RNS Number : 0880S

HSBC Holdings PLC

06 March 2019

Wholesale lending - commercial real estate loans and advances including loan commitments by level of collateral for key

countries/territories

(Audited)

Gross Gross Gross Gross

carrying/nomin carrying/nomin carrying/nomin carrying/nomin

al amount ECL coverage al amount ECL coverage al amount ECL coverage al amount ECL coverage

$m % $m % $m % $m %

Fully collateralised	477 1.5 435 1.1 3 33.3 19 -
LTV ratio:	178 269 13 17		149 265 7 14		3 - - -		19 - - -
- less than 50%		1.7		1.3		33.3		-
- 51% to 75%		0.4		0.4		-		-
- 76% to 90%		7.7		14.3		-		-
- 91% to 100%		11.8		14.3		-		-
Partially collateralised (B):	13 7.7 8 12.5 - - - -
Fully collateralised	621 13.5 433 9.2 12 - - -
LTV ratio:	425 90 38 68		304 58 35 36		2 10 - -		- - - -
- less than 50%		11.5		9.2		-		-
- 51% to 75%		26.7		6.9		-		-
- 76% to 90%		2.6		5.7		-		-
- 91% to 100%		16.2		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

Other corporate, commercial and financial (non-bank) loans and advances

Other corporate, commercial and financial (non-bank) loans are analysed separately in the following table, which focuses on the countries/territories containing the majority of our loans and advances balances. For financing activities in other corporate and commercial lending, collateral value is not strongly correlated to principal repayment performance.

Collateral values are generally refreshed when an obligor's general credit performance deteriorates and we have to assess the likely performance of secondary sources of repayment should it prove necessary to rely on them.

Accordingly, the following table reports values only for customers with CRR 8-10, recognising that these loans and advances generally have valuations that are comparatively recent.

HSBC Holdings plc Annual Report and Accounts 2018 113

Report of the Directors | Risk

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)

Gross Gross Gross Gross

carrying/nomina carrying/nomina carrying/nomina carrying/nomina

l amount ECL coverage l amount ECL coverage l amount ECL coverage l amount ECL coverage

$m % $m % $m % $m %

549,536 0.1 154,059 0.2 122,259 - 30,395 -

Fully collateralised		234,081 0.1 24,387 0.2 36,730 0.1 93,804 -
LTV ratio:		60,405 82,590 15,853 75,233		4,461 9,510 2,175 8,241		12,032 14,264 4,567 5,867		24,922 7,267 4,723 56,892
- less than 50%			0.2		0.4		0.1		-
- 51% to 75%			-		0.2		0.1		-
- 76% to 90%			0.1		0.2		0.1		-
- 91% to 100%			-		-		0.1		-
Partially collateralised (A):		48,877 0.1 5,551 0.1 21,942 - 747 -
- collateral value on A		21,097 2,388 10,263 696


Total		832,494 0.1 183,997 0.2 180,931 - 124,946 -

Stage 2
Not collateralised	42,053 1.4 12,364 3.1 6,212 0.4 1,578 1.3

Fully collateralised		24,977 1.0 7,378 1.0 3,378 0.5 9,713 1.1
LTV ratio:		11,915 5,344 1,642 6,076		5,410 1,042 140 786		1,421 1,290 391 276		3,711 810 691 4,501
- less than 50%			0.9		0.6		0.4		1.4
- 51% to 75%			1.3		3.5		0.6		1.4
- 76% to 90%			1.5		2.9		0.5		0.3
- 91% to 100%			0.8		0.1		0.4		0.9
Partially collateralised (B):		4,993 0.7 381 3.1 2,287 0.3 - -

2,074 207 971 -

72,023 1.2 20,123 2.3 11,877 0.4 11,291 1.1

4,990 52.5 1,775 42.1 478 81.2 6 16.7

Fully collateralised	1,660 25.2 513 6.2 146 - 188 9.6
LTV ratio:	596 487 382 195		181 172 86 74		11 62 32 41		77 103 - 8
- less than 50%		34.9		7.7		-		22.1
- 51% to 75%		10.5		1.7		-		1.0
- 76% to 90%		25.4		10.5		-		-
- 91% to 100%		31.8		8.1		-		-
Partially collateralised (C):	931 44.9 179 22.3 158 15.2 5 60.0

Fully collateralised	59 13.6 - - 9 - - -
LTV ratio:	12 16 22 9		- - - -		- - - 9		- - - -
- less than 50%		33.3		-		-		-
- 51% to 75%		25.0		-		-		-
- 76% to 90%		-		-		-		-
- 91% to 100%		-		-		-		-
Partially collateralised (C):	43 72.1 8 - 35 85.7 - -
- collateral value on C	38 3 34 -
Total	316 59.2 8 - 69 50.7 - -
At 31 Dec 2018	912,414 0.6 206,595 0.8 193,659 0.3 136,436 0.1

114 HSBC Holdings plc Annual Report and Accounts 2018

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

(Audited)

Rated CRR/ PD8

Fully collateralised	1,895 3.6 74 4.1 11 9.1 1,621 3.1
LTV ratio:	693 292 45 865		21 49 2 2		- 11 - -		594 169 20 838
- less than 50%		4.2		4.8		-		4.2
- 51% to 75%		2.7		2.0		9.1		2.4
- 76% to 90%		15.6		-		-		-
- 91% to 100%		2.8		-		-		-
Partially collateralised (A):	212 2.8 23 4.3 153 1.3 - -

Fully collateralised		1,719 24.8 513 6.2 155 - 188 9.6
LTV ratio:		608 503 405 203			181 172 86 74				11 62 32 50				77 103 - 8
- less than 50%			36.0				7.7				-				22.1
- 51% to 75%			8.7				1.7				-				1.0
- 76% to 90%			24.2				10.5				-				-
- 91% to 100%			31.5				8.1				-				-
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

Other credit risk exposures

In addition to collateralised lending, other credit enhancements are employed and methods used to mitigate credit risk arising from financial assets. These are summarised below:

· Some securities issued by governments, banks and other financial institutions benefit from additional credit enhancements provided by government guarantees that cover the assets.

