TIDM57HB
RNS Number : 9155F
Hongkong & Shanghai Banking Corp Ld
13 March 2020
The Hongkong and Shanghai Banking
Corporation Limited
Annual Report and Accounts 2019
Contents
Page
Certain defined terms 1
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Cautionary statement regarding
forward-looking statements 1
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Chinese translation 1
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Financial Highlights 2
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Report of the Directors 3
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Financial Review 8
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Risk 12
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Capital 51
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Statement of Directors' Responsibilities 54
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Independent Auditor's Report 55
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Consolidated Financial Statements
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Consolidated income statement 60
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Consolidated statement of comprehensive
income 61
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Consolidated balance sheet 62
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Consolidated statement of cash
flows 63
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Consolidated statement of changes
in equity 64
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Notes on the Consolidated Financial
Statements
----
Basis of preparation and significant
1 accounting policies 66
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2 Operating profit 76
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3 Insurance business 78
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Employee compensation and
4 benefits 79
5 Tax 83
6 Dividends 84
7 Trading assets 85
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8 Derivatives 85
Financial assets designated
and otherwise mandatorily
measured at fair value through
9 profit or loss 87
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10 Loans and advances to customers 87
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11 Financial investments 88
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Assets pledged, assets transferred
12 and collateral received 89
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13 Investments in subsidiaries 90
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Interests in associates and
14 joint ventures 90
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15 Goodwill and intangible assets 93
16 Property, plant and equipment 95
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Prepayments, accrued income
17 and other assets 96
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18 Customer accounts 96
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19 Trading liabilities 96
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Financial liabilities designated
20 at fair value 96
21 Debt securities in issue 97
Accruals and deferred income,
22 other liabilities and provisions 97
23 Subordinated liabilities 98
24 Preference shares 98
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25 Share capital 98
26 Other equity instruments 99
Maturity analysis of assets
27 and liabilities 99
Analysis of cash flows payable
under financial liabilities
28 by remaining contractual maturities 102
Contingent liabilities, contractual
29 commitments and guarantees 103
30 Other commitments 103
Offsetting of financial assets
31 and financial liabilities 103
32 Segmental analysis 104
33 Related party transactions 106
Fair values of financial instruments
34 carried at fair value 108
Fair values of financial instruments
35 not carried at fair value 111
36 Structured entities 112
Bank balance sheet and statement
37 of changes in equity 114
Legal proceedings and regulatory
38 matters 116
39 Ultimate holding company 117
Events after the balance sheet
40 date 117
41 Approval of financial statements 117
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Certain defined terms
This document comprises the
Annual Report and Accounts 2019
for The Hongkong and Shanghai Banking Corporation Limited ('the
Bank') and its subsidiaries (together 'the group'). References to
'HSBC', 'the Group' or 'the HSBC Group' within this document mean
HSBC Holdings plc together with its subsidiaries. Within this
document the Hong Kong Special Administrative Region of the
People's Republic of China is referred to as 'Hong Kong'. The
abbreviations 'HK$m' and 'HK$bn' represent millions and billions
(thousands of millions) of Hong Kong dollars respectively.
Cautionary statement regarding forward-
looking statements
This
Annual Report and Accounts
contains certain forward-looking statements with respect to the
financial condition, results of operations and business of the
group.
Statements that are not historical facts, including statements
about the Bank's beliefs and expectations, are forward-looking
statements. Words such as 'expects', 'anticipates', 'intends',
'plans', 'believes', 'seeks', 'estimates', 'potential' and
'reasonably possible', variations of these words and similar
expressions are intended to identify forward-looking statements.
These statements are based on current plans, estimates and
projections, and therefore undue reliance should not be placed on
them. Forward-looking statements speak only as of the date they are
made, and it should not be assumed that they have been revised or
updated in the light of new information or future events.
Forward-looking statements involve inherent risks and
uncertainties. Readers are cautioned that a number of factors could
cause actual results to differ, in some instances materially, from
those anticipated or implied in any forward-looking statement.
Chinese translation
A Chinese translation of the
Annual Report and Accounts
is available upon request from: Communications (Asia), Level 32,
HSBC Main Building, 1 Queen's Road Central, Hong Kong. The report
is also available, in English and Chinese, on the Bank's website at
www.hsbc.com.hk.
Financial Highlights
2019 2018
HK$m HK$m
--------- -----------
For the year
Net operating income before change in expected credit
losses and other credit impairment charges 219,381 210,469
Profit before tax 136,433 134,583
Profit attributable to shareholders 105,722 103,013
At the year-end
Total shareholders' equity 814,678 752,758
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Total equity 879,281 812,920
Total capital(1) 598,934 557,180
Customer accounts 5,432,424 5,207,666
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Total assets 8,661,714 8,263,454
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Ratios % %
Return on average ordinary shareholders' equity 13.9 14.8
Post-tax return on average total assets 1.3 1.4
Cost efficiency ratio 42.6 41.5
Net interest margin 2.02 2.06
Advances-to-deposits ratio 68.5 67.8
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Capital ratios
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Common equity tier 1 capital 17.2 16.5
Tier 1 capital 18.8 17.8
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Total capital 21.0 19.8
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1 Capital is calculated in accordance with the Banking (Capital)
Rules issued by the Hong Kong Monetary Authority ("HKMA") under
section 97C(1) of the Banking Ordinance.
Established in Hong Kong and Shanghai in 1865, The Hongkong and
Shanghai Banking Corporation Limited is the founding member of the
HSBC Group - one of the world's largest banking and financial
services organisations. It is the largest bank incorporated in Hong
Kong and one of Hong Kong's three note-issuing banks. It is a
wholly-owned subsidiary of HSBC Holdings plc, the holding company
of the HSBC Group, which has an international network organised
into five geographical regions: Europe, Asia, Middle East and North
Africa, North America and Latin America.
The Hongkong and Shanghai Banking Corporation Limited
Incorporated in the Hong Kong SAR with limited liability
Registered Office and Head Office: HSBC Main Building, 1 Queen's
Road Central, Hong Kong
Telephone: (852) 2822 1111 Facsimile: (852) 2810 1112 Web: www.hsbc.com.hk.
Report of the Directors
Principal Activities
The group provides a comprehensive range of domestic and
international banking and related financial services, principally
in the Asia - Pacific region.
Asia Strategy
HSBC's Asian franchise remains integral to the Group's focus on
growth and value creation for our stakeholders. Leveraging the HSBC
Group's signature balance sheet strength, privileged access to high
growth Asian markets, and unique history and positioning as the
world's Leading International Bank, we have made good progress in
executing our key strategic priorities in Asia. We continue to
fortify our leading position in the Greater Bay Area (including in
Hong Kong SAR and the Pearl River Delta), to invest in growing our
business in Southeast Asia, and to enhance our ability to serve
more of the region's growing wealth, insurance, and asset
management needs. We continue to support clients and economies
participating in the China-led Belt and Road Initiative, and we
re-affirm our commitment as an industry leader in sustainable
finance to support the world's ongoing transition to a low-carbon
economy.
Consolidated Financial Statements
The state of affairs of the Bank and the group, and the
consolidated profit of the group, are shown on pages 60 to 117.
Subordinated liabilities, Preference Shares and Share
Capital
Details on subordinated liabilities issued by the group are set
out in notes 23 and 33. Details on preference shares and share
capital of the Bank are set out in notes 24, 25 and 26 on the
Consolidated Financial Statements.
Dividends
The interim dividends paid in respect of 2019 are set out in
note 6 on the Consolidated Financial Statements.
Directors
The Directors at the date of this report are set out below:
Laura May Lung Cha*, GBM
Chairman
She is an independent non-executive
Director of HSBC Holdings plc. She
is also Chairman and an independent
non-executive Director of Hong Kong
Exchanges and Clearing Limited;
an independent non-executive Director
of Unilever PLC and Unilever N.V.;
and a non-executive Director of
The London Metal Exchange. She holds
a Bachelor of Arts from University
of Wisconsin-Madison and a Juris
Doctor from University of Santa
Clara Law School. She is also admitted
to practice in the State of California
and in Federal Courts.
Peter Tung Shun Wong
Deputy Chairman & Chief Executive
He is a Group Managing Director
and a member of the Group Management
Board of HSBC Holdings plc and a
non-executive Director of Hang Seng
Bank Limited. He is also Chairman
and a non-executive Director of
HSBC Bank (China) Company Limited.
He holds a Bachelor of Arts, a Master
of Business Administration and a
Master of Science from Indiana University.
----------------------------------------------------
Zia Mody*
Deputy Chairman
She is a partner of AZB & Partners;
an independent non-executive Director
of CLP Holdings Limited; and an
independent Director of Ascendas
Property Fund Trustee Pte. Ltd.
She holds a Bachelor of Arts (Law)
from Cambridge University and a
Master of Laws from Harvard University.
Graham John Bradley*
He is non-executive Chairman and
a Director of HSBC Bank Australia
Limited. He is also Chairman and
a non-executive Director of Graincorp
Limited; Chairman and a Director
of EnergyAustralia Holdings Limited,
Infrastructure New South Wales and
Virgin Australia International Holdings
Limited. He holds a Bachelor of
Arts and a Bachelor of Laws (Hons
I) from Sydney University and a
Master of Laws from Harvard University.
----------------------------------------------------
Louisa Wai Wan Cheang
She is Vice-Chairman and Chief Executive
of Hang Seng Bank Limited. She is
also a Group General Manager of
HSBC Holdings plc; an independent
non-executive Director of Treasury
Wine Estates Limited; and an International
Advisor of China Union Pay. She
holds a Bachelor of Social Sciences
from The University of Hong Kong.
She is also an Honorary Certified
Financial Management Planner of
The Hong Kong Institute of Bankers.
----------------------------------------------------
Dr Christopher Wai Chee Cheng*,
GBS, OBE
He is Chairman of Wing Tai Properties
Limited; an independent non-executive
Director of NWS Holdings Ltd.; and
an independent non-executive Director
of Eagle Asset Management (CP) Limited.
He holds a Bachelor of Business
Administration from University of
Notre Dame; a Master of Business
Administration from Columbia University;
a Doctorate in Social Sciences honoris
causa from The University of Hong
Kong and an Honorary Degree of Doctor
of Business Administration from
The Hong Kong Polytechnic University.
----------------------------------------------------
Dr Raymond Kuo Fung Ch'ien*, GBS,
CBE
He is independent non-executive
Chairman of Hang Seng Bank Limited.
He is also an independent non-executive
Director of China Resources Power
Holdings Company Limited, Swiss
Re Limited and Swiss Re Asia Pte.
Ltd. He holds a Bachelor of Arts
from Rockford College and a Master
of Arts and Doctor of Philosophy
(Economics) from University of Pennsylvania.
----------------------------------------------------
Yiu Kwan Choi*
He is an independent non-executive
Director of HSBC Bank (China) Company
Limited. He holds a higher certificate
in Accountancy from The Hong Kong
Polytechnic University and is a
fellow member of The Hong Kong Institute
of Bankers.
He was Deputy Chief Executive of
the Hong Kong Monetary Authority
('HKMA') in charge of Banking Supervision
when he retired in January 2010.
Before this, he was Deputy Chief
Executive of the HKMA in charge
of Monetary Policy and Reserves
Management from June 2005 to August
2007 and held various senior positions
in the HKMA including Executive
Director (Banking Supervision),
Head of Administration, and Head
of Banking Policy from 1993 to 2005.
Irene Yun-lien Lee*
She is an independent non-executive
Director of HSBC Holdings plc and
Hang Seng Bank Limited. She is also
executive Chairman of Hysan Development
Company Limited. She holds a Bachelor
of Arts (Distinction) in History
of Art from Smith College, Northampton,
Massachusetts, USA. She is also
a member of the Honourable Society
of Gray's Inn, UK and a Barrister-at-Law
in England and Wales.
----------------------------------------------------
Jennifer Xinzhe Li*
She is General Managing Partner
of Changcheng Investment Partners,
having previously been Chief Executive
Officer and General Partner of Baidu
Capital and Chief Financial Officer
of Baidu, Inc. She is also an independent
non-executive Director of Philip
Morris International Inc, and a
non-executive Director of Flex Ltd.
and ABB Ltd. She holds a Bachelor
of Arts from Tsinghua University
and a Master of Business Administration
from University of British Columbia.
----------------------------------------------------
Victor Tzar Kuoi Li(#)
He is Chairman and Managing Director
of CK Asset Holdings Limited; Chairman
and a Group Co-Managing Director
of CK Hutchison Holdings Limited;
Chairman of CK Infrastructure Holdings
Limited and CK Life Sciences Int'l.,
(Holdings) Inc.; a non-executive
Director of Power Assets Holdings
Limited and HK Electric Investments
Manager Limited; a non-executive
Director and Deputy Chairman of
HK Electric Investments Limited;
and Co-Chairman of Husky Energy
Inc. He is also Deputy Chairman
of Li Ka Shing Foundation Limited,
Li Ka Shing (Overseas) Foundation
and Li Ka Shing (Canada) Foundation.
He holds a Bachelor of Science degree
in Civil Engineering, a Master of
Science degree in Civil Engineering,
both received from Stanford University;
and an honorary degree, Doctor of
Laws, honoris causa (LL.D.) from
The University of Western Ontario.
----------------------------------------------------
Bin Hwee Quek (née Chua)*,
PBM, BBM, JP
She is an independent non-executive
Director of CapitaLand Commercial
Trust Management Limited and Mapletree
Oakwood Holdings Pte. Ltd.; a Director
of Certis Cisco Security Pte. Ltd.;
and Senior Adviser to the Envision
group of companies. She is also
a Director of several government
or government-funded organisations
in Singapore, including Duke-NUS
Graduate Medical School, Health
Promotion Board, Maritime and Port
Authority of Singapore, and National
Heritage Board.
She was an audit partner of PricewaterhouseCoopers
(PwC) Singapore until June 2017
and held leadership positions including
Vice Chairman of PwC Singapore and
Deputy Markets Leader of PwC Asia-Pacific
and Americas. She holds a Bachelor
of Accountancy (Hons) from The University
of Singapore and is a Chartered
Accountant with the Institute of
Singapore Chartered Accountants.
Kevin Anthony Westley*, BBS
He is an independent non-executive
Director of Fu Tak Iam Foundation
Limited and a member of the investment
committee of the West Kowloon Cultural
Development Authority. He holds
a Bachelor of Arts (Hons) from the
University of London (LSE) and is
a Fellow of the Institute of Chartered
Accountants in England and Wales.
He was Chairman (from 1996) and
Chief Executive (from 1992) of HSBC
Investment Bank Asia Limited (formerly
named as Wardley Limited) until
his retirement in 2000 and subsequently
acted as an advisor to the Bank
and the Group in Hong Kong.
----------------------------------------------------
Tan Sri (Sir) Francis Sock Ping
Yeoh*, KBE, CBE
He is executive Chairman of YTL
Corporation Berhad, YTL Land & Development
Berhad, YTL Power International
Berhad, YTL Cement Berhad, Malayan
Cement Berhad and executive Chairman
and a Managing Director of YTL E-Solutions
Berhad. He holds a Bachelor of Science
(Hons) in Civil Engineering and
an Honorary Doctorate of Engineering
from the University of Kingston.
----------------------------------------------------
* Independent non-executive Director
# Non-executive Director
====================================================
During the year, Marjorie Yang retired as a Director on 4 April
2019 and John Flint stepped down as Chairman and a Director with
effect from 5 August 2019. Laura Cha, an independent non-executive
Director and a former Deputy Chairman, was appointed as Chairman
with effect from 6 December 2019. Save for the above, all the
Directors served throughout the year.
A list of the directors of the Bank's subsidiary undertakings
(consolidated in the financial statements) during the period
from
1 January 2019 to the date of this report will be available on
the Bank's website
https://www.hsbc.com.hk/legal/regulatory-disclosures/.
Secretary
Paul Stafford was appointed as the Corporation Secretary with
effect from 13 January 2020. Neil Olofsson was Corporation
Secretary until 13 December 2019, when Philip Miller assumed the
responsibilities on an interim basis until Paul Stafford's
appointment.
Permitted Indemnity Provision
The Bank's Articles of Association provide that the Directors
and other officers for the time being of the Bank shall be
indemnified out of the Bank's assets against any liability incurred
by them or any of them as the holder of any such office or
appointment to a person other than the Bank or an associated
company of the Bank in connection with any negligence, default,
breach of duty or breach of trust in relation to the Bank or
associated company (as the case may be). In addition, the Bank's
ultimate holding company, HSBC Holdings plc, has maintained
directors' and officers' liability insurance providing appropriate
cover for the directors and officers within the Group, including
the Directors of the Bank and its subsidiaries.
Directors' Interests in Transactions, Arrangements or
Contracts
Save as disclosed in note 33 on the Consolidated Financial
Statements, no transactions, arrangements or contracts that were
significant in relation to the Bank's business and in which a
Director or his or her connected entities had, directly or
indirectly, a material interest were entered into by or subsisted
with the Bank, its holding companies, its subsidiaries or
subsidiaries of its holding companies during the year.
Directors' Rights to Acquire Shares or Debentures
To help align the interests of employees with shareholders,
executive Directors of the Bank and those executive Directors of
HSBC Holdings plc are eligible to be granted conditional awards
over ordinary shares in HSBC Holdings plc by that company (being
the ultimate holding company) under the HSBC Share Plan 2011 and
the HSBC International Employee Share Purchase Plan.
Executive Directors of the Bank and those executive Directors of
HSBC Holdings plc are eligible to receive an annual incentive award
based on the outcome of the performance measures (financial and non
financial) set out in their annual performance scorecard. Annual
incentive awards are normally delivered in cash and/or shares, and
these generally have a deferral rate of 60% or 40% if the annual
incentive award is GBP500,000 or below. The period over which
annual incentive awards would be deferred is determined in
accordance with the requirements of the Prudential Regulation
Authority ('PRA') Remuneration Rules, i.e. seven years for Senior
Managers (individuals in PRA and Financial Conduct Authority
('FCA') designation Senior Management Functions), five years for
Risk Managers, and three years for other Material Risk Takers
('MRTs'). From January 2017 onwards, all share awards granted to
MRTs are subject to a minimum retention period of one year as
opposed to six months previously. However, for certain individuals
whose variable pay awards will be deferred for at least five years
and who are not considered to be members of senior management,
their retention period may be kept at six months.
All unvested deferred awards made under the HSBC Share Plan 2011
are subject to the application of malus, i.e. the cancellation and
reduction of unvested deferred awards. All paid or vested variable
pay awards made to Identified Staff and MRTs will be subject to
clawback for a period of seven years from the date of award. For
Senior Managers, this may be extended to 10 years in the event of
an ongoing internal or regulatory investigation at the end of the
seven-year period.
Executive Directors and other senior executives of HSBC Holdings
plc are subject to Group minimum shareholding requirements.
Individuals are given five years from 2014 or (if later) their
appointment to build up the recommended levels of shareholding.
HSBC operates an anti-hedging policy for Group, sectorial and local
MRTs including executive Directors in accordance with the PRA
Rules, who are required to certify each year via the Bank's Global
Personal Account Dealing system that they have not entered into any
personal hedging strategies in relation to their holdings of HSBC
shares.
The HSBC International Employee Share Purchase Plan is an
employee share purchase plan offered to employees in Hong Kong
since 2013 and has been extended to further countries in the HSBC
Group from 2014. For every three shares in HSBC Holdings plc
purchased by an employee ('Investment Shares'), a conditional award
to acquire one share is granted ('Matching Shares'). The employee
becomes entitled to the Matching Shares subject to continued
employment with HSBC and retention of the Investment Shares until
the third anniversary of the start of the relevant plan year. HSBC
Holdings Savings-Related Share Option Plan (UK) is an all employee
share plan under which eligible employees may be granted options to
acquire HSBC Holdings ordinary shares. Employees may make monthly
contributions, up to a maximum defined limit, over a period of
three or five years and shares are exercisable within six months
following either the third or fifth anniversary of the
commencement. The exercise price is set at a 20% discount to the
market value immediately preceding the date of invitation.
During the year, John Flint, Peter Wong and Louisa Cheang
acquired or were awarded shares of HSBC Holdings plc under the
terms of the HSBC Share Plan 2011. John Flint also exercised
options over ordinary shares in HSBC Holdings plc under the HSBC
Holdings Savings-Related Share Option Plan (UK).
Apart from these arrangements, at no time during the year was
the Bank, its holding companies, its subsidiaries or any fellow
subsidiaries a party to any arrangements to enable the Directors to
acquire benefits by means of the acquisition of shares in or
debentures of the Bank or any other body corporate.
Donations
Donations made by the Bank and its subsidiaries during the year
amounted to HK$339m (2018: HK$302m).
Compliance with the Banking (Disclosure) Rules
The Directors are of the view that the Annual Report and
Accounts 2019 and Banking Disclosure Statements 2019, fully comply
with the Banking (Disclosure) Rules made under section 60A of the
Banking Ordinance.
Auditor
The Annual Report and Accounts have been audited by
PricewaterhouseCoopers ('PwC'). A resolution to reappoint PwC as
auditor of the Bank will be proposed at the forthcoming AGM.
Corporate Governance
The Bank is committed to high standards of corporate governance.
As an Authorised Institution, the Bank is subject to and complies
with the Hong Kong Monetary Authority ('HKMA') Supervisory Policy
Manual CG-1 'Corporate Governance of Locally Incorporated
Authorised Institutions'.
Board of Directors
The Board, led by the Chairman, provides entrepreneurial
leadership of the Bank within a framework of prudent and effective
controls which enables risks to be assessed and managed. The Board
is collectively responsible for the long-term success of the Bank
and delivery of sustainable value to shareholders. The Board sets
the strategy and risk appetite for the group and approves capital
and operating plans presented by management for the achievement of
the strategic objectives it has set.
Directors
The Bank has a unitary Board. The authority of each Director is
exercised in Board meetings where the Board acts collectively. As
at the date of this report, the Board comprised: the independent
non-executive Chairman; the Deputy Chairman and Chief Executive;
one Deputy Chairman who is an independent non-executive Director;
one Director with executive responsibilities for a subsidiary's
operations; one non-executive Director; and another nine
independent non-executive Directors.
Independent non-executive Directors
Independent non-executive Directors do not participate in the
daily business management of the Bank. They bring an external
perspective, constructively challenge and help develop proposals on
strategy, scrutinise the performance of management in meeting
agreed goals and objectives, and monitor the risk profile and
reporting of performance of the Bank. The independent non-executive
Directors bring experience from a number of industries and business
sectors, including the leadership of large complex multinational
enterprises. The Board has determined that there are 11 independent
non-executive Directors. In making this determination, it was
agreed that there are no relationships or circumstances likely to
affect the judgement of the independent non-executive Directors,
with any relationships or circumstances that could appear to do so
not considered to be material.
Chairman and Chief Executive
The roles of Chairman and Chief Executive are separate and held
respectively by an experienced independent non-executive Director
and a full-time employee of the HSBC Group. There is a clear
division of responsibilities between leading the Board and the
executive responsibility for running the Bank's business.
The Chairman provides leadership to the Board and is responsible
for the overall effective functioning of the Board. The Chairman
shall lead the Board in the development of strategy in Asia-Pacific
and the oversight of implementation of Board approved strategies
and direction. The Chief Executive is responsible for ensuring
implementation of the strategy and policy as established by the
Board and the day-to-day running of operations. The Chief Executive
is Chairman of the Executive Committee. Each Asia-Pacific Global
Business and Global Function head reports to the Chief
Executive.
Board Committees
The Board has established various committees consisting of
Directors and senior management. The committees include the
Executive Committee, Audit Committee, Risk Committee, Nomination
Committee, Remuneration Committee and Chairman's Committee. The
Chairmen of the Executive Committee and of each Board committee
that includes independent non-executive Directors report to each
subsequent Board meeting on the relevant committee's
proceedings.
The Board has also established an Asset, Liability and Capital
Management Committee (formerly known as Asset and Liability
Management Committee), a Risk Management Meeting and a Financial
Crime Risk Management Committee. The Executive Committee has the
delegated authority to approve any changes in the membership and
terms of reference of the Asset, Liability and Capital Management
Committee, the Risk Management Meeting and the Financial Crime Risk
Management Committee.
The Board and each Board committee have terms of reference to
document their responsibilities and governance procedures. The key
roles of the committees are described in the paragraphs below.
Executive Committee
The Executive Committee is responsible for the exercise of all
of the powers, authorities and discretions of the Board in so far
as they concern the management, operations and day-to-day running
of the group, in accordance with such policies and directions as
the Board may from time to time determine, with power to
sub-delegate. A schedule of items that require the approval of the
Board is maintained.
The Bank's Deputy Chairman and Chief Executive, Peter Wong, is
Chairman of the Committee. The current members of the Committee
are: Diana Cesar (Chief Executive Officer Hong Kong), Pui Mun Chan
(Head of Regulatory Compliance Asia-Pacific), David Grimme (Chief
Operating Officer Asia-Pacific), Gordon French (Head of Global
Banking and Markets Asia-Pacific), Ming Lau (Chief Financial
Officer Asia-Pacific), Tony Cripps (Chief Executive Officer
Singapore), Mukhtar Hussain (Head of Belt and Road Initiative
Asia-Pacific), Darren Furnarello (Head of Financial Crime
Compliance Asia-Pacific), David Liao (Chief Executive Officer
China), Kevin Martin (Head of Retail Banking and Wealth Management
Asia-Pacific), Edward Jenkins (Chief Risk Officer Asia-Pacific),
Stuart Milne (Chief Executive Officer Malaysia), Surendranath Rosha
(Chief Executive Officer India), Siew Meng Tan (Head of Global
Private Banking Asia-Pacific), Matthew Lobner (Head of Strategy and
Planning Asia-Pacific and Head of International Asia-Pacific),
Susan Sayers (General Counsel Asia-Pacific), Stuart Tait (Head of
Commercial Banking Asia-Pacific) and David Thomas (Head of Human
Resources, Asia-Pacific). Paul Stafford (Corporation Secretary) is
the Committee Secretary. In attendance are: Kaber Mclean (Head of
Remediation Management Office Asia-Pacific), Patrick Humphris (Head
of Communications Asia-Pacific), Astor Law (Head of Global Internal
Audit Asia-Pacific) Noel McNamara (Acting Chief Executive Officer
Australia) and Philip Miller (Deputy Corporation Secretary). The
Committee met 12 times in 2019.
Asset, Liability and Capital Management Committee
The Asset, Liability and Capital Management Committee ('ALCO')
is chaired by the Chief Financial Officer and is an advisory
committee to provide recommendations and advice to support the
Chief Financial Officer's individual accountability for the
efficient management of the Bank's balance sheet within the
constraints of liquidity, funding and capital, and other key
balance sheet risks such as interest rate risk, market risk and
equity risk.
The Committee consists of Ming Lau (Chief Financial Officer
Asia-Pacific), Peter Wong (the Bank's Deputy Chairman and Chief
Executive), the Head of Asset, Liability and Capital Management
Asia-Pacific, the Head of Balance Sheet Management Asia-Pacific and
other senior executives of the Bank most of whom are members of the
Executive Committee. The Committee met 12 times in 2019.
Risk Management Meeting
The Risk Management Meeting is chaired by the Chief Risk Officer
and is a formal governance committee established to provide
recommendations and advice to the Chief Risk Officer on
enterprise-wide management of all risks, including key policies and
frameworks for the management of risk within the Bank. The Risk
Management Meeting consists of Edward Jenkins (Chief Risk Officer
Asia-Pacific), Peter Wong (the Bank's Deputy Chairman and Chief
Executive), the Head of Global Internal Audit Asia-Pacific and
other senior executives of the Bank most of whom are members of the
Executive Committee. The Risk Management Meeting met 10 times in
2019.
Financial Crime Risk Management Committee
The Financial Crime Risk Management Committee is chaired by the
Bank's Deputy Chairman and Chief Executive and is a formal
governance committee established to ensure effective
enterprise-wide management of financial crime risk within the Asia
- Pacific Region and to support the Chief Executive in discharging
his financial crime risk responsibilities. The Committee consists
of Peter Wong (the Bank's Deputy Chairman and Chief Executive), the
Head of Financial Crime Compliance Asia - Pacific, the Head of
Operational Risk Asia-Pacific, the Head of Remediation Office
Asia-Pacific, and other senior executives of the Bank most of whom
are members of the Executive Committee. The Committee met 10 times
in 2019.
Audit Committee
The Audit Committee has non-executive responsibility for
oversight of and advice to the Board on matters relating to
financial reporting and internal financial controls. The current
members of the Committee, all being independent non-executive
Directors, are Kevin Westley (Chairman of the Committee), Graham
Bradley, Yiu Kwan Choi, Irene Lee and Jennifer Li. The Committee
met four times in 2019.
The Audit Committee monitors the integrity of the Consolidated
Financial Statements and disclosures relating to financial
performance, the effectiveness of the internal audit function and
the external audit process, and the effectiveness of internal
financial control systems. The Committee reviews the adequacy of
resources and expertise as well as succession planning for the
finance function. It reviews, and considers changes to, the Bank's
accounting policies. The Committee advises the Board on the
appointment, re-appointment, or removal of the external auditor and
reviews and monitors the external auditor's independence and
objectivity. The Committee reviews matters escalated for its
attention by subsidiaries' audit committees and reviews minutes of
meetings of the Asset, Liability and Capital Management
Committee.
Risk Committee
The Risk Committee has non-executive responsibility for
oversight of and advice to the Board on risk-related matters
impacting the Bank and its subsidiaries, including risk governance
and internal control systems (other than internal controls over
financial reporting). The current members of the Committee, all
being independent non-executive Directors, are Graham Bradley
(Chairman of the Committee), Christopher Cheng, Yiu Kwan Choi,
Irene Lee, Zia Mody and Kevin Westley. The Committee met five times
in 2019.
All of the Bank's activities involve, to varying degrees, the
identification, assessment, monitoring and management of risk or
combinations of risks. The Board, advised by the Risk Committee,
requires and encourages a strong risk culture which shapes the
Bank's attitude to risk. The Bank's risk governance is supported by
the Group's enterprise risk management framework which provides a
clear policy of risk ownership and accountability of all staff for
identifying, assessing and managing risks within the scope of their
assigned responsibilities. This personal accountability, reinforced
by clear and consistent employee communication on risk that sets
the tone from senior leadership, the governance structure,
mandatory learning and remuneration policy, helps to foster a
disciplined and constructive culture of risk management and control
throughout the group.
The Board and the Risk Committee oversee the maintenance and
development of a strong risk management framework by continually
monitoring the risk environment, top and emerging risks facing the
group and mitigating actions planned and taken. The Risk Committee
reviews any revisions to the group's risk appetite statement at
least annually and recommends any proposed changes to the Board for
approval. The Committee reviews management's assessment of risk
against the risk appetite statement and provides scrutiny of
management's proposed mitigating actions. The Committee monitors
the risk profiles for all of the risk categories within the group's
business. The Committee also monitors the effectiveness of the
Bank's risk management and internal controls other than those over
financial reporting. Regular reports from the Risk Management
Meeting, which is the executive body supporting the executive
accountability of the group Chief Risk Officer for the ongoing
monitoring, assessment and management of the risk environment and
the effectiveness of the risk management framework, are also
presented at each Risk Committee meeting to report on these items.
