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Report Of The Directors Financial Review Risk Report
 12 Months Ended
Dec. 31, 2019
Report Of The Directors Financial Review Risk Report [Abstract]  
Disclosure of audited information included in report of the directors risk report
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.
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 HSBC 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.
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 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 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 and territories where local regulation or legislation constrains 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.
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 financial statements
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied
(Audited)
 
 
 
 
 
 
 
31 Dec 2019
 At 31 Dec 2018
 
 
Gross carrying/nominal amount

Allowance for
ECL1

Gross carrying/nominal amount

Allowance for ECL1

 
Footnotes
$m

$m

$m

$m

Loans and advances to customers at amortised cost
 
1,045,475

(8,732
)
990,321

(8,625
)
– personal
 
434,271

(3,134
)
394,337

(2,947
)
– corporate and commercial
 
540,499

(5,438
)
534,577

(5,552
)
– non-bank financial institutions
 
70,705

(160
)
61,407

(126
)
Loans and advances to banks at amortised cost
 
69,219

(16
)
72,180

(13
)
Other financial assets measured at amortised cost
 
615,179

(118
)
582,917

(55
)
– cash and balances at central banks
 
154,101

(2
)
162,845

(2
)
– items in the course of collection from other banks
 
4,956

—

5,787

—

– Hong Kong Government certificates of indebtedness
 
38,380

—

35,859

—

– reverse repurchase agreements – non-trading
 
240,862

—

242,804

—

– financial investments
 
85,788

(53
)
62,684

(18
)
– prepayments, accrued income and other assets
2
91,092

(63
)
72,938

(35
)
Total gross carrying amount on-balance sheet
 
1,729,873

(8,866
)
1,645,418

(8,693
)
Loans and other credit-related commitments
 
600,029

(329
)
592,008

(325
)
– personal
 
223,314

(15
)
207,351

(13
)
– corporate and commercial
 
278,524

(307
)
271,022

(305
)
– non-bank financial institutions
 
98,191

(7
)
113,635

(7
)
Financial guarantees
 
 
20,214

(48
)
23,518

(93
)
– personal
 
804

(1
)
927

(1
)
– corporate and commercial
 
14,804

(44
)
17,355

(85
)
– non-bank financial institutions
 
4,606

(3
)
5,236

(7
)
Total nominal amount off-balance sheet
3
620,243

(377
)
615,526

(418
)
 
 
2,350,116

(9,243
)
2,260,944

(9,111
)
 
 
 
 
 
 
 
 
Fair value

Memorandum allowance for ECL4

Fair value

Memorandum allowance for
ECL4

 
 
$m

$m

$m

$m

Debt instruments measured at fair value through other comprehensive income (‘FVOCI’)

 
355,664

(166
)
343,110

(84
)
1
The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.
2
Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. ‘Prepayments, accrued income and other assets’, as presented within the consolidated balance sheet on page 262, includes both financial and non-financial assets.
3
Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
4
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 statement
Stage 2 days past due analysis at 31 December 2019
(Audited)
 
Gross carrying amount
Allowance for ECL
ECL coverage %
 
 
Of which:

Of which:

 
Of which:

Of which:

 
Of which:

Of which:
 
Stage 2

1 to 29 DPD1

30 and > DPD1

Stage 2

1 to 29 DPD1

30 and > DPD1

Stage 2
1 to 29 DPD1

30 and > DPD1
 
$m

$m

$m

$m

$m

$m

%
%

%
Loans and advances to customers at amortised cost
80,182

2,471

1,676

(2,284
)
(208
)
(247
)
2.8
8.4

14.7
–
personal
15,751

1,804

1,289

(1,336
)
(178
)
(217
)
8.5
9.9

16.8
–
corporate and commercial
59,599

657

385

(920
)
(30
)
(30
)
1.5
4.6

7.8
–
non-bank financial institutions
4,832

10

2

(28
)
—

—

0.6
—

—
Loans and advances to banks at amortised cost
1,450

—

—

(2
)
—

—

0.1
—

—
Other financial assets measured at amortised cost
1,827

14

30

(38
)
—

—

2.1
—

—
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 at
31 December 20183 (continued)
(Audited)
 
Gross carrying/nominal amount1
 
Allowance for ECL
 
ECL coverage %
 
 
Stage 1

Stage 2

Stage 3

POCI2

Total

Stage 1

Stage 2

Stage 3

POCI2

Total

Stage 1
Stage 2
Stage 3
POCI2
Total
 
$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

%
%
%
%
%
Loans and advances to customers at amortised cost
908,393

68,581

13,023

324

990,321

(1,276
)
(2,108
)
(5,047
)
(194
)
(8,625
)
0.1
3.1
38.8
59.9
0.9
– personal
374,681

15,075

4,581

—

394,337

(534
)
(1,265
)
(1,148
)
—

(2,947
)
0.1
8.4
25.1
—
0.7
– corporate and commercial
474,700

51,341

8,212

324

534,577

(698
)
(812
)
(3,848
)
(194
)
(5,552
)
0.1
1.6
46.9
59.9
1.0
– non-bank financial institutions
59,012

2,165

230

—

61,407

(44
)
(31
)
(51
)
—

(126
)
0.1
1.4
22.2
—
0.2
Loans and advances to banks at amortised cost
71,873

307

—

—

72,180

(11
)
(2
)
—

—

(13
)
—
0.7
—
—
—
Other financial assets measured at amortised cost
581,118

1,673

126

—

582,917

(27
)
(6
)
(22
)
—

(55
)
—
0.4
17.5
—
—
Loan and other credit-related commitments
567,232

23,857

912

7

592,008

(143
)
(139
)
(43
)
—

(325
)
—
0.6
4.7
—
0.1
– personal
205,183

1,760

408

—

207,351

(12
)
(1
)
—

—

(13
)
—
0.1
—
—
—
– corporate and commercial
249,587

20,925

503

7

271,022

(126
)
(136
)
(43
)
—

(305
)
0.1
0.6
8.5
—
0.1
– financial
112,462

1,172

1

—

113,635

(5
)
(2
)
—

—

(7
)
—
0.2
—
—
—
Financial guarantees
20,834

2,384

297

3

23,518

(19
)
(29
)
(45
)
—

(93
)
0.1
1.2
15.2
—
0.4
– personal
920

3

4

—

927

(1
)
—

—

—

(1
)
0.1
—
—
—
0.1
– corporate and commercial
14,963

2,101

288

3

17,355

(16
)
(25
)
(44
)
—

(85
)
0.1
1.2
15.3
—
0.5
– financial
4,951

280

5

—

5,236

(2
)
(4
)
(1
)
—

(7
)
—
1.4
20.0
—
0.1
At 31 Dec 2018
2,149,450

96,802

14,358

334

2,260,944

(1,476
)
(2,284
)
(5,157
)
(194
)
(9,111
)
0.1
2.4
35.9
58.1
0.4

1
Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2
Purchased or originated credit-impaired (‘POCI’).
3
During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 122.
Stage 2 days past due analysis at 31 December 20182
(Audited)
 
Gross carrying amount

Allowance for ECL

ECL coverage %

 
 
Of which:

Of which:

 
Of which:

Of which:

 
Of which:
Of which:
 
                    Stage 2


1 to 29
DPD1

30 and > DPD1

                    Stage 2


1 to 29
DPD1

30 and > DPD1

                    Stage 2

1 to 29
DPD1
30 and > DPD1
 
$m

$m

$m

$m

$m

$m

%
%
%
Loans and advances to customers at amortised cost
68,581

2,561

1,914

(2,108
)
(204
)
(254
)
3.1
8.0
13.3
–
personal
15,075

1,807

1,383

(1,265
)
(165
)
(220
)
8.4
9.1
15.9
–
corporate and commercial
51,341

744

485

(812
)
(39
)
(34
)
1.6
5.2
7.0
–
non-bank financial institutions
2,165

10

46

(31
)
—

—

1.4
—
—
Loans and advances to banks at amortised cost
307

—

—

(2
)
—

—

0.7
—
—
Other financial assets measured at amortised cost
1,673

10

26

(6
)
—

—

0.4
—
—
1
Days past due (‘DPD’). Up to date accounts in stage 2 are not shown in amounts.
2
During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 122.
Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at
31 December 2019
(Audited)
 
Gross carrying/nominal amount1
 
Allowance for ECL
 
ECL coverage %
 
 
Stage 1

Stage 2

Stage 3

POCI2

Total

Stage 1

Stage 2

Stage 3

POCI2

Total

Stage 1
Stage 2
Stage 3
POCI2
Total
 
$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

%
%
%
%
%
Loans and advances to customers at amortised cost
951,583

80,182

13,378

332

1,045,475

(1,297
)
(2,284
)
(5,052
)
(99
)
(8,732
)
0.1
2.8
37.8
29.8
0.8
– personal
413,669

15,751

4,851

—

434,271

(583
)
(1,336
)
(1,215
)
—

(3,134
)
0.1
8.5
25.0
—
0.7
– corporate and commercial
472,253

59,599

8,315

332

540,499

(672
)
(920
)
(3,747
)
(99
)
(5,438
)
0.1
1.5
45.1
29.8
1.0
– non-bank financial institutions
65,661

4,832

212

—

70,705

(42
)
(28
)
(90
)
—

(160
)
0.1
0.6
42.5
—
0.2
Loans and advances to banks at amortised cost
67,769

1,450

—

—

69,219

(14
)
(2
)
—

—

(16
)
—
0.1
—
—
—
Other financial assets measured at amortised cost
613,200

1,827

151

1

615,179

(38
)
(38
)
(42
)
—

(118
)
—
2.1
27.8
—
—
Loan and other credit-related commitments
577,631

21,618

771

9

600,029

(137
)
(133
)
(59
)
—

(329
)
—
0.6
7.7
—
0.1
– personal
221,490

1,630

194

—

223,314

(13
)
(2
)
—

—

(15
)
—
0.1
—
—
—
– corporate and commercial
259,138

18,804

573

9

278,524

(118
)
(130
)
(59
)
—

(307
)
—
0.7
10.3
—
0.1
– financial
97,003

1,184

4

—

98,191

(6
)
(1
)
—

—

(7
)
—
0.1
—
—
—
Financial guarantees
17,684

2,340

186

4

20,214

(16
)
(22
)
(10
)
—

(48
)
0.1
0.9
5.4
—
0.2
– personal
802

1

1

—

804

(1
)
—

—

—

(1
)
0.1
—
—
—
0.1
– corporate and commercial
12,540

2,076

184

4

14,804

(14
)
(21
)
(9
)
—

(44
)
0.1
1.0
4.9
—
0.3
– financial
4,342

263

1

—

4,606

(1
)
(1
)
(1
)
—

(3
)
—
0.4
100.0
—
0.1
At 31 Dec 2019
2,227,867

107,417

14,486

346

2,350,116

(1,502
)
(2,479
)
(5,163
)
(99
)
(9,243
)
0.1
2.3
35.6
28.6
0.4
1
Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2
Purchased or originated credit-impaired (‘POCI’).
Credit exposure
Maximum exposure to credit risk
(Audited)
This section provides information on balance sheet items and their offsets as well as loan and other credit-related commitments. Commentary on consolidated balance sheet movements in 2019 is provided on page 54.
The offset on derivatives remains in line with the movements in maximum exposure amounts.
Maximum exposure to credit risk
 