· Debt securities issued by banks and financial institutions include asset-backed securities ('ABSs') and similar instruments, which are supported by underlying pools of financial assets. Credit risk associated with ABSs is reduced through the purchase of credit default swap ('CDS') protection.

Disclosure of the Group's holdings of ABSs and associated CDS protection is provided on page 122.

· Trading loans and advances mainly pledged against cash collateral are posted to satisfy margin requirements. There is limited credit risk on cash collateral posted since in the event of default of the counterparty these would be set off against the related liability. Reverse repos and stock borrowing are by their nature collateralised.

Collateral accepted as security that the Group is permitted to sell or repledge under these arrangements is described on page 264 of the Financial Statements.

Derivatives

HSBC participates in transactions exposing us to counterparty credit risk. Counterparty credit risk is the risk of financial loss if the counterparty to a transaction defaults before satisfactorily settling it. It arises principally from over-the-counter ('OTC') derivatives and securities financing transactions and is calculated in both the trading and non-trading books. Transactions vary in value by reference to a market factor such as an interest rate, exchange rate or asset price.

·
The Group's maximum exposure to credit risk includes financial guarantees and similar contracts granted, as well as loan and other credit-related commitments. Depending on the terms of the arrangement, we may use additional credit mitigation if a guarantee is called upon or a loan commitment is drawn and subsequently defaults.

For further information on these arrangements, see Note 33 on the Financial Statements.

The counterparty risk from derivative transactions is taken into account when reporting the fair value of derivative positions. The adjustment to the fair value is known as the credit value adjustment ('CVA').

For an analysis of CVAs, see Note 12 on the Financial Statements.

The following table reflects by risk type the fair values and gross notional contract amounts of derivatives cleared through an exchange, central counterparty and non-central counterparty.

HSBC Holdings plc Annual Report and Accounts 2018 115

Report of the Directors | Risk

Notional contract amounts and fair values of derivatives by product type

Total OTC derivatives	31,982,343 255,190 251,001			25,346,612 328,806 324,442
- total OTC derivatives cleared by central counterparties	17,939,035	52,424	52,845	11,908,326	118,030	119,394
- total OTC derivatives not cleared by central counterparties	14,043,308	202,766	198,156	13,438,286	210,776	205,048
Total exchange traded derivatives	2,030,580 2,346 4,545			1,869,210 1,437 2,804

116 HSBC Holdings plc Annual Report and Accounts 2018

Report of the Directors | Risk

Personal lending - reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees⁸

(Audited)

Non-credit impaired Credit impaired

Stage 1 Stage 2 Stage 3 Total

Gross carrying/

nominal

Allowance for

nominal

Allowance for

nominal

Allowance for

nominal

Allowance for

amount

ECL

amount

ECL

amount

ECL

amount

ECL

$m $m $m $m $m $m $m $m

For footnotes, see page 147.

As shown in the above table, the allowance for ECL for loans and advances to customers and banks and relevant loan commitments and financial guarantees decreased $104m during the period from $3,065m at 1 January 2018 to $2,961m at 31 December 2018.

This overall decrease was primarily driven by:

· $1,380m of assets written off;

· $308m relating to underlying net book volume movements, which included the ECL allowance associated with new originations, assets derecognised and net further lending; and

·
foreign exchange and other movements of $160m.
These decreases were partially offset by increases of:

· $1,717m relating to underlying credit quality changes, including the credit quality of financial instruments transferring between stages; and

· $27m relating to the net new measurement impact of stage transfers.

Personal lending - credit risk profile by internal PD band for loans and advances to customers at amortised cost (continued)

Gross carrying amount Allowance for ECL

PD range²⁰ Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total ECL coverage

% $m $m $m $m $m $m $m $m %

First lien residential

mortgages 266,879 8,299 2,921 278,099 (60) (67) (533) (660)

- Band 1	0.000 to 0.250	235,249 17,350 9,316 3,524 1,414 26 -	339 535 3,975 1,236 1,177 1,037 -	- - - - - - 2,921	235,588 17,885 13,291 4,760 2,591 1,063 2,921	(43) (3) (7) (6) (1) - -	(1) (2) (6) (8) (21) (29) -	- - - - - - (533)	(44) (5) (13) (14) (22) (29) (533)
- Band 2	0.251 to 0.500
- Band 3	0.501 to 1.500
- Band 4	1.501 to 5.000
- Band 5	5.001 to 20.000
- Band 6	20.001 to 99.999
- Band 7	100.000

For footnotes, see page 147.

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 mitigants.