The Committee reviews matters escalated for its attention by
subsidiaries' risk committees and reviews minutes of meetings of
the Risk Management Meeting.
Nomination Committee
The Nomination Committee is responsible for leading the process
for Board and senior management appointments and for identifying
and nominating, for the approval of the Board, candidates for
appointment to the Board and certain senior management roles.
Appointments to the Board and certain senior management roles are
subject to the approval of the HKMA. The Committee considers plans
for orderly succession to the Board and the appropriate balance of
skills, knowledge and experience on the Board.
The current members of the Committee, all being independent
non-executive Directors, are Christopher Cheng (Chairman of the
Committee), Laura Cha (Chairman of the Board) and Zia Mody. The
Deputy Chairman and Chief Executive attends each meeting of the
Committee. The Committee met once in 2019. The Committee also
approved a number of matters during the year by written resolutions
of all members.
A rigorous selection process, overseen by the Nomination
Committee and based upon agreed requirements using an external
search consultancy, is followed in relation to the appointment of
non-executive Directors. Before recommending an appointment of a
Director to the Board, the Committee evaluates the Board
composition including balance of skills, knowledge and experience,
as well as diversity and the role and capabilities required. In
identifying suitable Board candidates, the Committee considers
candidates' backgrounds, knowledge and experience (including
international experience) to promote diversity of views, and takes
into account the required time commitment and any potential
conflicts of interest.
Chairman's Committee
The Chairman's Committee acts on behalf of the Board either in
accordance with authority delegated by the Board from time to time,
or as specifically set out within its terms of reference. The
Committee meets with such frequency and at such times as it may
determine and can implement previously agreed strategic decisions
by the full Board, approve specified matters subject to their prior
review by the full Board, and act exceptionally on urgent matters
within its terms of reference.
The current members of the Committee comprise the Chairman of
the Board, the Deputy Chairman and Chief Executive, the
non-executive Deputy Chairman and the Chairmen of the Audit and
Risk Committees. The Committee met twice in 2019.
Remuneration Committee
The Group Remuneration Committee is responsible for setting the
overarching principles, parameters and governance for the Group's
remuneration framework applicable to all Group employees. Following
revisions to the HKMA's Supervisory Policy Manual CG-1 'Corporate
Governance of Locally Incorporated Authorised Institutions', the
Board established a Remuneration Committee with effect from 1
January 2018 which annually reviews the effectiveness and
compliance of the Group's reward strategy as adopted by the Bank.
The current members of the Committee, all being independent
non-executive Directors, are Irene Lee (Chairman of the Committee),
Christopher Cheng, Jennifer Li and Bin Hwee Quek. The Committee met
four times in 2019. The following is a summary of the Committee's
key activities during 2019:
Details of the Committee's key activities
* Reviewed and approved senior management population's * Approved 2018/2019 performance year pay review
remuneration matters and pay proposals matters
* Reviewed and approved the scorecards for the Chief * Reviewed remuneration framework effectiveness
Executive and Executive Committee members of the
group
* Received updates on notable events and regulatory and
corporate governance matters
* Approved Remuneration Committee section in the Report
of the Directors
* Reviewed and approved 2019 Material Risk Taker
('MRT') identification approaches and outcomes of MRT
review under the Group definition and as defined by
some of its principal subsidiaries, as applicable
* Reviewed attrition data and plans to address area of
concerns
* Approved 2019 regulatory submissions
------------------------------------------------------------ ------------------------------------------------------------
* Senior Management includes the Chief Executive of the group,
Chief Executive of Hang Seng Bank Limited, Executive Committee
members, Alternate Chief Executives, Managers as registered with
the Hong Kong Monetary Authority (HKMA).
Remuneration Strategy
Our remuneration strategy is designed to reward competitively
the achievement of long-term sustainable performance, and attract
and motivate the very best people, regardless of gender, ethnicity,
age, disability or any other factor unrelated to performance or
experience with the Group. We believe that remuneration is an
important tool for instilling the right behaviours, and driving and
encouraging actions that are aligned to organisational values and
the long-term interests of our stakeholders. Our remuneration
strategy, as approved by the Group Remuneration Committee and
adopted subject to annual review by the Bank's Remuneration
Committee, is based on the following principles:
-- An alignment to performance at all levels (individual,
business and Group) taking into account both 'what' has been
achieved and 'how' it has been achieved. The 'how' helps ensure
that performance is sustainable in the longer term, consistent with
HSBC's values and risk and compliance standards.
-- Being informed, but not driven by, market position and
practice. Market benchmarks are sourced through independent
specialists and provide an indication of the range of pay levels
and employee benefits provided by our competitors.
-- Considering the full-market range when making pay decisions
for employees, taking into account the individual's and the Group's
performance in any given year. An individual's pay will vary
depending upon their performance.
-- Compliance with relevant regulation across all of our countries and territories.
More details of the Bank's remuneration strategy are contained
within the Annual Report and Accounts 2019 of HSBC Holdings
plc.
The Bank as an authorised institution under the Banking
Ordinance is required by HKMA Supervisory Policy Manual CG-5
'Guideline on a Sound Remuneration System' (the Guideline) to
assess whether their existing remuneration systems and policy are
in line with the principles in the Guideline, independently of
management and at least annually. The annual review for 2019 was
commissioned externally to Deloitte LLP, and the results confirm
that the Bank's remuneration framework as adopted from the Group is
consistent with the principles set out in the Guideline.
Banking structural reform and recovery and resolution
planning
The Financial Institutions (Resolution) (Loss-absorbing Capacity
Requirements-Banking Sector) Rules ('LAC Rules') came into
operation in Hong Kong in December 2018, under the powers set out
in the Financial Institutions (Resolution) Ordinance ('FIRO') which
came into effect in 2017. Within the LAC Rules, the group needs to
have sufficient loss-absorbing capacity ('LAC') which can be
written down or converted into equity at an intermediate holding
company in Hong Kong to recapitalise the group as a whole in the
event of failure.
HSBC Asia Holdings Limited, a wholly-owned subsidiary of HSBC
Holdings plc and the intermediate holding company of the group
since November 2018, is designated as the resolution entity for the
group, where adequate LAC has to be available in a form that will
be bailed-in at the point of resolution. The group completed the
restructuring of its internal regulatory capital and LAC-eligible
debt and equity instruments such that they are all held by HSBC
Asia Holdings Limited, in compliance with LAC requirements as
at
1 July 2019.
During 2019, the group also made progress in mitigating
operational dependencies, where one group entity provides critical
services to another, to facilitate operational continuity in
resolution. In particular, a substantial number of employees
performing critical shared services in Hong Kong have been
transferred from the group into a separate service company in Hong
Kong, HSBC Global Services (Hong Kong) Limited (the 'ServCo'),
which is outside the group but is wholly-owned by HSBC Holdings
plc. There were no changes to employment terms and conditions or
pension benefits as a result of these transfers.
Business review
The Bank is exempt from the requirement to prepare a business
review under section 388(3) of the Companies Ordinance Cap. 622
since it is a wholly-owned subsidiary of HSBC Holdings plc.
On behalf of the Board
Laura Cha, Chairman
18 February 2020
Financial Review
Results for 2019
Profit before tax for 2019 reported by The Hongkong and Shanghai
Banking Corporation Limited ('the Bank') and its subsidiaries
(together 'the group') increased by HK$
1,850m
, or
1%
, to HK$
136,433m
.
Consolidated income statement and balance sheet data by global business
(Audited)
Retail
Banking Global Global
and Wealth Commercial Banking Private Corporate
Management Banking and Markets Banking Centre(1) Total
HK$m HK$m HK$m HK$m HK$m HK$m
Year ended 31 Dec 2019
Net interest income 68,374 42,807 25,140 2,956 (8,374) 130,903
Net fee income 18,647 9,960 9,977 2,839 82 41,505
Net income from financial
instruments measured at
fair value 16,038 2,699 17,409 1,095 13,217 50,458
Gains less losses from
financial investments 20 - - - 618 638
Net insurance premium
income/(expense) 56,222 4,380 - - (327) 60,275
Other operating income 13,793 434 828 119 584 15,758
---------- --------- ----------- ------- --------- ---------
Total operating income 173,094 60,280 53,354 7,009 5,800 299,537
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Net insurance claims and
benefits paid and movement
in liabilities to policyholders (75,628) (4,528) - - - (80,156)
Net operating income before
change in expected credit
losses and other credit
impairment charges 97,466 55,752 53,354 7,009 5,800 219,381
--------------------------------- ---------- --------- ----------- ------- --------- ---------
of which: - external 62,226 53,208 71,511 5,442 26,994 219,381
---------------------------------
- inter-segment 35,240 2,544 (18,157) 1,567 (21,194) -
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Change in expected credit
losses and other credit
impairment charges (2,078) (3,029) (549) 1 (17) (5,672)
Net operating income 95,388 52,723 52,805 7,010 5,783 213,709
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Operating expenses (41,756) (19,212) (23,319) (4,013) (5,194) (93,494)
Operating profit 53,632 33,511 29,486 2,997 589 120,215
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Share of profit in associates
and joint ventures 346 - - - 15,872 16,218
Profit before tax 53,978 33,511 29,486 2,997 16,461 136,433
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Balance sheet data at 31
Dec 2019
--------------------------------- ----------- ---------- ------------ -------- ---------- ------------
Loans and advances to customers
(net) 1,244,236 1,244,007 1,066,235 164,895 1,502 3,720,875
Customer accounts 2,903,203 1,344,590 983,682 197,654 3,295 5,432,424
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Year ended 31 Dec 2018
Net interest income 62,829 39,004 22,590 2,683 (643) 126,463
Net fee income 21,087 10,598 9,794 2,650 102 44,231
Net income/(expense) from
financial instruments measured
at fair value (3,731) 2,694 18,283 800 7,919 25,965
Gains less losses from
financial investments 109 (34) 104 - 322 501
Net insurance premium
income/(expense) 57,301 3,441 - - (64) 60,678
Other operating income 5,851 508 737 110 3,264 10,470
Total operating income 143,446 56,211 51,508 6,243 10,900 268,308
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Net insurance claims and
benefits paid and movement
in liabilities to policyholders (54,539) (3,300) - - - (57,839)
Net operating income before
change in expected credit
losses and other credit
impairment charges 88,907 52,911 51,508 6,243 10,900 210,469
--------------------------------- ---------- --------- ----------- ------- --------- ---------
of which: - external 62,277 50,059 64,626 4,422 29,085 210,469
---------------------------------
- inter-segment 26,630 2,852 (13,118) 1,821 (18,185) -
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Change in expected credit
losses and other credit
impairment charges (2,019) (2,315) (394) (13) 21 (4,720)
---------------------------------
Net operating income 86,888 50,596 51,114 6,230 10,921 205,749
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Operating expenses (38,946) (17,878) (21,807) (3,479) (5,314) (87,424)
Operating profit 47,942 32,718 29,307 2,751 5,607 118,325
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Share of profit in associates
and joint ventures 247 - - - 16,011 16,258
Profit before tax 48,189 32,718 29,307 2,751 21,618 134,583
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Balance sheet data at 31
Dec 2018
--------------------------------- ----------- ---------- ------------ -------- ---------- ------------
Loans and advances to customers
(net) 1,146,689 1,223,999 1,035,629 120,985 1,400 3,528,702
Customer accounts 2,750,104 1,306,775 949,812 196,413 4,562 5,207,666
--------------------------------- ---------- --------- ----------- ------- --------- ---------
1 Includes inter-segment elimination.
Financial Review
(Unaudited)
The commentary that follows compares the group's financial
performance for the years ended 2019 with 2018.
Results Commentary
The group reported profit before tax of HK$136,433m, an increase
of HK$1,850m, or 1%, driven by higher net insurance income, higher
net interest income and higher income from financial instruments
held for trading or managed on a fair value basis, partly offset by
higher operating expenses.
Net interest income increased by HK$4,440m, or 4%, with
increases across all global businesses and mainly in Hong Kong,
primarily from growth in loans and advances to customers, coupled
with improved customer deposit spreads. Net interest income in
India and Singapore also increased, driven by growth in loans and
advances to customers. These were partly offset by decreases in
mainland China, Australia and Taiwan due to higher funding costs to
support business activities.
Net fee income decreased by HK$2,726m, or 6%, primarily in
Retail Banking and Wealth Management ('RBWM'). The decrease was
driven by Hong Kong from lower securities brokerage due to lower
equity market turnover in 2019, lower income from funds under
management and unit trusts, coupled with lower net fee income from
credit cards due to higher rewards and bonus points expenses. To a
lesser extent, net fee income also decreased in Commercial Banking
('CMB'), mainly in trade-related and remittance fees.
Net income from financial instruments measured at fair value
through profit or loss increased by HK$24,493m, or 94%.
Net income from financial instruments held for trading or
managed on a fair value basis increased by HK$4,318m, or 13%,
driven by Hong Kong, mainly from Rates and Credit trading, and
mainland China from lower cost on structured deposits, coupled with
higher Rates trading income.
Net income from assets and liabilities of insurance business,
including related derivatives, measured at fair value through
profit or loss increased by HK$19,818m, mainly in Hong Kong driven
by revaluation gains on the equity portfolio held to back insurance
and investment contracts from the favourable equity market
movements in 2019, as compared to revaluation losses in 2018. To
the extent that these gains are attributable to policyholders, the
gains are offset by a corresponding movement in 'Net insurance
claims and benefits paid and movement in liabilities to
policyholders'.
Net insurance premium income decreased slightly by
HK$403m, or 1%, driven by higher reinsurance ceded in 2019 in
Hong Kong. Gross insurance premium income (excluding the impact
from reinsurance arrangements) increased by 10%, mainly in Hong
Kong from higher renewal premiums and new business sales. These
were largely offset by a corresponding movement in 'Net insurance
claims and benefits paid and movement in liabilities to
policyholders'.
Other operating income increased by HK$5,288m, or 51%, driven by
the favourable movement in the present value of in-force long-term
insurance business ('PVIF'), primarily in Hong Kong. To the extent
that these gains are attributable to policyholders, the gains are
offset by a corresponding movement in 'Net insurance claims and
benefits paid and movement in liabilities to policyholders'. The
impact from the favourable change in PVIF was partly offset by
lower recoveries from fellow group companies due to a change in the
cost recharge mechanism following the transfer of shared services
and operations to the HSBC Global Service (Hong Kong) Limited
('ServCo') in 2019, with a corresponding decrease in 'operating
expenses'.
Net insurance claims and benefits paid and movement in
liabilities to policyholders increased by HK$22,317m, or 39%,
reflecting higher investment returns to policyholders due to the
favourable equity market performance in 2019, coupled with higher
premium income and the favourable movement in PVIF, partly offset
by the major reinsurance arrangement in 2019.
Change in expected credit losses and other credit impairment
charges increased by HK$952m, or 20%, driven by CMB mainly in Hong
Kong due to increased provisions to reflect the deterioration in
the Hong Kong and global economic outlook, partly offset by lower
specific charges.
Total operating expenses increased by HK$6,070m, or 7%, with
increases across all global businesses. The increase was driven by
higher IT and staff costs to support growth initiatives, wage
inflation and higher management charges from ServCo following the
transfer of over 8,500 employees to ServCo during the year.
Depreciation charges also increased due to a change in valuation
base of certain properties from cost to fair value following the
implementation of HKFRS 16. These increases were partly offset by
the release of a customer remediation provision in Hong Kong,
release of a provision in relation to a tax matter in Indonesia,
and from a change in cost recharge mechanism from fellow group
companies as mentioned above.
Share of profit in associates and joint ventures decreased by
HK$40m, driven by an unfavourable effect of foreign exchange
translation. Excluding this impact, share of profit in associates
and joint ventures increased by HK$667m, mainly from Bank of
Communications Co., Limited.
Net interest income
(Unaudited)
2019 2018
HK$m HK$m
Net interest income 130,903 126,463
---------
Average interest-earning assets 6,464,424 6,151,920
---------
% %
Net interest spread 1.87 1.93
---------
Contribution from net free funds 0.15 0.13
---------
Net interest margin 2.02 2.06
---------------------------------- --------- ---------
Net interest income ('NII') increased by HK$4,440m, or 4%, with
increases across all global businesses and mainly in Hong Kong,
primarily from growth in loans and advances to customers, coupled
with improved customer deposit spreads. NII in India and Singapore
also increased, driven by growth in loans and advances to
customers. These were partly offset by decreases in mainland China,
Australia and Taiwan due to higher funding costs to support
business activities.
Average interest-earning assets increased by HK$313bn, or 5%,
driven by Hong Kong primarily due to an increase in loans and
advances to customers, notably in corporate term lending and
mortgages. To a lesser extent, increases were also noted in
Singapore, Australia and India, mainly from growth in loans and
advances to customers.
Net interest margin decreased by four basis points, driven by
mainland China, Australia and Taiwan, partly offset by an increase
in Hong Kong.
At the Bank's operations in Hong Kong, the net interest margin
increased by one basis point, mainly from improved customer deposit
spreads and higher reinvestment yields on financial investments
which benefited from higher market interest rates compared to the
prior year, coupled with the change in asset portfolio mix due to
growth in customer lending. These increases were partly offset by
compressed lending spreads in mortgages and corporate lending.
At Hang Seng Bank, the net interest margin decreased by three
basis points, mainly from compressed lending spreads and from
financial liabilities raised to meet the 'Total Loss Absorbing
Capacity' regulatory requirement. These were partly offset by
improved customer deposit spreads, higher reinvestment yields on
financial investments, coupled with higher contribution from net
free funds as market interest rates increased.
In mainland China, the decrease in net interest margin was
driven by higher cost of funds from increased funding to support
business growth, coupled with lower reinvestment yields from
financial investments due to ample liquidity in the market.
In Australia and Taiwan, net interest margin decreased mainly
due to higher cost of funds following increases in market interest
rates in the prior year.
Insurance business
(Unaudited)
The following table shows the results of our insurance
manufacturing operations by income statement line item, and
separately the insurance distribution income earned by the group's
bank channels.
Results of insurance manufacturing operations and insurance distribution
income earned by the group's bank channels
2019 2018
HK$m HK$m
Insurance manufacturing operations(1)
Net interest income 14,634 13,650
--------------------------------------------------------------
Net fee expense (4,424) (3,162)
Net income/(expense) from financial instruments measured
at fair value 13,633 (6,279)
Net insurance premium income 60,577 60,713
Change in present value of in-force long-term insurance
business 12,546 4,629
--------------------------------------------------------------
Other operating income 267 529
Total operating income 97,233 70,080
Net insurance claims and benefits paid and movement
in liabilities to policyholders (80,156) (57,839)
Net operating income before change in expected credit
losses and other credit impairment charges 17,077 12,241
-------------------------------------------------------------- ------- -------
Change in expected credit losses and other credit impairment
charges (113) 1
Net operating income 16,964 12,242
-------------------------------------------------------------- ------- -------
Total operating expenses (2,095) (2,217)
Operating profit 14,869 10,025
-------------------------------------------------------------- ------- -------
Share of profit in associates and joint ventures 346 246
Profit before tax 15,215 10,271
-------------------------------------------------------------- ------- -------
Annualised new business premiums of insurance manufacturing
operations 22,395 21,804
-------------------------------------------------------------- ------- -------
Distribution income earned by the group's bank channels 5,800 5,726
-------------------------------------------------------------- ------- -------
1 The results presented for insurance manufacturing operations
are shown before elimination of intercompany transactions with the
group's non-insurance operations.
Insurance manufacturing
Profit before tax from the insurance manufacturing operations
increased by HK$4,944m, or 48%, driven by the favourable equity
market performance in 2019 (compared with adverse equity markets in
2018), together with growth in the value of new business.
Net interest income increased by 7% from growth in invested
funds, reflecting net new business and renewal premium inflows on
life insurance contracts.
Net income from financial instruments measured at fair value
increased significantly, driven by revaluation gains on the equity
portfolio held to support insurance and investment contracts, as
compared to revaluation losses in 2018.
Net insurance premium income decreased slightly, driven by
higher reinsurance ceded in 2019 in Hong Kong. Gross insurance
premium income (excluding the impact from reinsurance arrangements)
increased by 10%, mainly in Hong Kong from higher renewal premiums
and new business sales.
The higher movement in the present value of in-force long-term
insurance business was driven by Hong Kong, mainly from the
offsetting of the effect of interest rate changes on the valuation
of the liabilities under insurance contracts, actuarial assumption
and methodology updates, and from higher value of new business
written in 2019. For further details, please see note 15 on the
Consolidated Financial Statements.
To the extent that the above gains or losses are attributable to
policyholders, there is an offsetting movement reported under 'Net
insurance claims and benefits paid and movement in liabilities to
policyholders'.
Annualised new business premiums ('ANP') is a measure of new
insurance premium generation by the business. It is calculated as
the sum of 100% of annualised first year regular premiums and 10%
of single premiums, before reinsurance ceded. Growth in ANP during
the year reflected new business growth in all insurance
manufacturing markets, principally in Hong Kong.
Balance sheet commentary compared with
1 January 2019
(Unaudited)
The consolidated balance sheet at 31 December 2019 is set out in
the Consolidated Financial Statements.
The effect of transitioning to HKFRS 16 'Leases' on 1 January
2019 was an increase in total assets by HK$25bn, increase in total
liabilities by HK$12bn, and an increase in shareholders' equity by
by HK$13bn. The commentary that follows compares our balance sheet
at 31 December 2019 with that at 1 January 2019.
Gross loans and advances to customers increased by
HK$193bn, or 5%, including unfavourable foreign currency
translation effects of HK$5bn. Excluding this impact, the
underlying increase of HK$198bn was driven by an increase in
residential mortgages of HK$91bn, mainly in Hong Kong and
Australia, coupled with an increase in other personal lending
of
HK$44bn, mainly in Hong Kong and Singapore. Non-bank financial
institution lending also increased by HK$38bn, mainly in Hong
Kong.
Overall credit quality remained strong, with total gross
impaired loans and advances as a percentage of gross loans and
advances standing at 0.56% at the end of 2019. Change in expected
credit losses in 2019 in relation to average gross customer
advances remained low at 0.15% (2018: 0.13%).
Interest in associates and joint ventures
At 31 December 2019, an impairment review on the group's
investment in Bank of Communications Co., Ltd ('BoCom') was carried
out and it was concluded that the investment was not impaired based
on our value in use calculation (see note 14 on the Consolidated
Financial Statements for further details). As discussed in that
note, in future periods the value in use may increase or decrease
depending on the effect of changes to model inputs. It is expected
that the carrying amount will increase due to retained profits
earned by BoCom. At the point where the carrying amount exceeds the
value in use, impairment would be recognised. The group would
continue to recognise its share of BoCom's profit or loss, but the
carrying amount would be reduced to equal the value in use, with a
corresponding reduction in income. An impairment review would
continue to be performed at each subsequent reporting period, with
the carrying amount and income adjusted accordingly.
Customer deposits rose by HK$225bn, or 4%, to HK$5,432bn. The
advances-to-deposits ratio was 68.5% at the end of the year (2018:
67.8%).
Shareholders' equity grew by HK$48bn to HK$815bn at
31 December 2019, mainly reflecting current year's profit, net
of dividend payment, coupled with additional tier 1 capital
instruments issued.
Risk
Our approach to risk
(Unaudited)
Our conservative risk appetite
We have maintained a conservative risk profile throughout our
history. This is central to our business and strategy. We recognise
the importance of a strong risk culture, which refers to our shared
attitudes, values and norms that shape behaviours related to risk
awareness, risk taking and risk management. All employees are
responsible for the management of risk, with the ultimate
accountability residing with the Board.
We seek to build our business for the long term by balancing
social, environmental and economic considerations in the decisions
we make. Our strategic priorities are underpinned by our endeavour
to operate in a sustainable way. This helps us to carry out our
social responsibility and manage the risk profile of the business.
We are committed to managing and mitigating climate-related risks,
both physical and transition, and will continue to incorporate this
into how we manage and oversee risks internally and with our
customers.
The following principles guide the group's overarching appetite
for risk and determine how our businesses and risks are
managed.
Financial position
-- We aim to maintain a strong capital position, defined by
regulatory and internal capital ratios.
-- We carry out liquidity and funding management for each
operating entity, on a stand-alone basis.
Operating model
-- We seek to generate returns in line with a conservative risk
appetite and strong risk management capability.
-- We aim to deliver sustainable earnings and consistent returns for shareholders.
Business practice
-- We have zero tolerance for any of our people to knowingly
engage in any business, activity or association where foreseeable
reputational risk or damage has not been considered and/or
mitigated.
-- We have no appetite for deliberately or knowingly causing
detriment to consumers, or incurring a breach of the letter or
spirit of regulatory requirements.
-- We have no appetite for inappropriate market conduct by a
member of staff or by any group business.
Enterprise-wide application
Our risk appetite encapsulates consideration of financial and
non-financial risks. We define financial risk as the risk of a
financial loss as a result of business activities. We actively take
and prudently manage these types of risks to maximise shareholder
value and profits. Non-financial risk is defined as the risk to
achieving our strategy or objectives as a result of inadequate or
failed internal processes, people and systems or from external
events.
Our risk appetite is expressed in both quantitative and
qualitative terms and applied at the global business level, at the
regional level and to material operating entities.
The Board reviews and approves the group's risk appetite to make
sure it remains fit for purpose. The group's risk appetite is
considered, developed and enhanced through:
-- an alignment with our strategy, purpose, values and customer needs;
-- trends highlighted in other group risk reports, such as the
'Risk map' and 'Top and emerging risks';
-- communication with risk stewards on the developing risk landscape;
-- strength of our capital, liquidity and balance sheet;
-- compliance with applicable laws and regulations;
-- effectiveness of the applicable control environment to
mitigate risk, informed by risk ratings from risk control
assessments;
-- functionality, capacity and resilience of available systems to manage risk; and
-- the level of available staff with the required competencies to manage risks.
We formally articulate our risk appetite through our risk
appetite statement ('RAS'), which is approved by the Board. Setting
out our risk appetite ensures that planned business activities
provide an appropriate balance of return for the risk we are
taking, and that we agree a suitable level of risk for our
strategy. In this way, risk appetite informs our financial planning
process and helps senior management to allocate capital to business
activities, services and products.
The RAS consists of qualitative statements and quantitative
metrics, covering financial and non-financial risks. It is
fundamental to the development of business line strategies,
strategic and business planning, and senior management balanced
scorecards.
At a group level, performance against the RAS is reported to the
group Risk Management Meeting ('RMM') on a monthly basis so that
any actual performance that falls outside the approved risk
appetite is discussed and appropriate mitigating actions are
determined. This reporting allows risks to be promptly identified
and mitigated, and informs risk-adjusted remuneration to drive a
strong risk culture.
Global businesses, regions and strategically important countries
are required to have their own RASs, which are monitored to ensure
they remain aligned with the group's. All RASs and business
activities are guided and underpinned by qualitative principles and
or quantitative metrics.
Risk Management
We recognise that the primary role of risk management is to
protect our business, customers, colleagues, shareholders and the
communities that we serve, while ensuring we are able to support
our strategy and provide sustainable growth. As we move into
revised business focus, active risk management will be critical in
ensuring we manage the associated change and execution risks
arising from a major change programme. In addition we will perform
periodic risk assessments, including strategies to ensure retention
of key personnel to ensure our continued safe operation.
We use a comprehensive risk management framework across the
organisation and across all risk types, underpinned by the group's
culture and values. This outlines the key principles that we employ
in managing material risks, both financial and non-financial.
The framework fosters continual monitoring, promotes risk
awareness and encourages sound operational and strategic decision
making. It also ensures a consistent approach to identifying,
assessing, managing and reporting the risks we accept and incur in
our activities.
Our risk management framework
The following diagram and descriptions summarise key aspects of
the risk management framework, including governance and structure,
our risk management tools and our risk culture, which together help
align employee behaviour with our risk appetite.
Key components of our risk management framework
Risk governance Non-executive risk governance The Board approves the group's
risk appetite, plans and performance
targets. It sets the 'tone from
the top' and is advised by the
group's Risk Committee.
Executive risk governance Our executive risk governance structure
is responsible for the enterprise-wide
management of all risks, including
key policies and frameworks for
the management of risk within the
group.
Roles and Three lines of defence Our 'three lines of defence' model
responsibilities model defines roles and responsibilities
for risk management. An independent
Risk function helps ensure the
necessary balance in risk/return
decisions.
Processes Risk appetite The group has several processes
and tools to identify/assess, monitor, manage
and report risks to ensure we remain
within our risk appetite.
Enterprise-wide risk management
tools
Active risk management:
identification/assessment,
monitoring, management
and reporting
Internal Policies and procedures Policies and procedures define
controls the minimum requirements for the
controls required to manage our
risks.
Control activities The operational risk management
framework defines minimum standards
and processes for managing operational
risks and internal controls.
Systems and infrastructure The group has systems and/or processes
that support the identification,
capture and exchange of information
to support risk management activities.
Risk governance
The Board has ultimate responsibility for the effective
management of risk. It is advised on risk-related matters by the
Risk Committee ('RC').
The group's Chief Risk Officer, supported by the RMM, holds
executive accountability for the ongoing monitoring, assessment and
management of the risk environment and the effectiveness of the
risk management framework.
The management of financial crime risk resides with the group's
Chief Executive Officer. He is supported by the Financial Crime
Risk Management Committee.
Day-to-day responsibility for risk management is delegated to
senior managers with individual accountability for decision making.
All our people have a role to play in risk management. These roles
are defined using the three lines of defence model, which takes
into account the group's business and functional structures.
We use a defined executive risk governance structure to help
ensure there is appropriate oversight and accountability of risk,
which facilitates reporting and escalation to the RMM.
Governance structure for the management of risk
Risk Management group Chief Risk Officer
Meeting of group General Counsel * Supporting the group Chief Risk Officer in exercising
the group group Chief Executive Board-delegated risk management authority
group Chief Financial
Officer
group heads of global * Overseeing the implementation of risk appetite and
business and global functions the enterprise risk management framework
* Forward-looking assessment of the risk environment,
analysing possible risk impacts and taking
appropriate action
* Monitoring all categories of risk and determining
appropriate mitigating action
* Promoting a supportive group culture in relation to
risk management and conduct
--------------------- ------------------------------- -------------------------------------------------------------
Global business/Site Global business/Site Chief
risk management Risk Officer * Supporting the Chief Risk Officer in exercising
meetings Global business/Site Chief Board-delegated risk management authority
Executive
Global business/Site Chief
Financial Officer * Forward-looking assessment of the risk environment,
Global business/Site heads analysing the possible risk impact and taking
of global functions appropriate action
* Implementation of risk appetite and the enterprise
risk management framework
* Monitoring all categories of risk and determining
appropriate mitigating actions
* Embedding a supportive culture in relation to risk
management and controls
--------------------- ------------------------------- -------------------------------------------------------------
The Board committees with responsibility for oversight of
risk-related matters are set out on page 6.
