TIDM57HB
RNS Number : 0815A
Hongkong & Shanghai Banking Corp Ld
21 March 2017
40 Fair values of financial instruments not carried at fair
value
Fair values
---------------------------------------------
Valuation
techniques
-------------------------
Quoted Significant
market Observable unobservable
price inputs inputs
Carrying Level Level Level
amount 1 2 3 Total
At 31 December 2016 HK$m HK$m HK$m HK$m HK$m
Assets
Reverse repurchase
agreements - non-trading............... 271,567 - 260,167 11,839 272,006
Placings with and advances
to banks ............................. 463,211 - 451,012 12,215 463,227
Loans and advances
to customers ................................. 2,834,114 - 74,856 2,746,942 2,821,798
Financial investment
debt securities ............................. 260,767 5,099 257,290 - 262,389
Liabilities
Repurchase agreements
- non-trading .......................... 27,810 - 27,809 - 27,809
Deposits by banks
.................................................
....... 192,479 - 192,133 328 192,461
Customer accounts
.................................................
...... 4,900,004 - 4,900,114 - 4,900,114
Debt securities in
issue
.................................................
. 25,235 - 25,269 - 25,269
Subordinated liabilities
.................................................
. 4,836 - 1,763 2,263 4,026
Preference shares
.................................................
........ 26,879 - - 27,285 27,285
At 31 December 2015
Assets
Reverse repurchase
agreements - non-trading............... 212,779 - 205,434 7,432 212,866
Placings with and advances
to banks ............................. 421,221 - 411,044 10,387 421,431
Loans and advances
to customers ................................. 2,762,290 - 44,348 2,708,923 2,753,271
Financial investment
debt securities ............................. 228,599 4,098 231,821 - 235,919
Liabilities
Repurchase agreements
- non-trading .......................... 16,158 - 16,158 - 16,158
Deposits by banks
.................................................
....... 148,294 - 147,826 468 148,294
Customer accounts
.................................................
...... 4,640,076 - 4,640,626 - 4,640,626
Debt securities in
issue
.................................................
. 40,859 - 40,898 - 40,898
Subordinated liabilities
.................................................
. 8,003 - 1,838 5,027 6,865
Preference shares
.................................................
........ 36,553 - - 36,863 36,863
Other financial instruments not carried at fair value are
typically short-term in nature or re-price to current market rates
frequently. Accordingly, their carrying amount is a reasonable
approximation of fair value.
Valuation
The fair values of financial instruments that are not carried at
fair value on the balance sheet are calculated as
described below.
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.
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. 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. The fair value of a loan reflects loan
impairments at the balance sheet date. For impaired loans, fair
value is estimated by discounting the future cash flows over the
time period they are expected to be recovered.
40 Fair values of financial instruments not carried at fair
value (continued)
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 estimated by discounting future cash flows using
discount rates for the applicable maturities and taking own credit
spread into account.
The fair values in this note are stated at a specific date and
may be significantly different from the amounts which will actually
be paid on the maturity or settlement dates of the instruments. In
many cases, it would not be possible to realise immediately the
estimated fair values given the size of the portfolios measured.
Accordingly, these fair values do not represent the value of these
financial instruments to the group as a going concern.
41 Structured entities
The group enters into certain transactions with customers in the
ordinary course of business which involve the use of structured
entities ('SEs'). The group's arrangements that involve SEs are
authorised centrally when they are established to ensure
appropriate purpose and governance. The activities of SEs
administered by the group are closely monitored by senior
management. The group's transactions with consolidated and
unconsolidated SEs are set out below.
Structured credit transactions
The group provides structured credit products to third-party
professional and institutional investors who wish to obtain
exposure to a reference portfolio of debt instruments. In such
structures, the investor receives returns referenced to the
underlying portfolio by purchasing notes issued by the SEs. The
group enters into contracts with the SE, including derivatives, in
order to pass the required risks and rewards of the reference
portfolios to the SEs.
Securitisations by the group
The group uses SEs to securitise customer loans and advances
that it has originated in order to diversify its sources of funding
for asset origination and for capital efficiency purposes. The
loans and advances are transferred by the group to the SEs for
cash, and the SEs issue debt securities to investors to fund the
cash purchases. The group may also act as a derivative counterparty
or provide a guarantee. Credit enhancements to the underlying
assets may be provided to obtain investment grade ratings on the
senior debt issued by the SEs.
