TIDM57HB
RNS Number : 9318S
Hongkong & Shanghai Banking Corp Ld
15 March 2019
The Hongkong and Shanghai Banking
Corporation Limited
Annual Report and Accounts 2018
Contents
Page
Certain defined terms 1
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Cautionary statement regarding
forward-looking statements 1
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Chinese translation 1
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Financial Highlights 2
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Report of the Directors 3
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Financial Review 8
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Risk 12
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Capital 42
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Statement of Directors' Responsibilities 46
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Auditor's Report 47
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Financial Statements
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Consolidated income statement 52
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Consolidated statement of comprehensive
income 53
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Consolidated balance sheet 54
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Consolidated statement of cash
flows 55
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Consolidated statement of changes
in equity 56
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Notes on the Financial Statements
----
Basis of preparation and significant
1 accounting policies 57
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Effects of reclassification
2 upon adoption of HKFRS 9 70
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3 Operating profit 74
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4 Insurance business 76
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Employee compensation and
5 benefits 77
6 Tax expense 79
7 Dividends 81
8 Trading assets 81
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9 Derivatives 81
Financial assets designated
and otherwise mandatorily
10 measured at fair value 82
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11 Loans and advances to customers 83
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12 Financial investments 84
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Assets pledged, assets transferred
13 and collateral received 84
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14 Investments in subsidiaries 85
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Interests in associates and
15 joint ventures 86
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16 Goodwill and intangible assets 89
17 Property, plant and equipment 90
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Prepayments, accrued income
18 and other assets 91
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19 Customer accounts 91
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20 Trading liabilities 91
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Financial liabilities designated
21 at fair value 92
22 Debt securities in issue 92
Accruals and deferred income,
23 other liabilities and provisions 92
24 Subordinated liabilities 93
25 Preference shares 93
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26 Share capital 94
27 Other equity instruments 94
Maturity analysis of assets
28 and liabilities 94
Analysis of cash flows payable
under financial liabilities
29 by remaining contractual maturities 97
Contingent liabilities and
30 commitments 98
31 Other commitments 98
Offsetting of financial assets
32 and financial liabilities 99
33 Segmental analysis 100
34 Related party transactions 101
Fair values of financial instruments
35 carried at fair value 103
Fair values of financial instruments
36 not carried at fair value 106
37 Structured entities 108
Bank balance sheet and statement
38 of changes in equity 110
Legal proceedings and regulatory
39 matters 112
40 Ultimate holding company 113
Events after the balance sheet
41 date 113
42 Approval of financial statements 113
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Certain defined terms
This document comprises the
Annual Report and Accounts 2018
for The Hongkong and Shanghai Banking Corporation Limited ('the
Bank') and its subsidiaries (together 'the group'). References to
'HSBC', 'the Group' or 'the HSBC Group' within this document mean
HSBC Holdings plc together with its subsidiaries. Within this
document the Hong Kong Special Administrative Region of the
People's Republic of China is referred to as 'Hong Kong'. The
abbreviations 'HK$m' and 'HK$bn' represent millions and billions
(thousands of millions) of Hong Kong dollars respectively.
Cautionary statement regarding forward-
looking statements
This
Annual Report and Accounts
contains certain forward-looking statements with respect to the
financial condition, results of operations and business of the
group.
Statements that are not historical facts, including statements
about the Bank's beliefs and expectations, are forward-looking
statements. Words such as 'expects', 'anticipates', 'intends',
'plans', 'believes', 'seeks', 'estimates', 'potential' and
'reasonably possible', variations of these words and similar
expressions are intended to identify forward-looking statements.
These statements are based on current plans, estimates and
projections, and therefore undue reliance should not be placed on
them. Forward-looking statements speak only as of the date they are
made, and it should not be assumed that they have been revised or
updated in the light of new information or future events.
Forward-looking statements involve inherent risks and
uncertainties. Readers are cautioned that a number of factors could
cause actual results to differ, in some instances materially, from
those anticipated or implied in any forward-looking statement.
Chinese translation
A Chinese translation of the
Annual Report and Accounts
is available upon request from: Communications (Asia), Level 32,
HSBC Main Building, 1 Queen's Road Central, Hong Kong. The report
is also available, in English and Chinese, on the Bank's website at
www.hsbc.com.hk.
Financial Highlights
2018 2017
HK$m HK$m
--------- -----------
For the year
Net operating income before change in expected credit
losses and other credit impairment charges 210,469 186,443
Profit before tax 134,583 115,619
Profit attributable to shareholders 103,013 88,530
At the year-end
Total shareholders' equity 752,758 696,480
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Total equity 812,920 752,986
Total capital 557,180 522,244
Customer accounts 5,207,666 5,138,272
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Total assets 8,263,454 7,943,346
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Ratios %
Return on average ordinary shareholders' equity 14.8 13.7
Post-tax return on average total assets 1.4 1.2
Cost efficiency ratio 41.5 43.5
Net interest margin 2.06 1.88
Advances-to-deposits ratio 67.8 64.8
---------
Capital ratios
---------
Common equity tier 1 capital 16.5 15.9
Tier 1 capital 17.8 17.0
Total capital 19.8 18.9
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Established in Hong Kong and Shanghai in 1865, The Hongkong and
Shanghai Banking Corporation Limited is the founding member of the
HSBC Group - one of the world's largest banking and financial
services organisations. It is the largest bank incorporated in Hong
Kong and one of Hong Kong's three note-issuing banks. It is a
wholly-owned subsidiary of HSBC Holdings plc, the holding company
of the HSBC Group, which has an international network organised
into five geographical regions: Europe, Asia, Middle East and North
Africa, North America and Latin America.
The Hongkong and Shanghai Banking Corporation Limited
Incorporated in the Hong Kong SAR with limited liability
Registered Office and Head Office: HSBC Main Building, 1 Queen's
Road Central, Hong Kong
Telephone: (852) 2822 1111 Facsimile: (852) 2810 1112 Web: www.hsbc.com.hk.
Report of the Directors
Principal Activities
The group provides a comprehensive range of domestic and
international banking and related financial services, principally
in the Asia-Pacific region.
Asia Strategy
HSBC Group's aim is to be the world's leading international
bank. As a subsidiary of the HSBC Group, the group applies a
disciplined approach in managing its portfolio of businesses to
focus on areas where it has a clear competitive advantage. The
Group has set clear strategic actions to deliver growth, improve
returns, and enhance customer and employee experience. We will
accelerate growth from our Asian franchise by building on the
strength in Hong Kong, investing in the Pearl River Delta, the
Association of Southeast Asian Nations countries, and Wealth in
Asia including Insurance and Asset Management. In addition, we will
be the leading bank to support drivers of global investment,
including the China-led Belt and Road Initiative, and transition to
a low carbon economy whilst gaining market share and deliver growth
from our international network. We will continue to implement HSBC
Global Standards as a competitive advantage and to increase the
quality of earnings.
The group's strong presence across the Asia-Pacific region will
help maintain its competitive advantage in connecting business
opportunities within the region, as well as between Asia-Pacific
and other parts of the world.
Financial Statements
The state of affairs of the Bank and the group, and the
consolidated profit of the group, are shown on pages 52 to 113.
Subordinated liabilities, Preference Shares and Share
Capital
Details on subordinated liabilities issued by the group are set
out in notes 24 and 34. Details on preference shares and share
capital of the Bank are set out in notes 25, 26 and 27 on the
Financial Statements.
Dividends
The interim dividends paid in respect of 2018 are set out in
note 7 on the Financial Statements.
Directors
The Directors at the date of this report are set out below:
John Michael Flint(#)
Chairman
He is Group Chief Executive and
an executive Director of HSBC Holdings
plc. He holds a Bachelor of Arts
(Hons) in Economics from Portsmouth
Polytechnic.
His previous roles with the Group
include: Chief Executive of Retail
Banking and Wealth Management, Chief
of Staff to Group Chief Executive
and Group Head of Strategy and Planning,
Chief Executive Officer of Global
Asset Management, Group Treasurer
and Deputy Head of Global Markets.
Peter Tung Shun Wong
Deputy Chairman & Chief Executive
He is a Group Managing Director
and a member of the Group Management
Board of HSBC Holdings plc; a non-executive
Director of Hang Seng Bank Limited;
and Vice Chairman and a non-executive
Director of Bank of Communications
Co., Ltd. He is also Chairman of
HSBC Bank (China) Company Limited.
He holds a Bachelor of Arts, a Master
of Business Administration and a
Master of Science from Indiana University.
----------------------------------------------------
Laura May Lung Cha*, GBM
Deputy Chairman
She is an independent non-executive
Director of HSBC Holdings plc. She
is also Chairman and an independent
non-executive Director of Hong Kong
Exchanges and Clearing Limited;
an independent non-executive Director
of Unilever PLC and Unilever N.V.;
and a non-executive Director of
The London Metal Exchange. She holds
a Bachelor of Arts from University
of Wisconsin-Madison and a Juris
Doctor from University of Santa
Clara Law School. She is also admitted
to practice in the State of California
and in Federal Courts.
----------------------------------------------------
Zia Mody*
Deputy Chairman
She is a partner of AZB & Partners;
an independent non-executive Director
of CLP Holdings Limited; and an
independent Director of Ascendas
Property Fund Trustee Pte. Ltd.
She holds a Bachelor of Arts (Law)
from Cambridge University and a
Master of Laws from Harvard University.
Graham John Bradley*
He is non-executive Chairman and
a Director of HSBC Bank Australia
Limited. He is also Chairman and
a non-executive Director of Graincorp
Limited; Chairman and a Director
of EnergyAustralia Holdings Limited;
Chairman of Infrastructure New South
Wales; and Chairman and a Director
of Virgin Australia International
Holdings Limited. He holds a Bachelor
of Arts and a Bachelor of Laws (Hons
I) from Sydney University and a
Master of Laws from Harvard University.
----------------------------------------------------
Louisa Wai Wan Cheang
She is Vice-Chairman and Chief Executive
of Hang Seng Bank Limited; an independent
non-executive Director of Treasury
Wine Estates Limited; an International
Advisor of China Union Pay; and
a Group General Manager of HSBC
Holdings plc. She holds a Bachelor
of Social Sciences from The University
of Hong Kong. She is also an Honorary
Certified Financial Management Planner
of The Hong Kong Institute of Bankers.
----------------------------------------------------
Dr Christopher Wai Chee Cheng*,
GBS, OBE
He is Chairman of Wing Tai Properties
Limited; an independent non-executive
Director of NWS Holdings Ltd.; and
an independent non-executive Director
of Eagle Asset Management (CP) Limited.
He holds a Bachelor of Business
Administration from University of
Notre Dame; a Master of Business
Administration from Columbia University;
a Doctorate in Social Sciences honoris
causa from The University of Hong
Kong and an Honorary Degree of Doctor
of Business Administration from
the Hong Kong Polytechnic University.
----------------------------------------------------
Dr Raymond Kuo Fung Ch'ien*, GBS,
CBE
He is independent non-executive
Chairman of Hang Seng Bank Limited.
He is also an independent non-executive
Director of China Resources Power
Holdings Company Limited, Swiss
Re Limited and Swiss Re Asia Pte.
Ltd. He holds a Bachelor of Arts
from Rockford College and a Master
of Arts and a Doctor of Philosophy
(Economics) from University of Pennsylvania.
----------------------------------------------------
Yiu Kwan Choi*
He is an independent non-executive
Director of HSBC Bank (China) Company
Limited. He holds a higher certificate
in Accountancy from Hong Kong Polytechnic
University and is a fellow member
of The Hong Kong Institute of Bankers.
He was Deputy Chief Executive of
the Hong Kong Monetary Authority
('HKMA') in charge of Banking Supervision
when he retired in January 2010.
Before this, he was Deputy Chief
Executive of the HKMA in charge
of Monetary Policy and Reserves
Management from June 2005 to August
2007 and held various senior positions
in the HKMA including Executive
Director (Banking Supervision),
Head of Administration, and Head
of Banking Policy from 1993 to 2005.
Irene Yun-lien Lee*
She is executive Chairman of Hysan
Development Company Limited and
an independent non-executive Director
of HSBC Holdings plc, Hang Seng
Bank Limited and Cathay Pacific
Airways Limited. She holds a Bachelor
of Arts (Distinction) in History
of Art from Smith College, Northampton,
Massachusetts, USA. She is also
a member of the Honourable Society
of Gray's Inn, UK and a Barrister-at-Law
in England and Wales.
----------------------------------------------------
Jennifer Xinzhe Li*
She is General Managing Partner
of Changcheng Investment Partners,
having previously been Chief Executive
Officer and General Partner of Baidu
Capital and Chief Financial Officer
of Baidu, Inc. She is also an independent
non-executive Director of Philip
Morris International Inc. and a
non-executive Director of Flex Ltd.
and ABB Ltd. She holds a Bachelor
of Arts from Tsinghua University
and a Master of Business Administration
from University of British Columbia.
----------------------------------------------------
Victor Tzar Kuoi Li(#)
He is Chairman and Managing Director
of CK Asset Holdings Limited; Chairman
and a Group Co-Managing Director
of CK Hutchison Holdings Limited;
Chairman of CK Infrastructure Holdings
Limited and CK Life Sciences Int'l.,
(Holdings) Inc.; a non-executive
Director of Power Assets Holdings
Limited and HK Electric Investments
Manager Limited; a non-executive
Director and Deputy Chairman of
HK Electric Investments Limited;
and Co-Chairman of Husky Energy
Inc. He is also Deputy Chairman
of Li Ka Shing Foundation Limited,
Li Ka Shing (Overseas) Foundation
and Li Ka Shing (Canada) Foundation.
He holds a Bachelor of Science degree
in Civil Engineering, a Master of
Science degree in Civil Engineering,
both received from Stanford University;
and an honorary degree, Doctor of
Laws, honoris causa (LL.D.) from
The University of Western Ontario.
----------------------------------------------------
Bin Hwee Quek (née Chua)*,
JP
She is an independent non-executive
Director of CapitaLand Commercial
Trust Management Limited and Mapletree
Oakwood Holdings Pte. Ltd. She is
also a Director of several government
or government-funded organisations
in Singapore, including Duke-NUS
Graduate Medical School, Health
Promotion Board, Maritime and Port
Authority of Singapore, and National
Heritage Board.
She was an audit partner of PricewaterhouseCoopers
(PwC) Singapore and held many leadership
positions including Vice Chairman
of PwC Singapore and Deputy Markets
Leader of PwC Asia Pacific and Americas.
She holds a Bachelor of Accountancy
(Hons) from The University of Singapore
and is a Chartered Accountant with
the Institute of Singapore Chartered
Accountants.
Kevin Anthony Westley*, BBS
He is an independent non-executive
Director of Hutchison Port Holdings
Management Pte. Ltd. and Fu Tak
Iam Foundation Limited and a member
of the investment committee of The
West Kowloon Cultural Development
Authority. He holds a Bachelor of
Arts (Hons) from the University
of London (LSE) and is a Fellow
of the Institute of Chartered Accountants
in England and Wales.
He was Chairman (from 1996) and
Chief Executive (from 1992) of HSBC
Investment Bank Asia Limited (formerly
named as Wardley Limited) until
his retirement in 2000 and subsequently
acted as an advisor to the Bank
and the Group in Hong Kong.
----------------------------------------------------
Marjorie Mun Tak Yang*, GBS
She is Chairman of Esquel Holdings
Inc. She holds a B.Sc. in Mathematics
from Massachusetts Institute of
Technology and a Master of Business
Administration from Harvard Business
School.
----------------------------------------------------
Tan Sri Dr Francis Sock Ping Yeoh*,
CBE
He is executive Chairman of YTL
Corporation Berhad, YTL Land & Development
Berhad, YTL Power International
Berhad, YTL Cement Berhad and executive
Chairman and a Managing Director
of YTL E-Solutions Berhad. He holds
a Bachelor of Science (Hons) in
Civil Engineering and an Honorary
Doctorate of Engineering from the
University of Kingston.
----------------------------------------------------
* Independent non-executive Director
# Non-executive Director
====================================================
During the year, John Flint was appointed a Director on 16
January 2018 and Chairman on 21 February 2018. Stuart Gulliver
stepped down as Chairman and a Director on 20 February 2018 and
John Slosar resigned on 24 July 2018. Save for the above, all the
Directors served throughout the year.
A list of the directors of the Bank's subsidiary undertakings
(consolidated in the financial statements) during the period
from
1 January 2018 to the date of this report will be available on
the Bank's website
https://www.hsbc.com.hk/legal/regulatory-disclosures/.
Secretary
Neil Olofsson succeeded Paul Stafford as Corporation Secretary
with effect from 1 April 2018.
Permitted Indemnity Provision
The Bank's Articles of Association provide that the Directors
and other officers for the time being of the Bank shall be
indemnified out of the Bank's assets against any liability incurred
by them or any of them as the holder of any such office or
appointment to a person other than the Bank or an associated
company of the Bank in connection with any negligence, default,
breach of duty or breach of trust in relation to the Bank or
associated company (as the case may be).
In addition, the Bank's ultimate holding company, HSBC Holdings
plc, has maintained directors' and officers' liability insurance
providing appropriate cover for the directors and officers within
the Group, including the Directors of the Bank and its
subsidiaries.
Directors' Interests in Transactions, Arrangements or
Contracts
No transactions, arrangements or contracts that were significant
in relation to the Bank's business and in which a Director or his
or her connected entities had, directly or indirectly, a material
interest were entered into by or subsisted with the Bank, its
holding companies, its subsidiaries or subsidiaries of its holding
companies during the year.
Directors' Rights to Acquire Shares or Debentures
To help align the interests of employees with shareholders,
executive Directors of the Bank and those executive Directors of
HSBC Holdings plc are eligible to be granted conditional awards
over ordinary shares in HSBC Holdings plc by that company (being
the ultimate holding company) under the HSBC Share Plan 2011 and
the HSBC International Employee Share Purchase Plan.
Executive Directors of the Bank and those executive Directors of
HSBC Holdings plc are eligible to receive an annual incentive award
based on the outcome of the performance measures set out in their
annual performance scorecard. Annual incentive awards are normally
delivered in cash and/or shares, and these generally have a
deferral rate of 60% or 40% if the annual incentive award is
GBP500,000 or below. The period over which annual incentive awards
would be deferred is determined in accordance with the requirements
of the Prudential Regulation Authority ('PRA') Remuneration Rules,
i.e. seven years for Senior Managers (individuals in PRA and
Financial Conduct Authority ('FCA') designation Senior Management
Functions), five years for Risk Managers, and three years for other
Material Risk Takers ('MRTs'). From January 2017 onwards, all share
awards granted to MRTs are subject to a minimum retention period of
one year as opposed to six months previously. However, for certain
individuals whose variable pay awards will be deferred for at least
five years and who are not considered to be members of senior
management, their retention period may be kept at six months.
All unvested deferred awards made under the HSBC Share Plan 2011
are subject to the application of malus, i.e. the cancellation and
reduction of unvested deferred awards. All paid or vested variable
pay awards made to Identified Staff and MRTs will be subject to
clawback for a period of seven years from the date of award. For
Senior Managers, this may be extended to 10 years in the event of
an ongoing internal or regulatory investigation at the end of the
seven-year period.
Executive Directors and other senior executives of HSBC Holdings
plc are subject to Group minimum shareholding requirements.
Individuals are given five years from 2014 or (if later) their
appointment to build up the recommended levels of shareholding.
HSBC operates an anti-hedging policy, all employees including
executive Directors are required to certify each year that they
have not entered into any personal hedging strategies in relation
to their holdings of HSBC shares.
The HSBC International Employee Share Purchase Plan is an
employee share purchase plan offered to employees in Hong Kong
since 2013 and has been extended to further countries in the HSBC
Group from 2014. For every three shares in HSBC Holdings plc
purchased by an employee ('Investment Shares'), a conditional award
to acquire one share is granted ('Matching Shares'). The employee
becomes entitled to the Matching Shares subject to continued
employment with HSBC and retention of the Investment Shares until
the third anniversary of the start of the relevant plan year. HSBC
Holdings Savings-Related Share Option Plan (UK) is an all employee
share plan under which eligible employees may be granted options to
acquire HSBC Holdings ordinary shares. Employees may make monthly
contributions, up to a maximum defined limit, over a period of
three or five years and shares are exercisable within six months
following either the third or fifth anniversary of the
commencement. The exercise price is set at a 20% discount to the
market value immediately preceding the date of invitation.
During the year, Stuart Gulliver, John Flint, Peter Wong and
Louisa Cheang acquired or were awarded shares of HSBC Holdings plc
under the terms of the HSBC Share Plan 2011. John Flint was also
granted options over ordinary shares in HSBC Holdings plc under the
HSBC Holdings Savings-Related Share Option Plan (UK). Apart from
these arrangements, at no time during the year was the Bank, its
holding companies, its subsidiaries or any fellow subsidiaries a
party to any arrangements to enable the Directors to acquire
benefits by means of the acquisition of shares in or debentures of
the Bank or any other body corporate.
Donations
Donations made by the Bank and its subsidiaries during the year
amounted to HK$302m (2017: HK$386m).
Compliance with the Banking (Disclosure) Rules
The Directors are of the view that the Annual Report and
Accounts 2018 and Banking Disclosure Statements 2018, fully comply
with the Banking (Disclosure) Rules made under section 60A of the
Banking Ordinance.
Auditor
The Annual Report and Accounts have been audited by
PricewaterhouseCoopers ('PwC'). A resolution to reappoint PwC as
auditor of the Bank will be proposed at the forthcoming AGM.
Corporate Governance
The Bank is committed to high standards of corporate governance.
As an Authorised Institution, the Bank is subject to and complies
with the Hong Kong Monetary Authority ('HKMA') Supervisory Policy
Manual CG-1 'Corporate Governance of Locally Incorporated
Authorised Institutions'.
Board of Directors
The Board, led by the Chairman, provides entrepreneurial
leadership of the Bank within a framework of prudent and effective
controls which enables risks to be assessed and managed. The Board
is collectively responsible for the long-term success of the Bank
and delivery of sustainable value to shareholders. The Board sets
the strategy and risk appetite for the group and approves capital
and operating plans presented by management for the achievement of
the strategic objectives it has set.
Directors
The Bank has a unitary Board. The authority of each Director is
exercised in Board meetings where the Board acts collectively. As
at the date of this report, the Board comprised: the non-executive
Chairman; the Deputy Chairman and Chief Executive; two Deputy
Chairmen who are independent non-executive Directors; one Director
with executive responsibilities for a subsidiary's operations; one
non-executive Director; and another 10 independent non-executive
Directors.
Independent non-executive Directors
Independent non-executive Directors do not participate in the
daily business management of the Bank. They bring an external
perspective, constructively challenge and help develop proposals on
strategy, scrutinise the performance of management in meeting
agreed goals and objectives, and monitor the risk profile and
reporting of performance of the Bank. The independent non-executive
Directors bring experience from a number of industries and business
sectors, including the leadership of large complex multinational
enterprises. The Board has determined that there are 12 independent
non-executive Directors. In making this determination, it was
agreed that there are no relationships or circumstances likely to
affect the judgement of the independent non-executive Directors,
with any relationships or circumstances that could appear to do so
not considered to be material.
Chairman and Chief Executive
The roles of Chairman and Chief Executive are separate and held
by experienced full-time employees of the HSBC Group. There is a
clear division of responsibilities between leading the Board and
the executive responsibility for running the Bank's business.
The Chairman provides leadership to the Board and is responsible
for the overall effective functioning of the Board. The Chairman is
responsible for the development of strategy and the oversight of
implementation of Board approved strategies and direction. The
Chief Executive is responsible for ensuring implementation of the
strategy and policy as established by the Board and the day-to-day
running of operations. The Chief Executive is Chairman of the
Executive Committee. Each Asia-Pacific Global Business and Global
Function head reports to the Chief Executive.
Board Committees
The Board has established various committees consisting of
Directors and senior management. The committees include the
Executive Committee, Audit Committee, Risk Committee, Nomination
Committee, Remuneration Committee and Chairman's Committee. The
Chairmen of the Executive Committee and of each Board committee
that includes independent non-executive Directors report to each
subsequent Board meeting on the relevant committee's
proceedings.
The Board has also established an Asset and Liability Management
Committee, a Risk Management Meeting and a Financial Crime Risk
Management Committee. The Executive Committee has the delegated
authority to approve any changes in the membership and terms of
reference of the Asset and Liability Management Committee, the Risk
Management Meeting and the Financial Crime Risk Management
Committee. The Board had established Financial System Risk Advisory
Committees for North Asia and South Asia as sub-committees of the
Risk Committee with responsibilities to advise on the effectiveness
of the policies, procedures and the framework of controls
established by management relating to financial crime risks. Both
sub-committees consisted of external professional advisors. Yiu
Kwan Choi, who is an independent non-executive Director of the
Bank, was also a member of the sub-committee for North Asia. Both
sub-committees met once in 2018 and were subsequently demised on 19
April 2018.
The Board and each Board committee have terms of reference to
document their responsibilities and governance procedures. The key
roles of the committees are described in the paragraphs below.
Executive Committee
The Executive Committee is responsible for the exercise of all
of the powers, authorities and discretions of the Board in so far
as they concern the management, operations and day-to-day running
of the group, in accordance with such policies and directions as
the Board may from time to time determine, with power to
sub-delegate. A schedule of items that require the approval of the
Board is maintained.
The Bank's Deputy Chairman and Chief Executive, Peter Wong, is
Chairman of the Committee. The current members of the Committee
are: Diana Cesar (Chief Executive Officer Hong Kong), Pui Mun Chan
(Head of Regulatory Compliance Asia-Pacific), Raymond Cheng (Chief
Operating Officer Asia-Pacific), Gordon French (Head of Global
Banking and Markets Asia-Pacific), Kathleen Gan (Chief Financial
Officer Asia-Pacific), Tony Cripps (Chief Executive Officer
Singapore), Mukhtar Hussain (Head of Belt and Road Initiative
Asia-Pacific), Darren Furnarello (Head of Financial Crime
Compliance Asia-Pacific), David Liao (Chief Executive Officer
China), Kevin Martin (Head of Retail Banking and Wealth Management
Asia-Pacific), Mark McKeown (Chief Risk Officer Asia-Pacific),
Stuart Milne (Chief Executive Officer Malaysia), Surendranath Rosha
(Chief Executive Officer India), Siew Meng Tan (Head of Global
Private Banking Asia-Pacific), Matthew Lobner (Head of Strategy and
Planning Asia-Pacific and Head of International Asia-Pacific),
Susan Sayers (General Counsel Asia-Pacific), Stuart Tait (Head of
Commercial Banking Asia-Pacific), Martin Tricaud (Chief Executive
Officer Australia) and Helen Wong (Chief Executive Officer Greater
China). Neil Olofsson (Corporation Secretary) is the Committee
Secretary. In attendance are: Kaber Mclean (Head of Remediation
Management Office Asia-Pacific), Patrick Humphris (Head of
Communications Asia-Pacific), Amo Tauialo (Head of Global Internal
Audit Asia-Pacific) and Philip Miller (Deputy Corporation
Secretary). The Committee met 11 times in 2018.