HSBC Holdings plc Annual Report and Accounts 2018 119

Report of the Directors | Risk

Personal lending - residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage

(Audited)

Fully collateralised	299,072 - 130,646 - 79,180 - 15,321 -
LTV ratio:	160,563 51,415 40,273 28,383 14,191 4,247		66,834 20,937 17,480 15,086 8,824 1,485		54,262 11,591 5,979 2,986 2,637 1,725		8,060 3,382 2,473 1,113 158 135
- less than 50%		-		-		-		-
- 51% to 60%		-		-		-		-
- 61% to 70%		-		-		-		-
- 71% to 80%		-		-		-		-
- 81% to 90%		-		-		-		-
- 91% to 100%		0.1		-		-		-
Partially collateralised (A):	1,420 0.1 581 - 300 - 10 -
LTV ratio:	808 184 428		334 46 201		256 41 3		5 2 3
- 101% to 110%		0.1		-		-		-
- 111% to 120%		0.2		-		-		-
- greater than 120%		0.2		-		-		-
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:	3,334 932 853 586 331 134		917 113 105 39 27 33		699 74 43 28 20 3		814 268 231 79 32 11
- less than 50%		0.7		0.9		-		0.1
- 51% to 60%		1.1		3.0		-		0.4
- 61% to 70%		1.0		2.2		-		0.3
- 71% to 80%		1.3		3.4		-		0.9
- 81% to 90%		1.7		3.1		-		1.6
- 91% to 100%		2.4		1.5		-		0.8
Partially collateralised (B):	123 2.9 46 0.2 1 - 5 0.3
LTV ratio:	76 17 30		44 1 1		1 - -		3 1 1
- 101% to 110%		1.5		0.1		-		0.5
- 111% to 120%		4.5		4.3		-		-
- greater than 120%		5.3		0.6		-		-
Collateral value on B	118 44 1 4

6,293 1.0 1,280 1.3 868 - 1,440 0.3

Fully collateralised	2,557 12.3 1,023 10.9 25 0.9 671 1.0
LTV ratio:	1,255 359 336 280 190 137		638 151 119 70 33 12		24 1 - - - -		219 107 105 114 81 45
- less than 50%		13.6		7.8		0.9		0.9
- 51% to 60%		8.3		11.3		-		0.9
- 61% to 70%		12.0		18.4		-		1.0
- 71% to 80%		9.9		14.8		-		0.9
- 81% to 90%		9.4		19.4		-		1.2
- 91% to 100%		19.8		45.9		-		2.2
Partially collateralised (C):	391 33.6 23 15.8 - - 24 0.4
LTV ratio:	73 68 250		10 5 8		- - -		14 6 4
- 101% to 110%		17.4		14.3		-		0.6
- 111% to 120%		24.2		26.4		-		0.3
- greater than 120%		40.8		11.1		-		0.2
Collateral value on C	372 20 - 22

120 HSBC Holdings plc Annual Report and Accounts 2018

Supplementary information

Wholesale lending - loans and advances to customers at amortised cost by country/territory

Gross carrying amount Allowance for ECL

Non-bank

Corporate and Of which: real financial

commercial estate²¹ institutions

$m $m $m

Total

Corporate and commercial

Non-bank

Of which: real financial

estate²¹ institutions

$m $m

Total

Europe 176,577 25,715 22,529 199,106 (2,507) (481) (82) (2,589)
- UK	127,093	18,384	17,703	144,796	(1,701)	(410)	(78)	(1,779)
- France	28,204	5,890	2,488	30,692	(405)	(36)	(1)	(406)
- Germany	10,454	246	1,371	11,825	(35)	-	-	(35)
- Switzerland	1,674	509	348	2,022	(1)	-	-	(1)
- other	9,152	686	619	9,771	(365)	(35)	(3)	(368)
Asia 263,608 79,941 27,284 290,892 (1,343) (67) (31) (1,374)
- Hong Kong	168,621	63,287	15,062	183,683	(579)	(40)	(20)	(599)
- Australia	11,335	2,323	2,115	13,450	(68)	(3)	-	(68)
- India	6,396	1,408	2,846	9,242	(77)	(4)	(1)	(78)
- Indonesia	4,286	35	354	4,640	(269)	-	(2)	(271)
- mainland China	24,225	4,423	5,146	29,371	(172)	(15)	(6)	(178)
- Malaysia	7,924	1,649	274	8,198	(77)	(2)	-	(77)
- Singapore	17,564	4,463	431	17,995	(31)	(2)	-	(31)
- Taiwan	6,008	23	156	6,164	(2)	-	-	(2)
- other	17,249	2,330	900	18,149	(68)	(1)	(2)	(70)
Middle East and North Africa (excluding
Saudi Arabia) 23,738 2,025 322 24,060 (1,167) (178) (1) (1,168)
- Egypt	1,746	41	-	1,746	(125)	-	-	(125)
- UAE	14,445	1,849	206	14,651	(721)	(176)	(1)	(722)
- other	7,547	135	116	7,663	(321)	(2)	-	(321)
North America 56,983 14,169 9,647 66,630 (236) (37) (8) (244)
- US	35,714	8,422	8,777	44,491	(103)	(8)	(2)	(105)
- Canada	20,493	5,354	770	21,263	(105)	(5)	(2)	(107)
- other	776	393	100	876	(28)	(24)	(4)	(32)
Latin America 13,671 1,383 1,625 15,296 (299) (8) (4) (303)
- Mexico	11,302 1,354 1,567 12,869				(225)	(8) (4)		(229)
- other	2,369 29 58 2,427				(74)	- -		(74)
At 31 Dec 2018 534,577 123,233 61,407 595,984 (5,552) (771) (126) (5,678)

For footnotes, see page 147.