Third-party financing SEs
The group also transacts with third party SEs in the normal
course of business for a number of purposes, for example, to
provide finance to public and private sector infrastructure
projects, for asset and structured finance transactions and for
customers to raise finance against security. The group also has
interests in third-party established structured entities by holding
notes issued by these entities or entering into derivatives where
the group absorbs risk from the entities.
Funds
The group has established and managed funds to provide customers
with investment opportunities. The group, as the fund manager, may
be entitled to receive management and performance fees based on the
assets under management. The group purchases and holds units of
HSBC managed and third party managed funds in order to facilitate
both
business and customer needs. The majority of these funds held
relate to the insurance business. When the group is
deemed to be acting as a principal rather than an agent in its
role as a fund manager, the group controls and hence consolidates
these funds.
The group's transactions with consolidated SEs are not
significant.
.
41 Structured entities (continued)
Unconsolidated structured entities
The maximum exposure to loss from the group's interests in
unconsolidated SEs represents the maximum loss that the group could
incur as a result of its involvement with unconsolidated SEs
regardless of the probability of the loss being incurred. For
commitments and guarantees, the maximum exposure to loss is the
notional amount of potential future losses. For retained and
purchased investments in and loans to unconsolidated SEs, 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 the group's exposure to
loss.
Income from unconsolidated SEs includes recurring and
non-recurring fees, interest, dividends, gains or losses on the
re-measurement or derecognition of interests in structured
entities, any mark-to-market gains or losses on a net basis and
gains or losses from the transfer of assets and liabilities to the
structured entities.
The nature and risk associated with the group's interest in
unconsolidated SEs are set out below.
HSBC Non-HSBC
managed managed
Securitisations funds funds Other Total
HK$m HK$m HK$m HK$m HK$m
At 31 December 2016
Total assets
.....................................................
... 33,137 567,991 5,784,647 59,374 6,445,149
The group's interest-
assets
Trading assets
................................................ - 2,272 - - 2,272
Financial assets designated
at fair value .......... - 18,161 44,926 - 63,087
Derivatives
...................................................
. - - - 249 249
Loans and advances
to customers ................... 6,786 - - 7,568 14,354
Financial investments
.................................... - - 797 - 797
Other assets
................................................... - - - 358 358
--------------- ------- --------- ------ ---------
Total assets in relation
to the group's interests
in the unconsolidated
structured entities(1)
............ 6,786 20,433 45,723 8,175 81,117
--------------- ------- --------- ------ ---------
The group's interest-
liabilities
Derivatives
...................................................
. - - - 1 1
--------------- ------- --------- ------ ---------
Total liabilities
in relation to the
group's interests
in the unconsolidated
structured entities........... - - - 1 1
--------------- ------- --------- ------ ---------
The group's maximum
exposure.......................... 7,305 20,434 53,097 8,532 89,368
At 31 December 2015
Total assets
.....................................................
... 30,631 622,340 5,527,243 57,366 6,237,580
The group's interest-
assets
Trading assets
................................................ - 99 - - 99
Financial assets designated
at fair value .......... - 15,506 40,142 - 55,648
Derivatives
...................................................
. - - - 299 299
Loans and advances
to customers ................... 8,654 - - 6,918 15,572
Financial investments
.................................... - - 435 - 435
Other assets
................................................... - - - 283 283
--------------- ------- --------- ------ ---------
Total assets in relation
to the group's interests
in the unconsolidated
structured entities(1)
............ 8,654 15,605 40,577 7,500 72,336
--------------- ------- --------- ------ ---------
The group's interest-
liabilities
Derivatives
...................................................
. 205 - - 2 207
--------------- ------- --------- ------ ---------
Total liabilities
in relation to the
group's interests
in the unconsolidated
structured entities........... 205 - - 2 207
--------------- ------- --------- ------ ---------
The group's maximum
exposure.......................... 9,305 15,605 40,598 7,946 73,454
1 Most of HSBC managed funds and non-HSBC managed funds are held by the insurance business.
Structured entities sponsored by the group
The amount of assets transferred to and income received from
unconsolidated structured entities sponsored by the group during
2016 and 2015 was not significant.