Asset and Liability Management Committee
The Asset and Liability Management Committee is chaired by the
Chief Financial Officer and is an advisory committee to provide
recommendations and advice to support the Chief Financial Officer's
individual accountability for issues and risks with regards to
capital, liquidity risk, funding risk, interest rate risk in the
banking book, structural foreign exchange risk and structural
/strategic equity risk. The Committee consists of Kathleen Gan
(Chief Financial Officer Asia-Pacific), Peter Wong (the Bank's
Deputy Chairman and Chief Executive), the Head of Asset, Liability
and Capital Management Asia-Pacific, the Head of Balance Sheet
Management Asia-Pacific and other senior executives of the Bank
most of whom are members of the Executive Committee. The Committee
met 12 times in 2018.
Risk Management Meeting
The Risk Management Meeting is chaired by the Chief Risk Officer
and is a formal governance committee established to provide
recommendations and advice to the Chief Risk Officer on
enterprise-wide management of all risks, including key policies and
frameworks for the management of risk within the Bank. The Risk
Management Meeting consists of Mark McKeown (Chief Risk Officer
Asia-Pacific), Peter Wong (the Bank's Deputy Chairman and Chief
Executive), the Head of Global Internal Audit Asia-Pacific and
other senior executives of the Bank most of whom are members of the
Executive Committee. The Risk Management Meeting met 10 times in
2018.
Financial Crime Risk Management Committee
The Financial Crime Risk Management Committee is chaired by the
Bank's Deputy Chairman and Chief Executive and is a formal
governance committee established to ensure effective
enterprise-wide management of financial crime risk within the
Asia-Pacific Region and to support the Chief Executive in
discharging his financial crime risk responsibilities. The
Committee consists of the Head of Financial Crime Compliance
Asia-Pacific, the Head of Financial Crime Threat Mitigation
Asia-Pacific, the Head of Operational Risk Asia-Pacific, the Head
of Remediation Office Asia-Pacific, the Head of Global Internal
Audit Asia-Pacific, the Chief Operating Officer, Compliance,
Asia-Pacific, the Head of Regulatory Compliance Asia-Pacific and
other senior executives of the Bank most of whom are members of the
Executive Committee. The Committee met 10 times in 2018.
Audit Committee
The Audit Committee has non-executive responsibility for
oversight of and advice to the Board on matters relating to
financial reporting. The current members of the Committee, all
being independent non-executive Directors, are Kevin Westley
(Chairman of the Committee), Graham Bradley, Yiu Kwan Choi, Irene
Lee and Jennifer Li. The Committee met four times in 2018.
The Audit Committee monitors the integrity of the financial
statements and oversees the internal control systems over financial
reporting, covering all material controls. The Committee reviews
the adequacy of resources, qualifications and experience of staff
of the accounting and financial reporting function and their
training programmes and budget. The Committee also reviews the
financial statements before submission to the Board. It monitors
and reviews the effectiveness of the internal audit function and
reviews the Bank's financial and accounting policies and practices.
The Committee advises the Board on the appointment of the external
auditor and reviews and monitors the external auditor's
independence and objectivity and the effectiveness of the audit
process. The Committee reviews matters escalated for its attention
by subsidiaries' audit committees and reviews minutes of meetings
of the Asset and Liability Management Committee.
Risk Committee
The Risk Committee has non-executive responsibility for
oversight of and advice to the Board on high-level risk-related
matters and risk governance. The current members of the Committee,
all being independent non-executive Directors, are Graham Bradley
(Chairman of the Committee), Dr Christopher Cheng, Yiu Kwan Choi,
Irene Lee, Zia Mody and Kevin Westley. The Committee met five times
in 2018.
All of the Bank's activities involve, to varying degrees, the
measurement, evaluation, acceptance and management of risk or
combinations of risks. The Board, advised by the Risk Committee,
requires and encourages a strong risk culture which shapes the
Bank's attitude to risk. The Bank's risk governance is supported by
the Group's enterprise risk management framework which provides a
clear policy of risk ownership and accountability of all staff for
identifying, assessing and managing risks within the scope of their
assigned responsibilities. This personal accountability, reinforced
by clear and consistent employee communication on risk that sets
the tone from senior leadership, the governance structure,
mandatory learning and remuneration policy, helps to foster a
disciplined and constructive culture of risk management and control
throughout the group.
The Board and the Risk Committee oversee the maintenance and
development of a strong risk management framework by continually
monitoring the risk environment, top and emerging risks facing the
group and mitigating actions planned and taken. The Risk Committee
reviews any revisions to the group's risk appetite statement
biannually and recommends any proposed changes to the Board for
approval. The Committee reviews management's assessment of risk
against the risk appetite statement and provides scrutiny of
management's proposed mitigating actions. The Committee monitors
the risk profiles for all of the risk categories within the group's
business. The Committee also monitors the effectiveness of the
Bank's risk management and internal controls, including operational
and compliance controls, and risk management systems. Regular
reports from the Risk Management Meeting, which is the executive
body supporting the executive accountability of the group Chief
Risk Officer for the ongoing monitoring, assessment and management
of the risk environment and the effectiveness of the risk
management framework, are also presented at each Risk Committee
meeting to report on these items.
The Committee reviews matters escalated for its attention by
subsidiaries' risk committees and reviews minutes of meetings of
the Risk Management Meeting.
Nomination Committee
The Nomination Committee is responsible for leading the process
for Board and senior management appointments and for identifying
and nominating, for the approval of the Board, candidates for
appointment to the Board and certain senior management roles.
Appointments to the Board and certain senior management roles are
subject to the approval of the HKMA. The Committee considers plans
for orderly succession to the Board and the appropriate balance of
skills and experience on the Board.
The current members of the Committee, being a majority of
independent non-executive Directors, are Marjorie Yang (Chairman of
the Committee), John Flint (Chairman of the Board) and Laura Cha.
The Deputy Chairman and Chief Executive attends each meeting of the
Committee. The Committee met twice in 2018.
A rigorous selection process, overseen by the Nomination
Committee and based upon agreed requirements using an external
search consultancy, is followed in relation to the appointment of
non-executive Directors. Before recommending an appointment of a
Director to the Board, the Committee evaluates the Board
composition including balance of skills, knowledge and experience,
as well as diversity and the role and capabilities required. In
identifying suitable Board candidates, the Committee considers
candidates' backgrounds, knowledge and experience (including
international experience) to promote diversity of views, and takes
into account the required time commitment and any potential
conflicts of interest.
Chairman's Committee
The Chairman's Committee acts on behalf of the Board either in
accordance with authority delegated by the Board from time to time,
or as specifically set out within its terms of reference. The
Committee meets with such frequency and at such times as it may
determine and can implement previously agreed strategic decisions,
approve specified matters subject to their prior review by the full
Board, and act exceptionally on urgent matters within its terms of
reference.
The current members of the Committee comprise the Chairman of
the Board, the Deputy Chairman and Chief Executive, the
non-executive Deputy Chairmen and the Chairmen of the Audit and
Risk Committees. The Committee met twice times in 2018.
Remuneration Committee
The Group Remuneration Committee is responsible for setting the
principles, parameters and governance framework for the Group's
remuneration policy applicable to all Group employees. Following
revisions to the HKMA's Supervisory Policy Manual CG-1 'Corporate
Governance of Locally Incorporated Authorised Institutions', the
Board established a Remuneration Committee with effect from 1
January 2018 which annually reviews the effectiveness and
compliance of the Group's reward strategy as adopted by the group.
The current members of the Committee, all being independent
non-executive Directors, are Irene Lee (Chairman of the Committee),
Marjorie Yang, Dr Christopher Cheng, Jennifer Li and Bin Hwee Quek.
The Committee met five times in 2018.
Remuneration Strategy
Our remuneration strategy is designed to reward competitively
the achievement of long-term sustainable performance, and attract
and motivate the very best people, regardless of gender, ethnicity,
age, disability or any other factor unrelated to performance or
experience with the Group. We believe that remuneration is an
important tool for instilling the right behaviours, and driving and
encouraging actions that are aligned to organisational values and
the long-term interests of our stakeholders. Our remuneration
strategy, as approved by the Group Remuneration Committee, is based
on the following principles:
-- An alignment to performance at all levels (individual,
business and Group) taking into account both 'what' has been
achieved and 'how' it has been achieved. The 'how' helps ensure
that performance is sustainable in the longer term, consistent with
HSBC's values and risk and compliance standards.
-- Being informed, but not driven by, market position and
practice. Market benchmarks are sourced through independent
specialists and provide an indication of the range of pay levels
and employee benefits provided by our competitors.
-- Considering the full-market range when making pay decisions
for employees, taking into account the individual's and the Group's
performance in any given year. An individual's pay will vary
depending upon their performance.
-- Compliance with relevant regulation across all of our countries and territories.
More details of the Bank's remuneration strategy are contained
within the Annual Report and Accounts 2018 of HSBC Holdings
plc.
An annual review of the Bank's remuneration strategy applicable
to the Bank as a Group's subsidiary and its operation is
commissioned externally and carried out independently of
management. The review conducted by Deloitte LLP confirms that the
Bank's remuneration policy is consistent with the principles set
out in the HKMA Supervisory Policy Manual CG-5 'Guideline on a
Sound Remuneration System'.
Banking structural reform and recovery and resolution
planning
During 2018, the HSBC Group continued to work with regulators on
banking structural reform including the implementation of recovery
and resolution regimes. This included further progress in relation
to implementing changes to the legal and operating structures of
the HSBC Group, which would allow it to be resolved in an orderly
manner in the event of failure and in a manner that minimises
disruption to financial stability and the risk to public funds.
In Hong Kong, the Financial Institutions (Resolution) Ordinance
('FIRO'), which came into effect on 7 July 2017, established the
legal basis for a resolution regime in Hong Kong to mitigate the
risks posed by the failure of systemically important financial
institutions to the stability and effective working of the Hong
Kong financial system. Under FIRO, there are a number of options
available to regulators for implementing an orderly resolution of a
failed bank. These options include a bail-in stabilisation option,
which allows regulators to recapitalise a failing bank by imposing
losses on its shareholders and certain creditors, thereby
stabilising and restoring it to viability. The preferred resolution
strategy for the group is a bail-in at an intermediate holding
company ('IHC') level in Hong Kong to recapitalise the group as a
whole. For this purpose, the ownership of the group was transferred
in November 2018 to HSBC Asia Holdings Limited, a newly
incorporated IHC that is a wholly-owned subsidiary of HSBC Holdings
plc. The transfer of ownership of the group to HSBC Asia Holdings
Limited was an internal legal entity restructuring which did not
impact the business and management of the group.
In order to ensure the effective use of the bail-in
stabilisation option, banks are required to issue loss-absorbing
capacity ('LAC') instruments that can be written down or converted
into equity in the event of failure. The LAC rules in Hong Kong
were passed in December 2018, with phased implementation periods.
For the group and HSBC Asia Holdings Limited, the LAC requirements
are expected to be implemented in 2019.
During 2018, the group also made progress to remove internal
operational dependencies (for instance, where one group entity
provides critical services to another) to further facilitate the
recovery and resolution planning of the group. In particular, the
group transferred critical shared services to a separate internal
group of service companies ('ServCo group'), which is outside of
the group but remains wholly-owned by HSBC Holdings plc. The
transfer to the ServCo group of relevant employees, critical shared
services and assets in Hong Kong was substantially completed on 1
January 2019. The establishment of the ServCo group does not change
how the group operates and there were no changes to employment
terms and conditions or pension benefits as a result of these
transfers.
Business review
The Bank is exempt from the requirement to prepare a business
review under section 388(3) of the Companies Ordinance Cap. 622
since it is a wholly-owned subsidiary of HSBC Holdings plc.
On behalf of the Board
John Flint, Chairman
19 February 2019
Financial Review
Results for 2018
Profit before tax for 2018 reported by The Hongkong and Shanghai
Banking Corporation Limited ('the Bank') and its subsidiaries
(together 'the group') increased by HK$
18,964m
, or
16%
, to HK$
134,583m
.
Consolidated income statement by global business
(Audited)
Retail
Banking Global Global
and Wealth Commercial Banking Private Corporate
Management Banking and Markets Banking Centre(1) Total
HK$m HK$m HK$m HK$m HK$m HK$m
Year ended 31 Dec 2018
Net interest income 62,829 39,004 22,590 2,683 (643) 126,463
Net fee income 21,087 10,598 9,794 2,650 102 44,231
Net income/(expense) from
financial instruments measured
at fair value (3,731) 2,694 18,283 800 7,919 25,965
Gains less losses from
financial investments 109 (34) 104 - 322 501
Dividend income - - - - 164 164
Net insurance premium
income/(expense) 57,301 3,441 - - (64) 60,678
Other operating income 5,851 508 737 110 3,100 10,306
Total operating income 143,446 56,211 51,508 6,243 10,900 268,308
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Net insurance claims and
benefits paid and movement
in liabilities to policyholders (54,539) (3,300) - - - (57,839)
Net operating income before
change in expected credit
losses and other credit
impairment charges 88,907 52,911 51,508 6,243 10,900 210,469
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Change in expected credit
losses and other credit
impairment charges (2,019) (2,315) (394) (13) 21 (4,720)
Net operating income 86,888 50,596 51,114 6,230 10,921 205,749
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Operating expenses (38,946) (17,878) (21,807) (3,479) (5,314) (87,424)
Operating profit 47,942 32,718 29,307 2,751 5,607 118,325
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Share of profit in associates
and joint ventures 247 - - - 16,011 16,258
Profit before tax 48,189 32,718 29,307 2,751 21,618 134,583
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Balance at 31 Dec 2018
--------------------------------- ----------- ---------- ------------ -------- ---------- ------------
Net loans and advances
to customers 1,146,689 1,223,999 1,035,629 120,985 1,400 3,528,702
Customer accounts 2,750,104 1,306,775 949,812 196,413 4,562 5,207,666
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Year ended 31 Dec 2017
Net interest income 50,789 31,237 19,147 1,868 7,196 110,237
Net fee income 20,695 10,443 9,936 1,916 160 43,150
Net income/(expense) from
financial instruments measured
at fair value 17,959 2,560 16,180 963 928 38,590
Gains less losses from
financial investments 149 64 1 - 1,894 2,108
Dividend income 36 1 - - 195 232
Net insurance premium
income/(expense) 53,275 2,933 - - (32) 56,176
Other operating income 1,488 336 189 51 2,676 4,740
Total operating income 144,391 47,574 45,453 4,798 13,017 255,233
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Net insurance claims and
benefits paid and movement
in liabilities to policyholders (65,941) (2,849) - - - (68,790)
Net operating income before
loan impairment charges
and other credit risk
provisions 78,450 44,725 45,453 4,798 13,017 186,443
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Loan impairment
(charges)/releases
and other credit risk
provisions (1,907) (2,157) (451) (2) 80 (4,437)
Net operating income 76,543 42,568 45,002 4,796 13,097 182,006
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Operating expenses (34,807) (16,115) (20,653) (2,679) (6,813) (81,067)
Operating profit 41,736 26,453 24,349 2,117 6,284 100,939
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Share of profit in associates
and joint ventures 86 - - - 14,594 14,680
Profit before tax 41,822 26,453 24,349 2,117 20,878 115,619
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Balance at 31 Dec 2017
--------------------------------- ----------- ---------- ------------ -------- ---------- ------------
Net loans and advances
to customers 1,049,006 1,143,241 1,004,350 115,064 17,319 3,328,980
Customer accounts 2,701,399 1,311,873 905,991 187,825 31,184 5,138,272
--------------------------------- ---------- --------- ----------- ------- --------- ---------
1 Includes inter-segment elimination
Results Commentary
(Unaudited)
The group reported profit before tax of HK$134,583m, an increase
of 16% compared with 2017, driven by higher net interest
income.
Net interest income increased by HK$16,226m, or 15%, compared
with 2017, driven by Hong Kong from improved deposit spreads,
mainly in Retail Banking and Wealth Management ('RBWM') and
Commercial Banking ('CMB'), which benefited from interest rate
rises, coupled with balance sheet growth, primarily in loans and
advances to customers, partly offset by compressed lending spreads.
Net interest income also increased in mainland China mainly from
growth in loans to customers and improved yields.
Net fee income increased by HK$1,081m, or 3%, compared with
2017, mainly in Hong Kong from securities brokerage, unit trust and
global custody due to higher turnover, coupled with higher
mandatory provident fund and credit cards fee income, partly offset
by lower underwriting and remittance fees. Fee income in mainland
China also increased, mainly from unit trust, underwriting,
trade-related fees, credit facilities and credit cards.
Net income from financial instruments measured at fair value
decreased by HK$12,625m, or 33%, compared with 2017, driven by
lower insurance income, mainly in Hong Kong due to revaluation
losses on the equity portfolio from the unfavourable equity market
performance in 2018, as compared to revaluation gains in 2017. To
the extent that revaluation is attributable to policyholders, there
is an offsetting movement reported under 'Net insurance claims and
benefits paid and movement in liabilities to policyholders'. The
decrease was partly offset by higher trading income in Hong Kong,
mainly from increased holdings of trading debt securities, higher
structured equities revenue and revaluation gains on funding swaps.
Trading income in mainland China also increased due to a favourable
effect from translation of balance sheet exposures and higher
income from debt securities trading.
Gains less losses from financial investments decreased by
HK$1,607m, or 76%, compared with 2017, mainly in Hong Kong from the
non-recurrence of the gain on disposal of our investment in Vietnam
Technological and Commercial Joint Stock Bank ('TechCom Bank') in
2017.
Net insurance premium income increased by HK$4,502m, or 8%,
compared with 2017, driven by the non-recurrence of a major
reinsurance arrangement in 2017, coupled with higher premium from
new business sales and higher renewals. This was largely offset by
a corresponding movement in 'Net insurance claims and benefits paid
and movement in liabilities to policyholders'.
Other operating income increased by HK$5,566m, or 117%, compared
with 2017, primarily driven by the favourable movement in the
present value of in-force long-term insurance business ('PVIF'),
mainly in Hong Kong from higher new business sales, the future
sharing of lower investment returns with policyholders, and
favourable actuarial and interest rate assumption updates in 2018.
In addition, the non-recurrence of regulatory driven changes in
actuarial assumptions in Singapore in 2017 also contributed to the
overall favourable movement in PVIF in the year. The change in PVIF
was partly offset by a corresponding movement in 'Net insurance
claims and benefits paid and movement in liabilities to
policyholders'.
Net insurance claims and benefits paid and movement in
liabilities to policyholders decreased by HK$10,951m, or 16%,
compared with 2017, reflecting lower investment returns to
policyholders due to the unfavourable equity market performance in
2018 as compared with the favourable equity market performance in
2017, partly offset by the non-recurrence of the large reinsurance
arrangement in prior year, coupled with higher premium income and
the favourable movement in PVIF in 2018.
Change in expected credit losses and other credit impairment
charges (under HKFRS 9) amounted to HK$4,720m for the year ended
2018, mainly from Hong Kong and mainland China in CMB and RBWM, and
to a lesser extent Indonesia in CMB and Malaysia in Global Banking
and Markets ('GB&M').
Loan impairment charges and other credit risk provisions in 2017
(under HKAS 39) amounted to HK$4,437m, mainly from Hong Kong in CMB
and RBWM, and to a lesser extent Indonesia and mainland China
mainly in CMB.
Total operating expenses increased by HK$6,357m, or 8%, compared
with 2017, driven by higher IT-related and staff costs from
investments to support digital and business growth initiatives.
Share of profit in associates and joint ventures increased by
HK$1,578m, or 11%, compared with 2017, mainly from our share of
higher profits from Bank of Communications Co., Limited, coupled
with a favourable effect of foreign exchange translation.
Net interest income
(Unaudited)
2018 2017
HK$m HK$m
Net interest income 126,463 110,237
---------
Average interest-earning assets 6,151,920 5,850,010
---------
% %
Net interest spread 1.93 1.80
---------
Contribution from net free funds 0.13 0.08
---------
Net interest margin 2.06 1.88
---------------------------------- --------- -----------
Net interest income ('NII') increased by HK$16,226m, or 15%
compared with 2017, driven by Hong Kong from improved customer
deposit spreads and balance sheet growth, mainly in loans and
advances to customers, coupled with higher yields on financial
investments which benefited from interest rate rises. These
increases were partly offset by compressed lending spreads,
increases in financial liabilities to meet the 'Total Loss
Absorbing Capacity' regulatory requirement, coupled with the impact
of re-pricing on these financial liabilities as market interest
rates increased. NII also increased in mainland China from balance
sheet growth and improved yields, partly offset by higher cost of
funds on debt securities issued to support business growth. To a
lesser extent, NII also increased in Singapore and Malaysia from
improved yields and balance sheet growth.
Average interest-earning assets increased by HK$302bn, or 5%,
compared with 2017, driven by Hong Kong primarily due to an
increase in loans and advances to customers, notably in corporate
term lending and mortgages. To a lesser extent, increases were also
noted in mainland China, Australia, Singapore, Taiwan and Malaysia,
mainly from growth in loans and advances to customers.
Net interest margin increased by 18 basis points compared with
2017, driven by Hong Kong and mainland China.
In Hong Kong, the net interest margin for the Bank increased by
25 basis points, mainly due to improved customer deposit spreads
and a change in asset portfolio mix due to growth in customer
lending, coupled with higher re-investment yields on financial
investments following interest rate increases. These increases were
partly offset by compressed lending spreads and increases in
financial liabilities to meet the 'Total Loss Absorbing Capacity'
regulatory requirement, coupled with the impact of re-pricing on
these financial liabilities as market interest rates increased.
At Hang Seng Bank, the net interest margin increased by 25 basis
points, mainly from improved customer deposit spreads and a change
in asset portfolio mix due to growth in customer lending, coupled
with higher re-investment yields on financial investments following
interest rate increases, partly offset by compressed lending
spreads.
In mainland China, the increase in net interest margin was
driven by higher yield from portfolio mix changes due to growth in
customer lending, improved lending spreads and customer deposit
spreads, coupled with an increase in contribution from net free
funds, partly offset by higher cost of funds from increased funding
to support business growth.
Insurance business
(Unaudited)
The following table shows the profit from insurance
manufacturing operations and insurance distribution income earned
by banking operations.
Summary income statement of insurance manufacturing operations
2018 2017
HK$m HK$m
Insurance manufacturing operations
Net interest income 13,650 12,571
--------------------------------------------------------------
Net fee expense (3,162) (2,487)
Net income/(expense) from financial instruments measured
at fair value (6,279) 15,475
Net insurance premium income 60,713 56,176
Change in present value of in-force long-term insurance
business 4,629 305
--------------------------------------------------------------
Other operating income 529 470
Total operating income 70,080 82,510
Net insurance claims and benefits paid and movement
in liabilities to policyholders (57,839) (68,790)
Net operating income before change in expected credit
losses and other credit impairment charges 12,241 13,720
-------------------------------------------------------------- ------- -------
Change in expected credit losses and other credit impairment
charges 1 -
Net operating income 12,242 13,720
-------------------------------------------------------------- ------- -------
Total operating expenses (2,217) (1,967)
Operating profit 10,025 11,753
-------------------------------------------------------------- ------- -------
Share of profit in associates and joint ventures 246 86
Profit before tax 10,271 11,839
-------------------------------------------------------------- ------- -------
Distribution income earned by banking operations(1) 5,726 5,301
-------------------------------------------------------------- ------- -------
1 Distribution income earned by banking operations are presented
separately. Comparatives have been represented accordingly.
Insurance manufacturing
Profit before tax from the insurance manufacturing business
decreased by HK$1,568m, or 13%, driven by the unfavourable equity
market performance in 2018 compared to the favourable equity market
performance in 2017.
Net interest income increased by 9% from growth in insurance
fund size, reflecting net inflows from new and renewal of life
insurance premiums.
Net income from financial instruments measured at fair value
decreased due to revaluation losses on the equity portfolio
supporting insurance contracts from unfavourable equity market
performance in 2018, compared to revaluation gains in 2017.
Net insurance premium income increased, mainly in Hong Kong due
to the non-recurrence of a major reinsurance arrangement entered
into in 2017, coupled with higher new business sales and
renewals.
The favourable movement in the present value of in-force
long-term insurance business ('PVIF') was driven by Hong Kong, from
the future sharing of lower investment returns with policyholders,
higher new business sales, and favourable actuarial and interest
rate assumption updates in 2018. In addition, the non-recurrence of
regulatory driven changes in actuarial assumptions in Singapore in
2017 also contributed to the overall favourable movement in PVIF in
the year, although this was partly offset by the impact from higher
lapse rate experience in 2018.
To the extent that the above gains or losses are attributable to
policyholders, there is an offsetting movement reported under 'Net
insurance claims and benefits paid and movement in liabilities to
policyholders.
Balance sheet commentary compared with
1 January 2018 (Unaudited)
The consolidated balance sheet at 31 December 2018 is set out in
the Financial Statements.
The effect of transitioning to HKFRS 9 'Financial Instruments'
on 1 January 2018 was a reduction in our total assets of HK$14bn
from 31 December 2017, and the reclassification of certain items
within the balance sheet as set out in note 2 on the Financial
Statements. The commentary that follows compares our balance sheet
at 31 December 2018 with that at 1 January 2018.
Gross loans and advances to customers grew by HK$241bn, or 7%,
including unfavourable foreign exchange translation effects of
HK$53bn. Excluding this impact, the underlying increase of
HK$294bn was driven by increases in corporate and commercial
lending and residential mortgages, mainly in Hong Kong and
Australia.
Overall credit quality remained strong, with total gross
impaired loans and advances as a percentage of gross loans and
advances standing at 0.56% at the end of 2018. Change in expected
credit losses in 2018 in relation to average gross customer
advances remained low at 0.13% (2017: 0.14%).
Interest in associates and joint ventures
At 31 December 2018, an impairment review on the group's
investment in Bank of Communications Co., Ltd ('BoCom') was carried
out and it was concluded that the investment was not impaired based
on our value in use calculation (see note 15 on the Financial
Statements for further details). As discussed in that note, in
future periods the value in use may increase or decrease depending
on the effect of changes to model inputs. It is expected that the
carrying amount will increase in 2019 due to retained profits
earned by BoCom. At the point where the carrying amount exceeds the
value in use, impairment would be recognised. The group would
continue to recognise its share of BoCom's profit or loss, but the
carrying amount would be reduced to equal the value in use, with a
corresponding reduction in income. An impairment review would
continue to be performed at each subsequent reporting period, with
the carrying amount and income adjusted accordingly.
Customer deposits rose by HK$85bn, or 2%, to HK$5,208bn from 1
January 2018, the advances-to-deposits ratio was 67.8% at the end
of the year, compared with 64.2% at 1 January 2018.
Shareholders' equity grew by HK$68bn to HK$753bn at
31 December 2018, mainly reflecting current year's profit, net
of dividend payment, coupled with additional tier 1 capital
instruments issued, partly offset by a decrease in foreign exchange
reserve due to depreciation of various currencies against the Hong
Kong dollar.
