value basis, the quantum of capital required given the exposures in the Insurance operation. Total exposures, a breakdown by risk class, and movement analysis are presented to the Insurance Risk Management Committee on a quarterly basis.

Credit risk

(Audited)

Description of credit risk

Credit risk arises in two main areas for our insurance manufacturers:

(i) risk of default by debt security counterparties after investing premiums to generate a return for policyholders and shareholders; and

(ii) risk of default by reinsurance counterparties and non-reimbursement for claims made after ceding insurance risk.

How credit risk is managed

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 local insurance manufacturing subsidiaries, and are aggregated and reported to Group Insurance Credit Risk and Group Credit Risk. Stress testing is performed by Group Insurance on the 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 which contains a watch-list of investments with current credit concerns and is circulated monthly to senior management in Group Insurance and the individual country CROs to identify investments which may be at risk of future impairment.

Liquidity risk

(Audited)

Description of liquidity risk

It is an inherent characteristic of almost all insurance contracts that there is uncertainty over the amount of claims liabilities that may arise and the timing of their settlement, and this creates liquidity risk.

There are three aspects to liquidity risk. The first arises in normal market conditions and is referred to as funding liquidity risk; specifically, the capacity to raise sufficient cash when needed to meet payment obligations. Secondly, market liquidity risk arises when the size of a particular holding may be so large that a sale cannot be completed around the market price. Finally, standby liquidity risk refers to the capacity to meet payment terms in abnormal conditions.

 

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How liquidity risk is managed

Our insurance manufacturing subsidiaries primarily fund cash outflows arising from claim liabilities from the following sources of cash inflows:

 

•

premiums from new business, policy renewals and recurring premium products;

 

•

interest and dividends on investments and principal repayments of maturing debt investments;

 

•

cash resources; and

 

•

the sale of investments.

They manage liquidity risk by utilising some or all of the following techniques:

 

•

matching cash inflows with expected cash outflows using specific cash flow projections or more general asset and liability matching techniques such as duration matching;

 

•

maintaining sufficient cash resources;

 

•

investing in good credit-quality investments with deep and liquid markets to the degree to which they exist;

 

•

monitoring investment concentrations and restricting them where appropriate, for example, by debt issues or issuers; and

 

•

establishing committed contingency borrowing facilities.

Each of these techniques contributes to mitigating the three types of liquidity risk described above.

Every quarter, our insurance manufacturing subsidiaries are required to complete and submit liquidity risk reports to Group Insurance for collation and review. Liquidity risk is assessed in these reports by measuring changes in expected cumulative net cash flows under a series of stress scenarios designed to determine the effect of reducing expected available liquidity and accelerating cash outflows. This is achieved, for example, by assuming new business or renewals are lower, and surrenders or lapses are greater, than expected.

Insurance risk

(Audited)

Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to the issuer (i.e. HSBC). 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 cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, lapse and surrender rates.

Insurance risks are controlled by high-level policies and procedures set both centrally and locally, taking into account where appropriate local market conditions and regulatory requirements. Formal underwriting, reinsurance and claims-handling procedures designed to ensure compliance with regulations are applied, supplemented with stress testing.

As well as exercising underwriting controls, we use reinsurance as a means of mitigating exposure to insurance risk. Where we manage our exposure to insurance risk through the use of third-party reinsurers, the associated revenue and manufacturing profit is ceded to the reinsurers. Although reinsurance provides a means of managing insurance risk, such contracts expose us to credit risk, the risk of default by the reinsurer.

The principal drivers of our insurance risk are described below. The liabilities for long-term contracts are set by reference to a range of assumptions around these drivers. These typically reflect the issuers’ own experiences. The type and quantum of insurance risk arising from life insurance depends on the type of business, and varies considerably.

 

•

mortality and morbidity: the main contracts which generate exposure to these risks are term assurance, whole life products, critical illness and income protection contracts and annuities. The risks are monitored on a regular basis, and are primarily mitigated by underwriting controls and reinsurance and by retaining the ability in certain cases to amend premiums in the light of experience;

 

•

lapses and surrenders: the risks associated with this are generally mitigated by product design, the application of surrender charges and management actions, for example, managing the level of bonus payments to policyholders. A detailed persistency analysis at a product level is carried out at least on an annual basis; and

 

•

expense risk is mitigated by pricing, for example, retaining the ability in certain cases to amend premiums and/or policyholder charges based on experience, and cost management discipline.