 
 
(Audited)
 
 
 
 
2019
2018
 
Maximum
exposure

Offset

Net

Maximum
exposure

Offset

Net

 
$m

$m

$m

$m

$m

$m

Loans and advances to customers held at amortised cost
1,036,743

(28,524
)
1,008,219

981,696

(29,534
)
952,162

– personal
431,137

(4,640
)
426,497

391,390

(3,679
)
387,711

– corporate and commercial
535,061

(21,745
)
513,316

529,025

(23,421
)
505,604

– non-bank financial institutions
70,545

(2,139
)
68,406

61,281

(2,434
)
58,847

Loans and advances to banks at amortised cost
69,203

—

69,203

72,167

—

72,167

Other financial assets held at amortised cost
616,648

(28,826
)
587,822

585,600

(21,788
)
563,812

– cash and balances at central banks
154,099

—

154,099

162,843

—

162,843

– items in the course of collection from other banks
4,956

—

4,956

5,787

—

5,787

– Hong Kong Government certificates of indebtedness
38,380

—

38,380

35,859

—

35,859

– reverse repurchase agreements – non-trading
240,862

(28,826
)
212,036

242,804

(21,788
)
221,016

– financial investments
85,735

—

85,735

62,666

—

62,666

– prepayments, accrued income and other assets
92,616

—

92,616

75,641

—

75,641

Derivatives
242,995

(232,908
)
10,087

207,825

(194,306
)
13,519

Total on-balance sheet exposure to credit risk
1,965,589

(290,258
)
1,675,331

1,847,288

(245,628
)
1,601,660

Total off-balance sheet
893,246

—

893,246

874,751

—

874,751

– financial and other guarantees
95,967

—

95,967

94,810

—

94,810

– loan and other credit-related commitments
797,279

—

797,279

779,941

—

779,941

At 31 Dec
2,858,835

(290,258
)
2,568,577

2,722,039

(245,628
)
2,476,411

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 on the financial statements.
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)

Non-credit impaired
Credit impaired


Stage 1
Stage 2
Stage 3
POCI
Total

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL


$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2019
1,502,976

(1,449
)
95,104

(2,278
)
14,232

(5,135
)
334

(194
)
1,612,646

(9,056
)
Transfers of financial instruments:
(36,244
)
(543
)
31,063

1,134

5,181

(591
)
—

—

—

—

– transfers from stage 1 to stage 2
(108,434
)
487

108,434

(487
)
—

—

—

—

—

—

– transfers from stage 2 to stage 1
73,086

(1,044
)
(73,086
)
1,044

—

—

—

—

—

—

– transfers to stage 3
(1,284
)
59

(5,022
)
665

6,306

(724
)
—

—

—

—

– transfers from stage 3
388

(45
)
737

(88
)
(1,125
)
133

—

—

—

—

Net remeasurement of ECL arising from transfer of stage
—

669

—

(676
)
—

(114
)
—

—

—

(121
)
New financial assets originated or purchased
504,064

(534
)
—

—

—

—

135

(21
)
504,199

(555
)
Assets derecognised (including final repayments)
(352,961
)
112

(19,909
)
553

(2,712
)
656

(26
)
8

(375,608
)
1,329

Changes to risk parameters – further lending/repayment
(72,239
)
291

(2,560
)
67

402

(6
)
28

12

(74,369
)
364

Changes to risk parameters – credit quality
—

2

—

(1,208
)
—

(2,704
)
—

(51
)
—

(3,961
)
Changes to models used for ECL calculation
—

(6
)
—

4

—

14

—

—

—

12

Assets written off
—

—

—

—

(2,657
)
2,657

(140
)
140

(2,797
)
2,797

Credit-related modifications that resulted in derecognition
—

—

—

—

(268
)
125

—

—

(268
)
125

Foreign exchange
16,838

(9
)
1,201

(40
)
160

(31
)
1

1

18,200

(79
)
Others
(821
)
3

652

3

(3
)
8

13

6

(159
)
20

At 31 Dec 2019
1,561,613

(1,464
)
105,551

(2,441
)
14,335

(5,121
)
345

(99
)
1,681,844

(9,125
)
ECL income statement change for the period


534



(1,260
)


(2,154
)


(52
)


(2,932
)
Recoveries


















361

Others


















(20
)
Total ECL income statement change for the period


















(2,591
)
 
At 31 Dec 2019
12 months ended 
31 Dec 2019

 
Gross carrying/nominal amount

Allowance for ECL

ECL charge

 
$m

$m

$m

As above
1,681,844

(9,125
)
(2,591
)
Other financial assets measured at amortised cost
615,179

(118
)
(26
)
Non-trading reverse purchase agreement commitments
53,093

—

—

Performance and other guarantees not considered for IFRS 9
—

—

(34
)
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement
2,350,116

(9,243
)
(2,651
)
Debt instruments measured at FVOCI
355,664

(166
)
(105
)
Total allowance for ECL/total income statement ECL change for the period
n/a

(9,409
)
(2,756
)
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including
loan commitments and financial guarantees1,2
(Audited)
 
Non-credit impaired
Credit impaired
Total
 
Stage 1
Stage 2
Stage 3
POCI
 
Gross exposure

Allowance/ provision for ECL

Gross exposure

Allowance/ provision for ECL

Gross exposure

Allowance/ provision for ECL

Gross exposure

Allowance/ provision for ECL

Gross exposure

Allowance/ provision for ECL

 
$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2018
1,446,857

(1,469
)
102,032

(2,406
)
15,083

(5,722
)
1,042

(242
)
1,565,014

(9,839
)
Transfers of financial instruments:
(8,747
)
(685
)
3,582

1,185

5,165

(500
)
—

—

—

—

– transfers from stage 1 to stage 2
(84,181
)
319

84,181

(319
)
—

—

—

—

—

—

– transfers from stage 2 to stage 1
77,325

(999
)
(77,325
)
999

—

—

—

—

—

—

– transfers to stage 3
(2,250
)
35

(4,439
)
607

6,689

(642
)
—

—

—

—

– transfers from stage 3
359

(40
)
1,165

(102
)
(1,524
)
142

—

—

—

—

Net remeasurement of ECL arising from transfer of stage
—

620

—

(605
)
—

(103
)
—

—

—

(88
)
Net new lending and further lending/payments
126,868

(512
)
(16,162
)
564

(2,902
)
733

(587
)
42

107,217

827

Changes to risk parameters – credit quality
—

423

—

(1,087
)
—

(2,238
)
—

(51
)
—

(2,953
)
Changes to models used for ECL calculation
—

—

—

—

—

—

—

—

—

—

Assets written off
—

—

—

—

(2,568
)
2,552

(1
)
1

(2,569
)
2,553

Foreign exchange
(52,911
)
76

(2,935
)
99

(636
)
232

(26
)
6

(56,508
)
413

Other
(9,091
)
98

8,587

(28
)
90

(89
)
(94
)
50

(508
)
31

At 31 Dec 2018
1,502,976

(1,449
)
95,104

(2,278
)
14,232

(5,135
)
334

(194
)
1,612,646

(9,056
)
ECL income statement change for the period
 
531

 
(1,128
)
 
(1,608
)
 
(9
)
 
(2,214
)
Recoveries
 
 
 
 
 
 
 
 
 
408

Others
 
 
 
 
 
 
 
 
 
(62
)
Total ECL income statement change for the period
 
 
 
 
 
 
 
 
 
(1,868
)
 
At 31 Dec 2018
12 months ended 31 Dec 2018

 
Gross carrying/nominal amount

Allowance for ECL

ECL charge

 
$m

$m

$m

As above
1,612,646

(9,056
)
(1,868
)
Other financial assets measured at amortised cost
582,917

(55
)
21

Non-trading reverse purchase agreement commitments
65,381

—

—

Performance and other guarantees not considered for IFRS 9
—

—

(25
)
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/ Summary consolidated income statement
2,260,944

(9,111
)
(1,872
)
Debt instruments measured at FVOCI
343,110

(84
)
105

Total allowance for ECL/total income statement ECL change for the period
n/a

(9,195
)
(1,767
)
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.
2
During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount for 31 December 2018 only. For further details, see page 122.
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 PD, 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, although 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 personal lending businesses and the external ratings attributed by external agencies to debt securities, as shown in the table on page 121.
Distribution of financial instruments by credit quality at 31 December 2019
(Audited)
 
Gross carrying/notional amount
Allowance for ECL/other credit provisions

Net

 
Strong

Good

Satisfactory

Sub-standard

Credit impaired

Total

 
$m

$m

$m

$m

$m

$m

$m

$m

In-scope for IFRS 9
 
 
 
 
 
 
 
 
Loans and advances to customers held at amortised cost
524,889

258,402

228,485

20,007

13,692

1,045,475

(8,732
)
1,036,743

– personal
354,461

45,037

27,636

2,286

4,851

434,271

(3,134
)
431,137

– corporate and commercial
138,126

190,470

186,383

16,891

8,629

540,499

(5,438
)
535,061

– non-bank financial institutions
32,302

22,895

14,466

830

212

70,705

(160
)
70,545

Loans and advances to banks held at amortised cost
60,636

5,329

1,859

1,395

—

69,219

(16
)
69,203

Cash and balances at central banks
151,788

1,398

915

—

—

154,101

(2
)
154,099

Items in the course of collection from other banks
4,935

18

3

—

—

4,956

—

4,956

Hong Kong Government certificates of indebtedness
38,380

—

—

—

—

38,380

—

38,380

Reverse repurchase agreements – non-trading
193,157

37,947

9,621

137

—

240,862

—

240,862

Financial investments
78,318

6,503

906

61

—

85,788

(53
)
85,735

Prepayments, accrued income and other assets
70,675

8,638

11,321

306

152

91,092

(63
)
91,029

– endorsements and acceptances
1,133

4,651

4,196

230

4

10,214

(16
)
10,198

– accrued income and other
69,542

3,987

7,125

76

148

80,878

(47
)
80,831

Debt instruments measured at
fair value through other comprehensive income1
333,158

10,966

7,222

544

1

351,891

(166
)
351,725

Out-of-scope for IFRS 9
















Trading assets
135,059

15,240

22,964

2,181

—

175,444

—

175,444

Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss
4,655

1,391

5,584

139

—

11,769

—

11,769

Derivatives
187,636

42,642

11,894

821

2

242,995

—

242,995

Total gross carrying amount on balance sheet
1,783,286

388,474

300,774

25,591

13,847

2,511,972

(9,032
)
2,502,940

Percentage of total credit quality
70.9%

15.5%

12.0%

1.0%

0.6%

100%





Loan and other credit-related commitments
369,424

146,988

77,499

5,338

780

600,029

(329
)
599,700

Financial guarantees
7,441

6,033

5,539

1,011

190

20,214

(48
)
20,166

In-scope: Irrevocable loan commitments and financial guarantees
376,865

153,021

83,038

6,349

970

620,243

(377
)
619,866

Loan and other credit-related commitments2
66,148

69,890

58,754

2,605

182

197,579

—

197,579

Performance and other guarantees
30,099

23,335

20,062

2,057

380

75,933

(132
)
75,801

Out-of-scope: Revocable loan commitments and non-financial guarantees
96,247

93,225

78,816

4,662

562

273,512

(132
)
273,380



Distribution of financial instruments by credit quality at 31 December 2018 (continued)
(Audited)
 