42 Bank balance sheet and statement of changes in equity
Bank balance sheet at 31 December 2016
2016 2015
HK$m HK$m
ASSETS
Cash and sight balances at central
banks .............................................................................. 163,204 112,427
Items in the course of collection
from other banks .............................................................. 15,006 18,055
Hong Kong Government certificates
of indebtedness ........................................................... 242,194 220,184
Trading assets
...........................................................................................
........................... 274,287 215,109
Derivatives
...........................................................................................
............................... 453,746 360,222
Financial assets designated at
fair value ................................................................................ 403 911
Reverse repurchase agreements -
non-trading ...................................................................... 146,398 94,592
Placings with and advances to banks
.................................................................................... 202,763 179,109
Loans and advances to customers
........................................................................................ 1,575,340 1,546,056
Financial investments
...........................................................................................
............... 983,049 950,504
Amounts due from Group companies
................................................................................... 450,399 407,194
Investments in subsidiaries
...........................................................................................
........ 81,801 72,395
Interests in associates and joint
ventures ............................................................................. 39,830 39,830
Goodwill and intangible assets
...........................................................................................
... 4,578 4,361
Property, plant and equipment
...........................................................................................
. 82,344 80,513
Deferred tax assets
...........................................................................................
................... 530 924
Prepayment, accrued income and
other assets ..................................................................... 108,001 80,271
--------- ---------
Total assets
...........................................................................................
............................ 4,823,873 4,382,657
--------- ---------
LIABILITIES
Hong Kong currency notes in circulation
............................................................................. 242,194 220,184
Items in the course of transmission
to other banks .............................................................. 25,350 21,960
Repurchase agreements - non-trading
.................................................................................. 10,464 6,192
Deposits by banks
...........................................................................................
..................... 139,033 92,969
Customer accounts
...........................................................................................
................... 3,100,506 2,972,413
Trading liabilities
...........................................................................................
...................... 100,777 101,342
Derivatives
...........................................................................................
............................... 440,528 350,281
Financial liabilities designated
at fair value ........................................................................... 8,917 8,744
Debt securities in issue
...........................................................................................
.............. 18,255 32,054
Retirement benefit liabilities
...........................................................................................
..... 2,914 4,465
Amounts due to Group companies
....................................................................................... 272,210 141,047
Accruals and deferred income, other
liabilities and provisions .............................................. 53,779 47,809
Current tax liabilities
...........................................................................................
................ 1,119 1,451
Deferred tax liabilities
...........................................................................................
.............. 7,625 6,806
Subordinated liabilities
...........................................................................................
.............. 3,102 6,204
Preference shares
...........................................................................................
..................... 26,779 36,451
--------- ---------
Total liabilities
...........................................................................................
...................... 4,453,552 4,050,372
--------- ---------
EQUITY
Share capital
...........................................................................................
............................. 114,359 96,052
Other equity instruments
...........................................................................................
......... 14,737 14,737
Other reserves
...........................................................................................
.......................... 8,443 6,558
Retained profits
...........................................................................................
........................ 232,782 214,938
--------- ---------
Total equity
...........................................................................................
............................. 370,321 332,285
--------- ---------
Total equity and liabilities
...........................................................................................
.. 4,823,873 4,382,657
--------- ---------
Directors
Stuart Gulliver
Peter Wong
42 Bank balance sheet and statement of changes in equity
(continued)
Bank statement of changes in equity for the year ended 31
December 2016
Other reserves
--------------------------------------------------------------------------------------------------
Other Available- Cash
equity Property for-sale flow Foreign
Share instruments Retained revaluation investment hedge exchange Total
capital profits reserve reserve reserve Reserve Other(1) equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
2016
At 1 January
..................
..................
........ 96,052 14,737 214,938 33,056 1,355 19 (12,867) (15,005) 332,285
Profit for the
year
..................
................. - - 59,314 - - - - - 59,314
Other
comprehensive
income/(expense)
(net of tax)
................
................
......... - - 573 4,082 913 (694) (867) - 4,007
------- --------------------- ----------------- ----------------- ------------------ ----------------- ----------------- --------------------- --------
Available-for-sale
investments
................. - - - - 913 - - - 913
Cash flow hedges
..................
