TIDM57HB
RNS Number : 9326S
Hongkong & Shanghai Banking Corp Ld
15 March 2019
Consolidated Financial Statements
Consolidated income statement
for the year ended 31 December
2018 2017
Notes HK$m HK$m
Net interest income 3a 126,463 110,237
---------------------------------------------------------- ------ -------
* interest income 170,065 138,081
- interest expense (43,602) (27,844)
------- -------
Net fee income 3b 44,231 43,150
---------------------------------------------------------- ------ ------- -------
- fee income 54,585 52,312
* fee expense (10,354) (9,162)
---------------------------------------------------------- ------ ------- -------
Net income from financial instruments held for trading
or managed on a fair value basis 3c 31,723 23,098
---------------------------------------------------------- ------ ------- -------
Net income/(expense) from assets and liabilities of
insurance businesses, including related derivatives,
measured at fair value through profit or loss 3c (5,561) 15,607
---------------------------------------------------------- ------ ------- -------
Changes in fair value of long-term debt issued and
related derivatives 3c 20 (115)
---------------------------------------------------------- ------ ------- -------
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit
or loss 3c (217) N/A
---------------------------------------------------------- ------ ------- ----------
Gains less losses from financial investments 3d 501 2,108
-------
Dividend income 164 232
-------
Net insurance premium income 4a 60,678 56,176
------- -------
Other operating income 3e 10,306 4,740
Total operating income 268,308 255,233
---------------------------------------------------------- ------ ------- -------
Net insurance claims and benefits paid and movement
in liabilities to policyholders 4b (57,839) (68,790)
---------------------------------------------------------- ------ ------- -------
Net operating income before change in expected credit
losses and other credit impairment charges 210,469 186,443
---------------------------------------------------------- ------ ------- -------
Change in expected credit losses and other credit
impairment charges 3f (4,720) N/A
---------------------------------------------------------- ------ ------- ----------
Loan impairment charges and other credit risk provisions N/A (4,437)
------ --------
Net operating income 205,749 182,006
---------------------------------------------------------- ------ ------- -------
Employee compensation and benefits 5a (40,793) (40,095)
General and administrative expenses 3g (39,989) (34,786)
Depreciation and impairment of property, plant and
equipment 17 (4,686) (4,650)
Amortisation and impairment of intangible assets (1,956) (1,536)
---------------------------------------------------------- ------ ------- -------
Total operating expenses (87,424) (81,067)
Operating profit 118,325 100,939
---------------------------------------------------------- ------ ------- -------
Share of profit in associates and joint ventures 16,258 14,680
-------
Profit before tax 134,583 115,619
---------------------------------------------------------- ------ ------- -------
Tax expense 6 (22,467) (19,601)
-------
Profit for the year 112,116 96,018
---------------------------------------------------------- ------ -------
Profit attributable to shareholders of the parent
company 103,013 88,530
-------
Profit attributable to non-controlling interests 9,103 7,488
---------------------------------------------------------- ------ ------- -------
Consolidated statement of comprehensive income
for the year ended 31 December
2018 2017
HK$m HK$m
-------------------------------------------------------------- -------- ----------
Profit for the year 112,116 96,018
-------------------------------------------------------------- ------- -------
Other comprehensive income/(expense)
-------- ----------
Items that will be reclassified subsequently to profit
or loss when specific conditions are met:
Available-for-sale investments N/A 1,609
- fair value gains N/A 3,346
- fair value gains reclassified to the income statement N/A (1,667)
--------------------------------------------------------------
- amounts reclassified to the income statement in respect
of impairment losses N/A 5
--------------------------------------------------------------
- income taxes N/A (75)
-------------------------------------------------------------- -------- -------
Debt instruments at fair value through other comprehensive
income 826 N/A
--------------------------------------------------------------
- fair value gains 908 N/A
--------------------------------------------------------------
- fair value losses transferred to the income statement
on disposal 142 N/A
--------------------------------------------------------------
- expected credit losses recognised in the income statement (9) N/A
--------------------------------------------------------------
- income taxes (215) N/A
--------------------------------------------------------------
Cash flow hedges 131 607
--------------------------------------------------------------
- fair value gains/(losses) 1,264 (6,780)
--------------------------------------------------------------
- fair value (gains)/losses reclassified to the income
statement (1,125) 7,506
--------------------------------------------------------------
- income taxes (8) (119)
-------------------------------------------------------------- ------- -------
Share of other comprehensive expense of associates and
joint ventures (146) (852)
------- -------
Exchange differences (18,098) 25,387
-------------------------------------------------------------- -------
Items that will not be reclassified subsequently to profit
or loss:
Property revaluation 8,826 8,864
-------
- fair value gains 10,626 10,442
- income taxes (1,800) (1,578)
-------------------------------------------------------------- ------- -------
Equity instruments measured at fair value through other
comprehensive income (581) N/A
-------------------------------------------------------------- ------- ----------
- fair value losses (576) N/A
--------------------------------------------------------------
- income taxes (5) N/A
-------------------------------------------------------------- ------- ----------
Changes in fair value of financial liabilities designated
at fair value upon initial recognition arising from changes
in own credit risk (199) (209)
-------------------------------------------------------------- ------- -------
- before income taxes (241) (250)
--------------------------------------------------------------
- income taxes 42 41
-------------------------------------------------------------- ------- -------
Remeasurement of defined benefit asset/liability (910) 1,371
- before income taxes (1,091) 1,640
- income taxes 181 (269)
------- -------
Other comprehensive income for the year, net of tax (10,151) 36,777
-------------------------------------------------------------- ------- -------
Total comprehensive income for the year 101,965 132,795
-------------------------------------------------------------- ------- -------
Attributable to:
- shareholders of the parent company 92,796 123,739
--------------------------------------------------------------
- non-controlling interests 9,169 9,056
-------------------------------------------------------------- ------- -------
Total comprehensive income for the year 101,965 132,795
-------------------------------------------------------------- ------- -------
Consolidated balance sheet
at 31 December
2018 2017
Notes HK$m HK$m
------------------------------------------------------- ------ --------- -----------
Assets
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 8 558,838 496,434
---------
Derivatives 9 292,869 300,243
------------------------------------------------------- ------ --------- ---------
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 10 132,859 N/A
------------------------------------------------------- ------ --------- -----------
Financial assets designated at fair value 10 N/A 122,646
------------------------------------------------------- ------ --------- ---------
Reverse repurchase agreements - non-trading 406,327 330,890
------------------------------------------------------- ------ --------- ---------
Placings with and advances to banks 338,151 433,005
---------
Loans and advances to customers 11 3,528,702 3,328,980
---------
Financial investments 12 1,871,026 1,720,873
------ ---------
Amounts due from Group companies 34 70,455 227,729
--------- ---------
Interests in associates and joint ventures 15 142,885 144,717
------------------------------------------------------- ------ --------- ---------
Goodwill and intangible assets 16 65,104 59,865
------------------------------------------------------- ------ --------- ---------
Property, plant and equipment 17 112,080 116,336
---------
Deferred tax assets 6 2,315 2,156
------------------------------------------------------- ------ --------- ---------
Prepayments, accrued income and other assets 18 229,949 158,511
------
Total assets 8,263,454 7,943,346
------------------------------------------------------- ------ --------- ---------
Liabilities
Hong Kong currency notes in circulation 280,854 267,174
Items in the course of transmission to other banks 33,806 38,283
------------------------------------------------------- ------ --------- ---------
Repurchase agreements - non-trading 70,279 47,170
Deposits by banks 164,664 201,697
---------
Customer accounts 19 5,207,666 5,138,272
------ ---------
Trading liabilities 20 81,194 231,365
---------
Derivatives 9 295,553 309,353
------------------------------------------------------- ------ --------- ---------
Financial liabilities designated at fair value 21 161,143 49,278
---------
Debt securities in issue 22 58,236 38,394
---------
Retirement benefit liabilities 5b 3,369 2,222
Amounts due to Group companies 34 396,487 265,688
Accruals and deferred income, other liabilities and
provisions 23 196,665 110,687
------------------------------------------------------- ------ --------- ---------
Liabilities under insurance contracts 4 468,589 438,017
---------
Current tax liabilities 6 3,337 3,242
------------------------------------------------------- ------ --------- ---------
Deferred tax liabilities 6 24,513 24,391
------------------------------------------------------- ------ --------- ---------
Subordinated liabilities 24 4,081 4,090
---------
Preference shares 25 98 21,037
------------------------------------------------------- ------ --------- ---------
Total liabilities 7,450,534 7,190,360
------------------------------------------------------- ------ --------- ---------
Equity
------------------------------------------------------- ------
Share capital 26 172,335 151,360
---------
Other equity instruments 27 35,879 14,737
------ ---------
Other reserves 114,949 123,417
Retained earnings 429,595 406,966
---------
Total shareholders' equity 752,758 696,480
Non-controlling interests 60,162 56,506
------------------------------------------------------- ------ --------- ---------
Total equity 812,920 752,986
Total liabilities and equity 8,263,454 7,943,346
------------------------------------------------------- ------ --------- ---------
Consolidated statement of cash flows
for the year ended 31 December
2018 2017
HK$m HK$m
----------------------------------------------------------------- --------- -----------
Profit before tax 134,583 115,619
--------
Adjustments for non-cash items:
--------- -----------
Depreciation and amortisation 6,657 6,202
-------- --------
Net gain from investing activities (1,071) (3,564)
-------- --------
Share of profits in associates and joint ventures (16,258) (14,680)
-------- --------
(Gain)/loss on disposal of subsidiaries, businesses, associates
and joint ventures (38) 186
-------- --------
Change in expected credit losses gross of recoveries and
other credit impairment charges 4,720 N/A
----------------------------------------------------------------- -------- -----------
Loan impairment losses gross of recoveries and other credit
risk provisions N/A 5,330
----------------------------------------------------------------- --------- --------
Provisions 51 (618)
-------- --------
Share-based payment expense 881 970
-------- --------
Other non-cash items included in profit before tax (3,861) 510
-------- --------
Elimination of exchange differences 15,723 (36,213)
-------- --------
Changes in operating assets and liabilities
--------- -----------
Change in net trading securities and derivatives (65,937) (55,262)
-------- --------
Change in loans and advances to banks and customers (299,137) (491,235)
-------- --------
Change in reverse repurchase agreements - non-trading (61,887) (75,091)
----------------------------------------------------------------- -------- --------
Change in financial assets designated and otherwise mandatorily
measured at fair value through profit and loss 1,176 N/A
-------- -----------
Change in financial assets designated at fair value N/A (16,630)
--------- --------
Change in other assets 113,636 144,752
-------- --------
Change in deposits by banks and customer accounts 71,688 247,486
-------- --------
Change in repurchase agreements - non-trading 23,109 19,360
-------- --------
Change in debt securities in issue 19,842 13,159
-------- --------
Change in financial liabilities designated at fair value (8,605) (1,838)
-------- --------
Change in other liabilities 166,634 63,627
-------- --------
Dividends received from associates 4,948 4,556
-------- --------
Contributions paid to defined benefit plans (576) (722)
-------- --------
Tax paid (18,216) (14,674)
-------- --------
Net cash from operating activities 88,062 (88,770)
----------------------------------------------------------------- -------- --------
Purchase of financial investments (822,067) (721,925)
Proceeds from the sale and maturity of financial investments 756,630 749,277
----------------------------------------------------------------- -------- --------
Purchase of property, plant and equipment (1,646) (2,997)
-------- --------
Proceeds from sale of property, plant and equipment and
assets held for sale 11,820 5,572
----------------------------------------------------------------- -------- --------
Proceeds from disposal of customer loan portfolios 2,542 2,004
-------- --------
Net investment in intangible assets (4,691) (2,831)
-------- --------
Cash outflow on purchase of subsidiaries - (1,757)
-------- --------
Net cash from investing activities (57,412) 27,343
----------------------------------------------------------------- -------- --------
Issue of ordinary share capital and other equity instruments 21,142 1,744
--------
Redemption of preference shares and other equity instruments (20,975) (6,022)
--------
Subordinated loan capital issued(1) 79,834 76,433
--------
Subordinated loan capital repaid(1) (42,986) (18,737)
--------
Dividends paid to shareholders of the parent company and
non-controlling interests (52,508) (60,892)
--------
Net cash from financing activities (15,493) (7,474)
--------
Net increase/(decrease) in cash and cash equivalents 15,157 (68,901)
----------------------------------------------------------------- -------- --------
Cash and cash equivalents at 1 Jan(2) 718,038 752,705
--------
Exchange differences in respect of cash and cash equivalents (11,586) 34,234
--------
Cash and cash equivalents at 31 Dec 721,609 718,038
----------------------------------------------------------------- --------
Cash and cash equivalents comprise(3)
---------
- cash and balances at central banks 205,660 208,073
--------
- items in the course of collection from other banks 25,380 25,714
--------
- loans and advances to banks of one month or less 179,952 293,499
--------
- reverse repurchase agreements with banks of one month
or less 165,654 152,104
--------
- treasury bills, other bills and certificates of deposit
less than three months 178,769 76,931
--------
- less: items in the course of transmission to other banks (33,806) (38,283)
----------------------------------------------------------------- -------- --------
Cash and cash equivalents at 31 Dec 721,609 718,038
----------------------------------------------------------------- -------- --------
Interest received was HK$166,441m (2017: HK$136,539m), interest
paid was HK$41,583m (2017: HK$28,324m) and dividends received were
HK$178m (2017: HK$175m).
1 Changes in subordinated liabilities (including those issued to
Group companies) during the year included amounts from issuance and
repayments as presented above, and non-cash changes from foreign
exchange losses (HK$ 280m) and fair value losses (HK$353m).
2 At 1 January 2018, the cumulative changes in cash and cash
equivalents as a result of remeasurement upon the transition to
HKFRS 9 'Financial Instruments' was a loss of HK$1m.
3 At 31 December 2018 HK$ 122,899m (2017: HK$ 199,336m) was not
available for use by the group, of which HK$ 71,783m (2017: HK$
82,667m) related to mandatory deposits at Central banks.
Consolidated statement of changes in equity
for the year ended 31 December
Other reserves
Financial Cash Total
Other Property assets flow Foreign share- Non-
Share equity Retained revaluation at FVOCI hedge exchange holders' controlling Total
capital instruments earnings reserve reserve(7) reserve reserve Other(1) equity interests equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
-----------------------------------------------------------
At 31 Dec 2017 151,360 14,737 406,966 58,381 6,825 (197) (6,948) 65,356 696,480 56,506 752,986
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Impact on transition
to HKFRS 9 - - (7,478) - (4,512) - - - (11,990) (323) (12,313)
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- ----- ------- ------- ------- -------- -------
At 1 Jan 2018 151,360 14,737 399,488 58,381 2,313 (197) (6,948) 65,356 684,490 56,183 740,673
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Profit for the
year - - 103,013 - - - - - 103,013 9,103 112,116
------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Other comprehensive
income/(expense)
(net of tax) - - (890) 8,050 228 98 (17,701) (2) (10,217) 66 (10,151)
* debt instruments at fair value through other
comprehensive income - - - - 734 - - - 734 92 826
* equity instruments designated at fair value through
other comprehensive income - - - - (367) - - - (367) (214) (581)
-----------------------------------------------------------
* cash flow hedges - - - - - 98 - - 98 33 131
-----------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (197) - - - - - (197) (2) (199)
-----------------------------------------------------------
* property revaluation - - - 8,050 - - - - 8,050 776 8,826
-----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (688) - - - - - (688) (222) (910)
-----------------------------------------------------------
* share of other comprehensive expense of associates
and joint ventures - - (5) - (139) - - (2) (146) - (146)
-----------------------------------------------------------
* exchange differences - - - - - - (17,701) - (17,701) (397) (18,098)
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- -------
Total comprehensive
income/(expense)
for the year - - 102,123 8,050 228 98 (17,701) (2) 92,796 9,169 101,965
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Other equity instruments
issued(2) - 21,142 - - - - - - 21,142 - 21,142
------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Dividends paid(3) - - (47,440) - - - - - (47,440) (5,068) (52,508)
------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- -------
Movement in respect
of share-based
payment arrangements - - (234) - - - - 246 12 10 22
------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Transfers and
other movements(4,5,6) 20,975 - (24,342) (8,517) 412 - - 13,230 1,758 (132) 1,626
----------------------------------------------------------- ------- ----------- ------- -------- ------- --- ----- ------- ------- ------- -------- -------
At 31 Dec 2018 172,335 35,879 429,595 57,914 2,953 (99) (24,649) 78,830 752,758 60,162 812,920
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
At 1 Jan 2017 114,359 14,737 413,024 53,763 6,189 (793) (31,861) 58,588 628,006 51,130 679,136
---------------------------------------------------------- ------- ------ ------- ------ ----- ---- ------- ------ ------- ------ -------
Profit for the
year - - 88,530 - - - - - 88,530 7,488 96,018
---------------------------------------------------------- ------- ------ ------- ------ -------
Other comprehensive
income/(expense)
(net of tax) - - 976 8,144 636 596 24,913 (56) 35,209 1,568 36,777
* available-for-sale investments - - - - 1,422 - - - 1,422 187 1,609
- cash flow hedges - - - - - 596 - - 596 11 607
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (207) - - - - - (207) (2) (209)
* property revaluation - - - 8,144 - - - - 8,144 720 8,864
----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - 1,193 - - - - - 1,193 178 1,371
----------------------------------------------------------
* share of other comprehensive expense of associates
and joint ventures - - (10) - (786) - - (56) (852) - (852)
----------------------------------------------------------
* exchange differences - - - - - - 24,913 - 24,913 474 25,387
----------------------------------------------------------
Total comprehensive
income/(expense)
for the year - - 89,506 8,144 636 596 24,913 (56) 123,739 9,056 132,795
---------------------------------------------------------- ------- ------ ------- ------ ----- ---- ------- ------ ------- ------ -------
Shares issued 1,744 - - - - - - - 1,744 - 1,744
------ ------- ------ -------
Dividends paid(3) - - (56,260) - - - - - (56,260) (4,632) (60,892)
------- ------ ------- ------ ----- ---- ------- ------
Movement in respect
of share-based
payment arrangements - - (73) - - - - (324) (397) (9) (406)
---------------------------------------------------------- ------- ------ ------- ------ ----- ---- ------- ------ ------- ------ -------
Transfers and
other movements(4,5,6) 35,257 - (39,231) (3,526) - - - 7,148 (352) 961 609
------- ------ ------- ------ ----- ---- ------- ------ ------- ------ -------
At 31 Dec 2017 151,360 14,737 406,966 58,381 6,825 (197) (6,948) 65,356 696,480 56,506 752,986
---------------------------------------------------------- ------- ------ ------- ------ ----- ---- ------- ------ ------- ------ -------
1 The other reserves mainly comprise share of associates' other
reserves, purchase premium arising from transfer of business from
fellow subsidiaries, property revaluation reserve relating to
transfer of properties to a fellow subsidiary and the share-based
payment reserve. The share-based payment reserve is used to record
the amount relating to share awards and options granted to
employees of the group directly by HSBC Holdings plc.
2 In 2018, there were US$2,700m additional tier 1 capital instruments issued.
3 Including distributions paid on perpetual subordinated loans
classified as equity under HKFRS.
4 Ordinary share capital includes preference shares which have
been redeemed or bought back via payment out of distributable
profits. In 2018, the Bank redeemed HK$20,975m (2017: HK$35,257m)
of preference shares.
5 The movement from retained earnings to other reserves includes
the relevant transfers in associates according to local regulatory
requirements.
6 The movement from property revaluation reserve to other
reserves in 2018 included HK$7,169m (2017: HK$2,100m) relating to
transfer of properties to a fellow subsidiary as part of the
Recovery and Resolution Plan as set out in the Report of Directors
in the Annual Report and Accounts 2018.
7 The balance at 31 December 2017 represents the HKAS 39
Available-for-sale fair value reserve as at 31 December 2017.
Notes on the Consolidated Financial Statements
1 Basis of preparation and significant accounting policies
---------------------------------------------------------
1.1 Basis of preparation
(a) Compliance with Hong Kong Financial Reporting Standards
The consolidated financial statements of The Hongkong and
Shanghai Banking Corporation Limited ('the Bank') and its
subsidiaries (together 'the group') have been prepared in
accordance with Hong Kong Financial Reporting Standards ('HKFRSs')
as issued by the Hong Kong Institute of Certified Public
Accountants ('HKICPA') and accounting principles generally accepted
in Hong Kong. These financial statements also comply with the
requirements of the Hong Kong Companies Ordinance (Cap. 622) which
are applicable to the preparation of financial statements.
Standards adopted during the year ended 31 December 2018
The group has adopted the requirements of HKFRS 9 'Financial
Instruments' from 1 January 2018, with the exception of the
provisions relating to the presentation of gains and losses on
financial liabilities designated at fair value, which were adopted
from 1 January 2017. This includes the adoption of 'Prepayment
Features with Negative Compensation (Amendments to HKFRS 9)' which
is effective for annual periods beginning on or after 1 January
2019 with early adoption permitted. The effect of adopting the
amendments to HKFRS 9 is not considered to be significant. HKFRS 9
includes an accounting policy choice to remain with HKAS 39 hedge
accounting, which the group has exercised. The classification and
measurement and impairment requirements are applied retrospectively
by adjusting the opening balance sheet at the date of initial
application. As permitted by HKFRS 9, the group has not restated
comparatives. Adoption reduced net assets at 1 January 2018 by
HK$12,313m as set out in note 2.
In addition, the group has adopted the requirements of HKFRS 15
'Revenue from Contracts with Customers' and a number of
interpretations and amendments to standards which have had an
insignificant effect on the group's consolidated financial
statements.
HKFRS 9 transitional requirements
The transition requirements of HKFRS 9 have necessitated a
review of the designation of financial instruments at fair value.
HKFRS 9 requires that the designation is revoked where there is no
longer an accounting mismatch at 1 January 2018 and permits
designations to be revoked or additional designations created at 1
January 2018 if there are accounting mismatches at that date. As a
result, fair value designations for financial liabilities have been
revoked where the accounting mismatch no longer exists, as required
by HKFRS 9.
The results of these changes are included in the reconciliation
set out in note 2.
Changes in accounting policy
While not necessarily required by the adoption of HKFRS 9, the
following voluntary changes in accounting policy and presentation
have been made as a result of reviews carried out in conjunction
with its adoption. The effect of presentational changes at 1
January 2018 is included in the reconciliation set out in note 2
and comparatives have not been restated.
-- We have considered market practices for the presentation of
certain financial liabilities which contain both deposit and
derivative components. We have concluded that a change in
accounting policy and presentation from 'Trading liabilities' would
be appropriate, since it would better align with the presentation
of similar financial instruments by peers and therefore provide
more relevant information about the effect of these financial
liabilities on our financial position and performance. As a result,
rather than being classified as held for trading, we designate
these financial liabilities as at fair value through profit or loss
since they are managed and their performance evaluated on a fair
value basis. A further consequence of this change in presentation
is that the effects of changes in the liabilities' credit risk will
be presented in 'Other comprehensive income' with the remaining
effect presented in profit or loss in accordance with group's
accounting policy adopted in 2017 (following the adoption of the
requirements in HKFRS 9 relating to the presentation of gains and
losses on financial liabilities designated at fair value).
-- Cash collateral, margin and settlement accounts have been
reclassified from 'Trading assets', 'Placings with and advances to
banks' and 'Loans and advances to customers' to 'Prepayments,
accrued income and other assets' and from 'Trading liabilities' and
'Deposits by banks' and 'Customer accounts' to 'Accruals and
deferred income, other liabilities and provisions'. The change in
presentation for financial assets is in accordance with HKFRS 9 and
the change in presentation for financial liabilities is considered
to provide more relevant information, given the change in
presentation for the financial assets. The change in presentation
for financial liabilities has had no effect on measurement of these
items and therefore on retained earnings or profit for any
period.
-- Certain stock borrowing assets have been reclassified from
'Placings with and advances to banks' and 'Loans and advances to
customers' to 'Trading assets'. The change in measurement is a
result of the determination of the global business model for this
activity and will align to the global presentation.
(b) Future accounting developments
Minor amendments to HKFRSs
The HKICPA has published a number of minor amendments to HKFRSs
which are effective from 1 January 2019. The group expects they
will have an insignificant effect, when adopted, on the
consolidated financial statements.
Major new HKFRSs
The HKICPA has published HKFRS 16 'Leases' and HKFRS 17
'Insurance contracts'.
HKFRS 16 'Leases'
HKFRS 16 'Leases' has an effective date for annual periods
beginning on or after 1 January 2019. HKFRS 16 results in lessees
accounting for most leases within the scope of the standard in a
manner similar to the way in which finance leases are currently
accounted for under HKAS 17 'Leases'. Lessees will recognise a
right of use ('ROU') asset and a corresponding financial liability
on the balance sheet. The asset will be amortised over the length
of the lease, and the financial liability measured at amortised
cost. Lessor accounting remains
substantially the same as under HKAS 17. At 1 January 2019, the
group expects to adopt the standard using a modified retrospective
approach where the cumulative effect of initially applying the
standard is recognised as an adjustment to the opening balance of
retained earnings and comparatives are not restated. The
implementation is expected to increase assets by approximately
HK$9.2bn and increase financial liabilities by the same amount,
with no effect on net assets or retained earnings.
As a consequence of HKFRS 16, properties currently reported
under 'Prepayments, accrued income and other assets' as operating
leases and held at cost will be reclassified to 'Property, plant
and equipment' and be measured at fair value. The implementation is
expected to increase 'Property, plant and equipment' by HK$16.3bn
and increase deferred tax liabilities by HK$2.7bn, with the net
impact taken to the 'Property Revaluation Reserve'.
HKFRS 17 'Insurance Contracts'
HKFRS 17 'Insurance Contracts' was issued in January 2018 and
sets out the requirements that an entity should apply in accounting
for insurance contracts it issues and reinsurance contracts it
holds. HKFRS 17 is effective from 1 January 2021. However, the
HKICPA is considering delaying the mandatory implementation date by
one year and may make additional changes to the standard. The group
is in the process of implementing HKFRS 17. Industry practice and
interpretation of the standard is still developing and there may be
changes to the standard, therefore the likely impact of its
implementation remains uncertain.
Amendment to HKAS 12 'Income Taxes'
An amendment to HKAS 12 was issued in February 2018 as part of
the Annual Improvement Cycle. The amendment clarifies that an
entity should recognise the tax consequences of dividends where the
transactions or events that generated the distributable profits are
recognised. This amendment will be effective for annual periods
beginning on or after 1 January 2019 and is applied to the income
tax consequences of distributions recognised on or after the
beginning of the earliest comparative period. As a consequence,
income tax related to distributions on perpetual subordinated loans
will be presented in profit or loss rather than equity.
(c) Foreign currencies
Items included in each of the group's entities are measured
using the currency of the primary economic environment in which the
entity operates (the 'functional currency'). The group's
consolidated financial statements are presented in Hong Kong
dollars.
Transactions in foreign currencies are recorded at the rate of
exchange on the date of the transaction. Assets and liabilities
denominated in foreign currencies are translated at the rate of
exchange at the balance sheet date except non-monetary assets and
liabilities measured at historical cost that are translated using
the rate of exchange at the initial transaction date. Exchange
differences are included in other comprehensive income or in the
income statement depending on where the gain or loss on the
underlying item is recognised.
In the consolidated financial statements, the assets,
liabilities and results of foreign operations whose functional
currency is not Hong Kong dollars are translated into the group's
presentation currency at the reporting date. Exchange differences
arising are recognised in other comprehensive income. On disposal
of a foreign operation, exchange differences previously recognised
in other comprehensive income are reclassified to the income
statement.
(d) Presentation of information
Certain disclosures required by HKFRSs have been included in the
audited sections of the Annual Report and Accounts as follows:
-- Consolidated income statement and balance sheet data by
global business are included in the 'Financial Review' on page
8.
-- Disclosures concerning the nature and extent of risks
relating to banking and insurance activities are included in the
'Risk' section on pages 14 to 15, pages 18 to 29, page 32, page 33,
page 34, page 35 and pages 38 to 41 as specified as "audited".
-- Capital disclosures are included in the 'Capital' section on page 42.
In accordance with the group's policy to provide disclosures
that help other stakeholders to understand the group's performance,
financial position and changes thereto, the information provided in
the Risk section and the Capital section goes beyond the minimum
levels required by accounting standards, statutory and regulatory
requirements. In addition, the group assesses good practice
recommendations issued from time to time by relevant regulators and
standard setters and will assess the applicability and relevance of
such guidance, enhancing disclosures where appropriate.
(e) Critical accounting estimates and judgements
The preparation of financial information requires the use of
estimates and judgements about future conditions. In view of the
inherent uncertainties and the high level of subjectivity involved
in the recognition or measurement of items highlighted as the
critical accounting estimates and judgements in note 1.2 below, it
is possible that the outcomes in the next financial year could
differ from those on which management's estimates are based. This
could result in materially different estimates and judgements from
those reached by management for the purposes of the 2018 Financial
Statements. Management's selection of the group's accounting
policies which contain critical estimates and judgements reflects
the materiality of the items to which the policies are applied and
the high degree of judgement and estimation uncertainty
involved.
(f) Segmental analysis
The group's chief operating decision-maker is the Executive
Committee which operates as a general management committee under
the direct authority of the Board and operating segments are
reported in a manner consistent with the internal reporting
provided to the Executive Committee.
Measurement of segmental assets, liabilities, income and
expenses is in accordance with the group's accounting policies.
Segmental income and expenses include transfers between segments
and these transfers are conducted at arm's length. Shared costs are
included in segments on the basis of the actual recharges made.
(g) Going concern
The financial statements are prepared on a going concern basis,
as the Directors are satisfied that the group and parent company
have the resources to continue in business for the foreseeable
future. In making this assessment, the Directors have considered a
wide range of information relating to present and future
conditions, including future projections of profitability, cash
flows and capital resources.