Risk
Risk Management
(Unaudited)
This section describes the enterprise-wide risk management
framework and the significant policies and practices employed by
HSBC in managing its material risks, both financial and
non-financial.
Our risk management framework
We use an enterprise-wide risk management framework at all
levels of the organisation and across all risk types, underpinned
by our risk culture.
The framework fosters continuous monitoring, promotes risk
awareness and encourages sound operational and strategic decision
making. It also ensures a consistent approach to monitoring,
managing and mitigating the risks we accept and incur in our
activities.
The following diagram and descriptions summarise key aspects of
the framework, including governance and structure, our risk
management tools and our risk culture, which together help align
employee behaviour with our risk appetite.
Key aspects of risk management framework
Key components of our risk management framework
Risk governance Non-executive risk governance The Board approves the group's
risk appetite, plans and performance
targets. It sets the 'tone from
the top' and is advised by the
group's Risk Committee.
Executive risk governance Responsible for the enterprise-wide
management of all risks, including
key policies and frameworks for
the management of risk within the
group.
Roles and Three lines of defence Our 'Three lines of defence' model
responsibilities model defines roles and responsibilities
for risk management. An independent
Risk function ensures the necessary
balance in risk/return decisions.
Processes Risk appetite Processes to identify/assess, monitor
and tools and mitigate risks to ensure we
remain within our risk appetite.
Enterprise-wide risk management
tools
Active risk management:
identification/assessment,
monitoring, management
and reporting
Internal Policies and procedures Policies and procedures define
controls the minimum requirements for the
controls required to manage our
risks.
==================
Control activities The operational risk management
framework defines minimum standards
and processes for managing operational
risks and internal controls.
Systems and infrastructure Systems and/or processes that support
the identification, capture and
exchange of information to support
risk management activities.
==================
Our risk culture
Risk culture refers to HSBC's norms, attitudes and behaviours
related to risk awareness, risk taking and risk management.
HSBC has long recognised the importance of a strong risk
culture, the fostering of which is a key responsibility of senior
executives. Our risk culture is reinforced by HSBC Values and our
Global Standards. It is instrumental in aligning the behaviours of
individuals with our attitude to assuming and managing risk, which
helps to ensure that our risk profile remains in line with our risk
appetite.
We use clear and consistent employee communications on risk
to convey strategic messages and set the tone from the Board
and senior management. We also deploy mandatory training on risk
and compliance topics to embed skills and understanding in order to
strengthen our risk culture and reinforce the attitude to risk in
the behaviour expected of employees, as described in our risk
policies.
We operate a global whistleblowing platform, HSBC Confidential,
allowing staff to report matters of concern confidentially. We also
maintain an external email address for concerns about accounting
and internal financial controls or auditing matters
(accountingdisclosures@hsbc.com). The Group has a strict policy
prohibiting retaliation against those who raise their concerns. All
allegations of retaliation reported are escalated to senior
management.
Our risk culture is also reinforced by our approach to
remuneration. Individual awards, including those for senior
executives, are based on compliance with HSBC Values and the
achievement of financial and non-financial objectives which are
aligned to our risk appetite and global strategy.
Risk Governance
The Board has ultimate responsibility for the effective
management of risk and approves the group's risk appetite. It is
advised by the Risk Committee on risk appetite and its alignment
with strategy, risk governance and internal controls, and
high-level risk related matters.
Executive accountability for the ongoing monitoring, assessment
and management of risk environment and the effectiveness of the
risk management framework resides with the group's Chief Risk
Officer. He is supported by the Risk Management Meeting
('RMM').
The management of financial crime risk resides with the group's
Chief Executive Officer. He is supported by the Financial Crime
Risk Management Committee.
Day-to-day responsibility for risk management is delegated to
senior managers with individual accountability for decision making.
All employees have a role to play in risk management. These roles
are defined using the three lines of defence model, which takes
into account the group's business and functional structures.
We use a defined executive risk governance structure to help
ensure appropriate oversight and accountability of risk, which
facilitates reporting and escalation to the RMM.
Our responsibilities
All employees are responsible for identifying and managing risk
within the scope of their role as part of the three lines of
defence model.
Three lines of defence
To create a robust control environment to manage risks, we use
an activity-based three lines of defence model. This model
delineates management accountabilities and responsibilities for
risk management and the control environment.
The model underpins our approach to risk management by
clarifying responsibilities, encouraging collaboration and enabling
efficient coordination of risk and control activities.
The three lines of defence are summarised below:
-- The first line of defence owns the risks and is responsible
for identifying, recording, reporting and managing them and
ensuring that the right controls and assessments are in place to
mitigate them.
-- The second line of defence sets the policy and guidelines for
managing specific risk areas, provides advice and guidance in
relation to the risk, and challenges the first line of defence on
effective risk management.
-- The third line of defence is our Internal Audit function,
which provides independent and objective assurance of the adequacy
of the design and operational effectiveness of the group's risk
management framework and control governance process.
Independent Risk function
The group's Risk function, headed by the group's Chief Risk
Officer, is responsible for the group's risk management framework.
This responsibility includes establishing and monitoring of risk
profiles and forward-looking risk identification and management.
The group's Risk function is made up of sub-functions covering all
risks to our operations and forms part of the second line of
defence. It is independent from the global businesses, including
sales and trading functions, to provide challenge, appropriate
oversight and balance in risk/return decisions.
Enterprise-wide risk management tools
The Group uses a range of tools to identify, monitor and manage
risk. The key enterprise-wide risk management tools are summarised
below.
Risk appetite
The Risk Appetite Statement ('RAS') sets out the aggregate level
and risk types that the group is willing to accept in order to
achieve its business objectives. It provides a benchmark for
business decisions that are based on balancing risk and return, and
making the best use of our capital. The group's RAS is interlinked
with the group's strategic and financial plans, as well as
remuneration, and is therefore forward-looking in describing the
group's desired risk appetite profile. The RAS consists of
qualitative statements and quantitative metrics, covering financial
and non-financial risks and is formally approved by the Board every
six months on the recommendation of the group's Risk Committee. It
is fundamental to the development of business line strategies,
strategic and business planning, and senior management balanced
scorecards.
The group's performance against the RAS is reported to the RMM
on a monthly basis so that any actual performance which falls
outside the approved risk appetite is discussed and appropriate
mitigating actions are determined. This reporting allows risks to
be promptly identified and mitigated, and informs risk-adjusted
remuneration to drive a strong risk culture.
Global businesses and strategic countries are required to have
their own RASs, which are monitored to ensure they remain aligned
with the group's RAS. All RASs and business activities are guided
and underpinned by a set of qualitative principles. Additionally,
quantitative metrics are defined along with appetite and tolerance
thresholds for key risk areas.
Risk map
The group's risk map provides a point-in-time view of its risk
profile across HSBC's risk taxonomy. It assess the potential for
these risks to have a material impact on the group's financial
results, reputation and the sustainability of its business. Risks
that have an 'amber' or 'red' risk rating require monitoring and
mitigating action plans to be either in place or initiated to
manage the risk down to acceptable levels.
Top and emerging risks
We use a top and emerging risks process to provide a
forward-looking view of issues that have the potential to threaten
the execution of our strategy or operations over the medium to long
term.
We proactively assess the internal and external risk
environment, as well as review the themes identified across our
regions and global businesses, for any risks that may require
global escalation, updating our top and emerging risks as
necessary.
We define a 'top risk' as a thematic issue that may form and
crystallise between six months and one year, and has the potential
to materially affect the group's financial results, reputation or
business model. It may arise across any combination of risk types,
countries or global businesses. The impact may be well understood
by senior management and some mitigating actions may already be in
place. Stress tests of varying granularity may already have been
carried out to assess the impact.
An 'emerging risk' is defined as a thematic issue with large
unknown components that may form and crystallise beyond a one- year
time horizon. If it were to materialise, it could have a material
effect on a combination of the group's long-term strategy,
profitability and/or reputation. Existing mitigation action plans
are likely to be minimal, reflecting the uncertain nature of these
risks at this stage. Some high-level analysis and/or stress testing
may have been carried out to assess the potential impact.
Our top and emerging risks are discussed on page 16.
Stress testing
The group operates a comprehensive stress testing programme that
supports our risk management and capital planning. It includes
execution of stress tests mandated by our regulators, as well as
internal stress tests and reverse stress tests. Our stress testing
is supported by dedicated teams and infrastructure and is overseen
at the most senior level of the group.
Our stress testing programme assesses our capital strength
through a rigorous examination of our resilience to external
shocks. It also helps us understand and mitigate risks and informs
our decisions about capital levels.
Internal stress tests are an important element in our risk
management and capital management frameworks. Our capital plan is
assessed through a range of stress scenarios which explore risks
identified by management. They include potential adverse
macroeconomic, geopolitical and operational risk events, and other
potential events that are specific to the group. The selection of
scenarios reflects our top and emerging risks identification
process and our risk appetite. Stress testing analysis helps
management understand the nature and extent of vulnerabilities to
which the group is exposed. Using this information, management
decides whether risks can or should be mitigated through management
actions or, if they were to crystallise, should be absorbed through
capital. This in turn informs decisions about preferred capital
levels.
Reverse stress tests are conducted annually at group and, where
required, subsidiary entity level in order to understand which
potential extreme conditions would make our business model
non-viable. Reverse stress testing identifies potential stresses
and vulnerabilities which the group might face, and helps inform
early-warning triggers, management actions and contingency plans
designed to mitigate risks.
Our material banking and insurance risks
The material risk types associated with our banking and
insurance manufacturing operations are described in the following
tables:
Description of risks - banking operations
(Audited)
Credit risk
Credit risk is Credit risk is:
the * Credit risk arises principally from direct lending, * measured as the amount which could be lost if a
risk of trade finance and leasing business, but also from customer or counterparty fails to make repayments;
financial certain other products such as guarantees and
loss if a derivatives.
customer * monitored using various internal risk management
or counterparty measures and within limits approved by individuals
fails within a framework of delegated authorities; and
to meet an
obligation
under a * managed through a robust risk control framework which
contract. outlines clear and consistent policies, principles
and guidance for risk managers.
Liquidity and
funding
risk
Liquidity risk Liquidity and funding risk is:
is * Liquidity risk arises from mismatches in the timing * measured using a range of metrics including liquidity
the risk that of cash flows. coverage ratio and net stable funding ratio;
we
do not have
sufficient * Funding risk arises when illiquid asset positions * assessed through the internal liquidity adequacy
financial cannot be funded at the expected terms and when assessment process;
resources required.
to meet our
obligations * monitored against the group's liquidity and funding
as they fall risk framework; and
due
or that we can
only * managed on a stand-alone basis with no reliance on
do so at an any Group entity (unless pre-committed) or central
excessive bank unless this represents routine established
cost. Funding business-as-usual market practice.
risk
is the risk
that
funding
considered
to be
sustainable,
and therefore
used
to fund assets,
is
not sustainable
over
time.
------------------------------------------------------------ ------------------------------------------------------------
Market risk
Market risk is Market risk is:
the * Exposure to market risk is separated into two * measured in terms of value at risk ('VaR'), which
risk that portfolios: trading and non-trading. Market risk measures the potential losses on risk positions over
movements exposures arising from our insurance operations are a specified time horizon for a given level of
in market discussed on the following page. confidence, and assessed using stress testing;
factors,
such as foreign
exchange * monitored using VaR, stress testing and other
rates, interest measures including the sensitivity of net interest
rates, income and the sensitivity of structural foreign
credit spreads, exchange; and
equity
prices and
commodity * managed using risk limits approved by the RMM for the
prices, will group and the various global businesses.
reduce
our income or
the
value of our
portfolios.
---------------- ------------------------------------------------------------ ------------------------------------------------------------
Operational risk
Operational Operational risk is:
risk * Operational risk arises from day-to-day operations or * measured using the risk and control assessment
is the risk to external events, and is relevant to every aspect of process, which assesses the level of risk and
achieving our business. effectiveness of controls;
our strategy or
objectives
as a result of * Regulatory compliance risk and financial crime risk * monitored using key indicators and other internal
inadequate are discussed below. control activities; and
or failed
internal
processes, * managed primarily by global business and functional
people managers who identify and assess risks, implement
and systems or controls to manage them and monitor the effectiveness
from of these controls using the operational risk
external management framework.
events.
---------------- ------------------------------------------------------------ ------------------------------------------------------------
Regulatory compliance risk
Regulatory Regulatory compliance risk is:
compliance * Regulatory compliance risk is part of operational * measured by reference to identified metrics, incident
risk is the risk, and arises from the risks associated with assessments, regulatory feedback and the judgement
risk breaching our duty to clients and other and assessment of our regulatory compliance teams;
that we fail to counterparties, inappropriate market conduct and
observe breaching other regulatory requirements.
the letter and * monitored against the first line of defence risk and
spirit control assessments, the results of the monitoring
of all relevant and control assurance activities of the second line
laws, of defence functions, and the results of internal and
codes, rules, external audits and regulatory inspections; and
regulations
and standards
of * managed by establishing and communicating appropriate
good market policies and procedures, training employees in them,
practice, and monitoring activity to help ensure their
and incur fines observance. Proactive risk control and/or remediation
and work is undertaken where required.
penalties and
suffer
damage to our
business
as a
consequence.
---------------- ------------------------------------------------------------ ------------------------------------------------------------
Description of risks - banking operations (continued)
(Audited)
Financial crime risk
Financial crime Financial crime risk is:
risk * Financial crime risk is part of operational risk and * measured by reference to identified metrics, incident
is the risk arises from day-to-day banking operations. assessments, regulatory feedback and the judgement
that and assessment of our financial crime risk teams;
we knowingly or
unknowingly
help parties to * monitored against our financial crime risk appetite
commit statements and metrics, the results of the monitoring
or to further and control activities of the second line of defence
potentially functions, and the results of internal and external
illegal audits and regulatory inspections; and
activity
through HSBC.
* managed by establishing and communicating appropriate
policies and procedures, training employees in them,
and monitoring activity to help ensure their
observance. Proactive risk control and/or remediation
work is undertaken where required.
---------------- ------------------------------------------------------------ ------------------------------------------------------------
Other material risks
--------------------------------------------------------------------------------------------------------------------------------------------
Reputational risk
Reputational Reputational risk is:
risk * Primary reputational risks arise directly from an * measured by reference to our reputation as indicated
is the risk of action or inaction by HSBC, its employees or by our dealings with all relevant stakeholders,
failure associated parties that are not the consequence of including media, regulators, customers and employees;
to meet another type of risk. Secondary reputational risks
stakeholders' are those arising indirectly and are a result of a
expectations as failure to control any other risks. * monitored through a reputational risk management
a framework that is integrated into the group's broader
result of any risk management framework; and
event,
behaviour,
action * managed by every member of staff and is covered by a
or inaction, number of policies and guidelines. There is a clear
either structure of committees and individuals charged with
by HSBC itself, mitigating reputational risk.
our
employees or
those
with whom we
are
associated.
---------------- ------------------------------------------------------------ ------------------------------------------------------------
Pension risk
Pension risk is Pension risk is:
the * Pension risk arises from investments delivering an * measured in terms of the schemes' ability to generate
risk of inadequate return, adverse changes in interest rates sufficient funds to meet the cost of their accrued
increased or inflation, or members living longer than expected. benefits;
costs to HSBC Pension risk includes operational and reputational
from risks of sponsoring pension plans.
offering * monitored through a specific risk appetite; and
post-employment
benefit plans
to * managed through the appropriate pension risk
its employees. governance structure and ultimately the RMM.
---------------- ------------------------------------------------------------ ------------------------------------------------------------
Sustainability
risk
Sustainability Sustainability risk is:
risk * Sustainability risk arises from the provision of * measured assessing the potential sustainability
is the risk financial services to companies or projects which effect of a customer's activities and assigning a
that indirectly result in unacceptable impacts on people sustainability risk rating to all high risk
financial or on the environment. transactions;
services
provided to
customers * monitored by the RMM and by the group's
by the group sustainability risk function; and
indirectly
result in
unacceptable * managed using sustainability risk policies covering
impacts on project finance lending and sector-based
people sustainability policies for sectors and themes with
or on the potentially high environmental or social impact.
environment.
---------------- ------------------------------------------------------------ ------------------------------------------------------------
Our insurance manufacturing subsidiaries are separately
regulated from our banking operations. Risks in the insurance
entities are managed using methodologies and processes appropriate
to insurance manufacturing operations, but remain subject to
oversight at group level. Our insurance operations are also subject
to some of the same risks as our banking operations, which are
covered by the group's respective risk management processes.
Description of risks - insurance manufacturing operations
(Audited)
Insurance risk
Insurance risk Insurance risk is:
is * The cost of claims and benefits can be influenced by * measured in terms of life insurance liabilities and
the risk that, many factors, including mortality and morbidity economic capital allocated to insurance underwriting
over experience, as well as lapse and surrender rates. risk;
time, the cost
of
acquiring and * monitored through a framework of approved limits and
administering delegated authorities; and
an insurance
contract
and paying * managed through a robust risk control framework which
claims outlines clear and consistent policies, principles
and benefits and guidance. This includes using product design,
may underwriting, reinsurance and claims-handling
exceed the procedures.
total
amount of
premiums
and investment
income
received.
Financial risk
Our ability to Exposure to financial Financial risk is:
effectively risks arises from: * measured separately for each type of risk:
match the * market risk of changes in the fair values of
liabilities financial assets or their future cash flows;
arising under * market risks are measured in terms of exposure to
insurance fluctuations in key financial variables;
contracts with * credit risk; and
the
asset * credit risk is measured as the amount which could be
portfolios * liquidity risk of entities being unable to make lost if a counterparty fails to make repayments; and
that back them payments to policyholders as they fall due.
is
contingent on * liquidity risk is measured using internal metrics
the including stressed operational cash flow projections;
management of
financial
risks and the * monitored within a framework of approved limits and
extent delegated authorities; and
to which these
risks
are borne by * managed through a robust risk control framework which
the outlines clear and consistent policies, principles
policyholders. and guidance. This includes using product design,
asset liability matching and bonus rates.
--------------- ----------------------------------------------------------- ---------------------------------------------------------------
Top and emerging risks
(Unaudited)
Our approach to identifying and monitoring top and emerging
risks is described on page 13. During 2018, we made a number of
changes to our top and emerging risks to reflect our assessment of
the issues facing HSBC. Our current top and emerging risks are as
follows:
-- Economic outlook and capital flows;
-- Geopolitical risk;
-- The credit cycle;
-- Cyber-threat and unauthorised access to systems;
-- Regulatory developments including conduct, with adverse
impact on business model and profitability;
-- Financial crime risk environment;
-- Ibor transition;
-- Risks associated with workforce capability, capacity and
environmental factors with potential impact on growth; and
-- Risks arising from the receipt of services from third parties.
Economic outlook and capital flows
Economic activity diverged across the global economy during
2018. The US benefited from a fiscal stimulus that helped to drive
GDP growth above its long-term trend. The growth rate in
trade-dependent regions like the European Union ('EU') declined on
the back of a slowing Chinese economy, and trade and geopolitical
tensions. Tightening global financial conditions alongside the
tapering off of fiscal stimulus in the US is expected to lead to
more moderate growth in global economic activity in 2019. Oil
prices will likely remain volatile as contrasting supply and demand
factors prevail in turn.
The stand-off between the US and China on a variety of economic
and technological issues is likely to continue in 2019, although
further liberalising initiatives in a vein similar to the
Comprehensive and Progressive Agreement for Trans-Pacific
Partnership ('CPTPP') and the EU-Japan trade deal, as well as some
re-organisation of global supply chains, could partly offset rising
protectionism. Nevertheless, the net impact on trade flows could be
negative, and may damage HSBC's traditional lines of business.
Emerging markets are set to face challenging cross-currents. The
reduction in global liquidity and consequent increase in the cost
of external funding could expose vulnerabilities that spread more
broadly. However, China has pledged to enact some stimulus to
offset the effects of tariff hikes. This should help emerging
markets achieve reasonable growth rates even in the face of
headwinds, though downside risks abound.
Mitigating actions
-- We actively assess the impact of economic developments in key
markets on specific customer segments and portfolios and take
appropriate mitigating actions. These actions include revising risk
appetite and/or limits, as circumstances evolve.
-- We use internal stress testing and scenario analysis, as well
as regulatory stress test programmes, to evaluate the potential
impact of macroeconomic shocks on our businesses and portfolios.
Our approach to stress testing is described on pages 13-14.
Geopolitical risk
Our operations and portfolios are exposed to risks associated
with political instability, civil unrest and military conflict,
which could lead to disruption to our operations, physical risk to
our staff and/or physical damage to our assets. In addition, rising
protectionism and the increasing trend of using trade and
investment policies as diplomatic tools may also adversely affect
global trade flows.
Geopolitical risk remained heightened throughout 2018. In Asia,
US-China competition and confrontation across multiple dimensions
will likely continue, including economic power and technology
leadership. US investment and export restrictions on Chinese
imports could disrupt investment decisions, leading to a slow
decoupling of US and Chinese technology sectors.
Mitigating actions
-- We continually monitor the geopolitical outlook, in
particular in countries where we have material exposures and/or a
physical presence. We have also established dedicated forums to
monitor geopolitical developments.
-- We use internal stress tests and scenario analysis as well as
regulatory stress test programmes, to adjust limits and exposures
to reflect our risk appetite and mitigate risks as appropriate. Our
internal credit risk ratings of sovereign counterparties take into
account geopolitical developments that could potentially disrupt
our portfolios and businesses.
-- We have taken steps to enhance physical security in those
geographical areas deemed to be at high risk from terrorism and
military conflicts.
The credit cycle
Steadily rising US interest rates and the looming end of the
European Central Bank's ('ECB') quantitative easing programme,
alongside the uncertainty caused by trade and geopolitical
tensions, caused a correction in stock indices and a widening in
corporate bond spreads in in the fourth quarter of 2018. The Bank
for International Settlements ('BIS') estimates that 80% of US
leveraged loans are 'covenant-lite'. Pressures in this segment
could come to a head and spill over to other asset classes. The
International Monetary Fund deems that thin liquidity coverage
('LCRs') and stable funding ('SFRs') ratios for international
banks' US dollar positions could cause offshore dollar liquidity to
tighten abruptly during periods of high volatility, possibly
affecting HSBC's positions.
After reining in excess leverage during 2018, China has pledged
renewed stimulus in 2019 to counter various adverse effects on
economic activity. This could lead to renewed global concerns about
Chinese debt levels. Following sharp foreign exchange ('FX')
depreciations in Turkey and Argentina in 2018, there currently
appear to be no major emerging market currency misalignments.
However, debt servicing burdens are high in some major countries,
making them vulnerable to shocks.
Mitigating actions
-- We closely monitor economic developments in key markets and
sectors and undertake scenario analysis. This helps enable us to
take portfolio actions where necessary, including enhanced
monitoring, amending our risk appetite and/or reducing limits and
exposures.
-- We stress test portfolios of particular concern to identify
sensitivity to loss under a range of scenarios, with management
actions being taken to rebalance exposures and manage risk appetite
where necessary.
-- We undertake regular reviews of key portfolios to help ensure
that individual customer or portfolio risks are understood and our
ability to manage the level of facilities offered through any
downturn is appropriate.
Cyber threat and unauthorised access to systems
The group and other organisations continue to operate in an
increasingly hostile cyber threat environment which requires
ongoing investment in business and technical controls to defend
against these threats.
Key threats include unauthorised access to online customer
accounts, advanced malware attacks and distributed denial of
service ('DDOS') attacks.
Destructive malware (including ransomware), DDOS attacks and
organised cyber criminals targeting payments are increasingly
dominant threats across the industry. In 2018, the Group was
subjected to a small number of DDOS attacks on our external facing
websites, which were successfully mitigated across the Group with
no destructive malware (including ransomware) or payment
infrastructure attacks reported.
Mitigating actions
-- We continue to strengthen and significantly invest in both
business and technical controls in order to prevent, detect and
respond to an increasingly hostile cyber threat environment. We
continue to evaluate the threat environment for the most prevalent
attack types and their potential outcomes to determine the most
effective controls to mitigate those threats.
-- Specifically, we continue to enhance our controls to protect
against advanced malware, data leakage, infiltration of payment
systems and denial of service attacks as well as enhance our
ability to quickly detect and respond to increasingly sophisticated
cyber-attacks. Ensuring our staff continue to be 'cyber aware' is a
key element of our defence strategy.
-- Cyber risk is a priority area for the Board and is routinely
reported at Board level to ensure appropriate visibility,
governance and executive support for our ongoing cybersecurity
programme.
Regulatory developments including conduct, with adverse impact
on business model and profitability
Financial service providers continue to face stringent
regulatory and supervisory requirements, particularly in the areas
of capital and liquidity management, conduct of business, financial
crime, internal control frameworks, the use of models and the
integrity of financial services delivery. The competitive landscape
in which the group operates may be significantly altered by future
regulatory changes and government intervention. Regulatory changes
may affect the activities of the group as a whole, or of some or
all of its principal subsidiaries.
In September 2017, HSBC Holdings plc ('HSBC Holdings') and HSBC
North America Holdings Inc. ('HNAH') consented to a civil money
penalty order with the US Federal Reserve Board ('FRB') in
connection with its investigation into HSBC's foreign exchange
activities. Under the terms of the order, HSBC Holdings and HNAH
agreed to undertake certain remedial steps and to pay a civil money
penalty to the FRB.
In January 2018, HSBC Holdings entered into a three-year
deferred prosecution agreement with the US Department of Justice
('DoJ') ('FX DPA'), regarding fraudulent conduct in connection with
two particular transactions in 2010 and 2011. This concluded the
DoJ's investigation into HSBC's historical foreign exchange
activities.
Under the terms of the FX DPA, HSBC has a number of ongoing
obligations, including continuing to cooperate with authorities and
implementing enhancements to its internal controls and procedures
in its Global Markets business, which will be the subject of annual
reports to the DoJ. In addition, HSBC agreed to pay a financial
penalty and restitution.
Mitigating actions
-- We are fully engaged, wherever possible with governments and
regulators in the countries in which we operate, to help ensure
that new requirements are considered properly by regulatory
authorities and the financial sector and can be implemented
effectively.
-- We have invested significant resources and have taken, and
will continue to take, a number of steps to improve our compliance
systems and controls relating to our activities in global markets.
This included enhancements to trade, voice and audio surveillance
and implementation of algorithmic trading for benchmark orders.
Financial crime risk environment
Financial institutions remain under considerable regulatory
scrutiny regarding their ability to prevent and detect financial
crime. Financial crime threats continue to evolve, often in tandem
with geopolitical developments. The highly speculative, volatile
and opaque nature of virtual currencies as well as the pace of new
currencies and associated technological developments, create
challenges in effectively managing financial crime risks. The
evolving regulatory landscape continues to present execution
challenge. An increasing trend towards greater data privacy
requirements may affect our ability to effectively manage financial
crime risks.