Liabilities are affected by changes in assumptions (see ‘Sensitivity analysis’ on page 188).

 

 

 

HSBC HOLDINGS PLC   223

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Report of the Directors: Risk (continued)

Appendix to Risk – Policies and practices

    

    

    

 

Reputational risk

The Global Head of Financial Crime Compliance and the Global Head of Regulatory Compliance are the risk stewards for reputational risk. The development of policies and an effective control environment for the identification, assessment, management and mitigation of reputational risk are co-ordinated through the Group Reputational Risk Policy Committee (‘GRRPC’), which is chaired by the Group Chairman. In parallel, the Global Risk Resolution Committee (‘GRRC’), chaired by the Chief Risk Officer, is the highest decision-making forum in the Group for dealing with matters arising from clients or transactions that either present a serious potential reputational risk to the Group or merit a Group-led decision to ensure a consistent risk management approach across the regions and global businesses. Both committees are responsible for keeping the RMM apprised of areas and activities presenting significant reputational risk and, where appropriate, for making recommendations to the RMM to mitigate such risk. Significant issues posing reputational risk are also reported to the Board and the Conduct & Values Committee, where appropriate.

Overseeing all reputational risk matters, the Reputational Risk sub-function is responsible for setting policies to guide the Group’s management of reputational risk, devising strategies to protect against reputational risk and advising the global businesses and global functions in helping them identify, assess and mitigate such risks, where possible. This sub-function is led by a central headquarters-based team and supported by teams within each business line and region who help to ensure that issues are directed to the appropriate forums, that decisions are made and implemented effectively, and that management information is generated to aid senior management in the businesses and regions in understanding where reputational risk exists within the Group. Each global business has established a governance process that empowers the Reputational Risk and Client Selection committees to address reputational risk issues at the appropriate level, escalating decisions where appropriate. The global functions manage and escalate reputational risks within established operational risk frameworks.

Standards for all major aspects of business are set for the Group and for individual subsidiaries, businesses and functions. Reputational risks, including environmental, social and governance matters, are considered and assessed by the Board, the GMB, the RMM, subsidiary company boards, Board committees and senior management during the formulation of policy and the establishment of our standards. These policies, which form an integral part of the internal control system (see page 275), are communicated through manuals and statements of policy and are promulgated through internal communications and training. The policies set out our risk appetite and operational procedures for all areas of reputational risk, including financial crime prevention (money laundering, terrorist and proliferation financing, sanctions-breaking and bribery and corruption deterrence), regulatory compliance, conduct-related concerns, environmental impacts, human rights matters and employee relations. The policy manuals address risk issues in detail and co-operation between Group departments and businesses is required to ensure a strong adherence to our risk management system and our sustainability practices.

 

 

Fiduciary risk

Business activities in which fiduciary risk is inherent are only permitted within designated lines of business. Fiduciary risk is managed within the designated businesses via a comprehensive policy framework and monitoring of key indicators. The Group’s principal fiduciary businesses and activities (‘designated businesses and activities’) are:

 

•

HSBC Securities Services, which is exposed to fiduciary risk through its funds services and corporate trust and loan agency activities;

 

•

HSBC Global Asset Management, which is exposed to fiduciary risks through its investment management activities on behalf of clients;

 

•

HSBC Global Private Banking, which is exposed to fiduciary risks through its private trust division and discretionary investment management;

 

•

HSBC Insurance, which is exposed to fiduciary risks through the investment management activities it undertakes when providing insurance products and services;

 

•

RBWM Trust Investment Wrappers, required by regulation for the provision of normal RBWM Wealth Management products and services; and

 

•

HSBC Employee Pension Scheme activities, where fiduciary duties may arise as part of carrying out a function of discretion or control over an HSBC employee pension scheme’s operations.

The Group’s requirements for the management of fiduciary risk are laid down in the fiduciary section of the Global Risk Functional Instruction Manual, which is owned by Global Operational Risk. No business other than the designated businesses may undertake fiduciary activities without notifying Global Operational Risk and receiving specific dispensations from the relevant fiduciary policy requirements.