..................
.. - - - - - (694) - - (694)
Property
revaluation
..................
............ - - (173) 4,082 - - - - 3,909
Actuarial gains
on defined benefit
plans ... - - 746 - - - - - 746
Exchange
differences
..................
............. - - - - - - (867) - (867)
------- --------------------- ----------------- ----------------- ------------------ ----------------- ----------------- --------------------- --------
Total comprehensive
income/(expense)
.. - - 59,887 4,082 913 (694) (867) - 63,321
Shares issued
..................
..................
........ 18,307 - - - - - - - 18,307
Dividends paid(2)
..................
..................
.... - - (43,296) - - - - - (43,296)
Movement in respect
of share-based
payment
arrangements......
..................
........... - - 205 - - - - (215) (10)
Transfers and other
movements(3)
.............. - - 1,048 (1,322) (6) - - (6) (286)
------- --------------------- ----------------- ----------------- ------------------ ----------------- ----------------- --------------------- --------
-
At 31 December
..................
..................
.. 114,359 14,737 232,782 35,816 2,262 (675) (13,734) (15,226) 370,321
------- --------------------- ----------------- ----------------- ------------------ ----------------- ----------------- --------------------- --------
2015
At 1 January
.....................
.....................
.. 96,052 14,737 199,851 28,933 2,575 (106) (8,825) (15,324) 317,893
Profit for the
year
.....................
.............. - - 52,541 - - - - - 52,541
Other comprehensive
income/(expense)
(net of tax)
...................
...................
... - - (1,026) 5,108 (1,220) 125 (4,042) - (1,055)
------ ------ -------- ------ ------- ----- -------- -------- --------
Available-for-sale
investments
................. - - - - (1,220) - - - (1,220)
Cash flow hedges
.....................
................. - - - - - 125 - - 125
Property revaluation
.....................
......... - - (142) 5,108 - - - - 4,966
Actuarial losses
on defined benefit
plans .. - - (884) - - - - - (884)
Exchange differences
.....................
.......... - - - - - - (4,042) - (4,042)
------ ------ -------- ------ ------- ----- -------- -------- --------
Total comprehensive
income/(expense)
.. - - 51,515 5,108 (1,220) 125 (4,042) - 51,486
Dividends paid(2)
.....................
.................... - - (37,405) - - - - - (37,405)
Movement in respect
of share-based
payment
arrangements.........
.....................
..... - - 12 - - - - 329 341
Transfers and other
movements(3)
.............. - - 965 (985) - - - (10) (30)
At 31 December
.....................
................. 96,052 14,737 214,938 33,056 1,355 19 (12,867) (15,005) 332,285
------ ------ -------- ------ ------- ----- -------- -------- --------
For footnotes, please refer to page 70.
43 Legal proceedings and regulatory matters
The group 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, the Bank
considers that none of these matters are material. The recognition
of provisions is determined in accordance with the accounting
policies set out in note 1(b)(x). 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 2016. 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.
Anti-money laundering and sanctions-related matters
In October 2010, HSBC Bank USA entered into a consent order with
the Office of the Comptroller of the Currency (the 'OCC') and the
indirect parent of that company, HSBC North America Holdings Inc.
('HNAH'), entered into a consent order with the Federal Reserve
Board (together the 'Orders'). These Orders required improvements
to establish an effective compliance risk management programme
across HSBC's US businesses, including risk management related to
the US Bank Secrecy Act ('BSA') and anti-money laundering ('AML')
compliance. HSBC Bank USA is not currently in compliance with the
OCC Order. Steps are being taken to address the requirements of the
Orders.
In December 2012, HSBC Holdings plc, 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 plc and HSBC
Bank USA entered into a five-year deferred prosecution agreement
with, among others, the US Department of Justice ('DoJ') (the 'US
DPA'); and HSBC Holdings plc consented to a cease-and-desist order
and HSBC Holdings plc and HNAH consented to a civil money penalty
order with the Federal Reserve Board. HSBC Holdings plc 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
Financial Conduct Authority to comply with certain forward-looking
AML and sanctions-related obligations. In addition, HSBC Bank USA
entered into civil money penalty orders with the Financial Crimes
Enforcement Network of the US Treasury Department and the OCC.