In December 2012, among other agreements, HSBC Holdings
consented to a cease-and-desist order with the FRB and agreed to an
undertaking with the UK Financial Conduct Authority ('FCA') to
comply with certain forward-looking anti-money laundering ('AML')
and sanctions-related obligations. HSBC Holdings also agreed to
retain an independent compliance monitor - who is for FCA purposes
a 'Skilled Person' under section 166 of the Financial Services and
Markets Act, and for FRB purposes an 'Independent Consultant' - to
produce annual assessments of the Group's AML and sanctions
compliance programme. HSBC Holdings entered into an agreement with
the Office of Foreign Assets Control ('OFAC') regarding historical
transactions involving parties subject to OFAC sanctions. The
Skilled Person/Independent Consultant will continue to conduct
country reviews and provide periodic reports for a period of time
at the FCA's and FRB's discretion.
Mitigating actions
-- We continued to enhance our financial crime risk management
capabilities. We are investing in the next generation of tools to
fight financial crime through the application of advanced analytics
and artificial intelligence.
-- We are developing procedures and controls to manage the risks
associated with direct and indirect exposure to virtual
currencies.
-- We continue to work with jurisdictions and relevant
international bodies to address data privacy challenges through
international standards, guidance, and legislation to enable
effective management of financial crime risk.
-- We continue to to take steps designed to ensure that the
reforms we have put in place are both effective and sustainable
over the long term.
Ibor transition
Interbank offered rates ('Ibors') are used to set interest rates
on hundreds of trillions of US dollars' worth of different types of
financial transactions and are used extensively for valuation
purposes, risk measurement and performance benchmarking.
Following the recommendations of the Financial Stability Board,
a fundamental review and reform of the major interest rates
benchmarks, including Ibors, are underway across the world's
largest financial markets. In some cases, the reform will include
replacing interest rate benchmarks with alternative risk free rates
('RFRs'). This replacement process is at different stages, and is
progressing at different speeds, across several major currencies.
There is therefore uncertainty as to the basis, method and timing
of transition and their implications on the participants in the
financial markets.
The group has identified a number of potential prudential,
conduct and systemic risks associated with the transition.
Mitigating actions
-- We have established a global programme across all of our
global businesses to coordinate HSBC's transition activities and to
assess the potential risks and impacts of any transition.
-- We will continue to engage with industry participants and the
official sector to support an orderly transition.
Risks associated with workforce capability, capacity and
environmental factors with potential impact on growth
Our success in delivering our strategic priorities, as well as
proactively managing the regulatory environment, depends on the
development and retention of our leadership and high-performing
employees. The ability to continue to attract, train, motivate and
retain highly qualified professionals in an employment market where
expertise is often mobile and in short supply is critical,
particularly as our business lines execute their strategic business
outlooks. This may be affected by external and environmental
factors, such as changes to immigration policies and regulations
and tax reforms in key markets that require active responses.
Mitigating actions
-- HSBC University is focused on developing opportunities and
tools for current and future skills, personal skills and leaders to
create an environment for success.
-- We continue to develop succession plans for key management
roles, with actions agreed and reviewed on a regular basis.
-- We actively respond to immigration changes through the global
immigration programme. Other political and regulatory challenges
are being closely monitored to minimise the impact on the
attraction and retention of talent and key performers.
-- HSBC is building the healthiest human system where colleagues
can thrive. A number of initiatives have been launched to improve
our ways of working and encourage an open and positive culture
(e.g. simplifying processes and governance, and adopting new
behaviours). We also promote a diverse and inclusive workforce and
provide active support across a wide range of health and well-being
activities.
Risks arising from the receipt of services from third
parties
We utilise third parties for the provision of a range of
services, in common with other financial service providers. Risks
arising from the use of third-party service providers may be less
transparent and therefore more challenging to manage or influence.
It is critical that we ensure that we have appropriate risk
management policies, processes and practices. This includes
adequate control over the selection, governance and oversight of
third parties, particularly for key processes and controls that
could affect operational resilience. Any deficiency in our
management of risks arising from the use of third parties could
affect our ability to meet strategic, regulatory or client
expectations.
Mitigating actions
-- We continue to embed our delivery model in the first line of
defence through a dedicated team. Processes, controls and
technology to assess third party service providers against key
criteria and associated control monitoring, testing and assurance
have been deployed.
-- A dedicated oversight forum in the second line of defence
monitors the embedding of policy requirements and performance
against risk appetite. In the fourth quarter of 2018, second line
of defence oversight capabilities were established.
Credit Risk
(Audited)
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet an obligation under a contract. Credit
risk arises principally from direct lending, trade finance and
leasing business, but also from certain other products, such as
guarantees and derivatives.
Credit risk generates the largest regulatory capital requirement
of the risks we incur. The group has standards, policies and
procedures dedicated to controlling and monitoring risk from all
such activities. The group's principal credit risk management
procedures and policies, which follow policies established by HSBC
Group Head Office, include the following:
-- Formulating credit policies which are consistent with the
Group credit policy and documenting these in detail in dedicated
manuals.
-- Establishing and maintaining the group's large credit
exposure policy. This policy delineates the group's maximum
exposures to individual customers, customer groups and other risk
concentrations.
-- Establishing and complying with lending guidelines on the
group's attitude towards, and appetite for, lending to specified
market sectors and industries.
-- Undertaking an objective assessment of risk. All commercial
non-bank credit facilities originated by the group in excess of
designated limits are subject to review prior to the facilities
being committed to customers.
-- Controlling exposures to banks and other financial
institutions. The group's credit and settlement risk limits to
counterparties in the finance and government sectors are designed
to optimise the use of credit availability and avoid excessive risk
concentration.
-- Managing exposures to debt securities by establishing
controls in respect of the liquidity of securities held for trading
and setting issuer limits for financial investments. Separate
portfolio limits are established for asset-backed securities and
similar instruments.
-- Controlling cross-border exposures to manage country and
cross-border risk through the imposition of country limits, with
sub-limits by maturity and type of business.
-- Controlling exposures to selected industries. When necessary,
restrictions are imposed on new business, or exposures in the
group's operating entities are capped.
-- Maintaining and developing risk ratings in order to
categorise exposures meaningfully and facilitate focused management
of the attendant risks. Rating methodology is based upon a wide
range of financial analytics together with market data-based tools
which are core inputs to the assessment of counterparty risk.
Although automated risk-rating processes are increasingly used for
the larger facilities, ultimate responsibility for setting risk
grades rests in each case with the final approving executive. Risk
grades are reviewed frequently and amendments, where necessary, are
implemented promptly.
Both the group's Risk Management Meeting ('RMM') and
HSBC Group Head Office receive regular reports on credit
exposures. These include information on large credit exposures,
concentrations, industry exposures, levels of impairment
provisioning and country exposures.
RMM has the responsibility for risk approval authorities and
approving definitive risk policies and controls. It monitors risk
inherent to the financial services business, receives reports,
determines action to be taken and reviews the efficacy of the risk
management framework.
The Executive Committee ('EXCO') and RMM are supported by a
dedicated group risk function headed by the Chief Risk Officer, who
is a member of both EXCO and RMM and reports to the Chief
Executive.
The Risk Committee also has responsibility for oversight and
advice to the Board on risk matters. The key responsibilities of
the Risk Committee in this regard include preparing advice to the
Board on the overall risk appetite tolerance and strategy within
the group, and seeking such assurance as it may deem appropriate
that account has been taken of the current and prospective
macroeconomic and financial environment. The Risk Committee is also
responsible for the periodic review of the effectiveness of the
internal control and risk management frameworks and advising the
Board on all high level risk matters. The Risk Committee approves
the appointment and removal of the group's Chief
Risk Officer.
Maximum exposure to credit risk
(Audited)
Our credit exposure is spread across a broad range of asset
classes, including those measured at amortised cost and fair value,
and off-balance sheet financial instruments. The following table
presents the maximum exposure to credit risk from balance sheet and
off-balance sheet financial instruments, before taking account of
any collateral held or other credit enhancements (unless such
credit enhancements meet accounting offsetting requirements). For
financial assets recognised on the balance sheet, the maximum
exposure to credit risk equals their carrying amount; for financial
guarantees and similar contracts granted, it is the maximum amount
that we would have to pay if the guarantees were called upon. For
loan commitments and other credit-related commitments, it is
generally the full amount of the committed facilities.
Maximum exposure to credit risk before collateral held or other credit
enhancements
2018 2017
HK$m HK$m
Cash and sight balances at central banks 205,660 208,073
----------------------------------------------------- ---------- ----------
Items in the course of collection from other banks 25,380 25,714
---------- ----------
Hong Kong Government certificates of indebtedness 280,854 267,174
---------- ----------
Trading assets 439,363 389,133
----------------------------------------------------- ---------- ----------
Derivatives 292,869 300,243
----------
Financial assets designated at fair value 33,023 18,656
----------------------------------------------------- ----------
Reverse repurchase agreements - non-trading 406,327 330,890
----------------------------------------------------- ----------
Placings with and advances to banks 338,151 433,005
----------------------------------------------------- ----------
Loans and advances to customers 3,528,702 3,328,980
----------------------------------------------------- ----------
Financial investments 1,865,168 1,711,598
----------------------------------------------------- ----------
Amounts due from Group companies 70,455 227,729
----------------------------------------------------- ----------
Other assets 159,483 93,610
----------------------------------------------------- ----------
Financial guarantees and other similar contracts(1) 291,915 288,779
----------------------------------------------------- ---------- ----------
Loan and other credit-related commitments 2,879,365 2,779,845
----------
At 31 Dec 10,816,715 10,403,429
----------------------------------------------------- ---------- ----------
1 Performance and other guarantees were included. Comparatives
have been represented to conform to the current year
presentation.
Total exposure to credit risk remained broadly unchanged in 2018
with loans and advances continuing to be the largest element.
Summary of credit risk
(Audited)
The group has adopted the requirements of HKFRS 9 from 1 January
2018. The scope of impairment under HKFRS 9 covers amortised cost
financial assets, loan commitments and financial guarantees, as
well as debt instruments measured at Fair Value through Other
Comprehensive Income ('FVOCI'). Impairment is calculated in three
stages and financial instruments are allocated into one of the
three stages, where the transfer mechanism depends on whether there
is a significant increase in credit risk between its first
recognition and the relevant reporting period, or there is
objective evidence of impairment and therefore considered to be in
default or otherwise credit-impaired. After the allocation, the
measurement of expected credit loss ('ECL'), which is the product
of probability of default ('PD'), loss given default ('LGD') and
exposure at default ('EAD'), will reflect the change in risk of
default occurring over the remaining life of the instruments.
The table below presents the gross carrying/nominal amount of
financial instruments to which the impairment requirements in
HKFRS 9 are applied and the associated allowance for expected
credit losses ('ECL'). Due to the forward-looking nature of HKFRS
9, the scope of financial instruments on which ECL are recognised
is greater than the scope of HKAS 39.
Summary of financial instruments to which the impairment requirements
in HKFRS 9 are applied
Gross carrying/nominal Allowance
amount for ECL(1)
At 31 Dec 2018 HK$m HK$m
---------------------- -------------
Loans and advances to customers at amortised cost 3,545,258 (16,556)
Placings with and advances to banks at amortised cost 338,177 (26)
----------------------
Other financial assets measured at amortised cost 1,436,433 (167)
- cash and sight balances at central banks 205,660 -
- items in the course of collection from other banks 25,380 -
- Hong Kong Government certificates of indebtedness 280,854 -
- reverse repurchase agreements - non-trading 406,327 -
- financial investments 367,521 (120)
- prepayments, accrued income and other assets 150,691 (47)
------------------------------------------------------- ---------------------- ----------
Amounts due from Group companies 58,631 -
---------------------- ----------
Loans and other credit related commitments 1,490,711 (376)
Financial guarantee 50,307 (280)
------------------------------------------------------- ---------------------- ----------
Allowance
Fair value for ECL
HK$m HK$m
---------------------- -------------
At 31 Dec 2018
------------------------------------------------------- ---------------------- -------------
Debt instruments measured at Fair Value through Other
Comprehensive Income ('FVOCI')(2) 1,497,767 (44)
------------------------------------------------------- ---------------------- ----------
1 For retail overdrafts and credit cards, the total ECL is
recognised against the financial asset unless the total ECL exceeds
the gross carrying amount of the financial asset, in which case the
ECL is recognised against the loan commitment.
2 Debt instruments measured at FVOCI continue to be measured at
fair value with the allowance for ECL as a memorandum item. Change
in ECL is recognised in 'Change in expected credit losses and other
credit impairment charges' in the income instatement.
The following table provides an overview of the group's credit
risk by stage, and the associated ECL coverage. The financial
assets recorded in each stage have the following
characteristics:
Stage Unimpaired and without significant increase in credit risk on
1: which a 12-month allowance for ECL is recognised.
Stage A significant increase in credit risk has been experienced since
2: initial recognition on which a lifetime ECL is recognised.
Objective evidence of impairment, and are therefore considered
Stage to be in default or otherwise credit-impaired on which
3: a lifetime ECL is recognised.
Purchased or originated at a deep discount that reflects the incurred
POCI: credit losses on which a lifetime ECL is recognised.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector
Gross carrying/nominal
amount Allowance for ECL ECL coverage %
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total 1 2 3 POCI Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % % %
------- ------ ---- --------- ------- ------- ------- ----- -------- ----- ----- ----- ---- -----
At 31
Dec 2018
---------------------------------
Loans
and advances
to customers 3,345,371 180,142 19,024 721 3,545,258 (3,014) (3,713) (9,549) (280) (16,556) 0.1 2.1 50.2 38.8 0.5
* personal 1,219,173 42,395 5,431 - 1,266,999 (1,625) (2,763) (1,412) - (5,800) 0.1 6.5 26.0 - 0.5
* corporate(1) 1,919,264 131,234 13,407 721 2,064,626 (1,297) (920) (8,017) (280) (10,514) 0.1 0.7 59.8 38.8 0.5
* financial institutions(2) 206,934 6,513 186 - 213,633 (92) (30) (120) - (242) 0.0 0.5 64.5 - 0.1
Placings
with
and advances
to banks 337,079 1,098 - - 338,177 (24) (2) - - (26) 0.0 0.2 - - 0.0
---------------------------------
Other
financial
assets 1,427,193 9,170 70 - 1,436,433 (140) (27) - - (167) 0.0 0.3 - - 0.0
---------------------------------
Loan
and other
credit-related
commitments 1,464,749 25,847 115 - 1,490,711 (275) (101) - - (376) 0.0 0.4 - - 0.0
---------------------------------
* personal 1,024,061 8,102 4 - 1,032,167 (1) (3) - - (4) 0.0 0.0 - - 0.0
* corporate(1) 384,855 15,559 111 - 400,525 (262) (97) - - (359) 0.1 0.6 - - 0.1
* financial institutions(2) 55,833 2,186 - - 58,019 (12) (1) - - (13) 0.0 0.0 - - 0.0
Financial
guarantee 43,261 6,349 697 - 50,307 (26) (33) (221) - (280) 0.1 0.5 31.7 - 0.6
* personal 4,562 1 5 - 4,568 - - (1) - (1) - - 20.0 - 0.0
* corporate(1) 34,978 6,254 692 - 41,924 (25) (33) (220) - (278) 0.1 0.5 31.8 - 0.7
* financial institutions(2) 3,721 94 - - 3,815 (1) - - - (1) 0.0 - - - 0.0
--------- ------- ------ ---- --------- ------ ------ ------ ---- ------- ----- ----- ----- ----
The above table does not include balances due from Group
companies.
1 Includes corporate and commercial.
2 Includes non-bank financial institutions.
Unless identified at an earlier stage, all financial assets are
deemed to have suffered a significant increase in credit risk when
they are 30 days past due ('DPD') and are transferred from stage 1
to stage 2. The table below presents the ageing of stage 2 loans
and advances to customers by those less than 30 and greater than 30
days past due and therefore presents those amounts classified
as
stage 2 due to ageing (30 days past due) and those identified at
an earlier stage (less than 30 days past due).
Stage 2 days past due analysis for loans and advances to customers
Gross carrying amount Allowance for ECL ECL coverage %
Of Of Of Of Of Of
which: which: which: which: which: which:
Stage 1 to 30 and Stage 1 to 30 and Stage 1 to 30 and
2 29 DPD > DPD 2 29 DPD > DPD 2 29 DPD > DPD
HK$m HK$m HK$m HK$m HK$m HK$m % % %
------- ------ ------ ------- ------ ------ ----- --------
At 31 Dec 2018
Loans and advances
to customers at
amortised cost 180,142 7,632 3,733 (3,713) (270) (332) 2.1 3.5 8.9
* personal 42,395 6,366 3,443 (2,763) (229) (310) 6.5 3.6 9.0
* corporate and commercial 131,234 1,264 80 (920) (41) (22) 0.7 3.2 27.5
---------------------------------------
* non-bank financial institutions 6,513 2 210 (30) - - 0.5 - -
--------------------------------------- ------- ------ ------ ------ ----- ----- ----- ------ ------
Measurement uncertainty and
sensitivity analysis of ECL estimates
(Audited)
ECL impairment allowances recognised in the financial statements
reflect the effect of a range of possible economic outcomes,
calculated on a probability-weighted basis, based on the economic
scenarios described below. The recognition and measurement of ECL
involves the use of significant judgement and estimation. It is
necessary to formulate multiple forward-looking economic forecasts
and incorporate them into the ECL estimates. HSBC uses a standard
framework to form economic scenarios to reflect assumptions about
future economic conditions, supplemented with the use of management
judgement, which may result in using alternative or additional
economic scenarios and/or management adjustments.
Methodology
The group has adopted the use of three scenarios, representative
of our view of forecast economic conditions, sufficient to
calculate unbiased expected loss in most economic environments.
They represent a 'most likely outcome' (the Central scenario), and
two, less likely 'outer' scenarios, referred to as the Upside and
Downside scenarios. Each outer scenario is consistent with a
probability of 10%, while the Central scenario is assigned the
remaining 80%, according to the decision of the group's senior
management. This weighting scheme is deemed appropriate for the
unbiased estimation of ECL in most circumstances. Key scenario
assumptions are set using the average of forecasts of external
economists, helping to ensure that the HKFRS 9 scenarios are
unbiased and maximise the use of independent information. The
Central, Upside and Downside scenarios selected with reference to
external forecast distributions using the above approach are termed
the 'consensus economic scenarios'.
For the Central scenario, the Group sets key assumptions such as
GDP growth, inflation, unemployment and policy interest rates,
using either the average of external forecasts (commonly referred
to as consensus forecasts) for most economies, or market prices. An
external provider's global macro model, conditioned to follow the
consensus forecasts, projects the other paths required as inputs to
credit models. This external provider is subject to HSBC's risk
governance framework, with oversight by a specialist internal
unit.
The Upside and Downside scenarios are designed to be cyclical,
in that GDP growth, inflation and unemployment usually revert back
to the Central scenario after the first three years for major
economies. The Group determines the maximum divergence of GDP
growth from the Central scenario using the 10(th) and the 90(th)
percentile of the entire distribution of forecast outcomes for
major economies. While key economic variables are set with
reference to external distributional forecasts, the Group also
aligns the overall narrative of the scenarios to the macroeconomic
risks described in HSBC's 'Top and emerging risks'. This ensures
that scenarios remain consistent with the more qualitative
assessment of these risks. The Group projects additional variable
paths using the external provider's global macro model.
The Upside and Downside scenarios are generated at the year-end
and are only updated during the year if economic conditions change
significantly. The Central scenario is generated every quarter.
The group recognises that the consensus economic scenario
approach, using three scenarios, will be insufficient in certain
economic environments. Additional analysis may be requested at
management's discretion. This may result in a change in the
weighting scheme assigned to the three scenarios or the inclusion
of extra scenarios. The group anticipates that there will be only
limited instances when the standard approach will not apply. We
invoked this additional step during 2018 to make a management
adjustment in respect of trade and tariff-related tensions. See
'Global trade war scenario' below.
Description of Consensus Economic Scenarios
The economic assumptions presented in this section have been
formed internally by HSBC specifically for the purpose of
calculating ECL.
The consensus Central scenario
The group's central scenario is one of moderate growth over the
forecast period 2019-2023. Global GDP growth is expected to be 2.9%
on average over the period, which is marginally higher than the
average growth rate over the period 2013-2017. Across the key
markets, we note:
-- Expected average rates of GDP growth over the 2019-2023
period are lower than average growth rates achieved over the
2013-2017 period for mainland China and Hong Kong. For mainland
China, it is consistent with the theme of ongoing rebalancing from
an export-oriented economy to deeper domestic consumption.
-- The average unemployment rate over the projection horizon is
expected to remain at or below the averages observed in the
2013-2017 period across all of our major markets.
-- Inflation is expected to be stable despite steady GDP growth
and strong labour markets and will remain close to central bank
targets in our core markets over the forecast period.
-- Major central banks are expected to gradually raise their
main policy interest rate. The US Federal Reserve Board ('FRB')
will continue to reduce the size of its balance sheet. The Chinese
Central Bank is expected to continue to rely on its toolkit of
measures to control capital flows and manage domestic
credit growth.
-- The West Texas Intermediate oil price is forecast to average
US$63 per barrel over the projection period.
The following table describes key macroeconomic variables
and
the probabilities assigned in the Consensus Central
scenario.
Central scenario (average 2019-2023)
Hong Mainland
Kong China
GDP growth rate (%) 2.6 5.9
Inflation (%) 2.3 2.5
Unemployment (%) 3.1 4.0
Short term interest
rate (%) 2.6 4.0
------------------------------ ----- --------
10Y treasury bond yields
(%) 3.1 N/A
------------------------------ ----- ----------
Property price growth
(%) 1.0 5.8
------------------------------ ----- --------
Equity price growth
(%) 3.8 9.6
------------------------------ ----- --------
Probability (%) 80.0 80.0
------------------------------ ----- --------
Note: N/A - not required in credit models.
The consensus Upside scenario
Globally, real GDP growth rises in the first two years of the
Upside scenario before converging to the Central scenario.
Increased confidence, de-escalation of trade tensions and removal
of trade barriers, expansionary fiscal policy, stronger oil prices
as well as calming of geopolitical tensions are the risk themes
that support the 2018 year-end Upside scenario.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Upside scenario.
Upside scenario (average 2019-2023)
Hong Mainland
Kong China
GDP growth rate (%) 2.9 6.1
Inflation (%) 2.6 2.7
Unemployment (%) 2.9 3.7
Short term interest
rate (%) 2.6 4.1
----------------------------- ----- --------
10Y treasury bond yields
(%) 3.3 N/A
----------------------------- ----- ----------
Property price growth
(%) 1.4 7.3
----------------------------- ----- --------
Equity price growth
(%) 7.1 13.6
----------------------------- ----- --------
Probability (%) 10.0 10.0
----------------------------- ----- --------
Note: N/A - not required in credit models.
The Downside scenarios
The consensus Downside scenario
Globally, real GDP growth declines for two years in the Downside
scenario before recovering to the Central scenario. House price
growth either stalls or contracts and equity markets correct
abruptly in our major markets. The global slowdown in demand drives
commodity prices lower and results in an accompanying fall in
inflation. Central Banks remain accommodative. This is consistent
with the key risk themes of the downside, such as an
intensification of global protectionism and trade barriers, faster
than expected tightening of Fed policy rate, China choosing to
rebalance with stringent measures, and weaker commodity prices.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Downside scenario.
Downside scenario (average 2019-2023)
Hong Mainland
Kong China
GDP growth rate (%) 2.2 5.8
Inflation (%) 1.9 2.2
Unemployment (%) 3.5 4.2
Short term interest
rate (%) 0.6 3.6
------------------------------ ----- --------
10Y treasury bond yields
(%) 1.6 N/A
------------------------------ ----- ----------
Property price growth
(%) (0.8) 3.3
------------------------------ ----- --------
Equity price growth
(%) (1.6) 2.0
------------------------------ ----- --------
Probability (%) 5.0 5.0
------------------------------ ----- --------
Note: N/A - not required in credit models.
Global trade war Downside scenario
Continued escalation of trade- and tariff-related tensions
throughout 2018 resulted in management modelling deeper effects of
a trade war scenario than currently captured by the consensus
Downside scenario for key Asia-Pacific economies. This additional
trade war scenario models the effects of a significant escalation
in global tensions, stemming from trade disputes but going beyond
increases in tariffs to affect non-tariff barriers, cross-border
investment flows and threatens the international trade
architecture. This scenario assumes actions that lie beyond
currently enacted and proposed tariffs and has been modelled as an
addition to the three consensus-driven scenarios for these
economies. This scenario has been assigned a 5% weight, leaving 5%
assigned to the consensus Downside scenario, and has been used in
addition to the consensus economic scenarios for eight Asia-Pacific
markets, including the group's major markets of Hong Kong and
mainland China.
Key macro-economic variables are shown in the table below:
Global Trade War scenario
(average 2019-2023)
Hong Mainland
Kong China
GDP growth rate (%) 1.5 5.4
Inflation (%) 1.6 2.1
Unemployment (%) 4.7 4.3
Short term interest
rate (%) 1.0 3.1
-------------------------- ---- --------
10Y treasury bond yields
(%) 2.0 N/A
-------------------------- ---- ----------
Property price growth
(%) (2.0) 2.9
-------------------------- ---- --------
Equity price growth
(%) (3.5) 1.1
-------------------------- ---- --------
Probability (%) 5.0 5.0
-------------------------- ---- --------
Note: N/A - not required in credit models.
The conditions that resulted in departure from the consensus
economic forecasts will be reviewed regularly as economic
conditions change in future to determine whether these adjustments
continue to be necessary.
How economic scenarios are reflected in the wholesale
calculation of ECL
The Group has developed a globally consistent methodology for
the application of forward economic guidance into the calculation
of ECL by incorporating forward economic guidance into the
estimation of the term structure of probability of default ('PD')
and loss given default ('LGD'). For PDs, we consider the
correlation of forward economic guidance to default rates for a
particular
industry in a country. For LGD calculations we consider the
correlation of forward economic guidance to collateral values and
realisation rates for a particular country and industry. PDs and
LGDs are estimated for the entire term structure of each
instrument.
For impaired loans, LGD estimates take into account independent
recovery valuations provided by external consultants where
available, or internal forecasts corresponding to anticipated
economic conditions and individual company conditions. In
estimating the ECL on impaired loans that are individually
considered not to be significant, the group incorporates forward
economic guidance proportionate to the probability-weighted outcome
and the Central scenario outcome for non-stage 3 populations.
How economic scenarios are reflected in the retail calculation
of ECL
The Group has developed and implemented a globally consistent
methodology for incorporating forecasts of economic conditions into
ECL estimates. The impact of economic scenarios on PD is modelled
at a portfolio level. Historic relationships between observed
default rates and macro-economic variables are integrated into
HKFRS 9 ECL estimates by leveraging economic response models. The
impact of these scenarios on PD is modelled over a period equal to
the remaining maturity of underlying asset or assets. The impact on
LGD is modelled for mortgage portfolios by forecasting future
loan-to-value ('LTV') profiles for the remaining maturity of the
asset by leveraging national level forecasts of the house price
index and applying the corresponding LGD expectation.