1.2 Summary of significant accounting policies
(a) Consolidation and related policies
Investments in subsidiaries
Where an entity is governed by voting rights, the group
consolidates when it holds, directly or indirectly, the necessary
voting rights to pass resolutions by the governing body. In all
other cases, the assessment of control is more complex and requires
judgement of other factors, including having exposure to
variability of returns, power to direct relevant activities and
whether power is held as agent or principal.
Business combinations are accounted for using the acquisition
method. The amount of non-controlling interest is measured either
at fair value or at the non-controlling interest's proportionate
share of the acquiree's identifiable net assets. This election is
made for each business combination.
The Bank's investments in subsidiaries are stated at cost less
impairment losses.
Goodwill
Goodwill is allocated to cash-generating units ('CGU') for the
purpose of impairment testing, which is undertaken at the lowest
level at which goodwill is monitored for internal management
purposes. Impairment testing is performed at least annually, or
whenever there is an indication of impairment, by comparing the
recoverable amount of a CGU with its carrying amount.
Interests in associates
The group classifies investments in entities over which it has
significant influence, and that are neither subsidiaries nor joint
arrangements, as associates.
Investments in associates are recognised using the equity
method. The attributable share of the results and reserves of
associates are included in the consolidated financial statements of
the group based on either financial statements made up to 31
December or pro-rated amounts adjusted for any material
transactions or events occurring between the date of financial
statements available and 31 December.
Investments in associates are assessed at each reporting date
and tested for impairment when there is an indication that the
investment may be impaired. Goodwill on acquisitions of interests
in associates is not tested separately for impairment but is
assessed as part of the carrying amount of the investment.
Critical accounting estimates and judgements
Impairment testing of investments in associates involves significant
judgement in determining the value in use, and in particular estimating
the present values of cash flows expected to arise from continuing
to hold the investment. The most significant judgements relate to the
impairment testing of our investment in Bank of Communications ('BoCom').
Key assumptions used in estimating BoCom's value in use, the sensitivity
of the value in use calculation to different assumptions and a sensitivity
analysis that shows the changes in key assumptions that would reduce
the excess of value in use over the carrying amount (the 'headroom')
to nil are described in note 15.
============================================================================
(b) Income and expenses
Operating income
Interest income and expense
Interest income and expense for all financial instruments,
excluding those classified as held for trading or designated at
fair value are recognised in 'Interest income' and 'Interest
expense' in the income statement using the effective interest
method. However, as an exception to this, interest on debt
securities issued by the group that are designated under the fair
value option and derivatives managed in conjunction with those debt
securities are included in interest expense.
Interest on impaired financial assets is recognised using the
rate of interest used to discount the future cash flows for the
purpose of measuring the impairment loss.
Non-interest income and expense
The group generates fee income from services provided at a fixed
price over time, such as account service and card fees, or when the
group delivers a specific transaction at a point in time such as
broking services and import/export services. With the exception of
certain fund management and performance fees, all other fees are
generated at a fixed price. Fund management and performance fees
can be variable depending on the size of the customer portfolio and
the group's performance as fund manager. Variable fees are
recognised when all uncertainties are resolved. Fee income is
generally earned from short term contracts with payment terms that
do not include a significant financing component.
The group acts as principal in the majority of contracts with
customers, with the exception of broking services. For most
brokerage trades the group acts as agent in the transaction and
recognises broking income net of fees payable to other parties in
the arrangement.
The group recognises fees earned on transaction-based
arrangements at a point in time when we have fully provide the
service to the customer. Where the contract requires services to be
provided over time, income is recognised on a systematic basis over
the life of the agreement.
Where the group offers a package of services that contains
multiple non-distinct performance obligations, such as those
included in account service packages, the promised services are
treated as a single performance obligation. If a package of
services contains distinct performance obligations, such as those
including both account and insurance services, the corresponding
transaction price is allocated to each performance obligation based
on the estimated stand-alone selling prices.
Dividend income is recognised when the right to receive payment
is established. This is the ex-dividend date for listed equity
securities, and usually the date when shareholders approve the
dividend for unlisted equity securities.
Net income/(expense) from financial instruments measured at fair
value through profit or loss includes the following:
-- 'Net income from financial instruments held for trading or
managed on a fair value basis'. This element is comprised of the
net trading income, which includes all gains and losses from
changes in the fair value of financial assets and financial
liabilities held for trading, together with the related interest
income, expense and dividends; and it also includes all gains and
losses from changes in the fair value of derivatives that are
managed in conjunction with financial assets and liabilities
measured at fair value through profit or loss.
-- 'Net income/(expense) from assets and liabilities of
insurance businesses, including related derivatives, measured at
fair value through profit or loss'. This includes interest income,
interest expense and dividend income in respect of financial assets
and liabilities measured at fair value through profit or loss; and
those derivatives managed in conjunction with the above which can
be separately identifiable from other trading derivatives.
-- 'Changes in fair value of long-term debt and related
derivatives'. Interest paid on the external long-term debt and
interest cash flows on related derivatives is presented in interest
expense.
-- 'Changes in fair value of other financial instruments
mandatorily measured at fair value through profit or loss'. This
includes interest on instruments which fail the SPPI test. See (d)
below.
The accounting policies for insurance premium income are
disclosed in note 1.2(j).
(c) Valuation of financial instruments
All financial instruments are initially recognised at fair
value. Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair value
of a financial instrument on initial recognition is generally its
transaction price (that is, the fair value of the consideration
given or received). However, if there is a difference between the
transaction price and the fair value of financial instruments whose
fair value is based on a quoted price in an active market or a
valuation technique that uses only data from observable markets,
the group recognises the difference as a trading gain or loss at
inception ('day 1 gain or loss'). In all other cases, the entire
day 1 gain or loss is deferred and recognised in the income
statement over the life of the transaction until the transaction
matures or is closed out, the valuation inputs become observable or
the group enters into an offsetting transaction.
The fair value of financial instruments is generally measured on
an individual basis. However, in cases where the group manages a
group of financial assets and liabilities according to its net
market or credit risk exposure, the fair value of the group of
financial instruments is measured on a net basis but the underlying
financial assets and liabilities are presented separately in the
financial statements, unless they satisfy the HKFRSs offsetting
criteria.
Critical accounting estimates and judgements
The majority of valuation techniques employ only observable market
data. However, certain financial instruments are valued on the basis
of valuation techniques that feature one or more significant market
inputs that are unobservable, where the measurement of fair value is
more judgemental. An instrument in its entirety is classified as valued
using significant unobservable inputs if, in the opinion of management,
a significant proportion of the instrument's inception profit or greater
than 5% of the instrument's valuation is driven by unobservable inputs.
'Unobservable' in this context means that there is little or no current
market data available from which to determine the price at which an
arm's length transaction would be likely to occur. It generally does
not mean that there is no data available at all upon which to base
a determination of fair value (consensus pricing data may, for example,
be used).
==========================================================================
(d) Financial instruments measured at amortised cost
Financial assets that are held to collect the contractual cash
flows and that contain contractual terms that give rise on
specified dates to cash flows that are solely payments of principal
and interest, such as most loans and advances to banks and
customers and some debt securities, are measured at amortised cost.
In addition, most financial liabilities are measured at amortised
cost. The group accounts for regular way amortised cost financial
instruments using trade date accounting. The carrying value of
these financial assets at initial recognition includes any directly
attributable transactions costs. If the initial fair value is lower
than the cash amount advanced, such as in the case of some
leveraged finance and syndicated lending activities, the difference
is deferred and recognised over the life of the loan through the
recognition of interest income.
The group may commit to underwrite loans on fixed contractual
terms for specified periods of time. When the loan arising from the
lending commitment is expected to be held for trading, the
commitment to lend is recorded as a derivative. When the group
intends to hold the loan, the loan commitment is included in the
impairment calculations set out below.
Non-trading reverse repurchase, repurchase and similar
agreements
When debt securities are sold subject to a commitment to
repurchase them at a predetermined price ('repos'), they remain on
the balance sheet and a liability is recorded in respect of the
consideration received. Securities purchased under commitments to
resell ('reverse repos') are not recognised on the balance sheet
and an asset is recorded in respect of the initial consideration
paid. Non-trading repos and reverse repos are measured at amortised
cost. The difference between the sale and repurchase price or
between the purchase and resale price is treated as interest and
recognised in net interest income over the life of the
agreement.
Contracts that are economically equivalent to reverse repurchase
or repurchase agreements (such as sales or purchases of debt
securities entered into together with total return swaps with the
same counterparty) are accounted for similarly to, and presented
together with, reverse repurchase or repurchase agreements.
(e) Financial assets measured at fair value through other comprehensive income ('FVOCI')
Financial assets held for a business model that is achieved by
both collecting contractual cash flows and selling and that contain
contractual terms that give rise on specified dates to cash flows
that are solely payments of principal and interest are measured at
FVOCI. These comprise primarily debt securities. They are
recognised on the trade date when the group enters into contractual
arrangements to purchase and are normally derecognised when they
are either sold or redeemed. They are subsequently remeasured at
fair value and changes therein (except for those relating to
impairment, interest income and foreign currency exchange gains and
losses) are recognised in other comprehensive income until the
assets are sold. Upon disposal, the cumulative gains or losses in
other comprehensive income are recognised in the income statement
as 'Gains less losses from financial instruments'. Financial assets
measured at FVOCI are included in the impairment calculations set
out below and impairment is recognised in profit or loss.
(f) Equity securities measured at fair value with fair value movements presented in OCI
The equity securities for which fair value movements are shown
in OCI are business facilitation and other similar investments
where the group holds the investments other than to generate a
capital return. Gains or losses on the derecognition of these
equity securities are not transferred to profit or loss. Dividend
income is recognised in profit or loss.
(g) Financial instruments designated at fair value through profit or loss
Financial instruments, other than those held for trading, are
classified in this category if they meet one or more of the
criteria set out below and are so designated irrevocably at
inception:
-- the use of the designation removes or significantly reduces an accounting mismatch;
-- when a group of financial assets and liabilities or a group
of financial liabilities is managed and its performance is
evaluated on a fair value basis, in accordance with a documented
risk management or investment strategy; and
-- where the financial liability contains one or more non-closely related embedded derivatives.
Designated financial assets are recognised when the group enters
into contracts with counterparties, which is generally on trade
date, and are normally derecognised when the rights to the cash
flows expire or are transferred. Designated financial liabilities
are recognised when the group enters into contracts with
counterparties, which is generally on settlement date, and are
normally derecognised when extinguished. Subsequent changes in fair
values are recognised in the income statement in 'Net income from
financial instruments held for trading or managed on a fair value
basis' or 'Net income/(expense) from assets and liabilities of
insurance businesses, including related derivatives, measured at
fair value through profit or loss'.
Under the above criterion, the main classes of financial
instruments designated by the group are:
-- Long-term debt issues
The interest and/or foreign exchange exposure on certain fixed
rate debt securities issued has been matched with the interest
and/or foreign exchange exposure on certain swaps as part of a
documented risk management strategy.
-- Financial assets and financial liabilities under unit-linked
and non-linked investment contracts
A contract under which the group does not accept significant
insurance risk from another party is not classified as an insurance
contract, other than investment contracts with discretionary
participation features ('DPF'), but is accounted for as a financial
liability. Customer liabilities under linked and certain non-linked
investment contracts issued by insurance subsidiaries are
determined based on the fair value of the assets held in the linked
funds. If no fair value designation was made for the related
assets, at least some of the assets would otherwise be measured at
either fair value through other comprehensive income or amortised
cost. The related financial assets and liabilities are managed and
reported to management on a fair value basis. Designation at fair
value of the financial assets and related liabilities allows
changes in fair values to be recorded in the income statement and
presented in the same line.
(h) Derivatives
Derivatives are financial instruments that derive their value
from the price of underlying items such as equities, interest rates
or other indices. Derivatives are recognised initially and are
subsequently measured at fair value, with changes in fair value
generally recorded in the income statement. Derivatives are
classified as assets when their fair value is positive or as
liabilities when their fair value is negative. This includes
embedded derivatives in financial liabilities which are bifurcated
from the host contract when they meet the definition of a
derivative on a stand-alone basis.
Where the derivatives are managed with debt securities issued by
the group that are designated at fair value, the contractual
interest is shown in 'Interest expense' together with the interest
payable on the issued debt.
Hedge accounting
When derivatives are held for risk management purposes, they are
designated in hedge accounting relationships where the required
criteria for documentation and hedge effectiveness are met. The
group enters into fair value hedges, cash flow hedges or hedges of
net investments in foreign operations as appropriate to the risk
being hedged.
Fair value hedge
Fair value hedge accounting does not change the recording of
gains and losses on derivatives and other hedging instruments, but
results in recognising changes in the fair value of the hedged
assets or liabilities attributable to the hedged risk that would
not otherwise be recognised in the income statement. If a hedge
relationship no longer meets the criteria for hedge accounting,
hedge accounting is discontinued; the cumulative adjustment to the
carrying amount of the hedged item is amortised to the income
statement on a recalculated effective interest rate, unless the
hedged item has been derecognised, in which case it is recognised
in the income statement immediately.
Cash flow hedge
The effective portion of gains and losses on hedging instruments
is recognised in other comprehensive income; the ineffective
portion
of the change in fair value of derivative hedging instruments
that are part of a cash flow hedge relationship is recognised
immediately
in the income statement within 'Net income from financial
instruments held for trading or managed on a fair value basis'. The
accumulated gains and losses recognised in other comprehensive
income are reclassified to the income statement in the same periods
in which the hedged item affects profit or loss. In hedges of
forecast transactions that result in recognition of a non-financial
asset or liability, previous gains and losses recognised in other
comprehensive income are included in the initial measurement of the
asset or liability. When a hedge relationship is discontinued, or
partially discontinued, any cumulative gain or loss recognised in
other comprehensive income remains in equity until the forecast
transaction is recognised in the income statement. When a forecast
transaction is no longer expected to occur, the cumulative gain or
loss previously recognised in other comprehensive income is
immediately reclassified to the income statement.
Derivatives that do not qualify for hedge accounting
Non-qualifying hedges are derivatives entered into as economic
hedges of assets and liabilities for which hedge accounting was not
applied.
(i) Impairment of amortised cost and FVOCI financial assets
Expected credit losses ('ECL') are recognised for placings with
and advances to banks, loans and advances to customers, non-trading
reverse repurchase agreements, other financial assets held at
amortised cost, debt instruments measured at fair value through
other comprehensive income, and certain loan commitments and
financial guarantee contracts. At initial recognition, allowance
(or provision in the case of some loan commitments and financial
guarantees) is required for ECL resulting from default events that
are possible within the next 12 months (or less, where the
remaining life is less than 12 months) ('12-month ECL'). In the
event of a significant increase in credit risk, allowance (or
provision) is required for ECL resulting from all possible default
events over the expected life of the financial instrument
('lifetime ECL'). Financial assets where 12-month ECL is recognised
are considered to be 'stage 1'; financial assets which are
considered to have experienced a significant increase in credit
risk are in 'stage 2'; and financial assets for which there is
objective evidence of impairment so are considered to be in default
or otherwise credit-impaired are in 'stage 3'. Purchased or
originated credit-impaired financial assets ('POCI') are treated
differently as set out below.
Credit-impaired (stage 3)
The group determines that a financial instrument is
credit-impaired and in stage 3 by considering relevant objective
evidence, primarily whether:
-- contractual payments of either principal or interest are past due for more than 90 days;
-- there are other indications that the borrower is unlikely to
pay such as that a concession has been granted to the borrower for
economic or legal reasons relating to the borrower's financial
condition; and
-- the loan is otherwise considered to be in default.
If such unlikeliness to pay is not identified at an earlier
stage, it is deemed to occur when an exposure is 90 days past due,
even where regulatory rules permit default to be defined based on
180 days past due. Therefore the definitions of credit-impaired and
default are aligned as far as possible so that stage 3 represents
all loans which are considered defaulted or otherwise
credit-impaired.
Interest income is recognised by applying the effective interest
rate to the amortised cost amount, i.e. gross carrying amount less
ECL allowance.
Write-off
Financial assets (and the related impairment allowances) are
normally written off, either partially or in full, when there is no
realistic prospect of recovery. Where loans are secured, this is
generally after receipt of any proceeds from the realisation of
security. In circumstances where the net realisable value of any
collateral has been determined and there is no reasonable
expectation of further recovery, write-off may be earlier.
Renegotiation
Loans are identified as renegotiated and classified as
credit-impaired when we modify the contractual payment terms due to
significant credit distress of the borrower. Renegotiated loans
remain classified as credit-impaired until there is sufficient
evidence to demonstrate a significant reduction in the risk of
non-payment of future cash flows and retain the designation of
renegotiated until maturity or derecognition.
A loan that is renegotiated is derecognised if the existing
agreement is cancelled and a new agreement is made on substantially
different terms or if the terms of an existing agreement are
modified such that the renegotiated loan is a substantially
different financial instrument. Any new loans that arise following
derecognition events in these circumstances are considered to be
purchased or originated credit-impaired ('POCI') and will continue
to be disclosed as renegotiated loans.
Other than originated credit-impaired loans, all other modified
loans could be transferred out of stage 3 if they no longer exhibit
any evidence of being credit-impaired and, in the case of
renegotiated loans, there is sufficient evidence to demonstrate a
significant reduction in the risk of non-payment of future cash
flows, over the minimum observation period, and there are no other
indicators of impairment. These loans could be transferred to stage
1 or 2 based on the mechanism as described below by comparing the
risk of a default occurring at the reporting date (based on the
modified contractual terms) and the risk of a default occurring at
initial recognition (based on the original, unmodified contractual
terms). Any amount written off as a result of the modification of
contractual terms would not be reversed.
Loan modifications that are not credit-impaired
Loan modifications that are not identified as renegotiated are
considered to be commercial restructuring. Where a commercial
restructuring results in a modification (whether legalised through
an amendment to the existing terms or the issuance of a new loan
contract) such that the group's rights to the cash flows under the
original contract have expired, the old loan is derecognised and
the new loan is recognised at fair value. The rights to cash flows
are generally considered to have expired if the commercial
restructure is at market rates and no payment-related concession
has been provided.
Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly
since initial recognition is performed at each reporting period by
considering the change in the risk of default occurring over the
remaining life of the financial instrument. The assessment
explicitly or implicitly compares the risk of default occurring at
the reporting date compared to that at initial recognition, taking
into account reasonable and supportable information, including
information about past events, current conditions and future
economic conditions. The assessment is unbiased,
probability-weighted, and to the extent relevant, uses
forward-looking information consistent with that used in the
measurement of ECL. The analysis of credit risk is multifactor. The
determination of whether a specific factor is relevant and its
weight compared with other factors depends on the type of product,
the characteristics of the financial instrument and the borrower,
and the geographical region. Therefore, it is not possible to
provide a single set of criteria that will determine what is
considered to be a significant increase in credit risk and these
criteria will differ for different types of lending, particularly
between retail and wholesale. However, unless identified at an
earlier stage, all financial assets are deemed to have suffered a
significant increase in credit risk when 30 days past due. In
addition, wholesale loans that are individually assessed, typically
corporate and commercial customers, and included on a watch or
worry list are included in stage 2.
For wholesale portfolios, the quantitative comparison assesses
default risk using a lifetime probability of default ('PD') which
encompasses a wide range of information including the obligor's
customer risk rating ('CRR'), macroeconomic condition forecasts and
credit transition probabilities. For origination CRRs up to 3.3,
significant increase in credit risk is measured by comparing the
average PD for the remaining term estimated at origination with the
equivalent estimation at reporting date. The quantitative measure
of significance varies depending on the credit quality at
origination as follows:
Significance trigger -- PD to increase
Origination CRR by
0.1-1.2 15bps
2.1-3.3 30bps
---------------- ---------------------------------------
For CRRs greater than 3.3 which are not impaired, a significant
increase in credit risk is considered to have occurred when the
origination PD has doubled. The significance of changes in PD was
informed by expert credit risk judgement, referenced to historical
credit mitigations and to relative changes in external market
rates.
For loans originated prior to the implementation of HKFRS 9, the
origination PD does not include adjustments to reflect expectations
of future macroeconomic conditions since these are not available
without the use of hindsight. In the absence of this data,
origination PD must be approximated assuming through-the-cycle
('TTC') PDs and TTC migration probabilities, consistent with the
instrument's underlying modelling approach and the CRR at
origination. For these loans, the quantitative comparison is
supplemented with additional CRR deterioration based thresholds as
set out in the table below:
Additional significance criteria
-- Number of CRR grade notches deterioration
required to identify as significant
credit deterioration (stage 2) (>
Origination CRR or equal to)
0.1 5 notches
---------------- ----------------------------------------------
1.1-4.2 4 notches
---------------- ----------------------------------------------
4.3-5.1 3 notches
---------------- ----------------------------------------------
5.2-7.1 2 notches
----------------------------------------------
7.2-8.2 1 notch
---------------- ----------------------------------------------
8.3 0 notch
---------------- ----------------------------------------------
Further information about the 23-grade scale used for CRR can be
found on page 25.
For certain portfolios of debt securities where external market
ratings are available and credit ratings are not used in credit
risk management, the debt securities will be in stage 2 if their
credit risk increases to the extent they are no longer considered
investment grade. Investment grade is where the financial
instrument has a low risk of incurring losses, the structure has a
strong capacity to meet its contractual cash flow obligations in
the near term and adverse changes in economic and business
conditions in the longer term may, but will not necessarily, reduce
the ability of the borrower to fulfil their contractual cash flow
obligations.
For retail portfolios, default risk is assessed using a
reporting date 12-month PD derived from credit scores which
incorporate all available information about the customer. This PD
is adjusted for the effect of macroeconomic forecasts for periods
longer than 12 months and is considered to be a reasonable
approximation of a lifetime PD measure. Retail exposures are first
segmented into homogeneous portfolios, generally by country,
product and brand. Within each portfolio, the stage 2 accounts are
defined as accounts with an adjusted 12-month PD greater than the
average 12-month PD of loans in that portfolio 12 months before
they become 30 days past due. The expert credit risk judgement is
that no prior increase in credit risk is significant. This
portfolio-specific threshold identifies loans with a PD higher than
would be expected from loans that are performing as originally
expected and higher than that which would have been acceptable at
origination. It therefore approximates a comparison of origination
to reporting date PDs.
Unimpaired and without significant increase in credit risk -
(stage 1)
ECL resulting from default events that are possible within the
next 12 months ('12-month ECL') are recognised for financial
instruments that remain in stage 1.
Purchased or originated credit-impaired ('POCI')
Financial assets that are purchased or originated at a deep
discount that reflects the incurred credit losses are considered to
be POCI. This population includes the recognition of a new
financial instrument following a renegotiation where concessions
have been granted for economic or contractual reasons relating to
the borrower's financial difficulty that otherwise would not have
been considered. The amount of change-in-lifetime ECL is recognised
in profit or loss until the POCI is derecognised, even if the
lifetime ECL are less than the amount of ECL included in the
estimated cash flows on initial recognition.
Movement between stages
Financial assets can be transferred between the different
categories (other than POCI) depending on their relative increase
in credit risk since initial recognition. Financial instruments are
transferred out of stage 2 if their credit risk is no longer
considered to be significantly increased since initial recognition
based on the assessments described above. Except for renegotiated
loans, financial instruments are transferred out of stage 3 when
they no longer exhibit any evidence of credit impairment as
described above. Renegotiated loans that are not POCI will continue
to be in stage 3 until there is sufficient evidence to demonstrate
a significant reduction in the risk of non-payment of future cash
flows, observed over a minimum one-year period and there are no
other indicators of impairment. For loans that are assessed for
impairment on a portfolio basis, the evidence typically comprises a
history of payment performance against the original or revised
terms, as appropriate to the circumstances. For loans that are
assessed for impairment on an individual basis, all available
evidence is assessed on a case-by-case basis.
Measurement of ECL
The assessment of credit risk, and the estimation of ECL, are
unbiased and probability-weighted, and incorporate all available
information which is relevant to the assessment including
information about past events, current conditions and reasonable
and supportable forecasts of future events and economic conditions
at the reporting date. In addition, the estimation of ECL should
take into account the time value of money.
In general, the group calculates ECL using three main
components, a probability of default, a loss given default ('LGD')
and the exposure at default ('EAD').
The 12-month ECL is calculated by multiplying the 12-month PD,
LGD and EAD. Lifetime ECL is calculated using the lifetime PD
instead. The 12-month and lifetime PDs represent the probability of
default occurring over the next 12 months and the remaining
maturity of the instrument respectively.
The EAD represents the expected balance at default, taking into
account the repayment of principal and interest from the balance
sheet date to the default event together with any expected
drawdowns of committed facilities. The LGD represents expected
losses on the EAD given the event of default, taking into account,
among other attributes, the mitigating effect of collateral value
at the time it is expected to be realised and the time value of
money.
The group leverages the Basel II IRB framework where possible,
with recalibration to meet the differing HKFRS 9 requirements as
follows.
Model Regulatory capital HKFRS 9
PD
* Through the cycle (represents long-run average PD * Point in time (based on current conditions, adjusted
throughout a full economic cycle) to take into account estimates of future conditions
that will impact PD)
* The definition of default includes a backstop of 90+
days past due * Default backstop of 90+ days past due for all
portfolios
------------------------------------------------------------
EAD
* Cannot be lower than current balance * Amortisation captured for term products
------ ----------------------------------------------------------- ------------------------------------------------------------
LGD
* Downturn LGD (consistent losses expected to be * Expected LGD (based on estimate of loss given default
suffered during a severe but plausible economic including the expected impact of future economic
downturn) conditions such as changes in value of collateral)
* Regulatory floors may apply to mitigate risk of * No floors
underestimating downturn LGD due to lack of
historical data
* Discounted using the original effective interest rate
of the loan
* Discounted using cost of capital
* Only costs associated with obtaining/selling
* All collection costs included collateral included
------ ----------------------------------------------------------- ------------------------------------------------------------
Other
* Discounted back from point of default to balance
sheet date
------ ----------------------------------------------------------- ------------------------------------------------------------
While 12-month PDs are recalibrated from Basel models where
possible, the lifetime PDs are determined by projecting the
12-month PD using a term structure. For the wholesale methodology,
the lifetime PD also takes into account credit migration, i.e. a
customer migrating through the CRR bands over its life.
The ECL for wholesale stage 3 is determined on an individual
basis using a discounted cash flow ('DCF') methodology. The
expected future cash flows are based on the credit risk officer's
estimates as at the reporting date, reflecting reasonable and
supportable assumptions and projections of future recoveries and
expected future receipts of interest. Collateral is taken into
account if it is likely that the recovery of the outstanding amount
will include realisation of collateral based on its estimated fair
value of collateral at the time of expected realisation, less costs
for obtaining and selling the collateral. The cash flows are
discounted at a reasonable approximation of the original effective
interest rate. For significant cases, cash flows under four
different scenarios are probability-weighted by reference to the
three economic scenarios applied more generally by the group and
the judgement of the credit risk officer in relation to the
likelihood of the workout strategy succeeding or receivership being
required. For less significant cases, the effect of different
economic scenarios and work-out strategies is approximated and
applied as an adjustment to the most likely outcome.
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of
the financial asset. The maximum period considered when measuring
ECL (be it 12-month or lifetime ECL) is the maximum contractual
period over which the group is exposed to credit risk. For
wholesale overdrafts, credit risk management actions are taken no
less frequently than on an annual basis and therefore this period
is to the expected date of the next substantive credit review. The
date of the substantive credit review also represents the initial
recognition of the new facility. However, where the financial
instrument includes both a drawn and undrawn commitment and the
contractual ability to demand repayment and cancel the undrawn
commitment does not serve to limit the group's exposure to credit
risk to the contractual notice period, the contractual period does
not determine the maximum period considered. Instead, ECL is
measured over the period the group remains exposed to credit risk
that is not mitigated by credit risk management actions. This
applies to retail overdrafts and credit cards, where the period is
the average time taken for stage 2 exposures to default or close as
performing accounts, determined on a portfolio basis and ranging
from between two and six years. In addition, for these facilities
it is not possible to identify the ECL on the loan commitment
component separately from the financial asset component. As a
result, the total ECL is recognised in the loss allowance for the
financial asset unless the total ECL exceeds the gross carrying
amount of the financial asset, in which case the ECL is recognised
as a provision.
Forward-looking economic inputs
The group will in general apply three forward-looking global
economic scenarios determined with reference to external forecast
distributions representative of our view of forecast economic
conditions, the consensus economic scenario approach. This approach
is considered 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 an Upside and a Downside scenario. The Central
scenario is used by the annual operating planning process and, with
regulatory modifications, will also be used in enterprise-wide
stress tests. The Upside and Downside are constructed following a
standard process supported by a scenario narrative reflecting the
group's current top and emerging risks and by consulting external
and internal subject matter experts. The relationship between the
outer scenarios and Central scenario will generally be fixed with
the Central scenario being assigned a weighting of 80% and the
Upside and Downside scenarios 10% each, with the difference between
the Central and Outer scenarios in terms of economic severity being
informed by the spread of external forecast distributions among
professional industry forecasts. The outer scenarios are
economically plausible, internally consistent states of the world
and will not necessarily be as severe as scenarios used in stress
testing. The period of forecast is five years, after which the
forecasts will revert to a view based on average past experience.
The spread between the central and outer scenarios is grounded on
consensus distributions of projected gross domestic product of the
following economies: UK, France, Hong Kong, mainland China, US and
Canada. The economic factors include, but are not limited to, gross
domestic product, unemployment, interest rates, inflation and
commercial property prices across all the countries and territories
in which the group operates.