Other policies around the provision of advice, including investment advice and corporate advisory, and the management of potential conflicts of interest, also mitigate our fiduciary risks.

 

 

 

HSBC HOLDINGS PLC   224

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Pension risk

(Audited)

We operate a number of pension plans throughout the world, as described in the Pension risk section on page 189 and below. A global pension risk framework and accompanying global policies on the management of risks related to defined benefit and defined contribution plans is in place. The Global Pensions Oversight Committee is responsible for the governance and oversight of all pension plans sponsored by HSBC around the world.

In order 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 schemes’ trustees (where relevant). The defined benefit plans invest these contributions in a range of investments designed to meet their long-term liabilities.

The level of these contributions has a direct impact on HSBC’s cash flow and would normally be 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 triennially, depending on the plan. The agreed contributions to the principal plan are revised triennially.

 

A deficit in a defined benefit plan may arise from a number of factors, including:   •  investments delivering a return below that required to provide the projected plan benefits. This could arise, for example, when there is a fall in the market value of equities, or when increases in long-term interest rates cause a fall in the value of fixed income securities held;   •  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 which causes an increase in the value of the scheme liabilities; and   •  scheme members living longer than expected (known as longevity risk).

A plan’s investment strategy is determined after taking into consideration the market risk inherent in the investments and its consequential impact on potential future contributions. The long-term investment objectives of both HSBC and, where relevant and appropriate, the trustees are:

 

•

to limit the risk of the assets failing to meet the liabilities of the plans over the long term; and

 

•

to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of the defined benefit plans.

In pursuit of these long-term objectives, a benchmark is established for the allocation of the defined benefit plan assets between asset classes. In addition, each permitted asset class has its own benchmarks, such as stock market or property valuation indices and, where relevant, desired levels of out-performance. The benchmarks are reviewed at least triennially within 18 months of the date at which an actuarial valuation is made, or more frequently if required by local legislation or circumstances. The process generally involves an extensive asset and liability review.

Ultimate responsibility for investment strategy rests with either the trustees or, in certain circumstances, a management committee. The degree of independence of the trustees from HSBC varies in different jurisdictions, however all fiduciaries are required to put the plan members’ needs above all others.

Defined contribution plans result in far less exposure to market risk for the Group, but remain exposed to operational and reputational risks as they place the responsibility and flexibility more directly with employees. To manage these risks, the performance of defined contribution investment funds is monitored and local engagement with employees is actively promoted to ensure they are provided with sufficient information about the options available to them.

Pension plans in the UK

The HSBC Bank (UK) Pension Scheme (the principal plan) has both defined benefit and defined contribution sections. The defined benefit section accounts for approximately 72% of our total defined benefit obligations around the world. All new employees have joined the defined contribution section since 1996 and from 1 July 2015 the defined benefit section was fully closed to future accrual so that all future pension provision for all employees is provided by the defined contribution section. The principal plan is overseen by an independent corporate trustee who has a fiduciary responsibility for the operation of the pension plan. The trustee is responsible for monitoring and managing the investment strategy and administration of scheme benefits. The principal plan holds a diversified portfolio of investments to meet future cash flow liabilities arising from accrued benefits as they fall due to be paid. The trustee of the principal plan is required to produce a written Statement of Investment Principles which governs decision-making about how investments are made and the need for adequate diversification is taken into account in the choice of asset allocation and manager structure in the defined benefit section. Longevity risk in the principal plan is assessed as part of the measurement of the pension liability and managed through the funding process of the plan.

 

 

 

HSBC HOLDINGS PLC   225

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Report of the Directors: Capital (pages 233-244)

 

HSBC HOLDINGS PLC

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Report of the Directors: Capital (continued)

Capital

    

    

    

 

Composition of regulatory capital

(Audited)

 