Economic scenarios sensitivity analysis of ECL estimates
The ECL outcome is sensitive to judgement and estimations made
with regards to the formulation and incorporation of multiple
forward-looking economic conditions described above. As a result,
management assessed and considered the sensitivity of the ECL
outcome against the forward-looking economic conditions as part of
the ECL governance process by recalculating the ECL under each
scenario described above for selected portfolios, applying a 100%
weighting to each scenario in turn. The weighting is reflected in
both the determination of significant increase in credit risk as
well as the measurement of the resulting ECL.
The economic scenarios are generated to capture HSBC's view of a
range of possible forecast economic conditions that is sufficient
for the calculation of unbiased and probability-weighted ECL.
Therefore, the ECL calculated for each of the scenarios represent a
range of possible outcomes that have been evaluated to estimate
ECL. As a result, the ECL calculated for the Upside and Downside
scenarios should not be taken to represent the upper and lower
limits of possible actual ECL outcomes. A wider range of possible
ECL outcomes reflects uncertainty about the distribution of
economic conditions and does not necessarily mean that credit risk
on the associated loans is higher than for loans where the
distribution of possible future economic conditions is narrower.
The recalculated ECL for each of the scenarios should be read in
the context of the sensitivity analysis as a whole and in
conjunction with the narrative disclosures provided below.
Under certain economic conditions, economic factors can
influence ECL in counter-intuitive ways (for example an increase in
GDP growth accompanied by rising interest rates resulting in an
increase in PDs) and it may be necessary to apply management
judgement to the output, which following management review of the
calculated ECL sensitivities, may require modelled output
adjustments.
ECL under each scenario is given as a percentage of the
probability-weighted ECL impairment allowance as at
31 December 2018.
Wholesale analysis
HKFRS 9 ECL sensitivity to future
economic conditions (1)
Mainland
Hong Kong China
ECL coverage of
loans and advances
to customers at
31 December 2018
--------- ----------
Reported ECL (HK$m) 1,267 647
--------- ----------
Drawn Amount (HK$m) 2,542,747 526,996
--------- --------
Reported ECL Coverage 0.05% 0.12%
----------------------- --------- ----------
Coverage ratios
by scenario:
--------- ----------
Consensus Central
scenario 0.05% 0.12%
--------- ----------
Consensus Upside
scenario 0.05% 0.12%
--------- ----------
Consensus Downside
scenario 0.05% 0.13%
----------------------- --------- ----------
Global trade war
scenario 0.17% 0.23%
----------------------- --------- ----------
1 Excludes ECL and drawn amounts related to defaulted obligors.
ECL coverage rates reflect the underlying observed credit
defaults, the sensitivity to economic environment, extent of
security and the
effective maturity of the book. Hong Kong is typically a
short-dated book with low defaults, which is reflected in the low
ECL coverage ratio.
Retail analysis
HKFRS 9 ECL sensitivity to future
economic conditions
Mainland
Hong Kong China
ECL coverage of
loans and advances
to customers at
31 December 2018
--------- --------
Reported ECL (HK$m) 2,671 60
--------- --------
Drawn Amount (HK$m) 723,351 72,039
--------- --------
Reported ECL Coverage 0.37% 0.08%
----------------------- --------- --------
Coverage ratios
by scenario:
----------------------- --------- --------
Consensus Central
scenario 0.37% 0.08%
--------- --------
Consensus Upside
scenario 0.35% 0.08%
--------- --------
Consensus Downside
scenario 0.37% 0.09%
----------------------- --------- --------
Global trade war
scenario 0.43% 0.09%
----------------------- --------- --------
ECL coverage rates for retail are reflective of the portfolio
quality and sensitivity to the economic environment. The economic
uncertainty in Hong Kong increases the ECL by 6bp. This is
reflective of the nature of book, which is primarily comprised of
mortgage portfolio with low LTVs.
Overall, as the level of uncertainty in economy or historical
economic variable correlations or credit quality changes,
corresponding changes in the ECL sensitivity would occur.
Reconciliation of changes in gross carrying/nominal amount and
allowances for placings with and advances to banks and loans and
advances to customers, including loan commitments and financial
guarantees
The table below provides a reconciliation by stage of the
group's gross carrying/nominal amount and allowances for placings
with and advances to banks and loans and advances to customers,
including loan commitments and financial guarantees.
The transfers of financial instruments represents the impact of
stage transfers upon the gross carrying/nominal amount and
associated allowance for ECL. The net remeasurement of ECL arising
from stage transfers represents the increase or decrease due to
these transfers, for example, moving from a 12-month (stage 1) to a
lifetime (stage 2) ECL measurement basis. Net remeasurement
excludes the underlying CRR/PD movements of the financial
instruments transferring stage. This is captured, along with other
credit quality movements in the 'changes in risk parameters -
credit quality' line item.
The 'Net new and further lending/repayments' represent the gross
carrying/nominal amount and associated allowance ECL impact from
volume movements within the group's lending portfolio.
Reconciliation of changes in gross carrying/nominal amount and allowances
for placings with and advances to banks and loans and
advances to customers, including loan commitments and financial guarantees
(Audited)
---------- --------- --------- --------- --------- --------- ----------- ----------- ---------- -----------
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance
nominal for nominal for nominal for nominal for nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------- --------- --------- --------- --------- ----------- ----------- ---------- -----------
At 1 Jan 2018 4,852,623 (3,365) 280,319 (4,277) 17,713 (9,239) 1,231 (185) 5,151,886 (17,066)
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------- --------- --------
Transfers of financial
instruments: (33,980) (2,276) 21,399 3,214 12,581 (938) - - - -
--------- -------- -------- -------- -------- -------- ------- ------- --------- --------
* transfers from stage 1 to stage 2 (324,248) 789 324,248 (789) - - - - - -
-----------------------------------------
* transfers from stage 2 to stage 1 295,728 (3,109) (295,728) 3,109 - - - - - -
-----------------------------------------
- transfers to
stage 3 (5,481) 50 (8,862) 1,064 14,343 (1,114) - - - -
- transfers from
stage 3 21 (6) 1,741 (170) (1,762) 176 - - - -
--------- -------- -------- -------- -------- -------- ------- ------- --------- --------
Net remeasurement
of ECL arising
from transfer
of stage - 1,819 - (1,800) - (262) - - - (243)
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------- --------- --------
Net new and further
lending/repayments 466,876 (872) (83,068) 173 (5,105) 2,434 (500) 11 378,203 1,746
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------- --------- --------
Changes in risk
parameters - credit
quality - 1,170 - (1,177) - (7,040) - (114) - (7,161)
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------- --------- --------
Changes to model
used for ECL calculation - - - - - - - - - -
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------- --------- --------
Assets written
off - - - - (4,974) 4,973 (6) 6 (4,980) 4,979
Foreign exchange
and other (95,123) 185 (5,216) 18 (379) 300 (4) 3 (100,722) 506
At 31 Dec 2018 5,190,396 (3,339) 213,434 (3,849) 19,836 (9,772) 721 (279) 5,424,387 (17,239)
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------- --------- --------
ECL release/(charge)
for the year (5,658)
Recoveries 940
Others (21)
----------------------------------------- ---------- --------- --------- --------- --------- --------- ----------- ----------- ---------- --------
Total ECL charge
for the year (4,739)
----------------------------------------- ---------- --------- --------- --------- --------- --------- ----------- ----------- ---------- --------
Credit quality of financial instruments
(Audited)
We assess the credit quality of all financial instruments that
are subject to credit risk. The credit quality of financial
instruments is a point in time assessment of the probability of
default of financial instruments, whereas HKFRS 9 stages 1 and 2
are determined based on relative deterioration of credit quality
since initial recognition. Accordingly, for non-credit impaired
financial instruments, there is no direct relationship between the
credit quality assessment and HKFRS 9 stages 1 and 2, though
typically the lower credit quality bands exhibit a higher
proportion in
stage 2. 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, as shown in the table below. Under HKAS 39, retail
lending credit quality was disclosed based on expected-loss
percentages. Under HKFRS 9 retail lending credit quality is now
disclosed based on a 12-month probability-weighted PD. The credit
quality classifications for wholesale lending are unchanged and are
based on internal credit risk ratings.
Credit quality classification
Debt securities
and other
bills Wholesale lending Retail lending
----------------
12-month
Basel probability 12-month
of probability-
External Internal default Internal weighted
credit rating credit rating % credit rating PD %
---------------- --------------- ------------------ -------------- ---------------
Credit quality
classification
---------------
CRR1 to Band 1 and
Strong A- and above CRR2 0.000-0.169 2 0.000-0.500
---------------
Good BBB+ to BBB- CRR3 0.170-0.740 Band 3 0.501-1.500
BB+ to B and CRR4 to Band 4 and
Satisfactory unrated CRR5 0.741-4.914 5 1.501-20.000
---------------
CRR6 to
Sub-standard B- to C CRR8 4.915-99.999 Band 6 20.001-99.999
---------------------------- ------------------ ---------------
CRR9 to
Credit-impaired Default CRR10 100.000 Band 7 100.000
---------------------------- ---------------- --------------- ------------------ -------------- ------------
Quality classification definitions
'Strong' exposures demonstrate a strong capacity to meet financial
commitments, with negligible or low probability of default.
'Good' exposures demonstrate a good capacity to meet financial commitments,
with low default risk.
'Satisfactory' exposures require closer monitoring and demonstrate
an average to fair capacity to meet financial commitments, with moderate
default risk.
'Sub-standard' exposures require varying degrees of special attention
and default risk is of greater concern.
'Credit-impaired' exposures have been assessed as impaired.
=============================================================================
Distribution of financial instruments by credit quality
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------- ------------ -------- --------- --------- --------- -----------
In-scope for
HKFRS
9 impairment
Loans and
advances
to customers
held at
amortised cost 1,867,142 881,026 758,398 19,123 19,569 3,545,258 (16,556) 3,528,702
- personal 1,052,365 116,821 88,755 3,627 5,431 1,266,999 (5,800) 1,261,199
- corporate and
commercial 713,295 702,871 619,057 15,451 13,952 2,064,626 (10,514) 2,054,112
- non-bank
financial
institutions 101,482 61,334 50,586 45 186 213,633 (242) 213,391
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Placings with
and advances
to banks held
at amortised
cost 311,304 22,434 4,439 - - 338,177 (26) 338,151
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Cash and sight
balances
at central
banks 200,977 3,890 793 - - 205,660 - 205,660
Items in the
course
of collection
from
other banks 25,380 - - - - 25,380 - 25,380
Hong Kong
Government
certificates
of
indebtedness 280,854 - - - - 280,854 - 280,854
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Reverse
repurchase
agreements -
non-trading 294,944 68,872 42,511 - - 406,327 - 406,327
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Other financial
assets
held at
amortised cost 321,495 41,044 4,982 - - 367,521 (120) 367,401
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Prepayments,
accrued
income and
other assets 83,748 32,197 34,283 393 70 150,691 (47) 150,644
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Debt
instruments
measured
at fair value
through
other
comprehensive
income(1) 1,422,307 67,108 9,111 - - 1,498,526 (44) 1,498,482
--------- --------- ------------ -------- --------- --------- -------- ---------
Out-of-scope
for HKFRS
9 impairment
Trading assets 381,629 37,719 19,717 298 - 439,363 - 439,363
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 22,286 3,183 3,159 - - 28,628 - 28,628
--------- --------- ------------ -------- --------- --------- -------- ---------
Derivatives 165,327 43,362 5,011 159 - 213,859 - 213,859
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
At 31 Dec 2018 5,377,393 1,200,835 882,404 19,973 19,639 7,500,244 (16,793) 7,483,451
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Percentage of
total
credit quality 72.0% 16.0% 12.0% 0.0% 0.0% 100% - -
Loan and other
credit
related
commitments(2) 2,139,267 261,579 145,681 2,248 115 2,548,890 (376) 2,548,514
--------- --------- ------------ -------- --------- --------- -------- ---------
Financial
guarantee
and similar
contracts 97,697 104,379 69,593 1,628 1,169 274,466 (314) 274,152
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
The above table does not include balances due from Group
companies.
1 For the purposes of this disclosure, gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
2 Revocable loan and other commitments of HK$1,058bn which are
out-of-scope of HKFRS 9 are presented within the strong credit
quality classification.
Distribution of financial instruments to which the impairment requirements
in HKFRS 9 are applied, by credit quality and stage
allocation
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------- --------- ------------ -------- -------- --------- --------- -----------
Placings with
and advances
to banks at
amortised
cost 311,304 22,434 4,439 - - 338,177 (26) 338,151
--------- --------- ------------ -------- -------- --------- -------- ---------
- stage 1 311,012 22,022 4,045 - - 337,079 (24) 337,055
- stage 2 292 412 394 - - 1,098 (2) 1,096
- stage 3 - - - - - - - -
- POCI - - - - - - - -
--------- ------------ -------- -------- --------- -------- ---------
Loans and
advances to
customers at
amortised
cost 1,867,142 881,026 758,398 19,123 19,569 3,545,258 (16,556) 3,528,702
- stage 1 1,861,473 840,372 639,812 3,714 - 3,345,371 (3,014) 3,342,357
- stage 2 5,669 40,654 118,586 15,233 - 180,142 (3,713) 176,429
- stage 3 - - - - 19,024 19,024 (9,549) 9,475
- POCI - - - 176 545 721 (280) 441
--------- --------- ------------ -------- -------- --------- -------- ---------
Other financial
assets
measured at
amortised
cost 1,207,398 146,003 82,569 393 70 1,436,433 (167) 1,436,266
- stage 1 1,204,886 143,493 78,720 94 - 1,427,193 (140) 1,427,053
- stage 2 2,512 2,510 3,849 299 - 9,170 (27) 9,143
- stage 3 - - - - 70 70 - 70
- POCI - - - - - - - -
--------- --------- ------------ -------- -------- --------- -------- ---------
Loan and other
credit-related
commitments 1,081,090 261,578 145,681 2,247 115 1,490,711 (376) 1,490,335
- stage 1 1,078,356 250,973 134,399 1,021 - 1,464,749 (275) 1,464,474
- stage 2 2,734 10,605 11,282 1,226 - 25,847 (101) 25,746
- stage 3 - - - - 115 115 - 115
- POCI - - - - - - - -
--------- --------- ------------ -------- -------- --------- -------- ---------
Financial
guarantees 14,791 19,700 14,675 444 697 50,307 (280) 50,027
- stage 1 14,370 18,051 10,779 61 - 43,261 (26) 43,235
- stage 2 421 1,649 3,896 383 - 6,349 (33) 6,316
- stage 3 - - - - 697 697 (221) 476
- POCI - - - - - - - -
--------- --------- ------------ -------- -------- --------- -------- ---------
At 31 Dec 2018 4,481,725 1,330,741 1,005,762 22,207 20,451 6,860,886 (17,405) 6,843,481
---------------- --------- --------- ------------ -------- -------- --------- -------- ---------
Debt
instruments at
FVOCI(1)
----------------
- stage 1 1,422,307 67,108 9,110 - - 1,498,525 (44) 1,498,481
- stage 2 - - 1 - - 1 - 1
- stage 3 - - - - - - - -
- POCI - - - - - - - -
--------- --------- ------------ -------- -------- --------- -------- ---------
At 31 Dec 2018 1,422,307 67,108 9,111 - - 1,498,526 (44) 1,498,482
---------------- --------- --------- ------------ -------- -------- --------- -------- ---------
The above table does not include balances due from Group
companies.
1 For the purposes of this disclosure, gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Collateral and other credit enhancements
(Audited)
Although collateral can be an important mitigant of credit risk,
it is the group's general practice to lend on the basis of the
customer's ability to meet their obligations out of their cash flow
resources rather than rely on the value of security offered.
Depending on the customer's standing and the type of product,
facilities may be provided unsecured. 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
use 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. The
tables below provide a quantification of the value of fixed charges
we hold over a borrower's specific asset (or assets) where we have
a history of enforcing, and are able to enforce the collateral in
satisfying a debt in the event of the borrower failing to meet its
contractual obligations, and can be realised by sale in an
established market or where the collateral is cash. The collateral
valuation in the tables below excludes any adjustments for
obtaining and selling the collateral.
We may also manage our risk 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. In particular, loans shown in the tables below as not
collateralised may benefit from such credit mitigants.
Certain credit mitigants are used strategically in portfolio
management activities. While single name concentrations arise in
portfolios managed by Global Banking and Corporate Banking, it is
only in Global Banking that their size requires the use of
portfolio level credit mitigants. Across Global Banking, risk
limits and utilisations, maturity profiles and risk quality are
monitored and managed pro--actively. This process is key to the
setting of risk appetite for these larger, more complex,
geographically distributed customer groups. While the principal
form of risk management continues to be at the point of exposure
origination, through the lending decision-making process, Global
Banking also utilises loan sales and credit default swap ('CDS')
hedges to manage concentrations and reduce risk. These transactions
are the responsibility of a dedicated Global Banking portfolio
management team. Hedging activity is carried out within agreed
credit parameters, and is subject to market risk limits and a
robust governance structure. CDS mitigants are held at portfolio
level and are not reported in the presentation below.
Collateral on loans and advances
The collateral measured in the following tables consists of
fixed first charges on real estate, and charges over cash and
marketable financial instruments. The values in the tables
represent the expected market value on an open market basis; no
adjustment has been made to the collateral for any expected costs
of recovery. Marketable securities are measured at their fair
value. The loan-to-value ('LTV') ratios presented are calculated by
directly associating loans and advances with the collateral that
individually and uniquely supports each facility. When collateral
assets are shared by multiple loans and advances, whether
specifically or, more generally, by way of an all monies charge,
the collateral value is pro-rated across the loans and advances
protected by the collateral.
Other types of collateral such as unsupported guarantees and
floating charges over the assets of a customer's business are not
measured in the tables below. While such mitigants have value,
often providing rights in insolvency, their assignable value is not
sufficiently certain and they are therefore assigned no value for
disclosure purposes.
For credit impaired loans, the collateral values cannot be
directly compared with impairment allowances recognised. The
loan-to-value ('LTV') figures use open market values with no
adjustments.
Impairment allowances are calculated on a different basis, by
considering other cash flows and adjusting collateral values for
costs of realising collateral.
Personal lending
The table below shows residential mortgage lending, including
off-balance sheet loan commitments, by level of collateral. The
collateral included in the table below consists of fixed first
charges on real estate.
Residential mortgages including loan commitments by level of collateral
Gross carrying/nominal
amount ECL coverage
HK$m %
Stage 1
Fully collateralised 965,164 0.0
LTV ratio:
---------------------------------------------
- less than 70% 859,476 0.0
- 71% to 90% 89,821 0.0
- 91% to 100% 15,867 0.1
----------------------
Partially collateralised (A): 3,121 0.0
----------------------
- collateral value on A 2,792
----------------------
Total 968,285 0.0
--------------------------------------------- ---------------------- -----------------
Stage 2
------------------------
Fully collateralised 20,638 0.4
----------------------
LTV ratio:
--------------------------------------------- ------------------------
- less than 70% 15,913 0.2
- 71% to 90% 4,277 0.7
- 91% to 100% 448 2.9
----------------------
Partially collateralised (B): 93 4.3
----------------------
- collateral value on B 83
Total 20,731 0.4
--------------------------------------------- ---------------------- -----------------
Stage 3
Fully collateralised 1,694 9.3
LTV ratio:
---------------------------------------------
- less than 70% 1,210 4.9
- 71% to 90% 371 16.4
- 91% to 100% 113 32.7
Partially collateralised (C): 88 43.2
- collateral value on C 80
Total 1,782 10.9
--------------------------------------------- ---------------------- -----------------
At 31 Dec 2018 990,798 0.0
--------------------------------------------- ---------------------- -----------------
The LTV ratio is calculated as the gross on-balance sheet
carrying amount of the loan and any off-balance sheet loan
commitment at the balance sheet date divided by the value of
collateral. The methodologies for obtaining residential property
collateral values vary throughout the group, but are typically
determined through a combination of professional appraisals, house
price indices or statistical analysis. Valuations are updated on a
regular basis and, as a minimum, at intervals of every three years.
Valuations are conducted more frequently when market conditions or
portfolio performance are subject to significant change or where a
loan is identified and assessed as impaired.
Other personal lending
Other personal lending consists primarily of personal loans,
overdrafts and credit cards, all of which are generally unsecured,
except lending to private banking customers which are generally
secured.
Corporate, commercial and non-bank financial institutions
lending
Collateral held is analysed below separately for commercial real
estate and for other corporate, commercial and non-bank financial
institutions lending. This reflects the difference in level of
collateral held on the portfolios. In each case, the analysis
includes off-balance sheet loan commitments, primarily undrawn
credit lines.
Commercial real estate loans and advances including loan commitments
by level of collateral
Gross carrying/nominal
amount ECL coverage
HK$m %
Stage 1
Not collateralised 352,258 0.0
Fully collateralised 363,729 0.1
Partially collateralised (A): 31,107 0.1
- collateral value on A 17,246
Total 747,094 0.0
-------------------------------------------------------- ---------------------- --------------
Stage 2
Not collateralised 10,228 0.2
Fully collateralised 19,440 0.6
Partially collateralised (B): 1,235 0.8
- collateral value on B 702
Total 30,903 0.5
-------------------------------------------------------- ---------------------- --------------
Stage 3
Not collateralised - -
Fully collateralised 129 0.8
Partially collateralised (C): - -
------------
- collateral value on C -
Total 129 0.8
-------------------------------------------------------- ---------------------- --------------
POCI
--------------------------------------------------------
Not collateralised - -
------------
Fully collateralised - -
------------
Partially collateralised (D): - -
------------
- collateral value on D -
Total - -
-------------------------------------------------------- ---------------------- ------------
At 31 Dec 2018 778,126 0.1
-------------------------------------------------------- ---------------------- --------------
The collateral included in the table above consist of fixed
first charges on real estate and charges over cash for the
commercial real estate sector. The table includes lending to major
property developers which is typically secured by guarantees or is
unsecured.
The value of commercial real estate collateral is determined
through a combination of professional and internal valuations and
physical inspection. Due to the complexity of collateral valuations
for commercial real estate, local valuation policies determine the
frequency of review based on local market conditions. Revaluation
are sought with greater frequency where, as part of the regular
credit assessment of the obligor, material concerns arise in
relation to the transaction which may reflect on the underlying
performance of the collateral, or in circumstances where an
obligor's credit quality has declined sufficiently to cause concern
that the principal payment source may not fully meet the obligation
(i.e. the obligor's credit quality classification indicates it is
at the lower end e.g. sub-standard, or approaching impaired).
Commercial real estate lending includes the financing of
corporate, institutional and high net worth customers who are
investing primarily in income-producing assets and, to a lesser
extent, in their construction and development. The group has
aligned the definition of commercial real estate to reflect the
internal risk management view, and the comparatives presented on
page 31, have been represented.
Other corporate, commercial and non-bank financial institutions loans
and advances including loan commitments by level of collateral
Gross carrying/nominal
amount ECL coverage
HK$m %
Stage 1
Not collateralised 2,082,196 0.0
Fully collateralised 352,225 0.1
Partially collateralised (A): 260,184 0.1
- collateral value on A 108,264
Total 2,694,605 0.1
------------------------------------------- ---------------------- ----------------
Stage 2
Not collateralised 144,940 0.4
Fully collateralised 34,740 0.6
Partially collateralised (B): 27,608 0.4
- collateral value on B 10,987
Total 207,288 0.5
------------------------------------------- ---------------------- ----------------
Stage 3
Not collateralised 8,339 69.1
Fully collateralised 2,536 34.8
Partially collateralised (C): 3,361 51.6
- collateral value on C 1,237
Total 14,236 58.9
------------------------------------------- ---------------------- ----------------
POCI
-------------------------------------------
Not collateralised 204 20.1
Fully collateralised 243 0.8
Partially collateralised (D): 274 86.5
- collateral value on D 269
Total 721 38.8
------------------------------------------- ---------------------- ----------------
At 31 Dec 2018 2,916,850 0.4
------------------------------------------- ---------------------- ----------------
The collateral used in the assessment of the above primarily
includes first legal charges over real estate and charges over cash
in the commercial and industrial sector, and charges over cash and
marketable financial instruments in the financial sector.
It should be noted that the table above excludes other types of
collateral which are commonly taken for corporate and commercial
lending such as unsupported guarantees and floating charges over
the assets of a customer's business. While such mitigants have
value, and often provide rights in insolvency, their assignable
value is insufficiently certain. They are assigned no value for
disclosure purposes.
As with commercial real estate, the value of real estate
collateral included in the table above is generally determined
through a combination of professional and internal valuations and
physical inspection. The frequency of revaluation is undertaken on
a similar basis to commercial real estate loans and advances;
however, for lending activities that are not predominantly
commercial real estate-oriented, collateral value is not as
strongly correlated to principal repayment performance. Collateral
values will generally be refreshed when an obligor's general credit
performance deteriorates and it is necessary to assess the likely
performance of secondary sources of repayment should reliance upon
them prove necessary. For this reason, the table above reports
values only for customers with CRR 8 to 10, reflecting that these
loans and advances generally have valuations which are
comparatively recent. For the purposes of the table above, cash is
valued at its nominal value and marketable securities at their fair
value.
Derivatives
The International Swaps and Derivatives Association ('ISDA')
Master Agreement is our preferred agreement for documenting
derivatives activity. It provides the contractual framework within
which dealing activity across a full range of over the counter
('OTC') products is conducted, and contractually binds both parties
to apply close-out netting across all outstanding transactions
covered by an agreement if either party defaults or another
pre-agreed termination event occurs. It is common, and our
preferred practice, for the parties to execute a Credit Support
Annex ('CSA') in conjunction with the ISDA Master Agreement. Under
a CSA, collateral is passed between the parties to mitigate the
counterparty risk inherent in outstanding positions. The majority
of our CSAs are with financial institution clients. Please refer
to
Note 32 'Offsetting of financial assets and liabilities' for
further details.
Other credit risk exposures
In addition to collateralised lending described above, other
credit enhancements are employed and methods used to mitigate
credit risk arising from financial assets. These are described in
more detail below.
Government, bank and other financial institution-issued
securities may benefit from additional credit enhancement, notably
through government guarantees that reference these assets.
Corporate-issued debt securities are primarily unsecured. Debt
securities issued by banks and financial institutions include
asset-backed securities ('ABS') and similar instruments, which are
supported by underlying pools of financial assets. Credit risk
associated with ABS is reduced through the purchase of credit
default swap ('CDS') protection.
The group's maximum exposure to credit risk includes financial
guarantees and similar arrangements that it issues or enters into,
and loan commitments to which it is irrevocably committed.
Depending on the terms of the arrangement, the group may have
recourse to additional credit mitigation in the event that a
guarantee is called upon, or a loan commitment is drawn and
subsequently defaults. Further information about these arrangements
is provided in note 30 'Contingent liabilities and
commitments'.
2017 credit risk disclosures
(Unaudited)
The disclosures below were included in our 2017 external reports
and do not reflect the adoption of HKFRS 9. As these tables are not
directly comparable to the current 2018 credit risk tables, which
are disclosed on an HKFRS 9 basis, these 2017 disclosures have been
shown below and not adjacent to 2018 tables.