In general, the consequences of the assessment of credit risk
and the resulting ECL outputs will be probability-weighted using
the standard probability weights. This probability weighting may be
applied directly or the effect of the probability weighting
determined on a periodic basis, at least annually, and then applied
as an adjustment to the outcomes resulting from the central
economic forecast. The central economic forecast is updated
quarterly.
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, including the production of extra
scenarios. If conditions warrant, this could result in alternative
scenarios and probability weightings being applied in arriving at
the ECL.
Critical accounting estimates and judgements
In determining ECL, management is required to exercise judgement in
defining what is considered to be a significant increase in credit
risk and in making assumptions and estimates to incorporate relevant
information about past events, current conditions and forecasts of
economic conditions. Judgement has been applied in determining the
lifetime and point of initial recognition of revolving facilities.
The PD, LGD and EAD models which support these determinations are reviewed
regularly in light of differences between loss estimates and actual
loss experience, but given that HKFRS 9 requirements have only just
been applied, there has been little time available to make these comparisons.
Therefore, the underlying models and their calibration, including how
they react to forward-looking economic conditions, remain subject to
review and refinement. This is particularly relevant for lifetime PDs,
which have not been previously used in regulatory modelling and for
the incorporation of 'Upside scenarios' which have not generally been
subject to experience gained through stress testing.
The exercise of judgement in making estimations requires the use of
assumptions which are highly subjective and very sensitive to the risk
factors, in particular to changes in economic and credit conditions
across a large number of geographical areas. Many of the factors have
a high degree of interdependency and there is no single factor to which
loan impairment allowances as a whole are sensitive. Pages 20 to 29
set out the assumptions underlying the Central scenario and information
about how scenarios are developed in relation to the group's top and
emerging risks and its judgements, informed by consensus forecasts
of professional industry forecasters. The sensitivity of ECL to different
economic scenarios is illustrated by recalculating the ECL for selected
portfolios as if 100% weighting had been assigned to each scenario.
===============================================================================
(j) Insurance contracts
A contract is classified as an insurance contract where the
group accepts significant insurance risk from another party by
agreeing to compensate that party on the occurrence of a specified
uncertain future event. An insurance contract may also transfer
financial risk, but is accounted for as an insurance contract if
the insurance risk is significant. In addition, the group issues
investment contracts with DPF which are also accounted for as
insurance contracts as required by HKFRS 4 'Insurance
Contracts'.
Net insurance premium income
Premiums for life insurance contracts are accounted for when
receivable, except in unit-linked insurance contracts where
premiums are accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting
period as the premiums for the direct insurance contracts to which
they relate.
Net insurance claims and benefits paid and movements in
liabilities to policyholders
Gross insurance claims for life insurance contracts reflect the
total cost of claims arising during the year, including claim
handling costs and any policyholder bonuses allocated in
anticipation of a bonus declaration.
Maturity claims are recognised when due for payment. Surrenders
are recognised when paid or at an earlier date on which, following
notification, the policy ceases to be included within the
calculation of the related insurance liabilities. Death claims are
recognised when notified.
Reinsurance recoveries are accounted for in the same period as
the related claim.
Liabilities under insurance contracts
Liabilities under non-linked life insurance contracts are
calculated by each life insurance operation based on local
actuarial principles. Liabilities under unit-linked life insurance
contracts are at least equivalent to the surrender or transfer
value, which is calculated by reference to the value of the
relevant underlying funds or indices.
Future profit participation on insurance contracts with
Discretionary Participation Feature ('DPF')
Where contracts provide discretionary profit participation
benefits to policyholders, liabilities for these contracts include
provisions for the future discretionary benefits to policyholders.
These provisions reflect the actual performance of the investment
portfolio to date and management's expectation of the future
performance of the assets backing the contracts, as well as other
experience factors such as mortality, lapses and operational
efficiency, where appropriate. The benefits to policyholders may be
determined by the contractual terms, regulation, or past
distribution policy.
Investment contracts with DPF
While investment contracts with DPF are financial instruments,
they continue to be treated as insurance contracts as required
by
HKFRS 4. The group therefore recognises the premiums for these
contracts as revenue and recognises as an expense the resulting
increase in the carrying amount of the liability.
In the case of net unrealised investment gains on these
contracts, whose discretionary benefits principally reflect the
actual performance of the investment portfolio, the corresponding
increase in the liabilities is recognised in either the income
statement or other comprehensive income, following the treatment of
the unrealised gains on the relevant assets. In the case of net
unrealised losses, a deferred participating asset is recognised
only to the extent that its recoverability is highly probable.
Movements in the liabilities arising from realised gains and losses
on relevant assets are recognised in the income statement.
Present value of in-force long-term insurance business
The group recognises the value placed on insurance contracts and
investment contracts with DPF, which are classified as long-term
and in-force at the balance sheet date, as an asset. The asset
represents the present value of the equity holders' interest in the
issuing insurance companies' profits expected to emerge from these
contracts written at the balance sheet date. The present value of
in-force business ('PVIF') is determined by discounting those
expected future profits using appropriate assumptions in assessing
factors such as future mortality, lapse rates and levels of
expenses, and a risk discount rate that reflects the risk premium
attributable to the respective contracts. The PVIF incorporates
allowances for both non-market risk and the value of financial
options and guarantees. The PVIF asset is presented gross of
attributable tax in the balance sheet and movements in the PVIF
asset are included in 'Other operating income' on a gross of tax
basis.
Critical accounting estimates and judgements
The value of PVIF depends upon assumptions regarding future events.
The PVIF is determined by discounting those expected future profits
using appropriate assumptions in assessing factors such as future mortality,
lapse rates and levels of expenses, and a risk discount rate that reflects
the risk premium attributable to the respective contracts. The PVIF
incorporates allowances for both non-market risk and the value of financial
options and guarantees. The assumptions are reassessed at each reporting
date and changes in the estimates which affect the value of PVIF are
reflected in the income statement.
==============================================================================
(k) Property
Land and buildings
Land and buildings held for own use are carried at their
revalued amount, being the fair value at the date of the
revaluation less any subsequent accumulated depreciation and
impairment losses.
Revaluations are performed by professional qualified valuers, on
a market basis, with sufficient regularity to ensure that the net
carrying amount does not differ materially from the fair value.
Surpluses arising on revaluation are credited firstly to the income
statement, to the extent of any deficits arising on revaluation
previously charged to the income statement in respect of the same
land and buildings, and are thereafter taken to the 'Property
revaluation reserve'. Deficits arising on revaluation are first set
off against any previous revaluation surpluses included in the
'Property revaluation reserve' in respect of the same land and
buildings, and are thereafter recognised in the income
statement.
Buildings held for own use which are situated on leasehold land
where it is possible to reliably separate the value of the building
from the value of the leasehold land at inception of the lease are
revalued by professional qualified valuers, on a depreciated
replacement cost basis or surrender value, with sufficient
regularity to ensure that the net carrying amount does not differ
materially from the fair value.
Leasehold land and buildings are depreciated over the shorter of
the unexpired terms of the leases or the remaining useful
lives.
The Government of Hong Kong owns all the land in Hong Kong and
permits its use under leasehold arrangements. Similar arrangements
exist in mainland China. At inception of the lease, where the cost
of land is known or can be reliably determined and the term of the
lease is not less than 50 years, the group records its interests in
leasehold land and land use rights as land and buildings held for
own use. Where the term is less than 50 years, the group records
its interests as operating leases.
Where the cost of the land is unknown or cannot be reliably
determined, and the leasehold land and land use rights are not
clearly held under an operating lease, they are accounted for as
land and buildings held for own use.
Investment properties
The group holds certain properties as investments to earn
rentals or for capital appreciation, or both, and those investment
properties are included on balance sheet at fair value with changes
in fair value being recognised in the income statement.
(l) Employee compensation and benefits
Post-employment benefit plans
The group operates a number of pension schemes including defined
benefit and defined contribution, and post-employment benefit
schemes.
Payments to defined contribution schemes are charged as an
expense as the employees render service.
Defined benefit pension obligations are calculated using the
projected unit credit method. The net charge to the income
statement mainly comprises the service cost and the net interest on
the net defined benefit asset or liability, and is presented in
operating expenses.
Remeasurements of the net defined benefit asset or liability,
which comprise actuarial gains and losses, return on plan assets
excluding interest and the effect of the asset ceiling (if any,
excluding interest), are recognised immediately in other
comprehensive income. The net defined benefit asset or liability
represents the present value of defined benefit obligations reduced
by the fair value of plan assets, after applying the asset ceiling
test, where the net defined benefit surplus is limited to the
present value of available refunds and reductions in future
contributions to the plan.
(m) Tax
Income tax comprises current tax and deferred tax. Income tax is
recognised in the income statement except to the extent that it
relates to items recognised in other comprehensive income or
directly in equity, in which case the tax is recognised in the same
statement as the related item appears.
Current tax is the tax expected to be payable on the taxable
profit for the year and on any adjustment to tax payable in respect
of previous years. The group provides for potential current tax
liabilities that may arise on the basis of the amounts expected to
be paid to the tax authorities.
Deferred tax is recognised on temporary differences between the
carrying amounts of assets and liabilities in the balance sheet,
and the amounts attributed to such assets and liabilities for tax
purposes. Deferred tax is calculated using the tax rates expected
to apply in the periods in which the assets will be realised or the
liabilities settled.
Current and deferred tax are calculated based on tax rates and
laws enacted, or substantively enacted, by the balance sheet
date.
(n) Provisions, contingent liabilities and guarantees
Provisions
Provisions are recognised when it is probable that an outflow of
economic benefits will be required to settle a present legal or
constructive obligation that has arisen as a result of past events
and for which a reliable estimate can be made.
Critical accounting estimates and judgements
Judgement is involved in determining whether a present obligation exists
and in estimating the probability, timing and amount of any outflows.
Professional expert advice is taken on the assessment of litigation,
property (including onerous contracts) and similar obligations. Provisions
for legal proceedings and regulatory matters typically require a higher
degree of judgement than other types of provisions. When matters are
at an early stage, accounting judgements can be difficult because of
the high degree of uncertainty associated with determining whether
a present obligation exists, and estimating the probability and amount
of any outflows that may arise. As matters progress, management and
legal advisers evaluate on an ongoing basis whether provisions should
be recognised, revising previous judgements and estimates as appropriate.
At more advanced stages, it is typically easier to make judgements
and estimates around a better defined set of possible outcomes. However,
the amount provisioned can remain very sensitive to the assumptions
used. There could be a wide range of possible outcomes for any pending
legal proceedings, investigations or inquiries. As a result, it is
often not practicable to quantify a range of possible outcomes for
individual matters. It is also not practicable to meaningfully quantify
ranges of potential outcomes in aggregate for these types of provisions
because of the diverse nature and circumstances of such matters and
the wide range of uncertainties involved. Provisions for customer remediation
also require significant levels of estimation and judgement. The amounts
of provisions recognised depend on a number of different assumptions,
such as the volume of inbound complaints, the projected period of inbound
complaint volumes, the decay rate of complaint volumes, the population
identified as systemically mis-sold and the number of policies per
customer complaint.
===============================================================================
Contingent liabilities, contractual commitments and
guarantees
Contingent liabilities
Contingent liabilities, which include certain guarantees and
letters of credit pledged as collateral security, and contingent
liabilities related to legal proceedings or regulatory matters, are
not recognised in the financial statements but are disclosed unless
the probability of settlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts which are not
classified as insurance contracts are recorded initially at their
fair value, which is generally the fee received or present value of
the fee receivable.
The Bank has issued financial guarantees and similar contracts
to other group entities. The group elects to account for certain
guarantees as insurance contracts in the Bank's financial
statements, in which case they are measured and recognised as
insurance liabilities. This election is made on a
contract-by-contract basis, and is irrevocable.
(o) Accounting policies applicable prior to 1 January 2018
Financial instruments measured at amortised cost
Loans and advances to banks and customers, held-to-maturity
investments and most financial liabilities are measured at
amortised cost. The carrying value of these financial assets at
initial recognition includes any directly attributable transactions
costs. If the initial fair value is lower than the cash amount
advanced, such as in the case of some leveraged finance and
syndicated lending activities, the difference is deferred and
recognised over the life of the loan (as described in note 1.2(c)
above) through the recognition of interest income, unless the loan
becomes impaired.
The group may commit to underwriting loans on fixed contractual
terms for specified periods of time. When the loan arising from the
lending commitment is expected to be held for trading, the
commitment to lend is recorded as a derivative. When the group
intends to hold the loan, a provision on the loan commitment is
only recorded where it is probable that the group will incur a
loss.
Impairment of loans and advances
Losses for impaired loans are recognised when there is objective
evidence that impairment of a loan or portfolio of loans has
occurred. Losses which may arise from future events are not
recognised.
Individually assessed loans and advances
The factors considered in determining whether a loan is
individually significant for the purposes of assessing impairment
include the size of the loan, the number of loans in the portfolio,
the importance of the individual loan relationship and how this is
managed. Loans that are determined to be individually significant
will be individually assessed for impairment, except when volumes
of defaults and losses are sufficient to justify treatment under a
collective methodology.
Loans considered as individually significant are typically to
corporate and commercial customers, are for larger amounts and are
managed on an individual basis. For these loans, the group
considers on a case-by-case basis at each balance sheet date
whether there is any objective evidence that a loan is
impaired.
The determination of the realisable value of security is based
on the most recently updated market value at the time the
impairment assessment is performed. The value is not adjusted for
expected future changes in market prices, though adjustments are
made to reflect local conditions such as forced sale discounts.
Impairment losses are calculated by discounting the expected
future cash flows of a loan, which include expected future receipts
of contractual interest, at the loan's original effective interest
rate or an approximation thereof, and comparing the resultant
present value with the loan's current carrying amount.
Collectively assessed loans and advances
Impairment is assessed collectively to cover losses which have
been incurred but have not yet been identified on loans subject to
individual assessment or for homogeneous groups of loans that are
not considered individually significant, which are generally retail
lending portfolios.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of impairment
has been specifically identified on an individual basis are grouped
together according to their credit risk characteristics for a
collective impairment assessment. This assessment captures
impairment losses that the group has incurred as a result of events
occurring before the balance sheet date that the group is not able
to identify on an individual loan basis, and that can be reliably
estimated. When information becomes available that identifies
losses on individual loans within a group, those loans are removed
from the group and assessed individually.
Homogeneous groups of loans and advances
Statistical methods are used to determine collective impairment
losses for homogeneous groups of loans not considered individually
significant. The methods used to calculate collective allowances
are set out below:
-- When appropriate empirical information is available, the
group utilises roll-rate methodology, which employs statistical
analyses of historical data and experience of delinquency and
default to reliably estimate the amount of the loans that will
eventually be written off as a result of events occurring before
the balance sheet date. Individual loans are grouped using ranges
of past due days, and statistical estimates are made of the
likelihood that loans in each range will progress through the
various stages of delinquency and become irrecoverable.
Additionally, individual loans are segmented based on their credit
characteristics, such as industry sector, loan grade or product. In
applying this methodology, adjustments are made to estimate the
periods of time between a loss event occurring, for example because
of a missed payment, and its confirmation through write-off (known
as the loss identification period). Current economic conditions are
also evaluated when calculating the appropriate level of allowance
required to cover inherent loss. In certain highly developed
markets, models also take into account behavioural and account
management trends as revealed in, for example bankruptcy and
rescheduling statistics.
-- When the portfolio size is small or when information is
insufficient or not reliable enough to adopt a roll-rate
methodology, the group adopts a basic formulaic approach based on
historical loss rate experience, or a discounted cash flow model.
Where a basic formulaic approach is undertaken, the period between
a loss event occurring and its identification is estimated by local
management, and is typically between six and 12 months.
Write-off of loans and advances
Loans and the related impairment allowance accounts are normally
written off, either partially or in full, when there is no
realistic prospect of recovery. Where loans are secured, this is
generally after receipt of any proceeds from the realisation of
security. In circumstances where the net realisable value of any
collateral has been determined and there is no reasonable
expectation of further recovery, write-off may be earlier.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequent
period, and the decrease can be related objectively to an event
occurring after the impairment was recognised, the excess is
written back by reducing the loan impairment allowance account
accordingly. The write-back is recognised in the income
statement.
Assets acquired in exchange for loans
When non-financial assets acquired in exchange for loans as part
of an orderly realisation are held for sale, these assets are
recorded as 'Assets held for sale.'
Renegotiated loans
Loans subject to collective impairment assessment whose terms
have been renegotiated are no longer considered past due, but are
treated as up-to-date loans for measurement purposes once a minimum
number of required payments has been received. Where collectively
assessed loan portfolios include significant levels of renegotiated
loans, these loans are segregated from other parts of the loan
portfolio for the purposes of collective impairment assessment to
reflect their risk profile. Loans subject to individual impairment
assessment, whose terms have been renegotiated, are subject to
ongoing review to determine whether they remain impaired. The
carrying amounts of loans that have been classified as renegotiated
retain this classification until maturity or derecognition.
A loan that is renegotiated is derecognised if the existing
agreement is cancelled and a new agreement made on substantially
different terms or if the terms of an existing agreement are
modified such that the renegotiated loan is substantially a
different financial instrument. Any new loans that arise following
derecognition events will continue to be disclosed as renegotiated
loans and are assessed for impairment as above.
Non-trading reverse repurchase, repurchase and similar
agreements
When debt securities are sold subject to a commitment to
repurchase them at a predetermined price ('repos'), they remain on
the balance sheet and a liability is recorded in respect of the
consideration received. Securities purchased under commitments to
resell ('reverse repos') are not recognised on the balance sheet
and an asset is recorded in respect of the initial consideration
paid. Non-trading repos and reverse repos are measured at amortised
cost. The difference between the sale and repurchase price or
between the purchase and resale price is treated as interest and
recognised in net interest income over the life of the
agreement.
Contracts that are economically equivalent to reverse repurchase
or repurchase agreements (such as sales or purchases of debt
securities entered into together with total return swaps with the
same counterparty) are accounted for similarly to, and presented
together with, reverse repurchase or repurchase agreements.
Financial instruments measured at fair value
Available-for-sale financial assets
Available-for-sale financial assets are recognised on the trade
date when the group enters into contractual arrangements to
purchase them, and are normally derecognised when they are either
sold or redeemed. They are subsequently remeasured at fair value,
and changes therein are recognised in other comprehensive income
until the assets are either sold or become impaired. Upon disposal,
the cumulative gains or losses in other comprehensive income are
recognised in the income statement as 'Gains less losses from
financial investments'.
Impairment of available-for-sale financial assets
Available-for-sale financial assets are assessed at each balance
sheet date for objective evidence of impairment. Impairment losses
are recognised in the income statement within 'Loan impairment
charges and other credit risk provisions' for debt instruments and
within 'Gains less losses from financial investments' for
equities.
Available-for-sale debt securities
In assessing objective evidence of impairment at the reporting
date, the group considers all available evidence, including
observable data or information about events specifically relating
to the securities which may result in a shortfall in the recovery
of future cash flows. A subsequent decline in the fair value of the
instrument is recognised in the income statement when there is
objective evidence of impairment as a result of decreases in the
estimated future cash flows. Where there is no further objective
evidence of impairment, the decline in the fair value of the
financial asset is recognised in other comprehensive income. If the
fair value of a debt security increases in a subsequent period, and
the increase can be objectively related to an event occurring after
the impairment loss was recognised in the income statement, or the
instrument is no longer impaired, the impairment loss is reversed
through the income statement.
Available-for-sale equity securities
A significant or prolonged decline in the fair value of the
equity below its cost is objective evidence of impairment. In
assessing whether it is significant, the decline in fair value is
evaluated against the original cost of the asset at initial
recognition. In assessing whether it is prolonged, the decline is
evaluated against the continuous period in which the fair value of
the asset has been below its original cost at initial
recognition.
All subsequent increases in the fair value of the instrument are
treated as a revaluation and are recognised in other comprehensive
income. Subsequent decreases in the fair value of the
available-for-sale equity security are recognised in the income
statement to the extent that further cumulative impairment losses
have been incurred. Impairment losses recognised on the equity
security are not reversed through the income statement.
Financial instruments designated at fair value
Financial instruments, other than those held for trading, are
classified in this category if they meet one or more of the
criteria set out below, and are so designated irrevocably at
inception:
-- the use of the designation removes or significantly reduces an accounting mismatch;
-- when a group of financial assets, liabilities or both is
managed and its performance is evaluated on a fair value basis, in
accordance with a documented risk management or investment
strategy; and
-- where financial instruments contain one or more non-closely related embedded derivatives.
Designated financial assets are recognised when the bank enters
into contracts with counterparties, which is generally on trade
date, and are normally derecognised when the rights to the cash
flows expire or are transferred. Designated financial liabilities
are recognised when the bank enters into contracts with
counterparties, which is generally on settlement date, and are
normally derecognised when extinguished. Subsequent changes in fair
values are recognised in the income statement in 'Net
income/(expense) from financial instruments designated at fair
value'. Under this criterion, the main classes of financial
instruments designated by the group are:
Long-term debt issues
The interest and/or foreign exchange exposure on certain fixed
rate debt securities issued has been matched with the interest
and/or foreign exchange exposure on certain swaps as part of a
documented risk management strategy.
Financial assets and financial liabilities under unit-linked and
non-linked investment contracts
A contract under which the group does not accept significant
insurance risk from another party is not classified as an insurance
contract, other than investment contracts with discretionary
participation features ('DPF'), but is accounted for as a financial
liability. See note 1.2(j) for investment contracts with DPF and
contracts where the group accepts significant insurance risk.
Customer liabilities under linked and certain non-linked investment
contracts issued by insurance subsidiaries and the corresponding
financial assets are designated at fair value. Liabilities are at
least equivalent to the surrender or transfer value which is
calculated by reference to the value of the relevant underlying
funds or indices. Premiums receivable and amounts withdrawn are
accounted for as increases or decreases in the liability recorded
in respect of investment contracts. The incremental costs directly
related to the acquisition of new investment contracts or renewing
existing investment contracts are deferred and amortised over the
period during which the investment management services are
provided.
2 Effects of reclassification upon adoption of HKFRS 9
-----------------------------------------------------
Reconciliation of consolidated balance sheet at 31 December 2017 and
1 January 2018
HKFRS 9 reclassification
to
HKAS
39 Fair Fair HKFRS HKFRS
carrying value value 9 remeasure-ment 9 carrying
amount Other through through Carrying including amount
at changes profit other amount expected at
31 Dec in and compre-hensive Amortised post credit 1 Jan
2017 classi-fication loss income cost reclassification losses(4) 2018
HKFRS
HKAS 39 9
measurement measurement
Footnotes category category HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------- ------------ ----------- --------- ----------------- ---------- ---------------- --------- ---------------- ---------------- -----------
Assets
----------
Cash and
sight
balances
at central Amortised Amortised
banks cost cost 208,073 - - - - 208,073 (1) 208,072
Items in
the course
of
collection
from other Amortised Amortised
banks cost cost 25,714 - - - - 25,714 - 25,714
Hong Kong
Government
certificates
of Amortised Amortised
indebtedness cost cost 267,174 - - - - 267,174 - 267,174
------------
Trading 1,
assets 3 FVPL FVPL 496,434 36,282 - - (26,572) 506,144 9 506,153
---------------- --------- ----- ---------
Derivatives FVPL FVPL 300,243 - - - - 300,243 - 300,243
-------------- ---------- ------------ ----------- --------- ----------- ---- ------ ------- ------- -------- ---------------- --------- ----- ---------
Financial
assets
designated
and
otherwise
mandatorily
measured
at fair
value 2,5,6,7 FVPL FVPL 122,646 - 12,130 - (899) 133,877 158 134,035
--------------
Reverse
repurchase
agreements
- Amortised Amortised
non-trading cost cost 330,890 - - - - 330,890 - 330,890
-------------- ---------- ------------ ----------- --------- ----------- ---- ------ ------- ------- -------- ---------------- --------- ----- ---------
Placings
with and 1,
advances 2, Amortised Amortised
to banks 3 cost cost 433,005 (37,095) (4,667) - - 391,243 (53) 391,190
1,
Loans and 2,
advances 3, Amortised Amortised
to customers 4 cost cost 3,328,980 (35,406) (2,654) - - 3,290,920 (3,492) 3,287,428
-------------- ----------
FVOCI
(Available
for sale
Financial - debt
investments 5 instruments) FVOCI 1,410,655 - (47) - (50,699) 1,359,909 - 1,359,909
-------------- ------------
FVOCI
(Available
for sale
- equity
6 instruments) FVOCI 9,275 - (3,093) 297 - 6,479 6 6,485
-------------- ------------
Amortised Amortised
5 cost cost 300,943 - - - 51,598 352,541 (4,457) 348,084
-------------- -------- ---------------- --------- ---- ---------
Amounts
due from Amortised Amortised
Group cost / cost /
companies FVPL FVPL 227,729 - - - - 227,729 (26) 227,703
-------------- ---------- ------------ ----------- --------- ----------- ---- ------ ------- ------- -------- ---------------- --------- ---- ---------
Interests
in
associates
and joint
ventures 8 N/A N/A 144,717 - - - - 144,717 (6,029) 138,688
-------------- ------------ ----------- --------- ----------- ---- ------ ------- ------- -------- ---------------- --------- ---- ---------
Goodwill
and
intangible
assets 9 N/A N/A 59,865 - - - - 59,865 (616) 59,249
-------------- ------------ ----------- --------- ----------- ---- ------ ------- ------- -------- ---------------- --------- ---- ---------
Property,
plant and
equipment N/A N/A 116,336 - - - - 116,336 - 116,336
-------------- ---------- ------------ ----------- --------- ----------- ---- ------ ------- ------- -------- ---------------- --------- ----- ---------
Deferred
tax assets N/A N/A 2,156 - - - - 2,156 383 2,539
-------------- ---------- ------------ ----------- --------- ----------- ---- ------ ------- ------- -------- ---------------- --------- ----- ---------
Prepayments,
accrued
income
and other 1,
assets 7 N/A N/A 158,511 36,219 (1,669) (297) 26,572 219,336 (32) 219,304
-------------- ---------- ------------ ----------- --------- ----------- ---- ------ ------- ------ -------- ---------------- --------- ---- ---------
Total assets 7,943,346 - - - - 7,943,346 (14,150) 7,929,196
-------------- ---------- ------------ ----------- --------- ----------- ---- ------ ------- ------- -------- ---------------- --------- ---- ---------
For footnotes, see page 73.
Reconciliation for consolidated balance sheet at 31 December 2017 and
1 January 2018 (continued)
HKFRS 9 reclassification
to
HKAS
39 Fair Fair HKFRS HKFRS
carrying value value 9 remeasure-ment 9 carrying
amount Other through through Carrying including amount
at changes profit other amount expected at
31 Dec in and compre-hensive Amortised post credit 1 Jan
2017 classi-fication loss income cost reclassification losses(4) 2018
HKFRS
HKAS 39 9
measurement measurement
Footnotes category category HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------- ----------- ----------- --------- ----------------- ------- -------------- --------- ---------------- ---------------- -----------
Liabilities
Hong Kong
currency
notes in Amortised Amortised
circulation cost cost 267,174 - - - - 267,174 - 267,174
Items in
the course
of
transmission
to other Amortised Amortised
banks cost cost 38,283 - - - - 38,283 - 38,283
-------------- ---------- ----------- ----------- --------- ----------- ---- ------- -------------- --------- ---------------- --------- ----- ---------
Repurchase
agreements
- Amortised Amortised
non-trading cost cost 47,170 - - - - 47,170 - 47,170
Deposits Amortised Amortised
by banks 1 cost cost 201,697 (24,023) - - - 177,674 - 177,674
Customer Amortised Amortised
accounts 1 cost cost 5,138,272 (15,303) - - - 5,122,969 - 5,122,969
Trading 1,
liabilities 10 FVPL FVPL 231,365 (147,654) - - - 83,711 - 83,711
Derivatives FVPL FVPL 309,353 - - - - 309,353 - 309,353
Financial
liabilities
designated
at fair 9,
value 10 FVPL FVPL 49,278 120,397 - - - 169,675 73 169,748
Debt
securities Amortised Amortised
in issue cost cost 38,394 - - - - 38,394 - 38,394
Retirement
benefit
liabilities N/A N/A 2,222 - - - - 2,222 - 2,222
Amounts
due to Amortised Amortised
Group cost / cost /
companies FVPL FVPL 265,688 - - - - 265,688 - 265,688
----------
Accruals
and deferred
income,
other
liabilities
and 1,
provisions 4 N/A N/A 110,687 66,583 - - - 177,270 487 177,757
-------------- ---------- ----------- ----------- --------- ----------- ---- ------- -------------- --------- ---------------- --------- ----- ---------
Liabilities
under
insurance
contracts 9 N/A N/A 438,017 - - - - 438,017 (536) 437,481
-------------- ---------- ----------- ----------- --------- ----------- ---- ------- -------------- --------- ---------------- --------- ---- ---------
Current
tax
liabilities N/A N/A 3,242 - - - - 3,242 - 3,242
-------------- ---------- ----------- ----------- --------- ----------- ---- ------- -------------- --------- ---------------- --------- ----- ---------
Deferred
tax
liabilities N/A N/A 24,391 - - - - 24,391 (1,861) 22,530
-------------- ---------- ----------- ----------- --------- ----------- ---- ------- -------------- --------- ---------------- --------- ---- ---------
Subordinated Amortised Amortised
liabilities cost cost 4,090 - - - - 4,090 - 4,090
-------------- ---------- ----------- ----------- --------- ----------- ---- ------- -------------- --------- ---------------- --------- ----- ---------
Preference Amortised Amortised
shares cost cost 21,037 - - - - 21,037 - 21,037
Total
liabilities 7,190,360 - - - - 7,190,360 (1,837) 7,188,523
-------------- ---------- ----------- ----------- --------- ----------- ---- ------- -------------- --------- ---------------- --------- ---- ---------
HKFRS 9
HKAS 39 remeasurement Carrying
carrying Carrying including amount at
amount at HKFRS 9 amount post expected 1 January
31 Dec 2017 reclassification reclassification credit losses 2018
Footnotes HK$m HK$m HK$m HK$m HK$m
----------
Equity
Called up share
capital 151,360 - 151,360 - 151,360
Other equity
instruments 14,737 - 14,737 - 14,737
----------
Other reserves 11 123,417 (4,569) 118,848 57 118,905
----------
Retained
earnings 406,966 4,569 411,535 (12,047) 399,488
Total
shareholders'
equity 696,480 - 696,480 (11,990) 684,490
----------------- ---------- ------------ --------------- ---------------- ------------- ----------
Non-controlling
interests 56,506 - 56,506 (323) 56,183
----------------- ---------- ------------ --------------- ---------------- ------------- ----------
Total equity 752,986 - 752,986 (12,313) 740,673
----------------- ---------- ------------ --------------- ---------------- ------------- ----------
For footnotes, see page 73.