				At 31 December
				2015						2014
		Ref		$m						$m
Common equity tier 1 capital
Shareholders’ equity					160,664						166,617
– shareholders’ equity per balance sheet8		a			188,460						190,447
– foreseeable interim dividend2					(3,717	)					(3,362	)
– preference share premium		b			(1,405	)					(1,405	)
– other equity instruments		c			(15,112	)					(11,532	)
– deconsolidation of special purpose entities9		a			(91	)					(323	)
– deconsolidation of insurance entities		a, h			(7,471	)					(7,208	)
Non-controlling interests					3,519						4,640
– non-controlling interests per balance sheet		d			9,058						9,531
– preference share non-controlling interests		e			(2,077	)					(2,127	)
– non-controlling interests transferred to tier 2 capital		f			–						(473	)
– non-controlling interests in deconsolidated subsidiaries		d			(933	)					(851	)
– surplus non-controlling interests disallowed in CET1					(2,529	)					(1,440	)
Regulatory adjustments to the accounting basis					(4,556	)					(3,556	)
– own credit spread10					(159	)					767
– debit valuation adjustment					(336	)					(197	)
– defined benefit pension fund adjustment		g			(4,009	)					(4,069	)
– cash flow hedging reserve					(52	)					(57	)
Deductions					(28,764	)					(31,748	)
– goodwill and intangible assets		h			(20,650	)					(22,475	)
– deferred tax assets that rely on future profitability (excludes those arising from temporary differences)		n			(1,204	)					(1,036	)
– additional valuation adjustment (referred to as PVA)					(1,151	)					(1,341	)
– investments in own shares through the holding of composite products of which HSBC is a component (exchange traded funds, derivatives and index stock)					(839	)					(1,083	)
– negative amounts resulting from the calculation of expected loss amounts		i			(4,920	)					(5,813	)
Common equity tier 1 capital on an end point basis					130,863						135,953
Tier 1 and tier 2 capital on a transitional basis
Common equity tier 1 capital on an end point basis					130,863						135,953
Transitional adjustments											(2,753	)
– unrealised gains arising from revaluation of property											(1,375	)
– unrealised gains in available-for-sale debt and equities											(1,378	)
Common equity tier 1 capital on a transitional basis					130,863						133,200
Additional tier 1 capital on a transitional basis
Other tier 1 capital before deductions					22,621						19,687
– preference share premium		b			1,015						1,160
– preference share non-controlling interests		e			1,711						1,955
– allowable non-controlling interest in AT1		d			1,546						884
– Hybrid capital securities		j			18,349						15,688
Deductions					(181	)					(148	)
– unconsolidated investments11					(121	)					(148	)
– holding of own additional tier 1 instruments					(60	)					–
Tier 1 capital on a transitional basis					153,303						152,739
Tier 2 capital on a transitional basis
Total qualifying tier 2 capital before deductions					36,852						38,213
– allowable non-controlling interest in tier 2		d			14						99
– perpetual subordinated debt		l			1,941						2,218
– term subordinated debt		m			34,897						35,656
– non-controlling interests in tier 2 capital		f			–						240
Total deductions other than from tier 1 capital					(322	)					(222	)
– unconsolidated investments11					(282	)					(222	)
– holding of own tier 2 instruments					(40	)					–
Total regulatory capital on a transitional basis					189,833						190,730

For footnotes, see page 243.

The references (a) – (n) identify balance sheet components on page 236 which are used in the calculation of regulatory capital.

 

HSBC HOLDINGS PLC   234

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Reconciliation of regulatory capital from transitional basis to an estimated CRD IV end point basis

 

				At 31 December
				2015						2014
				$m						$m
Common equity tier 1 capital on a transitional basis					130,863						133,200
Unrealised gains arising from revaluation of property											1,375
Unrealised gains in available-for-sale debt and equities											1,378
Common equity tier 1 capital on an end point basis					130,863						135,953
Additional tier 1 capital on a transitional basis					22,440						19,539
Grandfathered instruments: Preference share premium					(1,015	)					(1,160	)
Preference share non-controlling interests					(1,711	)					(1,955	)
Hybrid capital securities					(9,088	)					(10,007	)
Transitional provisions:
Allowable non-controlling interest in AT1					(1,377	)					(487	)
Unconsolidated investments11					121						148
Additional tier 1 capital end point basis					9,370						6,078
Tier 1 capital on an end point basis					140,233						142,031
Tier 2 capital on a transitional basis					36,530						37,991
Grandfathered instruments:
Perpetual subordinated debt					(1,941	)					(2,218	)
Term subordinated debt					(19,034	)					(21,513	)
Transitional provisions:
Non-controlling interest in tier 2 capital					–						(240	)
Allowable non-controlling interest in tier 2					21						396
Unconsolidated investments11					(121	)					(148	)
Tier 2 capital on an end point basis					15,455						14,268
Total regulatory capital on an end point basis					155,688						156,299

For footnote, see page 243.