Distribution of financial instruments by credit quality
Neither past due nor impaired
Past
Sub- due not Impairment
Strong Good Satisfactory standard impaired Impaired allowances Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------------------------------------
At 31 Dec 2017
---------------------------------------
Items in the course
of collection from
other banks 24,420 219 1,075 - - - - 25,714
Trading assets 324,060 27,258 37,216 599 389,133
Derivatives 253,480 38,202 7,855 706 300,243
Financial assets
designated at fair
value 17,032 855 767 2 18,656
Reverse repurchase
agreements - non-trading 249,043 50,103 31,744 - - - - 330,890
Placings with and
advances to banks
held at amortised
cost 401,097 28,366 3,433 109 - - - 433,005
Loans and advances
to customers held
at amortised cost 1,772,405 805,145 696,882 20,136 29,878 17,579 (13,045) 3,328,980
---------------------------------------
* personal 992,682 101,938 56,398 641 18,930 4,686 (2,106) 1,173,169
* corporate and commercial 666,138 649,775 604,638 19,139 8,742 12,695 (10,728) 1,950,399
* non-bank financial institutions 113,585 53,432 35,846 356 2,206 198 (211) 205,412
Financial investments 1,628,709 40,980 41,909 - - - - 1,711,598
Other assets 40,817 19,582 31,945 593 486 187 - 93,610
Total 4,711,063 1,010,710 852,826 22,145 30,364 17,766 (13,045) 6,631,829
--------------------------------------- --------- --------- ------------ -------- -------- -------- -------- ---------
1 The above table does not include balances due from Group companies.
Ageing analysis of past due but not impaired financial instruments
Up to 30-59 60-89 90-180 Over 180
29 days days days days days Total
HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2017
Loans and advances to customers
held at amortised cost(1) 24,976 3,572 1,326 4 - 29,878
---------------------------------------
- personal 15,272 2,704 954 - - 18,930
- corporate and commercial 7,498 868 372 4 - 8,742
- non-bank financial institutions 2,206 - - - - 2,206
Other assets 98 35 54 59 240 486
Total 25,074 3,607 1,380 63 240 30,364
--------------------------------------- -------- ------ ----- ------ -------- ------
1 The majority of the loans and advances to customers that are
operating within revised terms following restructuring are excluded
from this table.
Impairment allowances as a percentage of gross loans and advances to
customers
Rest of
Hong Kong Asia-Pacific Total
HK$m HK$m HK$m
---------- ------------- ------------
At 31 Dec 2017
Gross loans and advances to customers
Individually assessed impaired gross loans and
advances 6,284 9,259 15,543
Collectively assessed 2,101,416 1,225,066 3,326,482
- impaired loans and advances 673 1,363 2,036
- non-impaired loans and advances 2,100,743 1,223,703 3,324,446
--------- ------------ ---------
Total gross loans and advances to customers 2,107,700 1,234,325 3,342,025
------------------------------------------------------- --------- ------------ ---------
Impairment allowances (5,669) (7,376) (13,045)
- individually assessed (3,429) (4,800) (8,229)
- collectively assessed (2,240) (2,576) (4,816)
--------- ------------ ---------
Net loans and advances to customers 2,102,031 1,226,949 3,328,980
------------------------------------------------------- --------- ------------ ---------
Fair value of collateral which has been taken into
account in respect
of individually assessed impaired loans and advances
to customers 2,666 4,806 7,472
Individually assessed impaired gross loans and
advances to customers as a
percentage of gross loans and advances to customers 0.3% 0.8% 0.5%
Total allowances as a percentage of total gross
loans and advances to customers 0.3% 0.6% 0.4%
------------------------------------------------------- ---------- ------------- ------------
Movement in impairment allowances on loans and advances to customers
Individually Collectively
assessed assessed Total
HK$m HK$m HK$m
At 1 Jan 2017 8,059 4,633 12,692
Amounts written off (2,189) (2,806) (4,995)
Recoveries of loans and advances written off in
previous years 180 713 893
Net charge to income statement 2,194 2,136 4,330
Unwinding of discount of loan impairment (235) (17) (252)
Exchange and other adjustments 220 157 377
At 31 Dec 2017 8,229 4,816 13,045
------------------------------------------------- ----------- ----------- ------
Residential mortgages including loan commitments by level of
collateral
---------
HK$m
Unimpaired loans
Fully collateralised 905,997
Partially collateralised
- greater than 100% LTV (A) 420
- collateral value on A 378
Not collateralised 44
Total 906,461
-------------------------------------------------------------- -------
Impaired loans
Fully collateralised 2,223
- less than 70% LTV 1,635
- 71% to 90% LTV 498
- 91% to 100% LTV 90
-------
Partially collateralised
- greater than 100% LTV (B) 80
- collateral value on B 69
Not collateralised 1
Total 2,304
At 31 Dec 2017 908,765
-------------------------------------------------------------- -------
Commercial real estate loans and advances including loan commitments
by level of collateral(1)
HK$m
Rated CRR/EL 1 to 7 597,335
Not collateralised 288,424
Fully collateralised 293,069
Partially collateralised (A) 15,842
- collateral value on A 8,297
Rated CRR/EL 8 1
Not collateralised -
Fully collateralised 1
Partially collateralised (B) -
- collateral value on B -
Rated CRR/EL 9 to 10 133
Not collateralised 10
Fully collateralised 123
Partially collateralised (C) -
- collateral value on C -
At 31 Dec 2017 597,469
--------------------------------------------------------- -------------
1 Comparatives have been restated to align the definition of
commercial real estate to reflect the internal risk management
view.
Other corporate, commercial and non-bank financial institutions loans
and advances rated CRR/EL 8 to 10 only, including loan
commitments, by level of collateral(1)
HK$m
Rated CRR/EL 8 1,494
Not collateralised 331
Fully collateralised 70
Partially collateralised (A) 1,093
- collateral value on A 97
Rated CRR/EL 9 to 10 12,769
Not collateralised 7,236
Fully collateralised 2,807
Partially collateralised (B) 2,726
- collateral value on B 1,658
At 31 Dec 2017 14,263
----------------------------------------------------------- ------------
1 Comparatives have been restated to align the definition of
commercial real estate to reflect the internal risk management
view.
Liquidity and Funding Risk
(Audited)
Strategies and processes in the management of liquidity risk
HSBC has an internal liquidity and funding risk management
framework ('LFRF') which aims to allow it to withstand very severe
liquidity stresses. It is designed to be adaptable to changing
business models, markets and regulations. The management of
liquidity and funding is primarily undertaken locally (by country)
in our operating entities in compliance with the Group's LFRF and
local regulations, and with practices and limits set by the Group
Management Board ('GMB') through the group's RMM and approved by
the Board. Our general policy is that each defined operating entity
should be self-sufficient in funding its own activities.
Structure and organisation of the liquidity risk management
function
The Group Treasurer, who reports to the Group CFO, has
responsibility for the oversight of the LFRF. Asset, Liability and
Capital Management ('ALCM') teams are responsible for the
application of the LFRF at a local operating entity level.
The elements of the LFRF are underpinned by a robust governance
framework, the two major elements of which are:
-- Asset and Liability Management Committees ('ALCOs') at the group and entity level; and
-- annual internal liquidity adequacy assessment ('ILAA') used
to validate risk tolerance and set risk appetite.
The Board is ultimately responsible for determining the types
and magnitude of liquidity risk that the group is able to take and
ensuring that there is an appropriate organisation structure for
managing this risk. Under authorities delegated by the Board, the
group ALCO is responsible for managing all ALCM issues including
liquidity and funding risk management.
The group ALCO delegates to the group Tactical Asset and
Liability Management Committee ('TALCO') the task of reviewing
various analyses of the group pertaining to sites' liquidity and
funding. TALCO's primary responsibilities include but are not
limited to:
-- reviewing the funding structure of operating entities and the
allocation of liquidity among them; and
-- monitoring liquidity and funding limit breaches and providing
direction to those operating entities that have not been able to
rectify breaches on a timely basis.
Compliance with liquidity and funding requirements is monitored
by local ALCO who report to the RMM and Executive Committee on a
regular basis. This process includes:
-- maintaining compliance with relevant regulatory requirements of the operating entity;
-- projecting cash flows under various stress scenarios and
considering the level of liquid assets necessary in relation
thereto;
-- monitoring liquidity and funding ratios against internal and regulatory requirements;
-- maintaining a diverse range of funding sources with adequate back-up facilities;
-- managing the concentration and profile of term funding;
-- managing contingent liquidity commitment exposures within pre-determined limits;
-- maintaining debt financing plans;
-- monitoring of depositor concentration in order to avoid undue
reliance on large individual depositors and ensuring a satisfactory
overall funding mix; and
-- maintaining liquidity and funding contingency plans. These
plans identify early indicators of stress conditions and describe
actions to be taken in the event of difficulties arising from
systemic or other crises, while minimising adverse long-term
implications for the business.
Along with ALCM, the Balance Sheet Management teams form the
first line of defence in the management of liquidity risk, ensuring
continuous compliance with the firm's risk appetite operating
within their risk mandates.
Liquidity risk assurance is provided by Risk. Second line
liquidity risk assurance performs the following activities:
-- reviews and challenges assumptions of current liquidity and
funding risk management framework;
-- reviews and challenges methods and calculation processes of
all aspects of liquidity and funding risk;
-- reviews results of liquidity and funding metrics against
limits and proposed limit changes prior to approval at governance
forums; and
-- reviews risk items that require escalation.
Scope and nature of liquidity risk reporting and measurement
Where possible, the group maintains standardised platforms
utilising common data feeds in order to ensure consistency of
standard internal and regulatory reporting and flexibility to
deliver ad hoc requests.
Hedging and mitigating liquidity risk at HSBC
HSBC's business strategy and overall liquidity risk profile
The key aspects of the internal LFRF which is used to ensure
that HSBC maintains an appropriate overall liquidity risk profile
are:
-- stand-alone management of liquidity and funding by operating entity;
-- minimum liquidity coverage ratio ('LCR') requirement,
including by currency, for each operating entity;
-- minimum net stable funding ratio ('NSFR') requirement for each operating entity;
-- legal entity depositor concentration limit;
-- three-month and 12-month cumulative rolling term contractual
maturity limits covering deposits from banks, deposits from
non-bank financial institutions and securities issued;
-- annual ILAA by operating entity;
-- intra-day liquidity;
-- liquidity funds transfer pricing; and
-- forward-looking funding assessments.
Management of liquidity and funding risk
Liquidity coverage ratio
(Unaudited)
The LCR aims to ensure that a bank has sufficient unencumbered
high-quality liquid assets ('HQLA') to meet its liquidity needs in
a 30 calendar day liquidity stress scenario. HQLA consist of cash
or assets that can be converted into cash at little or no loss of
market value.
At 31 December 2018, all the group's principal operating
entities were well above regulatory minimums and above the
internally expected levels established by the Board.
Net stable funding ratio
(Unaudited)
The NSFR measures stable funding relative to required stable
funding, and reflects a bank's long-term funding profile (funding
with a term of more than a year). It is designed to complement
the LCR.
At 31 December 2018, all the group's principal operating
entities were within the NSFR risk tolerance level established by
the Board and applicable under the LFRF.
Liquid assets of HSBC's principal operating entities
(Unaudited)
Liquid assets are held and managed on a stand-alone operating
entity basis. They include those held directly by each operating
entity's BSM department, primarily for the purpose of managing
liquidity risk in line with the LFRF, and any unencumbered liquid
assets held outside BSM departments for any other purpose. The LFRF
gives ultimate control of all unencumbered assets and sources of
liquidity to BSM.
Overall adequacy of liquidity risk management at HSBC
(Unaudited)
All operating entities are required to manage liquidity risk and
funding risks on a standalone basis in accordance with the LFRF,
which includes the preparation of an ILAA document, in order to
ensure that:
-- liquidity resources are adequate, both as to the amount and quality;
-- there is no significant risk that liabilities cannot be met as they fall due;
-- a prudent structural funding profile is maintained;
-- adequate liquidity resources continue to be maintained; and
-- the operating entity's liquidity risk framework is adequate and robust.
The key objectives of the ILAA process are to:
-- demonstrate that all material liquidity and funding risks are
captured within the internal framework;
-- validate the operating entity's risk tolerance/appetite by
demonstrating that reverse stress testing scenarios are acceptably
remote and vulnerabilities have been assessed through the use of
severe stress scenarios; and
-- provide review and challenge of the operating entity's ILAA document.
Concentration of funding and liquidity sources
Depositor concentration and term funding maturity
concentration
(Unaudited)
The LCR metric assume a stressed outflow based on a portfolio of
depositors within retail, corporate and financial deposit segment.
The validity of these assumptions is challenged if the portfolio of
depositors is not large enough to avoid depositor
concentration.
Operating entities are exposed to term re-financing
concentration risk if the current maturity profile results in
future maturities being overly concentrated in any defined
period.
At 31 December 2018, all the group's principal operating
entities were within the risk tolerance levels set for depositor
concentration and term funding maturity concentration. These risk
tolerances were established by the Board and applicable under the
LFRF.
Sources of funding
(Audited)
Our primary sources of funding are customer current accounts and
customer savings deposits payable on demand or at short notice. We
issue wholesale securities (secured and unsecured) to supplement
our customer deposits and change the currency mix, maturity profile
or location of our liabilities.
Currency mismatch in the LCR
(Unaudited)
In time of stress it cannot automatically be assumed that one
currency can always be converted for another, even if those
currencies are 'hard' currencies. LCR must therefore be assessed by
currency, if the currency is material.
In some currencies, convertibility is restricted by regulators
and central banks and this restriction results in local currency
not being convertible offshore or even onshore.
The LFRF requires all operating entities to monitor material
single currency LCR. Limits are approved and monitored by local
ALCO.
Liquidity and funding risk profile
(Unaudited)
The Banking (Liquidity) Rules ('BLR') were introduced by the
HKMA in 2014 and became effective from 1 January 2015. The group is
required to calculate its LCR on a consolidated basis in accordance
with rule 11(1) of the BLR. During 2018 the group is required to
maintain an LCR of not less than 90%, increasing to not less than
100% from January 2019. Effective from 1 January 2018, the group is
also required to calculate its NSFR on a consolidated basis in
accordance with rule 11(1) of the BLR and maintain an NSFR of not
less than 100%.
The average LCRs for the period are as follows:
Quarter ended
31 Dec 31 Dec
2018 2017
% %
Average LCRs 161.0 153.6
--------------------- -------- ------
The liquidity position of the group remained strong in 2018. The
average LCR increased by 7.4% from 153.6% for the quarter ended 31
December 2017 to 161.0% for the quarter ended 31 December 2018,
mainly as a result of the growth in customer deposits.
The majority of HQLA included in the LCR are Level 1 assets as
defined in the BLR, which consist mainly of government debt
securities.
The total weighted amount of HQLA for the period are as
follows:
Weighted amount
(average value)
at quarter
ended
31 Dec 31 Dec
2018 2017
HK$m HK$m
Level 1 assets 1,489,744 1,405,999
Level 2A assets 67,333 65,248
Level 2B assets 9,638 20,071
-----------------
Total 1,566,715 1,491,318
----------------- --------- ---------
The NSFRs for the period are as follows:
Quarter ended
31 Dec 31 Dec
2018 2017
% %
Net stable funding ratio 149.7 N/A
------------------------- ------- -------
The funding position of the group remained robust in 2018. The
NSFR was 149.7% for the quarter ended 31 December 2018,
highlighting a surplus of stable funding relative to the required
stable funding requirement. The NSFR requirements have been
implemented with effect from 2018 and accordingly the NSFR for the
quarter ended 31 December 2017 is not shown.
Interdependent assets and liabilities included in the group's
NSFR are certificates of indebtedness held and legal tender notes
issued.
Additional contractual obligations
(Unaudited)
Under the terms of our current collateral obligations under
derivative contracts (which are ISDA compliant CSA contracts), the
additional collateral required to post in the event of one-notch
and two-notch downgrade in credit ratings is immaterial.
Further details of the group's liquidity information disclosures
can be viewed in the Banking Disclosure Statement 2018, which will
be available in the Regulatory Disclosure Section of our website:
www.hsbc.com.hk.
Market Risk
(Audited)
Market risk is the risk that movements in market factors,
including foreign exchange rates and commodity prices, interest
rates, credit spreads and equity prices, will reduce our income or
the value of our portfolios.
There were no significant changes to our policies and practices
for the management of market risk in 2018.
Exposure to market risk
Exposure to market risk is separated
into two portfolios:
* Trading portfolios comprise positions arising from
market-making and warehousing of customer-derived
positions.
* Non-trading portfolios comprise positions that
primarily arise from the interest rate management of
our retail and commercial banking assets and
liabilities, financial investments designated as
available-for-sale and held-to-maturity, and
exposures arising from our insurance operations.
============================================================
The diagram below illustrates the main business areas where
trading and non-trading market risks reside and market risk
measures to monitor and limit exposures.
Trading risk
* Foreign exchange and commodities * Structural foreign exchange
* Interest rates * Interest rates
* Credit spreads * Credit spreads
* Equities
-----------------------------------
Global GB&M incl GB&M, BSM,
business BSM GPB, CMB and
RBWM
-----------------------------------
Risk measure VaR | Sensitivity VaR | Sensitivity
| Stress Testing | Stress Testing
------------- ---------------------------------------- -----------------------------------
Note-Balance Sheet Management ('BSM'), for external reporting
purposes, forms part of Corporate Centre while daily operations and
risk are managed within GB&M.
Where appropriate, the group applies similar risk management
policies and measurement techniques to both trading and non-trading
portfolios. The group's objective is to manage and control market
risk exposures in order to optimise return on risk while
maintaining a market profile consistent with our established risk
appetite.
The nature of the hedging and risk mitigation strategies
performed across the group corresponds to the market risk
management instruments available within each operating
jurisdiction. These strategies range from the use of traditional
market instruments, such as interest rate swaps, to more
sophisticated hedging strategies to address a combination of risk
factors arising at portfolio level.
Market risk governance
(Unaudited)
Market risk is managed and controlled through limits approved by
the Risk Management Meeting of the Group Management Board ('GMB')
for HSBC Holdings plc and the 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 Global Markets through risk limits. Value at Risk ('VaR') limits
are set for portfolios, products, and risk types, with market
liquidity being the primary factors in determining the level of
limits set.
Each major operating entity has an independent market risk
management and control function which is responsible for measuring
market risk exposures in accordance with the policies defined by
Group Risk, and monitoring and reporting these exposures against
the prescribed limits on a daily basis. 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 Asset and Liability Management Committee ('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 impact of
varying scenarios on valuations or on net interest income resulting
from any residual risk positions.
The Regional Markets Model Oversight Committee ('MOC') is a
formal governance committee established to provide oversight on
model risk management related matters for traded risk models used
in the region. The Regional Markets MOC is responsible for
overseeing, monitoring, and escalating model risk management
related matters within Traded risk. It supports accountable
individual model approvers in the oversight of model risk. The
Regional Markets MOC is accountable to the Global Markets MOC which
oversees all traded risk models at Group level. The Regional MOC
informs the Regional Risk Management Meeting about material model
risks and model related issues.
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 Group Risk, of enforcing new product
approval procedures, and of restricting trading in the more complex
derivative products only to sites with appropriate levels of
product expertise and robust control systems.
Market risk measures
(Audited)
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with our risk
appetite. We use a range of tools to monitor and limit market risk
exposures including sensitivity analysis, VaR and stress
testing.
Sensitivity analysis
(Unaudited)
Sensitivity analysis measures the impact of individual market
factor movements on specific instruments or portfolios including
interest rates, foreign exchange rates and equity prices, for
example, the impact 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
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 no approved internal
model, we use the appropriate local rules to capitalise
exposures.
In addition, we calculate VaR for non-trading portfolios in
order to have a complete picture of market risk. Where VaR is not
calculated explicitly, alternative tools are used as summarised in
the Market Risk stress testing section below.
Our models are predominantly based on historical simulation
which 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 models also incorporate the effect of the option features on
the underlying exposures. The nature of the VaR models means that
an increase in observed market volatility will lead to an increase
in VaR without any changes in the underlying positions.
VaR model limitations
Although a valuable guide to risk, VaR should always be viewed
in the context of its limitations. For example:
-- 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; and
-- VaR is calculated on the basis of exposures outstanding at
the close of business and therefore does not necessarily reflect
intra-day exposures.
Back-testing
We routinely validate the accuracy of our VaR models by
back-testing them against both actual and hypothetical profit and
loss against the trading VaR numbers. Hypothetical profit and loss
excludes non-modelled items such as fees, commissions and revenues
of intra-day transactions.
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 VaR at various levels which reflects the
full legal entity scope of the group, including entities that do
not have local permission to use VaR for regulatory purposes.
Back-testing using the regulatory hierarchy includes entities which
have approval to use VaR in the calculation of market risk
regulatory capital requirement.
Risk not in VaR framework
(Unaudited)
The risks not in VaR ('RNIV') framework aims to capture and
capitalise material market risks that are not adequately covered in
the VaR model, such as the LIBOR tenor basis.
Risk factors are reviewed on a regular basis and are either
incorporated directly in the VaR models, where possible, or
quantified through the VaR-based RNIV approach or a stress test
approach within the RNIV framework. A stressed VaR RNIV is computed
for the risk factors considered in the VaR-based RNIV approach.
Stress-type RNIVs are also included where appropriate.
Stress testing
(Audited)
Stress testing is an important tool that is integrated into our
market risk management framework to evaluate the potential impact
on portfolio values of more extreme, although plausible, events or
movements in a set of financial variables. In such scenarios,
losses can be much greater than those predicted by VaR
modelling.
Stress testing is implemented at the legal entity, regional,
sites and the overall group levels. A standard set of scenarios is
utilised consistently across all sites within the group. Scenarios
are tailored to capture the relevant potential events or market
movements at each level. The risk appetite around potential stress
losses for the region is set and monitored against referral
limits.
Market risk reverse stress tests are undertaken based upon 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, provide management with insights regarding the 'tail risk'
beyond VaR for which the group's appetite is limited.
Market risk in 2018
(Unaudited)
Market sentiment in 2018 remained fragile with short term market
volatilities amid the sustained US-China trade tensions. The
prospect of rising USD interest rates and tightening USD liquidity
have brought volatility to emerging markets in Asia and also
increased the cost of USD funding. US-China trade talk outcome,
geopolitical events including the evolving situation in the Korean
Peninsula, the US policy priorities as well as the key elections in
Asia are among the key drivers for market volatility in 2019.
Trading portfolios
(Audited)
Value at risk of the trading portfolios
Trading VaR predominantly resides within Global Markets. This
was slightly lower at 31 December 2018 compared to 31 December 2017
due to the reduction in the credit trading VaR and interest rate
trading VaR, which was driven by reduction in the inventory
position under the fixed income business.
The trading VaR for the year is shown in the table below.
Trading value at risk, 99% 1 day(1)
Foreign
exchange Interest Credit Portfolio
and commodity rate Equity spread diversification(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2018
Year end 43 123 51 42 (123) 136
Average 35 150 30 33 163
-------------- -------- ------ ------- --------------------- -----
Maximum 59 199 58 75 222
------------------ -------------- -------- ------ ------- --------------------- -----
At 31 Dec 2017
Year end 48 128 19 69 (123) 141
Average 48 118 13 28 111
Maximum 84 202 25 73 189
------------------ -------------- -------- ------ ------- --------------------- -----
1 Trading portfolios comprise positions arising from the
market-making and warehousing of customer-derived positions.
2 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types, 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 occur on different days for different risk
types, it is not meaningful to calculate a portfolio
diversification benefit for these measures.
Non-trading portfolios
(Unaudited)
Banking book interest rate risk is the risk of an adverse impact
to earnings or capital due to changes in market interest rates. The
risk arises from timing mismatches in the repricing of non-traded
assets and liabilities and is the potential adverse impact of
changes in interest rates on earnings and capital. In its
management of the risk, the group aims to mitigate the impact of
future interest rate movements which could reduce future net
interest income, while balancing the cost of hedging activities to
the current revenue stream. Monitoring the sensitivity of projected
net interest income under varying interest rate scenarios is a key
part of this.
In order to manage structural interest rate risk, non-traded
assets and liabilities are transferred to Balance Sheet Management
('BSM') based on their repricing and maturity characteristics. For
assets and liabilities with no defined maturity or repricing
characteristics, behaviouralisation is used to assess the interest
rate risk profile. BSM manages the banking book interest rate
positions transferred to it within the approved limits. Local ALCOs
are responsible for monitoring and reviewing their overall
structural interest rate risk position. Interest rate
behaviouralisation policies have to be formulated in line with the
Group's behaviouralisation policies and approved at least annually
by local ALCOs.
Sensitivity of net interest income
A principal part of our management of non-traded interest rate
risk is to monitor the sensitivity of expected net interest income
at least quarterly under varying interest rate scenarios
(simulation modelling), where all other economic variables are held
constant.
Sensitivity of net interest income reflects the group's
sensitivity of earnings due to changes in market interest rates.
Entities forecast net interest income sensitivities across a range
of interest rate scenarios based on a static balance sheet
assumption. Sites include business line interest rate pass-on
assumptions, re-investment of maturing assets and liabilities at
market rates per shock scenario and prepayment risk. BSM is
modelled based on no management actions i.e. the risk profile at
the month end is assumed to remain constant throughout the forecast
horizon.
Structural foreign exchange exposures
(Unaudited)
Structural foreign exchange exposures represent net investments
in subsidiaries, branches and associates, the functional currencies
of which are currencies other than the HK dollar. An entity's
functional currency is normally that of the primary economic
environment in which the entity operates.
Exchange differences on structural exposures are recognised in
'Other comprehensive income'.
Our structural foreign exchange exposures are managed with the
primary objective of ensuring, where practical, that our
consolidated capital ratios and the capital ratios of individual
banking subsidiaries are largely protected from the effect of
changes in exchange rates. We hedge structural foreign exchange
exposures only in limited circumstances.
The group had the following structural foreign currency
exposures that were not less than 10% of the total net structural
foreign currency positions:
LCYm HK$m equivalent
At 31 Dec 2018
Renminbi 189,054 215,266
------- ---------------
At 31 Dec 2017
Renminbi 181,740 218,262
---------------- ------- ---------------
Operational Risk
(Unaudited)
Operational risk is the risk to achieving our strategy or
objectives as a result of inadequate or failed internal processes,
people and systems or from external events. Responsibility for
minimising operational risk lies with HSBC's staff. All staff are
required to manage the operational risks of the business and
operational activities for which they are responsible.
Operational risk management framework
HSBC's Operational Risk Management Framework ('ORMF') is our
overarching approach for managing operational risk, the purpose of
which is to:
-- identify and manage our operational risks in an effective manner;
-- remain within the operational risk appetite, which helps the
organisation to understand the level of risk it is willing to
accept; and
-- drive forward-looking risk awareness and assist management focus.