Reconciliation of impairment allowance under HKAS 39 and provision
under HKAS 37 to expected credit losses under HKFRS 9
Reclassification to Remeasurement
Fair value
Fair value through
through other Stage 1
profit comprehensive Amortised Stage & Stage
and loss income cost 3 2 Total
HKAS 39 measurement
category HK$m HK$m HK$m HK$m HK$m HK$m
------------------- ------------ ------------- --------- ------- -------- --------
Financial assets
at amortised
cost
-------------------
HKAS 39 impairment
allowance at
31 Dec 2017 - - - - - 13,046
----------------------------------------
Cash and sight Amortised cost
balances at (Loans and
central banks receivables) - - - - 1 1
-------------------
Items in the
course of
collection Amortised cost
from other (Loans and
banks receivables) - - - - - -
------------------- ------------------- ------------ ------------- --------- ------- -------- ------
Hong Kong
Government Amortised cost
certificates (Loans and
of indebtedness receivables) - - - - - -
------------------- ------------------- ------------ ------------- --------- ------- -------- ------
Reverse repurchase Amortised cost
agreements (Loans and
- non-trading receivables) - - - - - -
------------------- ------------------- ------------ ------------- --------- ------- -------- ------
Placings with Amortised cost
and advances (Loans and
to banks receivables) - - - - 53 53
-------------------
Amortised cost
Loans and advances (Loans and
to customers receivables) - - - 827 2,665 3,492
-------------------
Financial Amortised cost
investments (Held to maturity) - - 23 - 99 122
-------------------
Prepayments, Amortised cost
accrued income (Loans and
and other assets receivables) - - - - 32 32
------------------- ------------------- ------------ ------------- --------- ------- -------- ------
Expected credit
loss
allowance at
1 Jan 2018 - - - - - 16,746
---------------------------------------- ------------ ------------- --------- ------- -------- ------
Loan commitments
and financial
guarantee
contracts
-------------------
HKAS 37 provisions
at 31 Dec 2017 - - - - - 54
----------------------------------------
Provisions
(loan commitments
and financial
guarantees) N/A N/A N/A N/A 1 486 487
------------------- ------------------- ------------ ------------- --------- ------- -------- ------
Expected credit
loss
provision at
1 Jan 2018 - - - - - 541
---------------------------------------- ------------ ------------- --------- ------- -------- ------
The pre-tax net asset impact of additional impairment allowances
on adoption of HKFRS 9 is HK$4,187m; HK$3,700m in respect of
financial assets at amortised cost and HK$487m related to loan
commitments and financial guarantee contracts. Total expected
credit loss allowance at 1 January 2018 is HK$16,746m in respect of
financial assets at amortised cost and HK$541m related to loan
commitments and financial guarantee contracts.
Effects of reclassification upon adoption of HKFRS 9
Assuming no reclassification
Gains/(losses)
Carrying Gains/(losses) recognised
amount Fair value recognised in other
at 31 at 31 in profit comprehensive
Dec 2018 Dec 2018 or loss income
HK$m HK$m HK$m HK$m
--------------------------------------------- --------- ---------- -------------------- ----------------
Reclassified from available-for-sale to
amortised cost
--------------------------------------------- --------- ---------- -------------------- ----------------
Debt instruments measured at amortised cost 41,704 42,448 N/A (3,427)
--------------------------------------------- --------- ---------- -------------------- -------------
The majority of the assets reclassified from fair value through
profit and loss to amortised cost matured during the year.
Footnotes to Effects of reclassification upon adoption of HKFRS 9
1 Settlement accounts of HK$26,572m have been reclassified from 'Trading
assets' to 'Prepayments, accrued income and other assets' as a result
of the assessment of business model in accordance with HKFRS 9. Cash
collateral, margin and settlement accounts previously presented as
'Placings with and advances to banks' of HK$28,032m and 'Loans and
advances to customers' of HK$8,187m have been represented in 'Prepayments,
accrued income and other assets' to ensure consistent presentation
of all such balances. Cash collateral, margin and settlement accounts
previously presented as 'Trading liabilities' of HK$27,257m, 'Deposits
by banks' of HK$24,023m and 'Customer accounts' of
HK$15,303m have been represented in 'Accruals and deferred income,
other liabilities and provisions'. This change in presentation for
financial liabilities is considered to provide more relevant information,
given the change in presentation for the financial assets. These
changes in presentation for financial assets and liabilities have
had no effect on measurement of these items and therefore on 'Retained
earnings'.
2 'Loans and advances to customers' of HK$2,654m and 'Placings with
and advances to banks' of HK$4,667m did not meet the 'solely payments
of principal and interest' ('SPPI') requirement for amortised cost
classification under HKFRS 9. As a result, these financial assets
were reclassified to 'Financial assets designated and otherwise mandatorily
measured at fair value'.
3 Stock borrowing assets of HK$36,282m have been reclassified from
'Placings with and advances to banks' and 'Loans and advances to
customers' to 'Trading assets'. The change in measurement is a result
of the determination of the global business model for this activity
and to align the presentation throughout the group.
4 HKFRS 9 expected credit losses have decreased net assets by HK$4,187m
principally comprising of HK$3,492m reduction in the carrying value
of assets classified as 'Loans and advances to customers' and HK$487m
increase in 'Provisions' relating to expected credit losses on loan
commitments and financial guarantee contracts.
5 Debt instruments of HK$47m previously classified as available-for-sale
under HKAS 39 did not meet the SPPI requirement for FVOCI classification.
As a result, these financial assets were classified as 'Financial
assets designated and otherwise mandatorily measured at fair value'
upon adoption of HKFRS 9. Debt instruments of HK$50,699m previously
classified as available-for-sale under HKAS 39, have been reclassified
to amortised cost as a result of 'hold to collect' business model
classification under HKFRS 9. This resulted in a HK$4,335m downward
remeasurement of the financial assets now measured at amortised cost
excluding expected credit losses.
6 HK$3,093m of available-for-sale equity instruments have been reclassified
as 'Financial assets designated and otherwise mandatorily measured
at fair value' in accordance with HKFRS 9. The group has elected
to apply the FVOCI option under HKFRS 9 for the remaining HK$6,182m.
7 HK$1,669m of other financial assets, representing default fund contributions
which were measured at amortised cost under HKAS 39, did not meet
the SPPI requirement for amortised cost classification under HKFRS
9. As a result, these financial assets were classified as 'Financial
assets designated and otherwise mandatorily measured at fair value'.
8 'Interests in associates and joint ventures' includes the consequential
downward remeasurement of our interests in associates and joint ventures
as a result of these entities applying HKFRS 9 of HK$6,029m.
9 Changes in the classification and measurement of financial assets
held in our insurance business and the recognition of ECL under HKFRS
9 has resulted in secondary impacts on the present value of in-force
long-term insurance business ('PVIF') and liabilities to holders
of insurance and investment contracts. The gross carrying value of
PVIF reported in 'Goodwill and intangible assets' and liabilities
reported in 'Liabilities under insurance contracts' has decreased
by HK$616m and HK$536m respectively. Liabilities reported under 'Financial
liabilities designated at fair value' have increased by HK$73m.
10 We have considered market practices for the presentation of HK$120,397m
of financial liabilities which contain both deposit and derivative
components. We have concluded that a change in accounting policy
and presentation from 'Trading liabilities' would be appropriate,
since it would better align with the presentation of similar financial
instruments by peers and therefore provide more relevant information
about the effect of these financial liabilities on our financial
position and performance. As a result, rather than being classified
as held for trading, we have designated these financial liabilities
as at fair value since they are managed and their performance evaluated
on a fair value basis.
11 While HKFRS 9 ECL has no effect on the carrying value of FVOCI financial
assets, which remain measured at fair value, the adoption of HKFRS
9 results in a transfer from the FVOCI reserve (formerly AFS reserve)
to retained earnings to reflect the cumulative impairment recognised
in profit or loss in accordance with HKFRS 9 (net of impairment losses
previously recognised in profit or loss under HKAS 39). The resulting
cumulative expected credit losses recognised in 'Retained earnings'
on financial assets measured at FVOCI on adoption of HKFRS 9 is HK$55m.
In addition, the cumulative AFS reserve relating to financial investments
reclassified to 'Financial assets designated and otherwise mandatorily
measured at fair value' in accordance with HKFRS 9 has been transferred
to retained earnings.
3 Operating profit
-----------------
(a) Net interest income
Net interest income includes:
2018 2017
HK$m HK$m
Interest income recognised on impaired financial assets 276 277
------- ----
Interest income recognised on financial assets measured
at amortised cost 143,709 N/A
--------------------------------------------------------------- ------- ------
Interest income recognised on financial assets measured
at FVOCI 26,412 N/A
--------------------------------------------------------------- ------- ------
Interest expense on financial instruments, excluding interest
on financial liabilities held for trading or designated
or otherwise mandatorily measured at fair value (41,259) N/A
--------------------------------------------------------------- ------- ------
(b) Net fee income
Net fee income by global business
2018 2017
---------
Retail
Banking Global
and Banking Global
Wealth Commercial and Private Corporate
Management Banking Markets Banking Centre(1) Total Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
Account services 1,434 979 337 55 3 2,808 2,863
---------------------------- ---------- --------- ------- ------- --------- ------- ------
Funds under management 4,122 724 1,749 910 1 7,506 7,000
---------- --------- ------- ------- --------- ------- ------
Cards 6,552 1,788 74 - - 8,414 7,622
---------- --------- ------- ------- --------- ------- ------
Credit facilities 242 1,568 1,360 9 1 3,180 2,886
---------- --------- ------- ------- --------- ------- ------
Broking income 3,397 73 702 507 - 4,679 4,386
---------- --------- ------- ------- --------- ------- ------
Imports/exports - 2,909 723 - - 3,632 3,627
---------- --------- ------- ------- --------- ------- ------
Unit trusts 6,381 172 - 558 (4) 7,107 6,987
---------- --------- ------- ------- --------- ------- ------
Underwriting 5 3 1,111 - (7) 1,112 1,477
---------- --------- ------- ------- --------- ------- ------
Remittances 333 2,183 625 3 (6) 3,138 3,316
---------- --------- ------- ------- --------- ------- ------
Global custody 713 51 3,025 95 (18) 3,866 3,626
---------- --------- ------- ------- --------- ------- ------
Insurance agency commission
(2) 1,510 142 4 94 (9) 1,741 1,528
---------- --------- ------- ------- --------- ------- ------
Other 1,816 2,020 5,087 719 (2,240) 7,402 6,994
---------- --------- ------- --------- ------- ------
Fee income 26,505 12,612 14,797 2,950 (2,279) 54,585 52,312
---------------------------- ---------- --------- ------- ------- --------- ------- ------
Fee expense (5,418) (2,014) (5,003) (300) 2,381 (10,354) (9,162)
---------------------------- ---------- --------- ------- ------- --------- ------- ------
Net fee income 21,087 10,598 9,794 2,650 102 44,231 43,150
---------------------------- ---------- --------- ------- ------- --------- ------- ------
1 Includes inter-segment elimination
2 Re-insurance fees (previously reported under 'insurance agency
commission') were reclassified under 'Other' to align with the
Group's presentation. Comparatives have been represented to conform
to the current year's presentation.
Net fee income includes:
2018 2017
HK$m HK$m
Net fee income includes the following:
Fees earned on financial assets that are not at fair
value through profit and loss (other than amounts included
in determining the effective interest rate) 11,583 11,031
------------------------------------------------------------- ------ ------
- fee income 16,368 15,443
-------------------------------------------------------------
- fee expense (4,785) (4,412)
------ ------
Fee earned on trust and other fiduciary activities 9,653 8,904
------
- fee income 10,787 9,843
-------------------------------------------------------------
- fee expense (1,134) (939)
------------------------------------------------------------- ------ ------
(c) Net income from financial instruments measured at fair value
2018 2017
HK$m HK$m
Net income/(expense) arising on:
------------------------------------------------------------
Trading activities 32,567 23,432
------------------------------------------------------------ ------ ------
Gain on termination of hedges - 38
------------------------------------------------------------ ------ ------
Other trading income - hedging ineffectiveness (122) (14)
------------------------------------------------------------ ------ ------
- on cash flow hedges - 1
------------------------------------------------------------
- on fair value hedges (122) (15)
------------------------------------------------------------ ------ ------
Fair value movement on non-qualifying hedges (209) (246)
------------------------------------------------------------ ------ ------
Other instruments designated at fair value and related
derivatives(1) (513) (112)
------ ------
Net income from financial instruments held for trading
or managed on a fair value basis 31,723 23,098
------------------------------------------------------------
Financial assets held to meet liabilities under insurance
and investment contracts (6,104) 18,162
------------------------------------------------------------
Liabilities to customers under investment contracts 543 (2,555)
------------------------------------------------------------ ------ ------
Net income/(expense) from assets and liabilities of
insurance businesses, including related derivatives,
measured at fair value through profit or loss(1) (5,561) 15,607
------------------------------------------------------------ ------ ------
Changes in fair value of long-term debt issued and related
derivatives 20 (115)
------------------------------------------------------------ ------ ------
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss (217) N/A
------------------------------------------------------------ ------ ---------
Year ended 31 Dec 25,965 38,590
------------------------------------------------------------ ------ ------
1 The presentation has been updated to show the net
income/(expense) from assets and liabilities backing insurance and
investment contracts separately. Comparatives have been represented
to conform to the current year's presentation.
(d) Gains less losses from financial investments
2018 2017
HK$m HK$m
Gains on disposal of debt instruments measured at fair
value through other comprehensive income 501 N/A
-------------------------------------------------------- ---- --------
Gains on disposal of available-for-sale securities N/A 2,113
-------------------------------------------------------- ---- -----
Impairment of available-for-sale equity investments N/A (5)
-------------------------------------------------------- ---- -----
Year ended 31 Dec 501 2,108
-------------------------------------------------------- ---- -----
The decrease in gains on disposal of financial investments was
mainly due to the non-recurrence of disposal of the investment in
Techcom Bank in 2017.
(e) Other operating income
2018 2017
HK$m HK$m
Movement in present value of in-force insurance business 4,629 305
------ -----
Gains on investment properties 639 416
------ -----
Gains/(losses) on disposal of property, plant and equipment
and assets held for sale (69) 77
------ -----
Gains/(losses) on disposal of subsidiaries, associates
and business portfolios 38 (186)
------ -----
Rental income from investment properties 416 426
------------------------------------------------------------- ------ -----
Other 4,653 3,702
------------------------------------------------------------- ------ -----
Year ended 31 Dec 10,306 4,740
------------------------------------------------------------- ------ -----
There was a loss on disposal of loans and receivables of HK$5m
in the year (2017: loss of HK$75m). There were no gains or losses
on disposal of financial liabilities measured at amortised cost in
the year (2017: nil).
(f) Change in expected credit losses and other credit impairment charges
2018 2017
HK$m HK$m
Change in expected credit losses/ loan impairment charges
Loans and advances to banks and customers 4,611 4,330
----------------------------------------------------------- -----
- new allowances net of allowance releases 5,551 5,224
- recoveries of amounts previously written off (940) (894)
- modification losses and other movements - N/A
----------------------------------------------------------- -----
Loan commitments and guarantees 123 107
----------------------------------------------------------- -----
Other financial assets (14) -
----------------------------------------------------------- ----- -----
Year ended 31 Dec 4,720 4,437
----------------------------------------------------------- ----- -----
Change in expected credit losses as a percentage of average
gross customer advances was 0.13% for 2018 (2017: 0.14%).
(g) General and administrative expenses
2018 2017
HK$m HK$m
Premises and equipment 8,208 7,814
------ ------
- rental expenses 4,134 3,717
-----------------------------------------
- other premises and equipment expenses 4,074 4,097
----------------------------------------- ------ ------
Marketing and advertising expenses 2,940 2,785
----------------------------------------- ------ ------
Other administrative expenses 28,841 24,187
----------------------------------------- ------ ------
Year ended 31 Dec 39,989 34,786
----------------------------------------- ------ ------
Included in operating expenses were direct operating expenses of
HK$35m (2017: HK$32m) arising from investment properties that
generated rental income in the year. Direct operating expenses
arising from investment properties that did not generate rental
income amounted to HK$3m (2017: HK$4m).
Included in operating expenses were minimum lease payments under
operating leases of HK$3,550m (2017: HK$3,598m).
(h) Auditors' remuneration
Auditors' remuneration amounted to HK$125m (2017: HK$122m).
4 Insurance business
-------------------
(a) Net insurance premium Income
Non-linked Unit-linked Total
HK$m HK$m HK$m
---------- ----------- ---------
Gross insurance premium income 63,462 1,586 65,048
--------- ---------- ------
Reinsurers' share of gross insurance premium income (4,349) (21) (4,370)
-----------------------------------------------------
At 31 Dec 2018 59,113 1,565 60,678
----------------------------------------------------- --------- ---------- ------
Gross insurance premium income 61,577 1,669 63,246
Reinsurers' share of gross insurance premium income (7,052) (18) (7,070)
----------------------------------------------------- --------- ---------- ------
At 31 Dec 2017 54,525 1,651 56,176
----------------------------------------------------- --------- ---------- ------
(b) Net insurance claims and benefits paid and movement in liabilities
to policyholders
Non-linked Unit-linked Total
HK$m HK$m HK$m
---------- ----------- ---------
Gross claims and benefits paid and movement in
liabilities to policyholders 65,002 (3,080) 61,922
- claims, benefits and surrenders paid 27,086 7,598 34,684
- movement in liabilities 37,916 (10,678) 27,238
--------- ---------- ------
Reinsurers' share of claims and benefits paid and
movement in liabilities (4,155) 72 (4,083)
- claims, benefits and surrenders paid (1,930) (1,394) (3,324)
- movement in liabilities (2,225) 1,466 (759)
--------- ---------- ------
At 31 Dec 2018 60,847 (3,008) 57,839
--------------------------------------------------- --------- ---------- ------
Gross claims and benefits paid and movement in
liabilities to policyholders 65,671 8,841 74,512
- claims, benefits and surrenders paid 19,765 7,239 27,004
- movement in liabilities 45,906 1,602 47,508
Reinsurers' share of claims and benefits paid and
movement in liabilities (6,894) 1,172 (5,722)
- claims, benefits and surrenders paid (1,727) (1,715) (3,442)
- movement in liabilities (5,167) 2,887 (2,280)
At 31 Dec 2017 58,777 10,013 68,790
--------------------------------------------------- --------- ---------- ------
Liabilities under insurance 2017
contracts 2018
Reinsurers' Reinsurers'
Gross share(2) Net Gross share(2) Net
HK$m HK$m HK$m HK$m HK$m HK$m
-------- ----------- --------
Non-linked insurance contracts
At 31 Dec 391,348 (15,624) 375,724 342,134 (10,077) 332,057
Impact on transition to HKFRS
9 (535) - (535) - - -
----------
At 1 Jan 390,813 (15,624) 375,189 342,134 (10,077) 332,057
------- ---------- -------
Claims and benefits paid (27,086) 1,930 (25,156) (19,765) 1,727 (18,038)
Increase/(decrease) in liabilities
to policyholders 65,002 (4,155) 60,847 65,671 (6,894) 58,777
Exchange differences and other
movements(1) 4,939 91 5,030 3,308 (380) 2,928
------------------------------------ ------- ---------- -------
At 31 Dec 433,668 (17,758) 415,910 391,348 (15,624) 375,724
------------------------------------ ------- ---------- ------- ------- ---------- -------
Linked insurance contracts
At 1 Jan 46,669 (110) 46,559 44,036 (1,291) 42,745
------- ---------- -------
Claims and benefits paid (7,598) 1,394 (6,204) (7,239) 1,715 (5,524)
------------------------------------
Increase/(decrease) in liabilities
to policyholders (3,080) 72 (3,008) 8,841 1,172 10,013
------------------------------------
Exchange differences and other
movements(1) (1,070) (1,390) (2,460) 1,031 (1,706) (675)
------------------------------------
At 31 Dec 34,921 (34) 34,887 46,669 (110) 46,559
------------------------------------ ------- ---------- ------- ------- ---------- -------
Total liabilities to policyholders 468,589 (17,792) 450,797 438,017 (15,734) 422,283
------------------------------------ ------- ---------- ------- ------- ---------- -------
1 Exchange differences and other movements' includes movements
in liabilities arising from net unrealised investment gains
recognised in other comprehensive income.
2 Amounts recoverable from reinsurance of liabilities under
insurance contracts are included in the consolidated balance sheet
in 'Prepayment, accrued income and other assets'.
The key factors contributing to the movement in liabilities to
policyholders included death claims, surrenders, lapses,
liabilities to policyholders created at the initial inception of
the policies, the declaration of bonuses and other amounts
attributable to policyholders.
5 Employee compensation and benefits
-----------------------------------
(a) Employee compensation and benefits
2018 2017
HK$m HK$m
Wages and salaries 36,972 36,485
------
Social security costs 1,249 1,110
------ ------
Retirement benefits costs 2,572 2,500
------
- defined contribution plans 1,804 1,685
- defined benefit plans 768 815
------
Year ended 31 Dec 40,793 40,095
------------------------------ ------ ------
Share-based payments
'Wages and salaries' include the effect of share-based payments
arrangements of HK$968m (2017: HK$1,052m).
(b) Retirement benefit pension plans
The group operates a number of retirement benefit plans for its
employees. 'Pension risk management' in the Risk section contains
details of the policies and practices associated with these benefit
plans. Some of these plans are defined benefit plans, of which the
largest plan is The HSBC Group Hong Kong Local Staff Retirement
Benefit Scheme ('the Principal Plan').
The Principal Plan
In Hong Kong, the Principal Plan covers employees of the Bank
and certain other local employees of the Group. The Principal Plan
comprises a funded defined benefit scheme (which provides a lump
sum benefit on retirement but is now closed to new members) and a
defined contribution scheme. The latter was established on 1
January 1999 for new employees, and the group has been providing
defined contribution plans to all new employees. Since the defined
benefit scheme of the Principal Plan is a final salary lump sum
scheme, its exposure to longevity risk and interest rate risk is
limited compared to a scheme that provides annuity payments.
The investment strategy of the defined benefit scheme of the
Principal Plan is to hold the majority of assets in bonds, with a
smaller portion in equities and each investment manager has been
assigned a benchmark applicable to their respective asset class.
The target asset allocation for the portfolio is as follows: Bonds
65% and Equity 35%. The Principal Plan is predominantly a funded
plan with assets which are held in trust funds separate from the
group. The actuarial funding valuation of the Principal Plan is
reviewed at least on a triennial basis in accordance with the local
practice and regulations. The actuarial assumptions used to conduct
the actuarial funding valuation of the Principal Plan vary
according to the economic conditions.
The trustee assumes the overall responsibility for the Principal
Plan and the group has established a management committee and a
number of sub-committees to broaden the governance and manage the
concomitant issues.
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Present
value of
Fair value defined Net defined
of plan benefit benefit
assets obligations liability
HK$m HK$m HK$m
------------ -------------
At 1 Jan 2018 15,167 (17,308) (2,141)
--------- ----------- ----------
Service cost - (697) (697)
--------------------------------------------------- --------- ----------- ----------
- current service cost - (684) (684)
- past service cost and gains from settlements(1) - (13) (13)
--------- ----------- ----------
Net interest expense on the net defined benefit
liability 289 (338) (49)
--------- ----------- ----------
Re-measurement effects recognised in other
comprehensive income (692) (399) (1,091)
--------- ----------- ----------
- return on plan assets (excluding interest
income) (692) - (692)
- actuarial losses - (399) (399)
--------- ----------- ----------
Exchange differences and other movements (80) 74 (6)
--------- ----------- ----------
Contributions by the group 576 - 576
--------- ----------- ----------
Benefits paid (1,404) 1,471 67
--------------------------------------------------- --------- ----------- ----------
At 31 Dec 2018 13,856 (17,197) (3,341)
--------------------------------------------------- --------- ----------- ----------
Retirement benefit liabilities recognised on
the balance sheet (3,369)
---------------------------------------------------
Retirement benefit assets recognised on the
balance sheet (within 'Prepayment, accrued
income and other assets') 28
Present value of defined benefit obligation
relating to:
- actives (16,848)
-----------
- deferreds (19)
--------------------------------------------------- ---------- ----------- -------------
- pensioners (330)
--------------------------------------------------- ---------- ----------- -------------
At 1 Jan 2017 14,755 (18,552) (3,797)
Service cost - (722) (722)
---------------------------------------------------
- current service cost - (748) (748)
- past service cost and gains from settlements(1) - 26 26
------ ------- ------
Net interest expense on the net defined benefit
liability 281 (362) (81)
Re-measurement effects recognised in other
comprehensive income 1,633 7 1,640
- return on plan assets (excluding interest
income) 1,633 - 1,633
- actuarial gains - 7 7
------ ------- ------
Exchange differences and other movements(2) (450) 482 32
Contributions by the group 722 - 722
Benefits paid (1,774) 1,839 65
---------------------------------------------------
At 31 Dec 2017 15,167 (17,308) (2,141)
--------------------------------------------------- ------ ------- ------
Retirement benefit liabilities recognised on
the balance sheet (2,222)
Retirement benefit assets recognised on the
balance sheet (within 'Prepayment, accrued
income and other assets') 81
------- -------- ------
Present value of defined benefit obligation
relating to:
------- -------- ---------
- actives (17,044)
- pensioners (264)
--------------------------------------------------- ------- ------- ---------
1 Gains from settlements arise as the difference between assets
distributed and liabilities extinguished on settlements.
2 Other movements in 2017 included the impact from transfer of
certain employees to a fellow subsidiary.
The group expects to make HK$581m of contributions to defined
benefit pension plans during 2019. Benefits expected to be paid
from the Principal Plan to retirees over each of the next five
years, and in aggregate for the five years thereafter, are as
follows:
Benefits expected to be paid from the Principal Plan
2019 2020 2021 2022 2023 2024-2028
HK$m HK$m HK$m HK$m HK$m HK$m
HSBC Group Hong Kong
Local Staff Retirement
Benefit Scheme(1) 612 988 1,090 1,051 825 3,783
---------------------------- ---- ---- ----- ----- ---- ---------
1 The duration of the defined benefit obligation is 7 years for
the Principal Plan under the disclosure assumptions adopted (2017:
7 years).
Fair value of plan assets by asset classes
At 31 Dec 2018 At 31 Dec 2017
Quoted Quoted
market market
price in price in
active Thereof active Thereof
Value market HSBC Value market HSBC
HK$m HK$m HK$m HK$m HK$m HK$m
Fair value of plan
assets 13,856 13,856 454 15,167 15,167 321
------ --------- -------
- equities 4,390 4,390 - 4,791 4,791 -
- bonds 8,448 8,448 - 9,539 9,539 -
- other(1) 1,018 1,018 454 837 837 321
-------------------- ------ --------- ------- ------ --------- -------
1 Other mainly consists of cash and deposits.
.
The Principal Plan's principal actuarial financial
assumptions
The group determines the discount rate to be applied to its
obligations under the defined benefit scheme as prescribed by HKAS
19 and in consultation with the Principal Plan's local actuary, on
the basis of the current average yields of Hong Kong Government
bonds and Hong Kong Exchange Fund Notes, with maturities consistent
with that of the defined benefit obligation.
The present value of the Principal Plan's obligation was
HK$9,739m (2017: HK$10,086m). The principal actuarial assumptions
used to calculate the group's obligations for the Principal Plan
for the year, and used as the basis for measuring the expenses in
relation to the Principal Plan, were as follows:
Key actuarial assumptions for the principal plan
2018 2017
% p.a. % p.a.
Discount rate 1.95 1.70
Rate of pay increase 3.0 3.0
Mortality table HKLT2017(1) HKLT2016(2)
------------------------------------- ----------- -------------
1 HKLT2017- Hong Kong Life Tables 2017
2 HKLT2016- Hong Kong Life Tables 2016
Actuarial assumption sensitivities
The discount rate and rate of pay increase are sensitive to
changes in market conditions arising during the reporting period.
The following table shows the financial impact of assumption
changes on the Principal Plan at year end:
The effect of changes in key assumptions on the principal plan
Impact on pension obligation
Financial impact Financial impact
of increase of decrease
2018 2017 2018 2017
HK$m HK$m HK$m HK$m
------------- -------- ----------- ----------
Discount rate - increase/decrease of 25bps (167) (183) 172 189
-------- ------- -------
Rate of pay increase - increase/decrease
of 25bps 176 193 (172) (188)
-------------------------------------------- -------- --- ------- ------- -------
(c) Directors' emoluments
The aggregate emoluments of the Directors of the Bank disclosed
pursuant to section 4 of the Companies (Disclosure of Information
about Benefits of Directors) Regulation were HK$115m (2017:
HK$108m). This comprises fees of HK$10m (2017: HK$9m) and other
emoluments of HK$105m (2017: HK$99m) which includes contributions
to pension schemes of HK$1m (2017: HK$1m). Non-cash benefits which
are included in other emoluments mainly relate to share-based
payment awards, and the provision of housing and furnishing. 2017
balances have been represented to align to the 2018 presentation.