 

 

HSBC HOLDINGS PLC   235

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Report of the Directors: Capital (continued)

Regulatory balance sheet

    

    

    

 

 

Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation

 

		Ref				Accounting balance sheet $m						Deconsolidation of insurance/ other entities $m						Consolidation of banking associates $m						Regulatory balance sheet $m
Assets
Cash and balances at central banks							98,934						(2	)					28,784						127,716
Items in the course of collection from other banks							5,768						–						22						5,790
Hong Kong Government certificates of indebtedness							28,410						–						–						28,410
Trading assets							224,837						340						4,390						229,567
Financial assets designated at fair value							23,852						(23,521	)					2,034						2,365
Derivatives							288,476						(146	)					495						288,825
Loans and advances to banks							90,401						(3,008	)					16,413						103,806
Loans and advances to customers							924,454						(7,427	)					120,016						1,037,043
of which:
– impairment allowances on IRB portfolios		i					(6,291	)					–						–						(6,291	)
– impairment allowances on standardised portfolios							(3,263	)					–						(2,780	)					(6,043	)
Reverse repurchase agreements – non-trading							146,255						711						5,935						152,901
Financial investments							428,955						(51,684	)					42,732						420,003
Assets held for sale							43,900						(4,107	)					–						39,793
of which:
– goodwill and intangible assets		h					1,680						(219	)					–						1,461
– impairment allowances of disposal groups held for sale							(1,454	)					–						–						(1,454	)
of which:
– IRB portfolios		i					(7	)					–						–						(7	)
– standardised portfolios							(1,447	)					–						–						(1,447	)
Capital invested in insurance and other entities							–						2,371						–						2,371
Current tax assets							1,221						(15	)					–						1,206
Prepayments, accrued income and other assets							54,398						(2,539	)					9,692						61,551
of which:
– retirement benefit assets		g					5,272						–						–						5,272
Interests in associates and joint ventures							19,139						–						(18,571	)					568
of which:
– positive goodwill on acquisition		h					593						–						(579	)					14
Goodwill and intangible assets		h					24,605						(6,068	)					623						19,160
Deferred tax assets		n					6,051						195						518						6,764
Total assets at 31 December 2015							2,409,656						(94,900	)					213,083						2,527,839
Liabilities and equity
Hong Kong currency notes in circulation							28,410						–						–						28,410
Deposits by banks							54,371						(97	)					50,005						104,279
Customer accounts							1,289,586						(119	)					147,522						1,436,989
Repurchase agreements – non-trading							80,400						–						–						80,400
Items in course of transmission to other banks							5,638						–						–						5,638
Trading liabilities							141,614						(66	)					59						141,607
Financial liabilities designated at fair value							66,408						(6,046	)					–						60,362
of which:
– term subordinated debt included in tier 2 capital		m					21,168						–						–						21,168
– hybrid capital securities included in tier 1 capital		j					1,342						–						–						1,342

 