HSBC Holdings plc Annual Report and Accounts 2018 121

Report of the Directors | Risk

Personal lending - loans and advances to customers at amortised costs by country/territory

Europe	131,557 46,007 9,790 177,564 (258) (750) (313) (1,008)
- UK	124,357 3,454 - 1,120 2,626	20,503 19,616 288 5,213 387	9,356 376 - - 58	144,860 23,070 288 6,333 3,013	(141) (43) - (2) (72)	(592) (114) - (19) (25)	(309) (4) - - -	(733) (157) - (21) (97)
- France
- Germany
- Switzerland
- other
Asia 119,718 42,049 11,900 161,767					(44) (696) (465) (740)
- Hong Kong	79,059 13,858 1,030 59 8,706 2,890 5,991 5,123 3,002	28,734 764 608 279 1,139 3,209 5,353 860 1,103	8,124 626 228 206 502 888 434 289 603	107,793 14,622 1,638 338 9,845 6,099 11,344 5,983 4,105	(1) (5) (5) - (2) (24) - (1) (6)	(329) (55) (20) (34) (57) (71) (70) (20) (40)	(228) (54) (14) (27) (50) (33) (21) (5) (33)	(330) (60) (25) (34) (59) (95) (70) (21) (46)
- Australia
- India
- Indonesia
- mainland China
- Malaysia
- Singapore
- Taiwan
- other
Middle East and North Africa (excluding Saudi Arabia)	2,393 3,933 1,181 6,326 (88) (306) (148) (394)
- Egypt	- 1,974 419	309 1,477 2,147	71 538 572	309 3,451 2,566	- (82) (0)	(5) (126) (175)	(1) (54) (93)	(5) (208) (181)
- UAE
- other
North America	36,964 5,057 1,341 42,021 (122) (139) (81) (261)
- US	17,464 18,267 1,233	2,280 2,562 215	1,028 265 48	19,744 20,829 1,448	(13) (16) (93)	(106) (23) (10)	(75) (5) (1)	(119) (39) (103)
- Canada
- other
Latin America	2,701 3,958 1,432 6,659 (23) (521) (254) (544)
- Mexico	2,550 3,192 151 766		1,121 311	5,742 917	(22) (465) (1) (56)		(227) (27)	(487) (57)
- other
At 31 Dec 2018	293,333 101,004 25,644 394,337 (535) (2,412) (1,261) (2,947)

122 HSBC Holdings plc Annual Report and Accounts 2018

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied - by global business

Gross carrying/nominal amount Allowance for ECL

		Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI $m $m $m $m $m $m $m $m $m
Loans and advances to customers at amortised cost	915,188		61,786	13,023	324	990,321	(1,276)	(2,108)	(5,047)	(194) (8,625)
- RBWM	340,606 304,103 230,250 37,970 2,259		19,228 27,529 14,112 724 193	4,960 5,732 1,683 618 30	- 298 25 1 -	364,794 337,662 246,070 39,313 2,482	(544) (538) (188) (5) (1)	(1,250) (659) (182) (3) (14)	(1,129) (3,110) (718) (89) (1)	- (194) - - -
- CMB
- GB&M
- GPB
- Corporate Centre
Loans and advances to banks at amortised cost	71,873		307	-	-	72,180	(11)	(2)	-	- (13)
- RBWM	5,801 1,912 25,409 46 38,705		5 15 212 - 75	- - - - -	- - - - -	5,806 1,927 25,621 46 38,780	(1) (1) (7) - (2)	- - (2) - -	- - - - -	- - - - -
- CMB
- GB&M
- GPB
- Corporate Centre
Other financial assets measured at amortised cost	581,118		1,673	126	-	582,917	(27)	(6)	(22)	- (55)
- RBWM	49,142 15,082 272,028 924 243,942		184 774 703 1 11	32 60 20 2 12	- - - - -	49,358 15,916 272,751 927 243,965	(14) (7) (1) - (5)	(2) (3) (1) - -	(1) (21) - - -	- - - - -
- CMB
- GB&M
- GPB
- Corporate Centre
Total gross carrying amount on balance sheet at 31 Dec 2018	1,568,179		63,766	13,149	324	1,645,418	(1,314)	(2,116)	(5,069)	(194) (8,693)

592,008 (143) (139) (43) -

166,780 (6) (1) (1) -

123,411 (72) (52) (40) -

262,764 (58) (86) (2) -

34,940 - - - -

4,113 (7) - - -

23,518 (19) (29) (45) -

60 - - - -

9,065 (10) (11) (39) -

13,271 (8) (18) (5) -

1,066 (1) - - -

56 - - (1) -

Total nominal amount off balance sheet at 31 Dec 2018

Debt instruments measured at FVOCI at

31 Dec 2018 342,175 923

For footnotes, see page 147.

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 from guarantees issued in support of obligations assumed by certain Group operations in the normal conduct of their business. It principally represents claims on Group subsidiaries in Europe and North America.

In HSBC Holdings, the maximum exposure to credit risk arises from two components:

· financial instruments on the balance sheet (see page 221); 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 33).

In the case of our derivative balances, we have amounts with a legally enforceable right of offset in the case of counterparty

Securitisation exposures and other structured products

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 is $1.5bn at 31 December 2018 (2017: $2.1bn).

The credit quality of loans and advances and financial investments, both of which consist of intra-Group lending, is assessed as 'strong' or 'good', with 100% of the exposure being neither past due nor impaired (2017: 100%). For further details of credit quality classification, see page 79.

HSBC Holdings plc Annual Report and Accounts 2018 123

Report of the Directors | Risk

The following table summarises the carrying amount of our ABS exposure by categories of collateral. It includes assets held in the legacy credit portfolio held within Corporate Centre with a carrying value of $5.9bn (2017: $9bn).

At 31 December 2018, the FVOCI reserve in respect of ABSs was a deficit of $179m (2017: deficit of $466m). For 2018, the impairment write-back in respect of ABSs was $106m (2017: write-back of $240m).

Carrying amount of HSBC's consolidated holdings of ABSs

	Financial assets designated Of which Financial and otherwise mandatorily held through investments at Held at measured at fair value consolidated Trading FVOCI amortised cost through profit and loss Total SEs $m $m $m $m $m $m
Mortgage-related assets	1,680 15,422 15,498 127 32,727 208
- sub-prime residential	17 - 153 - 924 586	587 87 14,627 - 15 106	- 2 14,657 - 780 59	- 94 - - - 33	604 183 29,437 - 1,719 784	50 42 - - 10 106
- US Alt-A residential
- US Government agency and sponsored enterprises: MBSs²²
- UK buy-to-let residential
- other residential
- commercial property
Leveraged finance-related assets	306 40 - 21 367 200

For footnotes, see page 147.