Gross carrying/notional amount
Allowance for ECL/other credit provisions

Net

 
Strong

Good

Satisfactory

Sub-
standard

Credit impaired

Total

 
$m

$m

$m

$m

$m

$m

$m

$m

In-scope for IFRS 9
 
 
 
 
 
 
 
 
Loans and advances to customers held at amortised cost
485,451

244,199

230,357

16,993

13,321

990,321

(8,625
)
981,696

– personal
316,616

43,764

27,194

2,182

4,581

394,337

(2,947
)
391,390

– corporate and commercial
140,387

181,984

189,357

14,339

8,510

534,577

(5,552
)
529,025

– non-bank financial institutions
28,448

18,451

13,806

472

230

61,407

(126
)
61,281

Loans and advances to banks held at amortised cost
60,249

7,371

4,549

11

—

72,180

(13
)
72,167

Cash and balances at central banks
160,995

1,508

324

18

—

162,845

(2
)
162,843

Items in the course of collection from other banks
5,765

21

1

—

—

5,787

—

5,787

Hong Kong Government certificates of indebtedness
35,859

—

—

—

—

35,859

—

35,859

Reverse repurchase agreements – non-trading
200,774

29,423

12,607

—

—

242,804

—

242,804

Financial investments
56,031

5,703

949

1

—

62,684

(18
)
62,666

Prepayments, accrued income and other assets
55,424

8,069

9,138

181

126

72,938

(35
)
72,903

– endorsements and acceptances
1,514

4,358

3,604

155

3

9,634

(11
)
9,623

– accrued income and other
53,910

3,711

5,534

26

123

63,304

(24
)
63,280

Debt instruments measured at fair value through other comprehensive income1

319,632

12,454

7,210

2,558

12

341,866

(84
)
341,782

Out-of-scope for IFRS 9
















Trading assets
139,484

18,888

16,991

1,871

—

177,234

—

177,234

Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss
6,079

2,163

6,683

9

—

14,934

—

14,934

Derivatives
169,121

31,225

6,813

625

41

207,825

—

207,825

Total gross carrying amount on balance sheet
1,694,864

361,024

295,622

22,267

13,500

2,387,277

(8,777
)
2,378,500

Percentage of total credit quality
71%

15.1%

12.4%

0.9%

0.6%

100%





Loan and other credit-related commitments
373,302

137,076

75,478

5,233

919

592,008

(325
)
591,683

Financial guarantees
9,716

7,400

5,505

597

300

23,518

(93
)
23,425

In-scope: Irrevocable loan commitments and financial guarantees
383,018

144,476

80,983

5,830

1,219

615,526

(418
)
615,108

Loan and other credit-related commitments2
188,258

—

—

—

—

188,258

—

188,258

Performance and other guarantees
26,679

25,743

16,790

1,869

403

71,484

(99
)
71,385

Out-of-scope: Revocable loan commitments and non-financial guarantees
214,937

25,743

16,790

1,869

403

259,742

(99
)
259,643

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 IFRS 9, are presented within the ‘Strong’ classification.
Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation
(Audited)
 
 
Gross carrying/notional amount
Allowance for ECL

Net

 
 
Strong

Good

Satisfactory

Sub-
standard

Credit impaired

Total

 
Footnotes
$m

$m

$m

$m

$m

$m

$m

$m

Loans and advances to customers at amortised cost
 
524,889

258,402

228,485

20,007

13,692

1,045,475

(8,732
)
1,036,743

– stage 1
 
523,092

242,631

181,056

4,804

—

951,583

(1,297
)
950,286

– stage 2
 
1,797

15,771

47,429

15,185

—

80,182

(2,284
)
77,898

– stage 3
 
—

—

—

—

13,378

13,378

(5,052
)
8,326

– POCI
 
—

—

—

18

314

332

(99
)
233

Loans and advances to banks at amortised cost
 
60,636

5,329

1,859

1,395

—

69,219

(16
)
69,203

– stage 1
 
60,548

5,312

1,797

112

—

67,769

(14
)
67,755

– stage 2
 
88

17

62

1,283

—

1,450

(2
)
1,448

– stage 3
 
—

—

—

—

—

—

—

—

– POCI
 
—

—

—

—

—

—

—

—

Other financial assets measured at amortised cost
 
537,253

54,505

22,766

503

152

615,179

(118
)
615,061

– stage 1
 
536,942

54,058

21,921

279

—

613,200

(38
)
613,162

– stage 2
 
311

447

845

224

—

1,827

(38
)
1,789

– stage 3
 
—

—

—

—

151

151

(42
)
109

– POCI
 
—

—

—

—

1

1

—

1

Loan and other credit-related commitments
 
369,424

146,988

77,499

5,338

780

600,029

(329
)
599,700

– stage 1
 
368,711

141,322

66,283

1,315

—

577,631

(137
)
577,494

– stage 2
 
713

5,666

11,216

4,023

—

21,618

(133
)
21,485

– stage 3
 
—

—

—

—

771

771

(59
)
712

– POCI
 
—

—

—

—

9

9

—

9

Financial guarantees
 
7,441

6,033

5,539

1,011

190

20,214

(48
)
20,166

– stage 1
 
7,400

5,746

4,200

338

—

17,684

(16
)
17,668

– stage 2
 
41

287

1,339

673

—

2,340

(22
)
2,318

– stage 3
 
—

—

—

—

186

186

(10
)
176

– POCI
 
—

—

—

—

4

4

—

4

At 31 Dec 2019
 
1,499,643

471,257

336,148

28,254

14,814

2,350,116

(9,243
)
2,340,873

Debt instruments at FVOCI
1
 
 
 
 
 
 
 
 
– stage 1
 
333,072

10,941

6,902

—

—

350,915

(39
)
350,876

– stage 2
 
86

25

320

544

—

975

(127
)
848

– stage 3
 
—

—

—

—

—

—

—

—

– POCI
 
—

—

—

—

1

1

—

1

At 31 Dec 2019
 
333,158

10,966

7,222

544

1

351,891

(166
)
351,725

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.

Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation2 
(continued)
(Audited)
 
 
Gross carrying/notional amount
 
 
 
 
Strong

Good

Satisfactory

Sub-standard

Credit impaired

Total

Allowance for ECL

 Net

 
Footnotes
$m

$m

$m

$m

$m

$m

$m

$m

Loans and advances to customers at amortised cost
 
485,451

244,199

230,357

16,993

13,321

990,321

(8,625
)
981,696

– stage 1
 
483,170

232,004

187,773

5,446

—

908,393

(1,276
)
907,117

– stage 2
 
2,281

12,195

42,584

11,521

—

68,581

(2,108
)
66,473

– stage 3
 
—

—

—

—

13,023

13,023

(5,047
)
7,976

– POCI
 
—

—

—

26

298

324

(194
)
130

Loans and advances to banks at amortised cost
 
60,249

7,371

4,549

11

—

72,180

(13
)
72,167

– stage 1
 
60,199

7,250

4,413

11

—

71,873

(11
)
71,862

– stage 2
 
50

121

136

—

—

307

(2
)
305

– stage 3
 
—

—

—

—

—

—

—

—

– POCI
 
—

—

—

—

—

—

—

—

Other financial assets measured at amortised cost
 
514,848

44,724

23,019

200

126

582,917

(55
)
582,862

– stage 1
 
514,525

44,339

22,184

70

—

581,118

(27
)
581,091

– stage 2
 
323

385

835

130

—

1,673

(6
)
1,667

– stage 3
 
—

—

—

—

126

126

(22
)
104

– POCI
 
—

—

—

—

—

—

—

—

Loan and other credit-related commitments
 
373,302

137,076

75,478

5,233

919

592,008

(325
)
591,683

– stage 1
 
372,529

131,278

62,452

973

—

567,232

(143
)
567,089

– stage 2
 
773

5,798

13,026

4,260

—

23,857

(139
)
23,718

– stage 3
 
—

—

—

—

912

912

(43
)
869

– POCI
 
—

—

—

—

7

7

—

7

Financial guarantees
 
9,716

7,400

5,505

597

300

23,518

(93
)
23,425

– stage 1
 
9,582

6,863

4,231

158

—

20,834

(19
)
20,815

– stage 2
 
134

537

1,274

439

—

2,384

(29
)
2,355

– stage 3
 
—

—

—

—

297

297

(45
)
252

– POCI
 
—

—

—

—

3

3

—

3

At 31 Dec 2018
 
1,443,566

440,770

338,908

23,034

14,666

2,260,944

(9,111
)
2,251,833

Debt instruments at FVOCI
1
—








– stage 1
 
319,623

12,358

6,856

2,218

—

341,055

(33
)
341,022

– stage 2
 
9

96

354

340

—

799

(50
)
749

– stage 3
 
—

—

—

—

8

8

(1
)
7

– POCI
 
—

—

—

—

4

4

—

4

At 31 Dec 2018
 
319,632

12,454

7,210

2,558

12

341,866

(84
)
341,782

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
During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 122.
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.
Wholesale lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and
customers including loan commitments and financial guarantees1 

(Audited)
 
Non-credit impaired
Credit impaired
 
 
Stage 1
Stage 2
Stage 3
POCI
Total
 
Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

 
$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2018
897,529

(873
)
84,354

(1,249
)
10,209

(4,410
)
1,042

(242
)
993,134

(6,774
)
Transfers of financial instruments
(4,477
)
(274
)
1,535

386

2,942

(112
)
—

—

—

—

Net remeasurement of ECL arising from transfer of stage
—

262

—

(231
)
—

(92
)
—

—

—

(61
)
Net new and further lending/repayments
74,107

(271
)
(13,709
)
342

(2,414
)
406

(587
)
42

57,397

519

Changes to risk parameters – credit quality
—

157

—

(301
)
—

(1,041
)
—

(51
)
—

(1,236
)
Assets written off
—

—

—

—

(1,182
)
1,172

(1
)
1

(1,183
)
1,173

Foreign exchange and other
(44,967
)
97

6,086

41

(316
)
90

(120
)
56

(39,317
)
284

At 31 Dec 2018
922,192

(902
)
78,266

(1,012
)
9,239

(3,987
)
334

(194
)
1,010,031

(6,095
)
ECL income statement change for the period
 
148

 
(190
)
 
(727
)
 
(9
)
 
(778
)
Recoveries
 
 
 
 
 
 
 
 
 
118

Others
 
 
 
 
 
 
 
 
 
(69
)
Total ECL income statement change for the period
 
 
 
 
 
 
 
 
 
(729
)

1
During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount for 31 December 2018 only. For further details, see page 122.
Wholesale lending – 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)
 