Our responsibilities
All our people are responsible for identifying and managing risk
within the scope of their role as part of the three lines of
defence model.
Three lines of defence
To create a robust control environment to manage risks, we use
an activity-based three lines of defence model. This model
delineates management accountabilities and responsibilities for
risk management and the control environment.
The model underpins our approach to risk management by
clarifying responsibility and encouraging collaboration, as well as
enabling efficient coordination of risk and control activities.
The three lines of defence are summarised below:
-- The first line of defence owns the risks and is responsible
for identifying, recording, reporting and managing them in line
with risk appetite, and ensuring that the right controls and
assessments are in place to mitigate them.
-- The second line of defence sets the policy and control
standards for managing specific risk areas, provides advice and
guidance in relation to the risk, and challenges the first line of
defence on effective risk management.
-- The third line of defence is our Internal Audit function,
which provides independent assurance that our risk management
approach and processes are designed and operating effectively.
Risk function
The group's Risk function, headed by the group's Chief Risk
Officer, is responsible for the group's risk management framework.
This responsibility includes establishing and monitoring of risk
profiles, and forward-looking risk identification and management.
The group's Risk function is made up of sub-functions covering all
risks to our business and forms part of the second line of defence.
It is independent from the global businesses, including sales and
trading functions, to provide challenge, appropriate oversight and
balance in risk/return decisions.
Responsibility for minimising both financial and non-financial
risk lies with our people. They are required to manage the risks of
the business and operational activities for which they are
responsible. We maintain adequate oversight of our risks through
our various specialist risk stewards as well as the collective
accountability held by our Chief Risk Officers.
Non-financial risk includes some of the most material risks the
group faces, such as cyber-attacks, the loss of data and poor
conduct outcomes. Actively managing non-financial risk is crucial
to serving our customers effectively and having a positive impact
on society. During 2019 we continued to strengthen the control
environment and our approach to the management of non-financial
risk, as set out in our Operational Risk Management Framework. The
approach outlines non-financial risk governance and risk appetite,
and provides a single view of the non-financial risks that matter
the most, and associated controls. It incorporates a risk
management system designed to enable the active management of
non-financial risk. Our ongoing focus is on simplifying our
approach to non-financial risk management, while driving more
effective oversight and better end-to-end identification and
management of non-financial risks. This is overseen by the
Operational Risk function, headed by the group Head of Operational
Risk.
Stress testing
The group operates a wide-ranging stress testing programme that
is a key part of our risk management and capital planning. Stress
testing provides management with key insights into the impact of
severely adverse events on the group, and provides confidence to
regulators on the group's financial stability.
Our stress testing programme assesses our capital strength
through a rigorous examination of our resilience to external
shocks. As well as undertaking regulatory-driven stress tests, we
conduct our own internal stress tests, in order to understand the
nature and level of all material risks, quantify the impact of such
risks and develop plausible business as usual mitigating
actions.
Many of our regulators - including the Hong Kong Monetary
Authority ('HKMA') - use stress testing as a prudential regulatory
tool, and the group has focused significant governance and
resources to meet their requirements.
Internal stress tests
Our internal capital assessment uses a range of stress scenarios
that explore risks identified by management. They include potential
adverse macroeconomic, geopolitical and operational risk events, as
well as other potential events that are specific to the group.
The selection of scenarios is based upon the output of our top
and emerging risks identified and our risk appetite. Stress testing
analysis helps management understand the nature and extent of
vulnerabilities to which the group is exposed. Using this
information, management decides whether risks can or should be
mitigated through management actions or, if they were to
crystallise, should be absorbed through capital. This in turn
informs decisions about preferred capital levels.
In addition to the group-wide stress testing scenarios, each
major HBAP entity performs regular macroeconomic and event-driven
scenario analyses specific to the region. They also participate, as
required, in the regulatory stress testing programmes of the
jurisdictions in which they operate, and the stress tests of the
HKMA. Global functions and businesses also perform bespoke stress
testing to inform their assessment of risks in potential
scenarios.
The group stress testing programme is overseen by the RC and
results are reported, where appropriate, to the RMM and RC.
We also conduct reverse stress tests each year at a group level
and, where required, at subsidiary entity level to understand
potential extreme conditions that would make our business model
non-viable. Reverse stress testing identifies potential stresses
and vulnerabilities we might face, and helps inform early warning
triggers, management actions and contingency plans designed to
mitigate risks.
Recovery and resolution plans
Recovery and resolution plans form an integral framework in the
safeguarding of the group's financial stability. Together with
stress testing, it helps us understand the outcomes of adverse
business or economic conditions and the identification of
mitigating actions.
Key developments in 2019
In 2019, it was announced that Mark McKeown was stepping down
from his role of the group's Chief Risk Officer. Edward Jenkins,
who was previously the Global Head of Wholesale Credit and Market
Risk, has been appointed as the group's Chief Risk Officer with
effect from 1 September 2019.
During the year, we also undertook a number of initiatives to
enhance our approach to the management of risk. We continued
efforts to simplify and enhance how we manage risk. We simplified
the Group risk taxonomy through consolidating certain existing
risks into broader categories. These changes streamlined risk
reporting and promoted common language in our risk management
approach. Further simplification will continue during 2020,
including the combining of our two key risk management frameworks.
These changes include:
-- We formed a Resilience Risk sub-function to reflect the
growing regulatory importance of being able to ensure our
operations continue to function when an operational disturbance
occurs. Resilience Risk was formed to simplify the way we interact
with our stakeholders and to deliver clear, consistent and credible
responses globally. The leadership of the Resilience Risk function
is the responsibility of the group Head of Resilience Risk. For
further details on resilience risk, see page 44.
-- We have placed greater focus on our model risk activities
during 2019. To reflect this, Group has created the role of Chief
Model Risk Officer, which for the group is undertaken by the Head
of Model Risk Management.
Top and emerging risks
(Unaudited)
We use a top and emerging risks process to provide a
forward-looking view of issues with the potential to threaten the
execution of our strategy or operations over the medium to long
term.
We proactively assess the internal and external risk
environment, as well as review the themes identified across our
regions and global businesses, for any risks that may require
global escalation, updating our top and emerging risks as
necessary.
We define a 'top risk' as a thematic issue that may form and
crystallise within one year, and which has the potential to
materially affect the group's financial results, reputation or
business model. It may arise across any combination of risk types,
countries or global businesses. The impact may be well understood
by senior management and some mitigating actions may already be in
place. Stress tests of varying granularity may also have been
carried out to assess the impact.
An 'emerging risk' is a thematic issue with large unknown
components that may form and crystallise beyond a one year time
horizon. If it were to materialise, it could have a material effect
on the group's long-term strategy, profitability and/or reputation.
Existing mitigation action plans are likely to be minimal,
reflecting the uncertain nature of these risks at this stage. Some
high-level analysis and/or stress testing may have been carried out
to assess the potential impact.
Our current top and emerging risks are as follows:
Externally driven
Economic outlook and capital flows
Global manufacturing was in recession in 2019 as the Chinese
economy slowed, trade and geopolitical tensions continued, and key
sectors like automotive and information technology suffered from
idiosyncratic issues. This had an impact on trade-reliant regions
including the European Union, while the US benefited from a
resilient consumer. Early in 2019, global central banks abandoned
their previous intentions to tighten monetary policy gradually in
order to underpin economic activity. These and other factors
contributed to an increase in market optimism towards the end of
2019 that global economic activity may be bottoming out.
However, a significant degree of caution is warranted. US-China
relations are likely to remain tense as negotiations move to a
second phase, covering aspects like intellectual property. Changing
global consumption patterns and the introduction of stricter
environmental standards may continue to hamper the automotive and
other traditional industries. The net impact on trade flows could
be negative, and may damage the group's traditional lines of
business.
The coronavirus outbreak is a new emerging risk. In a baseline
scenario, the outbreak should be contained and may lead to a
slowdown in China's economic activity during the first quarter of
2020, followed by a rebound in the remainder of the year, helped by
an increased policy stimulus in response to the outbreak. However,
there is a risk that containment proves more challenging, and the
resulting socio-economic disruption more extensive and prolonged,
spilling beyond China. Since the beginning of January 2020, the
coronavirus outbreak has caused disruption to our staff, suppliers
and customers particularly in mainland China and Hong Kong. It
remains unclear how this will evolve through 2020 and we continue
to monitor the situation closely. The group has invoked its
business continuity plans to ensure the safety and well-being of
our staff, whilst ensuring our capability to support our customers
and maintain our business operations is upheld.
Subject to the extent of the effects and duration of the
outbreak referred to above, it is anticipated that oil prices are
likely to remain range-bound in 2020, with occasional spikes in
volatility.
The run-up to the US presidential election in November may be a
key factor in causing market volatility. Persistent social tensions
in Hong Kong may disrupt the local economy and business sentiment
further. We believe our businesses are well placed to weather
risks, but would nevertheless be affected by severe shocks.
Mitigating actions
-- We actively assess the impact of economic developments in key
markets on specific customer segments and portfolios and take
appropriate mitigating actions. These actions include revising risk
appetite and/or limits as circumstances evolve.
-- We use internal stress testing and scenario analysis, as well
as regulatory stress test programmes, to evaluate the potential
impact of macroeconomic shocks on our businesses and portfolios.
Our approach to stress testing is described on
page 14.
Geopolitical risk
The group's operations and portfolios are exposed to risks
associated with political instability, civil unrest and conflict,
which could lead to disruption to our operations, physical risk to
our staff and/or physical damage to our assets.
Multinational businesses are increasingly caught between
governments, heightening the risk of business decisions being
perceived as political statements. Global tensions over trade,
technology and ideology can manifest in divergent regulatory,
standards and compliance regimes, presenting long-term strategic
challenges.
In 2019, societies in nearly all our markets were affected by a
series of common issues with global reach in 2020. Migration,
income inequality, corruption, climate change, and terrorism have
appeared as common threads of discontent across markets. This
dissatisfaction is manifesting through increased protest activity
and at the ballot box, challenging traditional political
structures. This level of geopolitical risk is expected to remain
heightened throughout 2020.
In 2019, Hong Kong experienced heightened levels of domestic
social unrest and if prolonged, there could be broader economic
ramifications, affecting several of the group's portfolios.
Intensified US-China competition is expected to feature
prominently in 2020 - despite the Phase 1 trade deal, as
negotiations move to phase 2, which covers aspects such as
intellectual property. New regulations from both the US and China
will increase scrutiny of companies involved in cross-border data
transfers and limit the use of foreign technology in private, as
well as national infrastructure. Combined, these regulations could
drive the bifurcation of US and Chinese technology sectors,
standards and supply chain ecosystems, which may limit innovation
and drive up production and compliance costs for firms operating in
both markets.
Mitigating actions
-- We continually monitor the geopolitical outlook, in
particular in countries where we have material exposures and/or a
physical presence. We have also established dedicated forums to
monitor geopolitical developments.
-- We use internal stress tests and scenario analysis as well as
regulatory stress test programmes, to adjust limits and exposures
to reflect our risk appetite and mitigate risks as appropriate. Our
internal credit risk ratings of sovereign counterparties take into
account geopolitical developments that could potentially disrupt
our portfolios and businesses.
-- We have taken steps to enhance physical security in those
geographical areas deemed to be at high risk from terrorism and
military conflicts.
The credit cycle
Dovish global monetary policies remained accommodative through
much of 2019, and share indices hit record highs. The US Federal
Reserve System ('FRB'), European Central Bank ('ECB') and the Bank
of Japan ('BoJ') are expected to keep global liquidity abundant in
2020. However, there are signs of stress in parts of the credit
market, as shown by the FRB's interventions in the repo market.
There has been a surge in borrowing by entities in the lowest
investment grade segment ('BBB'), which now makes up 55% of the
total universe of rated corporate bonds. Profit margins at US
non-financial corporations are falling, as are job openings, both
of which could foreshadow a turn in the credit cycle. Corporate
credit quality in Europe is also deteriorating. Chinese authorities
are warier than in the past about leverage, but will still enact
limited stimulus measures, which could act to limit downside risks
to a degree.
Mitigating actions
-- We closely monitor economic developments in key markets and
sectors and undertake scenario analysis. This helps enable us to
take portfolio actions where necessary, including enhanced
monitoring, amending our risk appetite and/or reducing limits and
exposures.
-- We stress test portfolios of particular concern to identify
sensitivity to loss under a range of scenarios, with management
actions being taken to rebalance exposures and manage risk appetite
where necessary.
-- We undertake regular reviews of key portfolios to help ensure
that individual customer or portfolio risks are understood and our
ability to manage the level of facilities offered through any
downturn is appropriate.
Cyber threat and unauthorised access to systems
The group and other organisations continue to operate in an
increasingly hostile cyber threat environment, which requires
ongoing investment in business and technical controls to defend
against these threats.
Key threats include unauthorised access to online customer
accounts, advanced malware attacks and distributed denial of
service ('DDOS') attacks.
Mitigating actions
-- We continually evaluate threat levels for the most prevalent
attack types and their potential outcomes. To further protect the
group and our customers, we strengthen our controls to reduce the
likelihood and impact of advanced malware, data leakage,
infiltration of payment systems and denial of service attacks. We
continued to enhance our cybersecurity capabilities, including
threat detection, access control as well as back-up and recovery.
An important part of our defence strategy is ensuring our people
remain aware of cybersecurity issues and know how to report
incidents.
-- Cyber risk is a priority area for the Board, we report and
review cyber risk and control effectiveness quarterly at executive
and non-executive Board level. We also report it across the global
businesses, functions and regions to help ensure appropriate
visibility and governance of the risk and mitigating actions.
Regulatory developments including conduct, with adverse impact
on business model and profitability
Financial service providers continue to face stringent
regulatory and supervisory requirements, particularly in the areas
of capital and liquidity management, conduct of business, financial
crime, internal control frameworks, the use of models and the
integrity of financial services delivery. The competitive landscape
in which the group operates may be significantly altered by future
regulatory changes and government intervention. Regulatory changes
may affect the activities of the group as a whole, or of some or
all of its principal subsidiaries.
As described in note 38 on the Consolidated Financial
Statements, we continue to be subject to a number of material legal
proceedings, regulatory actions and investigations, including our
January 2018 deferred prosecution agreement with the US Department
of Justice arising from its investigation into HSBC's historical
foreign exchange activities (the 'FX DPA').
Mitigating actions
-- We are fully engaged, wherever possible with governments and
regulators in the countries in which we operate, to help ensure
that new requirements are considered properly by regulatory
authorities and the financial sector and can be implemented
effectively.
-- We have invested significant resources and have taken, and
will continue to take, a number of steps to improve our compliance
systems and controls relating to our activities in global markets.
These included enhancements to pricing and disclosure, order
management and trade execution; trade, voice and audio
surveillance; front office supervision; and improvements to our
enforcement and discipline framework for employee misconduct.
Financial crime risk environment
Throughout 2019, we continued to implement the final elements of
our Global Standards programme to integrate our anti-money
laundering and sanctions capabilities into our day-to-day
operations. We continue to enhance our financial crime risk
management capabilities and the effectiveness of our financial
crime controls, and we are maintaining our investment in the next
generation of tools to fight financial crime through the
application of advanced analytics and artificial intelligence.
Financial institutions remain under considerable regulatory
scrutiny regarding their ability to prevent and detect financial
crime. There is an increased regulatory focus on fraud and
anti-bribery and corruption controls, with expectations that banks
should do more to protect customers from fraud and identify and
manage bribery and corruption risks within our businesses.
Financial crime threats continue to evolve, often in tandem with
geopolitical developments. The highly speculative, volatile and
opaque nature of virtual currencies, including the pace of
development in this area, create challenges in effectively managing
financial crime risks. The evolving regulatory environment
continues to present execution challenge. We continue to see
increasing challenges presented by national data privacy
requirements in a global organisation, which may affect our ability
to effectively manage financial crime risks.
In December 2012, among other agreements, HSBC Holdings plc
('HSBC Holdings') agreed to an undertaking with the UK Financial
Services Authority, which was replaced by a Direction issued by the
UK Financial Conduct Authority ('FCA') in 2013, and consented to a
cease-and-desist order with the US Federal Reserve Board ('FRB'),
both of which contained certain forward-looking anti-money
laundering ('AML') and sanctions-related obligations. HSBC also
agreed to retain an independent compliance monitor (who is, for FCA
purposes, a 'Skilled Person' under section 166 of the Financial
Services and Markets Act and, for FRB purposes, an 'Independent
Consultant') to produce periodic assessments of the Group's AML and
sanctions compliance programme (the 'Skilled Person/Independent
Consultant'). In December 2012, HSBC Holdings also entered into an
agreement with the Office of Foreign Assets Control ('OFAC')
regarding historical transactions involving parties subject to OFAC
sanctions. Reflective of HSBC's significant progress in
strengthening its financial crime risk management capabilities,
HSBC's engagement with the current Skilled Person will be
terminated and a new Skilled Person with a narrower mandate will be
appointed to assess the remaining areas that require further work
in order for HSBC to transition fully to business-as-usual
financial crime risk management. The Independent Consultant will
continue to carry out an annual OFAC compliance review at the FRB's
discretion. The role of the Skilled Person/Independent Consultant
is discussed on page 45.
Mitigating actions
-- We continue to enhance our financial crime risk management
capabilities. We are investing in next generation capabilities to
fight financial crime through the application of advanced analytics
and artificial intelligence.
-- We are strengthening and investing in our Fraud controls, to
introduce next generation anti-fraud capabilities to protect both
customers and the bank.
-- We continue to embed our improved Anti-Bribery and Corruption
policies and controls, focusing on conduct.
-- We continue to educate our staff on emerging digital landscapes and associated risks.
-- We have developed procedures and controls to manage the risks
associated with direct and indirect exposure to virtual currencies,
and we continue to monitor external developments.
-- We continue to work with jurisdictions and relevant
international bodies to address data privacy challenges through
international standards, guidance, and legislation to enable
effective management of financial crime risk.
-- We continue to take steps designed to ensure that the reforms
we have put in place are both effective and sustainable over the
long term.
IBOR transition
Interbank offered rates ('IBORs') are used to set interest rates
on hundreds of trillions of US dollars' worth of different types of
financial transactions and are used extensively for valuation
purposes, risk measurement and performance benchmarking.
Following the announcement by the UK's Financial Conduct
Authority in July 2017 that it will no longer oblige or require
banks to submit rates for Libor after 2021, the national working
groups ('NWG') for the affected currencies were tasked with
facilitating an orderly transition of the relevant Libors to their
chosen replacement rates. The euro national working group is also
responsible for facilitating an orderly transition of the Euro
Overnight Index Average ('Eonia') to the euro short-term rate
('EURSTER'). In addition, there are four benchmark interest rates
(Singapore Dollar Swap Offer Rate ('SOR'), Thai Baht Interest Rate
Fixing ('THBFIX'), Mumbai Interbank Forward Offer Rate ('MIFOR')
and Philippine Interbank Reference Rate ('PHPREF')) in the
Asia-Pacific region which are impacted through their calculation
currently including US Dollar Libor ('Dependent Rates'). Working
groups for these Dependent Rates have been established to address
relevant requirements.
The process of developing products that reference the
replacement rates and transitioning legacy IBOR contracts exposes
the group to material execution, conduct and financial risks.
Mitigating actions
-- We have a global programme to facilitate an orderly
transition from Libor, Eonia and Dependent Rates for our business
and our clients. This programme, led by the Group Chief Risk
Officer, oversees the transitions made by each of the global
businesses.
-- Our programme is focused on developing alternative rate
products that reference the working group-selected replacement
rates and making them available to customers. It is also focusing
on the supporting processes and systems to developing these
products. At the same time, we are developing the capability to
transition, through repapering, outstanding Libor, Eonia and
Dependent Rates contracts.
-- We have identified a number of execution, conduct and
financial risks and are in the process of addressing these.
-- We will continue to engage with industry participants and the
official sector to support an orderly transition.
Climate-related risks
Climate change can impact across HSBC's risk taxonomy through
both transition and physical channels:
-- Transition Risk, arising from the move to a low-carbon
economy, such as through policy, regulatory and technological
changes.
-- Physical Risk, through increasing severity and/or frequency
of severe weather events or other climatic events (e.g. sea level
rise, flooding).
These have potential to cause both idiosyncratic and systemic
risks, resulting in potential financial impacts for the group.
Impacts could materialise through higher risk-weighted assets
('RWAs') over the longer term, greater transactional losses and/or
increased capital requirements.
The awareness of climate risk, regulatory expectations and
reputational risk have all heightened through 2019. The exposure we
have to the risk and materialisation of the risk have not
materially heightened.
Mitigating actions
We continue to enhance our approach to managing climate-related
risks, and develop and embed the measurement, monitoring and
management.
An internal Climate Risk Working Group provides oversight by
seeking to develop policy and limit frameworks in order to achieve
desired portfolios over time, and protect the group from
climate-related risks that are outside of risk appetite.
We have commenced sector specific scenario analysis and continue
our current work to source data and develop scenarios. For
wholesale credit risk work is focused on questionnaires to assess
transition risk across six sectors and 11 countries. Longer term, a
modelled framework is envisaged.
For retail credit risk, mortgage exposures are being reviewed on
a geographical basis in respect of natural hazard risk and
mitigants. For operational risk, we are working with our property
insurers to understand geographical exposure of the property
portfolio and assess effectiveness of controls for design
resilience, operations and business continuity.
We have public and internal policies for certain sectors that
pose sustainability risk to the group. These include policies on
energy, agricultural commodities, chemicals, forestry, mining and
metals, and UNESCO World Heritage Sites and Ramsar-designated
wetlands.
We are working through the Climate Financial Risk Forum to
ensure we remain aware of and drive emerging best practice.
Internally driven
Risks arising from the receipt of services from third
parties
We use third parties for the provision of a range of services,
in common with other financial service providers. Risks arising
from the use of third-party service providers may be less
transparent and therefore more challenging to manage or influence.
It is critical that we ensure that we have appropriate risk
management policies, processes and practices. These should include
adequate control over the selection, governance and oversight of
third parties, particularly for key processes and controls that
could affect operational resilience. Any deficiency in our
management of risks arising from the use of third parties could
affect our ability to meet strategic, regulatory or client
expectations.
Mitigating actions
-- We continued to embed our delivery model in the first line of
defence through a dedicated team. We have deployed processes,
controls and technology to assess third party service providers
against key criteria and associated control monitoring, testing and
assurance.
-- A dedicated oversight forum in the second line of defence
monitors the embedding of policy requirements and performance
against risk appetite.
Data management
The group uses a large number of systems and applications to
support key business processes and operations. As a result, we
often need to reconcile multiple data sources, including customer
data sources, to reduce the risk of error. Along with other
organisations, the group also needs to meet external/regulatory
obligations such as the General Data Protection Regulation
('GDPR'), the Basel Committee for Banking Supervision (BCBS 239)
principles and Basel III.
Mitigating actions
-- We are improving data quality across a large number of
systems globally. Our data management, aggregation and oversight
continue to strengthen and enhance the effectiveness of internal
systems and processes. We are implementing data controls for
critical processes in the front-office systems to improve our data
capture at the point of entry. We achieved a 'largely compliant'
rating in support of the Basel Committee for Banking Supervision
(BCBS 239) principles and have embedded them across the key
markets.
-- We are expanding and enhancing our global data governance
processes to monitor proactively the quality of critical customer,
product, reference and transaction data and resolving associated
data issues in a timely manner. We have implemented data controls
to improve the reliability of data used by our customers and
staff.
-- We are also modernising our data and analytics infrastructure
through investments in advanced capabilities in cloud,
visualisation, machine learning and artificial intelligence
platforms.
-- We have implemented a global data privacy framework that
establishes data privacy practices, design principles and
guidelines that demonstrate compliance with data privacy laws and
regulations in the jurisdictions in which we operate.
-- We continue to hold annual data symposiums and data privacy
awareness training to help our employees keep abreast of data
management and data privacy laws and regulations. These highlight
our commitment to protect personal data for our customers,
employees and stakeholders.
Areas of special interest
During 2019, a number of areas were identified and considered as
part of our top and emerging risks because of the effect they may
have on the group. In this section, we have placed particular focus
on IBOR transition and the risks to our operations and portfolios
in Asia-Pacific.
IBOR transition
The Financial Stability Board has observed that the decline in
interbank short-term unsecured funding poses structural risks for
interest rate benchmarks that reference these markets. In response,
regulators and central banks in various jurisdictions have convened
national working groups to identify replacement rates for these
interbank offer rates ('IBORs') and, where appropriate, to
facilitate an orderly transition to these rates.
Following the announcement by the UK's Financial Conduct
Authority in July 2017 that it will no longer oblige or require
banks to submit rates for Libor after 2021, the national working
groups for the affected currencies were tasked with facilitating an
orderly transition of the relevant Libors to their chosen
replacement rates. The euro working group is also responsible for
facilitating an orderly transition of the Euro Overnight Index
Average ('Eonia') to the euro short-term rate ('EURSTER'). In
addition, there are four benchmark interest rates (Singapore Dollar
Swap Offer Rate ('SOR'), Thai Baht Interest Rate Fixing ('THBFIX'),
Mumbai Interbank Forward Offer Rate ('MIFOR') and Philippine
Interbank Reference Rate ('PHPREF')) in the Asia-Pacific region
which are impacted through their calculation currently including US
Dollar Libor ('Dependent Rates'). Working groups for these
Dependent Rates have been established to address relevant
requirements. Although national working groups in other
jurisdictions have identified replacements for their respective
IBORs, there is no intention for these benchmark rates to be
discontinued.
Given the current lack of alternatives, the group has an
increasing portfolio of contracts referencing Libor, Eonia and
Dependent Rates with maturities beyond 2021. The Group established
the IBOR transition programme with the objective of facilitating an
orderly transition from Libor, Eonia and Dependent Rates for HSBC
and its clients. This global programme oversees the transition
effected by each of the global businesses and is led by the Group
Chief Risk Officer.
The programme is currently focused on developing alternative
rate products, and the supporting processes and systems, that
reference the national working group-selected replacement rates and
making them available to customers. Depending on the take up of
these products by customers, this should reduce the current growth
in Libor, Eonia and Dependent Rates contracts being transacted with
maturities beyond end 2021, while the new product capabilities will
also enable the transition of outstanding Libor, Eonia and
Dependent Rates products onto the replacement rates. A structured
development plan is required given the widespread use of Libor,
Eonia and Dependent Rates in a wide range of products, systems and
processes across each of the four global businesses and all of the
jurisdictions in which the group operates. The resulting execution
risk is closely monitored by the programme.
The programme is concurrently developing the capability to
transition, through repapering, outstanding Libor, Eonia and
Dependent Rates contracts. We expect that the International Swaps
and Derivatives Association's ('ISDA') efforts in guiding the
transition of derivatives contracts should reduce the risk of a
non-orderly transition of derivatives with an estimated notional
market size in excess of US$200tn. The process of implementing
ISDA's proposed protocol and transitioning outstanding contracts is
nonetheless a material undertaking for the industry as a whole and
may expose the group to the risk of financial losses.
We intend to actively engage in the process to achieve an
orderly transition of the group's Libor, Eonia and Dependent Rates
bond issuance, the group's holdings of Libor/Eonia/Dependent Rates
bonds and of those bonds where the group is the payment agent. At
this stage we are confident that we will be able to transition the
bulk of these exposures and we are actively engaged in industry
working groups.
Although we have plans to transition multi-billion dollar
contractually IBOR-referenced commercial loans onto replacement
rates, our ability to transition this portfolio by the end of 2021
is materially dependent on the availability of products that
reference the replacement rates and on our customers being ready
and able to adapt their own processes and systems to accommodate
the replacement products. This may give rise to an elevated level
of conduct-related risk. The group is engaging with impacted
clients to ensure that customers are aware of the risks associated
with the ongoing purchase of Libor-, Eonia- and Dependent
Rates-referencing contracts as well as the need to transition
legacy contracts prior to the end of 2021.
In addition to the execution and conduct risk previously
highlighted, the process of adopting new reference rates may expose
the group to an increased level of operational and financial risks,
such as potential earnings volatility resulting from contract
modifications, changes in hedge accounting and a large volume of
product and associated process changes. Furthermore, the transition
to alternative reference rates could have a range of adverse
impacts on our business, including legal proceedings or other
actions regarding the interpretation and enforceability of
provisions in IBOR-based contracts, and regulatory investigations
or reviews in respect of our preparation and readiness for the
replacement of IBOR with alternative reference rates. We continue
to engage with industry participants, the official sector and our
clients to support an orderly transition and the mitigation of the
risks resulting from the transition.
Risks to our operations and portfolios in Asia-Pacific
In 2019, the mainland Chinese economy grew at the slowest pace
in nearly three decades in the context of rising domestic leverage.
The authorities are expected to enact only modest stimulus measures
to boost growth. Along with the 'phase one' US-China trade deal and
plentiful global liquidity, these measures should help
emerging-market growth to make a partial recovery. Nevertheless,
downside idiosyncratic risks will abound.
Intensified US-China competition continued to feature
prominently in 2019. The two countries now compete across multiple
dimensions: economic power, diplomatic influence, innovation and
advanced technology leadership.
In 2019, we saw heightened levels of risk in Hong Kong. The
downside risk is further increased given the coronavirus outbreak,
which could further impact the local economy and dampen investor
and business sentiment in many sectors where the Group has a
material presence. The increasing headwinds will be challenging and
we will continue to monitor our portfolios to manage risk
exposures. We have carefully reviewed our exposures to help ensure
that we continue to support our customers and the Hong Kong
economy. We have reviewed and enhanced our business continuity
plans to ensure we minimise disruption to our clients and continued
safe operations of our branches and employees. The new coronavirus
outbreak is being actively monitored. It will have an immediate
impact on the economic scenarios used for expected credit losses
('ECL'), as key inputs for calculating ECL such as GDP for Hong
Kong and mainland China are deteriorating, and the probability of
particularly adverse economic scenarios for the short term is
higher. The economic scenarios for Hong Kong used for ECL at 31
December 2019 are set out on pages 27-30. In addition, should the
virus continue to cause disruption to economic activity in Hong
Kong and mainland China through 2020, there could be adverse
impacts on income due to lower lending and transaction volumes, and
insurance manufacturing revenue. Further ECL could arise from other
parts of our business impacted by the disruption to supply
chains.
We have invoked our business continuity plans to help ensure the
safety and well-being of our staff while maintaining our ability to
support our customers and maintain our business operations.
We regularly conduct stress tests to assess the resilience of
our balance sheet and our capital adequacy. We conduct this across
the group and in key sites such as Hong Kong. The stress tests are
used to consider our risk appetite and provide insights into our
financial stability. In the case of Hong Kong, our balance sheet
and capital adequacy remain resilient based on regulatory and
internal stress test outcomes.