Selected 2017 credit risk disclosures

The below disclosures were included in our 2017 external reports and do not reflect the adoption of IFRS 9. As these tables are not directly comparable to the current 2018 credit risk tables, which are disclosed on an IFRS 9 basis,

these 2017 disclosures have been shown below and not adjacent to 2018 tables.

Summary of credit risk

	At 31 Dec 2017 $bn
Maximum exposure to credit risk 3,078
- total assets subject to credit risk	2,306 772
- off-balance sheet commitments subject to credit risk7,23
Gross loans and advances 1,060
- personal lending	376 684
- wholesale lending
Impaired loans 15
- personal lending	5 10
- wholesale lending
Impaired loans as a % of gross loans and advances %
Personal lending 1.3
Wholesale lending 1.5
Total 1.5
$bn
Impairment allowances 7.5
- personal lending	1.7 5.8
- wholesale lending
Loans and advances net of impairment allowances 1,053

	For year ended 31 Dec 2017 $bn

Loan impairment charge 2.0

- personal lending

1.0

- wholesale lending

Other credit risk provisions (0.2)

1.8

For footnotes, see page 147.

124 HSBC Holdings plc Annual Report and Accounts 2018

Credit exposure (2017)

Maximum exposure to credit risk (Audited)

	Maximum exposure $m	Offset Net $m $m
Derivatives 219,818		(204,829) 14,989
Loans and advances to customers held at amortised cost 962,964		(35,414) 927,550
- personal	374,762 516,754 71,448	(2,946) (29,459) (3,009)	371,816 487,295 68,439
- corporate and commercial
- non-bank financial institutions
Loans and advances to banks at amortised cost 90,393		(273) 90,120
Reverse repurchase agreements - non-trading 201,553		(3,724) 197,829
Total on-balance sheet exposure to credit risk 2,305,592		(244,240) 2,061,352
Total off-balance sheet 771,908		- 771,908
- financial guarantees and similar contracts²³	41,422 730,486	- -	41,422 730,486
- loan and other credit-related commitments⁷
At 31 Dec 2017 3,077,500		(244,240) 2,833,260
For footnotes, see page 147.

Distribution of financial instruments by credit quality (Audited) Neither past due nor impaired
			Past due but not impaired $m		Total gross Impairment amount allowances $m $m
	Strong Good Satisfactory $m $m $m	Sub-standard $m	Past due but not impaired $m	Impaired $m		Total $m

Cash and balances at central banks		179,155	1,043		407		19	180,624		180,624
Items in the course of collection from other banks		6,322	29		273		4	6,628		6,628
Hong Kong Government certificates of indebtedness		34,186	-		-		-	34,186		34,186
Trading assets		137,983	22,365		26,438		1,949	188,735		188,735
- treasury and other eligible bills	15,412			531	491	1,098			17,532		17,532
- debt securities	84,493			9,517	12,978	498			107,486		107,486
- loans and advances to banks	15,496			5,778	4,757	26			26,057		26,057
- loans and advances to customers	22,582			6,539	8,212	327			37,660		37,660

HSBC Holdings plc Annual Report and Accounts 2018 125

Report of the Directors | Risk

Ageing analysis of days for past due but not impaired gross financial instruments

(Audited) Up to 29 days

At 31 Dec 2017

Impaired loans (2017)

Movement in impaired loans by industry sector
(Audited)

			Personal $m	Corporate and commercial $m	Financial $m	Total $m
At 1 Jan 2017			6,490	11,362 376		18,228
Classified as impaired during the year			2,671	3,691 17		6,379
Transferred from impaired to unimpaired during the year			(677)	(1,324) (8)		(2,009)
Amounts written off			(1,330)	(1,257) (53)		(2,640)
Net repayments and other			(2,232)	(2,218) (38)		(4,488)
At 31 Dec 2017			4,922	10,254 294		15,470

Impaired loans by industry sector and geographical region
				North	Latin
	Europe	Asia	MENA	America	America	Total
	$m	$m	$m	$m	$m	$m
Non-renegotiated impaired loans	4,551	1,645	870	1,180	452	8,698
- personal	1,648	475	227	665	280	3,295
- corporate and commercial	2,895	1,146	639	508	172	5,360
- financial	8	24	4	7	-	43
Renegotiated impaired loans	3,491	604	1,079	1,426	172	6,772
- personal	381	125	120	958	43	1,627
- corporate and commercial	2,926	478	895	466	129	4,894
- financial	184	1	64	2	-	251
At 31 Dec 2017	8,042	2,249	1,949	2,606	624	15,470
Impaired loans % of total gross loans and advances	2.0%	0.5%	5.4%	2.2%	2.6%	1.5%

Renegotiated loans and forbearance (2017)	At 31 Dec 2017
	Impairment allowances on renegotiated loans


Renegotiated loans and advances to customers by industry sector Renegotiated loans and advances to customers by geographical region
First lien
residential		Other personal		Corporate and		Non-bank financial
mortgages		lending		commercial		institutions			Europe Total
$m		$m		$m		$m			$m $m
Neither past due nor impaired	At 31 Dec 201 476		268		2,082		257	3,0835,667
Past due but not impaired	58		49		120		-	227
Impaired	1,329		298		4,894		251	6,772

126 HSBC Holdings plc Annual Report and Accounts 2018

Impairment of loans and advances (2017)