Non-credit impaired
Credit impaired
 
 
Stage 1
Stage 2
Stage 3
POCI
Total
 
Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

 
$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2019
922,192

(902
)
78,266

(1,012
)
9,239

(3,987
)
334

(194
)
1,010,031

(6,095
)
Transfers of financial instruments
(31,493
)
(169
)
28,418

276

3,075

(107
)
—

—

—

—

Net remeasurement of ECL arising from transfer of stage
—

223

—

(268
)
—

(38
)
—

—

—

(83
)
Net new and further lending/ repayments
27,918

(134
)
(20,121
)
167

(1,552
)
369

137

(1
)
6,382

401

Change in risk parameters – credit quality
—

102

—

(193
)
—

(1,514
)
—

(51
)
—

(1,656
)
Changes to models used for ECL calculation
—

—

—

(56
)
—

—

—

—

—

(56
)
Assets written off
—

—

—

—

(1,312
)
1,312

(140
)
140

(1,452
)
1,452

Credit-related modifications that resulted in derecognition
—

—

—

—

(268
)
125

—

—

(268
)
125

Foreign exchange and other
7,035

13

1,606

(17
)
107

(66
)
14

7

8,762

(63
)
At 31 Dec 2019
925,652

(867
)
88,169

(1,103
)
9,289

(3,906
)
345

(99
)
1,023,455

(5,975
)
ECL income statement change for the period

191


(350
)

(1,183
)

(52
)

(1,394
)
Recoveries













47

Others

 
 
 
 
 
 
 
 
(24
)
Total ECL income statement change for the period









(1,371
)
Collateral and other credit enhancements
(Audited)
Although collateral can be an important mitigant of credit risk, it is the Group’s 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 Group 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 included in the expected loss calculations. CDS mitigants are not reported in the following tables.
Collateral on loans and advances
Collateral held is analysed separately for commercial real estate and for other corporate, commercial and financial (non-bank) lending. The following tables include off-balance sheet loan commitments, primarily undrawn credit lines.
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 as explained further on page 275.
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. In Europe, facilities of a working capital nature are generally not secured by a first fixed charge, and are therefore disclosed as not collateralised.
Wholesale lending – commercial real estate loans and advances including loan commitments by level of collateral for key
countries/territories (by stage)
(Audited)
 
 
 
Of which:
 
Total
UK
Hong Kong
US
 
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
 
$m

%
$m

%
$m

%
$m

%
Stage 1
 
 
 
 
 
 
 
 
Not collateralised
61,820

0.1
7,266

0.1
32,478

—
541

—
Fully collateralised
89,319

0.1
18,535

—
41,798

—
4,722

—
LTV ratio:












– less than 50%
46,318

0.1
7,018

0.1
28,776

—
1,703

0.1
– 51% to 75%
32,583

0.1
9,349

—
10,815

0.1
2,854

—
– 76% to 90%
5,018

0.1
1,649

0.1
1,436

0.1
96

—
– 91% to 100%
5,400

0.2
519

—
771

—
69

—
Partially collateralised (A):
6,563

0.2
682

—
1,627

0.1
—

—
– collateral value on A
3,602

 
535


1,142


—


Total
157,702

0.1
26,483

0.1
75,903

—
5,263

—
Stage 2
 
 
 
 
 
 
 
 
Not collateralised
3,040

1.2
1,857

1.2
440

0.2
—

—
Fully collateralised
5,184

1.1
1,419

1.2
1,501

0.6
354

1.4
LTV ratio:












– less than 50%
2,167

1.1
615

1.8
955

0.3
62

—
– 51% to 75%
1,986

0.9
712

0.6
497

1.0
292

1.4
– 76% to 90%
333

2.1
16

6.3
29

—
—

—
– 91% to 100%
698

1.1
76

1.3
20

—
—

—
Partially collateralised (B):
500

0.6
296

0.3
42

—
—

—
– collateral value on B
203


56

 
25


—

 
Total
8,724

1.1
3,572

1.1
1,983

0.5
354

—
Stage 3
 
 
 
 
 
 
 
 
Not collateralised
315

57.8
66

92.4
—

—
—

—
Fully collateralised
557

14.9
404

12.9
17

11.8
—

—
LTV ratio:












– less than 50%
87

16.1
42

7.1
6

16.7
—

—
– 51% to 75%
90

7.8
69

4.3
10

—
—

—
– 76% to 90%
89

15.7
72

4.2
—

—
—

—
– 91% to 100%
291

16.5
221

19.5
1

—
—

—
Partially collateralised (C):
773

41.5
507

27.8
—

—
—

—
– collateral value on C
380


166

 
—


—


Total
1,645

35.6
977

26.0
17

11.8
—

—
POCI
 
 
 
 
 
 
 
 
Not collateralised
—

—
—

—
—

—
—

—
Fully collateralised
1

—
—

—
—

—
—

—
LTV ratio:












– less than 50%
1

—
—

—
—

—
—

—
– 51% to 75%
—

—
—

—
—

—
—

—
– 76% to 90%
—

—
—

—
—

—
—

—
– 91% to 100%
—

—
—

—
—

—
—

—
Partially collateralised (D):
—

—
—

—
—

—
—

—
– collateral value on D
—

 
—

 
—

 
—

 
Total
1

—
—

—
—

—
—

—
At 31 Dec 2019
168,072

0.5
31,032

1.0
77,903

0.1
5,617

0.1
Wholesale lending – commercial real estate loans and advances including loan commitments by level of collateral for key
countries/territories (by stage)1 (continued)
 
 
 
 
Of which:
 
Total
UK
Hong Kong
US
 
Gross carrying/nominal amount

ECL
coverage
Gross carrying/nominal amount

ECL
coverage
Gross carrying/nominal amount

ECL
coverage
Gross carrying/nominal amount

ECL
coverage
 
$m

%
$m

%
$m

%
$m

%
Stage 1
 
 
 
 
 
 
 
 
Not collateralised
61,486

0.1
9,920

0.2
31,224

—
—

—
Fully collateralised
86,960

0.1
17,196

0.1
39,174

—
4,862

—
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
46,650

0.1
7,673

0.1
25,870

—
3,463

—
– 51% to 75%
29,384

0.1
7,937

0.1
10,452

0.1
787

—
– 76% to 90%
5,167

0.1
1,038

—
1,168

0.1
519

—
– 91% to 100%
5,759

0.2
548

0.2
1,684

0.1
93

—
Partially collateralised (A):
6,101

0.1
487

0.2
2,130

—
—

—
– collateral value on A
3,735

 
285

 
1,401

 
—

 
Total
154,547

0.1
27,603

0.1
72,528

—
4,862

—
Stage 2
 
 
 
 
 
 
 
 
Not collateralised
2,886

0.9
1,083

1.0
1,140

0.2
—

—
Fully collateralised
5,309

1.1
1,352

2.6
1,576

0.4
439

0.5
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
2,372

0.9
727

1.9
795

0.4
303

0.7
– 51% to 75%
1,667

0.7
567

0.7
505

0.4
7

—
– 76% to 90%
363

5.0
34

44.1
29

—
129

—
– 91% to 100%
907

1.0
24

8.3
247

—
—

—
Partially collateralised (B):
289

1.4
52

5.8
15

—
—

—
– collateral value on B
156

 
20

 
5

 
—

 
Total
8,484

1.1
2,487

2.0
2,731

0.3
439

0.5
Stage 3
 
 
 
 
 
 
 
 
Not collateralised
338

57.1
61

85.2
—

—
—

—
Fully collateralised
606

12.7
433

9.2
12

—
—

—
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
412

10.0
304

9.2
2

—
—

—
– 51% to 75%
88

27.3
58

6.9
10

—
—

—
– 76% to 90%
38

2.6
35

5.7
—

—
—

—
– 91% to 100%
68

16.2
36

16.7
—

—
—

—
Partially collateralised (C):
474

56.5
261

42.9
—

—
—

—
– collateral value on C
321

 
137

 
—

 
—

 
Total
1,418

37.9
755

27.0
12

—
—

—
POCI
 
 
 
 
 
 
 
 
Not collateralised
—

—
—

—
—

—
—

—
Fully collateralised
15

53.3
—

—
—

—
—

—
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
13

61.5
—

—
—

—
—

—
– 51% to 75%
2

—
—

—
—

—
—

—
– 76% to 90%
—

—
—

—
—

—
—

—
– 91% to 100%
—

—
—

—
—

—
—

—
Partially collateralised (D):
—

—
—

—
—

—
—

—
– collateral value on D
—

 
—

 
—

 
—

 
Total
15

53.3
—

—
—

—
—

—
At 31 Dec 2018
164,464

0.5
30,845

0.9
75,271

—
5,301

0.1
1
During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 122.

Wholesale lending – commercial real estate loans and advances including loan commitments by level of collateral for key
countries/territories
(Audited)
 
 
 
Of which:
 
Total
UK
Hong Kong
US
 
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
 
$m

%
$m

%
$m

%
$m

%
Rated CRR/PD1 to 7
 
 
 
 
 
 
 
 
Not collateralised
64,850

0.1
9,119

0.3
32,918

—
541

—
Fully collateralised
94,299

0.1
19,833

0.1
43,299

0.1
5,021

0.1
Partially collateralised (A):
7,052

0.2
971

0.1
1,669

0.1
—

—
– collateral value on A
3,796

 
586

 
1,167

 
—

 
Total
166,201

0.1
29,923

0.1
77,886

—
5,562

0.1
Rated CRR/PD8
 
 
 
 
 
 
 
 
Not collateralised
10

50.0
4

100.0
—

—
—

—
Fully collateralised
204

4.9
121

5.0
—

—
55

3.6
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
47

8.5
27

14.8
—

—
13

—
– 51% to 75%
120

3.3
68

1.5
—

—
42

4.8
– 76% to 90%
25

4.0
15

6.7
—

—
—

—
– 91% to 100%
12

8.3
11

—
—

—
—

—
Partially collateralised (B):
11

—
7

—
—

—
—

—
– collateral value on B
9

 
5

 
—

 
—

 
Total
225

6.7
132

7.6
—

—
55

3.6
Rated CRR/PD9 to 10
 
 
 
 
 
 
 
 
Not collateralised
315

57.8
66

92.4
—

—
—

—
Fully collateralised
557

14.9
404

12.9
17

11.8
—

—
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
87

16.1
42

7.1
6

16.7
—

—
– 51% to 75%
90

7.8
69

4.3
10

—
—

—
– 76% to 90%
89

15.7
72

4.2
—

—
—

—
– 91% to 100%
291

16.5
221

19.5
1

100.0
—

—
Partially collateralised (C):
774

41.6
507

27.8
—

—
—

—
– collateral value on C
380

 
166

 
—

 
—

 
Total
1,646

35.7
977

26.0
17

11.8
—

—
At 31 Dec 2019
168,072

0.5
31,032

1.0
77,903

0.1
5,617

0.1
Rated CRR/PD1 to 7
 
 
 
 
 
 
 
 
Not collateralised
64,324

0.1
11,001

0.2
32,364

—
—

—
Fully collateralised
91,791

0.1
18,112

0.2
40,747

0.1
5,282

0.1
Partially collateralised (A):
6,377

0.2
532

0.6
2,145

—
—

—
– collateral value on A
3,879


299


1,406


—


Total
162,492

0.1
29,645

0.3
75,256

—
5,282

0.1
Rated CRR/PD8








Not collateralised
49

2.0
2

—
—

—
—

—
Fully collateralised
477

1.5
435

1.1
3

33.3
19

—
LTV ratio:








– less than 50%
178

1.7
149

1.3
3

33.3
19

—
– 51% to 75%
269

0.4
265

0.4
—

—
—

—
– 76% to 90%
13

7.7
7

14.3
—

—
—

—
– 91% to 100%
17

11.8
14

14.3
—

—
—

—
Partially collateralised (B):
13

7.7
8

12.5
—

—
—

—
– collateral value on B
12


6


—


—


Total
539

1.7
445

1.3
3

33.3
19

—
Rated CRR/PD9 to 10








Not collateralised
338

57.1
61

85.2
—

—
—

—
Fully collateralised
621

13.5
433

9.2
12

—
—

—
LTV ratio:








– less than 50%
425

11.5
304

9.2
2

—
—

—
– 51% to 75%
90

26.7
58

6.9
10

—
—

—
– 76% to 90%
38

2.6
35

5.7
—

—
—

—
– 91% to 100%
68

16.2
36

16.7
—

—
—

—
Partially collateralised (C):
474

56.5
261

42.9
—

—
—

—
– collateral value on C
321


137


—


—


Total
1,433

38.0
755

27.0
12

—
—

—
At 31 Dec 2018
164,464

0.5
30,845

0.9
75,271

—
5,301

0.1
Wholesale lending – other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level
of collateral for key countries/territories (by stage)
(Audited)
 
 
 
Of which:
 
Total
UK
Hong Kong
US
 
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
 
$m

%
$m

%
$m

%
$m

%
Stage 1
 
 
 
 
 
 
 
 
Not collateralised
680,079

0.1
132,197

0.2
116,536

—
112,911

—
Fully collateralised
128,290

0.1
40,172

0.1
32,818

0.1
14,830

—
LTV ratio:








– less than 50%
48,012

0.1
13,831

0.1
11,009

0.1
5,326

—
– 51% to 75%
37,891

0.1
11,903

0.2
12,783

0.1
3,717

0.1
– 76% to 90%
13,072

0.1
3,399

0.2
4,697

0.1
130

—
– 91% to 100%
29,315

—
11,039

—
4,329

0.1
5,657

—
Partially collateralised (A):
52,890

0.1
8,122

0.1
20,162

0.1
1,629

—
– collateral value on A
25,824


3,809


9,616


1,337


Total
861,259

0.1
180,491

0.2
169,516

—
129,370

—
Stage 2








Not collateralised
61,540

1.2
13,318

2.2
13,308

0.7
10,129

0.9
Fully collateralised
21,126

0.8
3,139

1.8
12,934

0.6
868

0.8
LTV ratio:








– less than 50%
7,081

0.9
1,208

2.0
3,845

0.6
303

0.3
– 51% to 75%
8,482

0.9
1,111

1.8
5,580

0.7
465

1.1
– 76% to 90%
2,684

0.9
282

2.1
1,646

0.5
47

2.1
– 91% to 100%
2,879

0.6
538

1.3
1,863

0.2
53

—
Partially collateralised (B):
8,463

0.8
1,516

1.4
3,768

0.4
124

1.6
– collateral value on B
3,669


370


1,801


53


Total
91,129

1.1
17,973

2.1
30,010

0.6
11,121

0.9
Stage 3








Not collateralised
4,768

49.2
1,899

33.0
504

83.5
2

50.0
Fully collateralised
1,479

22.4
494

12.6
86

12.8
214

—
LTV ratio:








– less than 50%
335

35.2
103

17.5
9

33.3
2

—
– 51% to 75%
352

24.4
198

8.6
21

4.8
—

—
– 76% to 90%
373

23.6
101

20.8
40

7.5
—

—
– 91% to 100%
419

9.1
92

7.6
16

25.0
212

—
Partially collateralised (C):
1,367

44.8
369

20.1
87

48.3
92

44.6
– collateral value on C
693


192


34


65


Total
7,614

43.2
2,762

27.6
677

70.0
308

13.6
POCI








Not collateralised
223

32.7
32

96.9
7

—
—

—
Fully collateralised
28

3.6
—

—
10

—
—

—
LTV ratio:








– less than 50%
2

50.0
—

—
—

—
—

—
– 51% to 75%
26

—
—

—
10

—
—

—
– 76% to 90%
—

—
—

—
—

—
—

—
– 91% to 100%
—

—
—

—
—

—
—

—
Partially collateralised (D):
97

33.0
57

1.8
31

90.3
—

—
– collateral value on D
57


19


30


—


Total
348

30.5
89

36.0
48

58.3
—

—
At 31 Dec 2019
960,350

0.5
201,315

0.7
200,251

0.4
140,799

0.1

Wholesale lending – other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level
of collateral for key countries/territories (by stage)1,2 (continued)
(Audited)

 
 
 
Of which:
 
Total
UK
Hong Kong
US
 
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
 
$m

%
$m

%
$m

%
$m

%
Stage 1
 
 
 
 
 
 
 
 
Not collateralised
673,589

0.1
137,269

0.2
122,259

—
116,001

—
Fully collateralised
127,443

0.1
30,492

0.1
36,730

0.1
11,229

0.1
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
39,509

0.1
8,519

0.2
12,032

0.1
4,686

—
– 51% to 75%
49,518

0.1
9,275

0.2
14,264

0.1
2,424

—
– 76% to 90%
12,627

0.1
3,201

0.2
4,567

0.1
318

—
– 91% to 100%
25,789

0.1
9,497

—
5,867

0.1
3,801

—
Partially collateralised (A):
54,412

0.1
6,668

0.2
21,942

—
1,875

—
– collateral value on A
23,857

 
3,250

 
10,263

 
912

 
Total
855,444

0.1
174,429

0.2
180,931

—
129,105

—
Stage 2
 
 
 
 
 
 
 
 
Not collateralised
61,464

1.1
21,035

1.7
6,212

0.4
10,085

1.2
Fully collateralised
13,633

1.2
5,645

1.5
3,378

0.5
1,131

9.3
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
5,109

1.1
2,047

1.7
1,421

0.4
342

0.6
– 51% to 75%
4,950

1.3
2,154

1.8
1,290

0.6
467

0.6
– 76% to 90%
1,399

1.8
496

1.2
391

0.5
85

1.2
– 91% to 100%
2,175

0.8
948

0.4
276

0.4
237

1.7
Partially collateralised (B):
6,623

0.7
1,793

1.2
2,287

0.3
63

1.6
– collateral value on B
2,324

 
339

 
971

 
16

 
Total
81,720

1.1
28,473

1.6
11,877

0.4
11,279

1.1
Stage 3
 
 
 
 
 
 
 
 
Not collateralised
5,240

50.2
1,882

38.8
478

81.2
1

100.0
Fully collateralised
1,460

22.9
517

6.2
146

—
130

13.8
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
361

36.0
133

10.5
11

—
4

—
– 51% to 75%
328

9.8
179

1.7
62

—
—

—
– 76% to 90%
427

24.6
131

13.7
32

—
—

—
– 91% to 100%
344

19.8
74

8.1
41

—
126

—
Partially collateralised (C):
1,147

43.1
228

21.1
158

15.2
71

31.0
– collateral value on C
580

 
132

 
38

 
55

 
Total
7,847

44.1
2,627

31.2
782

52.7
202

10.9
POCI
 
 
 
 
 
 
 
 
Not collateralised
232

66.8
—

—
25

20.0
—

—
Fully collateralised
37

2.7
—

—
9

—
—

—
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
1

—
—

—
—

—
—

—
– 51% to 75%
—

—
—

—
—

—
—

—
– 76% to 90%
22

—
—

—
—

—
—

—
– 91% to 100%
14

—
—

—
9

—
—

—
Partially collateralised (D):
49

63.3
8

—
35

85.7
—

—
– collateral value on D
38

 
3

 
34

 
—

 
Total
318

59.2
8

—
69

50.7
—

—
At 31 Dec 2018
945,329

0.6
205,537

0.8
193,659

0.3
140,586

0.1
1
During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 122.
2
The 2018 comparative amounts have been re-presented to reclassify amounts from fully collateralised to not collateralised and to include not collateralised amounts previously excluded. The impact of these re-presentations is to increase stage 1 not collateralised amounts by $130bn and decrease fully collateralised amounts by $105bn; increase stage 2 not collateralised amounts by $14bn and decrease fully collateralised amounts by $12bn; and to increase stage 3 not collateralised amounts by $0.3bn and decrease fully collateralised amounts by $0.1bn.
Wholesale lending – other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level
of collateral for key countries/territories
(Audited)
 
 
 
Of which:
 
Total
UK
Hong Kong
US
 
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
 
$m

%
$m

%
$m

%
$m

%
Rated CRR/PD8
 
 
 
 
 
 
 
 
Not collateralised
2,499

5.8
285

13.0
10

70.0
1,645

3.3
Fully collateralised
694

3.3
382

2.6
—

—
166

1.2
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
246

2.8
120

1.7
—

—
85

1.2
– 51% to 75%
189

4.2
93

3.2
—

—
18

—
– 76% to 90%
97

2.1
42

2.4
—

—
45

2.2
– 91% to 100%
162

3.7
127

3.9
—

—
18

—
Partially collateralised (A):
279

4.7
53

5.7
73

2.7
66

3.0
– collateral value on A
152


34


6


39


Total
3,472

5.2
720

6.9
83

12.0
1,877

3.0
Rated CRR/PD9 to 10
 
 
 

 

 

Not collateralised
4,991

48.5
1,930

34.1
510

82.5
2

50.0
Fully collateralised
1,507

22.0
494

12.6
96

11.5
214

—
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
338

35.2
103

17.5
10

—
2

—
– 51% to 75%
377

22.8
198

8.6
30

3.3
—

—
– 76% to 90%
373

23.6
101

20.8
40

7.5
—

—
– 91% to 100%
419

9.1
92

7.6
16

—
212

—
Partially collateralised (B):
1,464

44.0
427

17.6
119

58.8
92

44.6
– collateral value on B
750


211


64


65


Total
7,962

42.7
2,851

27.9
725

69.2
308

13.6
At 31 Dec 2019
11,434

31.3
3,571

23.7
808

63.4
2,185

4.5
Rated CRR/PD8
 
 
 
 
 
 
 
 
Not collateralised
1,243

5.4
565

6.2
94

7.4
191

5.2
Fully collateralised
1,895

3.6
74

4.1
11

9.1
1,621

3.1
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
693

4.2
21

4.8
—

—
594

4.2
– 51% to 75%
292

2.7
49

2.0
11

9.1
169

2.4
– 76% to 90%
45

15.6
2

—
—

—
20

—
– 91% to 100%
865

2.8
2

—
—

—
838

—
Partially collateralised (A):
212

2.8
23

4.3
153

1.3
—

—
– collateral value on A
84

 
14

 
49

 
—

 
Total
3,350

4.2
662

6
258

3.9
1,812

3.4
Rated CRR/PD9 to 10
 
 
 
 
 
 
 
 
Not collateralised
5,199

53.2
1,775

42.1
503

78.1
6

16.7
Fully collateralised
1,719

24.8
513

6.2
155

—
188

9.6
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
608

36.0
181

7.7
11

—
77

22.1
– 51% to 75%
503

8.7
172

1.7
62

—
103

1.0
– 76% to 90%
405

24.2
86

10.5
32

—
—

—
– 91% to 100%
203

31.5
74

8.1
50

—
8

—
Partially collateralised (B):
974

46.1
187

21.9
193

28.0
5

60.0
– collateral value on B
466

 
116

 
73

 
2

 
Total
7,892

46.1
2,475

33.2
851

52.6
199

11.1
At 31 Dec 2018
11,242

33.7
3,137

27.4
1,109

41.3
2,011

4.2
Personal lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers
including loan commitments and financial guarantees