HSBC HOLDINGS PLC   236

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		Ref						Accounting balance sheet $m						Deconsolidation of insurance/ other entities $m						Consolidation of banking associates $m						Regulatory balance sheet $m
Derivatives									281,071						87						508						281,666
Debt securities in issue									88,949						(7,885	)					5,065						86,129
Liabilities of disposal groups held for sale									36,840						(3,690	)					–						33,150
Current tax liabilities									783						(84	)					409						1,108
Liabilities under insurance contracts									69,938						(69,938	)					–						–
Accruals, deferred income and other liabilities									38,116						2,326						6,669						47,111
of which:
– retirement benefit liabilities									2,809						(2	)					61						2,868
Provisions									5,552						(25	)					–						5,527
of which:
– contingent liabilities and contractual commitments									240						–						–						240
of which:
– credit-related provisions on IRB portfolios			i						201						–						–						201
– credit-related provisions on standardised portfolios									39						–						–						39
Deferred tax liabilities									1,760						(868	)					5						897
Subordinated liabilities									22,702						–						2,841						25,543
of which:
– hybrid capital securities included in tier 1 capital			j						1,929						–						–						1,929
– perpetual subordinated debt included in tier 2 capital			l						2,368						–						–						2,368
– term subordinated debt included in tier 2 capital			m						18,405						–						–						18,405
Total shareholders’ equity			a						188,460						(7,562	)					–						180,898
of which:
– other equity instruments included in tier 1 capital			c, j						15,112						–						–						15,112
– preference share premium included in tier 1 capital			b						1,405						–						–						1,405
Non-controlling interests			d						9,058						(933	)					–						8,125
of which:
– non-cumulative preference shares issued by subsidiaries included in tier 1 capital			e						2,077						–						–						2,077
– non-controlling interests included in tier 2 capital, cumulative preferred stock			f						–						–						–						–
– non-controlling interests attributable to holders of ordinary shares in subsidiaries included in tier 2 capital			f, m						–						–						–						–
Total liabilities and equity at 31 December 2015									2,409,656						(94,900	)					213,083						2,527,839
Assets
Cash and balances at central banks									129,957						–						30,731						160,688
Items in the course of collection from other banks									4,927						–						80						5,007
Hong Kong Government certificates of indebtedness									27,674						–						–						27,674
Trading assets									304,193						(720	)					2,357						305,830
Financial assets designated at fair value									29,037						(28,791	)					3,312						3,558
Derivatives									345,008						(94	)					353						345,267
Loans and advances to banks									112,149						(2,727	)					7,992						117,414
Loans and advances to customers									974,660						(10,809	)					116,484						1,080,335
of which:
– impairment allowances on IRB portfolios			i						(6,942	)					–						–						(6,942	)
– impairment allowances on standardised portfolios									(5,395	)					–						(2,744	)					(8,139	)
Reverse repurchase agreements – non-trading									161,713						(30	)					7,510						169,193
Financial investments									415,467						(50,420	)					33,123						398,170
Capital invested in insurance and other entities									–						2,542						–						2,542
Current tax assets									1,309						(16	)					–						1,293
Prepayments, accrued income and other assets									75,176						(5,295	)					8,501						78,382
of which:
– goodwill and intangible assets of disposal groups held for sale			h						8						–						–						8
– retirement benefit assets			g						5,028						–						–						5,028
– impairment allowances on assets held for sale									(16	)					–						–						(16	)
of which:
– IRB portfolios			i						(16	)					–						–						(16	)
– standardised portfolios									–						–						–						–
Interests in associates and joint ventures									18,181						–						(17,479	)					702
of which:
– positive goodwill on acquisition			h						621						–						(606	)					15
Goodwill and intangible assets			h						27,577						(5,593	)					571						22,555
Deferred tax assets			n						7,111						163						474						7,748
Total assets at 31 December 2014									2,634,139						(101,790	)					194,009						2,726,358

 

HSBC HOLDINGS PLC   237

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Report of the Directors: Capital (continued)

Regulatory balance sheet / Leverage ratio / Regulatory developments

    

    

    

 

Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation (continued)

 