Loan impairment charge to the income statement by industry sector (Audited)
	North Latin Europe Asia MENA America America Total $m $m $m $m $m $m
Personal 140 243 92 32 452 959
- first lien residential mortgages	6 134	(1) 244	5 87	- 32	(27) 479	(17) 976
- other personal
Corporate and commercial 619 298 83 (163) 90 927
- manufacturing and international trade and services	314 200 105	236 21 41	95 (4) (8)	18 9 (190)	59 - 31	722 226 (21)
- commercial real estate and other property-related
- other commercial
Financial 66 17 22 1 - 106
At 31 Dec 2017 825 558 197 (130) 542 1,992

Charge for impairment losses as a percentage of average gross loans and advances	to customers by geographical region
	North Latin Europe Asia MENA America America Total % % % % % %
New allowances net of allowance releases 0.33 0.17 0.79 (0.05) 3.20 0.29
Recoveries (0.09) (0.03) (0.14) (0.07) (0.41) (0.07)
At 31 Dec 2017 0.24 0.14 0.65 (0.12) 2.79 0.22
Amount written off net of recoveries 0.23 0.13 1.35 0.28 2.42 0.28

Movement in impairment allowances by industry sector and by geographical	region
	North Latin Europe Asia MENA America America Total $m $m $m $m $m $m
At 1 Jan 2017 2,789 1,635 1,681 1,272 473 7,850
Amounts written off
Personal (438) (366) (329) (100) (487) (1,720)
- first lien residential mortgages	(8) (430)	(6) (360)	(42) (287)	(26) (74)	(9) (478)	(91) (1,629)
- other personal
Corporate and commercial (648) (273) (119) (273) (63) (1,376)
- manufacturing and international trade and services	(318) (121) (209)	(250) (10) (13)	(74) (37) (8)	(44) (20) (209)	(18) (4) (41)	(704) (192) (480)
- commercial real estate and other property-related
- other commercial
Financial (74) (1) - (2) - (77)
Total amounts written off (1,160) (640) (448) (375) (550) (3,173)
Recoveries of amounts written off in previous years
Personal 296 104 39 38 68 545
- first lien residential mortgages	9 287	4 100	- 39	17 21	25 43	55 490
- other personal
Corporate and commercial 35 10 2 37 13 97
- manufacturing and international trade and services	10 8 17	9 - 1	1 1 -	11 1 25	3 - 10	34 10 53
- commercial real estate and other property-related
- other commercial
Financial 2 - - - - 2
Total recoveries of amounts written off in previous years 333 114 41 75 81 644
Charge to income statement 825 558 197 (130) 542 1,992
Exchange and other movements 274 5 (10) (51) (47) 171
At 31 Dec 2017 3,061 1,672 1,461 791 499 7,484
Impairment allowances against banks:
- individually assessed - - - - - -
Impairment allowances against customers:
- individually assessed 2,296 1,056 1,104 383 121 4,960
- collectively assessed 765 616 357 408 378 2,524
Impairment allowances at 31 Dec 2017 3,061 1,672 1,461 791 499 7,484

HSBC Holdings plc Annual Report and Accounts 2018 127

Report of the Directors | Risk

Movement in impairment allowances on loans and advances to customers and banks
(Audited)


Banks	Customers		Total $m
individually assessed $m	Individually assessed $m	Collectively assessed $m	Total $m
At 1 Jan 2017 -	4,932	2,918	7,850
Amounts written off -	(1,468)	(1,705)	(3,173)
Recoveries of loans and advances previously written off -	119	525	644
Charge to income statement -	1,114	878	1,992
Exchange and other movements -	263	(92)	171
At 31 Dec 2017 -	4,960	2,524	7,484
Impairment allowances % of loans and advances -	0.5%	0.3%	0.8%
Wholesale lending (2017)
Total wholesale lending for loans and advances to banks and customers²⁴
		Gross loans $m	Impairment allowance $m

Corporate and commercial 522,248 (5,494)

- agriculture, forestry and fishing		6,302 10,911 115,531 17,397 2,806 15,443 98,079 24,258 16,971 18,405 114,349 18,094 19,960 221 1,490 5,688 3,003 20,354 - - 11,728 1,258	(122) (450) (1,390) (88) (3) (540) (1,361) (131) (138) (83) (638) (95) (138) - (7) (34) (14) (235) - - (8) (19)
- mining and quarrying
- manufacturing
- electricity, gas, steam and air-conditioning supply
- water supply, sewerage, waste management and remediation
- construction
- wholesale and retail trade, repair of motor vehicles and motorcycles
- transportation and storage
- accommodation and food
- publishing, audiovisual and broadcasting
- real estate
- professional, scientific and technical activities
- administrative and support services
- public administration and defence, compulsory social security
- education
- health and care
- arts, entertainment and recreation
- other services
- activities of households
- extra-territorial organisations and bodies activities
- government
- asset-backed securities
Non-bank financial institutions	71,719			(271)
Loans and advances to banks	90,393			-
At 31 Dec 2017	684,360			(5,765)
By geography
Europe	228,775			(2,469)
- of which: UK	163,393			(1,589)
Asia	332,680			(1,402)
- of which: Hong Kong	197,232			(639)
MENA	29,142			(1,131)
North America	76,661			(579)
Latin America	17,102			(184)
At 31 Dec 2017	684,360			(5,765)
For footnotes, see page 147.

Wholesale lending: loan and other credit-related commitments⁷

North Latin

Europe Asia MENA America America Total UK Hong Kong

$m $m $m $m $m $m $m $m

For footnotes, see page 147.