Our central scenario for Hong Kong, used as a key input for
calculating ECL in Hong Kong, has kept pace with expectations of
economic growth. The economy entered a technical recession in the
second-half of 2019 and is expected to record negative annual GDP
growth for the first time since 2009. This is a result of both
tensions over trade and tariffs between the US and China and
domestic social unrest. The economy is expected to gradually
recover in 2020. We have also developed a number of additional
scenarios to capture more extreme downside risks, and have used
these in impairment testing and measuring, and to assess our
capital resilience. While our economic scenarios used to calculate
credit loss capture a range of outcomes, the potential economic
impact of the coronavirus was not explicitly considered at the year
end due to the limited information and the emergent nature of the
outbreak in 2019.
For further details of all scenarios used in impairment
measurements see 'Measurement uncertainty and sensitivity analysis
of ECL estimates' on pages 27-30.
Our material banking and insurance risks
The material risk types associated with our banking and
insurance manufacturing operations are described in the following
tables:
Banking operations
Description of risks - banking operations
(Audited)
Credit risk
Credit risk is Credit risk arises Credit risk is:
the principally from * measured as the amount that could be lost if a
risk of direct lending, trade customer or counterparty fails to make repayments;
financial finance and leasing
loss if a business, but also
customer from certain other * monitored using various internal risk management
or counterparty products such as measures and within limits approved by individuals
fails guarantees and derivatives. within a framework of delegated authorities; and
to meet an
obligation
under a * managed through a robust risk control framework which
contract. outlines clear and consistent policies, principles
and guidance for risk managers.
---------------- ---------------------------------------------------------- ------------------------------------------------------------
Liquidity and funding risk
Liquidity risk Liquidity and funding risk is:
is * Liquidity risk arises from mismatches in the timing * measured using a range of metrics including liquidity
the risk that of cash flows. coverage ratio and net stable funding ratio;
we
do not have
sufficient * Funding risk arises when illiquid asset positions * assessed through the internal liquidity adequacy
financial cannot be funded at the expected terms and when assessment process;
resources required.
to meet our
obligations * monitored against the group's liquidity and funding
as they fall risk framework; and
due
or that we can
only * managed on a stand-alone basis with no reliance on
do so at an any Group entity (unless pre-committed) or central
excessive bank unless this represents routine established
cost. Funding business-as-usual market practice.
risk
is the risk
that
funding
considered
to be
sustainable,
and therefore
used
to fund assets,
is
not sustainable
over
time.
---------------- ---------------------------------------------------------- ------------------------------------------------------------
Pension risk
Pension risk is Pension risk arises Pension risk is:
the from investments * measured in terms of the schemes' ability to generate
risk of delivering an inadequate sufficient funds to meet the cost of their accrued
increased return, adverse changes benefits;
costs to the in interest rates
group or inflation, or
from offering members living longer * monitored through a specific risk appetite; and
post-employment than expected. Pension
benefit plans risk includes operational
to and reputational * managed through the appropriate pension risk
its employees. risks of sponsoring governance structure and ultimately the RMM.
pension plans.
---------------- ---------------------------------------------------------- ------------------------------------------------------------
Market risk
Market risk is Exposure to market Market risk is:
the risk is separated * measured using sensitivities, value at risk ('VaR')
risk that into two portfolios: and stress testing, giving a detailed picture of
movements trading and non-trading. potential gains and losses for a range of market
in market Market risk exposures movements and scenarios, as well as tail risks over
factors, arising from our specified time horizons;
such as foreign insurance operations
exchange are discussed on
rates, interest the following page. * monitored using VaR, stress testing and other
rates, measures including the sensitivity of net interest
credit spreads, income and the sensitivity of structural foreign
equity exchange; and
prices and
commodity
prices, will * managed using risk limits approved by the RMM for the
reduce group and the various global businesses.
our income or
the
value of our
portfolios.
---------------- ---------------------------------------------------------- ------------------------------------------------------------
Resilience risk
Resilience risk Resilience risk arises Resilience risk is:
is from failures or * measured through a range of metrics with defined
the risk that inadequacies in processes, maximum acceptable impact tolerances, and against our
we people, systems or agreed risk appetite;
are unable to external events.
provide These may be driven
critical by rapid technological * monitored through oversight of enterprise processes,
services innovation, changing risks, controls and strategic change programmes; and
to our behaviours of our
customers, consumers, cyber-threats
affiliates, and and attacks, cross-border * managed by continual monitoring and thematic reviews.
counterparties dependencies, and
as a result of third-party relationships.
sustained
and significant
operational
disruption.
---------------- ---------------------------------------------------------- ------------------------------------------------------------
Regulatory compliance risk
Regulatory Regulatory compliance Regulatory compliance risk is:
compliance risk arises from * measured by reference to identified metrics, incident
risk is the the risks associated assessments, regulatory feedback and the judgement
risk with breaching our and assessment of our regulatory compliance teams;
that we fail to duty to our customers
observe and other counterparties,
the letter and inappropriate market * monitored against the first line of defence risk and
spirit conduct and breaching control assessments, the results of the monitoring
of all relevant other regulatory and control assurance activities of the second line
laws, requirements. of defence functions, and the results of internal and
codes, rules, external audits and regulatory inspections; and
regulations
and standards
of * managed by establishing and communicating appropriate
good market policies and procedures, training employees in them,
practice, and monitoring activity to help ensure their
which as a observance. Proactive risk control and/or remediation
consequence work is undertaken where required.
incur fines and
penalties
and suffer
damage
to our
business.
---------------- ---------------------------------------------------------- ------------------------------------------------------------
Description of risks - banking operations (continued)
(Audited)
Financial crime and fraud risk
Financial crime Financial crime and Financial crime and fraud risk
and fraud risk arises is:
fraud risk is from day-to-day banking * measured by reference to identified metrics, incident
the operations. assessments, regulatory feedback and the judgement
risk that we and assessment of our financial crime risk teams;
knowingly
or unknowingly
help * monitored against our financial crime risk appetite
parties to statements and metrics, the results of the monitoring
commit and control activities of the second line of defence
or to further functions, and the results of internal and external
potentially audits and regulatory inspections; and
illegal
activity
through HSBC. * managed by establishing and communicating appropriate
policies and procedures, training employees in them,
and monitoring activity to help ensure their
observance. Proactive risk control and/or remediation
work is undertaken where required.
---------------- ---------------------------------------------------------- ------------------------------------------------------------
Model risk
Model risk is Model risk arises Model risk is:
the in both financial * measured by reference to model performance tracking
potential for and non-financial and the output of detailed technical reviews, with
adverse contexts whenever key metrics including model review statuses and
consequences business decision findings;
from making includes reliance
business on models.
decisions * monitored against model risk appetite statements,
informed by insight from the independent review function,
models, feedback from internal and external audits, and
which can be regulatory reviews; and
exacerbated
by errors in
methodology, * managed by creating and communicating appropriate
design or the policies, procedures and guidance, training
way colleagues in their application, and supervising
they are used. their adoption to ensure operational effectiveness.
---------------- ---------------------------------------------------------- ------------------------------------------------------------
Insurance manufacturing operations
Our insurance manufacturing subsidiaries are separately
regulated from our banking operations. Risks in the insurance
entities are managed using methodologies and processes that are
subject to oversight at group level. Our insurance operations are
also subject to some of the same risks as our banking operations,
which are covered by the group's respective risk management
processes.
Description of risks - insurance manufacturing operations
(Audited)
Financial risk
Our ability to Exposure to financial Financial risk is:
effectively risks arises from: * measured separately for each type of risk:
match the * market risk affecting the fair values of financial
liabilities assets or their future cash flows;
arising under * market risk is measured in terms of economic capital,
insurance internal metrics and fluctuations in key financial
contracts with * credit risk; and variables;
the
asset
portfolios * liquidity risk of entities being unable to make * credit risk is measured in terms of economic capital
that back them payments to policyholders as they fall due. and the amount that could be lost if a counterparty
is fails to make repayments; and
contingent on
the
management of * liquidity risk is measured in terms of internal
financial metrics including stressed operational cash flow
risks and the projections;
extent
to which these
risks * monitored through a framework of approved limits and
are borne by delegated authorities; and
the
policyholders.
* managed through a robust risk control framework,
which outlines clear and consistent policies,
principles and guidance. This includes using product
design, asset liability matching and bonus rates.
--------------- ----------------------------------------------------------- ---------------------------------------------------------------
Insurance risk
Insurance risk Insurance risk is:
is * The cost of claims and benefits can be influenced by * measured in terms of life insurance liabilities and
the risk that, many factors, including mortality and morbidity economic capital allocated to insurance underwriting
over experience, as well as lapse and surrender rates. risk;
time, the cost
of
insurance * monitored through a framework of approved limits and
policies delegated authorities; and
written,
including
claims and * managed through a robust risk control framework which
benefits, outlines clear and consistent policies, principles
may exceed the and guidance. This includes using product design,
total underwriting, reinsurance and claims-handling
amount of procedures.
premiums
and investment
income
received.
--------------- ----------------------------------------------------------- ---------------------------------------------------------------
Credit risk
Overview
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet an obligation under a contract. Credit
risk arises principally from direct lending, trade finance and
leasing business, but also from other products, such as guarantees
and credit derivatives.
Credit risk management
(Audited)
Key developments 2019
There were no material changes to the policies and practices for
the management of credit risk in 2019. We continued to apply the
requirements of HKFRS 9 'Financial Instruments' within Credit
Risk.
Governance and structure
We have established credit risk management and related HKFRS 9
processes throughout the group. We continue to actively assess the
impact of economic developments in key markets on specific
customers, customer segments or portfolios. As credit conditions
change, we take mitigating action, including the revision of risk
appetites or limits and tenors, as appropriate. In addition, we
continue to evaluate the terms under which we provide credit
facilities within the context of individual customer requirements,
the quality of the relationship, local regulatory requirements,
market practices and our local market position.
Credit risk sub-function
(Audited)
Credit approval authorities are delegated by the Board to the
group Chief Executive together with the authority to sub-delegate
them. The Credit Risk sub-function in Global Risk is responsible
for the key policies and processes for managing credit risk, which
include formulating group credit policies and risk rating
frameworks, guiding the group's appetite for credit risk exposures,
undertaking independent reviews and objective assessment of credit
risk, and monitoring performance and management of portfolios.
The principal objectives of our credit risk management are:
-- to maintain across the group a strong culture of responsible
lending, and robust risk policies and control frameworks;
-- to both partner and challenge our businesses in defining,
implementing and continually re-evaluating our risk appetite under
actual and scenario conditions; and
-- to ensure there is independent, expert scrutiny of credit
risks, their costs and their mitigation.
Key risk management processes
(Unaudited)
HKFRS 9 'Financial Instruments' process
The HKFRS 9 process comprises three main areas: modelling and
data; implementation; and governance.
Modelling and data
We have established HKFRS 9 modelling and data processes in
various geographies, which are subject to internal model risk
governance including independent review of significant model
developments.
Implementation
A centralised impairment engine performs the expected credit
loss ('ECL') calculation using data, which is subject to a number
of validation checks and enhancements, from a variety of client,
finance and risk systems. Where possible, these checks and
processes are performed in a globally consistent and centralised
manner.
Governance
Regional management review forums are established in key sites
and regions in order to review and approve the impairment results.
Regional management review forums have representatives from Credit
Risk and Finance. The key site and regional approvals are reported
up to the global business impairment committee for final approval
of the Group's ECL for the period. Required members of the
committee are the global heads of Wholesale Credit, Market Risk,
and Retail Banking and Wealth Management ('RBWM') Risk, as well as
the global business Chief Financial Officers and the Group Chief
Accounting Officer.
Concentration of exposure
(Audited)
Concentrations of credit risk arise when a number of
counterparties or exposures have comparable economic
characteristics, or such counterparties are engaged in similar
activities or operate in the same geographical areas or industry
sectors so that their collective ability to meet contractual
obligations is uniformly affected by changes in economic, political
or other conditions. We use a number of controls and measures to
minimise undue concentration of exposure in our portfolios across
industries, countries and global businesses. These include
portfolio and counterparty limits, approval and review controls,
and stress testing.
Credit quality of financial instruments
(Audited)
Our risk rating system facilitates the internal ratings-based
approach under the Basel framework adopted by the Group to support
the calculation of our minimum credit regulatory capital
requirement.
The five credit quality classifications each encompass a range
of granular internal credit rating grades assigned to wholesale and
retail lending businesses, and the external ratings attributed by
external agencies to debt securities.
For debt securities and certain other financial instruments,
external ratings have been aligned to the five quality
classifications based upon the mapping of related customer risk
rating ('CRR') to external credit rating.
Wholesale lending
(Unaudited)
The CRR 10-grade scale summarises a more granular underlying
23-grade scale of obligor probability of default ('PD'). All
corporate customers are rated using the 10- or 23-grade scale,
depending on the degree of sophistication of the Basel approach
adopted for the exposure.
Each CRR band is associated with an external rating grade by
reference to long-run default rates for that grade, represented by
the average of issuer-weighted historical default rates. This
mapping between internal and external ratings is indicative and may
vary over time.
Retail lending
(Unaudited)
Retail lending credit quality is based on a 12-month
point-in-time ('PIT') probability-weighted probability of default
('PD').
Credit quality classification
(Unaudited)
Sovereign Other debt
debt securities securities Wholesale lending
and bills and bills and derivatives Retail lending
12-month 12 month
External External Basel probability Internal probability-
credit credit Internal of default credit weighted
rating rating credit rating % rating PD %
-------------------- ----------------- --------------- --------------- ------------------ -------- -------------
Quality
classification(1,
2)
BBB and A- and CRR 1 to Band 1 0.000 -
Strong above above CRR 2 0 - 0.169 and 2 0.500
Good BBB- to BBB+ to CRR 3 0.170 - Band 3 0.501 -
BB BBB- 0.740 1.500
BB- to BB+ to CRR 4 to 0.741 - Band 4 1.501 -
Satisfactory B and unrated B and unrated CRR 5 4.914 and 5 20.000
CRR 6 to 4.915 - 20.001 -
Sub-standard B- to C B- to C CRR 8 99.999 Band 6 99.999
-------------------- ----------------- --------------- --------------- ------------------ -------- -------------
CRR 9 to
Credit impaired Default Default CRR 10 100 Band 7 100
-------------------- ----------------- --------------- --------------- ------------------ -------- -------------
1 Customer risk rating ('CRR').
2 12-month point-in-time ('PIT') probability-weighted probability of default ('PD').
Quality classification definitions
'Strong' exposures demonstrate a strong capacity to meet financial
commitments, with negligible or low probability of default and/or low
levels of expected loss.
'Good' exposures require closer monitoring and demonstrate a good
capacity to meet financial commitments, with low default risk.
'Satisfactory' exposures require closer monitoring and demonstrate
an average-to-fair capacity to meet financial commitments, with moderate
default risk.
'Sub-standard' exposures require varying degrees of special attention
and default risk is of greater concern.
'Credit-impaired' exposures have been assessed as described on Note
1.2(i) on the Consolidated Financial Statements.
==========================================================================
Renegotiated loans and forbearance
(Audited)
'Forbearance' describes concessions made on the contractual
terms of a loan in response to an obligor's financial
difficulties.
A loan is classed as 'renegotiated' when we modify the
contractual payment terms on concessionary terms because we have
significant concerns about the borrowers' ability to meet
contractual payments when due.
Non-payment-related concessions (e.g. covenant waivers), while
potential indicators of impairment, do not trigger identification
as renegotiated loans.
Loans that have been identified as renegotiated retain this
designation until maturity or derecognition.
For details of our policy on derecognised renegotiated loans,
see note 1.2(i) on the Consolidated Financial Statements.
Credit quality of renegotiated loans
(Unaudited)
On execution of a renegotiation, the loan will also be
classified as credit impaired if it is not already so classified.
In wholesale lending, all facilities with a customer, including
loans that have not been modified, are considered credit impaired
following the identification of a renegotiated loan.
Wholesale renegotiated loans are classified as credit-impaired
until there is sufficient evidence to demonstrate a significant
reduction in the risk of non-payment of future cash flows, observed
over a minimum one-year period, and there are no other indicators
of impairment. Personal renegotiated loans are deemed to remain
credit impaired until repayment, write-off or derecognition.
Renegotiated loans and recognition of expected credit losses
(Audited)
For retail lending, unsecured renegotiated loans are generally
segmented from other parts of the loan portfolio. Renegotiated
expected credit loss assessments reflect the higher rates of losses
typically encountered with renegotiated loans. For wholesale
lending, renegotiated loans are typically assessed individually.
Credit risk ratings are intrinsic to the impairment assessments.
The individual impairment assessment takes into account the higher
risk of the future non-payment inherent in renegotiated loans.
Impairment assessment
(Audited)
For details of our impairment policies on loans and advances and
financial investments, see note 1.2(i) on the Consolidated
Financial Statements.
Write-off of loans and advances
(Audited)
For details of our policy on the write-off of loans and
advances, see note 1.2(i) on the Consolidated Financial
Statements.
Unsecured personal facilities, including credit cards, are
generally written off at between 150 and 210 days past due. The
standard period runs until the end of the month in which the
account becomes 180 days contractually delinquent. Write-off
periods may be extended, generally to no more than 360 days past
due. However, in exceptional circumstances, they may be extended
further.
For secured facilities, write-off should occur upon repossession
of collateral, receipt of proceeds via settlement, or determination
that recovery of the collateral will not be pursued.
Any secured assets maintained on the balance sheet beyond 60
months of consecutive delinquency-driven default require additional
monitoring and review to assess the prospect of recovery.
There are exceptions in a few countries where local regulation
or legislation constrain earlier write-off, or where the
realisation of collateral for secured real estate lending takes
more time. In the event of bankruptcy or analogous proceedings,
write-off may occur earlier than the maximum periods stated above.
Collection procedures may continue after write-off.
Summary of credit risk
The following disclosure presents the gross carrying/nominal
amount of financial instruments to which the impairment
requirements in HKFRS 9 are applied and the associated allowance
for expected credit losses ('ECL').
Summary of financial instruments to which the impairment requirements
in HKFRS 9 are applied
(Audited)
2019 2018
Gross Gross
carrying/nominal Allowance carrying/nominal Allowance
amount for ECL(1) amount for ECL(1)
At 31 Dec HK$m HK$m HK$m HK$m
----------------- ----------- ----------------- -------------
Loans and advances to customers at amortised
cost 3,738,269 (17,394) 3,545,258 (16,556)
Loans and advances to banks 328,934 (29) 338,177 (26)
----------------- -----------------
Other financial assets measured at amortised
cost 1,540,963 (341) 1,436,433 (167)
- cash and balances at central banks 202,747 (1) 205,660 -
- items in the course of collection from
other banks 21,140 - 25,380 -
- Hong Kong Government certificates of
indebtedness 298,944 - 280,854 -
- reverse repurchase agreements - non-trading 422,333 - 406,327 -
- financial investments 434,523 (223) 367,521 (120)
- prepayments, accrued income and other
assets 161,276 (117) 150,691 (47)
---------------------------------------------- ----------------- ---------- ----------------- ----------
Amounts due from Group companies 85,385 - 58,631 -
----------------- ---------- ----------------- ----------
Total gross carrying amount on-balance
sheet 5,693,551 (17,764) 5,378,499 (16,749)
---------------------------------------------- ----------------- ---------- ----------------- ----------
Loans and other credit related commitments 1,630,005 (560) 1,490,711 (376)
Financial guarantee 41,163 (62) 50,307 (280)
---------------------------------------------- ----------------- ---------- ----------------- ----------
Total nominal amount off-balance sheet 1,671,168 (622) 1,541,018 (656)
---------------------------------------------- ----------------- ---------- ----------------- ----------
7,364,719 (18,386) 6,919,517 (17,405)
---------------------------------------------- ----------------- ---------- ----------------- ----------
Allowance Allowance
Fair value for ECL Fair value for ECL
HK$m HK$m HK$m HK$m
----------------- ----------- ----------------- -------------
At 31 Dec
---------------------------------------------- ----------------- ----------- ----------------- -------------
Debt instruments measured at Fair Value
through Other Comprehensive Income
('FVOCI')(2) 1,457,362 (64) 1,497,767 (44)
---------------------------------------------- ----------------- ---------- ----------------- ----------
1 For retail overdrafts and credit cards, the total ECL is
recognised against the financial asset unless the total ECL exceeds
the gross carrying amount of the financial asset, in which case the
ECL is recognised against the loan commitment.
2 Debt instruments measured at FVOCI continue to be measured at
fair value with the allowance for ECL as a memorandum item. Change
in ECL is recognised in 'Change in expected credit losses and other
credit impairment charges' in the income instatement.
The following table provides an overview of the group's credit
risk by stage and industry, and the associated ECL coverage. The
financial assets recorded in each stage have the following
characteristics:
-- Stage 1: These financial assets are unimpaired and without
significant increase in credit risk on which a 12-month allowance
for ECL is recognised.
-- Stage 2: A significant increase in credit risk has been
experienced on these financial assets since initial recognition for
which a lifetime ECL is recognised.
-- Stage 3: There is objective evidence of impairment and the
financial assets are therefore considered to be in default or
otherwise credit impaired on which a lifetime ECL is
recognised.
-- POCI: Financial assets that are purchased or originated at a
deep discount are seen to reflect the incurred credit losses on
which a lifetime ECL is recognised
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector
(Audited)
Gross carrying/nominal
amount Allowance for ECL ECL coverage %
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total 1 2 3 POCI Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % % %
------- ------ ----- --------- ------- ------- ------- ----- -------- ----- ----- ----- ----- -------
Loans
and advances
to customers 3,423,956 296,522 16,639 1,152 3,738,269 (3,480) (4,615) (8,999) (300) (17,394) 0.1 1.6 54.1 26.0 0.5
* personal 1,351,575 45,606 5,575 - 1,402,756 (1,732) (2,646) (1,325) - (5,703) 0.1 5.8 23.8 - 0.4
* corporate(1) 1,850,316 222,819 10,914 1,149 2,085,198 (1,622) (1,844) (7,525) (297) (11,288) 0.1 0.8 68.9 25.8 0.5
---------------------------------
* financial institutions(2) 222,065 28,097 150 3 250,315 (126) (125) (149) (3) (403) 0.1 0.4 99.3 100.0 0.2
---------------------------------
Loans
and advances
to banks 328,355 579 - - 328,934 (26) (3) - - (29) 0.0 0.5 - - 0.0
---------------------------------
Other
financial
assets 1,530,910 9,884 167 2 1,540,963 (214) (77) (50) - (341) 0.0 0.8 29.9 - 0.0
---------------------------------
Loan and
other
credit-related
commitments 1,601,934 27,967 104 - 1,630,005 (303) (236) (21) - (560) 0.0 0.8 20.2 - 0.0
---------------------------------
* personal 1,158,805 5,311 69 - 1,164,185 - (1) - - (1) - 0.0 - - 0.0
---------------------------------
* corporate(1) 378,362 18,495 35 - 396,892 (293) (230) (21) - (544) 0.1 1.2 60.0 - 0.1
---------------------------------
* financial institutions(2) 64,767 4,161 - - 68,928 (10) (5) - - (15) 0.0 0.1 - - 0.0
---------------------------------
Financial
guarantee 34,496 6,634 33 - 41,163 (29) (20) (13) - (62) 0.1 0.3 39.4 - 0.2
* personal 4,377 - 3 - 4,380 - - (3) - (3) - - 100.0 - 0.1
* corporate(1) 28,530 6,410 30 - 34,970 (29) (20) (10) - (59) 0.1 0.3 33.3 - 0.2
---------------------------------
* financial institutions(2) 1,589 224 - - 1,813 - - - - - - - - - -
---------------------------------
At 31
Dec 2019 6,919,651 341,586 16,943 1,154 7,279,334 (4,052) (4,951) (9,083) (300) (18,386) 0.1 1.4 53.6 26.0 0.3
--------------------------------- --------- ------- ------ ----- --------- ------ ------ ------ ---- ------- ----- ----- ----- ----- -------
The above table does not include balances due from Group
companies.
1 Includes corporate and commercial.
2 Includes non-bank financial institutions.
Unless identified at an earlier stage, all financial assets are
deemed to have suffered a significant increase in credit risk when
they are 30 days past due ('DPD') and are transferred from stage 1
to stage 2. The following disclosure presents the ageing of stage 2
financial assets by those less than 30 and greater than 30 days
past due and therefore presents those amounts classified as stage 2
due to ageing (30 DPD) and those identified at an earlier stage
(less than 30 DPD).`
Stage 2 days past due analysis for loans and advances to customers
(Audited)
----------------------- ------------------------- -----------------------
Gross carrying amount Allowance for ECL ECL coverage %
Of Of Of Of Of Of
which: which: which: which: which: which:
1 to 30 and 1 to 30 and 1 to
Stage 29 > Stage 29 > Stage 29 30 and
2 DPD(1) DPD(1) 2 DPD(1) DPD(1) 2 DPD(1) > DPD(1)
HK$m HK$m HK$m HK$m HK$m HK$m % % %
------- ------ ------ ------- -------- ------ ----- --------
At 31 Dec 2019
Loans and advances
to customers at
amortised cost 296,522 8,254 3,911 (4,615) (255) (434) 1.6 3.1 11.1
* personal 45,606 6,505 3,494 (2,646) (217) (396) 5.8 3.3 11.3
---------------------------------------
* corporate and commercial 222,819 1,687 417 (1,844) (38) (38) 0.8 2.3 9.1
---------------------------------------
* non-bank financial institutions 28,097 62 - (125) - - 0.4 - -
--------------------------------------- ------- ------ ------ ------ ---- ----- ----- ------ ------
1 Days past due ('DPD'). Up to date accounts in Stage 2 are not shown in amounts.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector
(continued)
(Audited)
------------------------------------------- ------------------------------------------ --------------------------------
Gross carrying/nominal
amount Allowance for ECL ECL coverage %
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total 1 2 3 POCI Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % % %
--------- ------- ------ ---- --------- ------- ------- ------- ----- -------- ----- ----- ----- ---- -----
Loans
and advances
to customers 3,345,371 180,142 19,024 721 3,545,258 (3,014) (3,713) (9,549) (280) (16,556) 0.1 2.1 50.2 38.8 0.5
* personal 1,219,173 42,395 5,431 - 1,266,999 (1,625) (2,763) (1,412) - (5,800) 0.1 6.5 26.0 - 0.5
* corporate(1) 1,919,264 131,234 13,407 721 2,064,626 (1,297) (920) (8,017) (280) (10,514) 0.1 0.7 59.8 38.8 0.5
* financial institutions(2) 206,934 6,513 186 - 213,633 (92) (30) (120) - (242) 0.0 0.5 64.5 - 0.1
Loans
and advances
to banks 337,079 1,098 - - 338,177 (24) (2) - - (26) 0.0 0.2 - - 0.0
---------------------------------
Other
financial
assets 1,427,193 9,170 70 - 1,436,433 (140) (27) - - (167) 0.0 0.3 - - 0.0
---------------------------------
Loan and
other
credit-related
commitments 1,464,749 25,847 115 - 1,490,711 (275) (101) - - (376) 0.0 0.4 - - 0.0
---------------------------------
* personal 1,024,061 8,102 4 - 1,032,167 (1) (3) - - (4) 0.0 0.0 - - 0.0
* corporate(1) 384,855 15,559 111 - 400,525 (262) (97) - - (359) 0.1 0.6 - - 0.1
* financial institutions(2) 55,833 2,186 - - 58,019 (12) (1) - - (13) 0.0 0.0 - - 0.0
Financial
guarantee 43,261 6,349 697 - 50,307 (26) (33) (221) - (280) 0.1 0.5 31.7 - 0.6
* personal 4,562 1 5 - 4,568 - - (1) - (1) - - 20.0 - 0.0
* corporate(1) 34,978 6,254 692 - 41,924 (25) (33) (220) - (278) 0.1 0.5 31.8 - 0.7
* financial institutions(2) 3,721 94 - - 3,815 (1) - - - (1) 0.0 - - - 0.0
At 31
Dec 2018 6,617,653 222,606 19,906 721 6,860,886 (3,479) (3,876) (9,770) (280) (17,405) 0.1 1.7 49.1 38.8 0.3
--------------------------------- --------- ------- ------ ---- --------- ------ ------ ------ ---- ------- ----- ----- ----- ---- -----
The above table does not include balances due from Group
companies.
1 Includes corporate and commercial.
2 Includes non-bank financial institutions.
Stage 2 days past due analysis for loans and advances to customers
(continued)
(Audited)
----------------------- ------------------------- -----------------------
Gross carrying amount Allowance for ECL ECL coverage %
Of Of Of Of Of Of
which: which: which: which: which: which:
1 to 30 and 1 to 30 and 1 to
Stage 29 > Stage 29 > Stage 29 30 and
2 DPD(1) DPD(1) 2 DPD(1) DPD(1) 2 DPD(1) > DPD(1)
HK$m HK$m HK$m HK$m HK$m HK$m % % %
------- ------ ------ ------- -------- ------ ----- --------
At 31 Dec 2018
Loans and advances
to customers at
amortised cost 180,142 7,632 3,733 (3,713) (270) (332) 2.1 3.5 8.9
* personal 42,395 6,366 3,443 (2,763) (229) (310) 6.5 3.6 9.0
* corporate and commercial 131,234 1,264 80 (920) (41) (22) 0.7 3.2 27.5
---------------------------------------
* non-bank financial institutions 6,513 2 210 (30) - - 0.5 - -
--------------------------------------- ------- ------ ------ ------ ---- ----- ----- ------ ------
1 Days past due ('DPD'). Up to date accounts in Stage 2 are not shown in amounts.
Credit exposure
Maximum exposure to credit risk
(Audited)
This section provides information on balance sheet items as well
as loan and other credit-related commitments.
'Maximum exposure to credit risk' table
The following table presents our maximum exposure before taking account
of any collateral held or other credit enhancements (unless such enhancements
meet accounting offsetting requirements). The table excludes financial
instruments whose carrying amount best represents the net exposure
to credit risk, and it excludes equity securities as they are not subject
to credit risk. For the financial assets recognised on the balance
sheet, the maximum exposure to credit risk equals their carrying amount;
for financial guarantees and other guarantees granted, it is the maximum
amount that we would have to pay if the guarantees were called upon.
For loan commitments and other credit-related commitments, it is generally
the full amount of the committed facilities.
===============================================================================
Other credit risk mitigants
There are arrangements in place that reduce our maximum exposure
to credit risk. These include a charge over collateral on
borrowers' specific assets, such as residential properties,
collateral held in the form of financial instruments that are not
held on the balance sheet and short positions in securities. In
addition, for financial assets held as part of linked
insurance/investment contracts the risk is predominantly borne by
the policyholder.
Collateral available to mitigate credit risk is disclosed in the
Collateral section on pages 36-39.