(Audited)

 
Non-credit impaired
Credit impaired
 
 
Stage 1
Stage 2
Stage 3
Total
 
Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

 
$m

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2018
549,328

(596
)
17,678

(1,157
)
4,874

(1,312
)
571,880

(3,065
)
Transfers of financial instruments
(4,270
)
(411
)
2,047

799

2,223

(388
)
—

—

Net remeasurement of ECL arising from transfer of stage
—

358

—

(374
)
—

(11
)
—

(27
)
Net new and further lending/repayments
52,761

(241
)
(2,453
)
222

(488
)
327

49,820

308

Changes to risk parameters – credit quality
—

266

—

(786
)
—

(1,197
)
—

(1,717
)
Assets written off
—

—

—

—

(1,386
)
1,380

(1,386
)
1,380

Foreign exchange and other
(17,035
)
77

(434
)
30

(230
)
53

(17,699
)
160

At 31 Dec 2018
580,784

(547
)
16,838

(1,266
)
4,993

(1,148
)
602,615

(2,961
)
ECL income statement change for the period


383



(938
)


(881
)


(1,436
)
Recoveries
 
 
 
 
 
 
 
290

Others
 
 
 
 
 
 
 
(18
)
Total ECL income statement change for the period

 
 
 
 
 
 
 
(1,164
)
Personal lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to
customers including loan commitments and financial guarantees

(Audited)

 
 
 
Non-credit impaired
Credit impaired
 
 
Stage 1
Stage 2
Stage 3
Total
 
Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

 
$m

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2019
580,784

(547
)
16,838

(1,266
)
4,993

(1,148
)
602,615

(2,961
)
Transfers of financial instruments
(4,751
)
(374
)
2,645

858

2,106

(484
)
—

—

Net remeasurement of ECL arising from transfer of stage
—

446

—

(408
)
—

(76
)
—

(38
)
Net new and further lending/repayments
50,946

3

(2,348
)
453

(758
)
281

47,840

737

Change in risk parameters – credit quality
—

(100
)
—

(1,015
)
—

(1,190
)
—

(2,305
)
Changes to models used for ECL calculation
—

(6
)
—

60

—

14

—

68

Assets written off
—

—

—

—

(1,345
)
1,345

(1,345
)
1,345

Foreign exchange and other
8,982

(19
)
247

(20
)
50

43

9,279

4

At 31 Dec 2019
635,961

(597
)
17,382

(1,338
)
5,046

(1,215
)
658,389

(3,150
)
ECL income statement change for the period


343



(910
)


(971
)


(1,538
)
Recoveries














314

Other














4

Total ECL income statement change for the period














(1,220
)
Collateral on loans and advances
(Audited)
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
Personal lending – residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage
(Audited)
 
 
 
Of which:
 
Total
UK
Hong Kong
US
 
Gross carrying/nominal amount

ECL coverage

Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage

Gross carrying/nominal amount

ECL coverage
 
$m

%

$m

%
$m

%

$m

%
Stage 1
 
 
 
 
 
 
 
 
Fully collateralised
326,510

—

143,772

—
86,049

—

16,079

—
LTV ratio:
 
 
 
 
 
 
 
 
– less than 50%
168,923

—

70,315

—
57,043

—

8,170

—
– 51% to 60%
55,287

—

21,898

—
13,169

—

3,330

—
– 61% to 70%
44,208

—

19,903

—
6,478

—

2,702

—
– 71% to 80%
33,049

—

17,649

—
3,195

—

1,610

—
– 81% to 90%
18,157

—

11,127

—
3,685

—

198

—
– 91% to 100%
6,886

—

2,880

—
2,479

—

69

—
Partially collateralised (A):
1,384

0.1
326

—
284

—

5

—
LTV ratio:








– 101% to 110%
843

0.1
89

—
281

—

3

—
– 111% to 120%
195

0.2
48

—
1

—

1

—
– greater than 120%
346

0.1
189

—
2

—

1

—
– collateral value on A
1,232


232


279


5


Total
327,894

—

144,098

—
86,333

—

16,084

—
Stage 2








Fully collateralised
7,087

0.9
1,941

1.0
1,116

—

1,074

0.3
LTV ratio:








– less than 50%
3,781

0.5
1,146

0.7
892

—

680

0.2
– 51% to 60%
923

1.1
233

1.5
95

—

184

0.3
– 61% to 70%
909

1.2
262

1.2
59

—

130

0.6
– 71% to 80%
894

1.1
231

1.0
32

—

53

1.3
– 81% to 90%
425

1.6
36

2.9
25

—

17

2.7
– 91% to 100%
155

4.4
33

1.8
13

—

10

1.1
Partially collateralised (B):
76

7.2
23

1.8
1

—

4

—
LTV ratio:








– 101% to 110%
45

5.4
20

1.5
1

—

2

—
– 111% to 120%
10

11.1
1

4.8
—

—

1

—
– greater than 120%
21

9.0
2

3.0
—

—

1

—
– collateral value on B
69


20


1


3


Total
7,163

1.0
1,964

1.0
1,117

—

1,078

0.3
Stage 3








Fully collateralised
2,725

9.0
1,177

9.9
44
0.5

695

0.7
LTV ratio:








– less than 50%
1,337

7.1
711

7.8
39

0.5

279

0.7
– 51% to 60%
410

7.0
159

10.0
3

0.2

126

0.8
– 61% to 70%
358

7.9
136

10.6
—

—

125

0.8
– 71% to 80%
309

13.4
100

18.9
1

—

93

1.1
– 81% to 90%
178

13.8
47

12.3
1

—

51

—
– 91% to 100%
133

21.8
24

26.3
—

—

21

—
Partially collateralised (C):
371

47.6
25

27.3
—

—

13

0.2
LTV ratio:








– 101% to 110%
97

36.4
11

19.1
—

—

7

0.3
– 111% to 120%
62

37.8
6

22.7
—

—

2

0.3
– greater than 120%
212

55.6
8

42.0
—

—

4

—
– collateral value on C
305


24


—


13


Total
3,096

13.7
1,202

10.3
44
0.5

708

0.7
At 31 Dec 2019
338,153

0.2
147,264

0.1
87,494

—

17,870

0.1
Personal lending – residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage
(continued)
(Audited)
 
 
 
Of which:
 
Total
UK
Hong Kong
US
 
Gross carrying/nominal amount

ECL coverage

Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
Gross carrying/nominal amount

ECL coverage
 
$m

%

$m

%
$m

%
$m

%
Stage 1
 
 
 
 
 
 
 
 
Fully collateralised
299,072

—

130,646

—
79,180

—
15,321

—
LTV ratio:








– less than 50%
160,563

—

66,834

—
54,262

—
8,060

—
– 51% to 60%
51,415

—

20,937

—
11,591

—
3,382

—
– 61% to 70%
40,273

—

17,480

—
5,979

—
2,473

—
– 71% to 80%
28,383

—

15,086

—
2,986

—
1,113

—
– 81% to 90%
14,191

—

8,824

—
2,637

—
158

—
– 91% to 100%
4,247

0.1
1,485

—
1,725

—
135

—
Partially collateralised (A):
1,420

0.1
581

—
300

—
10

—
LTV ratio:








– 101% to 110%
808

0.1
334

—
256

—
5

—
– 111% to 120%
184

0.2
46

—
41

—
2

—
– greater than 120%
428

0.2
201

—
3

—
3

—
– collateral value on A
1,266


493


284


8


Total
300,492

—

131,227

—
79,480

—
15,331

—
Stage 2








Fully collateralised
6,170

1.0
1,234

1.3
867

—
1,435

0.3
LTV ratio:








– less than 50%
3,334

0.7
917

0.9
699

—
814

0.1
– 51% to 60%
932

1.1
113

3.0
74

—
268

0.4
– 61% to 70%
853

1.0
105

2.2
43

—
231

0.3
– 71% to 80%
586

1.3
39

3.4
28

—
79

0.9
– 81% to 90%
331

1.7
27

3.1
20

—
32

1.6
– 91% to 100%
134

2.4
33

1.5
3

—
11

0.8
Partially collateralised (B):
123

2.9
46

0.2
1

—
5

0.3
LTV ratio:








– 101% to 110%
76

1.5
44

0.1
1

—
3

0.5
– 111% to 120%
17

4.5
1

4.3
—

—
1

—
– greater than 120%
30

5.3
1

0.6
—

—
1

—
– collateral value on B
118


44


1


4


Total
6,293

1.0
1,280

1.3
868

—
1,440

0.3
Stage 3








Fully collateralised
2,557

12.3
1,023

10.9
25

0.9
671

1.0
LTV ratio:








– less than 50%
1,255

13.6
638

7.8
24

0.9
219

0.9
– 51% to 60%
359

8.3
151

11.3
1

—
107

0.9
– 61% to 70%
336

12.0
119

18.4
—

—
105

1.0
– 71% to 80%
280

9.9
70

14.8
—

—
114

0.9
– 81% to 90%
190

9.4
33

19.4
—

—
81

1.2
– 91% to 100%
137

19.8
12

45.9
—

—
45

2.2
Partially collateralised (C):
391

33.6
23

15.8
—

—
24

0.4
LTV ratio:








– 101% to 110%
73

17.4
10

14.3
—

—
14

0.6
– 111% to 120%
68

24.2
5

26.4
—

—
6

0.3
– greater than 120%
250

40.8
8

11.1
—

—
4

0.2
– collateral value on C
372


20


—


22


Total
2,948

15.1
1,046

11.0
25

0.9
695

1.0
At 31 Dec 2018
309,733

0.2
133,553

0.1
80,373

—
17,466

0.1
HSBC Holdings
(Audited)
Risk in HSBC Holdings is overseen by the HSBC Holdings Asset and Liability Management Committee (‘Holdings ALCO’). The major risks faced by HSBC Holdings are credit risk, liquidity risk and market risk (in the form of interest rate risk and foreign exchange risk).
Credit risk in HSBC Holdings primarily arises from transactions with Group subsidiaries and its investments in those subsidiaries.
In HSBC Holdings, the maximum exposure to credit risk arises from two components:
•
financial instruments on the balance sheet (see page 268); and
•
financial guarantees and similar contracts, where the maximum exposure is the maximum that we would have to pay if the guarantees were called upon (see Note 32).
In the case of our derivative balances, we have amounts with a legally enforceable right of offset in the case of counterparty default that are not included in the carrying value. These offsets also include collateral received in cash and other financial assets. The total offset relating to our derivative balances was $0.1bn at 31 December 2019 (2018: $1.5bn).
The credit quality of loans and advances and financial investments, both of which consist of intra-Group lending and US Treasury bills and bonds, is assessed as ‘strong’, with 100% of the exposure being neither past due nor impaired (2018: 100%). For further details of credit quality classification, see page 121.
Capital risk management
Overview
Capital risk is the risk that we fail to meet our regulatory capital requirements either at Group, subsidiary or branch level.
Key developments in 2019
In 2019, we carried out a restructuring of our capital risk management function, with the creation of a dedicated second line of defence that will provide independent oversight of capital management activities. The approach to capital risk management is evolving. This will operate across the Group focusing on both adequacy of capital and sufficiency of returns. Other developments in 2019 included:
•
The Risk function was actively involved in the calibration of the capital risk appetite metrics, the review and challenge of the capital adequacy expressed through stress testing, and the internal capital adequacy assessment process (‘ICAAP’).
•
The common equity tier 1 (‘CET1’) ratio was 14.7% at 31 December 2019 and the leverage ratio was 5.3%. Allocation of the Group’s capital to business lines and legal entities is informed by return metrics and the performance of key capital ratios under plan and stress scenarios.
•
We passed the PRA annual stress test exercise with sufficient capital to operate through a severe macroeconomic scenario.
For quantitative disclosures on capital ratios, own funds and RWAs, refer to pages 188 to 191 in the Capital section.
ICAAP and risk appetite
The objectives of our capital management policy are to maintain a strong capital base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory capital requirements at all times. Our capital management policy is underpinned by a capital management framework and our ICAAP. The framework incorporates key capital risk appetites for CET1, total capital, minimum required eligible liabilities (‘MREL’), and double leverage. The ICAAP is an assessment of the Group’s capital position, outlining both regulatory and internal capital resources and requirements resulting from HSBC’s business model, strategy, risk profile and management, performance and planning, risks to capital, and the implications of stress testing. Our assessment of capital adequacy is driven by an assessment of risks. These risks include credit, market, operational, pensions, insurance, structural foreign exchange, residual risk and interest rate risk in the banking book. An ICAAP supports the determination of the consolidated and subsidiary capital risk appetite and target ratios as well as enables the assessment and determination of capital requirements by regulators.
HSBC Holdings is the provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings’ own capital issuance and profit retention.
HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investment in subsidiaries, including management of double leverage. Double leverage reflects the extent to which equity investments in operating entities are funded by holding company debt. Where Group capital requirements are less than the aggregate of operating entity capital requirements, double leverage can be used to improve Group capital efficiency provided it is managed appropriately and prudently in accordance with risk appetite. Double leverage is a constraint on managing our capital position, given the complexity of the Group’s subsidiary structure and the multiple regulatory regimes under which we operate. As a matter of long-standing policy, the holding company retains a substantial portfolio of high-quality liquid assets (‘HQLA’), which at 31 December 2019 was in excess of $14bn to mitigate holding company cash flow risk arising from double leverage and to underpin the strength of support the holding company can offer its subsidiaries in times of stress. Further mitigation is provided by additional tier 1 (‘AT1’) securities issued in excess of the regulatory requirements of our subsidiaries.
Planning and performance
Capital and risk-weighted asset (‘RWA’) plans form part of the annual operating plan that is approved by the Board. Capital and RWA forecasts are submitted to the Group Management Board on a monthly basis, and capital and RWAs are monitored and managed against the plan. The responsibility for global capital allocation principles rests with the Group Chief Financial Officer supported by the Group Capital Management Meeting. This is a specialist forum addressing capital management, reporting into Holdings ALCO.
Through our internal governance processes, we seek to strengthen discipline over our investment and capital allocation decisions, and to ensure that returns on investment meet the Group’s management objectives. Our strategy is to allocate capital to businesses and entities to support growth objectives where returns above internal hurdle levels have been identified and in order to meet their regulatory and economic capital needs. We evaluate and manage business returns by using a return on average tangible equity measure.
Risks to capital
Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs and/or capital position. Downside and Upside scenarios are assessed against our capital management objectives and mitigating actions are assigned as necessary. We closely monitor and consider future regulatory change. We continue to evaluate the impact upon our capital requirements of regulatory developments, including the amendments to the Capital Requirements Regulation, the Basel III reforms package and the UK’s withdrawal from the EU.
We currently estimate our pre-mitigation RWAs could potentially rise in the range of 5% to 10% as at 1 January 2022 as a result of the regulatory changes. The primary drivers include changes in the market risk, operational risk and credit valuation adjustment methodologies, as well as the potential lack of equivalence for certain investments in funds. We plan to take action to substantially mitigate a significant proportion of the increase.
The Basel package introduces an output floor that will be introduced in 2022 with a five-year transitional provision. This floor ensures that at the end of the transitional period banks’ total RWAs are no lower than 72.5% of those generated by the standardised approaches. We estimate that there will be an additional RWA impact as a result of the output floor from 2026.
There remains a significant degree of uncertainty in the impact due to the number of national discretions within Basel’s reforms, the need for further supporting technical standards to be developed and the lack of clarity regarding their implementation following the UK’s withdrawal from the EU. Furthermore, the impact does not take into consideration the possibility of offsets against Pillar 2, which may arise as the shortcomings within Pillar 1 are addressed.
Further details can be found in the ‘Regulatory developments’ section of the Group’s Pillar 3 Disclosures at 31 December 2019.
Stress testing and recovery planning
The Group uses stress testing to evaluate the robustness of plans and risk portfolios as well as to meet the requirements for stress testing set by supervisors. Stress testing also informs the ICAAP and supports recovery planning in many jurisdictions. It is a critical methodology used to evaluate how much capital the Group requires in setting risk appetite for capital risk and to re-evaluate business plans where analysis shows returns and/or capital do not meet target.
Supervisory stress testing requirements are increasing in frequency and in the granularity with which the results are required. These exercises include the programmes of the Bank of England, the US Federal Reserve Board, the European Banking Authority, the European Central Bank and the Hong Kong Monetary Authority, and stress tests undertaken in other jurisdictions. The results of regulatory stress testing and our internal stress tests are used when assessing our internal capital requirements through the ICAAP. The outcome of stress testing exercises carried out by the PRA and other regulators feeds into the setting of regulatory minimum ratios and buffers.
The Group and subsidiaries have established recovery plans addressing the actions that management would consider taking in a stress scenario if the capital position deteriorates through the target ratio and threatens to breach risk appetite and regulatory minimum levels. The recovery plans set out a range of appropriate actions that could feasibly be executed in a stressed environment to recover the capital position. These include cost management, reducing dividends and raising additional capital.
Funding sources
(Audited)
 
2019

2018

 
$m

$m

Customer accounts
1,439,115

1,362,643

Deposits by banks
59,022

56,331

Repurchase agreements – non-trading
140,344

165,884

Debt securities in issue
104,555

85,342

Cash collateral, margin and settlement accounts
71,002

54,066

Liabilities of disposal groups held for sale
—

313

Subordinated liabilities
24,600

22,437

Financial liabilities designated at fair value
164,466

148,505

Liabilities under insurance contracts
97,439

87,330

Trading liabilities
83,170

84,431

– repos
558

1,495

– stock lending
9,702

10,998

– other trading liabilities
72,910

71,938

Total equity
192,668

194,249

Other balance sheet liabilities
338,771

296,593

At 31 Dec
2,715,152

2,558,124


Funding uses
(Audited)
 
 
2019

2018

 
Footnotes
$m

$m

Loans and advances to customers
 
1,036,743

981,696

Loans and advances to banks
 
69,203

72,167

Reverse repurchase agreements – non-trading
 
240,862

242,804

Prepayments, accrued income and other assets
1
63,891

47,159

– cash collateral, margin and settlement accounts
 
63,891

47,159

Assets held for sale
 
123

735

Trading assets
 
254,271

238,130

– reverse repos
 
13,659

9,893

– stock borrowing
 
7,691

8,387

– other trading assets
 
232,921

219,850

Financial investments
 
443,312

407,433

Cash and balances with central banks
 
154,099

162,843

Other balance sheet assets
 
452,648

405,157

At 31 Dec
 
2,715,152

2,558,124

1
Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. ‘Prepayments, accrued income and other assets’ as presented within the consolidated balance sheet on page 262 includes both financial and non-financial assets.
Value at risk
(Audited)
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 that are calculated with reference to data from the past two years; and
•
calculations 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 is used with awareness 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
The risks not in VaR (‘RNIV’) framework captures and capitalises 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, the stressed VaR measure also includes risk factors considered in the VaR-based RNIV approach.
Stress-type RNIVs include a gap risk exposure measure to capture risk on non-recourse margin loans, and a de-peg risk measure to capture risk to pegged and heavily managed currencies.
Stress testing
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.
The Group trading VaR for the year is shown in the table below.
Trading VaR, 99% 1 day1
(Audited)
 
 
 
 
 
 
 
Foreign
exchange and commodity

Interest
rate

Equity

Credit
spread

Portfolio diversification2

Total3

 
$m

$m

$m

$m

$m

$m

Balance at 31 Dec 2019
7.7

28.2

15.7

15.2

(26.4
)
40.3

Average
6.9

29.9

16.2

23.7

(29.0
)
47.8

Maximum
13.5

36.5

24.9

33.2



59.3

Minimum
4.1

22.9

12.4

11.7



33.3

 
 
 
 
 
 
 
Balance at 31 Dec 2018
12.6

33.9

22.6

25.9

(37.9
)
57.1

Average
9.5

36.4

22.5

20.7

(34.3
)
54.8

Maximum
21.8

49.9

33.8

35.2

 
71.2

Minimum
5.5

27.0

13.5

12.2

 
43.9


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 – such as interest rate, equity and foreign exchange – together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.
3
The total VaR is non-additive across risk types due to diversification effects.
The Group non-trading VaR for the year is shown in the table below.
Non-trading VaR, 99% 1 day
(Audited)
 
Interest
rate

Credit
spread

Portfolio
diversification1

Total2

 
$m

$m

$m

$m

Balance at 31 Dec 2019
96.2

62.5

(28.2
)
130.5

Average
65.9

44.2

(25.6
)
84.5

Maximum
100.1

81.2



132.8

Minimum
49.2

26.6



60.9

 
 
 
 
 
Balance at 31 Dec 2018
61.4

37.2

(30.6
)
68

Average
96.8

48.3

(29.1
)
116

Maximum
129.3

96

 
154.1

Minimum
59.9

27.6

 
68

1
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 – such as interest rate, equity and foreign exchange – together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.
2
The total VaR is non-additive across risk types due to diversification effects.
Governance and structure
(Audited)
Insurance risks are managed to a defined risk appetite, which is aligned to the Group’s risk appetite and risk management framework, including its three lines of defence model. For details of the Group’s governance framework, see page 96. The Global Insurance Risk Management Meeting oversees the control framework globally and is accountable to the RBWM Risk Management Meeting on risk matters relating to the insurance business.
The monitoring of the risks within our insurance operations is carried out by insurance risk teams. Specific risk functions, including Wholesale Credit and Market Risk, Operational Risk, Resilience Risk, and Compliance, support Insurance Risk teams in their respective areas of expertise.
Stress and scenario testing
(Audited)
Stress testing forms a key part of the risk management framework for the insurance business. We participate in local and Group-wide regulatory stress tests, including the Bank of England stress test of the banking system, the Hong Kong Monetary Authority stress test, the European Insurance and Occupational Pensions 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 taken a number of actions, including repricing some products to reflect lower interest rates, launching less capital intensive products, investing in more capital efficient assets 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 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 match 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 on new contracts 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 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.
Measurement
(Audited)
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 to which the businesses are exposed. The methodology for the economic capital calculation is largely aligned to the pan-European Solvency II insurance capital regulations. The economic capital coverage ratio (economic net asset value divided by the economic capital requirement) is a key risk appetite measure.
Each of the businesses operates to appetite limits of 135% or higher. In addition to economic capital, the regulatory solvency ratio is also a metric used to manage risk appetite on an entity basis.
The following tables show the composition of assets and liabilities by contract type and by geographical region.
Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
 