128 HSBC Holdings plc Annual Report and Accounts 2018

Commercial real estate (2017) Commercial real estate lending

North

Europe Asia MENA America Latin America Total UK Hong Kong

$m $m $m $m $m $m $m $m

Gross loans and advances

On demand, overdrafts or revolving

< 1 year 5,734 18,038 268

1-2 years 4,780 11,549 119

2-5 years 14,770 25,395 117

> 5 years 2,309 5,986 183

At 31 Dec 2017 27,593 60,968 687

4,678 260

1,178 58

2,199 734

862 454

8,917 1,506

Commercial real estate loans and advances including loan commitments by level of collateral

(Audited)

Of which:

Report of the Directors | Risk

Other corporate, commercial and non-bank financial institutions loans and advances including loan commitments by level of collateral rated CRR/EL 8 to 10 only

(Audited) Of which:

Total UK Hong Kong US

$m $m $m $m

Rated CRR/ EL8
Not collateralised	3,722					319			15		1,708
Fully collateralised	554					104			5		48
- LTV ratio: less than 50%			188 157 39 170	25 66 11 2			3 2 - -			7 34 2 5
- 51% to 75%
- 76% to 90%
- 91% to 100%
Partially collateralised (A):		493			92			135			42
- Collateral value on A		206			59			10			21
Total		4,769			515			155			1,798
Rated CRR/ EL9 to 10
Not collateralised		3,734			1,508			511			3
Fully collateralised		2,572			1,223			98			317
- less than 50%			804 606 398 764	516 403 235 69			60 10 21 7			- 6 - 311
- 51% to 75%
- 76% to 90%
- 91% to 100%

Partially collateralised (B):	1,750 877 8,056 12,825	398 209 3,129 3,644	167	425 300 745 2,543
- Collateral value on B			123
Total			776
At 31 Dec 2017			931

Personal lending (2017)

Total personal lending gross loans

Europe $m						Asia $m				MENA North America Latin America $m $m $m							Total $m					Total as a % of total gross UK Hong Kong loans $m $m
First lien residential mortgages	126,685				109,502						2,375	37,330		2,281		278,173					119,770		70,279	26.2
- of which:
interest only (including offset)	35,242				873						65	92		-		36,272					33,468		-	3.4
affordability (including US adjustable rate mortgages)	409				3,111						-	13,742		-		17,262					-		3	1.6
Other personal lending	43,329				40,880						4,496	5,227		4,376		98,308					19,790		27,868	9.3
- other		32,995		29,400					2,663				2,919	2,205	70,182					10,039			19,977		6.7
- credit cards		10,235		11,435					1,531				1,037	1,642	25,880					9,751			7,891		2.4
- second lien residential mortgages		99		21					2				1,233	-	1,355					-			-		0.1
- motor vehicle finance		-		24					300				38	529	891					-			-		0.1
At 31 Dec 2017			170,014 50,384				150,382 120,312	6,871 42,557 6,657										376,481 194,310	139,560 98,147 35.5
Loan and other credit-related commitments								3,975 14,443 5,196											48,413 89,994

Total personal lending impairment allowances

First lien residential mortgages

Other personal lending

- other	230	109	132	17	151	639 147 36
- credit cards	111	128	122	30	140	531 110 50
- second lien residential mortgages	-	-	-	13	-	13 - -
- motor vehicle finance	-	-	5	-	7	12 - -

At 31 Dec 2017	603	267	327	208	314	1,719	402	86
Impairment allowances % of impaired loans	29.7%	44.5%	94.2%	12.8%	97.2%	34.9%	28.3%	62.3%

130 HSBC Holdings plc Annual Report and Accounts 2018

Residential mortgage loans including loan commitments by level of collateral (Audited)

Total UK Hong Kong US

$m $m $m $m

Non-impaired loans and advances

Fully collateralised 287,088 124,736 72,073 16,240

- LTV ratio: less than 50%	164,110 48,287 37,054 25,893 9,445 2,299	69,679 20,706 15,422 11,992 5,824 1,113	55,237 8,340 3,282 3,402 1,376 436	7,868 4,180 2,832 1,312 42 6
- 51% to 60%
- 61% to 70%
- 71% to 80%
- 81% to 90%
- 91% to 100%
Partially collateralised:
Greater than 100% (A)	660	174 - -
- 101% to 110%	270	89	-	-
- 111% to 120%	121	16	-	-
- greater than 120%	269	69	-	-
Collateral on A	550	125 - -
Non-impaired loans and advances	287,748	124,910 72,073 16,240
Impaired loans and advances
Fully collateralised	3,004	1,00846 1,138
- LTV ratio: less than 50%	1,238 518 416 354 323 155	538 196 130 85 40 19	42 3 - 1 - -	414 207 178 160 115 64
- 51% to 60%
- 61% to 70%
- 71% to 80%
- 81% to 90%
- 91% to 100%
Partially collateralised:
Greater than 100% (B)	342	38 -		36
- 101% to 110%	101	15	-	19
- 111% to 120%	61	5	-	11
- greater than 120%	180	18	-	6
Collateral on B	269	31 -		33
Impaired loans and advances	3,346	1,046 46		1,174
At 31 Dec 2017	291,094	125,956 72,119		17,414

HSBC Holdings plc Annual Report and Accounts 2018 131

Report of the Directors | Risk

Supplementary information (2017)

Wholesale gross loans and advances to customers by country/territory

Gross loans Impairment allowances

Non-bank

Corporate and

commercial Of which: real financial

estate²¹ institutions

$m $m

(2,286) (371) (183)

- UK	130,121	14,609	27,829	(1,390)	(299)	(180)
- France	32,647	5,597	2,048	(542)	(34)	-
- Germany	9,690	250	1,156	(51)	-	(2)
- Switzerland	1,244	1	531	-	-	-
- other	8,799	3,787	529	(303)	(38)	(1)

(1,375) (43) (27)

- Hong Kong	156,198	51,787	15,346	171,544	(613)	(30)	(26)	(639)
- Australia	11,311	1,987	2,355	13,666	(75)	(4)	-	(75)
- India	5,382	1,030	2,165	7,547	(95)	(3)	(1)	(96)
- Indonesia	4,157	18	114	4,271	(254)	-	-	(254)
- mainland China	26,052	8,953	4,824	30,876	(224)	(2)	-	(224)
- Malaysia	7,489	1,555	331	7,820	(34)	-	-	(34)
- Singapore	17,541	2,890	259	17,800	(41)	(2)	-	(41)
- Taiwan	5,176	11	185	5,361	(4)	-	-	(4)
- other	17,644	2,323	732	18,376	(35)	(2)	-	(35)

For footnotes, see page 147.