Business and functional managers throughout the organisation are
responsible for maintaining an acceptable level of internal control
commensurate with the scale and nature of operations, and for
identifying and assessing risks, designing controls and monitoring
the effectiveness of these controls. The ORMF helps managers to
fulfil these responsibilities by defining a standard risk
assessment methodology and providing a tool for the systematic
reporting of operational loss data.
A Group-wide risk management system is used to record the
results of the operational risk management process. Operational
risk and control self-assessments, long with issue and action
plans, are entered and maintained by business units. Business and
functional management monitor the progress of documented action
plans to address shortcomings. To help ensure that operational risk
losses are consistently reported and monitored at group level, all
group companies are required to report individual losses when the
net loss is expected to exceed US$10,000, and to aggregate all
other operational risk losses under US$10,000. Losses are entered
into the Group-wide risk management system and reported to the
group's Risk Management Meeting on a monthly basis.
Activities to strengthen our risk culture and better embed the
approach, particularly the three lines of defence model, continued
to be a key focus in 2018. The ORMF sets our roles and
responsibilities for managing operational risk on a daily
basis.
Operational risk exposures in 2018
(Unaudited)
In 2018, we continued our ongoing work to strengthen those
controls that manage our most material risks. Among other measures,
we:
-- further enhanced our controls to help ensure that we know our
customers, ask the right questions, monitor transactions and
escalate concerns to detect, prevent and deter financial crime
risk;
-- implemented a number of initiatives to raise our standards in
relation to the conduct of our business;
-- increased monitoring and enhanced detective controls to
manage those fraud risks which arise from new technologies and new
ways of banking;
-- strengthened internal security controls to prevent cyber-attacks;
-- improved controls and security to protect customers when using digital channels;
-- enhanced our third-party risk management capability to help
enable the consistent risk assessment of any third-party service;
and
-- enhanced controls associated with IT privileged access.
Regulatory Compliance Risk
(Unaudited)
Overview
The Regulatory Compliance ('RC') function provides independent,
objective oversight and challenge and promotes a
compliance-oriented culture, supporting the business in delivering
fair outcomes for customers, maintaining the integrity of financial
markets and achieving HSBC's strategic objectives.
Key risk management processes
We regularly review our policies and procedures. Global policies
and procedures require the prompt identification and escalation of
any actual or potential regulatory breach to RC. Reportable events
are escalated to the RMM and the Risk Committee, as
appropriate.
Conduct of business
In 2018, we continued to take steps to raise our standards
relating to conduct, which included:
-- delivering further global mandatory conduct training to all employees in 2018;
-- incorporating the assessment of expected values and
behaviours as key determinants in recruitment, performance
appraisal and remuneration processes;
-- improving our group-wide market surveillance capability;
-- introducing policies and procedures to strengthen support for
potentially vulnerable customers;
-- enhancing the quality and depth of conduct management
information and how it is used across the group;
-- implementing an assessment process to check the effectiveness
of our conduct initiatives across the group; and
-- assessing conduct standards and practices within our key
third-party suppliers and distributors.
Financial Crime Risk
(Unaudited)
Overview
HSBC continued to embed a sustainable financial crime risk
management capability across the Group. We are making good progress
with enhancing our financial crime control framework with the
three-year programme that began in 2017 to further strengthen the
management of anti-bribery and corruption risk. We continue to take
further steps to refine and strengthen our defences against
financial crime by applying advanced analytics and artificial
intelligence.
Key Developments in 2018
During 2018, we continued to increase its efforts to assist with
keeping financial crime out of the financial system. We integrated
into our day-to-day operations the majority of the financial crime
risk core capabilities delivered through the Global Standards
programme, which we set up in 2013 to enhance our risk management
policies, processes and systems. The programme infrastructure is
expected to close in 2019.
We began several initiatives to define the next phase of
financial crime risk management. We invested in the use of
artificial intelligence and advanced analytics techniques to
achieve an intelligence-led financial crime risk management
framework for the future.
Working in partnership is vital to managing financial crime
risk. HSBC is a strong proponent of public-private partnerships and
information-sharing initiatives. During 2018, Financial Crime Risk
created new alliances in Hong Kong and Singapore and continued to
develop existing partnerships which includes Australia in order to
bring further benefit to the group by enhancing the understanding
of financial crime risks.
Key risk management processes
We continued to deliver against our anti-bribery and corruption
transformation programme to further enhance the policies and
controls around identifying and managing the risks of bribery and
corruption across our business. We also introduced a transformation
programme to strengthen the anti-fraud capabilities of the group
and have deployed anti-tax evasion controls. We continue to
strengthen our governance and policy frameworks and improve our
management information on standardised financial crime controls. We
are investing in the next generation of capabilities to fight
financial crime by applying advanced analytics and artificial
intelligence. Our commitment to enhance our risk assessment
capabilities remains, aiming to deliver more proactive risk
management and improve the customer experience.
Skilled Person / Independent Consultant
Following expiration in December 2017 of the AML Deferred
Prosecution Agreement entered into with the US Department of
Justice ('DoJ'), the then Monitor has continued to work under the
Direction issued by the UK Financial Conduct Authority ('FCA') in
2012 in his capacity as a Skilled Person under section 166 of the
Financial Services and Markets Act. He has also continued to work
in his capacity as an Independent Consultant under the 2012 Cease
and Desist Order issued by the US Federal Reserve Board ('FRB').
The Skilled Person and the Independent Consultant will continue
working for a period of time at the FCA's and FRB's discretion.
The Skilled Person has assessed HSBC's progress towards being
able to effectively manage its financial risk on a business as
usual basis. The Skilled Person has issued five country reports and
two quarterly reports in 2018. The Skilled Person has noted that
HSBC continues to make material progress towards its financial
crime risk target end state in terms of key systems, processes and
people. Nonetheless, the Skilled Person has identified some areas
that require further work before HSBC reaches a business as usual
state. The Skilled Person has not highlighted potential instances
of financial crime.
The Independent Consultant completed his fifth annual
assessment. The Independent Consultant concluded that HSBC
continues to make significant strides toward establishing an
effective sanctions compliance programme, commending HSBC on a
largely successful affiliates remediation exercise. He has,
however, determined that that certain areas within HSBC's sanctions
compliance programme require further work and, as such, HSBC's
sanctions programme does not yet operate in a business-as-usual
state. The Independent Consultant has commenced his sixth annual
assessment which is due to conclude in March 2019.
Reputational Risk
(Unaudited)
Overview
Reputational risk is the risk of failing to meet stakeholder
expectations as a result of any event, behaviour, action or
inaction, either by HSBC, our employees or those with whom we are
associated. Stakeholders' expectations change constantly, and so
reputational risk is dynamic and varies between geographical
regions, groups and individuals. We have an unwavering commitment
to operating at the high standards we set for ourselves in every
jurisdiction. Any material lapse in standards of integrity,
compliance, customer service or operating efficiency may represent
a potential reputational risk.
Key developments in 2018
In the second half of 2018, as part of a revised enterprise risk
management framework, it was agreed that reputational risk would be
classified as a 'transverse' risk, which spans both financial and
non-financial risk categories. It was also agreed that the overall
risk stewardship for reputational risk would be transferred to a
single risk steward, the Group Chief Risk Officer. As a result, the
reputational risk policy will be revised and updated in 2019. The
governance structure, however, remains unchanged.
Governance and structure
The development of policies and an effective control environment
for the identification, assessment, management and mitigation of
reputational risk, are considered by the Group Reputational Risk
Committee which is chaired by the Group Chief Risk Officer. It 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, global businesses and global functions. The
committee is responsible for keeping the RMM apprised of areas and
activities presenting significant reputational risk and, where
appropriate, for making recommendations to the RMM to mitigate such
risk.
Key risk management processes
Our Reputational Risk and Client Selection team oversees the
identification, management and control of significant reputational
risks across the group. It is responsible for monitoring policies
for the group's reputational risk management, implementing
strategies to protect against reputational risk, and advising the
global businesses and global functions to help them identify,
assess and mitigate such risks, where possible. Each global
business has an established reputational risk management governance
process. The global functions manage and escalate reputational
risks within established operational risk frameworks.
Our policies set out our risk appetite and operational
procedures for all areas of reputational risk, including financial
crime prevention, regulatory compliance, conduct-related concerns,
environmental impacts, human rights matters and employee
relations.
Risks of insurance manufacturing operations
(Audited)
The majority of the risk in our insurance business derives from
manufacturing activities and can be categorised as financial risk
and insurance risk. Financial risks include market risk, credit
risk and liquidity risk. Insurance risk is the risk, other than
financial risk, of loss transferred from the holder of the
insurance contract to the issuer (HSBC).
HSBC's bancassurance model
We operate an integrated bancassurance model which provides
insurance products principally for customers with whom we have a
banking relationship. The insurance contracts we sell relate to the
underlying needs of our banking customers, which we can identify
from our point-of-sale contacts and customer knowledge. The
majority of sales are of savings and investment products.
By focusing largely on personal and small and medium-sized
enterprise businesses, we are able to optimise volumes and
diversify individual insurance risks.
We choose to manufacture these insurance products in HSBC
subsidiaries based on an assessment of operational scale and risk
appetite. Manufacturing insurance allows us to retain the risks and
rewards associated with writing insurance contracts by keeping part
of the underwriting profit and investment income within the group.
It also reduces distribution costs for our products by using our
established branch network, and enables us to control the quality
of the sale process and the products themselves to ensure our
customers receive products which address their specific needs at
the best value. We have life insurance manufacturing operations in
six locations: mainland China, Hong Kong, India, Macau, Malaysia
and Singapore.
Where we do not have the risk appetite or operational scale to
be an effective insurance manufacturer, we engage with a handful of
leading external insurance companies in order to provide insurance
products to our customers through our banking network and direct
channels. These arrangements are generally structured with our
exclusive strategic partners and earn the group a combination of
commissions, fees and a share of profits. We distribute insurance
products in all of our geographical regions. Insurance products are
sold through all global businesses, but predominantly by RBWM and
CMB through our branches and direct channels.
Risk management of insurance manufacturing operations
Governance
Insurance risks are managed to a defined risk appetite, which is
aligned to the Group's risk appetite and risk management framework,
including the Group's 'Three lines of defence' model. The group's
Insurance Risk Management Meeting oversees the control framework
globally and is accountable to the RBWM Risk Management Meeting on
risk matters relating to insurance business.
The monitoring of the risks within the insurance operations is
carried out by the Insurance Risk teams. Specific risk functions,
including wholesale credit & market risk, operational risk,
information security risk and financial crime compliance, support
insurance risk teams in their respective areas of expertise.
Measurement
The risk profile of our insurance manufacturing businesses is
measured using an economic capital approach. Assets and liabilities
are measured on a market value basis and a capital requirement is
defined to ensure that there is a less than one-in-200 chance of
insolvency over a one-year time horizon, given the risks that the
businesses are exposed to. The methodology for the economic capital
calculation is largely aligned to the pan-European Solvency II
insurance capital regulation. The economic capital coverage ratio
(economic net asset value divided by the economic capital
requirement) is a key risk appetite measure.
The business has a current appetite to remain above 140% with a
tolerance of 110%. In addition to economic capital, the regulatory
solvency ratio is also a metric used to manage risk appetite on an
entity basis.
The tables below show the composition of assets and liabilities
by contract type. 92% (2017: 91%) of both assets and liabilities
are derived from Hong Kong.
Balance sheet of insurance manufacturing subsidiaries by type of contract
Shareholders'
assets
Non-linked Unit-linked and liabilities Total
HK$m HK$m HK$m HK$m
At 31 Dec 2018
Financial assets: 447,459 41,325 34,503 523,287
- financial assets designated and otherwise
mandatorily measured at fair value 82,266 40,106 1,206 123,578
- derivatives 912 - 1 913
- financial investments measured at amortised
cost 347,894 547 32,023 380,464
- financial investments measured at fair
value through other comprehensive income 3,444 - - 3,444
- other financial assets 12,943 672 1,273 14,888
--------------------------------------------------- ---------- ----------- ---------------- -------
Reinsurance assets 19,045 39 - 19,084
PVIF - - 48,522 48,522
Other assets and investment properties 14,879 - 3,230 18,109
---------- ----------- ---------------- -------
Total assets 481,383 41,364 86,255 609,002
--------------------------------------------------- ---------- ----------- ---------------- -------
Liabilities under investment contracts designated
at fair value 30,420 6,218 - 36,638
---------- ----------- ---------------- -------
Liabilities under insurance contracts 433,668 34,921 - 468,589
---------- ----------- ---------------- -------
Deferred tax 224 109 7,890 8,223
---------- ----------- ---------------- -------
Other liabilities - - 15,109 15,109
---------- ----------- ---------------- -------
Total liabilities 464,312 41,248 22,999 528,559
--------------------------------------------------- ---------- ----------- ---------------- -------
Total equity - - 80,443 80,443
--------------------------------------------------- ---------- ----------- ---------------- -------
Total equity and liabilities 464,312 41,248 103,442 609,002
--------------------------------------------------- ---------- ----------- ---------------- -------
At 31 Dec 2017
Financial assets: 415,609 54,807 32,680 503,096
--------------------------------------------------- ---------- ----------- ---------------- -------
- financial assets designated at fair value 66,497 53,408 2,278 122,183
- derivatives 1,336 1 2 1,339
- financial investments - held-to-maturity 274,909 - 26,034 300,943
- financial investments - available-for-sale 49,268 - 695 49,963
- other financial assets 23,599 1,398 3,671 28,668
--------------------------------------------------- ---------- ----------- ---------------- -------
Reinsurance assets 15,974 155 - 16,129
PVIF - - 44,621 44,621
Other assets and investment properties 8,279 4 4,026 12,309
Total assets 439,862 54,966 81,327 576,155
--------------------------------------------------- ---------- ----------- ---------------- -------
Liabilities under investment contracts designated
at fair value 30,364 7,905 - 38,269
Liabilities under insurance contracts 391,348 46,669 - 438,017
Deferred tax 409 - 7,668 8,077
Other liabilities - - 12,330 12,330
Total liabilities 422,121 54,574 19,998 496,693
Total equity - - 79,462 79,462
Total equity and liabilities 422,121 54,574 99,460 576,155
--------------------------------------------------- ---------- ----------- ---------------- -------
Stress and scenario testing
Stress testing forms a key part of the risk management framework
for the insurance business. We participate in local and Group-wide
regulatory stress tests, including the Bank of England stress test
of the banking system, the Hong Kong Monetary Authority stress
test, and individual country insurance regulatory stress tests.
These have highlighted that a key risk scenario for the insurance
business is a prolonged low interest rate environment. In order to
mitigate the impact of this scenario, the insurance operations have
a range of strategies that could be employed including the hedging
of investment risk, repricing current products to reflect lower
interest rates, improving risk diversification, moving towards less
capital intensive products, and developing investment strategies to
optimise the expected returns against the cost of economic
capital.
Key Risk Types
The key risks for our insurance operations are market risks (in
particular interest rate and equity) and credit risks, followed by
insurance underwriting risks and operational risks. Liquidity risk,
while significant for the bank, is minor for our insurance
operations.
Market risk (insurance)
Market risk is the risk of changes in market factors
affecting
capital or profit. Market factors include interest rates, equity
and growth assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued.
Our most significant life insurance products are contracts with
discretionary participating features ('DPF') issued in Hong Kong.
These products typically include some form of capital guarantee or
guaranteed return, on the sums invested by the policyholders, to
which discretionary bonuses are added if allowed by the overall
performance of the funds. These funds are primarily invested in
bonds with a proportion allocated to other asset classes, to
provide customers with the potential for enhanced returns.
DPF products expose HSBC to the risk of variation in asset
returns, which will impact our participation in the investment
performance. In addition, in some scenarios the asset returns can
become insufficient to cover the policyholders' financial
guarantees, in which case the shortfall has to be met by HSBC.
Reserves are held against the cost of such guarantees, calculated
by stochastic modelling.
For unit-linked contracts, market risk is substantially borne by
the policyholders, but some market risk exposure typically remains
as fees earned are related to the market value of the linked
assets.
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, among others,
some or all of the techniques listed below, depending on the nature
of the contracts written:
-- 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 policyholders.
-- Asset and liability matching where asset portfolios are
structured to support projected liability cash flows. The group
manages its assets using an approach that considers asset quality,
diversification, cash flow matching, liquidity, volatility and
target investment return. It is not always possible to match asset
and liability durations due to uncertainty over the receipt of all
future premiums and the timing of claims; and because the forecast
payment dates of liabilities may exceed the duration of the longest
dated investments available. We use models to assess the effect of
a range of future scenarios on the values of financial assets and
associated liabilities, and ALCOs employ the outcomes in
determining how best to structure asset holdings to support
liabilities.
-- 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 for active
management.
-- 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.
-- Repricing premiums charged to policyholders.
The following table illustrates the effects of selected interest
rate, equity price and foreign exchange rate scenarios on our
profit for the year and the total equity of our insurance
manufacturing subsidiaries.
31 Dec 2018 31 Dec 2017
Impact on Impact on
profit after profit after
tax for the Impact on tax for the Impact on
year total equity year total equity
HK$m HK$m HK$m HK$m
+100 basis points parallel shift
in yield curves (229) (547) 97 (4,525)
-100 basis points parallel shift
in yield curves 81 399 (651) 4,976
10% increase in equity prices 1,433 1,433 1,534 1,643
10% decrease in equity prices (1,366) (1,366) (1,560) (1,669)
10% increase in USD exchange
rate compared to all currencies 267 267 177 177
10% decrease in USD exchange
rate compared to all currencies (267) (267) (177) (177)
---------------------------------- ------------ ------------ ------------ ------------
Where appropriate, the effects of the sensitivity tests on
profit after tax and total equity incorporate the impact of the
stress on the PVIF. The relationship between the profit and total
equity and the risk factors is non-linear; therefore the results
disclosed should not be extrapolated to measure sensitivities to
different levels of stress. For the same reason, the impact of the
stress is not symmetrical on the upside and downside. The
sensitivities reflect the established risk sharing mechanism with
policyholders for participating products, and are stated before
allowance for management actions which may mitigate the effect of
changes in the market environment. The sensitivities presented
allow for adverse changes in policyholders' behaviour that may
arise in response to changes in market rates.
Interest rate movements have a greater impact on total equity as
changes in market value of FVOCI and available-for-sale bonds are
not recognised in profit after tax.
Credit risk (insurance)
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet their obligation under a contract. It
arises in two main areas for our insurance manufacturers:
-- risk associated with credit spread volatility and default by
debt security counterparties after investing premiums to generate a
return for policyholders and shareholders; and
-- risk of default by reinsurance counterparties and
non-reimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect of
these items are shown in the table on page 39.
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 functions. Stress testing is performed by Group
Insurance
on investment credit exposures using credit spread sensitivities
and default probabilities.
We use tools to manage and monitor credit risk. These include a
credit report containing a watch-list of investments with current
credit concerns, primarily investments that may be at risk of
future impairment or where high concentrations to counterparties
are present in the investment portfolio. The report is circulated
monthly to senior management in Group Insurance and the individual
country Chief Risk Officers to identify investments which may be at
risk of future impairment.
Credit risk on assets supporting unit-linked liabilities is
predominantly borne by the policyholders; therefore our exposure is
primarily related to liabilities under non-linked insurance and
investment contracts and shareholders' funds. The credit quality of
insurance financial assets is included in the table on page 25.
The credit quality of the reinsurers' share of liabilities under
insurance contracts is assessed as 'strong' or 'good' (as defined
on page 25), with 100% of the exposure being neither past due nor
impaired (2017: 100%).
Liquidity risk (insurance)
Liquidity risk is the risk that an insurance operation, though
solvent, either does not have sufficient financial resources
available to meet its obligations when they fall due, or can secure
them only at excessive cost.
Risk is managed by cashflow matching and maintaining sufficient
cash resources; investing in high-credit-quality investments with
deep and liquid markets, monitoring investment concentrations and
restricting them where appropriate, and establishing committed
contingency borrowing facilities. Insurance manufacturing
subsidiaries are required to complete quarterly liquidity risk
reports for Group Insurance Risk function and an annual review of
the liquidity risks to which they are exposed.
The following table shows the expected undiscounted cash flows
for insurance contract liabilities at 31 December 2018. The
liquidity risk exposure is wholly borne by the policyholders in the
case of unit-linked business and is shared with the policyholders
for
non-linked insurance. The remaining contractual maturity of
investment contract liabilities is included in the table on page
95.
Expected maturity of insurance contract liabilities
Expected cash flows (undiscounted)
Within Over 15
1 year 1-5 years 5-15 years years Total
HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2018
Non-linked insurance contracts 42,868 144,817 291,726 383,026 862,437
------- --------- ---------- ------- -------
Unit-linked 6,999 19,350 16,285 11,040 53,674
------- --------- ---------- ------- -------
49,867 164,167 308,011 394,066 916,111
-------------------------------- ------- --------- ---------- ------- -------
At 31 Dec 2017
Non-linked insurance contracts 37,445 133,236 268,173 291,343 730,197
Unit-linked 4,523 20,357 32,084 48,606 105,570
41,968 153,593 300,257 339,949 835,767
-------------------------------- ------- --------- ---------- ------- -------
Insurance risk
Insurance risk is the risk of loss through adverse experience,
in either timing or amount, of insurance underwriting parameters
(non-economic assumptions). These parameters include mortality,
morbidity, longevity, lapses and unit costs.
The principal risk we face is that, over time, the cost of the
contract, including claims and benefits may exceed the total amount
of premiums and investment income received. The table on page 40
analyses our life insurance risk exposures by type of contract.
HSBC Insurance primarily manages and mitigates its insurance
risk through asset and liability management, product design,
pricing and overall proposition management (e.g. management of
lapses by introducing surrender charges), underwriting policy,
claims management process and reinsurance which cedes risks above
our acceptable thresholds to an external reinsurer thereby limiting
our exposure.
Present value of in-force long-term insurance business
In calculating PVIF, 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.
Actuarial Control Committees for each key insurance entity meet
on a quarterly basis to review and approve assumptions proposed for
use in the determination of the PVIF. All changes to non-economic
assumptions, economic assumptions that are not observable and model
methodology must be approved by the Actuarial Control
Committee.
Economic assumptions are either set in a way that is consistent
with observable market values or, in certain markets, long-term
economic assumptions are used. Setting such assumptions involves
the projection of long-term interest rates and the time horizon
over which observable market rates trend 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.
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 cash flow
modelling. Where shareholders provide options and guarantees to
policyholders, the cost of these options and guarantees is an
explicit reduction to PVIF.
The following table shows the impact on the PVIF from changes in
the risk-free rate at 31 December, across all insurance
manufacturing subsidiaries.
Impact on PVIF
2018 2017
HK$m HK$m
+100 basis points
shift in risk-free
rate 228 166
---------------------
-100 basis points
shift in risk-free
rate 3,136 1,513
--------------------- -------- -------
The impact on PVIF shown above, as well as the impact on profit
after tax and net assets shown below, are illustrative only and
employ simplified scenarios. It should be noted that the effects
may not be linear and, therefore, the results cannot be
extrapolated. The sensitivities reflect the established risk
sharing mechanism with policyholders for participating products,
but do not incorporate other actions that could be taken by
management to mitigate effects, nor do they take account of
consequential changes in policyholders' behaviour.
Non-economic assumptions
The table below shows the sensitivity of profit and total equity
to reasonably possible changes in non-economic assumptions across
all our insurance manufacturing subsidiaries.
2018 2017
HK$m HK$m
Effect on profit after tax and total equity at 31 Dec
10% increase in mortality and/or morbidity rates (448) (454)
10% decrease in mortality and/or morbidity rates 454 459
10% increase in lapse rates (408) (434)
10% decrease in lapse rates 468 495
10% increase in expense rates (304) (328)
10% decrease in expense rates 297 315
------------------------------------------------------- ---- ----
Mortality and morbidity risk is typically associated with life
insurance contracts. The effect on profit of an increase in
mortality or morbidity depends on the type of business being
written.
Sensitivity to lapse rates depends on the type of contracts
being written. In general, for life insurance contracts a policy
lapse has two offsetting effects on profits, which are the loss of
future income on the lapsed policy and the existence of surrender
charge
recouped at policy lapse. The net impact depends on the relative
size of these two effects which varies with the type of
contracts.
Expense rates risk is the exposure to a change in the cost of
administering insurance contracts. To the extent that increased
expenses cannot be passed on to policyholders, an increase in
expense rates will have a negative effect on our profits.
Capital
Capital Management
(Audited)
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.
It is our objective to maintain a strong capital base to support
the development of our business and to meet regulatory capital
requirements at all times. To achieve this, our policy is to hold
capital in a range of different forms and all capital raising is
agreed with major subsidiaries as part of their individual and the
group's capital management processes.
The policy on capital management is underpinned by a capital
management framework, which enables us to manage our capital in a
consistent manner. The framework defines regulatory capital and
economic capital as the two primary measures for the management and
control of capital.
Capital measures:
-- economic capital is the internally calculated capital
requirement to support risks to which we are exposed and forms a
core part of the internal capital adequacy assessment process;
and
-- regulatory capital is the capital which we are required to
hold in accordance with the rules established by regulators.
Our capital management process is articulated in our annual
capital plan which is approved by the Board. The plan is drawn up
with the objective of maintaining both an appropriate amount of
capital and an optimal mix between the different components of
capital. Each subsidiary manages its own capital to support its
planned business growth and meet its local regulatory requirements
within the context of the approved annual group capital plan. In
accordance with the Capital Management Framework, capital generated
by subsidiaries in excess of planned requirements is returned to
the Bank, normally by way of dividends.
The bank is the primary provider of capital to its subsidiaries
and these investments are substantially funded by the Bank's own
capital issuance and profit retention. As part of its capital
management process, the Bank seeks to maintain a prudent balance
between the composition of its capital and that of its investment
in subsidiaries.
The principal forms of capital are included in the following
balances on the consolidated balance sheet: share capital, other
equity instruments, retained earnings, other reserves and
subordinated liabilities.
Externally imposed capital requirements
(Unaudited)
The Hong Kong Monetary Authority ('HKMA') supervises the group
on both a consolidated and solo-consolidated basis and therefore
receives information on the capital adequacy of, and sets capital
requirements for, the group as a whole and on a solo-consolidated
basis. Individual banking subsidiaries and branches are directly
regulated by their local banking supervisors, who set and monitor
their capital adequacy requirements. In most jurisdictions,
non-banking financial subsidiaries are also subject to the
supervision and capital requirements of local regulatory
authorities.
The group uses the advanced internal ratings-based approach to
calculate its credit risk for the majority of its
non-securitisation exposures. For securitisation exposures, the
group uses the securitisation internal ratings-based approach,
securitisation external ratings-based approach, securitisation
standardised approach or securitisation fall-back approach to
determine credit risk for its banking book securitisation
exposures. For counterparty credit risk, the group uses both the
current exposure method and an internal models approach to
calculate its default risk exposures. For market risk, the group
uses an internal models approach to calculate its general market
risk for the risk categories of interest rate and foreign exchange
(including gold) exposures, and equity exposures. The group also
uses an internal models approach to calculate its market risk in
respect of specific risk for interest rate exposures and equity
exposures. The group uses the standardised (market risk) approach
for calculating other market risk positions, as well as trading
book securitisation exposures, and the standardised (operational
risk) approach to calculate its operational risk.