		Ref				Accounting balance sheet $m						Deconsolidation of insurance/ other entities $m						Consolidation of banking associates $m						Regulatory balance sheet $m
Liabilities and equity
Hong Kong currency notes in circulation							27,674						–						–						27,674
Deposits by banks							77,426						(21	)					40,530						117,935
Customer accounts							1,350,642						(535	)					141,858						1,491,965
Repurchase agreements – non-trading							107,432						–						–						107,432
Items in course of transmission to other banks							5,990						(3	)					–						5,987
Trading liabilities							190,572						(42	)					50						190,580
Financial liabilities designated at fair value							76,153						(6,317	)					–						69,836
of which:
– term subordinated debt included in tier 2 capital		m					21,822						–						–						21,822
– hybrid capital securities included in tier 1 capital		j					1,495						–						–						1,495
Derivatives							340,669						37						331						341,037
Debt securities in issue							95,947						(7,797	)					3,720						91,870
Current tax liabilities							1,213						(138	)					317						1,392
Liabilities under insurance contracts							73,861						(73,861	)					–						–
Accruals, deferred income and other liabilities							53,396						(3,659	)					5,145						54,882
of which:
– retirement benefit liabilities							3,208						(2	)					56						3,262
Provisions							4,998						(63	)					–						4,935
of which:
– contingent liabilities and contractual commitments							234						–						–						234
of which:
– credit-related provisions on IRB portfolios		i					132						–						–						132
– credit-related provisions on standardised portfolios							102						–						–						102
Deferred tax liabilities							1,524						(1,009	)					2						517
Subordinated liabilities							26,664						–						2,056						28,720
of which:
– hybrid capital securities included in tier 1 capital		j					2,761						–						–						2,761
– perpetual subordinated debt included in tier 2 capital		l					2,773						–						–						2,773
– term subordinated debt included in tier 2 capital		m					21,130						–						–						21,130
Total shareholders’ equity		a					190,447						(7,531	)					–						182,916
of which:
– other equity instruments included in tier 1 capital		c, j					11,532						–						–						11,532
– preference share premium included in tier 1 capital		b					1,405						–						–						1,405
Non-controlling interests		d					9,531						(851	)					–						8,680
of which:
– non-cumulative preference shares issued by subsidiaries included in tier 1 capital		e					2,127						–						–						2,127
– non-controlling interests included in tier 2 capital, cumulative preferred stock		f					300						–						–						300
– non-controlling interests attributable to holders of ordinary shares in subsidiaries included in tier 2 capital		f, m					173						–						–						173
Total liabilities and equity at 31 December 2014							2,634,139						(101,790	)					194,009						2,726,358

The references (a) – (n) identify balance sheet components which are used in the calculation of regulatory capital on page 234.

 

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Leverage ratio

Leverage ratio

 

				EU Delegated Act basis at 31 December
				2015 $bn						2014 $bn
Total assets per accounting balance sheet					2,410						2,634
Deconsolidation of insurance/other entities					(95	)					(102	)
Consolidation of banking associates					213						194
Total assets per regulatory/accounting balance sheet					2,528						2,726
Adjustments to reverse netting of loans and deposits allowable under IFRS					32						38
Reversal of accounting values including assets classified as held for sale:					(456	)					(525	)
– derivatives					(290	)					(345	)
– repurchase agreement and securities finance					(166	)					(180	)
Replaced with the regulatory rules:
Derivatives including assets classified as held for sale:					149						166
– mark-to-market					69						81
– deductions of receivables assets for cash variation margin					(65	)					(82	)
– add-on amounts for potential future exposure					125						148
– exposure amount resulting from the additional treatment for written credit derivatives					20						19
Repurchase agreement and securities finance including assets classified as held for sale:					173						188
– gross securities financing transactions assets					243						269
– netted amounts of cash payables and cash receivables of gross securities financing transactions assets					(78	)					(89	)
– measurement of counterparty risk					8						8
Addition of off-balance sheet commitments and guarantees					401						396
– guarantees and contingent liabilities					67						67
– commitments					326						321
– others					8						8
Exclusion of items already deducted from the capital measure					(33	)					(36	)
Exposure measure after regulatory adjustments					2,794						2,953
Tier 1 capital under CRD IV (end point)					140						142
Leverage ratio					5.0%						4.8%

 

 

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Report of the Directors: Capital (continued)

Regulatory developments

    

    

    

 

 

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Report of the Directors: Capital (continued)

Regulatory developments / Appendix to Capital

    

    

    

 

 

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Footnotes to Capital

 

1	From 1 January 2015 the CRD IV transitional CET1 and end point CET1 capital ratios became aligned for HSBC Holdings plc due to the recognition of unrealised gains on investment property and available-for-sale securities.

2	This includes dividends on ordinary shares, quarterly dividends on preference shares and coupons on capital securities, classified as equity.

3

The basis of presentation for foreign currency translation differences has changed to reflect the total amount in CET1 capital. Previously this only included foreign currency translation differences recognised in other comprehensive income. The comparative period, where applicable, has not been updated to reflect the change.

4	In the first half of 2015, a portfolio of customers was transferred from CMB to RBWM in Latin America in order to better align the combined banking needs of the customers with our established global businesses. Comparative data have been re-presented accordingly.

5	RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

6	For the basis of preparation, see page 247.

7	CRD IV balances as at 31 December 2013 were estimated based on the Group’s interpretation of final CRD IV legislation and final rules issued by the PRA, details of which can be found in the basis of preparation on page 324 of the Annual Report and Accounts 2013.