Maximum exposure to credit risk before collateral held or other credit
enhancements
(Audited)
2019 2018
HK$m HK$m
Cash and balances at central banks 202,746 205,660
---------------------------------------------------- ---------- ----------
Items in the course of collection from other banks 21,140 25,380
---------- ----------
Hong Kong Government certificates of indebtedness 298,944 280,854
---------- ----------
Trading assets 445,298 439,363
---------------------------------------------------- ---------- ----------
Derivatives 280,642 292,869
----------
Financial assets designated at fair value 33,464 33,023
---------------------------------------------------- ----------
Reverse repurchase agreements - non-trading 422,333 406,327
---------------------------------------------------- ----------
Loans and advances to banks 328,905 338,151
---------------------------------------------------- ----------
Loans and advances to customers 3,720,875 3,528,702
---------------------------------------------------- ----------
Financial investments 1,891,661 1,865,168
---------------------------------------------------- ----------
Amounts due from Group companies 87,632 70,455
---------------------------------------------------- ----------
Other assets 165,497 159,483
---------------------------------------------------- ----------
Total on-balance sheet exposure to credit risk 7,899,137 7,645,435
---------------------------------------------------- ---------- ----------
Total off-balance sheet 3,346,414 3,171,280
---------------------------------------------------- ---------- ----------
Financial guarantees and other similar contracts 315,257 291,915
---------------------------------------------------- ---------- ----------
Loan and other credit-related commitments 3,031,157 2,879,365
----------
At 31 Dec 11,245,551 10,816,715
---------------------------------------------------- ---------- ----------
Total exposure to credit risk remained broadly unchanged in 2019
with loans and advances continuing to be the largest element.
Credit deterioration of financial instruments
(Audited)
A summary of our current policies and practices regarding the
identification, treatment and measurement of stage 1, stage 2,
stage 3 (credit impaired) and POCI financial instruments can be
found in note 1.2(i) on the Consolidated Financial Statements.
Measurement uncertainty and sensitivity analysis of ECL
estimates
(Audited)
The recognition and measurement of expected credit losses
('ECL') involves the use of significant judgement and estimation.
We form multiple economic scenarios based on economic forecasts,
apply these assumptions to credit risk models to estimate future
credit losses, and probability-weight the results to determine an
unbiased ECL estimate.
Methodology
We use multiple economic scenarios to reflect assumptions about
future economic conditions, starting with three economic scenarios
based on consensus forecast distributions, supplemented by
alternative or additional economic scenarios and/or management
adjustments where, in management's judgement, the consensus
forecast distribution does not adequately capture the relevant
risks.
The three economic scenarios represent the 'most likely outcome'
and two less likely outcomes, referred to as the Upside and
Downside scenarios. Each outer scenario is consistent with a
probability of 10%, while the Central scenario is assigned the
remaining 80%, according to the decision of the group's senior
management. This weighting scheme is deemed appropriate for the
unbiased estimation of ECL in most circumstances.
Economic assumptions in the Central consensus economic scenario
are set using consensus forecasts which represent the average of
forecasts of external economists. Reliance on external forecasts
helps ensure that the Central scenario is unbiased and maximises
the use of independent information. The Upside and Downside
scenarios are selected with reference to externally available
forecast distributions and are designed to be cyclical, in that GDP
growth, inflation and unemployment usually revert back to the
Central scenario after the first three years for major economies.
We determine the maximum divergence of GDP growth from the Central
scenario using the 10th and the 90th percentile of the entire
distribution of forecast outcomes for major economies. While key
economic variables are set with reference to external
distributional forecasts, we also align the overall narrative of
the scenarios to the macroeconomic risks described in the group's
'Top and emerging risks'. This ensures that scenarios remain
consistent with the more qualitative assessment of these risks. We
project additional variable paths using an external provider's
global macro model.
The Upside and Downside scenarios are generated once a year,
reviewed at each reporting date to ensure that they are an
appropriate reflection of managements view and updated if economic
conditions change significantly. The Central scenario is generated
every quarter. For quarters without updates to outer
scenarios, wholesale and retail credit risk use the updated
central scenario to approximate the impact of the most recent outer
scenarios.
Additional scenarios are created as required, to address those
forward-looking risks that management considers are not adequately
captured by the consensus. At the reporting date, we deployed
additional scenarios to address the impact of deteriorating trade
relations between China and the US on key Asian economies and to
address the possibility of a further deterioration in economic
growth in Hong Kong.
Description of Consensus Economic Scenarios
The economic assumptions presented in this section have been
formed internally by the group specifically for the purpose of
calculating expected credit loss.
The consensus Central scenario
The Central scenario is one of moderate growth over the forecast
period 2020-2024. Global GDP growth is expected to be 2.8% on
average over the period, which is marginally lower than the average
growth rate over the period 2014-2018. Across the key markets, we
note that:
-- Expected average rates of GDP growth over the 2020-2024
period are lower than average growth rates achieved over the
2014-2018 period in all of our key markets. For China, it is
consistent with the theme of ongoing rebalancing from an
export-oriented economy to deeper domestic consumption. Short-term
expectations of economic growth in Hong Kong deteriorated sharply
in the second half of 2019.
-- The unemployment rate is expected to rise over the forecast
horizon in most of our major markets.
-- Inflation is expected to be stable and will remain close to
central bank targets in our core markets over the forecast
period.
-- Major central banks lowered their main policy interest rates
in 2019 and are expected to continue to maintain a low interest
rate environment over the projection horizon. The US Federal
Reserve Board has resumed asset purchases to provide liquidity and
the European Central bank is expected to restart its asset purchase
programmes.
-- The West Texas Intermediate oil price is forecast to average
US$59 per barrel over the projection period.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Central scenario.
Central scenario (average 2020-2024)
Hong Mainland
Kong China
GDP growth rate (%) 1.9 5.6
Inflation (%) 2.2 2.4
Unemployment (%) 3.1 4.0
Short-term interest
rate (%) 1.1 3.8
-----------------------------
10-year treasury bond
yields (%) 2.4 N/A
-----------------------------
Property price growth
(%) 3.8 4.6
-----------------------------
Equity price growth
(%) 5.1 7.9
----------------------------- ----- --------
Probability (%) 50.0 80.0
----------------------------- ----- --------
Note: N/A - not required in credit models.
The consensus Upside scenario
The economic forecast distribution of risks (as captured by
consensus probability distributions of GDP growth) has shown a
decrease in upside risks across our main markets over the course of
2019. In the first two years of the Upside scenario, global real
GDP growth rises before converging to the Central scenario.
Increased confidence, de-escalation of trade tensions and
removal of trade barriers, expansionary fiscal policy, stronger oil
prices as well as calming of geopolitical tensions are the risk
themes that support the Upside scenario.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Upside scenario.
Upside scenario (average 2020-2024)
Hong Mainland
Kong China
GDP growth rate (%) 2.2 5.9
Inflation (%) 2.5 2.7
Unemployment (%) 2.9 3.9
Short-term interest
rate (%) 1.2 3.9
---------------------------- -----
10-year treasury bond
yields (%) 2.5 N/A
---------------------------- -----
Property price growth
(%) 5.0 5.8
---------------------------- ----- --------
Equity price growth
(%) 6.9 10.7
---------------------------- ----- --------
Probability (%) 10.0 10.0
---------------------------- ----- ----------
Note: N/A - not required in credit models.
The Downside scenarios
The consensus Downside scenario
The distribution of risks (as captured by consensus probability
distributions of GDP growth) has shown a marginal increase in
downside risks over the course of 2019 for Hong Kong. In the
Downside scenario, global real GDP growth declines for two years
before recovering towards its long-run trend. House price growth
either stalls or contracts and equity markets correct abruptly in
our major markets in this scenario. The potential slowdown in
global demand would drive commodity prices lower and result in an
accompanying fall in inflation. Central banks would be expected to
enact loose monetary policy, which in some markets would result in
a reduction in the key policy interest rate. The scenario is
consistent with key in our 'Top and emerging risks', which include
an intensification of global protectionism and trade barriers, a
slowdown in China, further risks to economic growth in Hong Kong
and weaker commodity prices.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Downside scenario.
Downside scenario (average 2020-2024)
Hong Mainland
Kong China
GDP growth rate (%) 1.4 5.6
Inflation (%) 1.9 2.1
Unemployment (%) 3.3 4.0
Short-term interest
rate (%) (0.1) 3.6
----------------------------- ------
10-year treasury bond
yields (%) 1.2 N/A
----------------------------- ------
Property price growth
(%) 2.3 3.9
----------------------------- ------ --------
Equity price growth
(%) (0.7) 1.1
----------------------------- ------ --------
Probability (%) 10.0 0.0
----------------------------- ------ ----------
Note: N/A - not required in credit models.
The alternative Downside scenarios
Alternative Downside scenarios have been created to reflect
management's view of risk in some of our key markets.
Asia-Pacific alternative Downside scenario
Two alternative Downside scenarios have been implemented for key
Asia-Pacific markets to represent management's view of economic
uncertainty arising from trade and tariff tensions between China
and the US and the current economic situation in Hong Kong. These
scenarios and their associated probabilities are described
below.
Asia-Pacific alternative Downside scenario 1
A continuation of trade- and tariff-related tensions throughout
2019 resulted in management modelling an alternative Downside
scenario for eight of our key Asia-Pacific markets. This scenario
models the effects of a significant escalation in global tensions,
stemming from trade disputes but going beyond increases in tariffs
to affect non-tariff barriers, cross-border investment flows and
threats to the international trade architecture. This scenario
assumes actions that lie beyond currently enacted and proposed
tariffs and has been modelled as an addition to the three
consensus-driven scenarios for these economies.
Key macroeconomic variables are shown in the table below:
Average 2020-2024
Hong Mainland
Kong China
GDP growth rate (%) 0.8 5.2
---- -------
Inflation (%) 1.6 2
---- -------
Unemployment (%) 5.1 4.3
---- -------
Short-term interest
rate (%) 0.7 2.9
----------------------- ---- -------
10-year treasury bond
yields (%) 1.6 N/A
----------------------- ---- ----------
Property price growth
(%) (3.7) 2.6
----------------------- ---- -------
Equity price growth
(%) (3.3) (1.6)
----------------------- ---- -------
Probability (%) 20.0 10.0
----------------------- ---- -------
Note: N/A - not required in credit models.
Asia-Pacific alternative Downside scenario 2
A deep cyclical recessionary scenario has been modelled to
reflect Hong Kong-specific risks and the possibility of a further
deterioration in the economic environment. This scenario has been
applied to Hong Kong only and has been assigned a 10%
probability.
Average 2020-2024
Hong
Kong
GDP growth rate (%) (0.1)
----
Inflation (%) 1.3
----
Unemployment (%) 5.1
----
Short-term interest rate (%) 0.4
------------------------------ ----
10-year treasury bond yields
(%) 1.4
------------------------------ ----
Property price growth (%) (3.7)
------------------------------ ----
Equity price growth (%) (8.4)
------------------------------ ----
Probability (%) 10.0
------------------------------ ----
The conditions that resulted in departure from the consensus
economic forecasts will be reviewed regularly as economic
conditions change in future to determine whether these adjustments
continue to be necessary.
How economic scenarios are reflected in the wholesale
calculation of ECL
The Group has developed a globally consistent methodology for
the application of forward economic guidance into the calculation
of ECL by incorporating forward economic guidance into the
estimation of the term structure of probability of default ('PD')
and loss given default ('LGD'). For PDs, we consider the
correlation of forward economic guidance to default rates for a
particular industry in a country. For LGD calculations we consider
the correlation of forward economic guidance to collateral values
and realisation rates for a particular country and industry. PDs
and LGDs are estimated for the entire term structure of each
instrument.
For impaired loans, LGD estimates take into account independent
recovery valuations provided by external consultants where
available, or internal forecasts corresponding to anticipated
economic conditions and individual company conditions. In
estimating the ECL on impaired loans that are individually
considered not to be significant, the group incorporates forward
economic guidance proportionate to the probability-weighted outcome
and the Central scenario outcome for non-stage 3 populations.
How economic scenarios are reflected in the retail calculation
of ECL
The Group has developed and implemented a globally consistent
methodology for incorporating forecasts of economic conditions into
ECL estimates. The impact of economic scenarios on PD is modelled
at a portfolio level. Historic relationships between observed
default rates and macro-economic variables are integrated into
HKFRS 9 ECL estimates by leveraging economic response models. The
impact of these scenarios on PD is modelled over a period equal to
the remaining maturity of underlying asset or assets. The impact on
LGD is modelled for mortgage portfolios by forecasting future
loan-to-value ('LTV') profiles for the remaining maturity of the
asset by leveraging national level forecasts of the house price
index and applying the corresponding LGD expectation.
Economic scenarios sensitivity analysis of ECL estimates
Management considered the sensitivity of the ECL outcome against
the economic forecasts as part of the ECL governance process by
recalculating the ECL under each scenario described above for
selected portfolios, applying a 100% weighting to each scenario in
turn. The weighting is reflected in both the determination of
significant increase in credit risk as well as the measurement of
the resulting ECL.
The ECL calculated for the Upside and Downside scenarios should
not be taken to represent the upper and lower limits of possible
actual ECL outcomes. The impact of defaults that might occur in
future under different economic scenarios is captured by
recalculating ECL for loans in stages 1 and 2 at the balance sheet
date. The population of stage 3 loans (in default) at the balance
sheet date is unchanged in these sensitivity calculations. Stage 3
ECL would only be sensitive to changes in forecasts of future
economic conditions if the LGD of a particular portfolio was
sensitive to these changes.
There is a particularly high degree of estimation uncertainty in
numbers representing tail risk scenarios when assigned a 100%
weighting.
For wholesale credit risk exposures, the sensitivity analysis
excludes ECL and financial instruments related to defaulted
obligors because the measurement of ECL is relatively more
sensitive to credit factors specific to the obligor than future
economic scenarios, and it is impracticable to separate the effect
of macroeconomic factors in individual assessments.
For retail credit risk exposures, the sensitivity analysis
includes ECL for loans and advances to customers related to
defaulted obligors. This is because the retail ECL for secured
mortgage portfolios including loans in all stages is sensitive to
macroeconomic variables.
We also considered developments after the balance sheet date and
concluded that they did not necessitate any adjustment to the
approach or judgements taken on 31 December 2019.
Wholesale analysis
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Mainland
Hong Kong China
ECL coverage of financial
instruments subject
to significant measurement
uncertainty at 31 December
2019(2)
Reported ECL (HK$m) 2,555 966
Consensus scenarios
-------------------------------
Central scenario (HK$m) 1,895 919
Upside scenario (HK$m) 1,877 740
-------------------------------
Downside scenario (HK$m) 1,901 826
Alternative scenarios
-------------------------------
Asia-Pacific alternative
Downside scenario 1
(HK$m) 4,284 1,168
Asia-Pacific alternative
Downside scenario 2
(HK$m) 5,452 N/A
-------------------------------
Gross carrying amount/nominal
amount(3) (HK$m) 3,256,617 810,092
------------------------------- --------- --------
1 Excludes ECL and financial instruments relating to defaulted
obligors because the measurement of ECL is relatively more
sensitive to credit factors specific to the obligor than future
economic scenarios.
2 Includes off-balance sheet financial instruments that are
subject to significant measurement uncertainty.
3 Includes low credit-risk financial instruments such as Debt
instruments at FVOCI, which have low ECL coverage ratios under all
the above scenarios. Coverage ratios on loans and advances to
customers including loan commitments and financial guarantees are
typically higher.
ECL coverage rates reflect the underlying observed credit
defaults, the sensitivity to economic environment, extent of
security and the effective maturity of the book. Hong Kong is
typically a short-dated book with low defaults, which is reflected
in the low ECL coverage ratio.
Retail analysis
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Hong
Kong Malaysia Singapore Australia
-------- ---------
ECL coverage
of loans and
advances to customers
at 31 December
2019(2)
------- -------- --------- -----------
Reported ECL
(HK$m) 2,718 732 467 296
------- -------- --------- ---------
Consensus scenarios
------------------------ ------- -------- --------- -----------
Central scenario
(HK$m) 2,306 732 452 288
------------------------ ------- -------- --------- ---------
Upside scenario
(HK$m) 2,197 662 444 249
------------------------ ------- -------- --------- ---------
Downside scenario
(HK$m) 2,383 826 452 351
------- -------- --------- ---------
Alternative scenarios
------------------------ ------- -------- --------- -----------
Asia-Pacific
alternative Downside
scenario 1 (HK$m) 4,128 857 623 389
------------------------ ------- -------- --------- ---------
Asia-Pacific
alternative Downside
scenario 2 (HK$m) 4,206 N/A N/A N/A
------------------------ ------- -------- --------- -----------
Gross carrying
amount/nominal
amount (HK$m) 792,061 45,480 63,590 134,423
------------------------ ------- -------- --------- ---------
1 ECL sensitivities exclude portfolios using less complex modelling approaches.
2 ECL sensitivity includes only on-balance sheet financial
instruments to which HKFRS 9 impairment requirements are
applied.
The changes in sensitivity from 31 December 2018 is reflective
of changes in lending volumes, credit quality and movements in
foreign exchange. In Hong Kong, an additional downside scenario was
introduced during 2019 where an increase in severity of alternative
downside scenario partially offset by changes in credit quality is
observed.
Overall, as the level of uncertainty, economic forecasts,
historical economic variable correlations or credit quality
changes, corresponding changes in the ECL sensitivity would
occur.
Post-model adjustments
In the context of HKFRS 9, post-model adjustments are short-term
increases or decreases to the ECL at either a customer or portfolio
level to account for late breaking events, model deficiencies and
expert credit judgement applied following management review and
challenge. We have internal governance in place to regularly
monitor post-model adjustments and where possible to reduce the
reliance on these through model recalibration or redevelopment as
appropriate.
Reconciliation of changes in gross carrying/nominal amount and
allowances for placings with and advances to banks and loans and
advances to customers, including loan commitments and financial
guarantees
The following disclosure provides a reconciliation by stage of
the group's gross carrying/nominal amount and allowances for loans
and advances to banks and customers, including loan commitments and
financial guarantees. Movements are calculated on a quarterly basis
and therefore fully capture stage movements between quarters. If
movements were calculated on a year-to-date basis they would only
reflect the opening and closing position of the financial
instrument.
The transfers of financial instruments represents the impact of
stage transfers upon the gross carrying/nominal amount and
associated allowance for ECL.
The net remeasurement of ECL arising from stage transfers
represents the increase or decrease due to these transfers, for
example, moving from a 12-month (stage 1) to a lifetime (stage 2)
ECL measurement basis. Net remeasurement excludes the underlying
CRR/PD movements of the financial instruments transferring stage.
This is captured, along with other credit quality movements in the
'changes in risk parameters - credit quality' line item.
Changes in 'New financial assets originated or purchased',
'assets derecognised (including final repayments)' and 'changes to
risk parameters - further lending/repayments' represent the impact
from volume movements within the group's lending portfolio.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers, including
loan commitments and financial guarantees
(Audited)
----------- --------- --------- --------- --------- --------- ----------- ----------- ----------- -----------
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance
nominal for nominal for nominal for nominal for nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
----------------------------------------- ----------- --------- --------- --------- --------- --------- ----------- ----------- ----------- -----------
At 1 Jan 2019 5,190,396 (3,339) 213,434 (3,849) 19,836 (9,772) 721 (279) 5,424,387 (17,239)
----------------------------------------- ---------- -------- -------- -------- -------- -------- ------- ------ ---------- --------
Transfers of financial
instruments: (199,043) (1,999) 192,106 2,829 6,937 (830) - - - -
---------- -------- -------- -------- -------- -------- ------- ------ --- ---------- --------
* transfers from stage 1 to stage 2 (424,655) 904 424,655 (904) - - - - - -
-----------------------------------------
* transfers from stage 2 to stage 1 227,072 (2,849) (227,072) 2,849 - - - - - -
-----------------------------------------
- transfers to
stage 3 (1,987) 48 (6,513) 1,056 8,500 (1,104) - - - -
- transfers from
stage 3 527 (102) 1,036 (172) (1,563) 274 - - - -
---------- -------- -------- -------- -------- -------- ------- ------ --- ---------- --------
Net remeasurement
of ECL arising
from transfer
of stage - 1,657 - (1,887) - (215) - - - (445)
----------------------------------------- ---------- -------- -------- -------- -------- -------- ------- ------ --- ---------- --------
New financial
assets originated
and purchased 1,655,668 (1,347) - - - - 555 - 1,656,223 (1,347)
----------------------------------------- ---------- -------- -------- -------- -------- -------- ------- ------ --- ---------- --------
Assets derecognised
(including final
repayments) (1,132,107) 274 (77,234) 590 (4,991) 1,078 (18) - (1,214,350) 1,942
----------------------------------------- ---------- -------- -------- -------- -------- -------- ------- ------ --- ---------- --------
Changes to risk
parameters - further
lending/repayment (104,136) 757 3,871 289 850 363 (152) 7 (99,567) 1,416
----------------------------------------- ---------- -------- -------- -------- -------- -------- ------- ------ --- ---------- --------
Changes in risk
parameters - credit
quality - 207 - (2,880) - (4,989) - (64) - (7,726)
----------------------------------------- ---------- -------- -------- -------- -------- -------- ------- ------ ---------- --------
Changes to model
used for ECL calculation - (50) - 39 - 113 - - - 102
----------------------------------------- ---------- -------- -------- -------- -------- -------- ------- ------ --- ---------- --------
Assets written
off - - - - (4,842) 4,842 (41) 41 (4,883) 4,883
---------- -------- -------- -------- -------- -------- ------- ------ --- ---------- --------
Credit-related
modifications
that resulted
in derecognition - - - - (980) 394 - - (980) 394
---------- -------- -------- -------- -------- -------- ------- ------ --- ---------- --------
Foreign exchange (7,733) 16 (479) (2) 63 (37) (2) (1) (8,151) (24)
---------- -------- -------- -------- -------- -------- ------- ------ ---------- --------
Others (19,395) (15) 3 (3) (98) 21 89 (4) (19,401) (1)
---------- -------- -------- -------- -------- -------- ------- ------ ---------- --------
At 31 Dec 2019 5,383,650 (3,839) 331,701 (4,874) 16,775 (9,032) 1,152 (300) 5,733,278 (18,045)
----------------------------------------- ---------- -------- -------- -------- -------- -------- ------- ------ ---------- --------
ECL income statement
charge for the
year (6,058)
----------- --------- --------- --------- --------- --------- ----------- ----------- ----------- --------
Recoveries 863
----------- --------- --------- --------- --------- --------- ----------- ----------- ----------- --------
Others (197)
----------------------------------------- ----------- --------- --------- --------- --------- --------- ----------- ----------- ----------- --------
Total ECL income
statement charge
for the year (5,392)
----------------------------------------- ----------- --------- --------- --------- --------- --------- ----------- ----------- ----------- --------
Year ended
At 31 Dec 2019 31 Dec 2019
--------------
Gross carrying/nominal Allowance
amount for ECL ECL charge
HK$m HK$m HK$m
---------------------- --------- --------------
As above 5,733,278 (18,045) (5,392)
---------------------- -------- -----------
Other financial assets measured at amortised
cost 1,540,963 (341) (134)
---------------------- -------- -----------
Non-trading reverse repurchase agreement
commitments 5,093 - -
---------------------- -------- -----------
Performance and other guarantees not
considered for HKFRS 9 N/A N/A (123)
---------------------------------------------- ---------------------- --------- -----------
Amounts due from Group companies 85,385 - -
---------------------------------------------- ---------------------- -------- -----------
Summary of financial instruments to
which the impairment requirements in
HKFRS 9 are applied/Summary consolidated
income statement 7,364,719 (18,386) (5,649)
---------------------------------------------- ---------------------- -------- -----------
Debt instruments measured at FVOCI 1,457,362 (64) (23)
---------------------- -------- -----------
Total allowance for ECL/total income
statement ECL charge for the year N/A (18,450) (5,672)
---------------------------------------------- ---------------------- -------- -----------
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers, including
loan commitments and financial guarantees (continued)
(Audited)
---------- --------- --------- --------- --------- --------- ----------- ----------- ---------- -----------
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance
nominal for nominal for nominal for nominal for nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
----------------------------------------- ---------- --------- --------- --------- --------- --------- ----------- ----------- ---------- -----------
At 1 Jan 2018 4,852,623 (3,365) 280,319 (4,277) 17,713 (9,239) 1,231 (185) 5,151,886 (17,066)
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------ --------- --------
Transfers of financial
instruments: (33,980) (2,276) 21,399 3,214 12,581 (938) - - - -
--------- -------- -------- -------- -------- -------- ------- ------ --- --------- --------
* transfers from stage 1 to stage 2 (324,248) 789 324,248 (789) - - - - - -
-----------------------------------------
* transfers from stage 2 to stage 1 295,728 (3,109) (295,728) 3,109 - - - - - -
-----------------------------------------
- transfers to
stage 3 (5,481) 50 (8,862) 1,064 14,343 (1,114) - - - -
- transfers from
stage 3 21 (6) 1,741 (170) (1,762) 176 - - - -
--------- -------- -------- -------- -------- -------- ------- ------ --- --------- --------
Net remeasurement
of ECL arising
from transfer
of stage - 1,819 - (1,800) - (262) - - - (243)
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------ --- --------- --------
Net new and further
lending/repayments(1) 466,876 (872) (83,068) 173 (5,105) 2,434 (500) 11 378,203 1,746
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------ --- --------- --------
Changes in risk
parameters - credit
quality - 1,170 - (1,177) - (7,040) - (114) - (7,161)
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------ --------- --------
Changes to model
used for ECL calculation - - - - - - - - - -
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------ --- --------- --------
Assets written
off - - - - (4,974) 4,973 (6) 6 (4,980) 4,979
Foreign exchange
and other (95,123) 185 (5,216) 18 (379) 300 (4) 3 (100,722) 506
At 31 Dec 2018 5,190,396 (3,339) 213,434 (3,849) 19,836 (9,772) 721 (279) 5,424,387 (17,239)
----------------------------------------- --------- -------- -------- -------- -------- -------- ------- ------ --------- --------
ECL income statement
charge for the
year (5,658)
Recoveries 940
Others (21)
----------------------------------------- ---------- --------- --------- --------- --------- --------- ----------- ----------- ---------- --------
Total ECL income
statement charge
for the year (4,739)
----------------------------------------- ---------- --------- --------- --------- --------- --------- ----------- ----------- ---------- --------
Year ended
At 31 Dec 2018 31 Dec 2018
--------------
Gross carrying/nominal Allowance
amount for ECL ECL charge
HK$m HK$m HK$m
---------------------- --------- --------------
As above 5,424,387 (17,239) (4,739)
---------------------- -------- -----------
Other financial assets measured at amortised
cost 1,436,433 (167) 4
---------------------- -------- -----------
Non-trading reverse repurchase agreement
commitments 66 - -
---------------------- -------- -----------
Performance and other guarantees not
considered for HKFRS 9 N/A N/A 5
---------------------------------------------- ---------------------- --------- -----------
Amounts due from Group companies 58,631 - -
---------------------- -------- -----------
Summary of financial instruments to which
the impairment requirements in HKFRS
9 are applied/Summary consolidated income
statement 6,919,517 (17,406) (4,730)
---------------------------------------------- ---------------------- -------- -----------
Debt instruments measured at FVOCI 1,497,767 (44) 10
---------------------- -------- -----------
Total allowance for ECL/total income
statement ECL charge for the year N/A (17,450) (4,720)
---------------------------------------------- ---------------------- -------- -----------
1 The 31 December 2018 comparative 'Reconciliation of changes in
gross carrying/nominal amount and allowances for loans and advances
to banks and customers' disclosure presents 'New financial assets
originated or purchased', 'Assets derecognised (including final
repayments)' and 'Changes to risk parameters - further
lending/repayments' under 'Net new lending and further
lending/repayments'. To provide greater granularity, these amounts
have been separately presented in the 31 December 2019
disclosure.
Credit quality
Credit quality of financial instruments
(Audited)
We assess the credit quality of all financial instruments that
are subject to credit risk. The credit quality of financial
instruments is a point-in-time assessment of the probability of
default of financial instruments, whereas stages 1 and 2 are
determined based on relative deterioration of credit quality since
initial recognition. Accordingly, for non-credit-impaired financial
instruments, there is no direct relationship between the credit
quality assessment and stages 1 and 2, though typically the lower
credit quality bands exhibit a higher proportion in stage 2.
The five credit quality classifications each encompass a range
of granular internal credit rating grades assigned to wholesale and
retail lending businesses and the external ratings attributed by
external agencies to debt securities, as shown in the table
below.