 
 
 
 
 
 
 
With
DPF

Unit-linked

Other contracts1

Shareholder
assets and liabilities

Total

 
Footnotes
$m

$m

$m

$m

$m

Financial assets
 
73,929

7,333

17,514

8,269

107,045

– trading assets
 
—

—

—

—

—

– financial assets designated and otherwise mandatorily measured at fair value through profit or loss
 
21,652

7,119

3,081

2,426

34,278

– derivatives
 
202

(6
)
9

3

208

– financial investments at amortised cost
 
35,299

18

13,436

4,076

52,829

– financial investments at fair value through other comprehensive income
 
12,447

—

445

1,136

14,028

– other financial assets
2
4,329

202

543

628

5,702

Reinsurance assets
 
2,208

72

1,563

1

3,844

PVIF
3
—

—

—

8,945

8,945

Other assets and investment properties
 
2,495

2

211

602

3,310

Total assets
 
78,632

7,407

19,288

17,817

123,144

Liabilities under investment contracts designated at fair value
 
—

2,011

3,881

—

5,892

Liabilities under insurance contracts
 
77,147

6,151

14,141

—

97,439

Deferred tax
4
197

23

6

1,297

1,523

Other liabilities
 
—

—

—

4,410

4,410

Total liabilities
 
77,344

8,185

18,028

5,707

109,264

Total equity
 
—

—

—

13,879

13,879

Total liabilities and equity at 31 Dec 2019
 
77,344

8,185

18,028

19,586

123,143

Balance sheet of insurance manufacturing subsidiaries by type of contract (continued)
(Audited)
 
 
 
 
 
 
 
 
With
DPF

Unit-linked

Other contracts1

Shareholder
assets and liabilities

Total

 
Footnotes
$m

$m

$m

$m

$m

Financial assets
 
66,735

7,337

15,552

7,120

96,744

– trading assets
 
—

—

—

—

—

– financial assets designated and otherwise mandatorily measured at fair value through profit or loss

 
17,855

7,099

3,024

1,264

29,242

– derivatives
 
200

—

33

4

237

– financial investments at amortised cost

 
33,575

70

11,597

4,171

49,413

– financial investments at fair value through other comprehensive income

 
11,499

—

450

1,385

13,334

– other financial assets
2
3,606

168

448

296

4,518

Reinsurance assets
 
1,255

69

1,368

—

2,692

PVIF
3
—

—

—

7,149

7,149

Other assets and investment properties
 
2,670

2

235

453

3,360

Total assets
 
70,660

7,408

17,155

14,722

109,945

Liabilities under investment contracts designated at fair value
 
—

1,574

3,884

—

5,458

Liabilities under insurance contracts
 
69,269

5,789

12,272

—

87,330

Deferred tax
4
179

21

15

1,051

1,266

Other liabilities
 
—

—

—

3,659

3,659

Total liabilities
 
69,448

7,384

16,171

4,710

97,713

Total equity
 
—

—

—

12,232

12,232

Total liabilities and equity at 31 Dec 2018
 
69,448

7,384

16,171

16,942

109,945

1
‘Other Contracts’ includes term insurance, credit life insurance, universal life insurance and investment contracts not included in the ‘Unit-linked’ or ‘With DPF’ columns.
2
Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
3
Present value of in-force long-term insurance business.
4
‘Deferred tax’ includes the deferred tax liabilities arising on recognition of PVIF.
Balance sheet of insurance manufacturing subsidiaries by geographical region1
(Audited)
 
 
Europe

Asia

Latin
America

Total

 
Footnotes
$m

$m

$m

$m

Financial assets
 
31,613

74,237

1,195

107,045

– trading assets
 
—

—

—

—

– financial assets designated and otherwise mandatorily measured at fair value through profit or loss
 
15,490

18,562

226

34,278

– derivatives
 
84

124

—

208

– financial investments – at amortised cost
 
100

52,186

543

52,829

– financial investments – at fair value through other comprehensive income
 
13,071

582

375

14,028

– other financial assets
2
2,868

2,783

51

5,702

Reinsurance assets
 
237

3,604

3

3,844

PVIF
3
945

7,841

159

8,945

Other assets and investment properties
 
1,085

2,176

49

3,310

Total assets
 
33,880

87,858

1,406

123,144

Liabilities under investment contracts designated at fair value
 
1,139

4,753

—

5,892

Liabilities under insurance contracts
 
28,437

67,884

1,118

97,439

Deferred tax
4
229

1,275

19

1,523

Other liabilities
 
2,212

2,172

26

4,410

Total liabilities
 
32,017

76,084

1,163

109,264

Total equity
 
1,862

11,774

243

13,879

Total liabilities and equity at 31 Dec 2019
 
33,879

87,858

1,406

123,143

 
 
 
 
 
 
Balance sheet of insurance manufacturing subsidiaries by geographical region1 (continued)
 
 
Europe

Asia

Latin
America

Total

 
Footnotes
$m

$m

$m

$m

Financial assets
 
28,631

66,793

1,320

96,744

– trading assets
 
—

—

—

—

– financial assets designated and otherwise mandatorily measured at fair value through profit or loss
 
13,142

15,744

326

29,242

– derivatives
 
121

116

—

237

– financial investments – at amortised cost
 
296

48,595

522

49,413

– financial investments – at fair value through other comprehensive income
 
12,453

440

441

13,334

– other financial assets
2
2,619

1,868

31

4,518

Reinsurance assets
 
249

2,438

5

2,692

PVIF
3
832

6,195

122

7,149

Other assets and investment properties
 
1,053

2,280

27

3,360

Total assets
 
30,765

77,706

1,474

109,945

Liabilities under investment contracts designated at fair value
 
780

4,678

—

5,458

Liabilities under insurance contracts
 
26,375

59,829

1,126

87,330

Deferred tax
4
209

1,050

7

1,266

Other liabilities
 
1,690

1,911

58

3,659

Total liabilities
 
29,054

67,468

1,191

97,713

Total equity
 
1,711

10,238

283

12,232

Total liabilities and equity at 31 Dec 2018
 
30,765

77,706

1,474

109,945

1
HSBC has no insurance manufacturing subsidiaries in Middle East and North Africa or North America.
2
Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
3
Present value of in-force long-term insurance business.
4
‘Deferred tax’ includes the deferred tax liabilities arising on recognition of PVIF.
Market risk
(Audited)
Description and exposure
Market risk is the risk of changes in market factors affecting HSBC’s 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 France and Hong Kong. These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in bonds, with a proportion allocated to other asset classes to provide customers with the potential for enhanced returns.
DPF products expose HSBC to the risk of variation in asset returns, which will impact our participation in the investment performance.
In addition, in some scenarios the asset returns can become insufficient to cover the policyholders’ financial guarantees, in which case the shortfall has to be met by HSBC. Amounts 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.
The cost of guarantees increased to $693m (2018: $669m) primarily due to the reduction in swap rates in France and Hong Kong, partly offset by the impact of modelling changes in Hong Kong.
For unit-linked contracts, market risk is substantially borne by the policyholder, but some market risk exposure typically remains, as fees earned are related to the market value of the linked assets.
Financial return guarantees
(Audited)
 
 
2019
2018
 
 
Investment returns implied by guarantee
Long-term investment returns on relevant portfolios
Cost of guarantees

Investment returns implied by guarantee
Long-term investment returns on relevant portfolios
Cost of guarantees

 
Footnotes
%
%
$m

%
%
$m

Capital
 
0.0
1.3 - 3.9
110

0.0
2.2-3.0
100

Nominal annual return
 
0.1 - 2.0
3.0-4.5
118

0.1-2.0
3.6-3.7
78

Nominal annual return
1
2.0 - 4.0
2.4 - 4.5
355

2.1-4.0
2.7-4.6
420

Nominal annual return
 
4.1 - 5.0
2.3 - 4.1
110

4.1-5.0
2.7-4.1
71

At 31 Dec
 


693



669

1
A block of contracts in France with guaranteed nominal annual returns in the range 1.25%–3.72% is reported entirely in the 2.0%–4.0% category in line with the average guaranteed return of 2.6% offered to policyholders by these contracts.
Sensitivity of HSBC’s insurance manufacturing subsidiaries to market risk factors
(Audited)
 
2019
2018
 
Effect on
profit after tax

Effect on
total equity

Effect on
profit after tax

Effect on
total equity

 
$m

$m

$m

$m

+100 basis point parallel shift in yield curves
43

(37
)
9

(61
)
-100 basis point parallel shift in yield curves
(221
)
(138
)
(28
)
46

10% increase in equity prices
270

270

213

213

10% decrease in equity prices
(276
)
(276
)
(202
)
(202
)
10% increase in US dollar exchange rate compared with all currencies
41

41

36

36

10% decrease in US dollar exchange rate compared with all currencies
(41
)
(41
)
(36
)
(36
)
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 184.
The credit quality of the reinsurers’ share of liabilities under insurance contracts is assessed as ‘satisfactory’ or higher (as defined on page 121), 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 policyholder. 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 136. 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 policyholder in the case of unit-linked business and is shared with the policyholder 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 Note 29 on page 329.
Expected maturity of insurance contract liabilities
(Audited)
 
Expected cash flows (undiscounted)
 
Within 1 year

1-5 years

5-15 years

Over 15 years

Total

 
$m

$m

$m

$m

$m

Unit-linked
1,296

3,153

2,654

1,955

9,058

With DPF and Other contracts
7,907

26,906

50,576

71,731

157,120

At 31 Dec 2019
9,203

30,059

53,230

73,686

166,178

 
 
 
 
 
 
Unit-linked
1,119

2,932

2,684

1,962

8,697

With DPF and Other contracts
7,459

27,497

46,217

55,989

137,162

At 31 Dec 2018
8,578

30,429

48,901

57,951

145,859

Sensitivities
(Audited)
The following table 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. Our largest exposures to mortality and morbidity risk exist in Hong Kong and Singapore.
Sensitivity to lapse rates depends on the type of contracts being written. For a portfolio of term assurance, an increase in lapse rates typically has a negative effect on profit due to the loss of future income on the lapsed policies. However, some contract lapses have a positive effect on profit due to the existence of policy surrender charges. We are most sensitive to a change in lapse rates on unit-linked and universal life contracts in Hong Kong and Singapore, and DPF contracts in France.
Expense rate 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


$m

$m

Effect on profit after tax and total equity at 31 Dec




10% increase in mortality and/or morbidity rates
(88
)
(77
)
10% decrease in mortality and/or morbidity rates
88

82

10% increase in lapse rates
(99
)
(95
)
10% decrease in lapse rates
114

107

10% increase in expense rates
(106
)
(92
)
10% decrease in expense rates
105

93