8	Includes externally verified profits for the year to 31 December 2015.

9	Mainly comprises unrealised gains/losses in available-for-sale debt securities related to SPEs.

10	Includes own credit spread on trading liabilities.

11	Mainly comprise investments in insurance entities.

Appendix to Capital

Capital management

(Audited)

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 in which we operate. Pre-tax return on risk-weighted assets (‘RoRWA’) is an operational metric by which the global businesses are managed on a day-to-day basis. The metric is calibrated against return on equity and our capital requirements to ensure we are best placed to achieve capital strength and business profitability, combined with regulatory capital efficiency objectives. It is our objective to maintain a strong capital base to support the risks inherent in our business and invest in accordance with our strategy, exceeding 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, which enables us to manage our capital in a consistent manner. The framework, which is approved by the Group Management Board (‘GMB’) annually, incorporates a number of different capital measures including market capitalisation, shareholders’ equity, economic capital and regulatory capital. During 2015, we continued to manage Group capital to meet a medium-term target for return on equity of more than 10%. This is modelled on a CET1 ratio on an end point basis in the range of 12% to 13%.

 

Capital measures   • shareholders’ equity is the equity capital invested in HSBC by our shareholders, adjusted for certain reserves and goodwill previously amortised or written-off;   • economic capital is the internally calculated capital requirement which we deem necessary to support the risks to which we are exposed; and   • regulatory capital is the capital which we are required to hold in accordance with the rules established by the PRA for the consolidated Group and by our local regulators for individual Group companies. This comprises common equity tier 1, additional tier 1 and tier 2 capital.

Our assessment of capital adequacy is aligned to our assessment of risks, including: credit, market, operational, interest rate risk in the banking book, pensions, insurance, structural foreign exchange risk and residual risks.

Stress testing

In addition to our annual group internal stress test, the Group is subject to supervisory stress testing in many jurisdictions. Supervisory requirements are increasing in frequency and in the granularity with which the results are required. These exercises include the programmes of the PRA, the FRB, the EBA, the ECB and the HKMA, as well as stress tests undertaken in other jurisdictions. We take into account the results of all such regulatory stress testing and our internal stress test when assessing our internal capital requirements. The outcome of stress testing exercises carried out by the PRA, will also feed into a PRA buffer under the Pillar 2 requirements, where required.

Risks to capital

Outside of the stress-testing framework, a list of top and emerging risks is regularly evaluated for their effect on our CET1 capital ratio. As a result, other risks may be identified which have the potential to affect our RWAs and/or capital position. These risks are also included in the evaluation of risks to capital. The downside or upside scenarios are assessed against our capital management objectives and mitigating actions are assigned as necessary. The responsibility for global capital allocation principles and decisions rests with the GMB. Through our internal governance processes, we seek to maintain discipline over

 

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Report of the Directors: Capital (continued)

Appendix to Capital

    

    

    

 

our investment and capital allocation decisions and seek to ensure that returns on investment meet the Group’s management objectives. Our strategy is to allocate capital to businesses and entities on the basis of their ability to achieve established RoRWA objectives and their regulatory and economic capital requirements.

Risk-weighted asset plans

RWA plans form part of the Annual Operating Plan that is approved by the Board. Revised forecasts are submitted to the GMB on a monthly basis and reported RWAs are monitored against plan.

Our global businesses are set targets in line with the priorities outlined in last June’s strategy update including RWA efficiency and return on RWAs. Business performance against RWA targets is monitored through regular reporting to the Holding Company ALCO as well as the GMB. Performance measures are aligned to the Group’s strategic actions. The management of regulatory capital deductions is also addressed in the RWA monitoring framework through additional notional charges for these items.

Analysis is undertaken within the RWA monitoring framework to identify the key drivers of movements. Particular attention is paid to identifying and segmenting items within the day-to-day control of the business and those items that are driven by changes in risk models or regulatory methodology. Analysis is also undertaken to recognise and report specific actions that are targeted RWA reduction initiatives.

Capital generation

HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings’ own capital issuance and profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investment in subsidiaries.

 

 

 

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Exhibits

 

Consent of PricewaterhouseCooper LLP.		Exhibit 23.1
Consent of KPMG Audit Plc.		Exhibit 23.2

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: 25 February 2016