Details on loans to directors are set out in note 34.
6 Tax
----
The Bank and its subsidiaries in Hong Kong have provided for
Hong Kong profits tax at the rate of 16.5% (2017: 16.5%) on the
profits for the year assessable in Hong Kong. Overseas branches and
subsidiaries have similarly provided for tax in the countries in
which they operate at the appropriate rates of tax in force in
2018. Deferred taxation is provided for in accordance with the
group's accounting policy in note 1.2(m).
Tax expense
2018 2017
HK$m HK$m
Current tax 20,413 18,801
------ ------
- Hong Kong taxation - on current year profit 12,155 10,489
- Hong Kong taxation - adjustments in respect of prior
years (11) (3)
- overseas taxation - on current year profit 8,471 8,588
- overseas taxation - adjustments in respect of prior
years (202) (273)
------ ------
Deferred tax 2,054 800
------ ------
- origination and reversal of temporary differences 1,938 805
- effect of changes in tax rates 62 3
- adjustments in respect of prior years 54 (8)
------ ------
Year ended 31 Dec 22,467 19,601
-------------------------------------------------------- ------ ------
Tax reconciliation
The tax charged to the income statement differs from the tax
charge that would apply if all profits had been taxed at the
applicable tax rates in the countries concerned as follows:
Reconciliation between taxation charge and accounting profit at applicable
tax rates
2018 2017
HK$m HK$m
Profit before tax 134,583 115,619
Notional tax on profit before tax, calculated at the
rates applicable to profits in the countries concerned 25,232 21,915
Effects of profits in associates and joint ventures (2,683) (2,333)
Non-taxable income and gains (3,412) (2,623)
Local taxes and overseas withholding taxes 1,470 810
Permanent disallowables 1,132 1,001
Others 728 831
Year ended 31 Dec 22,467 19,601
------------------------------------------------------------ ------- -------
Movements of deferred tax assets and liabilities
Impairment
Accelerated allowance
capital Insurance Expense on financial Revaluation
allowances business provisions instruments of properties Other Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
Assets 93 - 1,296 491 - 2,154 4,034
Liabilities (751) (7,417) - - (13,667) (4,435) (26,270)
At 31 Dec 2017 (658) (7,417) 1,296 491 (13,667) (2,281) (22,236)
Impact on
transition
to HKFRS 9 (2) 103 (2) 873 - 1,321 2,293
----------------- --------- -------- ---------- ----------- ------------- ------ -------
At 1 Jan 2018 (660) (7,314) 1,294 1,364 (13,667) (960) (19,943)
----------------- --------- -------- ---------- ----------- ------------- ------ -------
Exchange and
other
adjustments 3 27 (60) 117 1,484 51 1,622
Charge/(credit)
to income
statement 185 (770) 185 (167) 310 (1,797) (2,054)
-----------------
Charge/(credit)
to other
comprehensive
income - - - - (1,800) (23) (1,823)
-----------------
At 31 Dec 2018 (472) (8,057) 1,419 1,314 (13,673) (2,729) (22,198)
----------------- --------- -------- ---------- ----------- ------------- ------ -------
Assets(1) 111 - 1,419 1,314 - 1,870 4,714
Liabilities(1) (583) (8,057) - - (13,673) (4,599) (26,912)
----------------- --------- -------- ---------- ----------- ------------- ------ -------
Assets(1) 108 - 961 674 - 2,415 4,158
Liabilities(1) (626) (7,323) - - (12,768) (3,339) (24,056)
At 1 Jan 2017 (518) (7,323) 961 674 (12,768) (924) (19,898)
------------------------- ---- ------ ----- ---- ------- ------ -------
Exchange and other
adjustments 9 (44) 84 18 396 (15) 448
Charge/(credit)
to income statement (149) (50) 251 (201) 283 (934) (800)
Charge/(credit)
to other comprehensive
income - - - - (1,578) (408) (1,986)
At 31 Dec 2017 (658) (7,417) 1,296 491 (13,667) (2,281) (22,236)
------------------------- ---- ------ ----- ---- ------- ------ -------
Assets(1) 93 - 1,296 491 - 2,154 4,034
Liabilities(1) (751) (7,417) - - (13,667) (4,435) (26,270)
------------------------- ---- ------ ----- ---- ------- ------ -------
1 After netting off balances within countries, the balances as
disclosed in the accounts are as follows: deferred tax assets
HK$2,315m (2017: HK$2,156m); and deferred tax liabilities
HK$24,513m (2017: HK$24,391m).
The amount of unused tax losses for which no deferred tax asset
is recognised in the balance sheet is HK$3,626m (2017: HK$2,572m).
Of this amount, HK$1,950m (2017: HK$1,898m) has no expiry date and
the remaining will expire within 10 years.
Deferred tax of HK$2,261m (2017: HK$2,321m) has been provided in
respect of distributable reserves or post-acquisition reserves of
associates that, on distribution or sale, would attract withholding
tax.
Deferred tax is not recognised in respect of the group's
investments in subsidiaries and branches where remittance or other
realisation is not probable, and for those associates and interests
in joint ventures where it has been determined that no additional
tax will arise.
7 Dividends
----------
Dividends to ordinary shareholders of the parent company
2018 2017
HK$ per HK$ per
share HK$m share HK$m
Dividends paid on ordinary shares
In respect of previous year:
----------------------------------------------------------- ------- ------ ------- --------
* fourth interim dividend in respect of the previous
financial year approved and paid during the year 0.36 16,559 0.56 25,438
----------------------------------------------------------- ------- ------ ------- ------
In respect of current year:
- first interim dividend paid 0.22 10,000 0.22 10,000
----------------------------------------------------------- ------- ------ ------- ------
- second interim dividend paid 0.22 10,000 0.22 10,000
------- ------ ------- ------
- third interim dividend paid 0.22 10,000 0.22 10,000
------- ------ ------- ------
Total 1.02 46,559 1.22 55,438
----------------------------------------------------------- ------- ------ ------- ------
The Directors have declared a fourth interim dividend in respect
of the financial year ended 31 December 2018 of HK$0.47 per
ordinary share (HK$21,958m) (2017: HK$0.36 per ordinary share
(HK$16,559m)).
Distributions on other equity instruments
2018 2017
HK$m HK$m
US$1,900m floating rate perpetual subordinated loans
(interest rate at one year US dollar LIBOR plus 3.84%) 881 822
--------------------------------------------------------- ---- ----
8 Trading assets
---------------
2018 2017
HK$m HK$m
Treasury and other eligible bills 140,050 100,566
Debt securities 283,506 250,730
Equity securities 119,475 107,301
Other(1,2) 15,807 37,837
At 31 Dec 558,838 496,434
----------------------------------- ------- -------
1 'Other' includes reverse repos, stock borrowing and other
accounts with banks and customers.
2 Settlement accounts were reclassified from 'Trading assets' to
'Other assets' on 1 January 2018 in accordance with HKFRS 9.
9 Derivatives
------------
Notional contract amounts and fair values of derivatives by product
contract type
Notional contract
amount Fair value - Assets Fair value - Liabilities
Trading Hedging Trading Hedging Total Trading Hedging Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------- --------- -------
Foreign Exchange 21,492,856 91,274 187,746 909 188,655 186,776 1,529 188,305
Interest rate 32,926,700 365,130 196,720 2,924 199,644 197,904 2,790 200,694
Equity 574,411 - 17,302 - 17,302 18,619 - 18,619
Credit 926,082 - 5,967 - 5,967 5,904 - 5,904
Commodity and
other 112,386 - 1,710 - 1,710 2,440 - 2,440
Gross total 56,032,435 456,404 409,445 3,833 413,278 411,643 4,319 415,962
------------------ ----------- ------- ------- ------- -------- --------- ------- ---------
Offset (120,409) (120,409)
At 31 Dec 2018 292,869 295,553
------------------ ----------- ------- ------- ------- -------- --------- ------- ---------
Foreign Exchange 18,928,664 132,198 198,483 2,449 200,932 201,829 3,575 205,404
-------
Interest rate 26,655,864 298,036 145,569 2,431 148,000 147,460 702 148,162
Equity 762,895 - 22,116 - 22,116 25,106 - 25,106
---------
Credit 659,200 - 5,591 - 5,591 5,970 - 5,970
---------
Commodity and
other 82,181 - 1,228 - 1,228 2,335 - 2,335
------- ------- ---------
Gross total 47,088,804 430,234 372,987 4,880 377,867 382,700 4,277 386,977
------------------ ----------- ------- ------- ------- -------- --------- ------- ---------
Offset (77,624) (77,624)
At 31 Dec 2017 300,243 309,353
------------------ ----------- ------- ------- ------- -------- --------- ------- ---------
Use of derivatives
The group transacts derivatives for three primary purposes: to
create risk management solutions for clients, to manage the
portfolio risk arising from client business, and to manage and
hedge the group's own risks. Derivatives (except for derivatives
which are designated as effective hedging instruments) are held for
trading. Within the held for trading classification are two types
of derivative instruments: those used in sales and trading
activities, and those used for risk management purposes but which
for various reasons do not meet the qualifying criteria for hedge
accounting. The second category includes derivatives managed in
conjunction with financial instruments designated at fair value.
These activities are described more fully below.
The group's derivative activities give rise to significant open
positions in portfolios of derivatives. These positions are managed
constantly to ensure that they remain within acceptable risk
levels. When entering into derivative transactions, the group
employs the same credit risk management framework to assess and
approve potential credit exposures that it uses for traditional
lending.
Trading derivatives
Most of the group's derivative transactions relate to sales and
trading activities. Sales activities include the structuring and
marketing of derivative products to customers to enable them to
take, transfer, modify or reduce current or expected risks. Trading
activities include market-making and risk management. Market-making
entails quoting bid and offer prices to other market participants
for the purpose of generating revenues based on spread and volume.
Risk management activity is undertaken to manage the risk arising
from client transactions, with the principal purpose of retaining
client margin. Other derivatives classified as held for trading
include non-qualifying hedging derivatives.
Derivatives valued using models with unobservable inputs
Any initial gain or loss on financial instruments where the
valuation is dependent on unobservable parameters is deferred over
the life of the contract or until the instrument is redeemed,
transferred or sold or the fair value becomes observable. All
derivatives that are part of qualifying hedging relationships have
valuations based on observable market parameters.
The aggregate unobservable inception profit yet to be recognised
in the income statement is immaterial.
Hedge accounting derivatives
The group applies hedge accounting to manage the following
risks: interest rate, foreign exchange and net investment in
foreign operations. The group uses derivatives (principally
interest rate and currency swaps) for hedging purposes in the
management of its own asset and liability portfolios and structural
positions. This enables the group to optimise the overall costs to
the group of accessing debt capital markets, and to mitigate the
market risk which would otherwise arise from structural imbalances
in the maturity and other profiles of its assets and liabilities.
The accounting treatment of hedging transactions varies according
to the nature of the instrument hedged and the type of hedging
transaction. Derivatives may qualify as hedges for accounting
purposes if they are fair value hedges, cash flow hedges, or hedges
of net investments in foreign operations.
Fair value hedges
The group enters into to fixed-for-floating-interest-rate swaps
to manage the exposure to changes in fair value due to movements in
market interest rates on certain fixed rate financial instruments
which are not measured at fair value through profit or loss,
including debt securities held and issued.
Sources of hedge ineffectiveness may arise from basis risk
including but not limited to the discount rates used for
calculating the fair value of derivatives, hedges using instruments
with a non-zero fair value and notional and timing differences
between the hedged items and hedging instruments.
For some debt securities held, the group manages interest rate
risk in a dynamic risk management strategy. The assets in scope of
this strategy are high quality fixed-rate debt securities, which
may be sold to meet liquidity and funding requirements.
The interest rate risk of the group's fixed rate debt securities
issued is managed in a non-dynamic risk management strategy.
Cash flow hedges
The group's cash flow hedging instruments consist principally of
interest rate swaps and cross-currency swaps that are used to
manage the variability in future interest cash flows of non-trading
financial assets and liabilities, arising due to changes in market
interest rates and foreign-currency basis.
The group applies macro cash flow hedging for interest-rate risk
exposures on portfolios of replenishing current and forecasted
issuances of non-trading assets and liabilities that bear interest
at variable rates, including rolling such instruments. The amounts
and timing of future cash flows, representing both principal and
interest flows, are projected for each portfolio of financial
assets and liabilities on the basis of their contractual terms and
other relevant factors, including estimates of prepayments and
defaults. The aggregate cash flows representing both principal
balances and interest cash flows across all portfolios are used to
determine the effectiveness and ineffectiveness. Macro cash flow
hedges are considered to be dynamic hedges.
The group also hedges the variability in future cash-flows on
foreign-denominated financial assets and liabilities arising due to
changes in foreign exchange market rates with cross-currency swaps;
these are considered non-dynamic hedges.
10 Financial assets designated and otherwise mandatorily measured at
fair value through profit
or loss
--- ------------------------------------------------------------------
2018 2017
Mandatorily Mandatorily
Designated measured Designated measured
at fair at fair at fair at fair
value value Total value value Total
HK$m HK$m HK$m HK$m HK$m HK$m
----------
Treasury and other eligible
bills 107 220 327 514 N/A 514
-----------
Debt securities 13,380 6,134 19,514 18,142 N/A 18,142
-----------
Equity securities(1) - 99,836 99,836 103,990 N/A 103,990
----------------------------- -----------
Other(2) - 13,182 13,182 N/A N/A N/A
----------------------------- ---------- ----------- ------- ---------- ----------- ---------
At 31 Dec 13,487 119,372 132,859 122,646 N/A 122,646
----------------------------- ---------- ----------- ------- ---------- ----------- -------
1 Equity securities have been reclassified from 'Financial
assets designated at fair value' to 'Financial assets mandatorily
measured at fair value through profit or loss' in accordance with
HKFRS 9.
2 'Other' primarily includes loans and advance to banks and customers.
11 Loans and advances to customers
--- --------------------------------
2018 2017
HK$m HK$m
Gross loans and advances to customers 3,545,258 3,342,025
Expected credit losses/Impairment allowances (16,556) (13,045)
---------
At 31 Dec 3,528,702 3,328,980
---------------------------------------------- --------- ---------
The following table provides an analysis of loans and advances
to customers by industry sector.
Analysis of gross loans and advances to customers
2018 2017
HK$m HK$m
----------------------------------- --------- -----------
Residential mortgages 937,666 855,788
Credit card advances 93,200 89,368
Other personal 236,133 230,119
----------------------------------- ---------
Total personal 1,266,999 1,175,275
----------------------------------- --------- ---------
Real estate 626,120 563,921
Wholesale and retail trade 433,734 460,347
Manufacturing 424,813 411,225
Transportation and storage 95,773 95,834
Other 484,186 429,800
--------- ---------
Total corporate and commercial(1) 2,064,626 1,961,127
----------------------------------- --------- ---------
Non-bank financial institutions 213,633 205,623
----------------------------------- --------- ---------
At 31 Dec 3,545,258 3,342,025
----------------------------------- --------- ---------
By geography(2)
----------------------------------- --------- -----------
Hong Kong 2,282,909 2,107,700
----------------------------------- --------- ---------
Rest of Asia Pacific 1,262,349 1,234,325
----------------------------------- --------- ---------
1 With effect from 2018, the industry sector is based on the
Statistical Classification of economic activities in the European
Community ('NACE') codes. Comparatives figures have been
represented to conform to the current year presentation.
2 The geographical information shown above has been classified
by the location of the principal operations of the subsidiary and
by the location of the branch responsible for advancing the
funds.
Finance lease receivables and hire purchase contracts
The group leases a variety of assets to third parties under
finance leases. At the end of lease terms, assets may be sold to
third parties or leased for further terms. Rentals are calculated
to recover the cost of assets less their residual value, and earn
finance income. Loans and advances to customers include receivables
under finance leases and hire purchase contracts having the
characteristics of finance leases.
Net investment in finance leases and hire purchase contracts
2018 2017
Total Total
future Unearned future Unearned
minimum finance Present minimum finance Present
payments income value payments income value
HK$m HK$m HK$m HK$m HK$m HK$m
Amounts receivable
- within one year 2,990 (640) 2,350 2,552 (584) 1,968
- after one year but within
five years 8,622 (2,097) 6,525 8,504 (1,922) 6,582
- after five years 23,346 (3,819) 19,527 22,823 (3,594) 19,229
----------------------------------- --------- ------- ------ --------- ------- ------
34,958 (6,556) 28,402 33,879 (6,100) 27,779
----------------------------------- --------- ------- ------ --------- ------- ------
Expected credit losses/Impairment
allowances (117) (82)
Net investment in finance leases
and hire purchase contracts
at 31 Dec 28,285 27,697
----------------------------------- --------- -------- ------ --------- -------- ------
12 Financial investments
--- ----------------------
2018 2017
HK$m HK$m
Financial investments measured at fair value through
other comprehensive income 1,503,625 N/A
--------- -----------
- treasury and other eligible bills 660,871 N/A
- debt securities 836,896 N/A
- equity securities 5,858 N/A
------------------------------------------------------ ---------
Debt instruments measured at amortised cost 367,401 N/A
--------- -----------
- treasury and other eligible bills 3,624 N/A
- debt securities 363,777 N/A
------------------------------------------------------ --------- -----------
Available-for-sale securities at fair value N/A 1,419,930
--------- ---------
- treasury and other eligible bills N/A 539,014
- debt securities N/A 871,641
- equity securities N/A 9,275
--------- ---------
Held-to-maturity securities at amortised cost N/A 300,943
--------- ---------
- treasury and other eligible bills N/A 699
- debt securities N/A 300,244
--------- ---------
At 31 Dec(1) 1,871,026 1,720,873
------------------------------------------------------ --------- ---------
1 Categories of financial instruments are disclosed under HKFRS
9 at 31 December 2018. These are not directly comparable with 31
December 2017, where the instruments were categorised in accordance
with HKAS 39.
Equity instruments measured at fair value through other comprehensive
income
Instruments held
at year end
Dividends
Fair value recognised
Type of equity instruments HK$m HK$m
-------------- -------------
Business facilitation 5,137 155
Investments required by central institutions 356 3
-------------- -----------
Others 365 5
------------------------------------------------------------- -------------- -----------
At 31 Dec 2018 5,858 163
------------------------------------------------------------- -------------- -----------
13 Assets pledged, assets transferred and collateral received
--- -----------------------------------------------------------
Assets pledged
Financial assets pledged to secure liabilities
2018 2017
HK$m HK$m
-------
Financial assets pledged as collateral
------------------------------------------------------- -------
Treasury bills, debt securities, equities and deposits 195,688 225,590
-------
Amount of liabilities secured 162,036 169,722
-------
The table above shows assets where a charge has been granted to
secure liabilities on a legal and contractual basis. These
transactions are conducted under terms that are usual and customary
to collateralised transactions including sale and repurchase
agreements, securities lending, derivative margining, and include
assets pledged to cover short positions and to facilitate
settlement processes with clearing houses.
Hong Kong currency notes in circulation are secured by the
deposit of funds in respect of which the Hong Kong Government
certificates of indebtedness are held.
Assets transferred
Transferred financial assets not qualifying for full derecognition
and associated financial liabilities
2018 2017
Carrying amount Carrying amount
of: of:
Transferred Associated Transferred Associated
assets liabilities assets liabilities
HK$m HK$m HK$m HK$m
Repurchase agreements 70,492 59,118 77,151 45,778
Securities lending agreements 6,702 870 3,209 63
77,194 59,988 80,360 45,841
------------ ------------ ------------
The financial assets shown above include amounts transferred to
third parties that do not qualify for derecognition, notably debt
securities held by counterparties as collateral under repurchase
agreements and equity securities lent under securities lending
agreements. As the substance of these transactions is secured
borrowings, the collateral assets continue to be recognised in full
and the related liabilities, reflecting the group's obligation to
repurchase the transferred assets for a fixed price at a future
date, are also recognised on the balance sheet. As a result of
these transactions, the group is unable to use, sell or pledge the
transferred assets for the duration of the transactions. The group
remains exposed to interest rate risk, credit risk and market risk
on these pledged instruments. The counterparty's recourse is not
limited to the transferred assets.
Collateral received
Assets accepted as collateral relate primarily to standard
securities lending, reverse repurchase agreements and derivative
margining. These transactions are conducted under terms that are
usual and customary to standard securities lending, reverse
repurchase agreements and derivative margining.
Fair value of collateral accepted as security for assets
2018 2017
HK$m HK$m
Fair value of collateral permitted to sell or repledge
in the absence of default 512,242 642,318
Fair value of collateral actually sold or repledged 112,832 102,382
-------------------------------------------------------- ------- -------
14 Investments in subsidiaries
--- ----------------------------
Principal subsidiaries of the Bank
The group's
interest in
issued share
capital/registered
or charter
Place of incorporation Principal activity capital
Hang Seng Bank Limited Hong Kong Banking 62.14%
People's Republic
HSBC Bank (China) Company Limited of China Banking 100%
HSBC Bank Malaysia Berhad Malaysia Banking 100%
HSBC Bank Australia Limited(1) Australia Banking 100%
HSBC Bank (Taiwan) Limited(1) Taiwan Banking 100%
HSBC Bank (Singapore) Limited Singapore Banking 100%
Retirement
benefits and
HSBC Life (International) Limited(1) Bermuda life insurance 100%
1 Held indirectly.
All the above subsidiaries are included in the group's
consolidated financial statements. All these subsidiaries make
their financial statements up to 31 December.
The principal places of business are the same as the places of
incorporation except for HSBC Life (International) Limited which
operates mainly in Hong Kong.
The proportion of voting rights held is the same as the
proportion of ownership interest held.
The principal subsidiaries are regulated banking and insurance
entities in the Asia-Pacific region and, as such, are required to
maintain certain minimum levels of capital and liquid assets to
support their operations. The effect of these regulatory
requirements is to limit the extent to which the subsidiaries may
transfer funds to the Bank in the form of repayment of shareholder
loans or cash dividends.
Subsidiary with significant non-controlling interest
2018 2017
Hang Seng Bank Limited
Proportion of ownership interests and voting rights
held by non-controlling interests 37.86% 37.86%
HK$m HK$m
Profit attributable to non-controlling interests 9,144 7,579
Accumulated non-controlling interests of the subsidiary 58,750 54,919
Dividends paid to non-controlling interests 5,066 4,632
Summarised financial information (before intra-group
eliminations):
- total assets 1,571,297 1,478,418
- total liabilities 1,409,190 1,326,339
- net operating income before loan impairment 41,493 35,498
- profit for the year 24,188 20,003
- other comprehensive income for the year 400 3,969
- total comprehensive income for the year 24,588 23,972
---------------------------------------------------------
15 Interests in associates and joint ventures
--- -------------------------------------------
Associates
2018 2017
HK$m HK$m
Share of net assets 139,052 140,670
-------
Goodwill 3,857 4,071
Impairment (24) (24)
--------------------- -------
At 31 Dec 142,885 144,717
--------------------- -------
The above balance represented the group's interests in
associates.
Principal associate
The group's interest
in issued share
Place of incorporation capital
People's Republic
Bank of Communications Co., Limited of China 19.03%
Bank of Communications Co., Ltd. is listed on recognised stock
exchanges. The fair value represents valuation based on the quoted
market price of the shares held (Level 1 in the fair value
hierarchy) and amounted to HK$86,086m at 31 December 2018
(2017: HK$81,987m).
Bank of Communications Co., Limited ('BoCom')
The group's investment in BoCom is classified as an associate.
Significant influence in BoCom was established via representation
on BoCom's Board of Directors and participation in a Technical
Cooperation and Exchange Programme ('TCEP'). Under the TCEP, a
number of HSBC staff have been seconded to assist in the
maintenance of BoCom's financial and operating policies.
Investments in associates are recognised using the equity method of
accounting in accordance with HKAS 28 whereby the investment is
initially recognised at cost and adjusted thereafter for the
post-acquisition change in the group's share of BoCom's net assets.
An impairment test is required if there is any indication of
impairment.
Impairment testing
At 31 December 2018, the fair value of the group's investment in
BoCom had been below the carrying amount for approximately 80
months. As a result, the group performed an impairment test on the
carrying amount, which confirmed that there was no impairment at 31
December 2018 as the recoverable amount as determined by a
value-in-use ('VIU') calculation was higher than the carrying
value.
At
31 Dec 2018 31 Dec 2017
Carrying Fair Carrying Fair
VIU value value VIU value value
HK$bn HK$bn HK$bn HK$bn HK$bn HK$bn
----- -------- --------
BoCom 141.3 139.6 86.1 143.2 141.7 82.0
----- -------- ------
In future periods, the VIU may increase or decrease depending on
the effect of changes to model inputs. The main model inputs are
described below and are based on factors observed at period-end.
The factors that could result in a change in the VIU and an
impairment include a short-term under-performance by BoCom, a
change in regulatory capital requirements, or an increase in
uncertainty regarding the future performance of BoCom resulting in
a downgrade of the future asset growth or profitability. An
increase in the discount rate as a result of an increase in the
risk premium or risk-free rates could also result in a reduction of
VIU and an impairment. At the point where the carrying value
exceeds the VIU, impairment would be recognised.
If the group did not have significant influence in BoCom, the
investment would be carried at fair value rather than the current
carrying value.
Basis of recoverable amount
The impairment test was performed by comparing the recoverable
amount of BoCom, determined by a VIU calculation, with its carrying
amount. The VIU calculation uses discounted cash flow projections
based on management's best estimates of future earnings available
to ordinary shareholders prepared in accordance with HKAS 36.
Significant management judgement is required in arriving at the
best estimate. There are two main components to the VIU
calculation. The first component is management's best estimate of
BoCom's earnings which is based on management's explicit forecasts
over the short to medium term. This results in forecast earnings
growth that is lower than recent historical actual growth and also
reflects the uncertainty arising from the current economic outlook.
Earnings beyond the short to medium term are then extrapolated in
perpetuity using a long-term growth rate to derive a terminal
value, which comprises the majority of the VIU. The second
component is the capital maintenance charge ('CMC') which is
management's forecast of the earnings that need to be withheld in
order for BoCom to meet regulatory capital requirements over the
forecast period (i.e. CMC is deducted when arriving at management's
estimate of future earnings available to ordinary shareholders).
The principal inputs to the CMC calculation include estimates of
asset growth, the ratio of risk-weighted assets to total assets,
and the expected minimum regulatory capital requirements. An
increase in the CMC as a result of a change to these principal
inputs would reduce VIU. Additionally, management considers other
factors (including qualitative factors) to ensure that the inputs
to the VIU calculation remain appropriate.
Key assumptions in value in use calculation
We used a number of assumptions in our VIU calculation, in
accordance with the requirements of HKAS 36:
-- Long-term profit growth rate: 3% (2017: 3%) for periods after
2022, which does not exceed forecast GDP growth in mainland China
and is consistent with forecasts by external analysts.
-- Long-term asset growth rate: 3% (2017: 3%) for periods after
2022, which is the rate that assets are expected to grow to achieve
long-term profit growth of 3%.
-- Discount rate: 11.82% (2017: 11.85%) which is based on a
Capital Asset Pricing Model ('CAPM') calculation for BoCom, using
market data. Management also compares the rate derived from the
CAPM with discount rates from external sources. The discount rate
used is within the range of 10.4% to 15.0% (2017: 10.2% to 13.4%)
indicated by external sources.
-- Loan impairment charge as a percentage of customer advances:
ranges from 0.73% to 0.79% (2017: 0.66% to 0.82%) in the short to
medium-term and reflect increases due to the US-China trade
tensions. For periods after 2022, the ratio is 0.7% (2017: 0.7%)
which is slightly higher than the historical average.
-- Risk-weighted assets as a percentage of total assets: 62%
(2017: 62%) for all forecast periods. This is slightly higher than
BoCom's actual results and slightly lower than the forecasts
disclosed by external analysts.
-- Cost-income ratio: ranges from 38.7% to 39.0% (2017: 37.1% to
38%) in the short-to medium-term. This is consistent with the
forecasts disclosed by external analysts.
-- Effective tax rate: ranges from 13.8% to 22.3% (2017: 18.2%
to 22.5%) in the short to medium-term reflecting an expected
increase towards the long-term assumption. For periods after 2022,
the rate is 22.5% (2017: 22.5%) which is slightly higher than the
historical average.
-- Regulatory capital requirements: Capital adequacy ratio:
11.5% (2017: 11.5%) and Tier 1 capital adequacy ratio: 9.5% (2017:
9.5%), based on the minimum regulatory requirements.
The following table shows the change to each key assumption in
the VIU calculation that on its own would reduce the headroom to
nil:
Changes to key assumption to reduce
Key assumption headroom to nil
* Long-term profit growth rate
* Long-term asset growth rate * Decrease by 10 basis points
* Discount rate * Increase by 9 basis points
* Loan impairment charge as a percentage of customer * Increase by 12 basis points
advances
* Increase by 2 basis point
* Risk-weighted assets as a percentage of total assets
* Increase by 58 basis points
* Cost-income ratio
* Increase by 37 basis points
* Long-term effective tax rate
* Increase by 92 basis points
* Regulatory capital requirements - capital adequacy
ratio
* Increase by 11 basis points
* Regulatory capital requirements - tier 1 capital
adequacy ratio * Increase by 69 basis points
The following table further illustrates the impact on VIU of
reasonably possible changes to key assumptions. This reflects the
sensitivity of the VIU to each key assumption on its own and it is
possible that more than one favourable and/or unfavourable change
may occur at the same time. The selected rates of reasonably
possible changes to key assumptions is largely based on external
analysts' forecasts which can change period to period.