During the year, the individual entities within the group and
the group itself complied with all of the externally imposed
capital requirements of the HKMA.
Basel III
(Unaudited)
The Banking (Capital) (Amendment) Rules 2014 came into effect on
1 January 2015 to implement the Basel III capital buffer
requirements in Hong Kong. The changes include the phase-in from
2016 to 2019 of the Capital Conservation Buffer ('CCB') which is
designed to ensure banks build up capital outside periods of stress
of 2.5% of RWAs, the Countercyclical Capital Buffer ('CCyB') which
is set on an individual country basis and is built up during
periods of excess credit growth to protect against future losses,
and the Higher Loss Absorbency ('HLA') requirement for Domestic
Systemically Important Banks ('D-SIB') of up to 3.5% of RWAs. The
CCyB for Hong Kong was 1.875% from 1 January 2018, and increased to
2.5% from 1 January 2019. This increase is consistent with the
Basel III phase-in arrangements for the CCyB. On 16 March 2015, the
HKMA announced the designation of the group as a D-SIB and the HLA
requirement to be 2.5% of RWAs which started to phase-in from
0.625% in 2016 and will reach full implementation in 2019. On 21
December 2018, the HKMA maintained the D-SIB designation as well as
the HLA requirements for the group.
Leverage Ratio
(Unaudited)
Basel III introduces a simple non risk-based leverage ratio as a
complementary measure to the risk-based capital requirements. It
aims to constrain the build-up of excess leverage in the banking
sector, introducing additional safeguards against model risk and
measurement errors. The ratio is a volume-based measure calculated
as Basel III tier 1 capital divided by total on- and off-balance
sheet exposures.
At
31 Dec 31 Dec
2018 2017
% %
Leverage ratio 6.5 6.3
---------
Capital and leverage
ratio exposure measure HK$m HK$m
-------------------------
Tier 1 capital 501,503 468,021
Total exposure measure 7,741,301 7,477,306
------------------------- --------- ---------
The increase in the leverage ratio from 31 December 2017 to
31 December 2018 was mainly due to an increase in Tier 1
capital, partly offset by a rise in the exposure measure.
Further details regarding the group's leverage position can be
viewed in the Banking Disclosure Statement 2018, which will be
available in the Regulatory Disclosures section of our website:
www.hsbc.com.hk.
Capital adequacy at 31 December 2018
(Unaudited)
The following tables show the capital ratios, RWAs and capital
base as contained in the 'Capital Adequacy Ratio' return submitted
to the HKMA on a consolidated basis under the requirements of
section 3C(1) of the Banking (Capital) Rules.
The basis of consolidation for financial accounting purposes is
described in note 1 on the Financial Statements and differs from
that used for regulatory purposes. Further information on the
regulatory consolidation basis and a full reconciliation between
the group's accounting and regulatory balance sheets can be viewed
in the Banking Disclosure Statement 2018, which will be available
in the Regulatory Disclosures section of our website
www.hsbc.com.hk. Subsidiaries not included in the group's
consolidation for regulatory purposes are securities and insurance
companies and the capital invested by the group in these
subsidiaries is deducted from regulatory capital, subject to
certain thresholds.
The Bank and its banking subsidiaries maintain regulatory
reserves to satisfy the provisions of the Banking Ordinance and
local regulatory requirements for prudential supervision purposes.
At
31 December 2018, the effect of this requirement is to reduce
the amount of reserves which can be distributed to shareholders by
HK$26,883m (31 December 2017: HK$27,703m).
Capital ratios
(Unaudited)
At
31 Dec 31 Dec
2018 2017
% %
Common equity tier
1 ('CET1') capital
ratio 16.5 15.9
Tier 1 capital ratio 17.8 17.0
Total capital ratio 19.8 18.9
---------------------- ------ ------
Risk-weighted assets by risk type
(Unaudited)
At
31 Dec 31 Dec
2018 2017
HK$m HK$m
Credit risk 2,290,786 2,205,845
Counterparty credit
risk 79,956 134,793
Market risk 117,826 115,081
Operational risk 325,344 302,890
Total 2,813,912 2,758,609
--------------------- --------- ---------
Risk-weighted assets by global business
(Unaudited)
At
31 Dec 31 Dec
2018 2017
HK$m HK$m
Retail Banking and
Wealth Management 481,268 404,771
Commercial Banking 988,602 927,472
Global Banking and
Markets 896,143 951,294
Global Private Banking 37,022 29,983
Corporate Centre 410,877 445,089
Total 2,813,912 2,758,609
------------------------ --------- ---------
Capital base
(Unaudited)
The following table sets out the composition of the group's
capital base under Basel III at 31 December 2018. The position at
31 December 2018 benefits from transitional arrangements which will
be phased out.
Capital base
(Unaudited)
At
31 Dec 31 Dec
2018 2017
HK$m HK$m
------------------------------------------------------------ --------- -----------
Common equity tier 1 ('CET1') capital
Shareholders' equity 645,810 610,307
-------- --------
- shareholders' equity per balance sheet 752,758 696,480
- revaluation reserve capitalisation issue (1,454) (1,454)
- other equity instruments (35,879) (14,737)
- unconsolidated subsidiaries (69,615) (69,982)
Non-controlling interests 26,034 24,416
- non-controlling interests per balance sheet 60,162 56,506
- non-controlling interests in unconsolidated subsidiaries (9,316) (8,590)
- surplus non-controlling interests disallowed in CET1 (24,812) (23,500)
Regulatory deductions to CET1 capital (208,070) (196,030)
- valuation adjustments (1,599) (1,485)
- goodwill and intangible assets (17,215) (15,347)
- deferred tax assets net of deferred tax liabilities (2,378) (2,237)
- cash flow hedging reserve 63 135
- changes in own credit risk on fair valued liabilities (198) (183)
- defined benefit pension fund assets (24) (79)
- significant capital investments in unconsolidated
financial sector entities (99,407) (86,046)
- property revaluation reserves(1) (60,429) (63,085)
- regulatory reserve (26,883) (27,703)
Total CET1 capital 463,774 438,693
------------------------------------------------------------ -------- --------
Additional tier 1 ('AT1') capital
Total AT1 capital before regulatory deductions 37,729 39,203
- perpetual subordinated loans 35,879 14,737
- perpetual non-cumulative preference shares - 19,367
- allowable non-controlling interests in AT1 capital 1,850 5,099
Regulatory deductions to AT1 capital - (9,875)
- significant capital investments in unconsolidated
financial sector entities - (9,875)
Total AT1 capital 37,729 29,328
Total tier 1 capital 501,503 468,021
Tier 2 capital
------------------------------------------------------------ --------- -----------
Total tier 2 capital before regulatory deductions 61,178 67,874
- perpetual cumulative preference shares - 1,563
- perpetual subordinated debt 3,133 3,126
- term subordinated debt 13,944 18,418
- property revaluation reserves(1) 27,847 29,043
- impairment allowances and regulatory reserve eligible
for inclusion in tier 2 capital 16,254 15,724
Regulatory deductions to tier 2 capital (5,501) (13,651)
- significant capital investments in unconsolidated
financial sector entities (5,501) (13,651)
Total tier 2 capital 55,677 54,223
------------------------------------------------------------ -------- --------
Total capital 557,180 522,244
------------------------------------------------------------ -------- --------
1 Includes the revaluation surplus on investment properties
which is reported as part of retained earnings and adjustments made
in accordance with the Banking (Capital) Rules issued by the
HKMA.
A detailed breakdown of the group's CET1 capital, AT1 capital,
Tier 2 capital and regulatory deductions can be viewed in the
Banking Disclosure Statement 2018, which will be available in the
Regulatory Disclosures section of our website www.hsbc.com.hk.
The following table shows the pro-forma Basel III end point
basis position once all transitional arrangements have been phased
out. It should be noted that the pro-forma Basel III end point
basis position takes no account of, for example, any future profits
or management actions. In addition, the current regulations or
their application may change before full implementation. Given
this, the final impact on the group's capital ratios may differ
from the pro-forma position, which is a mechanical application of
the current rules to the balance sheet at 31 December 2018; it is
not a projection. On this pro-forma basis, the group's CET1 ratio
is 16.5% (2017: 15.2%), which is above the Basel III minimum
requirement, plus expected regulatory capital buffer
requirements.
Reconciliation of capital from transitional basis to a pro-forma Basel
III end point basis
(Unaudited)
At
31 Dec 31 Dec
2018 2017
HK$m HK$m
CET1 capital on a transitional basis 463,774 438,693
Transitional provisions: Significant capital investments
in unconsolidated financial sector entities - (19,750)
------------------------------------------------------------- ------- -------
CET1 capital end point basis 463,774 418,943
------------------------------------------------------------- ------- -------
AT1 capital on a transitional basis 37,729 29,328
Grandfathered instruments: Perpetual non-cumulative
preference shares - (19,367)
Transitional provisions: - 6,406
Allowable non-controlling interests in AT1 capital - (3,469)
Significant capital investments in unconsolidated financial
sector entities - 9,875
------- -------
AT1 capital end point basis 37,729 16,367
------------------------------------------------------------- ------- -------
Tier 2 capital on a transitional basis 55,677 54,223
Grandfathered instruments: (3,133) (5,287)
Perpetual cumulative preference shares - (1,563)
Perpetual subordinated debt (3,133) (3,126)
Term subordinated debt - (598)
------- -------
Transitional provisions: Significant capital investments
in unconsolidated financial sector entities - 9,875
Tier 2 capital end point basis 52,544 58,811
------------------------------------------------------------- ------- -------
Statement of Directors' Responsibilities
The following statement, which should be read in conjunction
with the Auditor's statement of their responsibilities set out in
their report on pages 47-51, is made with a view to distinguishing
for shareholders the respective responsibilities of the Directors
and of the Auditor in relation to the Financial Statements.
The Directors of The Hongkong and Shanghai Banking Corporation
Limited ('the Bank') are responsible for the preparation of the
Bank's Annual Report and Accounts, which contains the consolidated
financial statements of the Bank and its subsidiaries (together
'the group'), in accordance with applicable law and
regulations.
The Hong Kong Companies Ordinance requires the Directors to
prepare for each financial year the consolidated financial
statements for the group and the balance sheet for the Bank.
The Directors are responsible for ensuring adequate accounting
records are kept that are sufficient to show and explain the
group's transactions, such that the group's financial statements
give a true and fair view.
The Directors are responsible for preparing the consolidated
financial statements that give a true and fair view and are in
accordance with Hong Kong Financial Reporting Standards ('HKFRSs')
issued by the Hong Kong Institute of Certified Public Accountants.
The Directors have elected to prepare the Bank's balance sheet on
the same basis.
The Directors, whose names and functions are set out in the
'Report of the Directors' on pages 3-7 of this Annual Report and
Accounts, confirm to the best of their knowledge that:
-- the consolidated financial statements, which have been
prepared in accordance with HKFRSs and in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the group and the undertakings included in the consolidation
taken as a whole; and
-- the management report represented by the Financial Review,
the Risk and Capital Reports includes a fair review of the
development and performance of the business and the position of the
group and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that the group faces.
On behalf of the Board
John Flint
Chairman
19 February 2019
Independent Auditor's Report
To the shareholder of The Hongkong and Shanghai Banking Corporation
Limited (incorporated in
Hong Kong with limited liability)
--------------------------------------------------------------------
Opinion
What we have audited
The consolidated financial statements of The Hongkong and
Shanghai Banking Corporation Limited ('the Bank') and its
subsidiaries (together, 'the group') set out on pages 52 to 113,
which comprise:
-- the consolidated balance sheet as at 31 December 2018;
-- the consolidated income statement for the year then ended;
-- the consolidated statement of comprehensive income for the year then ended;
-- the consolidated statement of changes in equity for the year then ended;
-- the consolidated statement of cash flows for the year then ended; and
-- the notes(1) on the consolidated financial statements, which
include a summary of significant accounting policies.
1 Certain required disclosures as described in Note 1.1 (d) have
been presented elsewhere in the Annual Report and Accounts 2018,
rather than in the notes to the financial statements. These are
cross-referenced from the financial statements and are identified
as audited.
Our opinion
In our opinion, the consolidated financial statements give a
true and fair view of the consolidated financial position of the
group as at 31 December 2018, and of its consolidated financial
performance and its consolidated cash flows for the year then ended
in accordance with Hong Kong Financial Reporting Standards
('HKFRSs') issued by the Hong Kong Institute of Certified Public
Accountants ('HKICPA') and have been properly prepared in
compliance with the Hong Kong Companies Ordinance.
Basis for Opinion
We conducted our audit in accordance with Hong Kong Standards on
Auditing ('HKSAs') issued by the HKICPA. Our responsibilities under
those standards are further described in the Auditor's
Responsibilities for the Audit of the Consolidated Financial
Statements section of our report.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the group in accordance with the HKICPA's
Code of Ethics for Professional Accountants ('the Code'), and we
have fulfilled our other ethical responsibilities in accordance
with the Code.
Key Audit Matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the
consolidated financial statements of the current period. These
matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters.
Key audit matters identified in our audit are summarised as
follows:
-- IT access management
-- Investment in associate - Bank of Communications Co., Limited ('BoCom')
-- The present value of in-force long-term insurance business
('PVIF') and liabilities under non-linked life insurance
contracts
-- Impairment of loans and advances to customers
-- Alternative performance measure
IT access management
Nature of the Key Audit Matter Matters discussed with the Audit
Committee
The audit approach relies extensively The status of management's remediation,
on automated controls and therefore our audit response and the results
on the effectiveness of controls of our testing procedures was discussed
over IT systems. In previous years, at Audit Committee meetings in 2018
we identified and reported that controls and 2019.
over access to applications, operating
systems and data in the financial
reporting process required improvements.
Access management controls are critical
to ensure that changes to applications
and underlying data are made in an
appropriate manner. Appropriate access
controls contribute to mitigating
the risk of potential fraud or errors
as a result of changes to applications
and data. Management has implemented
remediation activities that have
contributed to reducing the risk
over access management in the financial
reporting process. However, issues
related to privileged access and
business user access remained unresolved
on parts of the technology infrastructure,
requiring our audit approach to respond
to the risks presented.
How our audit addressed the Key Audit Matter
Access rights were tested over applications, operating systems and
databases relied upon for financial reporting. Specifically, the audit
tested that:
* new access requests for joiners were properly
reviewed and authorised;
* user access rights were removed on a timely basis
when an individual left or moved role;
* access rights to applications, operating systems and
databases were periodically monitored for
appropriateness; and
* highly privileged access was restricted to
appropriate personnel.
Other areas that were independently assessed included password policies,
security configurations, controls over changes to applications and
databases, and that business users, developers and production support
did not have access to change applications, the operating system or
databases in the production environment.
As a consequence of the deficiencies identified, a range of other procedures
were performed:
* where inappropriate access was identified, we
understood the nature of the access, and obtained
additional evidence on the appropriateness of the
activities performed;
* additional substantive testing was performed on
specific year-end reconciliations (i.e. custodian,
bank account and suspense account reconciliations)
and confirmations with external counterparties;
* testing was performed on other compensating controls
such as business performance reviews;
* testing was performed over controls that prevent
inappropriate combinations of access; and
* a list of users' access permissions was obtained and
manually compared to other access lists where
segregation of duties was deemed to be of higher risk,
for example users having access to both core banking
and payments systems.
Relevant references in the Annual Report and Accounts 2018
Risk: Top and Emerging Risks, page 17; Operational Risk, page 36
---------------------------------------------------------------------------------------
Investment in associate - Bank of Communications Company, Limited ('BoCom')
Nature of the Key Audit Matter Matters discussed with the Audit
Committee
At 31 December 2018, the market value The VIU model is dependent on many
of the Bank's investment in BoCom assumptions, both short-term and
based on the share price was HK$53,536 long-term in nature. These assumptions
million lower than the carrying value. are derived from a combination of
This is considered an indicator of management estimates, analysts' forecasts
potential impairment. An impairment and market data, and are highly judgemental.
test was performed by the Bank using Given the proximity of the carrying
a value in use (VIU) model to estimate value and VIU, small changes in some
the investment's value assuming it of these assumptions would lead to
continues to be held in perpetuity an impairment. We discussed the appropriateness
rather than sold. The VIU was HK$1,723 of these assumptions with the Audit
million in excess of carrying value Committee, particularly those with
at 31 December 2018. On this basis, the greatest sensitivity related
no impairment was recorded and the to short term cash flows and the
share of BoCom's profits has been minimum level of capital required
recognised in the consolidated income by BoCom. We discussed whether the
statement. impact of China-US trade tensions
and the impact of government policies
on the China banking market had been
fully reflected. We also reviewed
with the Audit Committee the long
term profit growth rate and loan
impairment rate, and considered reasonably
possible alternatives. In the discussion
we specifically considered whether
the assumptions used captured the
current levels of uncertainty, both
individually and considering the
output of the model in aggregate.
How our audit addressed the Key Audit Matter
* The conclusions on the appropriateness of the model
were evaluated, with the assistance of our valuation
expert.
* Inputs used in the determination of assumptions
within the model were challenged and corroborating
information was obtained with reference to external
market information, third-party sources including
analyst reports, and historical publicly available
BoCom information.
* A reasonable range for the discount rate used within
the model was independently calculated with the
assistance of our valuation experts.
* The controls in place over the model, and its
mathematical accuracy were tested.
* A meeting between management and senior BoCom
executive management, held specifically to identify
facts or circumstances impacting management
assumptions, was observed.
* Disclosures made in the Annual Report and Accounts
2018 in relation to BoCom were tested and assessed
for appropriateness.
* Representations were obtained from the Bank that the
assumptions used were consistent with information
currently available to the Bank both as shareholder
and to which the Bank is entitled through
participation on BoCom's board of Directors.
Relevant references in the Annual Report and Accounts 2018
Financial Review, page 11
Note 1: Basis of preparation and significant accounting policies, page
59
Note 15: Interests in associates and joint ventures, page 86-88
-------------------------------------------------------------------------------------------
The present value of in-force long-term insurance business ('PVIF')
and liabilities under non-linked life insurance contracts
Nature of the Key Audit Matter Matters discussed with the Audit
Committee
The group has recorded an asset for We discussed with the Audit Committee
PVIF of HK$48,522 million and liabilities the results of our testing procedures
under non-linked life insurance contracts over key assumptions used in the
of HK$433,668 million as at 31 December valuation of the PVIF asset and the
2018. The determination of these liabilities under non-linked life
balances requires the use of appropriate insurance contracts including testing
actuarial methodologies and also of changes made during the reporting
highly judgemental assumptions. Such period to the models and to the basis
assumptions include the long-term of the determination of key assumptions.
economic returns of insurance contracts
issued, assumptions over policyholder
behaviour such as longevity, mortality
and persistency, and management assumptions
over the future costs of obtaining
and maintaining the group's insurance
business. Small movements in these
assumptions can have a material impact
on the PVIF asset and the liabilities
under non-linked life insurance contracts.
How our audit addressed the Key Audit Matter
The controls in place for the determination of the valuation of the
PVIF asset and the liabilities under non-linked life insurance contracts
were tested. Specifically, these included controls over:
* policy data reconciliations from the policyholder
administration system to the actuarial valuation
system,
* assumption setting,
* review and determination of valuation methodologies,
* restriction of user access to the actuarial models,
and
* production and approval of the actuarial results.
With the assistance of our actuarial experts, the appropriateness of
the models, methodologies and assumptions used were assessed for reasonableness.
Specifically, these included assumptions in respect of:
* long-term economic returns of insurance contracts
issued;
* policyholder behaviour such as longevity, mortality
and persistency; and
* future costs of obtaining and maintaining the
insurance business.
Our challenge and evaluation of the key judgements and assumptions
made by management included whether these were supported by relevant
experience, market information and formed a reasonable basis for setting
the assumptions.
Relevant references in the Annual Report and Accounts 2018
Risk: Risks of insurance manufacturing operations, page 38-41
Note 1: Basis of preparation and significant accounting policies, page
65
Note 4: Liabilities under insurance contracts, page 77
Note 16: Goodwill and intangible assets, page 89
-----------------------------------------------------------------------------------------
Impairment of loans and advances to customers
Nature of the Key Audit Matter Matters discussed with the Audit
Committee
As this is the first year of adoption At each Audit Committee meeting there
of HKFRS 9, there is limited experience was a discussion on changes to risk
available to back-test the expected factors and other inputs within the
credit loss ('ECL') charge and allowance models, geopolitical risks, such
against actual results. There has as escalating US-China trade tensions,
been a significant increase in the as well as individually significant
number of data points required for loan impairments. The more judgemental
the impairment calculation. The data interpretations of HKFRS 9 made by
is sourced from a number of systems management were discussed, in particular
that have not been used previously the application of forward economic
for the preparation of the accounting guidance, including the severity
records. This increases the risk and magnitude of modelled downside
around completeness and accuracy scenarios; and associated considerations
of certain data used to create assumptions of post model adjustments. As the
and operate the models. The global control environment for the calculation
credit environment has remained relatively of ECL under HKFRS 9 continued to
benign for an extended period of be strengthened following initial
time, in part due to the low interest adoption, we provided updates on
rate environment, and the relative the changes being made and the results
strength of the global economy. However, of our testing procedures.
there are a number of headwinds to
the global economy as well as certain
regional and country specific risks.
As a result, whilst the current levels
of delinquencies and defaults remains
low, the risk of impairment remains
significant.
How our audit addressed the Key Audit Matter
* Model performance monitoring and validation controls
were tested, including periodic policy and
independent model reviews, back testing of
performance, and approval of model changes. We also
performed risk based substantive testing of models,
including independently re-building certain
assumptions.
* We tested the review and challenge of multiple
economic scenarios by an expert panel and internal
governance committee, and assessed the reasonableness
of the multiple economic scenarios and variables
using our economic experts.
* Controls over the inputs of critical data into source
systems and the flow and transformation of data
between source systems to the impairment calculation
system were tested. We also performed substantive
testing over the critical data used in the year end
ECL calculation.
* We assessed management's user acceptance testing over
the automated calculation of ECL to ensure it is
performed in line with business requirements, as well
as independently reviewed the underlying system
script to validate that the calculation operated as
we would have expected.
* We observed challenge forums to assess the ECL output
and approval of post model adjustments.
* We tested the approval of the key inputs, assumptions
and discounted cash-flows that supported the
impairment provisions for a sample of significant
individually assessed loans.
Relevant references in the Annual Report and Accounts 2018
Risk: Credit Risk, page 18-31
Note 1: Basis of preparation and significant accounting policies, page
62-65
Note 3: Operating profit - Change in expected credit losses and other
credit impairment charges, page 75
----------------------------------------------------------------------------------------
Alternative performance measure
Nature of the Key Audit Matter Matters discussed with the Audit
Committee
The group's results are significant We communicated our risk assessment
to HSBC Holdings plc ('HSBC'), a in November 2018, and designed a
listed company. The use of alternative year end testing response as a result.
performance measures is common by The outcome of our testing was communicated
listed companies to help better explain to the Audit Committee in February
performance to the established strategy. 2019.
HSBC use a number of alternative
performance measures, including a
Jaws target. Jaws represents the
difference between the rate of growth
of revenue and the rate of growth
of costs in a given financial period.
During the year we discussed with
the Audit Committee the sensitivity
of the jaws metric of HSBC to small
changes in revenue and costs. We
concluded that this increased the
incentive for management to override
controls to meet targets prompting
us to perform a number of incremental
procedures which might indicate that
revenue or costs were intentionally
misstated.
How our audit addressed the Key Audit Matter
* We reassessed significant judgements in light of the
enhanced incentives noted in the risk assessment.
* We performed additional tests on journals,
specifically considering cutoff and unusual
combinations that impact costs and revenue.
* We tested expenses booked post year end to assess if
they were included in the correct period.
* We tested the clearance and appropriateness of
classification of aged unreconciled items,
considering if there was a trend towards only
resolving issues which would improve revenue or
reduce costs.
* We performed additional tests on the completeness and
accuracy of accruals and capitalised expenses.
Relevant references in the Annual Report and Accounts 2018
Report of the Directors: Asia Strategy, page 3
Risk: Operational Risk, page 36
-----------------------------------------------------------------------------------------
Other Information
The directors of the Bank are responsible for the other
information. The other information comprises the information
included in the Financial Highlights, Report of the Directors,
Financial Review, Risk, Capital and Statement of Directors'
Responsibilities sections of the Annual Report and Accounts 2018
(but does not include the consolidated financial statements and our
auditor's report thereon), which we obtained prior to the date of
this auditor's report, and the Banking Disclosure Statement 2018
and the list of the directors of the Bank's subsidiary undertakings
(consolidated in the financial statements) during the period from 1
January 2018 to 19 February 2019, which are expected to be made
available to us after the date of this auditor's report.
Our opinion on the consolidated financial statements does not
cover the other information and we do not and will not express any
form of assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other
information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed on the other information
that we obtained prior to the date of this auditor's report, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report in this regard.
When we read the Banking Disclosure Statement 2018 and the list
of the directors of the Bank's subsidiary undertakings
(consolidated in the financial statements) during the period from 1
January 2018 to 19 February 2019, if we conclude that there is a
material misstatement therein, we are required to communicate the
matter to the Audit Committee and take appropriate action
considering our legal rights and obligations.
Responsibilities of Directors and the Audit Committee for the
Consolidated Financial Statements
The directors of the Bank are responsible for the preparation of
the consolidated financial statements that give a true and fair
view in accordance with HKFRSs issued by the HKICPA and the Hong
Kong Companies Ordinance, and for such internal control as the
directors determine is necessary to enable the preparation of
consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the
directors are responsible for assessing the group's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so.
The Audit Committee is responsible for overseeing the group's
financial reporting process.
Auditor's Responsibilities for the Audit of the Consolidated
Financial Statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. We report our
opinion solely to you, as a body, in accordance with Section 405 of
the Hong Kong Companies Ordinance and for no other purpose. We do
not assume responsibility towards or accept liability to any other
person for the contents of this report.
Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with HKSAs will
always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of
these consolidated financial statements.
As part of an audit in accordance with HKSAs, we exercise
professional judgment and maintain professional scepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the group's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by the directors.
-- Conclude on the appropriateness of the directors' use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the group's
ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in
our auditor's report to the related disclosures in the consolidated
financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor's report. However, future
events or conditions may cause the group to cease to continue as a
going concern.
-- Evaluate the overall presentation, structure and content of
the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair
presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the group to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for
our audit opinion.
We communicate with the Audit Committee regarding, among other
matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide the Audit Committee with a statement that we
have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with the Audit Committee, we
determine those matters that were of most significance in the audit
of the consolidated financial statements of the current period and
are therefore the key audit matters. We describe these matters in
our auditor's report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
The engagement partner on the audit resulting in this
independent auditor's report is Mr. Mervyn Robert John Jacob.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, 19 February 2019
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
ACSJIMATMBTBBTL
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March 15, 2019 07:01 ET (11:01 GMT)
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