Under these agreements, HSBC Holdings plc and HSBC Bank USA made
payments totalling US$1.9bn to US authorities and undertook various
further obligations, including, among others, to continue to
cooperate fully with the DoJ in any and all investigations, not to
commit any crime under US federal law subsequent to the signing of
the agreement, and to retain an independent compliance monitor (the
'Monitor'). In February 2017, the Monitor delivered his third
annual follow-up review report. Through his country-level reviews,
the Monitor identified potential anti-money laundering and
sanctions compliance issues that the DoJ and HSBC are reviewing
further.
HSBC Bank USA also entered into two consent orders with the OCC.
These required HSBC Bank USA to correct the circumstances noted in
the OCC's report and to adopt an enterprise-wide compliance
programme, and imposed restrictions on acquiring control of, or
holding an interest in, any new financial subsidiary, or commencing
a new activity in its existing financial subsidiary, without the
OCC's prior approval.
These settlements with US and UK authorities have led to private
litigation, and do not preclude further private litigation related
to HSBC's compliance with applicable BSA, AML and sanctions laws or
other regulatory or law enforcement actions for BSA, AML, sanctions
or other matters not covered by the various agreements.
Tax investigations
The Bank continues to cooperate with the relevant US and other
authorities, including with respect to US-based clients of the Bank
in India.
In addition, various tax administration, regulatory and law
enforcement authorities around the world, including in India, are
conducting investigations and reviews of HSBC Swiss Private Bank
and other HSBC companies in connection with allegations of tax
evasion or tax fraud, money laundering and unlawful cross-border
banking solicitation. The Indian tax authority issued a summons and
request for information to the Bank in India.
43 Legal proceedings and regulatory matters (continued)
The Bank and other HSBC companies are cooperating with the
relevant authorities. 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.
Mossack Fonseca & Co.
HSBC has received requests for information from various
regulatory and law enforcement authorities around the world
concerning persons and entities believed to be linked to Mossack
Fonseca & Co., a service provider of personal investment
companies. HSBC is cooperating with the relevant authorities.
Based on the facts currently known, it is not practicable at
this time for HSBC to predict the resolution of this matter,
including the timing or any possible impact on HSBC, which could be
significant.
Singapore Interbank Offered Rate ('SIBOR'), Singapore Swap Offer
Rate ('SOR') and Australia Bank Bill Swap Rate ('BBSW')
In July 2016 and August 2016, HSBC and other panel banks were
named as defendants in two putative class actions filed in the New
York District Court on behalf of persons who transacted in products
related to the SIBOR, SOR and BBSW benchmark rates. The complaints
allege, among other things, misconduct related to these benchmark
rates in violation of US antitrust, commodities and racketeering
laws, and state law.
These matters are at an early stage. There are many factors that
may affect the range of outcomes, and the resulting financial
impact, of these matters, which could be significant.
Foreign exchange rate investigations
Various regulators and competition and law enforcement
authorities around the world, including in South Korea, are
conducting investigations and reviews into trading by HSBC and
others on the foreign exchange markets. The Bank and other HSBC
companies are cooperating with these investigations and
reviews.
There are many factors that may affect the range of outcomes and
the resulting financial impact of these investigations, which could
be significant.
Hiring practices investigation
The US Securities and Exchange Commission (the 'SEC') is
investigating multiple financial institutions, including HSBC
Holdings plc, 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.
44 Ultimate holding company
The ultimate holding company of the Bank is HSBC Holdings plc,
which is incorporated in England.
The largest group in which the accounts of the Bank are
consolidated is that headed by HSBC Holdings plc. The consolidated
accounts of HSBC Holdings plc are available to the public on the
HSBC Group's web site at www.hsbc.com or may be obtained from 8
Canada Square, London E14 5HQ, United Kingdom.
45 Events after the balance sheet date
There have been no events after the balance sheet date that
would require disclosure in these financial statements.
46 Approval of financial statements
The financial statements were approved and authorised for issue
by the Board of Directors on 21 February 2017.
(c) The Hongkong and
Shanghai Banking Corporation
Limited 2017
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END
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