Distribution of financial instruments by credit quality at 31 December
2019
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------- ------------ -------- --------- --------- --------- -----------
In-scope for
HKFRS
9 impairment
Loans and
advances
to customers
held at
amortised cost 1,997,523 946,831 755,183 21,067 17,665 3,738,269 (17,394) 3,720,875
- personal 1,173,323 138,094 81,345 4,419 5,575 1,402,756 (5,703) 1,397,053
- corporate and
commercial 707,662 731,917 617,079 16,602 11,938 2,085,198 (11,288) 2,073,910
- non-bank
financial
institutions 116,538 76,820 56,759 46 152 250,315 (403) 249,912
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Loans and
advances
to banks 308,236 19,338 1,357 3 - 328,934 (29) 328,905
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Cash and
balances at
central banks 197,770 3,946 1,031 - - 202,747 (1) 202,746
Items in the
course
of collection
from
other banks 21,140 - - - - 21,140 - 21,140
Hong Kong
Government
certificates
of
indebtedness 298,944 - - - - 298,944 - 298,944
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Reverse
repurchase
agreements -
non-trading 286,338 99,555 36,440 - - 422,333 - 422,333
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Financial
investments
held at
amortised cost 382,384 46,887 5,252 - - 434,523 (223) 434,300
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Prepayments,
accrued
income and
other assets 82,725 38,627 38,922 833 169 161,276 (117) 161,159
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Debt
instruments
measured
at fair value
through
other
comprehensive
income(1) 1,382,729 60,202 9,301 - - 1,452,232 (64) 1,452,168
--------- --------- ------------ -------- --------- --------- -------- ---------
Out-of-scope
for HKFRS
9 impairment
Trading assets 378,656 39,057 26,683 905 - 445,301 - 445,301
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 22,850 3,702 3,174 - - 29,726 - 29,726
--------- --------- ------------ -------- --------- --------- -------- ---------
Derivatives 168,448 44,520 3,336 41 - 216,345 - 216,345
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Total gross
carrying
amount
on-balance
sheet 5,527,743 1,302,665 880,679 22,849 17,834 7,751,770 (17,828) 7,733,942
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Percentage of
total
credit quality 71% 17% 11% 0% 0% 100% - -
Loan and other
credit
related
commitments(2) 1,639,786 678,914 415,286 13,650 303 2,747,939 (561) 2,747,378
--------- --------- ------------ -------- --------- --------- -------- ---------
Financial
guarantee
and similar
contracts 113,138 108,045 71,562 3,222 324 296,291 (213) 296,078
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Total nominal
off-balance
sheet amount 1,752,924 786,959 486,848 16,872 627 3,044,230 (774) 3,043,456
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Distribution of financial instruments by credit quality at 31 December
2018 (continued)
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------- ------------ -------- --------- --------- --------- -----------
In-scope for
HKFRS
9 impairment
Loans and
advances
to customers
held at
amortised cost 1,867,142 881,026 758,398 19,123 19,569 3,545,258 (16,556) 3,528,702
- personal 1,052,365 116,821 88,755 3,627 5,431 1,266,999 (5,800) 1,261,199
- corporate and
commercial 713,295 702,871 619,057 15,451 13,952 2,064,626 (10,514) 2,054,112
- non-bank
financial
institutions 101,482 61,334 50,586 45 186 213,633 (242) 213,391
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Loans and
advances
to banks 311,304 22,434 4,439 - - 338,177 (26) 338,151
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Cash and
balances at
central banks 200,977 3,890 793 - - 205,660 - 205,660
Items in the
course
of collection
from
other banks 25,380 - - - - 25,380 - 25,380
Hong Kong
Government
certificates
of
indebtedness 280,854 - - - - 280,854 - 280,854
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Reverse
repurchase
agreements -
non-trading 294,944 68,872 42,511 - - 406,327 - 406,327
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Financial
investments
held at
amortised cost 321,495 41,044 4,982 - - 367,521 (120) 367,401
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Prepayments,
accrued
income and
other assets 83,748 32,197 34,283 393 70 150,691 (47) 150,644
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Debt
instruments
measured
at fair value
through
other
comprehensive
income(1) 1,422,307 67,108 9,111 - - 1,498,526 (44) 1,498,482
--------- --------- ------------ -------- --------- --------- -------- ---------
Out-of-scope
for HKFRS
9 impairment
Trading assets 381,629 37,719 19,717 298 - 439,363 - 439,363
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 22,286 3,183 3,159 - - 28,628 - 28,628
--------- --------- ------------ -------- --------- --------- -------- ---------
Derivatives 165,327 43,362 5,011 159 - 213,859 - 213,859
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Total gross
carrying
amount
on-balance
sheet 5,377,393 1,200,835 882,404 19,973 19,639 7,500,244 (16,793) 7,483,451
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Percentage of
total
credit quality 72% 16% 12% 0% 0% 100% - -
Loan and other
credit
related
commitments(2) 2,139,267 261,579 145,681 2,248 115 2,548,890 (376) 2,548,514
--------- --------- ------------ -------- --------- --------- -------- ---------
Financial
guarantee
and similar
contracts 97,697 104,379 69,593 1,628 1,169 274,466 (314) 274,152
Total nominal
off-balance
sheet amount 2,236,964 365,958 215,274 3,876 1,284 2,823,356 (690) 2,822,666
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
The above table does not include balances due from Group
companies.
1 For the purposes of this disclosure, gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
2 In 2018, revocable loan and other commitments, which are
out-of-scope of HKFRS 9 are presented within the 'Strong'
classification.
Distribution of financial instruments to which the impairment requirements
in HKFRS 9 are applied, by credit quality and stage
allocation
(Audited)
------------------------------------------------------------------ --------- -----------
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------- --------- ------------ -------- --------- --------- --------- -----------
Loans and
advances to
banks 308,236 19,338 1,357 3 - 328,934 (29) 328,905
--------- --------- ------------ -------- --------- -------- ---------
- stage 1 307,968 19,313 1,071 3 - 328,355 (26) 328,329
- stage 2 268 25 286 - - 579 (3) 576
- stage 3 - - - - - - - -
- POCI - - - - - - - -
--------- ------------ -------- --------- --------- -------- ---------
Loans and
advances to
customers at
amortised
cost 1,997,523 946,831 755,183 21,067 17,665 3,738,269 (17,394) 3,720,875
- stage 1 1,990,700 859,196 569,372 4,688 - 3,423,956 (3,480) 3,420,476
- stage 2 6,823 87,635 185,811 16,253 - 296,522 (4,615) 291,907
- stage 3 - - - - 16,639 16,639 (8,999) 7,640
- POCI - - - 126 1,026 1,152 (300) 852
--------- --------- ------------ -------- --------- --------- -------- ---------
Other financial
assets
measured at
amortised
cost 1,269,301 189,015 81,645 833 169 1,540,963 (341) 1,540,622
- stage 1 1,266,894 185,925 77,914 177 - 1,530,910 (214) 1,530,696
- stage 2 2,407 3,090 3,731 656 - 9,884 (77) 9,807
- stage 3 - - - - 167 167 (50) 117
- POCI - - - - 2 2 - 2
--------- --------- ------------ -------- --------- --------- -------- ---------
Loan and other
credit-related
commitments 1,246,440 285,938 94,436 3,087 104 1,630,005 (560) 1,629,445
- stage 1 1,244,851 273,593 81,601 1,889 - 1,601,934 (303) 1,601,631
- stage 2 1,589 12,345 12,835 1,198 - 27,967 (236) 27,731
- stage 3 - - - - 104 104 (21) 83
- POCI - - - - - - - -
--------- --------- ------------ -------- --------- --------- -------- ---------
Financial
guarantees 10,520 16,774 12,860 976 33 41,163 (62) 41,101
- stage 1 10,224 15,108 9,069 95 - 34,496 (29) 34,467
- stage 2 296 1,666 3,791 881 - 6,634 (20) 6,614
- stage 3 - - - - 33 33 (13) 20
- POCI - - - - - - - -
--------- --------- ------------ -------- --------- --------- -------- ---------
At 31 Dec 2019 4,832,020 1,457,896 945,481 25,966 17,971 7,279,334 (18,386) 7,260,948
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
Debt
instruments at
FVOCI(1)
----------------
- stage 1 1,382,708 60,180 9,301 - - 1,452,189 (64) 1,452,125
- stage 2 21 22 - - - 43 - 43
- stage 3 - - - - - - - -
- POCI - - - - - - - -
--------- --------- ------------ -------- --------- --------- -------- ---------
At 31 Dec 2019 1,382,729 60,202 9,301 - - 1,452,232 (64) 1,452,168
---------------- --------- --------- ------------ -------- --------- --------- -------- ---------
`
Distribution of financial instruments to which the impairment requirements
in HKFRS 9 are applied, by credit quality and stage
allocation (continued)
(Audited)
----------------------------------------------------------------- --------- -----------
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------- --------- ------------ -------- -------- --------- --------- -----------
Loans and
advances to
banks 311,304 22,434 4,439 - - 338,177 (26) 338,151
--------- --------- ------------ -------- -------- --------- -------- ---------
- stage 1 311,012 22,022 4,045 - - 337,079 (24) 337,055
- stage 2 292 412 394 - - 1,098 (2) 1,096
- stage 3 - - - - - - - -
- POCI - - - - - - - -
--------- ------------ -------- -------- --------- -------- ---------
Loans and
advances to
customers at
amortised
cost 1,867,142 881,026 758,398 19,123 19,569 3,545,258 (16,556) 3,528,702
- stage 1 1,861,473 840,372 639,812 3,714 - 3,345,371 (3,014) 3,342,357
- stage 2 5,669 40,654 118,586 15,233 - 180,142 (3,713) 176,429
- stage 3 - - - - 19,024 19,024 (9,549) 9,475
- POCI - - - 176 545 721 (280) 441
--------- --------- ------------ -------- -------- --------- -------- ---------
Other financial
assets
measured at
amortised
cost 1,207,398 146,003 82,569 393 70 1,436,433 (167) 1,436,266
- stage 1 1,204,886 143,493 78,720 94 - 1,427,193 (140) 1,427,053
- stage 2 2,512 2,510 3,849 299 - 9,170 (27) 9,143
- stage 3 - - - - 70 70 - 70
- POCI - - - - - - - -
--------- --------- ------------ -------- -------- --------- -------- ---------
Loan and other
credit-related
commitments 1,081,090 261,578 145,681 2,247 115 1,490,711 (376) 1,490,335
- stage 1 1,078,356 250,973 134,399 1,021 - 1,464,749 (275) 1,464,474
- stage 2 2,734 10,605 11,282 1,226 - 25,847 (101) 25,746
- stage 3 - - - - 115 115 - 115
- POCI - - - - - - - -
--------- --------- ------------ -------- -------- --------- -------- ---------
Financial
guarantees 14,791 19,700 14,675 444 697 50,307 (280) 50,027
- stage 1 14,370 18,051 10,779 61 - 43,261 (26) 43,235
- stage 2 421 1,649 3,896 383 - 6,349 (33) 6,316
- stage 3 - - - - 697 697 (221) 476
- POCI - - - - - - - -
--------- --------- ------------ -------- -------- --------- -------- ---------
At 31 Dec 2018 4,481,725 1,330,741 1,005,762 22,207 20,451 6,860,886 (17,405) 6,843,481
---------------- --------- --------- ------------ -------- -------- --------- -------- ---------
Debt
instruments at
FVOCI(1)
----------------
- stage 1 1,422,307 67,108 9,110 - - 1,498,525 (44) 1,498,481
- stage 2 - - 1 - - 1 - 1
- stage 3 - - - - - - - -
- POCI - - - - - - - -
--------- --------- ------------ -------- -------- --------- -------- ---------
At 31 Dec 2018 1,422,307 67,108 9,111 - - 1,498,526 (44) 1,498,482
---------------- --------- --------- ------------ -------- -------- --------- -------- ---------
The above table does not include balances due from Group
companies.
1 For the purposes of this disclosure, gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Credit-impaired loans
(Audited)
We determine that a financial instrument is credit impaired and
in stage 3 by considering relevant objective evidence, primarily
whether:
-- contractual payments of either principal or interest are past due for more than 90 days;
-- there are other indications that the borrower is unlikely to
pay, such as when a concession has been granted to the borrower for
economic or legal reasons relating to the borrower's financial
condition; and
-- the loan is otherwise considered to be in default. If such
unlikeliness to pay is not identified at an earlier stage, it is
deemed to occur when an exposure is 90 days past due, even where
regulatory rules permit default to be defined based on 180 days
past due. Therefore, the definitions of credit impaired and default
are aligned as far as possible so that stage 3 represents all loans
that are considered defaulted or otherwise credit impaired.
Collateral and other credit enhancements
(Audited)
Although collateral can be an important mitigant of credit risk,
it is the group's general practice to lend on the basis of the
customer's ability to meet their obligations out of cash flow
resources rather than placing primary reliance on collateral and
other credit risk enhancements. Depending on the customer's
standing and the type of product, facilities may be provided
without any collateral or other credit enhancements. For other
lending, a charge over collateral is obtained and considered in
determining the credit decision and pricing. In the event of
default, the bank may utilise the collateral as a source of
repayment.
Depending on its form, collateral can have a significant
financial effect in mitigating our exposure to credit risk. Where
there is sufficient collateral, an expected credit loss is not
recognised. This is the case for reverse repurchase agreements and
for certain loans and advances to customers where the loan to value
('LTV') is very low.
Mitigants may include a charge on borrowers' specific assets,
such as real estate or financial instruments. Other credit risk
mitigants include short positions in securities and financial
assets held as part of linked insurance/investment contracts where
the risk is predominantly borne by the policyholder. Additionally,
risk may be managed by employing other types of collateral and
credit risk enhancements, such as second charges, other liens and
unsupported guarantees. Guarantees are normally taken from
corporates and export credit agencies. Corporates would normally
provide guarantees as part of a parent/subsidiary relationship and
span a number of credit grades. The export credit agencies will
normally be investment grade.
Certain credit mitigants are used strategically in portfolio
management activities. While single name concentrations arise in
portfolios managed by Global Banking and Corporate Banking, it is
only in Global Banking that their size requires the use of
portfolio level credit mitigants. Across Global Banking, risk
limits and utilisations, maturity profiles and risk quality are
monitored and managed proactively. This process is key to the
setting of risk appetite for these larger, more complex,
geographically distributed customer groups. While the principal
form of risk management continues to be at the point of exposure
origination, through the lending decision-making process, Global
Banking also utilises loan sales and credit default swap ('CDS')
hedges to manage concentrations and reduce risk. These transactions
are the responsibility of a dedicated Global Banking portfolio
management team. Hedging activity is carried out within agreed
credit parameters, and is subject to market risk limits and a
robust governance structure. Where applicable, CDSs are entered
into directly with a central clearing house counterparty.
Otherwise, our exposure to CDS protection providers is diversified
among mainly banking counterparties with strong credit ratings.
CDS mitigants are held at portfolio level and are not reported
in the presentation below.
Collateral on loans and advances
The collateral measured in the following tables consists of
fixed first charges on real estate, and charges over cash and
marketable financial instruments. The values in the tables
represent the expected market value on an open market basis; no
adjustment has been made to the collateral for any expected costs
of recovery. Marketable securities are measured at their fair
value.
Other types of collateral such as unsupported guarantees and
floating charges over the assets of a customer's business are not
measured in the following tables. While such mitigants have value,
often providing rights in insolvency, their assignable value is not
sufficiently certain and they are therefore assigned no value for
disclosure purposes.
The LTV ratios presented are calculated by directly associating
loans and advances with the collateral that individually and
uniquely supports each facility. When collateral assets are shared
by multiple loans and advances, whether specifically or, more
generally, by way of an all monies charge, the collateral value is
pro-rated across the loans and advances protected by the
collateral.
For credit-impaired loans, the collateral values cannot be
directly compared with impairment allowances recognised. The LTV
figures use open market values with no adjustments.
Impairment allowances are calculated on a different basis, by
considering other cash flows and adjusting collateral values for
costs of realising collateral.
Personal lending
The following table provides a quantification of the value of
fixed charges we hold over specific assets where we have a history
of enforcing, and are able to enforce, collateral in satisfying a
debt in the event of the borrower failing to meet its contractual
obligations, and where the collateral is cash or can be realised by
sale in an established market. The collateral valuation excludes
any adjustments for obtaining and selling the collateral and, in
particular, loans shown as not collateralised or partially
collateralised may also benefit from other forms of credit
mitigants.
Residential mortgages including loan commitments by level of collateral
(Audited)
-------------------------------- --------------------------------
2019 2018
Gross Gross
carrying/nominal ECL carrying/nominal ECL
amount coverage amount coverage
HK$m % HK$m %
Stage 1
Fully collateralised 1,044,885 0.0 965,164 0.0
LTV ratio:
---------------------------------------
- less than 70% 914,665 0.0 859,476 0.0
- 71% to 90% 108,813 0.0 89,821 0.0
- 91% to 100% 21,407 0.0 15,867 0.1
----------------- -----------------
Partially collateralised (A): 2,525 - 3,121 0.0
-----------------
- collateral value on A 2,445 2,792
-----------------
Total 1,047,410 0.0 968,285 0.0
--------------------------------------- -----------------
Stage 2
Fully collateralised 26,748 0.3 20,638 0.4
-----------------
LTV ratio:
---------------------------------------
- less than 70% 19,430 0.1 15,913 0.2
- 71% to 90% 6,743 0.7 4,277 0.7
- 91% to 100% 575 2.3 448 2.9
----------------- -----------------
Partially collateralised (B): 151 6.6 93 4.3
-----------------
- collateral value on B 139 83
Total 26,899 0.4 20,731 0.4
---------------------------------------
Stage 3
Fully collateralised 1,997 6.9 1,694 9.3
LTV ratio:
---------------------------------------
- less than 70% 1,433 3.4 1,210 4.9
- 71% to 90% 422 13.5 371 16.4
- 91% to 100% 142 22.5 113 32.7
Partially collateralised (C): 97 59.8 88 43.2
- collateral value on C 85 80
Total 2,094 9.4 1,782 10.9
---------------------------------------
At 31 Dec 1,076,403 0.0 990,798 0.0
-----------------
Other personal lending
Other personal lending consists primarily of personal loans,
overdrafts and credit cards, all of which are generally unsecured,
except lending to private banking customers which are generally
secured.
Commercial real estate loans and advances
The value of commercial real estate collateral is determined by
using a combination of external and internal valuations and
physical inspections. For CRR 1-7, local valuation policies
determine the frequency of review on the basis of local market
conditions because of the complexity of valuing collateral for
commercial real estate. For CRR 8-10, almost all collateral would
have been revalued within the last three years. In Hong Kong,
market practice is typically for lending to major property
companies to be either secured by guarantees or unsecured.
Commercial real estate loans and advances including loan commitments
by level of collateral
(Audited)
2019 2018
Gross
Gross carrying/
carrying/nominal ECL nominal ECL
amount coverage amount coverage
HK$m % HK$m %
Stage 1
Not collateralised 344,010 0.0 352,258 0.0
Fully collateralised 387,796 0.1 363,729 0.1
Partially collateralised (A): 27,155 0.1 31,107 0.1
- collateral value on A 15,724 17,246
Total 758,961 0.1 747,094 0.0
Stage 2
Not collateralised 5,326 0.9 10,228 0.2
Fully collateralised 17,781 1.0 19,440 0.6
Partially collateralised (B): 589 0.3 1,235 0.8
- collateral value on B 423 702
Total 23,696 1.0 30,903 0.5
Stage 3
Not collateralised - - - -
Fully collateralised 165 9.1 129 0.8
Partially collateralised (C): - - - -
- collateral value on C - -
Total 165 9.1 129 0.8
POCI
Not collateralised - - - -
Fully collateralised - - - -
Partially collateralised (D): - - - -
- collateral value on D - -
Total - - - -
At 31 Dec 782,822 0.1 778,126 0.1
Corporate, commercial and non-bank financial institutions
lending
Other corporate, commercial and financial (non-bank) loans are
analysed separately in the following table. For financing
activities in other corporate and commercial lending, collateral
value is not strongly correlated to principal repayment
performance.
Collateral values are generally refreshed when an obligor's
general credit performance deteriorates and we have to assess the
likely performance of secondary sources of repayment should it
prove necessary to rely on them.
Accordingly, the following table reports values only for
customers with CRR 8-10, recognising that these loans and advances
generally have valuations that are comparatively recent.
Other corporate, commercial and non-bank financial institutions loans
and advances including loan commitments by level of collateral
(Audited)
2019 2018
Gross Gross
carrying/nominal carrying/nominal
amount ECL coverage amount ECL coverage
HK$m % HK$m %
Stage 1
Not collateralised 2,164,436 0.1 2,156,281 0.0
Fully collateralised 345,386 0.1 352,225 0.1
Partially collateralised (A): 242,433 0.1 260,184 0.1
- collateral value on A 103,251 108,264
Total 2,752,255 0.1 2,768,690 0.1
Stage 2
Not collateralised 191,455 0.6 149,977 0.4
Fully collateralised 108,229 0.6 34,740 0.6
Partially collateralised (B): 37,016 0.3 27,608 0.4
- collateral value on B 16,629 10,987
Total 336,700 0.6 212,325 0.4
Stage 3
Not collateralised 6,815 78.4 8,339 69.1
Fully collateralised 2,005 46.0 2,536 34.8
Partially collateralised (C): 2,353 60.5 3,361 51.6
- collateral value on C 1,046 1,237
Total 11,173 68.8 14,236 58.9
POCI
------------
Not collateralised 706 11.5 204 20.1
Fully collateralised 200 0.5 243 0.8
Partially collateralised (D): 246 88.6 274 86.5
- collateral value on D 233 269
Total 1,152 26.0 721 38.8
At 31 Dec 3,101,280 0.4 2,995,972 0.4
1 31 December 2018 balances have been restated to include
HK$79bn of undrawn commitments not previously identified for
disclosure.
Other credit risk exposures
(Unaudited)
In addition to collateralised lending described above, other
credit enhancements are employed and methods used to mitigate
credit risk arising from financial assets. These are summarised
below:
-- Some securities issued by governments, banks and other
financial institutions may benefit from additional credit
enhancements provided by government guarantees that cover the
assets.
-- Debt securities issued by banks and financial institutions
include asset-backed securities ('ABSs') and similar instruments,
which are supported by underlying pools of financial assets. Credit
risk associated with ABSs is reduced through the purchase of credit
default swap ('CDS') protection
-- The group's maximum exposure to credit risk includes
financial guarantees and similar contracts granted, as well as loan
and other credit-related commitments. Depending on the terms of the
arrangement, we may use additional credit mitigation if a guarantee
is called upon or a loan commitment is drawn and subsequently
defaults.
Derivatives
(Unaudited)
We participate in transactions exposing us to counterparty
credit risk. Counterparty credit risk is the risk of financial loss
if the counterparty to a transaction defaults before satisfactorily
settling it. It arises principally from over-the-counter ('OTC')
derivatives and securities financing transactions and is calculated
in both the trading and non-trading books. Transactions vary in
value by reference to a market factor such as an interest rate,
exchange rate or asset price.
The counterparty risk from derivative transactions is taken into
account when reporting the fair value of derivative positions. The
adjustment to the fair value is known as the credit value
adjustment ('CVA').
Liquidity and funding risk
(Audited)
Overview
Liquidity risk is the risk that we do not have sufficient
financial resources to meet our obligations as they fall due or
that we can only do so at an excessive cost. Liquidity risk arises
from mismatches in the timing of cash flows.
Funding risk is the risk that funding considered to be
sustainable, and therefore used to fund assets, is not sustainable
over time. Funding risk arises when illiquid asset positions cannot
be funded at the expected terms and when required.
Liquidity and funding risk profile
We maintain a comprehensive liquidity and funding risk
management framework ('LFRF'), which aims to allow us to withstand
severe liquidity stresses. It is based on global policies that are
designed to be adaptable to different business models, markets and
regulations. The LFRF comprises policies, metrics and controls
designed to ensure that group and entity management have oversight
of our liquidity and funding risks in order to manage them
appropriately.
We manage liquidity and funding risk at an operating entity
level to ensure that obligations can be met in the jurisdiction
where they fall due, generally without reliance on other parts of
the group. Operating entities are required to meet internal minimum
requirements and any applicable regulatory requirements at all
times. These requirements are set against the group's
implementation of the liquidity coverage ratio ('LCR') and the net
stable funding ratio ('NSFR'). Each entity is required to undertake
a qualitative and quantitative assessment of the contractual and
behavioural profile of its assets and liabilities when setting
internal limits in order to reflect their expected behaviour under
idiosyncratic, market-wide and combined stress scenarios.
Structure and organisation
Asset, Liability and Capital Management ('ALCM') teams are
responsible for the application of the LFRF at a local operating
entity level. The elements of the LFRF are underpinned by a robust
governance framework, the two major elements of which are:
-- Asset and Liability Management Committees ('ALCOs') at the group and entity level; and
-- annual internal liquidity adequacy assessment process
('ILAAP') used to validate risk tolerance and set risk
appetite.
All operating entities are required to prepare an internal
liquidity adequacy assessment ('ILAA') document at appropriate
frequency. The final objective of the ILAA, approved by the
relevant ALCOs, is to verify that the entity and subsidiaries
maintain liquidity resources which are adequate in both amount and
quality at all times, there is no significant risk that its
liabilities cannot be met as they fall due, and a prudent funding
profile is maintained.
The Board is ultimately responsible for determining the types
and magnitude of liquidity risk that the group is able to take and
ensuring that there is an appropriate organisation structure for
managing this risk. Under authorities delegated by the Board, the
group ALCO is responsible for managing all ALCM issues including
liquidity and funding risk management. The group ALCO delegates to
the group Tactical Asset and Liability Management Committee
('TALCO') the task of reviewing various analyses of the group
pertaining to sites' liquidity and funding.
Compliance with liquidity and funding requirements is monitored
by local ALCO who report to the RMM and Executive Committee on a
regular basis. This process includes:
-- maintaining compliance with relevant regulatory requirements of the operating entity;
-- projecting cash flows under various stress scenarios and
considering the level of liquid assets necessary in relation
thereto;
-- monitoring liquidity and funding ratios against internal and regulatory requirements;
-- maintaining a diverse range of funding sources with adequate back-up facilities;
-- managing the concentration and profile of term funding;
-- managing contingent liquidity commitment exposures within pre-determined limits;
-- maintaining debt financing plans;
-- monitoring of depositor concentration in order to avoid undue
reliance on large individual depositors and ensuring a satisfactory
overall funding mix; and
-- maintaining liquidity and funding contingency plans. These
plans identify early indicators of stress conditions and describe
actions to be taken in the event of difficulties arising from
systemic or other crises, while minimising adverse long-term
implications for the business.
Governance
ALCM teams apply the LFRF at both an individual entity and group
level, and are responsible for the implementation of Group-wide and
local regulatory policy at a legal entity level. Balance Sheet
Management ('BSM') has responsibility for cash and liquidity
management.
Liquidity Risk Management carry out independent review,
challenge and assurance of the appropriateness of the risk
management activities undertaken by ALCM and BSM. Their work
includes setting control standards, advice on policy
implementation, and review and challenge of reporting.
Internal Audit provide independent assurance that risk is
managed effectively.
Management of liquidity and funding risk
Liquidity coverage ratio
(Unaudited)
The LCR aims to ensure that a bank has sufficient unencumbered
high-quality liquid assets ('HQLA') to meet its liquidity needs in
a 30 calendar day liquidity stress scenario.
At 31 December 2019, all the group's principal operating
entities were well above regulatory minimums and above the
internally expected levels.
Net stable funding ratio
(Unaudited)
HSBC uses the NSFR as a basis for ensuring operating entities
raise sufficient stable funding to support their business
activities. The NSFR requires institutions to maintain minimum
amount of stable funding based on assumptions of asset
liquidity.
At 31 December 2019, all the group's principal operating
entities were above the internally expected levels.
Depositor concentration and term funding maturity
concentration
(Unaudited)
The LCR and NSFR metrics assume a stressed outflow based on a
portfolio of depositors within retail, corporate and financial
deposit segments. The validity of these assumptions is challenged
if the portfolio of depositors is not large enough to avoid
depositor concentration.
Operating entities are exposed to term refinancing concentration
risk if the current maturity profile results in future maturities
being overly concentrated in any defined period.
At 31 December 2019, all the group's principal operating
entities were above the internally expected levels.
Sources of funding
(Audited)
Our primary sources of funding are customer current accounts and
customer savings deposits payable on demand or at short notice. We
issue wholesale securities (secured and unsecured) to supplement
our customer deposits and change the currency mix, maturity profile
or location of our liabilities.
Currency mismatch in the LCR
(Unaudited)
The LFRF requires all operating entities to monitor material
single currency LCR. Limits are set to ensure that outflows can be
met, given assumptions on stressed capacity in the FX swap
markets.
Liquidity and funding risk in 2019
(Unaudited)
The group is required to calculate its LCR and NSFR on a
consolidated basis in accordance with rule 11(1) of The Banking
(Liquidity) Rules ('BLR'). The group is required to maintain both
LCR and NSFR of not less than 100%.
The average LCRs for the period are as follows:
Quarter ended
31 Dec 31 Dec
2019 2018
% %
Average LCRs 163.5 161.0
--------------
The liquidity position of the group remained strong in 2019. The
average LCR increased by 2.5% from 161.0% for the quarter ended 31
December 2018 to 163.5% for the quarter ended
31 December 2019, mainly as a result of the increase in customer
deposits exceeding the growth in loans and advances to
customers.
The majority of HQLA included in the LCR are Level 1 assets as
defined in the BLR, which consist mainly of government debt
securities.
The total weighted amount of HQLA for the period are as
follows:
Weighted amount
(average value)
at quarter
ended
31 Dec 31 Dec
2019 2018
HK$m HK$m
Level 1 assets 1,528,908 1,489,744
Level 2A assets 80,174 67,333
Level 2B assets 10,788 9,638
-----------------
Total 1,619,870 1,566,715
-----------------
The NSFRs for the period are as follows:
Quarter ended
31 Dec 31 Dec
2019 2018
% %
Net stable funding ratio 145.8 149.7
--------------------------
The funding position of the group remained robust in 2019,
highlighting a surplus of stable funding relative to the required
stable funding requirement. The NSFR decreased by 3.9% from 149.7%
for the quarter ended 31 December 2018 to 145.8% for the quarter
ended 31 December 2019.
Interdependent assets and liabilities included in the group's
NSFR are certificates of indebtedness held and legal tender notes
issued.
Additional contractual obligations
(Unaudited)
Under the terms of our current collateral obligations under
derivative contracts (which are ISDA compliant CSA contracts), the
additional collateral required to post in the event of one-notch
and two-notch downgrade in credit ratings is immaterial.
Further details of the group's liquidity information disclosures
can be viewed in the Banking Disclosure Statement 2019, which will
be available in the Regulatory Disclosure Section of our website:
www.hsbc.com.hk.
Market Risk
(Audited)
Overview
Market risk is the risk that movements in market factors, such
as foreign exchange rates, interest rates, credit spreads, equity
prices and commodity prices, will reduce our income or the value of
our portfolios. Exposure to market risk is separated into two
portfolios: trading portfolios and non-trading portfolios.
Market risk management
Key developments in 2019
There were no material changes to our policies and practices for
the management of market risk in 2019.
Governance and structure
The following diagram summarises the main business areas where
trading and non-trading market risks reside, and the market risk
measures used to monitor and limit exposures.
Trading risk
* Foreign exchange and commodities * Structural foreign exchange
* Interest rates * Interest rates
* Credit spreads * Credit spreads
* Equities
Global GB&M incl GB&M, BSM (1)
business BSM (1) ,
GPB, CMB and
RBWM
Risk measure VaR | Sensitivity VaR | Sensitivity
| Stress Testing | Stress Testing
1 Balance Sheet Management ('BSM'), for external reporting
purposes, forms part of the Corporate Centre while daily operations
and risk are managed within GB&M.
Where appropriate, we apply similar risk management policies and
measurement techniques to both trading and non-trading portfolios.
Our objective is to manage and control market risk exposures to
optimise return on risk while maintaining a market profile
consistent with our established risk appetite. Strategies range
from the use of traditional market instruments, such as interest
rate swaps, to more sophisticated hedging strategies to address a
combination of risk factors arising at portfolio level.
Key risk management processes
(Audited)
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with our risk
appetite.
We use a range of tools to monitor and limit market risk
exposures including sensitivity analysis, VaR and stress
testing.
Sensitivity analysis
(Unaudited)
Sensitivity analysis measures the impact of individual market
factor movements on specific instruments or portfolios, including
interest rates, foreign exchange rates and equity prices. We use
sensitivity measures to monitor the market risk positions within
each risk type. Granular sensitivity limits are set primarily for
trading desks with consideration of market liquidity, customer
demand and capital constraints, among other factors.
Value at risk
Value at risk ('VaR') is a technique for estimating potential
losses on risk positions as a result of movements in market rates
and prices over a specified time horizon and to a given level of
confidence. The use of VaR is integrated into market risk
management and calculated for all trading positions regardless of
how we capitalise them. In addition, we calculate VaR for
non-trading portfolios to have a complete picture of risk. Where we
do not calculate VaR explicitly, we use alternative tools as
summarised in the 'Stress testing' section below.