Favourable change Unfavourable change
Increase Decrease
in VIU VIU in VIU VIU
bps HK$bn HK$bn bps HK$bn HK$bn
At 31 December 2018
Long-term profit growth rate +100 20.2 161.5 -10 (1.7) 139.6
Long-term asset growth rate -10 2.0 143.3 +100 (21.7) 119.6
Discount rate -142 25.4 166.7 +28 (4.0) 137.3
2018
to 2022:
0.70%
2018
to 2022:
0.83%
2023 2023
Loan impairment charge as a onwards: onwards:
percentage of customer advances 0.65% 7.0 148.3 0.77% (7.9) 133.4
Risk-weighted assets as a percentage
of total assets -140 4.1 145.4 +80 (2.3) 139.0
Cost-income ratio -160 8.8 150.1 +200 (10.9) 130.4
Long term effective tax rate -280 5.3 146.6 +250 (4.6) 136.7
Earnings in short to medium
term - compound annual growth
rate(1) +204 12.2 153.5 -366 (19.9) 121.4
Regulatory capital requirements
- capital adequacy ratio - - 141.3 +258 (39.4) 101.9
Regulatory capital requirements
- tier 1 capital adequacy ratio - - 141.3 +243 (25.2) 116.1
At 31 December 2017
Long-term profit growth rate +200 51.5 194.7 - - 143.2
Long-term asset growth rate -20 4.2 147.4 +200 (55.4) 87.8
Discount rate -35 5.7 148.9 +65 (9.5) 133.7
2017
to 2020:
0.90%
2021
onwards:
2017
to 2020:
0.71%
2021
Loan impairment charge as a onwards:
percentage of customer advances 0.70% 1.1 144.3 0.77% (10.0) 133.2
Risk-weighted assets as a percentage
of total assets -60 1.9 145.1 +30 (1.0) 142.2
Cost-income ratio -173 11.7 154.9 - - 143.2
Long term effective tax rate -120 2.5 145.7 +250 (5.2) 138.0
Earnings in short to medium
term - compound annual growth
rate(1) +288 22.0 165.2 -311 (28.1) 115.1
Regulatory capital requirements
- capital adequacy ratio - - 143.2 +248 (43.8) 99.4
Regulatory capital requirements
- tier 1 capital adequacy ratio - - 143.2 +234 (27.9) 115.3
1 - Based on management's explicit forecasts over the short to
medium-term.
Considering the interrelationship of the changes set out in the
table above, management estimates that the reasonably possible
range of VIU is HK$121.4bn to HK$153.5bn (2017: HK$115.1bn to
HK$165.2bn). In 2018, the range is based on the
favourable/unfavourable change in the earnings in the short to
medium-term and long-term LICs set out in the table above. All
other long-term assumptions, the discount rate and the basis of the
CMC have been kept unchanged when determining the reasonably
possible range of the VIU.
Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December.
For the year ended 31 December 2018, the group included the
associate's results on the basis of financial statements made up
for the 12 months to 30 September 2018, but taking into account the
financial effect of significant transactions or events in the
period from 1 October 2018 to 31 December 2018.
Selected balance sheet information of BoCom
At 30 Sep
2018 2017
HK$m HK$m
-----------
Cash and balances at central banks 982,268 1,141,256
Loans and advances to banks and other financial institutions 806,561 940,983
Loans and advances to customers 5,380,339 5,179,210
Other financial assets 3,196,602 3,017,209
Other assets 332,795 458,039
Total assets 10,698,565 10,736,697
-------------------------------------------------------------- ---------- ----------
Deposits by banks and other financial institutions 2,384,086 2,868,142
Customer accounts 6,497,116 5,844,883
Other financial liabilities 743,278 967,143
Other liabilities 284,560 254,525
Total liabilities 9,909,040 9,934,693
-------------------------------------------------------------- ---------- ----------
Total equity(1) 789,525 802,004
-------------------------------------------------------------- ---------- ----------
1 Due to the adoption of HKFRS 9, the equity balance
of BoCom as at 1 January 2018 was reduced by HKD31,672m.
Reconciliation of BoCom's net assets to carrying amount in the group's
consolidated financial statements
At 30 Sep
2018 2017
HK$m HK$m
----------- -------------
The group's share of ordinary shareholders' equity 135,871 137,769
Goodwill 3,753 3,958
Carrying amount 139,624 141,727
-------------------------------------------------------------- ---------- ----------
Selected income statement information of BoCom
For the 12 months
ended 30 Sep
2018 2017
HK$m HK$m
Net interest income 151,223 148,688
Net fee and commission income 48,949 44,401
Change in expected credit losses/ loan impairment charges (43,907) (33,400)
Depreciation and amortisation (6,012) (10,460)
Tax expense (12,178) (17,411)
- profit for the year 87,122 80,172
- other comprehensive income 1,490 (4,860)
Total comprehensive income 88,612 75,312
-------------------------------------------------------------- ---------- ----------
Dividends received from BoCom 4,792 4,401
-------------------------------------------------------------- ---------- ----------
Other associates
Summarised aggregate financial information for all
associates excluding BoCom
At
31 Dec 31 Dec
2018 2017
HK$m HK$m
Carrying value 3,261 2,990
The group's share of:
- total assets 7,618 7,465
- total liabilities 4,461 4,588
------
- profit or loss from continuing operations 327 160
- total comprehensive income 327 160
------
Other expense related to investment in an associate:
- Impairment of an associate 24 24
------------------------------------------------------ ------ ------
At 31 December 2018, the group's share of associates' contingent
liabilities was HK$319,469m (2017: HK$303,541m).
16 Goodwill and intangible assets
--- -------------------------------
Goodwill and intangible assets include goodwill arising on
business combinations, the present value of in-force long-term
insurance business, and other intangible assets.
2018 2017
HK$m HK$m
Goodwill 5,932 7,128
Present value of in-force long-term insurance business 48,522 44,621
Other intangible assets 10,650 8,116
-------------------------------------------------------- ------ ------
At 31 Dec 65,104 59,865
-------------------------------------------------------- ------ ------
The present value of in-force long-term insurance business
When calculating the present value of in-force insurance
business ('PVIF'), expected cash flows are projected after
adjusting for a variety of assumptions made by each insurance
operation to reflect local market conditions and management's
judgement of future trends, and uncertainty in the underlying
assumptions is reflected by applying margins (as opposed to a cost
of capital methodology). Variations in actual experience and
changes to assumptions can contribute to volatility in the results
of the insurance business.
Actuarial Control Committees of each key insurance entity meet
on a quarterly basis to review and approve PVIF assumptions. All
changes to non-economic assumptions, economic assumptions that are
not observable and model methodology must be approved by the
Actuarial Control Committee.
Movements in PVIF
2018 2017
HK$m HK$m
PVIF at 31 Dec 44,621 44,077
Impact on transition to HKFRS 9 (616) -
------------------------------------------------- ------ ------
PVIF at 1 Jan 44,005 44,077
------------------------------------------------- ------ ------
Changes in PVIF of long-term insurance business 4,629 305
------------------------------------------------- ------ ------
- value of new business written during the year 8,138 6,597
- expected return (4,650) (3,687)
- experience variances (165) (180)
- changes in operating assumptions (1,877) (1,685)
- investment return variances 3,052 (638)
- changes in investment assumptions 143 (178)
- other adjustments (12) 76
------------------------------------------------- ------ ------
Exchange differences and other (112) 239
------------------------------------------------- ------ ------
PVIF at 31 Dec 48,522 44,621
------------------------------------------------- ------ ------
Key assumptions used in the computation of PVIF for main life
insurance operations
Economic assumptions are set in a way that is consistent with
observable market values. The following are the key long-term
assumptions used in the computation of PVIF for Hong Kong, being
the main life insurance operations:
2018 2017
% %
Weighted average risk free rate 2.29 2.02
Weighted average risk discount rate 5.90 6.20
Expense inflation 3.00 3.00
------------------------------------- ----
17 Property, plant and equipment
--- ------------------------------
Movement in property, plant and equipment
2018 2017
Land and Investment Land and Investment
buildings properties Equipment buildings properties Equipment
HK$m HK$m HK$m HK$m HK$m HK$m
Cost or valuation
At 1 Jan 97,619 12,617 22,617 95,134 10,629 22,092
--------- ---------- --------
Exchange and other adjustments (497) 1 (342) 621 2 585
--------- ---------- --------
Additions 271 278 1,097 765 - 2,232
--------- ---------- --------
Disposals (361) - (644) (312) - (2,292)
--------- ---------- -------- -----------
Transfers(1) (11,126) (464) - (5,106) - -
--------- ---------- -------- ----------- -----------
Elimination of accumulated
depreciation on revalued
land and buildings (2,613) - - (2,353) - -
--------- ---------- --------
Surplus on revaluation 10,626 639 - 9,479 1,379 -
--------- ---------- -------- --------
Reclassifications 118 (196) - (609) 607 -
--------- ---------- -------- --------
At 31 Dec 94,037 12,875 22,728 97,619 12,617 22,617
--------- ---------- -------- --------- ----------- --------
Accumulated depreciation
At 1 Jan 210 - 16,307 169 - 16,046
--------- ---------- -------- -----------
Exchange and other adjustments (2) - (251) 22 - 469
--------- ---------- -------- -----------
Charge for the year 2,643 - 2,043 2,678 - 1,972
--------- ---------- -------- -----------
Disposals (165) - (612) (306) - (2,180)
--------- ---------- -------- -----------
Elimination of accumulated
depreciation on revalued
land and buildings (2,613) - - (2,353) - -
--------- ---------- --------
At 31 Dec 73 - 17,487 210 - 16,307
--------- ---------- -------- --------- ----------- --------
Net book value at 31 Dec 93,964 12,875 5,241 97,409 12,617 6,310
--------- ---------- --------
Total at 31 Dec 112,080 116,336
---------- ----------- -------- ---------- ----------- --------
1 During 2017 and 2018, certain properties have been transferred
to a fellow subsidiary as part of the Recovery and Resolution Plan
as set out in the Report of Directors on page 10-11. The balance
represented the carrying value of these properties on the date of
transfer.
The carrying amount of land and buildings, had they been stated
at cost less accumulated depreciation, would have been as
follows:
2018 2017
HK$m HK$m
Cost less accumulated depreciation 16,281 19,358
------------------------------------ ------ ------
Valuation of land and buildings and investment properties
The group's land and buildings and investment properties were
revalued in November 2018 and updated for any material changes at
31 December 2018. The basis of valuation for land and buildings and
investment properties was open market value, depreciated
replacement cost or surrender value as noted in note 1.2(k). The
resultant values are Level 3 in the fair value hierarchy. The fair
values for land and buildings are determined by using direct
comparison approach which values the properties in their respective
existing states and uses, assuming sale with immediate vacant
possession and by making reference to comparable sales evidence.
The valuations take into account the characteristics of the
properties (unobservable inputs) which include the location, size,
shape, view, floor level, year of completion and other factors
collectively. The premium or discount applied to the
characteristics of the properties is within minus 20% and plus 20%.
In determining the open market value of investment properties,
expected future cash flows have been discounted to their present
values. The net book value of 'Land and buildings' includes
HK$8,374m (2017: HK$8,853m) in respect of properties which were
valued using the depreciated replacement cost method or surrender
value.
Valuation of land and buildings and investment properties in
Hong Kong, Macau and mainland China were largely carried out by
Cushman & Wakefield Limited, who have recent experience in the
location and type of properties and who are members of the Hong
Kong Institute of Surveyors. This represents 93% by value of the
group's properties subject to valuation. Other properties were
valued by different independent professionally qualified
valuers.
18 Prepayments, accrued income and other assets
--- ---------------------------------------------
2018 2017
HK$m HK$m
Prepayments and accrued income 27,897 24,541
-------
Bullion 50,058 44,555
-------
Acceptances and endorsements 44,401 36,720
-------
Reinsurers' share of liabilities under insurance contracts
(note 4) 17,792 15,734
-------
Current tax assets 1,517 2,485
-------
Settlement accounts(1, 2) 23,683 N/A
Cash collateral and margin receivables(1,2) 30,378 N/A
-------
Other assets 34,223 34,476
-------
At 31 Dec(1,2) 229,949 158,511
------------------------------------------------------------ ------- -------
1 Settlement accounts were reclassified from 'Trading assets' to
'Other assets' on 1 January 2018 in accordance with HKFRS 9.
2 Settlement accounts, cash collateral and margin receivables
were reclassified from 'Placings with and advances to Banks' and
'Loans and advances to customers' to 'Other assets' on 1 January
2018. This reclassification is to better reflect the nature of
these balances and ensure consistency of presentation. Comparatives
have not been restated.
Prepayments, accrued income and other assets included
HK$159,483m (2017: HK$93,610m) of financial assets, the majority of
which were measured at amortised cost.
19 Customer accounts
---
Customer accounts by country
2018 2017
HK$m HK$m
Hong Kong 3,797,807 3,728,687
Mainland China 358,026 359,428
----------------
Singapore 331,479 321,548
----------------
Australia 161,726 157,959
India 111,297 103,264
----------------
Malaysia 108,899 109,626
----------------
Taiwan 106,537 105,189
Indonesia 29,843 32,907
Other 202,052 219,664
---------------- --------- ---------
At 31 Dec(1) 5,207,666 5,138,272
---------------- --------- ---------
1 Settlement accounts, cash collateral and margin payables were
reclassified from 'Customer accounts' to 'Other liabilities' on 1
January 2018. This reclassification is to better reflect the nature
of these balances and ensure consistency of presentation.
Comparatives have not been restated.
20 Trading liabilities
--- --------------------
2018 2017
HK$m HK$m
Deposits by banks(1,2) 1,162 9,984
----------------------------------- ------ -------
Customer accounts(1,2,3) 773 117,602
----------------------------------- ------ -------
Debt securities in issue(3) - 20,755
------
Net short positions in securities 79,259 83,024
----------------------------------- ------ -------
At 31 Dec 81,194 231,365
----------------------------------- ------ -------
1 'Deposits by banks' and 'Customer accounts' include repos, stock lending and other amounts.
2 Settlement accounts, cash collateral and margin payable
included within 'Deposits by banks' and 'Customer accounts' were
reclassified from 'Trading liabilities' to 'Other liabilities' on 1
January 2018. This reclassification is to better reflect the nature
of these balances and ensure consistency of presentation.
Comparatives have not been restated.
3 Financial liabilities which contain both deposit and
derivative components were reclassified from 'Trading liabilities'
to 'Financial liabilities designated at fair value' on 1 January
2018. This reclassification is to better align with the
presentation of similar financial instruments by peers and
therefore provide more relevant information about the effect of
these financial liabilities on the group's financial position and
performance.
21 Financial liabilities designated at fair value
--- -----------------------------------------------
2018 2017
HK$m HK$m
Deposits by banks and customer accounts(1) 82,136 N/A
----------------------------------------------------- ------- --------
Debt securities in issue 42,369 11,010
-------
Liabilities to customers under investment contracts 36,638 38,268
At 31 Dec 161,143 49,278
----------------------------------------------------- ------- ------
1 Financial liabilities which contain both deposit and
derivative components were reclassified from 'Trading liabilities'
to 'Financial liabilities designated at fair value' on 1 January
2018. This reclassification is to better align with the
presentation of similar financial instruments by peers and
therefore provide more relevant information about the effect of
these financial liabilities on the group's financial position and
performance.
The carrying amount of financial liabilities designated at fair
value was HK$2,232m lower than the contractual amount at maturity
(2017: HK$27m higher). The cumulative gain in fair value
attributable to changes in credit risk was HK$177m (2017: HK$8m
loss).
22 Debt securities in issue
--- -------------------------
2018 2017
HK$m HK$m
Bonds and medium-term note 75,980 59,266
-------
Other debt securities in issue 24,625 10,893
-------
Total debt securities in issue 100,605 70,159
-------------------------------------------------------- ------- -------
Included within:
-------------------------------------------------------- -------- ----------
- trading liabilities (note 20) - (20,755)
-------------------------------------------------------- ------- -------
- financial liabilities designated at fair value (note
21) (42,369) (11,010)
-------------------------------------------------------- ------- -------
At 31 Dec 58,236 38,394
-------------------------------------------------------- ------- -------
23 Accruals and deferred income, other liabilities and provisions
--- ---------------------------------------------------------------
2018 2017
HK$m HK$m
-------
Accruals and deferred income 26,932 25,880
-------
Acceptances and endorsements 44,438 36,720
---------------------------------------------------- ------- -------
Settlement accounts(1) 37,833 N/A
-------
Cash collateral and margin payables(1) 36,613 N/A
-------
Share-based payment liability to HSBC Holdings plc 1,923 2,268
---------------------------------------------------- ------- -------
Other liabilities 47,521 45,193
-------
Provisions for liabilities and charges 1,405 626
-------
At 31 Dec(1) 196,665 110,687
---------------------------------------------------- ------- -------
1 Settlement accounts, cash collateral and margin payables were
reclassified from 'Trading liabilities', 'Deposits by banks' and
'Customer accounts' to 'Other liabilities' on 1 January 2018. This
reclassification is to better reflect the nature of these balances
and ensure consistency of presentation. Comparatives have not been
restated.
Accruals and deferred income, other liabilities and provisions
included HK$184,221m (2017: HK$102,902m) of financial liabilities
which were measured at amortised cost.
Movement in provisions
Restructuring
costs Other Total
HK$m HK$m HK$m
Provisions (excluding contractual commitments)
At 31 Dec 2017 192 380 572
Additions 11 469 480
Amounts utilised (97) (91) (188)
Unused amounts reversed (37) (83) (120)
Exchange and other movements 5 (35) (30)
At 31 Dec 2018 74 640 714
Contractual commitments(1)
At 31 Dec 2017 54
Impact on transition to HKFRS 9 487
Net change in expected credit loss provision 150
At 31 Dec 2018 691
Total Provisions at 31 Dec 2018 1,405
1 The contractual commitments provision at 31 December 2017
represented HKAS 37 provisions on off-balance sheet loan
commitments and guarantees, for which expected credit losses are
provided following transition to HKFRS 9 on 1 January 2018.
Movement in provisions (continued)
Restructuring
costs Other Total
HK$m HK$m HK$m
At 1 Jan 2017 786 381 1,167
Additions 110 232 342
Amounts utilised (728) (84) (812)
Unused amounts reversed (14) (109) (123)
Exchange and other movements 38 14 52
At 31 Dec 2017 192 434 626
24 Subordinated liabilities
Subordinated liabilities issued to third parties measured at
amortised cost consist of undated primary capital notes and other
loan capital having an original term to maturity of five years or
more. Subordinated liabilities issued to Group entities are not
included in the below.
2018 2017
HK$m HK$m
----- -------
US$400m Undated floating rate primary capital notes 3,133 3,126
Fixed rate (5.05%) subordinated bonds due 2027,
MYR500m callable from 2022(1) 948 964
-----
At 31
Dec 4,081 4,090
----- -----
1 The interest rate on the MYR500m 5.05% callable subordinated
bonds due 2027 will increase by 1% from November 2022.
25 Preference shares
Irredeemable preference shares, issued and fully paid
2018 2017
HK$m HK$m
--------
At 1 Jan 21,037 26,879
-------
Redeemed / bought back during the year (20,975) (6,022)
---------------------------------------- ------- ------
Exchange and other movements 36 180
------- ------
At 31 Dec 98 21,037
---------------------------------------- ------- ------
The preference shares were issued at the then nominal value, and
may be redeemed subject to 30 days' notice in writing to
shareholders and with the prior consent of the Hong Kong Monetary
Authority. In the event of redemption, holders of the shares shall
be entitled to receive the issue price of US$1 per share held
together with any unpaid dividends for the period since the annual
dividend payment date immediately preceding the date of redemption,
subject to the Bank having sufficient distributable profits. The
holders of the preference shares are entitled to one vote per share
at shareholders' meetings of the Bank.
2,478m of issued non-cumulative irredeemable preference shares
were fully bought back during the year (2017: 775m) and there were
no remaining balance of issued non-cumulative irredeemable
preference shares at 31 December 2018 (2017: 2,478m). The
preference shares are no longer in issue.
200m of issued cumulative irredeemable preference shares were
fully bought back during the year (2017: nil) and there were no
remaining balance of issued cumulative preference shares at 31
December 2018 (2017: 200m). The preference shares are no longer in
issue.
There was INR870m (2017: INR870m) of authorised preference share
capital, comprising 8.7m compulsorily convertible preference shares
('CCPS') of INR100 each in the share capital of a subsidiary, HSBC
InvestDirect Securities (India) Private Limited ('HSBC
InvestDirect'). The CCPS were issued and fully paid in 2009 at a
nominal value of INR100 each. These shares may be converted into
fully paid equity shares of HSBC InvestDirect at any time after one
year to 10 years from the date of allotment of the CCPS by written
notice. The conversion shall be made at par or premium as may be
determined by the Board of HSBC InvestDirect at the time of the
conversion. The CCPS shall carry a fixed dividend of 0.001% of the
face value per annum. After 10 years following the allotment of the
CCPS, all outstanding CCPS shall be converted at par or premium as
may be determined by the Board of HSBC InvestDirect at the time of
the conversion. HSBC InvestDirect did not convert any CCPS during
2018 (2017: nil). The number of issued CCPS at 31 December 2018 was
8.7m (2017: 8.7m). No CCPS were issued during the year (2017:
nil).
26 Share capital
2018 2017
HK$m HK$m
-------
Paid up share capital in HK$ 116,103 116,103
------- -------
Paid up share capital in US$ (1) 56,232 35,257
At 31 Dec 172,335 151,360
---------------------------------- ------- -------
Ordinary shares issued and fully paid
2018 2017
HK$m Number HK$m Number
-------
At 1 Jan 151,360 46,440,991,798 114,359 45,743,491,798
------- --------------
Shares issued during the year - - 1,744 697,500,000
------- -------------- ------- --------------
Redemption / bought back of preference
shares 20,975 - 35,257 -
------- -------------- ------- --------------
At 31 Dec 172,335 46,440,991,798 151,360 46,440,991,798
------- -------------- ------- --------------
1. Paid up share capital in US$ represents preference shares
which have been redeemed or bought back via payment out of
distributable profits and for which the amount was transferred from
retained earnings to share capital in accordance with the
requirements of the Companies Ordinance.
During 2018, no new ordinary shares were issued (2017: 698m).
The holders of the ordinary shares are entitled to receive
dividends as declared from time to time, rank equally with regard
to the Bank's residual assets and are entitled to one vote per
share at shareholder meetings of the Bank.
27 Other equity instruments
Other equity instruments comprise additional tier 1 capital
instruments in issue which are accounted for in equity.
2018 2017
HK$m HK$m
US$1,000m Floating rate perpetual subordinated loan,
callable from Dec 2019(1) 7,756 7,756
------------------------------------------------------ ------ ------
US$900m Floating rate perpetual subordinated loan,
callable from Dec 2019(1) 6,981 6,981
------------------------------------------------------ ------ ------
US$900m Floating rate perpetual subordinated loan,
callable from Nov 2023(2) 7,048 -
------------------------------------------------------ ------ ------
US$500m Floating rate perpetual subordinated loan,
callable from Nov 2023(2) 3,915 -
------------------------------------------------------ ------ ------
US$700m Floating rate perpetual subordinated loan,
callable from Dec 2023(3) 5,481 -
------------------------------------------------------
US$600m Floating rate perpetual subordinated loan,
callable from Nov 2024(4) 4,698 -
------------------------------------------------------ ------
At 31 Dec 35,879 14,737
------------------------------------------------------ ------ ------
1 Interest rate at one year US dollar LIBOR plus 3.84%
2 Interest rate at three months US dollar LIBOR plus 3.51%
3 Interest rate at three months US dollar LIBOR plus 4.98%
4 Interest rate at three months US dollar LIBOR plus 3.62%
The additional tier 1 capital instruments are perpetual
subordinated loans on which coupon payments may be cancelled at the
sole discretion of the Bank. The subordinated loans will be written
down at the point of non-viability on the occurrence of a trigger
event as defined in the Banking (Capital) Rules. They rank higher
than ordinary shares in the event of a wind-up.
28 Maturity analysis of assets and liabilities
The following table provides an analysis of consolidated total
assets and liabilities by residual contractual maturity at the
balance sheet date. These balances are included in the maturity
analysis as follows:
-- Trading assets and liabilities (including trading derivatives
but excluding reverse repos, repos and debt securities in issue)
are included in the 'Due not more than 1 month' time bucket,
because trading balances are typically held for short periods of
time.
-- Financial assets and liabilities with no contractual maturity
(such as equity securities) are included in the 'Due over 5 years'
time bucket. Undated or perpetual instruments are classified based
on the contractual notice period which the counterparty of the
instrument is entitled to give. Where there is no contractual
notice period, undated or perpetual contracts are included in the
'Due over 5 years' time bucket.
-- Non-financial assets and liabilities with no contractual
maturity are included in the 'Due over 5 years' time bucket.
-- Liabilities under insurance contracts are included in the
'Due over 5 years' time bucket. Liabilities under investment
contracts are classified in accordance with their contractual
maturity. Undated investment contracts are included in the 'Due
over 5 years' time bucket, however, such contracts are subject to
surrender and transfer options by the policyholders.
Maturity analysis of assets and liabilities
Due Due
Due over over Due
over 3 6 over Due
1 month months months 9 over
but but but months 1 year Due over
not not not but but 2 years
Due not more more more not not but not
more than than than more more more
than1 3 6 9 than than than Due over
month months months months 1 year 2 years 5 years 5 years Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
Financial
assets
Cash and sight
balances
at central
banks 205,660 - - - - - - - 205,660
Items in the
course
of collection
from
other banks 25,380 - - - - - - - 25,380
Hong Kong
Government
certificates
of
indebtedness 280,854 - - - - - - - 280,854
Trading assets 554,886 1,359 1,723 - - 870 - - 558,838
--------- --------- --------- ---------
Derivatives 291,515 83 117 247 17 324 318 248 292,869
Financial
assets
designated
and otherwise
mandatorily
measured at
fair value
through profit
or
loss 9,308 24 1,108 615 1,121 3,839 11,210 105,634 132,859
Reverse
repurchase
agreements -
non-trading 250,550 87,939 15,059 4,326 7,771 37,682 3,000 - 406,327
Placings with
and
advances to
banks 177,476 56,118 17,869 11,374 19,247 22,912 26,835 6,320 338,151
Loans and
advances
to customers 638,718 323,164 268,711 159,123 145,495 350,859 767,323 875,309 3,528,702
--------- --------- --------- ---------
Financial
investments 235,488 409,356 185,205 84,225 75,210 218,508 297,627 365,407 1,871,026
Amounts due
from Group
companies 63,150 6,477 649 28 - 2 149 - 70,455
Accrued income
and
other
financial
assets 102,461 33,492 14,830 2,189 1,178 1,071 584 3,678 159,483
Financial
assets at
31 Dec 2018 2,835,446 918,012 505,271 262,127 250,039 636,067 1,107,046 1,356,596 7,870,604
--------- --------- --------- ---------
Non-financial
assets - - - - - - - 392,850 392,850
--------- --------- --------- ---------
Total assets at
31
Dec 2018 2,835,446 918,012 505,271 262,127 250,039 636,067 1,107,046 1,749,446 8,263,454
--------- --------- --------- ---------
Financial
liabilities
Hong Kong
currency
notes in
circulation 280,854 - - - - - - - 280,854
--------- --------- --------- ---------
Items in the
course
of
transmission
to
other banks 33,806 - - - - - - - 33,806
Repurchase
agreements
- non-trading 63,273 723 1,159 4,555 569 - - - 70,279
--------- ---------
Deposits by
banks 154,915 2,415 3,923 2,018 1,260 53 80 - 164,664
Customer
accounts 4,547,352 342,264 150,739 72,992 61,663 16,011 16,570 75 5,207,666
Trading
liabilities 81,194 - - - - - - - 81,194
Derivatives 294,112 304 157 250 207 209 314 - 295,553
--------- --------- --------- ---------
Financial
liabilities
designated at
fair
value 22,524 23,447 21,021 7,873 10,014 18,541 18,314 39,409 161,143
Debt securities
in
issue 2,631 6,287 9,810 859 519 15,913 19,053 3,164 58,236
Amounts due to
Group
companies 120,904 93,361 1,299 50 27 15 77,508 103,323 396,487
--------- --------- ---------
Accruals and
other
financial
liabilities 115,539 40,894 16,241 3,542 4,423 1,718 1,154 710 184,221
--------- --------- ---------
Subordinated
liabilities(2) - - - - - - 948 3,133 4,081
Preference
shares - - - - - - - 98 98
Total financial
liabilities
at 31 Dec 2018 5,717,104 509,695 204,349 92,139 78,682 52,460 133,941 149,912 6,938,282
--------- --------- --------- ---------
Non-financial
liabilities - - - - - - - 512,252 512,252
Total
liabilities
at 31 Dec 2018 5,717,104 509,695 204,349 92,139 78,682 52,460 133,941 662,164 7,450,534
--------- --------- --------- ---------
Maturity analysis of assets and liabilities(1) (continued)
Due Due
Due over over Due
over 3 6 over Due Due
1 month months months 9 over over
but but but months 1 year 2 years
Due not not not but but but
not more more more not not not
more than than than more more more Due
than1 3 6 9 than than than over
(Represented) month months months months 1 year 2 years 5 years 5 years Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
Financial
assets
Cash and sight
balances
at central
banks 208,073 - - - - - - - 208,073
Items in the
course
of collection
from
other banks 25,714 - - - - - - - 25,714
Hong Kong
Government
certificates
of
indebtedness 267,174 - - - - - - - 267,174
Trading assets 492,178 4,121 135 - - - - - 496,434
Derivatives 295,653 827 503 644 178 768 1,487 183 300,243
Financial
assets
designated
at fair value 1,145 294 1,515 1,156 446 3,150 7,893 107,047 122,646
Reverse
repurchase
agreements -
non-trading 212,556 62,050 5,381 3,437 7,654 6,972 32,840 - 330,890
Placings with
and advances
to banks 282,259 74,043 20,088 10,398 6,724 14,877 15,997 8,619 433,005
Loans and
advances
to customers 656,101 315,163 227,683 149,786 156,397 334,895 676,249 812,706 3,328,980
Financial
investments 205,553 351,781 197,723 75,119 91,276 186,116 303,034 310,271 1,720,873
Amounts due
from Group
companies 74,484 151,749 100 318 442 446 110 80 227,729
Accrued income
and
other
financial
assets 49,384 27,632 10,733 1,810 809 446 382 2,414 93,610
Financial
assets at
31 Dec 2017 2,770,274 987,660 463,861 242,668 263,926 547,670 1,037,992 1,241,320 7,555,371
---------------
Non-financial
assets - - - - - - - 387,975 387,975
Total assets
at 31
Dec 2017 2,770,274 987,660 463,861 242,668 263,926 547,670 1,037,992 1,629,295 7,943,346
---------------
Financial
liabilities
Hong Kong
currency
notes in
circulation 267,174 - - - - - - - 267,174
Items in the
course
of
transmission
to
other banks 38,283 - - - - - - - 38,283
Repurchase
agreements
- non-trading 45,000 2,170 - - - - - - 47,170
---------------
Deposits by
banks 192,187 2,840 5,079 1,045 313 94 139 - 201,697
Customer
accounts 4,727,204 217,307 94,791 42,207 40,152 9,456 6,881 274 5,138,272
Trading
liabilities 212,618 2,493 2,321 2,722 841 2,491 7,857 22 231,365
Derivatives 305,014 361 950 368 636 1,333 343 348 309,353
Financial
liabilities
designated at
fair
value 199 - 2,621 - - 6,182 1,940 38,336 49,278
Debt
securities in
issue 1,189 2,677 5,331 301 3,363 3,963 17,151 4,419 38,394
Amounts due to
Group
companies 119,364 1,919 168 27 324 34 47,609 96,243 265,688
Accruals and
other
financial
liabilities 43,617 35,430 12,236 3,502 2,625 2,071 1,016 244 100,741
---------------
Subordinated
liabilities(2) - - - - - - 964 3,126 4,090
Preference
shares - - - - - - - 21,037 21,037
Financial
liabilities
at 31 Dec
2017 5,951,849 265,197 123,497 50,172 48,254 25,624 83,900 164,049 6,712,542
---------------
Non-financial
liabilities - - - - - - - 477,818 477,818
Total
liabilities at
31 Dec 2017 5,951,849 265,197 123,497 50,172 48,254 25,624 83,900 641,867 7,190,360
1 The table has been revised to align with the Group's
presentation and comparatives have been represented to conform to
the current year's presentation.
2 The maturity for subordinated liabilities is based on the
earliest date on which the group is required to pay, i.e. the
callable date.
29 Analysis of cash flows payable under financial liabilities by remaining
contractual
maturities
Due between Due between
Due within 3 and 1 and Due after
On demand 3 months 12 months 5 years 5 years Total
HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2018
Hong Kong currency
notes in
circulation 280,854 - - - - 280,854
Items in the course of
transmission
to other banks - 33,806 - - - 33,806
Repurchase agreements -
non-trading 12,492 51,591 6,464 - - 70,547
Deposits by banks 146,159 12,019 7,221 137 - 165,536
Customer accounts 3,941,160 953,242 289,185 34,197 80 5,217,864
Trading liabilities 81,194 - - - - 81,194
Derivatives 293,073 1,679 403 1,754 - 296,909
Financial liabilities
designated
at fair value 463 46,394 40,498 39,723 39,474 166,552
Debt securities in
issue - 9,329 12,028 37,140 3,521 62,018
Amounts due to Group
companies 38,093 176,357 885 88,418 137,417 441,170
Other financial
liabilities 81,633 68,515 22,377 2,850 1,194 176,569
Subordinated
liabilities - 22 65 1,294 3,995 5,376
Preference shares - - 98 - - 98
--------- ---------- ----------- ----------- --------- ---------
4,875,121 1,352,954 379,224 205,513 185,681 6,998,493
Loan commitments 1,950,956 612,015 237 - - 2,563,208
Financial guarantees 57,964 - - - - 57,964
---------
6,884,041 1,964,969 379,461 205,513 185,681 9,619,665
---------- ----------- ----------- --------- ---------
At 31 Dec 2017
Hong Kong currency
notes in
circulation 267,174 - - - - 267,174
Items in the course of
transmission
to other banks - 38,283 - - - 38,283
Repurchase agreements -
non-trading 11,829 35,554 - - - 47,383
Deposits by banks 163,030 32,048 6,467 267 - 201,812
Customer accounts 4,229,543 717,651 179,389 17,795 281 5,144,659
Trading liabilities 231,365 - - - - 231,365
Derivatives 304,970 412 1,820 1,253 411 308,866
Financial liabilities
designated
at fair value 199 32 2,724 8,524 38,069 49,548
Debt securities in
issue 40 4,026 9,521 22,421 4,753 40,761
Amounts due to Group
companies 40,004 82,614 4,495 67,306 113,635 308,054
Other financial
liabilities 8,870 69,010 16,515 3,287 218 97,900
Subordinated
liabilities - 25 74 1,361 3,634 5,094
Preference shares - 283 412 2,781 27,990 31,466
--------- ---------- ----------- ----------- --------- ---------
5,257,024 979,938 221,417 124,995 188,991 6,772,365
Loan commitments 1,821,774 640,726 14,437 4,678 97 2,481,712
Financial guarantees 57,353 - - - - 57,353
--------- ---------- ----------- ----------- --------- ---------
7,136,151 1,620,664 235,854 129,673 189,088 9,311,430
The balances in the above tables incorporates all cash flows
relating to principal and future coupon payments on an undiscounted
basis (except for trading liabilities and trading derivatives).
Trading liabilities and trading derivatives have been included in
the 'On demand' time bucket as trading liabilities are typically
held for short periods of time. The undiscounted cash flows payable
under hedging derivative liabilities are classified according to
their contractual maturity. Investment contract liabilities have
been included in financial liabilities designated at fair value,
whereby the policyholders have the options to surrender or transfer
at any time, and are reported in the 'Due after 5 years' time
bucket. A maturity analysis prepared on the basis of the earliest
possible contractual repayment date (assuming that all surrender
and transfer options are exercised) would result in all investment
contracts being presented as falling due within one year or less.
The undiscounted cash flows potentially payable under loan
commitments and financial guarantee contracts are classified on the
basis of the earliest date they can be called. Cash flows payable
in respect of customer accounts are primarily contractually
repayable on demand or at short notice.
30 Contingent liabilities, contractual commitments and guarantees
Off-balance sheet contingent liabilities and commitments
2018 2017
HK$m HK$m
-----------------------------------------------------------
Contingent liabilities and financial guarantee contracts:
- financial guarantees(1) 57,964 57,124
---------
- Performance & other guarantee(2) 234,265 231,709
- other contingent liabilities 3,416 1,059
At 31 Dec 295,645 289,892
----------------------------------------------------------- ---------
Commitments(3) :
- documentary credits and short-term trade-related
transactions 23,258 28,045
---------
- forward asset purchases and forward forward deposits
placed 14,087 8,198
-----------------------------------------------------------
- undrawn formal standby facilities, credit lines and
other commitments to lend 2,525,863 2,445,468
-----------------------------------------------------------
At 31 Dec 2,563,208 2,481,711
----------------------------------------------------------- --------- ---------
1 Financial guarantees are contracts that require the issuer to
make specified payments to reimburse the holder for a loss incurred
because a specified debtor fails to make payment when due in
accordance with the original or modified terms of a debt
instrument. The amounts in the above table are nominal principal
amounts.
2 Performance and other guarantees include re-insurance letters
of credit related to particular transactions, trade-related letters
of credit issued without provision for the issuing entity to retain
title to the underlying shipment, performance bonds, bid bonds,
standby letters of credit and other transaction-related
guarantees.
3 Includes HK$1,490,711m of commitments at 31 December 2018 to
which the impairment requirements in HKFRS 9 are applied where the
group has become party to an irrevocable commitment.
The above table discloses the nominal principal amounts of
commitments (excluding capital commitments), guarantees and other
contingent liabilities, which represent the amounts at risk should
contracts be fully drawn upon and clients default. The amount of
the loan commitments shown above reflects, where relevant, the
expected level of take-up of pre-approved facilities. As a
significant portion of guarantees and commitments is expected to
expire without being drawn upon, the total of the contractual
amounts is not representative of future liquidity requirements.
It also reflect the group's maximum exposure under a large
number of individual guarantee undertakings. The risks and
exposures from guarantees are captured and managed in accordance
with HSBC's overall credit risk management policies and procedures.
Guarantees are subject to an annual credit review process.
Other contingent liabilities at 31 Dec 2018 included provisions
made in relation to legal and regulatory matters as set out in note
39.
31 Other commitments
--- ------------------
Capital commitments
At 31 December 2018, capital commitments, mainly related to the
commitment for purchase of premises, were HK$7,912m
(2017: HK$7,097m).
Operating lease commitments
The group leases certain properties and equipment under
operating leases. The leases normally run for a period of one to 10
years and may include an option to renew. Lease payments are
usually adjusted annually to reflect market rentals. None of the
leases include contingent rentals. Future minimum lease payments
under non-cancellable operating leases for premises and equipment
are as follows:
2018 2017
HK$m HK$m
Amounts payable within
- one year or less 2,925 2,948
- five years or less but over one year 3,967 4,277
- over five years 1,391 874
At 31 Dec 8,283 8,099
---------------------------------------- ----- -----
32 Offsetting of financial assets and financial liabilities
--- ---------------------------------------------------------
Financial assets and financial liabilities are offset and the
net amount is reported in the balance sheet when there is a legally
enforceable right to offset the recognised amounts and there is an
intention to settle on a net basis, or realise the asset and settle
the liability simultaneously ('the offset criteria').
The 'Amounts not set off in the balance sheet' include
transactions where:
-- the counterparty has an offsetting exposure with the group
and a master netting or similar arrangement is in place with a
right to set off only in the event of default, insolvency or
bankruptcy, or the offset criteria are otherwise not satisfied;
and
-- in the case of derivatives and reverse repurchase/repurchase,
stock borrowing/lending and similar agreements, cash and non-cash
collateral has been received/pledged.
For risk management purposes, the net amounts of loans and
advances to customers are subject to limits, which are monitored
and the relevant customer agreements are subject to review and
updated, as necessary, to ensure that the legal right to set off
remains appropriate.
Offsetting of financial assets and financial liabilities
Amounts subject to enforceable netting
arrangements
Amounts not offset
in the
balance sheet
Net
amounts Amounts
reported not subject
in the to enforceable Balance
Gross Amounts balance Financial Non-cash Cash Net netting sheet
amounts offset sheet instruments collateral collateral amount arrangements(1) total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2018
Financial assets(2)
Derivatives 380,939 (120,409) 260,530 (208,893) (5,637) (31,801) 14,199 32,339 292,869
Reverse repos,
stock
borrowing and
similar
agreements
classified
as: 444,711 (31,283) 413,428 - (413,374) (42) 12 29,862 443,290
- trading
assets 23,112 - 23,112 - (23,100) - 12 - 23,112
- non-trading
assets 421,599 (31,283) 390,316 - (390,274) (42) - 29,862 420,178
Loans and
advances
to customers
at amortised
cost - - - - - - - - -
825,650 (151,692) 673,958 (208,893) (419,011) (31,843) 14,211 62,201 736,159
Financial
liabilities(3)
Derivatives 391,064 (120,409) 270,655 (208,893) (9,558) (18,754) 33,450 24,898 295,553
------- -------- ------- ------ -------
Repos, stock
lending
and similar
agreements
classified as: 146,026 (31,283) 114,743 - (114,548) (4) 191 26,560 141,303
- trading
liabilities 2,023 - 2,023 - (2,007) - 16 - 2,023
- non-trading
liabilities 144,003 (31,283) 112,720 - (112,541) (4) 175 26,560 139,280
Customer
accounts
at amortised
cost - - - - - - - - -
537,090 (151,692) 385,398 (208,893) (124,106) (18,758) 33,641 51,458 436,856
At 31 Dec 2017
Financial
assets(2)
Derivatives 353,713 (77,624) 276,089 (234,555) (4,926) (28,992) 7,616 24,154 300,243
Reverse repos,
stock
borrowing and
similar
agreements
classified
as: 550,165 (12,689) 537,476 - (537,348) (62) 66 23,487 560,963
- trading
assets 8,966 - 8,966 - (8,966) - - - 8,966
- non-trading
assets 541,199 (12,689) 528,510 - (528,382) (62) 66 23,487 551,997
Loans and
advances
to customers
at amortised
cost - - - - - - - - -
903,878 (90,313) 813,565 (234,555) (542,274) (29,054) 7,682 47,641 861,206
Financial
liabilities(3)
Derivatives 366,456 (77,624) 288,832 (234,555) (4,738) (27,959) 21,580 20,521 309,353
Repos, stock
lending
and similar
agreements
classified as: 94,755 (12,689) 82,066 - (81,847) - 219 27,617 109,683
- trading
liabilities 687 - 687 - (686) - 1 - 687
- non-trading
liabilities 94,068 (12,689) 81,379 - (81,161) - 218 27,617 108,996
Customer
accounts
at amortised
cost - - - - - - - - -
461,211 (90,313) 370,898 (234,555) (86,585) (27,959) 21,799 48,138 419,036
1 These exposures continue to be secured by financial
collateral, but the group may not have sought or been able to
obtain a legal opinion evidencing enforceability of the offsetting
right.
2 Amounts presented in the balance sheet included balances due
from Group companies of HK$103,358m (2017: HK$262,159m).
3 Amounts presented in the balance sheet included balances due
to Group companies of HK$139,410m (2017: HK$132,091m).
33 Segmental analysis
--- -------------------
The group's operating segments are organised into four global
businesses and a Corporate Centre. The group's chief operating
decision-maker, the Executive Committee ('EXCO'), regularly reviews
operating activities on a number of bases, including by global
businesses and by countries. Although the chief operating
decision-maker reviews information on a number of bases, business
performance is assessed and capital resources are allocated by
global business, and the segmental analysis is presented on that
basis. The global businesses are therefore considered our
reportable segments under HKFRS 8.
Information provided to EXCO is measured in accordance with
HKFRSs. The group's operations are closely integrated and,
accordingly, the presentation of data includes internal allocations
of certain items of income and expenses. These allocations include
the costs of certain support services and global functions to the
extent that they can be meaningfully attributed to operational
business lines and geographical regions. While such allocations
have been made on a systematic and consistent basis, they
necessarily involve a degree of subjectivity. Costs which are not
allocated to global businesses are included in the 'Corporate
Centre'. Where relevant, income and expenses amounts presented
include the results of inter-segment funding along with
inter-company and inter-business line transactions. All such
transactions are undertaken on arm's length terms. The intra-group
elimination items for the global businesses are presented in the
Corporate Centre.
The group provides a comprehensive range of banking and related
financial services to its customers organised by global
business:
-- Retail Banking and Wealth Management ('RBWM') serves personal
customers. We take deposits and provide transactional banking
services to enable customers to manage their day to day finances
and save for the future. We selectively offer credit facilities to
assist customers in their short or longer-term borrowing
requirements; and we provide financial advisory, broking, insurance
and investment services to help them manage and protect their
financial futures.
-- Commercial Banking ('CMB') is segmented into Corporate, to
serve both corporate and mid-market companies with more
sophisticated financial needs, and Business Banking, to serve
small- and medium-sized enterprises ('SMEs'), enabling
differentiated coverage of our target customers. This allows us to
provide continuous support to companies as they grow both
domestically and internationally, and ensures a clear focus on
internationally aspirant customers.
-- Global Banking and Markets ('GB&M') provides tailored
financial solutions to major government, corporate and
institutional clients worldwide. GB&M operates a long-term
relationship management approach to build a full understanding of
clients' financial requirements. Sector-focused client service
teams comprising relationship managers and product specialists
develop financial solutions to meet individual client needs.
-- Global Private Banking ('GPB') provides investment management
and trustee solutions to high net worth individuals and their
families. We aim to meet the needs of our clients by providing
excellent customer service, leveraging our global footprint and
offering a comprehensive suite of solutions.
-- Corporate Centre was established to align certain functions
of the group. The Corporate Centre includes Balance Sheet
Management, certain interests in associates and joint ventures, as
well as the results of our financing operations and central support
costs with associated recoveries.
Performance by global business is presented in the 'Financial
Review' section.
Information by geographical region
Rest of Intra-segment
Hong Kong Asia-Pacific elimination Total
HK$m HK$m HK$m HK$m
For the year ended 31 Dec 2018
Total operating income 195,249 75,297 (2,238) 268,308
Profit before tax 88,017 46,566 - 134,583
At 31 Dec 2018
Total assets 6,036,854 2,939,955 (713,355) 8,263,454
Total liabilities 5,590,770 2,573,119 (713,355) 7,450,534
--------- ------------- ------------ ---------
Credit commitments and contingent
liabilities
(contract amounts) 1,584,981 1,273,872 - 2,858,853
For the year ended 31 Dec 2017
Total operating income 187,935 70,397 (3,099) 255,233
Profit before tax 73,577 42,042 - 115,619
At 31 Dec 2017
Total assets 5,643,940 2,923,926 (624,520) 7,943,346
Total liabilities 5,263,539 2,551,341 (624,520) 7,190,360
Credit commitments and contingent
liabilities
(contract amounts) 1,500,456 1,271,147 - 2,771,603
Information by country
Revenue(1) Non-current assets(2)
For the year ended
31 Dec At 31 Dec
2018 2017 2018 2017
HK$m HK$m HK$m HK$m
Hong Kong 142,665 125,698 110,125 111,164
----------------
Mainland China 17,653 14,264 147,444 150,778
----------------
Australia 7,658 6,636 825 871
India 7,880 8,372 1,934 2,108
Indonesia 3,702 4,395 3,566 3,851
Malaysia 6,330 5,663 962 833
Singapore 10,053 9,054 1,415 1,404
Taiwan 3,509 3,295 2,201 2,325
Other 11,019 9,066 3,075 2,963
------- ---------------- -------
Total 210,469 186,443 271,547 276,297
1 Revenue (defined as 'Net operating income before change in
expected credit losses and other impairment charges') is
attributable to countries based on the location of the principal
operations of the branch, subsidiary, associate or joint
venture.
2 Non-current assets consist of property, plant and equipment,
goodwill, other intangible assets, interests in associates and
joint ventures and certain other assets.
34 Related party transactions
--- ---------------------------
The group's related parties include the parent, fellow
subsidiaries, associates, joint ventures, post-employment benefit
plans for the group's employees, Key Management Personnel ('KMP')
as defined by HKAS 24, close family members of KMP and entities
which are controlled or jointly controlled by KMP or their close
family members.
Particulars of transactions with related parties are set out
below.
(a) Inter-company
As part of recovery and resolution planning, the ownership of
the group was transferred in November 2018 from HSBC Asia Holdings
B.V. (previously the group's immediate holding company) to HSBC
Asia Holdings Limited, a newly incorporated intermediate holding
company in Hong Kong that is a wholly-owned subsidiary of HSBC
Holdings plc (incorporated in England).
During the year, the group transferred another property to the
service company, HSBC Global Services (Hong Kong) Limited (the
'ServCo'), which is a fellow subsidiary of the group set up in Hong
Kong as part of recovery and resolution planning to provide
functional support services to the group. The transfer was made at
market value with no impact to the profit and loss. The group
recognised a management charge of HK$1,098m for services provided
by ServCo for the year ended 31 Dec 2018 (2017: HK$238m), which is
included under 'General and administrative expenses'.
The group entered into transactions with its fellow subsidiaries
in the normal course of business, including the acceptance and
placement of interbank deposits, correspondent banking transactions
and off-balance sheet transactions. The activities were on
substantially the same terms, including interest rates and
security, as for comparable transactions with third-party
counterparties.
The group shared the costs of certain IT projects with its
fellow subsidiaries and also used certain processing services of
fellow subsidiaries. The Bank also acted as agent for the
distribution of retail investment funds for fellow subsidiaries and
paid professional fees for services provided by fellow
subsidiaries. These transactions and services are priced on an
arm's length basis.
The aggregate amount of income and expenses arising from these
transactions during the year and the balances of amounts due to and
from the relevant parties at the year end were as follows:
2018 2017
Immediate Ultimate Immediate Ultimate
holding holding Fellow holding holding Fellow
company company subsidiaries company company subsidiaries
HK$m HK$m HK$m HK$m HK$m HK$m
Income and
expenses for
the year
Interest income - - 1,220 - - 2,447
---------
Interest
expense(1) 1,563 5,545 1,681 2,739 1,709 625
--------
Fee income - 43 2,547 - 41 2,605
Fee expense - - 1,153 - - 1,100
Net income from
financial
instruments held
for
trading or
managed on
a fair value
basis - 5 1,289 - 2 27
Other operating
income - 1,348 2,531 - 1,201 2,506
Other operating
expenses(2) - 3,405 13,682 2 2,879 9,632
--------- -------- ------------ --------- -------- ------------
At 31 Dec
Assets - 327 149,122 1 713 306,099
- trading
assets(3) - 123 11,586 - 202 8,270
- derivative
assets - - 78,994 - - 79,084
- other assets(3) - 204 58,542 1 511 218,745
Liabilities - 254,547 212,358 71,700 94,460 190,831
Trading
liabilities(3) - 15 97 - 2 12,994
Financial
liabilities
designated at
fair value(3,4) - 87,065 298 - 35,866 15
Derivative
liabilities - - 70,320 - - 70,266
Other
liabilities(3) - 96,000 120,551 515 1,067 107,449
Subordinated
liabilities(3,5) - 71,467 20,994 50,255 57,525 -
Preference shares - - 98 20,930 - 107
Guarantees - - 17,763 - - 17,908
Commitments - - 14,319 - - 14,372
--------- -------- --------- -------- ------------
1 Interest expense included distribution on preference shares
and interest on subordinated liabilities.
2 In 2018, payments were made of HK$459m (2017: HK$432m) for
software costs which were capitalised as intangible assets in the
balance sheet of the group.
3 These balances are presented under 'Amounts due from/to Group
companies' in the consolidated balance sheet.
4 The balance included subordinated liabilities of HK$87,065m to
meet Total Loss Absorbing Capacity ('TLAC') requirements (2017:
HK$35,866m).
5 The balance included subordinated liabilities of HK$78,450m to
meet TLAC requirements (2017: HK$89,889m).
(b) Share option and share award schemes
The group participates in various share option and share plans
operated by HSBC whereby share options or shares of HSBC are
granted to employees of the group. The group recognises an expense
in respect of these share options and share awards. The cost borne
by the ultimate holding company in respect of share options is
treated as a capital contribution and is recorded within 'Other
reserves'. In respect of share awards, the group recognises a
liability to the ultimate holding company over the vesting period.
This liability is measured at the fair value of the shares at each
reporting date, with changes since the award dates adjusted through
the capital contribution account within 'Other reserves'. The
balances of the capital contribution and the liability at 31
December 2018 amounted to HK$3,147m and HK$1,923m respectively
(2017: HK$2,901m and HK$2,268m respectively).
(c) Retirement benefit plans
At 31 December 2018, HK$12.3bn (2017: HK$15.1bn) of the group's
retirement benefit plan assets were under management by group
companies, earning management fees of HK$29m in 2018 (2017:
HK$27m). At 31 December 2018, the group's retirement benefit plans
had placed deposits of HK$486m (2017: HK$370m) with its banking
subsidiaries, earning interest payable to the schemes of HK$2m
(2017: HK$3m). The above outstanding balances arose from the
ordinary course of business and on substantially the same terms,
including interest rates and security, as for comparable
transactions with third-party counterparties.
(d) Associates and joint ventures
The group provides certain banking and financial services to
associates and joint ventures, including loans, overdrafts,
interest and non-interest bearing deposits and current accounts.
Details of interests in associates and joint ventures are given in
note 15. Transactions and balances during the year with associates
and joint ventures were as follows:
2018 2017
Highest Highest
balance Balance balance Balance
during at during at
the year 31 December the year 31 December
HK$m HK$m HK$m HK$m
Amounts due from associates -
unsubordinated 30,411 23,487 24,178 19,793
--------- ------------
Amounts due to associates 15,821 2,141 20,454 9,632
Commitments 1 1 1 1
-------------------------------------------- --------- ------------
The disclosure of the year-end balance and the highest amounts
outstanding during the year is considered to be the most meaningful
information to represent the amount of transactions and outstanding
balances during the year.
The transactions resulting in outstanding balances arose in the
ordinary course of business and on substantially the same terms,
including interest rates and security, as for comparable
transactions with third--party counterparties.
(e) Key Management Personnel
Key Management Personnel are defined as those persons having
authority and responsibility for planning, directing and
controlling the activities of the Bank and the group. It includes
members of the Board of Directors and Executive Committee of the
Bank and the Board of Directors and Group Managing Directors of
HSBC Holdings plc.
The following table shows the expense in respect of compensation
for Key Management Personnel of the Bank for services rendered to
the Bank:
2018 2017
HK$m HK$m
Salaries and other short-term benefits 337 308
Post employment benefits 10 10
Share-based payments(1) 92 94
---------------------------------------- ---- ----
Total(1) 439 412
----------------------------------------
1 2017 amounts have been represented.
Transactions, arrangements and agreements involving Key Management
Personnel
2018 2017
HK$m HK$m
During the year
Highest average assets(1) 47,132 36,413
------ ------
Highest average liabilities(1) 48,251 55,629
Contribution to group's profit before tax 936 899
At the year end
Guarantees 7,060 10,249
------
Commitments 3,841 2,961
------------------------------------------------------------------------ ------
1 The disclosure of the highest average balance during the year
is considered the most meaningful information to represent
transactions during the year.
Transactions, arrangements and agreements are entered into by
the group with companies that may be controlled by Key Management
Personnel of the group and their immediate relatives. These
transactions are primarily loans and deposits, and were entered
into in the ordinary course of business and on substantially the
same terms, including interest rates and security, as comparable
transactions with persons or companies of a similar standing or,
where applicable, with other employees. The transactions did not
involve more than the normal risk of repayment or present other
unfavourable features.
Change in expected credit losses recognised for the year, and
impairment allowances against balances outstanding at the end of
the year, in respect of Key Management Personnel were insignificant
(2017: nil).
(f) Loans to directors
Directors are defined as the Directors of the Bank, its ultimate
holding company, HSBC Holdings plc and intermediate companies.
Loans to directors also include loans to companies that are
controlled by, and entities that are connected with these
directors. Particulars of loans to directors disclosed pursuant to
section 17 of the Companies (Disclosure of Information about
Benefits of Directors) Regulation are as follows:
Aggregate amount Maximum aggregate
outstanding at amount outstanding
31 Dec during the year
2018 2017 2018 2017
HK$m HK$m HK$m HK$m
By the Bank 857 1,090 7,986 1,213
By subsidiaries 8 - 10 1
----------------- ---------------- -------------------
865 1,090 7,996 1,214
----- -----
These amounts include principal and interest, and the maximum
liability that may be incurred under guarantees.
35 Fair values of financial instruments carried at fair value
--- -----------------------------------------------------------
Control framework
Fair values are subject to a control framework designed to
ensure that they are either determined, or validated, by a function
independent of the risk-taker.
Where fair values are determined by reference to externally
quoted prices or observable pricing inputs to models, independent
price determination or validation is utilised. For inactive
markets, the group sources alternative market information, with
greater weight given to information that is considered to be more
relevant and reliable. Examples of the factors considered are price
observability, instrument comparability, consistency of data
sources, underlying data accuracy and timing of prices.
For fair values determined using valuation models, the control
framework includes development or validation by independent support
functions of the model logic, inputs, model outputs and
adjustments. Valuation models are subject to a process of due
diligence before becoming operational and are calibrated against
external market data on an ongoing basis.
Changes in fair value are generally subject to a profit and loss
analysis process and are disaggregated into high-level categories
including portfolio changes, market movements and other fair value
adjustments.
The majority of financial instruments measured at fair value are
in GB&M. GB&M's fair value governance structure comprises
its Finance function and Valuation Committees. Finance is
responsible for establishing procedures governing valuation and
ensuring fair values are in compliance with accounting standards.
The fair values are reviewed by the group's Valuation Committees,
which consist of independent support functions. These Committees
are overseen by the Group's Valuation Committee Review Group, which
considers all material subjective valuations.
Financial liabilities measured at fair value
In certain circumstances, the group records its own debt in
issue at fair value, based on quoted prices in an active market for
the specific instrument. When quoted market prices are unavailable,
the own debt in issue is valued using valuation techniques, the
inputs for which are either based on quoted prices in an inactive
market for the instrument or are estimated by comparison with
quoted prices in an active market for similar instruments. In both
cases, the fair value includes the effect of applying the credit
spread which is appropriate to the group's liabilities. The change
in fair value of issued debt securities attributable to the group's
own credit spread is computed as follows: for each security at each
reporting date, an externally verifiable price is obtained or a
price is derived using credit spreads for similar securities for
the same issuer. Then, using discounted cash flow, each security is
valued using a Libor-based discount curve. The difference in the
valuations is attributable to the group's own credit spread. This
methodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instruments are
included within 'Financial liabilities designated at fair value'
and are measured at fair value. The credit spread applied to these
instruments is derived from the spreads at which the group issues
structured notes.
Gains and losses arising from changes in the credit spread of
liabilities issued by the group reverse over the contractual life
of the debt, provided that the debt is not repaid at a premium or a
discount.
Fair value hierarchy
Fair values of financial assets and liabilities are determined
according to the following hierarchy:
-- Level 1 - valuation technique using quoted market price:
financial instruments with quoted prices for identical instruments
in active markets that the group can access at the measurement
date.