Our models are predominantly based on historical simulation that
incorporates the following features:
-- historical market rates and prices, which are calculated with
reference to foreign exchange rates, commodity prices, interest
rates, equity prices and the associated volatilities;
-- potential market movements which are calculated with
reference to data from the past two years; and
-- these are calculated to a 99% confidence level and using a one-day holding period.
The models also incorporate the effect of option features on the
underlying exposures. The nature of the VaR models means that an
increase in observed market volatility will lead to an increase in
VaR without any changes in the underlying positions.
VaR model limitations
Although a valuable guide to risk, VaR should always be viewed
in the context of its limitations. For example:
-- the use of historical data as a proxy for estimating future
market moves may not encompass all potential market events,
particularly those that are extreme in nature.
-- the use of a one-day holding period for risk management
purposes of trading and non-trading books assumes that this short
period is sufficient to hedge or liquidate all positions.
-- the use of a 99% confidence level by definition does not take
into account losses that might occur beyond this level of
confidence.
-- VaR is calculated on the basis of exposures outstanding at
the close of business and therefore does not reflect intra-day
exposures.
Risk not in VaR framework
(Unaudited)
The risks not in VaR ('RNIV') framework aims to capture and
capitalise material market risks that are not adequately covered in
the VaR model.
Risk factors are reviewed on a regular basis and are either
incorporated directly in the VaR models, where possible, or
quantified through either the VaR-based RNIV approach or a stress
test approach within the RNIV framework. While VaR-based RNIVs are
calculated by using historical scenarios, stress-type RNIVs are
estimated on the basis of stress scenarios whose severity is
calibrated to be in line with the capital adequacy requirements.
The outcome of the VaR-based RNIV approach is included in the
overall VaR calculation but excluded from the VaR measure used for
regulatory back-testing. In addition, stressed VaR also captures
risk factors considered in the VaR-based RNIV approach. Stress-type
RNIVs include a de-peg risk measure to capture risk to pegged and
heavily-managed currencies.
Stress testing
(Audited)
Stress testing is an important procedure that is integrated into
our market risk management framework to evaluate the potential
impact on portfolio values of more extreme, although plausible,
events or movements in a set of financial variables. In such
scenarios, losses can be much greater than those predicted by VaR
modelling.
Stress testing is implemented at legal entity, regional and
overall Group levels. A set of scenarios is used consistently
across all regions within the Group. The risk appetite around
potential stress losses for the Group is set and monitored against
a referral limit.
Market risk reverse stress tests are designed to identify
vulnerabilities in our portfolios by looking for scenarios that
lead to loss levels considered severe for the relevant portfolio.
These scenarios may be quite local or idiosyncratic in nature, and
complement the systematic top-down stress testing.
Stress testing and reverse stress testing provide senior
management with insights regarding the 'tail risk' beyond VaR, for
which our appetite is limited.
Back-testing
We routinely validate the accuracy of our VaR models by
back-testing them with both actual and hypothetical profit and loss
against the corresponding VaR numbers. Hypothetical profit and loss
excludes non-modelled items such as fees, commissions and revenue
of intra-day transactions.
The actual number of profits or losses in excess of VaR over
this period can be used to gauge how well the models are
performing. A VaR model is deemed satisfactory if it experiences
less than five profit or loss exceptions in a 250-day period.
We back-test our VaR at various levels of our group entity
hierarchy.
Market risk in 2019
(Unaudited)
The market environment in year 2019 was dominated by headline
geopolitical events of US-China trade tensions, uncertainty of the
UK's exit from the European Union, and the busy election calendar
in Asia. Amid the prospect of economic slowdown, Asian central
banks and governments responded by monetary and fiscal easing and
are expected to ease further. In 2020, the market backdrop of
continuing trade and geopolitical tensions as well as the upcoming
US presidential election could add to the market uncertainty and
volatilities.
Trading portfolios
(Audited)
Value at risk of the trading portfolios
Trading VaR predominantly resides within Global Markets.
Total trading VaR (excluding Risk not in VaR) was lower as
at
31 December 2019 compared to 31 December 2018 due to reduction
in credit VaR and interest rate VaR, as trading positions were
managed down.
The trading VaR for the year is shown in the table below.
Trading value at risk, 99% 1 day(1)
(Audited)
Foreign
exchange Interest Credit Portfolio
and commodity rate Equity spread diversification(2) Total(3,4)
HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2019
Year end 48 90 50 24 (110) 140
Average 38 102 38 34 157
Maximum 58 145 63 81 210
At 31 Dec 2018
Year end 43 123 51 42 (123) 136
Average 35 150 30 33 163
Maximum 59 199 58 75 222
1 Trading portfolios comprise positions arising from the
market-making and warehousing of customer-derived positions.
2 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types, for example,
interest rate, equity and foreign exchange, together in one
portfolio. It is measured as the difference between the sum of the
VaR by individual risk type and the combined total VaR. A negative
number represents the benefit of portfolio diversification. As the
maximum and minimum occur on different days for different risk
types, it is not meaningful to calculate a portfolio
diversification benefit for these measures.
3 The total VaR includes HK$38m Risk not in VaR ('RNIV') for the year ended 31 December 2019.
4 The RNIV was excluded for year 2018. 2018 year end total VaR including RNIV was HK$187m.
Non-trading portfolios
(Unaudited)
Banking book interest rate risk is the risk of an adverse impact
to earnings or capital due to changes in market interest rates. The
risk arises from timing mismatches in the repricing of non-traded
assets and liabilities and is the potential adverse impact of
changes in interest rates on earnings and capital. In its
management of the risk, the group aims to mitigate the impact of
future interest rate movements which could reduce future net
interest income, while balancing the cost of hedging activities to
the current revenue stream. Monitoring the sensitivity of projected
net interest income under varying interest rate scenarios is a key
part of this.
In order to manage structural interest rate risk, non-traded
assets and liabilities are transferred to Balance Sheet Management
('BSM') based on their repricing and maturity characteristics. For
assets and liabilities with no defined maturity or repricing
characteristics, behaviouralisation is used to assess the interest
rate risk profile. BSM manages the banking book interest rate
positions transferred to it within the approved limits. Local ALCOs
are responsible for monitoring and reviewing their overall
structural interest rate risk position. Interest rate
behaviouralisation policies have to be formulated in line with the
Group's behaviouralisation policies and approved at least annually
by local ALCOs.
Sensitivity of net interest income
A principal part of our management of non-traded interest rate
risk is to monitor the sensitivity of expected net interest income
at least quarterly under varying interest rate scenarios, where all
other economic variables are held constant.
Sensitivity of net interest income reflects the group's
sensitivity of earnings due to changes in market interest rates.
Entities forecast net interest income sensitivities across a range
of interest rate scenarios based on a static balance sheet
assumption. Balance sheet projection is modelled based on no
management actions i.e. the risk profile at the month end is
assumed to remain constant throughout the forecast horizon.
Sensitivity of economic value of equity
Economic value of equity ('EVE') represents the present value of
the future banking book cash flows that could be distributed to
equity providers under a managed run-off scenario. This equates to
the current book value of equity plus the present value of future
net interest income in this scenario. EVE can be used to assess the
economic capital required to support interest rate risk in the
banking book ('IRRBB'). An EVE sensitivity is the extent to which
the EVE value will change due to pre-specified movements in
interest rates, where all other economic variables are held
constant. Operating entities are required to monitor EVE
sensitivity as a percentage of Tier 1 capital resources.
Structural foreign exchange exposures
(Unaudited)
Structural foreign exchange exposures represent net investments
in subsidiaries, branches and associates, the functional currencies
of which are currencies other than the HK dollar. An entity's
functional currency is normally that of the primary economic
environment in which the entity operates.
Exchange differences on structural exposures are recognised in
'Other comprehensive income'.
Our structural foreign exchange exposures are managed with the
primary objective of ensuring, where practical, that our
consolidated capital ratios and the capital ratios of individual
banking subsidiaries are largely protected from the effect of
changes in exchange rates. We hedge structural foreign exchange
exposures only in limited circumstances.
The group had the following structural foreign currency
exposures that were not less than 10% of the total net structural
foreign currency positions:
LCYm HK$m equivalent
At 31 Dec 2019
Renminbi 201,509 225,392
------- ---------------
At 31 Dec 2018
Renminbi 189,054 215,266
Resilience risk
(Unaudited)
Overview
Resilience risk is the risk that we are unable to provide
critical services to our customers, affiliates and counterparties,
as a result of sustained and significant operational
disruption.
Resilience risk arises from failures or inadequacies in
processes, people, systems or external events. These may be driven
by rapid technological innovation, changing behaviours of our
consumers, cyber-threats, cross-border dependencies and third-party
relationships.
Resilience risk management
Key developments in 2019
In May 2019, in line with our simplified risk taxonomy, we
formed a new Resilience Risk sub-function to ensure our operations
continue functioning when an operational disturbance occurs. Our
resilience strategy is focused on the establishment of robust
back-up plans, detailed response methods, alternative delivery
channels and recovery options. Resilience risk was formed to
simplify the way we interact with our stakeholders and to deliver
clear, consistent and credible responses globally. Investment in
information technology ('IT') Resilience is central to this
commitment. Designing and implementing IT Systems that continue to
be available to use, in the face of adverse conditions is a key
objective. We seek to ensure that we understand the root cause of
IT failures and learn lessons both from our own experiences and
those of others.
We have undertaken a number of initiatives to develop and embed
the new sub-function:
-- We recruited and consolidated personnel from previously
independent risk functions, in Information and Cyber Security;
Protective Security; Business Continuity and Incident Management;
Third-party; and Systems, Data Integrity and Transaction
Processing.
-- We adopted a new model that allows us to provide a globally
consistent view across Resilience Risk in order to strengthening
risk management oversight.
-- We developed a target operating model to set out our desired
state for the function. We identified areas where we need to
develop the resilience risk vision.
-- We used internal and external channels to recruit a
leadership team that is aligned to our core values of being open,
dependable and connected.
Governance and structure
Resilience Risk provides guidance and stewardship to our
businesses and global functions about how we can prevent, adapt,
and learn from resilience-related threats when something goes
wrong. We view resilience through six lenses: strategic change and
emerging threats; third-party risk; information and data
resilience; payments and processing resilience; systems and cyber
resilience; and protective security risk.
The Resilience Risk Management Committee oversees resilience
risk and has accountability to the Global Risk Management Board.
The Resilience Risk Management Committee is supported by its
subcommittees that provide oversight over each of the respective
Resilience Risk sub-teams.
Key risk management processes
Operational resilience is our ability to adapt operations to
continue functioning when an operational disturbance occurs. We
measure resilience in terms of the maximum disruption period or the
impact tolerance that we are willing to accept for a business
service. Resilience risk cannot be managed down to zero, so we
concentrate on critical business and strategic change programmes
that have the highest potential to threaten our ability to provide
continued service to our customers. Our resilience strategy is
focused on the establishment of robust back-up plans, detailed
response methods, alternative delivery channels and recovery
options.
The Resilience Risk team oversees the identification, management
and control of resilience risks.
Regulatory compliance risk
(Unaudited)
Overview
Regulatory compliance risk is the risk that we fail to observe
the letter and spirit of all relevant laws, codes, rules,
regulations and standards of good market practice, which as a
consequence incur fines and penalties and suffer damage to our
business.
Regulatory compliance risk arises from the risks associated with
breaching our duty to our customers and other counterparties,
inappropriate market conduct and breaching other regulatory
requirements.
Regulatory compliance risk management
Key developments in 2019
There were no material changes to the practices for the
management of regulatory compliance risk in 2019, except for the
initiatives that we undertook to raise our standards in relation to
the conduct of our business, as described below under 'Conduct of
business'.
Governance and structure
The Regulatory Compliance sub-function provides independent,
objective oversight and challenge, and promotes a
compliance-orientated culture that supports the business in
delivering fair outcomes for customers, maintaining the integrity
of financial markets and achieving the group's strategic
objectives.
Regulatory Compliance is part of the Compliance function, which
is headed by the Group Chief Compliance Officer. Regulatory
Compliance is structured as a global sub-function with regional and
country Regulatory Compliance teams, which support and advise each
global business and global function.
Key risk management processes
We regularly review our policies and procedures. Global policies
and procedures require the prompt identification and escalation of
any actual or potential regulatory breach to Regulatory Compliance.
Reportable events are escalated to the RMM and the Risk Committee,
as appropriate.
Conduct of business
In 2019, we continued to promote and encourage good conduct
through our people's behaviour and decision making in order to
deliver fair outcomes for our customers, and to maintain financial
market integrity. During 2019:
-- We developed and implemented a set of principles to govern
the ethical management and use of data and artificial intelligence
('AI'), which includes support of digital products and services.
This was complemented with training of our people to use customer
data appropriately.
-- We continued to focus on the needs of vulnerable customers in
our product and process design. In specific markets, we provided
awareness and training initiatives, and we also deployed staff with
specialist knowledge of conditions such as dementia. Financial
inclusion initiatives progressed in specific markets, combating
financial abuse and developing financial education schemes for
older customers.
-- We further defined roles and responsibilities for our people
as part of the enterprise risk management framework across the
group to consider the customer in decision making and action.
-- We delivered our fifth annual global mandatory training
course on conduct, and reinforced the importance of conduct by
highlighting examples of good conduct.
-- We continued the expansion of recognition programmes across
business areas for our people when they deliver exceptional
service, when working directly with customers or in supporting
roles.
Financial crime and fraud risk
(Unaudited)
Overview
Financial crime and fraud risk is the risk that we knowingly or
unknowingly help parties to commit or to further potentially
illegal activity. Financial crime and fraud risk arises from
day-to-day banking operations.
Financial crime and fraud risk management
Key developments in 2019
During 2019, we continued to increase our efforts to strengthen
our ability to combat financial crime. We integrated into our
day-to-day operations the majority of the financial crime risk core
capabilities delivered through the Global Standards programme,
which we set up in 2013 to enhance our risk management policies,
processes and systems. We have begun several initiatives to define
the next phase of financial crime risk management.
-- We continued to strengthen our anti-fraud capabilities,
focusing on threats posed by new and existing technologies, and
have delivered a comprehensive fraud training programme to our
people.
-- We continued to invest in the use of artificial intelligence
('AI') and advanced analytics techniques to develop a financial
crime risk management framework for the future.
-- We launched advanced anti-money laundering ('AML') and
sanctions automation systems to detect and disrupt financial crime
in international trade. These systems are designed to strengthen
our ability to fight financial crime through the detection of
suspicious activity and possible criminal networks.
Governance and structure
Since establishing a global framework of Financial Crime Risk
Management Committees in the first quarter of 2018, we have
continued to strengthen and review the effectiveness of our
governance framework to manage financial crime risk. Formal
governance committees are held across all countries, territories,
regions and lines of business, and are chaired by the respective
chief executive officers. They help to enable compliance with the
letter and the spirit of all applicable financial crime compliance
laws and regulations, as well as our own standards, values and
policies relating to financial crime risks.
Key risk management processes
We continued to deliver a programme to further enhance the
policies and controls around identifying and managing the risks of
bribery and corruption across our business. Our transformation
programme continued to focus on our anti-fraud and anti-tax evasion
capabilities. Further enhancements have been made to our governance
and policy frameworks, and to the management information reporting
process which demonstrates the effectiveness of our financial crime
controls.
We are investing in the next generation of capabilities to fight
financial crime by applying advanced analytics and AI. We remain
committed to enhancing our risk assessment capabilities and to
delivering more proactive risk management.
Working in partnership with the public sector and other
financial institutions is vital to managing financial crime risk.
We are a strong proponent of public-private partnerships and
participate in information-sharing initiatives around the world to
better understand these risks so that they can be mitigated more
effectively.
Skilled Person/Independent Consultant
Following expiration in December 2017 of the anti-money
laundering Deferred Prosecution Agreement entered into with the US
Department of Justice ('DoJ'), the then Monitor has continued to
work in his capacity as a Skilled Person under Section 166 of the
Financial Services and Markets Act under the Direction issued by
the UK Financial Conduct Authority ('FCA') in 2012. He has also
continued to work in his capacity as an Independent Consultant
under a cease-and-desist order issued by the US Federal Reserve
Board ('FRB').
The Skilled Person has assessed HSBC's progress towards being
able to effectively manage its financial crime risk on a
business-as-usual basis. The Skilled Person issued several reports
in 2019. The Skilled Person has noted that HSBC continues to make
material progress towards its financial crime risk target end state
in terms of key systems, processes and people. Nonetheless, the
Skilled Person has identified some areas that require further work
before HSBC reaches a business-as-usual state. Reflective of HSBC's
significant progress in strengthening its financial crime risk
management capabilities, HSBC's engagement with the current Skilled
Person will be terminated and a new Skilled Person with a narrower
mandate will be appointed to assess the remaining areas that
require further work in order for HSBC to transition fully to
business-as-usual financial crime risk management. The FCA also
intends to take steps to maintain global oversight of HSBC's
management of financial crime risk.
The Independent Consultant completed his sixth annual
assessment, which was primarily focused on HSBC's Sanctions
programme. The Independent Consultant concluded that HSBC continues
to make significant strides toward establishing an effective
Sanctions compliance programme, commending HSBC's material progress
since the fifth annual assessment in 2018. However, he has
determined that certain areas within HSBC's sanctions compliance
programme require further work. A seventh annual assessment will
take place in the first quarter of 2020. The Independent Consultant
will continue to carry out an annual Office of Foreign Assets
Control compliance review, at the FRB's discretion.
Model risk
(Unaudited)
Overview
Model risk is the potential for adverse consequences from
business decisions informed by models, which can be exacerbated by
errors in methodology, design or the way they are used. Model risk
arises in both financial and non-financial contexts whenever
business decision making includes reliance on models.
Key developments in 2019
In September 2019, we carried out a number of initiatives to
further develop and embed the new Model Risk Management
sub-function, including:
-- We appointed a Regional Head of Model Risk Management in Asia-Pacific.
-- We refined the model risk policy to enable a more risk-based
approach to model risk management.
-- We conducted a full review of model governance arrangements
overseeing model risk across the group, resulting in a range of
enhancements to the underlying structure to improve effectiveness
and increase business engagement.
-- We designed a new target operating model for Model Risk
Management, referring to internal and industry best practice.
Governance and structure
We have placed greater focus on our model risk activities during
2019. To reflect this, Group has created the role of Chief Model
Risk Officer, which for group is undertaken by the Head of Model
Risk Management. Model Risk Management is structured as a
sub-function within Regional Risk Strategy. Regional Model Risk
Management support and advise all areas of the group, headed by the
Regional Model Risk Steward.
Key risk management processes
We regularly review our model risk management policies and
procedures, and require the first line of defence to demonstrate
comprehensive and effective controls based on a library of model
risk controls provided by Model Risk Management.
Model Risk Management reports on model risk to senior management
through use of the risk map and regular key updates. We also review
the effectiveness of these processes, including the regional model
oversight committee structure, to ensure appropriate understanding
and ownership of model risk is embedded in the businesses and
functions.
Insurance manufacturing operations
risk
management
(Audited)
Overview
Insurance risk is the risk that, over time, the cost of
insurance policies written, including claims and benefits, may
exceed the total amount of premiums and investment income received.
The cost of claims and benefits can be influenced by many factors,
including mortality and morbidity experience, as well as lapse and
surrender rates.
Insurance manufacturing operations risk management
Key developments in 2019
(Unaudited)
There were no material changes to our policies and practices for
the management of risks arising in our insurance manufacturing
operations in 2019.
Governance
(Unaudited)
Insurance risks are managed to a defined risk appetite, which is
aligned to the group's risk appetite and risk management framework,
including the group's 'Three lines of defence' model. The group's
Insurance Risk Management Meeting oversees the control framework
globally and is accountable to the RBWM Risk Management Meeting on
risk matters relating to insurance business.
The monitoring of the risks within the insurance operations is
carried out by the Insurance Risk teams. Specific risk functions,
including wholesale credit & market risk, operational risk,
information security risk and financial crime compliance, support
insurance risk teams in their respective areas of expertise.
Stress and scenario testing
(Unaudited)
Stress testing forms a key part of the risk management framework
for the insurance business. Where in scope we participate in local
and Group-wide regulatory stress tests, including the Bank of
England stress test of the banking system, the Hong Kong Monetary
Authority stress test, and individual country insurance regulatory
stress tests. These have highlighted that a key risk scenario for
the insurance business is a prolonged low interest rate
environment. In order to mitigate the impact of this scenario, the
insurance operations have a range of strategies that could be
employed, repricing current products to reflect lower interest
rates, moving towards less capital intensive products, and
developing investment strategies to optimise the expected returns
against the cost of economic capital.
Key risk management processes
Market risk
(Audited)
All our insurance manufacturing subsidiaries have market risk
mandates that specify the investment instruments in which they are
permitted to invest and the maximum quantum of market risk that
they may retain. They manage market risk by using, among others,
some or all of the techniques listed below, depending on the nature
of the contracts written:
-- We are able to adjust bonus rates to manage the liabilities
to policyholders for products with discretionary participating
features ('DPF'). The effect is that a significant portion of the
market risk is borne by the policyholder.
-- We use asset and liability matching where asset portfolios
are structured to support projected liability cash flows. The group
manages its assets using an approach that considers asset quality,
diversification, cash flow matching, liquidity, volatility and
target investment return. It is not always possible to match asset
and liability durations, due to several factors such as uncertainty
over the receipt of all future premiums, the timing of claims and
because the forecast payment dates of liabilities may exceed the
duration of the longest dated investments available. We use models
to assess the effect of a range of future scenarios on the values
of financial assets and associated liabilities, and ALCOs employ
the outcomes in determining how best to structure asset holdings to
support liabilities.
-- We use derivatives to protect against adverse market
movements to better support liability cash flows.
-- For new products with investment guarantees, we consider the
cost when determining the level of premiums or the price
structure.
-- We periodically review products identified as higher risk,
such as those that contain investment guarantees and embedded
optionality features linked to savings and investment products, for
active management.
-- We design new products to mitigate market risk, such as
changing the investment return sharing portion between
policyholders and the shareholder.
-- We exit, to the extent possible, investment portfolios whose risk is considered unacceptable.
-- We reprice premiums charged to policyholders.
Credit risk
(Audited)
Our insurance manufacturing subsidiaries are responsible for the
credit risk, quality and performance of their investment
portfolios. Our assessment of the creditworthiness of issuers and
counterparties is based primarily upon internationally recognised
credit ratings, internal credit ratings, and other publicly
available information.
Investment credit exposures are monitored against limits by our
insurance manufacturing subsidiaries and are aggregated and
reported to the Group Insurance Credit Risk and Group Credit Risk
functions. Stress testing is performed on investment credit
exposures using credit spread sensitivities and default
probabilities.
We use a number of tools to manage and monitor credit risk.
These include a credit report containing a watch-list of
investments with current credit concerns, primarily investments
that may be at risk of future impairment or where high
concentrations to counterparties are present in the investment
portfolio. Sensitivities to credit spread risk are assessed and
monitored regularly.
Liquidity risk
(Audited)
Risk is managed by cash flow matching and maintaining sufficient
cash resources, investing in high credit-quality investments with
deep and liquid markets, monitoring investment concentrations and
restricting them where appropriate, and establishing committed
contingency borrowing facilities.
Insurance manufacturing subsidiaries complete quarterly
liquidity risk reports and an annual review of the liquidity risks
to which they are exposed.
Insurance risk
(Unaudited)
The group primarily uses the following techniques to manage and
mitigate insurance risk:
-- a formalised product approval process covering product
design, pricing and overall proposition management (for example,
management of lapses by introducing surrender charges);
-- underwriting policy;
-- claims management processes; and
-- reinsurance which cedes risks above our acceptable thresholds
to an external reinsurer thereby limiting our exposure.
Insurance manufacturing operations risk in 2019
(Unaudited)
The majority of the risk in our insurance business derives from
manufacturing activities and can be categorised as financial risk
or insurance risk. Financial risks include market risk, credit risk
and liquidity risk. Insurance risk is the risk, other than
financial risk, of loss transferred from the holder of the
insurance contract to HSBC, the issuer.
HSBC's bancassurance model
We operate an integrated bancassurance model which provides
insurance products principally for customers with whom we have a
banking relationship. The insurance contracts we sell relate to the
underlying needs of our banking customers, which we can identify
from our point-of-sale contacts and customer knowledge. For the
products we manufacture, the majority of sales are of savings and
investment products.
By focusing largely on personal and small and medium-sized
enterprise businesses, we are able to optimise volumes and
diversify individual insurance risks. We choose to manufacture
these insurance products in HSBC subsidiaries based on an
assessment of operational scale and risk appetite. Manufacturing
insurance allows us to retain the risks and rewards associated with
writing insurance contracts by keeping part of the underwriting
profit and investment income within the group.
We have life insurance manufacturing operations in: Hong Kong,
Singapore and mainland China. We also have a life insurance
manufacturing associate in India.
Where we do not have the risk appetite or operational scale to
be an effective insurance manufacturer, we engage with a handful of
leading external insurance companies in order to provide insurance
products to our customers through our banking network and direct
channels. These arrangements are generally structured with our
exclusive strategic partners and earn the group a combination of
commissions, fees and a share of profits. We distribute insurance
products in all of our geographical regions.
Insurance products are sold through all global businesses, but
predominantly by RBWM and CMB through our branches and direct
channels.
Measurement
(Unaudited)
The risk profile of our insurance manufacturing businesses is
measured using an economic capital approach. Assets and liabilities
are measured on a market value basis and a capital requirement is
defined to ensure that there is a less than one-in-200 chance of
insolvency over a one-year time horizon, given the risks that the
businesses are exposed to. The methodology for the economic capital
calculation is largely aligned to the pan-European Solvency II
insurance capital regulation. The economic capital coverage ratio
(economic net asset value divided by the economic capital
requirement) is a key risk appetite measure.
Insurance entities in Asia manage their economic capital cover
ratios against their appetite and tolerance as approved by their
respective Boards. The tables below show the composition of assets
and liabilities by contract type. 92% (2018: 92%) of both assets
and liabilities are derived from Hong Kong.
Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
Shareholders'
assets and
Non-linked Unit-linked liabilities Total
HK$m HK$m HK$m HK$m
At 31 Dec 2019
Financial assets 501,625 41,893 34,940 578,458
- financial assets designated and otherwise
mandatorily measured at fair value 103,902 40,563 124 144,589
- derivatives 957 4 4 965
- financial investments measured at
amortised cost 374,630 342 31,508 406,480
- financial investments measured at
fair value through other comprehensive
income 4,126 - 395 4,521
- other financial assets(1) 18,010 984 2,909 21,903
---------- ----------- -------
Reinsurance assets 28,031 44 - 28,075
PVIF(2) - - 61,075 61,075
Other assets and investment properties 13,015 2 3,898 16,915
Total assets 542,671 41,939 99,913 684,523
Liabilities under investment contracts
designated at fair value 30,231 6,793 - 37,024
Liabilities under insurance contracts 494,181 34,579 - 528,760
Deferred tax(3) 20 118 9,780 9,918
Other liabilities - - 17,116 17,116
Total liabilities 524,432 41,490 26,896 592,818
Total equity - - 91,705 91,705
Total equity and liabilities 524,432 41,490 118,601 684,523
At 31 Dec 2018
Financial assets 447,459 41,325 34,503 523,287
- financial assets designated at fair
value 82,266 40,106 1,206 123,578
- derivatives 912 - 1 913
- financial investments - held-to-maturity 347,894 547 32,023 380,464
- financial investments - available-for-sale 3,444 - - 3,444
- other financial assets(1) 12,943 672 1,273 14,888
Reinsurance assets 19,045 39 - 19,084
PVIF(2) - - 48,522 48,522
Other assets and investment properties 14,879 - 3,230 18,109
Total assets 481,383 41,364 86,255 609,002
Liabilities under investment contracts
designated at fair value 30,420 6,218 - 36,638
Liabilities under insurance contracts 433,668 34,921 - 468,589
Deferred tax(3) 224 109 7,890 8,223
Other liabilities - - 15,109 15,109
Total liabilities 464,312 41,248 22,999 528,559
Total equity - - 80,443 80,443
Total equity and liabilities 464,312 41,248 103,442 609,002
1 Comprise mainly loans and advances to banks, cash and
inter-company balances with other non-insurance legal entities.
2 Present value of in-force long-term insurance business.
3 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
Key risk types
The key risks for our insurance operations are market risks (in
particular interest rate and equity) and credit risks, followed by
insurance underwriting risks and operational risks. Liquidity risk,
while significant for the bank, is minor for our insurance
operations.
Market risk
(Audited)
Description and exposure
Market risk is the risk of changes in market factors
affecting
capital or profit. Market factors include interest rates, equity
and growth assets and foreign exchange rates.
Our exposure varies depending on the type of contract
issued.
Our most significant life insurance products are contracts
with
discretionary participating features ('DPF') issued in Hong
Kong. These products typically include some form of capital
guarantee or guaranteed return on the sums invested by the
policyholders, to which discretionary bonuses are added if allowed
by the overall performance of the funds. These funds are primarily
invested in bonds, with a proportion allocated to other asset
classes to provide customers with the potential for enhanced
returns.
DPF products expose the group to the risk of variation in asset
returns, which will impact our participation in the investment
performance. In addition, in some scenarios the asset returns can
become insufficient to cover the policyholders' financial
guarantees, in which case the shortfall has to be met by the group.
Reserves are held against the cost of such guarantees, calculated
by stochastic modelling.
Where local rules require, these reserves are held as part of
liabilities under insurance contracts. Any remainder is accounted
for as a deduction from the present value of in-force ('PVIF')
long-term insurance business on the relevant product. The following
table shows the total reserve held for the cost of guarantees, the
range of investment returns on assets supporting these products and
the implied investment return that would enable the business to
meet the guarantees.
For unit-linked contracts, market risk is substantially borne by
the policyholders, but some market risk exposure typically remains
as fees earned are related to the market value of the linked
assets.
Sensitivities
Where appropriate, the effects of the sensitivity tests on
profit after tax and total equity incorporate the impact of the
stress on the PVIF. The relationship between the profit and total
equity and the risk factors is non-linear; therefore the results
disclosed should not be extrapolated to measure sensitivities to
different levels of stress. For the same reason, the impact of the
stress is not symmetrical on the upside and downside. The
sensitivities reflect the established risk sharing mechanism with
policyholders for participating products, and are stated before
allowance for management actions which may mitigate the effect of
changes in the market environment. The sensitivities presented
allow for adverse changes in policyholders' behaviour that may
arise in response to changes in market rates.
The following table illustrates the effects of selected interest
rate, equity price and foreign exchange rate scenarios on our
profit for the year and the total equity of our insurance
manufacturing subsidiaries.
Sensitivity of the group's insurance manufacturing subsidiaries to
market risk factors
(Audited)
31 Dec 2019 31 Dec 2018
Effect Effect Effect Effect
on profit on total on profit on total
after tax equity after tax equity
HK$m HK$m HK$m HK$m
+100 basis points parallel shift in
yield curves (538) (929) (229) (547)
-100 basis points parallel shift in
yield curves 38 429 81 399
10% increase in equity prices 1,814 1,814 1,433 1,433
10% decrease in equity prices (1,840) (1,840) (1,366) (1,366)
10% increase in USD exchange rate compared
to all currencies 327 327 267 267
10% decrease in USD exchange rate compared
to all currencies (327) (327) (267) (267)
--------- -------- --------- --------
Credit risk
(Audited)
Description and exposure
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet their obligation under a contract. It
arises in two main areas for our insurance manufacturers:
-- risk associated with credit spread volatility and default by
debt security counterparties after investing premiums to generate a
return for policyholders and shareholders; and
-- risk of default by reinsurance counterparties and
non-reimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect of
these items are shown in the table on page 48.
The credit quality of the reinsurers' share of liabilities under
insurance contracts is assessed as 'strong' or 'good' (as defined
on page 23), with 100% of the exposure being neither past due nor
impaired (2018: 100%).
Credit risk on assets supporting unit-linked liabilities is
predominantly borne by the policyholders. Therefore our exposure is
primarily related to liabilities under non-linked insurance and
investment contracts and shareholders' funds. The credit quality of
insurance financial assets is included in the table on page 33. The
risk associated with credit spread volatility is to a large extent
mitigated by holding debt securities to maturity, and sharing a
degree of credit spread experience with policyholders.
Capital and Liquidity risk
(Audited)
Description and exposure
Liquidity risk is the risk that an insurance operation, though
solvent, either does not have sufficient financial resources
available to meet its obligations when they fall due, or can secure
them only at excessive cost.
The following table shows the expected undiscounted cash flows
for insurance liabilities at 31 December 2019. The liquidity risk
exposure is wholly borne by the policyholders in the case of
unit-linked business and is shared with the policyholders for
non-linked insurance.
The profile of the expected maturity of insurance contracts at
31 December 2019 remained comparable with 2018.
The remaining contractual maturity of investment contract
liabilities is included in the table on page 100.
Expected maturity of insurance contract liabilities
(Audited)
Expected cash flows (undiscounted)
Within Over 15
1 year 1-5 years 5-15 years years Total
HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2019
Non-linked insurance contracts 46,115 152,561 319,151 482,671 1,000,498
Unit-linked 8,110 19,913 14,154 8,940 51,117
54,225 172,474 333,305 491,611 1,051,615
At 31 Dec 2018
Non-linked insurance contracts 42,868 144,817 291,726 383,026 862,437
Unit-linked 6,999 19,350 16,285 11,040 53,674
49,867 164,167 308,011 394,066 916,111
Insurance risk
Description and exposure
(Unaudited)
Insurance risk is the risk of loss through adverse experience,
in either timing or amount, of insurance underwriting parameters
(non-economic assumptions). These parameters include mortality,
morbidity, longevity, lapses and unit costs.
The principal risk we face is that, over time, the cost of the
contract, including claims and benefits may exceed the total amount
of premiums and investment income received. The table on page 49
analyses our life insurance risk exposures by type of contract.
Sensitivities
(Audited)
The table below shows the sensitivity of profit and total equity
to reasonably possible changes in non-economic assumptions across
all our insurance manufacturing subsidiaries.
Mortality and morbidity risk is typically associated with life
insurance contracts. The effect on profit of an increase in
mortality or morbidity depends on the type of business being
written.
Sensitivity to lapse rates depends on the type of contracts
being written. In general, for life insurance contracts a policy
lapse has two offsetting effects on profits, which are the loss of
future income on the lapsed policy and the existence of surrender
charge recouped at policy lapse. The net impact depends on the
relative size of these two effects which varies with the type of
contracts.
Expense rates risk is the exposure to a change in the cost of
administering insurance contracts. To the extent that increased
expenses cannot be passed on to policyholders, an increase in
expense rates will have a negative effect on our profits.
Sensitivity analysis
(Audited)
2019 2018
HK$m HK$m
Effect on profit after tax and total equity at 31 Dec
10% increase in mortality and/or morbidity rates (509) (448)
10% decrease in mortality and/or morbidity rates 507 454
10% increase in lapse rates (496) (408)
10% decrease in lapse rates 564 468
10% increase in expense rates (314) (304)
10% decrease in expense rates 310 297
Capital
Capital management
(Audited)
Our approach to capital management is driven by our strategic
and organisational requirements, taking into account the
regulatory, economic and commercial environment in which we
operate.
It is our objective to maintain a strong capital base to support
the development of our business and to meet regulatory capital
requirements at all times. To achieve this, our policy is to hold
capital in a range of different forms and all capital raising is
agreed with major subsidiaries as part of their individual and the
group's capital management processes.
The policy on capital management is underpinned by a capital
management framework, which enables us to manage our capital in a
consistent manner. The framework defines regulatory capital and
economic capital as the two primary measures for the management and
control of capital.
Capital measures:
-- economic capital is the internally calculated capital
requirement to support risks to which we are exposed and forms a
core part of the internal capital adequacy assessment process;
and
-- regulatory capital is the capital which we are required to
hold in accordance with the rules established by regulators.
Our capital management process is articulated in our annual
capital plan which is approved by the Board. The plan is drawn up
with the objective of maintaining both an appropriate amount of
capital and an optimal mix between the different components of
capital. Each subsidiary manages its own capital to support its
planned business growth and meet its local regulatory requirements
within the context of the approved annual group capital plan. In
accordance with the Capital Management Framework, capital generated
by subsidiaries in excess of planned requirements is returned to
the Bank, normally by way of dividends.
The bank is the primary provider of capital to its subsidiaries
and these investments are substantially funded by the Bank's own
capital issuance and profit retention. As part of its capital
management process, the Bank seeks to maintain a prudent balance
between the composition of its capital and that of its investment
in subsidiaries.
The principal forms of capital are included in the following
balances on the consolidated balance sheet: share capital, other
equity instruments, retained earnings, other reserves and
subordinated liabilities.
Externally imposed capital requirements
(Unaudited)
The Hong Kong Monetary Authority ('HKMA') supervises the group
on both a consolidated and solo-consolidated basis and therefore
receives information on the capital adequacy of, and sets capital
requirements for, the group as a whole and on a solo-consolidated
basis. Individual banking subsidiaries and branches are directly
regulated by their local banking supervisors, who set and monitor
their capital adequacy requirements. In most jurisdictions,
non-banking financial subsidiaries are also subject to the
supervision and capital requirements of local regulatory
authorities.
The group uses the advanced internal ratings-based approach to
calculate its credit risk for the majority of its
non-securitisation exposures. For securitisation exposures, the
group uses the securitisation internal ratings-based approach,
securitisation external ratings-based approach, securitisation
standardised approach or securitisation fall-back approach to
determine credit risk for its banking book securitisation
exposures. For counterparty credit risk, the group uses both the
current exposure method and an internal models approach to
calculate its default risk exposures. For market risk, the group
uses an internal models approach to calculate its general market
risk for the risk categories of interest rate and foreign exchange
(including gold) exposures, and equity exposures. The group also
uses an internal models approach to calculate its market risk in
respect of specific risk for interest rate exposures and equity
exposures. The group uses the standardised (market risk) approach
for calculating other market risk positions, as well as trading
book securitisation exposures, and the standardised (operational
risk) approach to calculate its operational risk.
During the year, the individual entities within the group and
the group itself complied with all of the externally imposed
capital requirements of the HKMA.
Basel III
(Unaudited)
The Basel III capital rules set out the minimum CET1 capital
requirement of 4.5% and total capital requirement of 8%. The
Banking (Capital) (Amendment) Rules 2014 came into effect on
1 January 2015 to implement the Basel III capital buffer
requirements in Hong Kong. The requirements were phased-in from
2016 to 2019, in line with the Basel phase-in arrangements, and
reached full implementation in 2019. At 31 December 2019, the
capital buffers applicable to the group include the Capital
Conservation Buffer ('CCB'), the Countercyclical Capital Buffer
('CCyB') and the Higher Loss Absorbency ('HLA') requirement for
Domestic Systemically Important Banks ('D-SIB'). The CCB is
designed to ensure banks build up capital outside periods of stress
at 2.5%. The CCyB is set on an individual country basis and is
built up during periods of excess credit growth to protect against
future losses. On 14 October 2019, the HKMA reduced the CCyB for
Hong Kong to 2.0% from 2.5% with immediate effect. On 24 December
2019, the HKMA maintained the D-SIB designation as well as HLA
requirements at 2.5% for the group.
In December 2018, the Financial Institutions (Resolution)
(Loss-absorbing Capacity Requirements - Banking Sector) Rules
('LAC') in Hong Kong were passed into legislation, with transition
periods provided for their implementation. The group is classified
as a material subsidiary under the LAC and therefore is subject to
the LAC requirements to maintain its internal LAC risk-weighted
ratio and the internal LAC leverage ratio at or above specified
minimum.
Leverage ratio
(Unaudited)
Basel III introduces a simple non risk-based leverage ratio as a
complementary measure to the risk-based capital requirements. It
aims to constrain the build-up of excess leverage in the banking
sector, introducing additional safeguards against model risk and
measurement errors. The ratio is a volume-based measure calculated
as Basel III tier 1 capital divided by total on- and off-balance
sheet exposures.
At
31 Dec 31 Dec
2019 2018
% %
Leverage ratio 6.7 6.5
--------- ---------
Capital and leverage
ratio exposure measure HK$m HK$m
Tier 1 capital 537,460 501,503
Total exposure measure 8,078,204 7,741,301
--------- ---------
The increase in the leverage ratio from 31 December 2018 to
31 December 2019 was mainly due to an increase in Tier 1
capital, partly offset by a rise in the exposure measure.
Further details regarding the group's leverage position can be
viewed in the Banking Disclosure Statement 2019, which will be
available in the Regulatory Disclosures section of our website:
www.hsbc.com.hk.
Capital adequacy at 31 December 2019
(Unaudited)
The following tables show the capital ratios, RWAs and capital
base as contained in the 'Capital Adequacy Ratio' return submitted
to the HKMA on a consolidated basis under the requirements of
section 3C(1) of the Banking (Capital) Rules.
The basis of consolidation for financial accounting purposes is
described in note 1 on the Consolidated Financial Statements and
differs from that used for regulatory purposes. Further information
on the regulatory consolidation basis and a full reconciliation
between the group's accounting and regulatory balance sheets can be
viewed in the Banking Disclosure Statement 2019, which will be
available in the Regulatory Disclosures section of our website
www.hsbc.com.hk. Subsidiaries not included in the group's
consolidation for regulatory purposes are securities and insurance
companies and the capital invested by the group in these
subsidiaries is deducted from regulatory capital, subject to
certain thresholds.
The Bank and its banking subsidiaries maintain regulatory
reserves to satisfy the provisions of the Banking Ordinance and
local regulatory requirements for prudential supervision purposes.
At
31 December 2019, the effect of this requirement is to reduce
the amount of reserves which can be distributed to shareholders by
HK$23,979m (31 December 2018: HK$26,883m).
We closely monitor and consider future regulatory change and
continue to evaluate the impact upon our capital requirements of
regulatory developments. This includes the Basel III reforms
package, over which there remains a significant degree of
uncertainty due to the number of national discretions within
Basel's reforms. It remains premature to provide details of an
impact although we currently anticipate the potential for an
increase for RWAs.
Capital ratios
(Unaudited)
At
31 Dec 31 Dec
2019 2018
% %
Common equity tier
1 ('CET1') capital
ratio 17.2 16.5
Tier 1 capital ratio 18.8 17.8
Total capital ratio 21.0 19.8
------ ------
Risk-weighted assets by risk type
(Unaudited)
At
31 Dec 31 Dec
2019 2018
HK$m HK$m
Credit risk 2,318,266 2,290,786
Counterparty credit
risk 79,758 79,956
Market risk 97,908 117,826
Operational risk 355,448 325,344
Total 2,851,380 2,813,912
--------- ---------
Risk-weighted assets by global business
(Unaudited)
At
31 Dec 31 Dec
2019 2018
HK$m HK$m
Retail Banking and
Wealth Management 494,029 481,268
Commercial Banking 1,009,183 988,602
Global Banking and
Markets 859,744 896,143
Global Private Banking 29,080 37,022
Corporate Centre 459,344 410,877
Total 2,851,380 2,813,912
--------- ---------
Capital base
(Unaudited)
The following table sets out the composition of the group's
capital base under Basel III at 31 December 2019.
Capital base
(Unaudited)
At
31 Dec 31 Dec
2019 2018
HK$m HK$m
--------- -----------
Common equity tier 1 ('CET1') capital
Shareholders' equity 690,104 645,810
- shareholders' equity per balance sheet 814,678 752,758
- revaluation reserve capitalisation issue (1,454) (1,454)
- other equity instruments (44,615) (35,879)
- unconsolidated subsidiaries (78,505) (69,615)
Non-controlling interests 27,459 26,034
- non-controlling interests per balance sheet 64,603 60,162
- non-controlling interests in unconsolidated subsidiaries (10,316) (9,316)
- surplus non-controlling interests disallowed in CET1 (26,828) (24,812)
Regulatory deductions to CET1 capital (225,922) (208,070)
- valuation adjustments (1,554) (1,599)
- goodwill and intangible assets (20,132) (17,215)
- deferred tax assets net of deferred tax liabilities (2,214) (2,378)
- cash flow hedging reserve 41 63
- changes in own credit risk on fair valued liabilities 2,013 (198)
- defined benefit pension fund assets (45) (24)
- significant Loss-absorbing capacity ('LAC') investments
in unconsolidated financial sector entities (105,426) (99,407)
- property revaluation reserves(1) (74,626) (60,429)
- regulatory reserve (23,979) (26,883)
Total CET1 capital 491,641 463,774
------------------------------------------------------------
Additional tier 1 ('AT1') capital
Total AT1 capital before regulatory deductions 45,819 37,729
- perpetual subordinated loans 44,615 35,879
- allowable non-controlling interests in AT1 capital 1,204 1,850
Total AT1 capital 45,819 37,729
Total tier 1 capital 537,460 501,503
Tier 2 capital
------------------------------------------------------------
Total tier 2 capital before regulatory deductions 68,340 61,178
- perpetual subordinated debt(2) 3,114 3,133
- term subordinated debt 14,839 13,944
- property revaluation reserves(1) 34,236 27,847
- impairment allowances and regulatory reserve eligible
for inclusion in tier 2 capital 16,151 16,254
Regulatory deductions to tier 2 capital (6,866) (5,501)
- significant LAC investments in unconsolidated financial
sector entities (6,866) (5,501)
Total tier 2 capital 61,474 55,677
------------------------------------------------------------
Total capital 598,934 557,180
1 Includes the revaluation surplus on investment properties
which is reported as part of retained earnings and adjustments made
in accordance with the Banking (Capital) Rules issued by the
HKMA.
2 This Tier 2 capital instrument is grandfathered under Basel
III and will be phased out in full after 31 December 2021.
A detailed breakdown of the group's CET1 capital, AT1 capital,
Tier 2 capital and regulatory deductions can be viewed in the
Banking Disclosure Statement 2019, which will be available in the
Regulatory Disclosures section of our website www.hsbc.com.hk.
Statement of Directors' Responsibilities
The following statement, which should be read in conjunction
with the Auditor's statement of their responsibilities set out in
their report on pages 55-59, is made with a view to distinguishing
for shareholders the respective responsibilities of the Directors
and of the Auditor in relation to the Consolidated Financial
Statements.
The Directors of The Hongkong and Shanghai Banking Corporation
Limited ('the Bank') are responsible for the preparation of the
Bank's Annual Report and Accounts, which contains the Consolidated
Financial Statements of the Bank and its subsidiaries (together
'the group'), in accordance with applicable law and
regulations.
The Hong Kong Companies Ordinance requires the Directors to
prepare for each financial year the consolidated financial
statements for the group and the balance sheet for the Bank.
The Directors are responsible for ensuring adequate accounting
records are kept that are sufficient to show and explain the
group's transactions, such that the group's consolidated financial
statements give a true and fair view.
The Directors are responsible for preparing the consolidated
financial statements that give a true and fair view and are in
accordance with Hong Kong Financial Reporting Standards ('HKFRSs')
issued by the Hong Kong Institute of Certified Public Accountants.
The Directors have elected to prepare the Bank's balance sheet on
the same basis.
The Directors, whose names and functions are set out in the
'Report of the Directors' on pages 3-7 of this Annual Report and
Accounts, confirm to the best of their knowledge that:
-- the Consolidated Financial Statements, which have been
prepared in accordance with HKFRSs and in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the group; and
-- the management report represented by the Financial Review,
the Risk and Capital Reports includes a fair review of the
development and performance of the business and the position of the
group, together with a description of the principal risks and
uncertainties that the group faces.
On behalf of the Board
Laura Cha
Chairman
18 February 2020
Independent Auditor's Report
To the shareholder of The Hongkong and Shanghai Banking Corporation
Limited (incorporated in
Hong Kong with limited liability)
Opinion
What we have audited
The consolidated financial statements of The Hongkong and
Shanghai Banking Corporation Limited ('the Bank') and its
subsidiaries (together 'the group') set out on pages 60 to 117,
which comprise:
-- the consolidated balance sheet as at 31 December 2019;
-- the consolidated income statement for the year then ended;
-- the consolidated statement of comprehensive income for the year then ended;
-- the consolidated statement of changes in equity for the year then ended;
-- the consolidated statement of cash flows for the year then ended; and
-- the notes(1) on the consolidated financial statements, which
include a summary of significant accounting policies.
1 Certain required disclosures as described in Note 1.1(d) have
been presented elsewhere in the Annual Report and Accounts 2019,
rather than in the notes to the consolidated financial statements.
These are cross-referenced from the consolidated financial
statements and are identified as audited.
Our opinion
In our opinion, the consolidated financial statements give a
true and fair view of the consolidated financial position of the
group as at
31 December 2019, and of its consolidated financial performance
and its consolidated cash flows for the year then ended in
accordance with Hong Kong Financial Reporting Standards ('HKFRSs')
issued by the Hong Kong Institute of Certified Public Accountants
('HKICPA') and have been properly prepared in compliance with the
Hong Kong Companies Ordinance.
Basis for Opinion
We conducted our audit in accordance with Hong Kong Standards on
Auditing ('HKSAs') issued by the HKICPA. Our responsibilities under
those standards are further described in the Auditor's
Responsibilities for the Audit of the consolidated financial
statements section of our report.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the group in accordance with the HKICPA's
Code of Ethics for Professional Accountants ('the Code'), and we
have fulfilled our other ethical responsibilities in accordance
with the Code.
Key Audit Matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the
consolidated financial statements of the current period. These
matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters.
Key audit matters identified in our audit are summarised as
follows:
-- IT access management
-- Investment in associate - Bank of Communications Co., Limited ('BoCom')
-- The present value of in-force long-term insurance business
('PVIF') and liabilities under non-linked life insurance
contracts
-- Impairment of loans and advances to customers.
IT access management
Nature of the Key Audit Matter Matters discussed with the Audit
Committee
Our audit approach relies extensively The significance of IT controls to
on automated controls and therefore our audit and the status of the remediation
on the effectiveness of controls was discussed at the Audit Committee
over IT systems. meetings during the year.
In previous years, we identified
and reported that controls over access
to applications, operating systems
and data in the financial reporting
process required improvements. Access
management controls are critical
to ensure that changes to applications
and underlying data are made in an
appropriate manner. Appropriate access
and change controls contribute to
mitigating the risk of potential
fraud or errors as a result of changes
to applications and data. Management
implemented remediation activities
that have contributed to progress
being made in reducing the risk over
access management in the financial
reporting process. Controls continue
to require some improvement going
forward.
How our audit addressed the Key Audit Matter
Access rights were tested over applications, operating systems and
databases relied upon for financial reporting. Specifically, the audit
tested that:
* new access requests for joiners were properly
reviewed and authorised;
* user access rights were removed on a timely basis
when an individual left or moved role;
* access rights to applications, operating systems and
databases were periodically monitored for
appropriateness; and
* highly privileged access was restricted to
appropriate personnel.
Other areas that were independently assessed included password policies,
security configurations, controls over changes to code, data and configurations,
and that the ability to make such change via privileged operating system
or database access in the production environment was appropriately
restricted.
Where control deficiencies were identified, a range of other procedures
were performed:
* where access outside of policy was identified, we
understood the nature of the access, and, where
required, obtained additional evidence on whether
that access had been exploited;
* testing of controls to manage the monitoring of
business access, including access that would allow a
user to potentially override segregations of duty;
and
* substantive testing of whether users inappropriately
hold access to key functionality underpinning
financial reporting processes, specific year-end
reconciliations (i.e. custodian, bank account and
suspense account reconciliations) and confirmations
with external counterparties.
Relevant references in the Annual Report and Accounts 2019
Risk: Top and Emerging Risks, page 16;
Investment in associate - Bank of Communications Company, Limited ('BoCom')
Nature of the Key Audit Matter Matters discussed with the Audit
Committee
At 31 December, the market value We discussed the appropriateness
of the Bank's investment in BoCom, of these assumptions with the Audit
based on the share price, was HK$70.1bn Committee, particularly those for
lower than the carrying value. This which variations had the most significant
is considered an indicator of potential impact on the carrying value of the
impairment. An impairment test was VIU. We focused on the assumptions
performed by the Bank using a value relating to forecasted cash flows
in use ('VIU') model to estimate and the impact of meeting regulatory
the investment's value assuming it capital requirements. We also discussed
continues to be held in perpetuity with the Audit Committee the effective
rather than sold. The VIU was HK$19.4bn tax rate and loan impairment rate
in excess of the carrying value. assumptions and considered reasonably
On this basis no impairment was recorded possible alternatives. Our discussions
and the share of BoCom's profits and focus on assumptions was driven
has been recognised in the consolidated by consideration of the current levels
income statement. of uncertainty and the overall outlook
The VIU model is based on the requirements for the Chinese banking market, the
of the relevant accounting standard broader Chinese economy and the impact
and is dependent on many assumptions, of China-US trade tensions.
both short-term and long-term in
nature. These assumptions, which
are judgemental, are derived from
a combination of management estimates,
analysts' forecasts and market data.
How our audit addressed the Key Audit Matter
* We assessed the appropriateness of the methodology
used to estimate the VIU.
* A reasonable range for the discount rate used within
the model was independently calculated with the
assistance of our valuation experts and compared to
the discount rate used by management.
* We challenged the basis for determining assumptions
and the inputs used. We obtained corroborating
information for inputs into assumptions from external
market information, third-party sources, including
analyst reports, and historical publicly available
BoCom information.
* We performed sensitivity analysis on key assumptions
used, both individually and in aggregate.
* The controls in place over the model, and its
mathematical accuracy, were tested.
* We observed meetings in September and November 2019
between management and senior BoCom executive
management, held specifically to identify facts and
circumstances impacting assumptions relevant to the
determination of the VIU.
* We read and assessed the disclosures made in the
Annual Report and Accounts 2019 in relation to BoCom,
specifically giving consideration to the sensitivity
disclosures and the variations in assumptions that
would result in an impairment.
* Representations were obtained from HSBC that
assumptions used were consistent with information
currently available to them, both as a shareholder
and to which HSBC are entitled through their
participation on BoCom's Board of Directors.
Relevant references in the Annual Report and Accounts 2019
Financial Review, page 9
Note 1: Basis of preparation and significant accounting policies, page
66-75
Note 14: Interests in associates and joint ventures, page 90-93
The present value of in-force long-term insurance business ('PVIF')
and liabilities under non-linked life insurance contracts
Nature of the Key Audit Matter Matters discussed with the Audit
Committee
The group has recorded an asset for We discussed with the Audit Committee
PVIF of HK$61.1bn and liabilities the results of our testing procedures
under non-linked life insurance contracts over key assumptions used in the
of HK$467.9bn as at valuation of the PVIF asset and the
31 December 2019. The determination liabilities under non-linked life
of these balances requires the use insurance contracts including testing
of appropriate actuarial methodologies of changes made during the reporting
and also highly judgemental assumptions, period to the models and to the basis
including assumptions over long-term of the determination of key assumptions.
economic returns, longevity, mortality,
persistency and expenses. Small movements
in these assumptions can have a material
impact on the PVIF asset and the
liabilities under non-linked life
insurance contracts.
How our audit addressed the Key Audit Matter
The controls in place for the determination of the valuation of the
PVIF asset and the liabilities under non-linked life insurance contracts
were tested. Specifically, these included controls over:
* policy data reconciliations from the policyholder
administration system to the actuarial valuation
system,
* assumptions setting,
* review and determination of valuation methodologies,
* restriction of user access to the actuarial models,
and
* production and approval of the actuarial results.
With the assistance of our actuarial experts, the appropriateness of
the models, methodologies and assumptions used were assessed for reasonableness.
Specifically, these included assumptions in respect of:
* economic assumptions, including discount rate and
long term investment return assumptions;
* operating assumptions and policyholder behaviour,
such as longevity, mortality, morbidity and
persistency; and
* future costs of obtaining and maintaining the
insurance business.
Our challenge and evaluation of the key judgements and assumptions
made by management included whether these were supported by relevant
experience and market information.
Relevant references in the Annual Report and Accounts 2019
Risk: Risks of insurance manufacturing operations, page 46-50
Note 1: Basis of preparation and significant accounting policies, page
66-75
Note 3: Insurance business, page 78-79
Note 15: Goodwill and intangible assets, page 93-94
Impairment of loans and advances to customers
Nature of the Key Audit Matter Matters discussed with the Audit
Committee
This is the second year that expected At each Audit Committee meeting,
credit losses ('ECL') have been reported there were discussions on changes
under HKFRS 9. The underlying processes made to models and the inputs into
and controls have continued to mature them; the impact of evolving geopolitical
during the year, with an increased risks, such as the social unrest
focus on back-testing. The Bank has in Hong Kong and the US-China trade
also updated certain ECL models during tensions and impairment of significant
the year. wholesale exposures.
The credit environment appears to
have remained relatively benign during
the year, in part due to low interest
rates globally. However, there are
a growing number of specific risks.
We continued to critically assess
the more judgemental decisions made
by management, in particular the
severity and likelihood of various
economic scenarios (including the
base, upside and various downside
scenarios) that form part of the
forward economic guidance and their
impact on ECL. We also considered:
the controls over the determination
of customer credit ratings and probabilities
of default, and the impact they had
on the determination of significant
increases in credit risk; the appropriateness
of post model adjustments made to
reflect model and data limitations;
and the estimation of specific impairment
for wholesale exposures that had
defaulted.
How our audit addressed the Key Audit Matter
* We performed risk based substantive testing of models
that were updated during the year, including
independently rebuilding the modelling for certain
assumptions.
* We independently reviewed the updates to the scripts
used in the underlying tool to calculate ECL to
ensure that they reflected approved updates to models,
parameters and inputs.
* We tested controls over the inputs of critical data
into source systems and the flow and transformation
of data between source systems to the impairment
calculation engine. Substantive testing was performed
over the critical data used in the year end ECL
calculation.
* We tested the review and challenge of multiple
economic scenarios by an expert panel and internal
governance committee, and assessed the reasonableness
and likelihood of these scenarios using our economics
experts. Relevant economic, political and other
events were considered in assessing the
reasonableness of alternative downside scenarios. The
severity and magnitude of the scenarios were compared
to external forecasts and data from historical
economic downturns, and the sensitivities of the
scenarios on the ECL were considered.
* We observed challenge forums to assess the ECL output
and approval of post model adjustments.
* We tested the approval of the key inputs, assumptions
and discounted cash-flows that support the impairment
allowances for a sample of significant individually
assessed loans.
Relevant references in the Annual Report and Accounts 2019
Risk: Credit Risk, page 22-39
Note 1: Basis of preparation and significant accounting policies, page
66-75
Note 2(e): Operating profit - Change in expected credit losses and
other credit impairment charges, page 77
Note 10: Loans and advances to customers, page 87
Other Information
The directors of the Bank are responsible for the other
information. The other information comprises the information
included in the Financial Highlights, Report of the Directors,
Financial Review, Risk, Capital and Statement of Directors'
Responsibilities sections of the Annual Report and Accounts 2019
(but does not include the consolidated financial statements and our
auditor's report thereon), which we obtained prior to the date of
this auditor's report, and the Banking Disclosure Statement 2019
and the list of the directors of the Bank's subsidiary undertakings
(consolidated in the financial statements) during the period from 1
January 2019 to 18 February 2020, which are expected to be made
available to us after the date of this auditor's report.
Our opinion on the consolidated financial statements does not
cover the other information and we do not and will not express any
form of assurance conclusion thereon, apart from the specific
information presented therein that is identified as being an
integral part of the consolidated financial statements and,
therefore, covered by our audit opinion on the consolidated
financial statements.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other
information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated.
If, based on the work we have performed on the other information
that we obtained prior to the date of this auditor's report, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report in this regard.
When we read the Banking Disclosure Statement 2019 and the list
of the directors of the Bank's subsidiary undertakings
(consolidated in the financial statements) during the period from 1
January 2019 to 18 February 2020, if we conclude that there is a
material misstatement therein, we are required to communicate the
matter to the Audit Committee and take appropriate action
considering our legal rights and obligations.
Responsibilities of Directors and the Audit Committee for the
Consolidated Financial Statements
The directors of the Bank are responsible for the preparation of
the consolidated financial statements that give a true and fair
view in accordance with HKFRSs issued by the HKICPA and the Hong
Kong Companies Ordinance, and for such internal control as the
directors determine is necessary to enable the preparation of
consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the
directors are responsible for assessing the group's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so.
The Audit Committee is responsible for overseeing the group's
financial reporting process.
Auditor's Responsibilities for the Audit of the Consolidated
Financial Statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. We report our
opinion solely to you, as a body, in accordance with Section 405 of
the Hong Kong Companies Ordinance and for no other purpose. We do
not assume responsibility towards or accept liability to any other
person for the contents of this report. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit
conducted in accordance with HKSAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these
consolidated financial statements.
As part of an audit in accordance with HKSAs, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the group's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by the directors.
-- Conclude on the appropriateness of the directors' use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the group's
ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in
our auditor's report to the related disclosures in the consolidated
financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor's report. However, future
events or conditions may cause the group to cease to continue as a
going concern.
-- Evaluate the overall presentation, structure and content of
the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair
presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the group to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for
our audit opinion.
We communicate with the Audit Committee regarding, among other
matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide the Audit Committee with a statement that we
have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with the Audit Committee, we
determine those matters that were of most significance in the audit
of the consolidated financial statements of the current period and
are therefore the key audit matters. We describe these matters in
our auditor's report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
The engagement partner on the audit resulting in this
independent auditor's report is Mr. Mervyn Robert John Jacob.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, 18 February 2020
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
ACSKKBBQKBKDKND
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