-- Level 2 - valuation technique using observable inputs:
financial instruments with quoted prices for similar instruments in
active markets or quoted prices for identical or similar
instruments in inactive markets and financial instruments valued
using models where all significant inputs are observable.
-- Level 3 - valuation technique with significant unobservable
inputs: financial instruments valued using valuation techniques
where one or more significant inputs are unobservable.
Financial instruments carried at fair value and bases of valuation
Fair Value Hierarchy
Level Level Level Third-party Inter-
1 2 3 total company(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2018
Assets
Trading assets(1) 395,769 162,841 228 558,838 - 558,838
Derivatives 3,219 209,450 1,206 213,875 78,994 292,869
Financial assets designated
and otherwise mandatorily
measured at fair value
through profit or loss 75,105 36,599 21,155 132,859 - 132,859
Financial investments 1,146,426 352,490 4,709 1,503,625 - 1,503,625
Liabilities
Trading liabilities(1) 74,376 6,818 - 81,194 - 81,194
Derivatives 3,348 220,043 1,842 225,233 70,320 295,553
Financial liabilities
designated
at fair value(1) - 139,782 21,361 161,143 - 161,143
At 31 Dec 2017
Assets
Trading assets(1) 300,646 195,575 213 496,434 - 496,434
Derivatives 4,773 215,869 517 221,159 79,084 300,243
Financial assets designated
at fair value 90,641 23,567 8,438 122,646 - 122,646
Financial investments 916,385 498,512 5,033 1,419,930 - 1,419,930
Liabilities
Trading liabilities(1) 79,209 141,972 10,184 231,365 - 231,365
Derivatives 4,501 232,627 1,959 239,087 70,266 309,353
Financial liabilities
designated
at fair value(1) - 49,278 - 49,278 - 49,278
1 Amounts with HSBC Group entities are not reflected here.
2 Derivatives balances with HSBC Group entities are largely under 'Level 2'.
Transfers between Level 1 and Level 2 fair values
Assets Liabilities
Designated
and
otherwise
mandatorily
measured Designated
Financial Trading at fair Trading at fair
investments assets value Derivatives liabilities value Derivatives
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2018
Transfers from Level
1 to Level 2 9,955 1,389 - - 349 - -
------------------ ------- ----------- ----------- ----------- ---------- -----------
Transfers from Level
2 to Level 1 121,667 18,109 - - 376 - -
-------------------------
Assets Liabilities
Held Designated Designated
for at fair Held at fair
Available-for-sale trading value Derivatives for trading value Derivatives
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2017
Transfers from Level
1 to Level 2 5,424 9,402 - - - - -
------------------ ----------- ----------- ----------- ---------- -----------
Transfers from Level
2 to Level 1 63,280 - - - - - -
-------------------------
Transfers between levels of the fair value hierarchy are deemed
to occur at the end of each quarterly reporting period. Transfers
into and out of Level of the fair value hierarchy are primarily
attributable to changes in observability of valuation inputs and
price transparency.
Movements in Level 3 financial instruments
There were no material transfers from/to Level 1 and 2 as a
result of change in observability of valuation inputs, settlement,
nor gains/loss recognised in the income statement/other
comprehensive income during the year in relation to financial
instruments carried at fair value in Level 3 (2017: immaterial).
The increase in Level 3 assets was mainly due to the purchase of
financial assets of HK$12,200m (2017: HK$4,577m) to support growth
in insurance business. The increase in Level 3 liabilities was
mainly due to increased financial liabilities which contain both
deposit and derivative components of HK$10,954m (2017: Nil),
reflecting increase in customers' demand.
Fair value adjustments
Fair value adjustments are adopted when the group determines
there are additional factors considered by market participants that
are not incorporated within the valuation model. Movements in the
level of fair value adjustments do not necessarily result in the
recognition of profits or losses within the income statement, such
as when models are enhanced and therefore fair value adjustments
may no longer be required.
Bid-offer
HKFRS 13 requires use of the price within the bid-offer spread
that is most representative of fair value. Valuation models will
typically generate mid-market values. The bid-offer adjustment
reflects the extent to which bid-offer costs would be incurred if
substantially all residual net portfolio market risks were closed
using available hedging instruments or by disposing of, or
unwinding the position.
Uncertainty
Certain model inputs may be less readily determinable from
market data, and/or the choice of model itself may be more
subjective. In these circumstances, an adjustment may be necessary
to reflect the likelihood that market participants would adopt more
conservative values for uncertain parameters and/or model
assumptions, than those used in the group's valuation model.
Credit valuation adjustment ('CVA') and debit valuation
adjustment ('DVA')
The CVA is an adjustment to the valuation of over-the-counter
('OTC') derivative contracts to reflect the possibility that the
counterparty may default and the group may not receive the full
market value of the transactions.
The DVA is an adjustment to the valuation of OTC derivative
contracts to reflect the possibility that the group may default,
and that the group may not pay the full market value of the
transactions.
The group calculates a separate CVA and DVA for each legal
entity, and for each counterparty to which the entity has exposure.
With the exception of central clearing parties, all third-party
counterparties are included in the CVA and DVA calculations, and
these adjustments are not netted across group entities.
The group calculates the CVA by applying the probability of
default ('PD') of the counterparty, conditional on the non-default
of the group, to the group's expected positive exposure to the
counterparty and multiplying the result by the loss expected in the
event of default. Conversely, the group calculates the DVA by
applying the PD of the group, conditional on the non-default of the
counterparty, to the expected positive exposure of the counterparty
to the group and multiplying the result by the loss expected in the
event of default. Both calculations are performed over the life of
the potential exposure.
For most products the group uses a simulation methodology, which
incorporates a range of potential exposures over the life of the
portfolio, to calculate the expected positive exposure to a
counterparty. The simulation methodology includes credit mitigants,
such as counterparty netting agreements and collateral agreements
with the counterparty.
The methodologies do not, in general, account for 'wrong-way
risk' which arises when the underlying value of the derivative
prior to any CVA is positively correlated to the PD of the
counterparty. When there is significant wrong-way risk, a
trade-specific approach is applied to reflect this risk in the
valuation.
Funding fair value adjustment ('FFVA')
The FFVA is calculated by applying future market funding spreads
to the expected future funding exposure of any uncollateralised
component of the OTC derivative portfolio. The expected future
funding exposure is calculated by a simulation methodology, where
available and is adjusted for events that may terminate the
exposure, such as the default of the group or the counterparty. The
FFVA and DVA are calculated independently.
Model limitation
Models used for portfolio valuation purposes may be based upon a
simplifying set of assumptions that do not capture all material
market characteristics. In these circumstances, model limitation
adjustments are adopted.
Inception profit (Day 1 profit or loss reserves)
Inception profit adjustments are adopted when the fair value
estimated by a valuation model is based on one or more significant
unobservable inputs.
Effects of changes in significant unobservable assumptions to
reasonably possible alternatives
The key unobservable inputs to Level 3 financial instruments
include volatility and correlation for structured notes and
deposits valued using option models, bid quotes for corporate bonds
valued using approaches that take into account of market
comparables, and multiple items for private equity and strategic
investments. In the absence of an active market, the fair value of
private equity and strategic investments is estimated on the basis
of an analysis of the investee's financial position and results,
risk profile, prospects and other factors, as well as by reference
to market valuations for similar entities quoted in an active
market, or the price at which similar companies have changed
ownership. The change in fair values due to changes in reasonably
possible alternative assumptions for these unobservable inputs is
not significant.
Favourable and unfavourable changes are determined on the basis
of sensitivity analysis. The sensitivity analysis aims to measure a
range of fair values consistent with the application of a 95%
confidence interval. Methodologies take account of the nature of
the valuation technique employed, the availability and reliability
of observable proxies and historical data. When the available data
is not amenable to statistical analysis, the quantification of
uncertainty is judgemental, but remains guided by the 95%
confidence interval. The sensitivity of Level 3 fair values to
reasonably possible alternative assumptions is not significant.
36 Fair values of financial instruments not carried at fair value
--- ---------------------------------------------------------------
Fair values of financial instruments not carried at fair value and
bases of valuation
Fair Value Hierarchy
Quoted Significant
market Observable unobservable
price inputs inputs
Carrying Level Level Level
amount 1 2 3 Total
HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2018
Assets
Reverse repurchase
agreements -
non-trading 406,327 - 396,061 10,723 406,784
Placings with and
advances to banks 338,151 - 322,443 15,531 337,974
Loans and advances to
customers 3,528,702 - 52,262 3,473,497 3,525,759
Financial investments -
at amortised
cost 367,401 8,543 356,836 - 365,379
Liabilities
Repurchase agreements -
non-trading 70,279 - 70,282 - 70,282
Deposits by banks 164,664 - 164,662 - 164,662
Customer accounts 5,207,666 - 5,207,871 - 5,207,871
Debt securities in
issue 58,236 - 58,808 - 58,808
Subordinated
liabilities 4,081 - 960 2,919 3,879
Preference shares 98 - - 98 98
At 31 Dec 2017
Assets
Reverse repurchase
agreements -
non-trading 330,890 - 318,849 11,927 330,776
Placings with and
advances to banks 433,005 - 418,652 14,561 433,213
Loans and advances to
customers 3,328,980 - 92,146 3,230,365 3,322,511
Financial investments -
at amortised
cost 300,244 6,244 303,240 - 309,484
Liabilities
Repurchase agreements -
non-trading 47,170 - 47,155 - 47,155
Deposits by banks 201,697 - 201,456 233 201,689
Customer accounts 5,138,272 - 5,138,352 - 5,138,352
Debt securities in
issue 38,394 - 38,279 - 38,279
Subordinated
liabilities 4,090 - 993 2,773 3,766
Preference shares 21,037 - - 21,539 21,539
The fair values above are stated at a specific date and may be
significantly different from the amounts which will actually be
paid on the maturity or settlement dates of the instruments. In
many cases, it would not be possible to realise immediately the
estimated fair values given the size of the portfolios measured.
Accordingly, these fair values do not represent the value of these
financial instruments to the group as a going concern.
Other financial instruments not carried at fair value are
typically short-term in nature or reprice to current market rates
frequently. Accordingly, their carrying amount is a reasonable
approximation of fair value. They include cash and sight balances
at central banks, items in the course of collection from and
transmission to other banks, Hong Kong Government certificates of
indebtedness and Hong Kong currency notes in circulation, all of
which are measured at amortised cost.
Valuation
Fair value is an estimate of the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. It
does not reflect the economic benefits and costs that the group
expects to flow from an instrument's cash flow over its expected
future life. Our valuation methodologies and assumptions in
determining fair values for which no observable market prices are
available may differ from those of other companies.
Repurchase and reverse repurchase agreements - non-trading
Fair values approximate carrying amounts as these balances are
generally short dated.
Loans and advances to banks and customers
To determine the fair value of loans and advances to banks and
customers, loans are segregated, as far as possible, into
portfolios of similar characteristics. Fair values are based on
observable market transactions, when available. When they are
unavailable, fair values are estimated using valuation models
incorporating a range of input assumptions. These assumptions may
include: value estimates from third-party brokers reflecting
over-the-counter trading activity; forward-looking discounted cash
flow models, taking account of expected customer prepayment rates,
using assumptions that the group believes are consistent with those
that would be used by market participants in valuing such loans;
new business rates estimates for similar loans; and trading inputs
from other market participants including observed primary and
secondary trades. From time to time, we may engage a third-party
valuation specialist to measure the fair value of a pool of
loans.
The fair value of loans reflects expected credit losses at the
balance sheet date and estimates of market participants'
expectations of credit losses over the life of the loans, and the
fair value effect of repricing between origination and the balance
sheet date. For credit impaired loans, fair value is estimated by
discounting the future cash flows over the time period they are
expected to be recovered.
Financial investments
The fair values of listed financial investments are determined
using bid market prices. The fair values of unlisted financial
investments are determined using valuation techniques that
incorporate the prices and future earnings streams of equivalent
quoted securities.
Deposits by banks and customer accounts
The fair values of on-demand deposits are approximated by their
carrying value. For deposits with longer-term maturities, fair
values are estimated using discounted cash flows, applying current
rates offered for deposits of similar remaining maturities.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted market prices at the
balance sheet date where available, or by reference to quoted
market prices for similar instruments.
37 Structured entities
--- --------------------
The group is involved with both consolidated and unconsolidated
structured entities through the securitisation of financial assets,
conduits and investment funds, established either by the group or a
third party.
Consolidated structured entities
The group uses consolidated structured entities to securitise
customer loans and advances it originates to diversify its sources
of funding for asset origination and capital efficiency purposes.
The loans and advances are transferred by the group to the
structured entities for cash or synthetically through credit
default swaps, and the structured entities issue debt securities to
investors. The group's transactions with these entities are not
significant.
Unconsolidated structured entities
The term 'unconsolidated structured entities' refers to all
structured entities not controlled by the group. The group enters
into transactions with unconsolidated structured entities in the
normal course of business to facilitate customer transactions and
for specific investment opportunities.
Nature and risks associated with the group's interests in unconsolidated
structured entities
HSBC Non-HSBC
managed managed
Securitisations funds funds Other Total
Total asset values of the entities
(HK$bn)
0-4 38 39 97 36 210
4-15 7 18 84 1 110
15-39 1 4 38 - 43
39-196 - 1 21 - 22
196+ - 1 5 - 6
Number of entities at 31 Dec 2018 46 63 245 37 391
-----------------
HK$m HK$m HK$m HK$m HK$m
Total assets in relation to the
group's interests in the unconsolidated
structured entities 17,907 20,540 40,101 15,598 94,146
* trading assets - 76 - - 76
* financial assets designated and otherwise mandatorily
measured at fair value - 19,292 40,101 - 59,393
* derivatives - - - - -
* loans and advances to customers 17,907 - - 15,253 33,160
* financial investments - 1,172 - - 1,172
* other assets - - - 345 345
Total liabilities in relation
to the group's interests in the
unconsolidated structured entities - - - - -
-----------------
Other off balance sheet commitments 19 - 8,905 6,877 15,801
The group's maximum exposure at
31 Dec 2018 17,926 20,540 49,006 22,475 109,947
Total asset values of the entities
(HK$bn)
0-4 36 39 92 25 192
4-15 4 16 75 1 96
15-39 - 8 36 - 44
39-196 2 2 29 - 33
196+ - 1 4 - 5
Number of entities at 31 Dec 2017 42 66 236 26 370
HK$m HK$m HK$m HK$m HK$m
Total assets in relation to the
group's interests in the unconsolidated
structured entities 20,201 28,160 44,854 8,578 101,793
* trading assets - 874 - - 874
* financial assets designated at fair value - 26,016 44,463 - 70,479
* derivatives 1 - - - 1
* loans and advances to customers 20,200 - - 8,281 28,481
* financial investments - 1,270 391 - 1,661
* other assets - - - 297 297
Total liabilities in relation
to the group's interests in the
unconsolidated structured entities - - - - -
Other off balance sheet commitments 18 - 6,265 3,120 9,403
The group's maximum exposure at
31 Dec 2017 20,219 28,160 51,119 11,698 111,196
The maximum exposure to loss from the group's interests in
unconsolidated structured entities represents the maximum loss it
could incur as a result of its involvement with these entities
regardless of the probability of the loss being incurred.
-- For commitments, guarantees and written credit default swaps,
the maximum exposure to loss is the notional amount of potential
future losses.
-- For retained and purchased investments in and loans to
unconsolidated structured entities, the maximum exposure to loss is
the carrying value of these interests at the balance sheet
reporting date.
The maximum exposure to loss is stated gross of the effects of
hedging and collateral arrangements entered into to mitigate the
group's exposure to loss.
Securitisations
The group has interests in unconsolidated securitisation
vehicles through holding notes issued by these entities.
HSBC managed funds
The group establishes and manages money market funds and
non-money market investment funds to provide customers with
investment opportunities. The group, as fund manager, may be
entitled to receive management and performance fees based on the
assets under management. The group may also retain units in these
funds.
Non-HSBC managed funds
The group purchases and holds units of third-party managed funds
in order to facilitate business and meet customer needs. In
addition to entities, asset and liability classes disclosed above,
the group enters into derivative contracts with non-HSBC managed
funds.
Other
The group has established structured entities in the normal
course of business, such as structured credit transactions for
customers, to provide finance to public and private sector
infrastructure projects, and for asset and structured finance
transactions. In addition to the interest disclosed above, the
group enters into derivative contracts, reverse repos and stock
borrowing transactions with structured entities. These interests
arise in the normal course of business for the facilitation of
third-party transactions and risk management solutions.
Structured entities sponsored by the group
The amount of assets transferred to and income received from
such sponsored entities during 2018 and 2017 were not
significant.
38 Bank balance sheet and statement of changes in equity
--- ------------------------------------------------------
Bank balance sheet at 31 December 2018
2018 2017
HK$m HK$m
Assets
Cash and sight balances at central banks 147,447 149,529
---------
Items in the course of collection from other banks 18,021 19,172
Hong Kong Government certificates of indebtedness 280,854 267,174
Trading assets 439,155 354,114
Derivatives 276,558 281,552
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 6,298 N/A
Financial assets designated at fair value N/A 463
Reverse repurchase agreements - non-trading 243,203 203,031
Placings with and advances to banks 159,636 187,495
Loans and advances to customers 1,947,307 1,832,490
Financial investments 866,566 796,384
Amounts due from Group companies 347,652 486,744
Investments in subsidiaries 88,169 89,418
Interests in associates and joint ventures 39,830 39,830
Goodwill and intangible assets 8,419 5,542
Property, plant and equipment 75,897 83,520
Deferred tax assets 682 738
Prepayments, accrued income and other assets 130,057 87,287
--------- ---------
Total assets 5,075,751 4,884,483
Liabilities
Hong Kong currency notes in circulation 280,854 267,174
---------
Items in the course of transmission to other banks 22,786 28,217
Repurchase agreements - non-trading 55,142 12,243
Deposits by banks 121,618 154,728
Customer accounts 3,186,542 3,179,845
Trading liabilities 47,491 101,529
Derivatives 279,056 289,649
Financial liabilities designated at fair value 42,545 7,838
Debt securities in issue 41,398 27,865
Retirement benefit liabilities 2,085 1,675
Amounts due to Group companies 439,262 337,344
Accruals and deferred income, other liabilities and provisions 98,983 51,929
Current tax liabilities 1,600 1,099
Deferred tax liabilities 8,836 8,758
Subordinated liabilities 3,133 3,126
Preference shares - 20,930
---------
Total liabilities 4,631,331 4,493,949
Equity
Share capital 172,335 151,360
---------
Other equity instruments 35,879 14,737
Other reserves 23,346 18,855
Retained earnings 212,860 205,582
---------
Total equity 444,420 390,534
Total equity and liabilities 5,075,751 4,884,483
--------- ---------
Bank statement of changes in equity for the year ended 31
December 2018
Other reserves
Financial Cash
Other Property assets flow Foreign
Share equity Retained revaluation at FVOCI hedge exchange Total
capital instruments earnings reserve reserve(7) reserve reserve Other(1) equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2017 151,360 14,737 205,582 39,799 1,688 (118) (9,473) (13,041) 390,534
--- ---
Impact on transition
to HKFRS 9 - - (896) - (356) - - - (1,252)
---
At 1 Jan 2018 151,360 14,737 204,686 39,799 1,332 (118) (9,473) (13,041) 389,282
--- ---
Profit for the year - - 75,742 - - - - - 75,742
Other comprehensive
income/(expense) (net
of tax) - - (535) 8,410 (295) 34 (3,373) - 4,241
* debt instruments at fair value through other
comprehensive income - - - (261) - - - (261)
* equity instruments designated at fair value through
other comprehensive income - - - (34) - - - (34)
* cash flow hedges - - - - 34 - - 34
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (208) - - - - (208)
* property revaluation - 8,410 8,410
* remeasurement of defined benefit asset/liability - - (327) - - - - (327)
* exchange differences - - - - - - (3,373) - (3,373)
Total comprehensive
income/(expense) for
the year - - 75,207 8,410 (295) 34 (3,373) - 79,983
---
Other equity instruments
issued(2) - 21,142 - - - - - - 21,142
Dividends paid(3) - - (47,440) - - - - - (47,440)
Movement in respect
of share-based payment
arrangements - - (213) - - - - 215 2
Transfers and other
movements(4,6) 20,975 - (19,380) (8,703) - - - 8,559 1,451
At 31 Dec 2018 172,335 35,879 212,860 39,506 1,037 (84) (12,846) (4,267) 444,420
--- ---
Other reserves
Available- Cash
Other Property for-sale flow Foreign
Share equity Retained revaluation investment hedge exchange Total
capital instruments earnings reserve reserve reserve reserve Other(1) equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 1 Jan 2017 114,359 14,737 232,782 35,816 2,262 (675) (13,734) (15,226) 370,321
Profit for the year - - 62,511 - - - - - 62,511
Other comprehensive
income/expense
(net of tax) - - 707 7,252 (538) 557 4,261 - 12,239
- available-for-sale
investments - - - - (538) - - - (538)
- cash flow hedges - - - - - 557 - - 557
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (205) - - - - - (205)
- property revaluation - - - 7,252 - - - - 7,252
* remeasurement of defined benefit asset/liability - - 912 - - - - - 912
- exchange differences - - - - - - 4,261 - 4,261
Total comprehensive
income/(expense) for
the year - - 63,218 7,252 (538) 557 4,261 - 74,750
Shares issued 1,744 - - - - - - - 1,744
Dividends paid(3) - - (56,260) - - - - - (56,260)
Movement in respect
of share-based payment
arrangements - - (103) - - - - (311) (414)
Transfers and other
movements(4,6) 35,257 - (34,055) (3,269) (36) - - 2,496 393
At 31 Dec 2017 151,360 14,737 205,582 39,799 1,688 (118) (9,473) (13,041) 390,534
For footnotes, please refer to page 56.
39 Legal proceedings and regulatory matters
--- -----------------------------------------
The group is party to legal proceedings and regulatory matters
in a number of jurisdictions arising out of its normal business
operations. Apart from the matters described below, the Bank
considers that none of these matters are material. The recognition
of provisions is determined in accordance with the accounting
policies set out in note 1.2(n). While the outcome of legal
proceedings and regulatory matters is inherently uncertain,
management believes that, based on the information available to it,
appropriate provisions have been made in respect of these matters
as at 31 December 2018. Any provision recognised does not
constitute an admission of wrongdoing or legal liability. It is not
practicable to provide an aggregate estimate of potential liability
for our legal proceedings and regulatory matters as a class of
contingent liabilities.
Anti-money laundering and sanctions-related matters
In 2010, HSBC Bank USA entered into a consent cease and desist
order with the Office of the Comptroller of the Currency ('OCC')
and the indirect parent of that company, HSBC North America
Holdings Inc. ('HNAH'), entered into a consent cease and desist
order with the US Federal Reserve Board ('FRB'). In 2012, HSBC Bank
USA further entered into an enterprise-wide compliance consent
order with the OCC (together the 'Orders'). These Orders required
improvements to establish an effective compliance risk management
programme across HSBC's US businesses, including risk management
related to the US Bank Secrecy Act ('BSA') and anti-money
laundering ('AML') compliance. In 2012, an additional consent order
was entered into with the OCC that required HSBC Bank USA to
correct the circumstances noted in the OCC's report and imposed
restrictions on HSBC Bank USA acquiring control of, or holding an
interest in, any new financial subsidiary, or commencing a new
activity in its existing financial subsidiary, without the OCC's
approval. Between June and September 2018, following implementation
of the required remediation actions by HNAH and HSBC Bank USA, the
FRB and OCC terminated each of these orders.
In December 2012, among other agreements, HSBC Holdings plc
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 AML and sanctions-related
obligations and to retain an independent compliance monitor (who
is, for FCA purposes, a 'skilled person' under section 166 of the
Financial Services and Markets Act) to produce periodic assessments
of the Group's AML and sanctions compliance programme (the 'Skilled
Person/Independent Consultant'). In December 2012, HSBC Holdings
plc also entered into an agreement with the Office of Foreign
Assets Control ('OFAC') regarding historical transactions involving
parties subject to OFAC sanctions. 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.
Through his country-level reviews, the Skilled
Person/Independent Consultant has identified potential AML and
sanctions compliance issues that HSBC is reviewing further with the
FRB and/or FCA. The Financial Crimes Enforcement Network of the US
Treasury Department as well as the Civil Division of the US
Attorney's Office for the Southern District of New York are
investigating the collection and transmittal of third-party
originator information in certain payments instructed over HSBC's
proprietary payment systems. HSBC is cooperating with all of these
investigations.
Based on the facts currently known, it is not practicable at
this time for HSBC to predict the resolution of these matters,
including the timing or any possible impact on HSBC, which could be
significant.
Tax investigations
The Bank continues to cooperate with the relevant US and other
authorities, including with respect to clients of the Bank in India
who may have had US tax reporting obligations.
In addition, various tax administration, regulatory and law
enforcement authorities around the world, including in India, are
conducting investigations and reviews of HSBC Swiss Private Bank
and other HSBC companies in connection with allegations of tax
evasion or tax fraud, money laundering and unlawful cross-border
banking solicitation. In February 2015, the Indian tax authority
issued a summons and request for information to the Bank in
India.
The Bank and other HSBC companies are cooperating with these
ongoing investigation. There are many factors that may affect the
range of outcomes, and the resulting financial impact, of these
investigations and reviews, which could be significant.
In light of the media attention regarding these matters, it is
possible that other tax administration, regulatory or law
enforcement authorities will also initiate or enlarge similar
investigations or regulatory proceedings.
Singapore Interbank Offered Rate ('Sibor'), Singapore Swap Offer
Rate ('SOR') and Australia Bank Bill Swap Rate ('BBSW')
In July 2016 and August 2016, HSBC and other panel banks were
named as defendants in two putative class actions filed in the New
York District Court on behalf of persons who transacted in products
related to the SIBOR, SOR and BBSW benchmark rates. The complaints
allege, among other things, misconduct related to these benchmark
rates in violation of US antitrust, commodities and racketeering
laws, and state law. Following a decision in October 2018 on the
defendants' motion to dismiss in the SIBOR/SOR litigation, the
claims against a number of HSBC entities were dismissed and the
Bank remains the only HSBC defendant in this action. In October
2018, the Bank filed a motion for reconsideration of the decision
based on the issue of personal jurisdiction. The plaintiff filed a
third amended complaint in October 2018 naming only the SIBOR panel
members. In November 2018, the defendants moved to dismiss the
third amended complaint, and this motion remains pending.
In November 2018, the court granted in part and denied in part
the defendants' motion to dismiss the BBSW case and dismissed all
foreign defendants, including all the HSBC entities, on personal
jurisdiction grounds. The plaintiff sought leave to file a second
amended complaint in January 2019.
There are many factors that may affect the range of outcomes,
and the resulting financial impact, of these matters, which could
be significant.
United States Bankruptcy Court for the Southern District of New
York litigation
In June 2018, a claim was issued against the Bank in the United
States Bankruptcy Court for the Southern District of New York by
the Chapter 11 Trustee of CFG Peru Investments Pte. Ltd.
(Singapore) (the 'Trustee Complaint'). The Trustee Complaint makes
allegations under the Peruvian Civil Code, Hong Kong and U.S.
common law and the Bankruptcy Code concerning the Bank's alleged
conduct in commencing the winding-up proceedings and pursuing the
appointment of joint provisional liquidators for affiliates of CFG
Peru Investments Pte. Ltd. The Trustee is seeking damages and
equitable subordination or disallowance of the Bank's Chapter 11
claims in a related bankruptcy proceeding.
The Bank will seek to dismiss the Trustee Complaint. Based on
the facts currently known, it is not practicable at this time to
predict the resolution of these matters, including the timing or
any possible impact, which could be significant.
Foreign exchange rate investigations
In January 2018, HSBC Holdings plc entered into a three-year
deferred prosecution agreement with the Criminal Division of the
DoJ (the 'FX DPA'), regarding fraudulent conduct in connection with
two particular transactions in 2010 and 2011. This concluded the
DoJ's investigation into HSBC's historical foreign exchange
activities. Under the terms of the FX DPA, HSBC has a number of
ongoing obligations, including implementing enhancements to its
internal controls and procedures in its Global Markets business,
which will be the subject of annual reports to the DoJ. In
addition, HSBC agreed to pay a financial penalty and
restitution.
There are many factors that may affect the range of outcomes and
the resulting financial impact of this matter, which could be
significant.
Other regulatory investigations, reviews and litigation
HSBC Holdings plc and/or certain of its affiliates are subject
to a number of other investigations and reviews by various
regulators and competition and law enforcement authorities, as well
as litigation, in connection with various matters relating to the
firm's businesses and operations, including:
-- requests for information from various tax administration or
regulatory authorities relating to Mossack Fonseca & Co.;
-- an investigation by the US Securities and Exchange Commission
of multiple institutions, including HSBC, in relation to hiring
practices of candidates referred by or related to government
officials or employees of state-owned enterprises in
Asia-Pacific.
There are many factors that may affect the range of outcomes,
and the resulting financial impact, of these matters, which could
be significant.
40 Ultimate holding company
--- -------------------------
The ultimate holding company of the Bank is HSBC Holdings plc,
which is incorporated in England.
The largest group in which the accounts of the Bank are
consolidated is that headed by HSBC Holdings plc. The consolidated
accounts of HSBC Holdings plc are available to the public on the
HSBC Group's website at www.hsbc.com or may be obtained from 8
Canada Square, London E14 5HQ, United Kingdom.
41 Events after the balance sheet date
--- ------------------------------------
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 remain 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.
42 Approval of financial statements
--- ---------------------------------
The financial statements were approved and authorised for issue
by the Board of Directors on 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
ACSJIMATMBTBBFL
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March 15, 2019 07:02 ET (11:02 GMT)
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