132 HSBC Holdings plc Annual Report and Accounts 2018

Personal gross loans and advances to customers by country/territory

Gross loans Impairment allowances

First lien

residential Of which:

mortgages Other personal credit cards

$m $m $m

Europe 126,685 43,329 10,235

- UK	119,770	19,790	9,751	(145)	(110)
- France	2,910	16,650	420	(33)	-
- Germany	1	234	-	-	-
- Switzerland	839	5,776	-	-	-
- other	3,165	879	64	(84)	(1)

(30)

- Hong Kong	70,279 12,444 1,185 64 8,877 3,003 5,760 4,877 3,013	27,868 838 441 322 1,170 3,385 4,952 822 1,082	7,891 749 193 225 289 837 419 283 549	- (2) (4) - (2) (14) - (1) (7)	(50) (18) (4) (11) (5) (20) (6) (2) (12)
- Australia
- India
- Indonesia
- mainland China
- Malaysia
- Singapore
- Taiwan
- other

Middle East and North Africa (excluding Saudi Arabia)

- Egypt

- UAE

- other
North America

- US

- Canada

- other
Latin America

- Mexico

- other
At 31 Dec 2017

Carrying amount of HSBC's consolidated holdings of ABSs

Designated at fair value

through profit or Loans and

Trading Available for sale Held to maturity loss receivables

$m $m $m $m $m

Mortgage-related assets 1,767 14,221 13,965 - 1,762

- sub-prime residential	22 - 331 814 600	918 1,102 11,750 181 270	- 3 13,962 - -	- - - - -	32 - - 1,595 135	484 1,041 - 75 226
- US Alt-A residential
- US Government agency and sponsored enterprises: MBSs
- other residential
- commercial property

Leveraged finance-related assets	128	373	-
Student loan-related assets	155	2,198	-
Other assets	1,266	731	-
At 31 Dec 2017	3,316	17,523	13,965

HSBC Holdings plc Annual Report and Accounts 2018 133

Liquid assets of HSBC's principal entities

For footnotes, see page 147.

Sources of funding

(Audited)

Our primary sources of funding are customer current accounts and customer savings deposits payable on demand or at short notice. We issue wholesale securities (secured and unsecured) to supplement our customer deposits and change the currency mix, maturity profile or location of our liabilities and to meet the Group's minimum requirement for own funds and eligible liabilities.

The following 'Funding sources and uses' table provides a consolidated view of how our balance sheet is funded, and should be read in light of the LFRF, which requires operating entities to manage liquidity and funding risk on a stand-alone basis.

The table analyses our consolidated balance sheet according to the assets that primarily arise from operating activities and the sources of funding primarily supporting these activities. Assets and liabilities that do not arise from operating activities are presented as a net balancing source or deployment of funds.

In 2018, the level of customer accounts continued to exceed the level of loans and advances to customers. The positive funding gap was predominantly deployed in liquid assets (cash and balances with central banks and financial investments) as required by the LFRF.

Loans and advances to banks continued to exceed deposits by banks, meaning the Group remained a net unsecured lender to the banking sector.

HSBC Holdings plc Annual Report and Accounts 2018 135

Report of the Directors | Risk

Funding sources

For footnotes, see page 147.

Wholesale term debt maturity profile

The maturity profile of our wholesale term debt obligations is set out in the following table.

The balances in the table are not directly comparable with those in the consolidated balance sheet because the table presents gross cash flows relating to principal payments and not the balance sheet carrying value, which include debt securities and subordinated liabilities measured at fair value.

Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities

Debt securities issued	8,091 13,362 15,808 10,241 5,447 21,811 70,462 63,914 209,136
- unsecured CDs and CP	4,378	7,640	10,696	6,546	818	529	764	1,031	32,402
- unsecured senior MTNs	467	1,233	3,107	2,263	2,172	11,252	55,307	54,256	130,057
- unsecured senior structured notes	817	821	1,452	1,029	2,394	3,005	7,021	4,473	21,012
- secured covered bonds	-	-	205	-	-	1,190	3,469	1,137	6,001
- secured asset-backed commercial paper	2,094	-	-	-	-	-	-	-	2,094
- secured ABS	-	-	-	-	-	-	-	327	327
- others	335	3,668	348	403	63	5,835	3,901	2,690	17,243
Subordinated liabilities	- 95 2,007 - - 2,021 1,383 31,131 36,637
- subordinated debt securities	- 95 2,007 - - 2,021 1,383							28,934	34,440
- preferred securities	- - - - - - -							2,197	2,197
At 31 Dec 2018	8,091 13,457 17,815 10,241 5,447 23,832 71,845 95,045 245,773

Debt securities issued 7,502 8,409 9,435 8,132 15,111 13,000 55,347 48,234 165,170

- unsecured CDs and CP	1,085	3,636	4,334	3,064	6,132	137	386	277	19,051
- unsecured senior MTNs	1,614	2,973	3,047	2,924	5,109	6,564	41,090	39,544	102,865
- unsecured senior structured notes	1,298	1,796	2,054	1,935	2,870	4,586	10,156	5,328	30,023
- secured covered bonds	-	-	-	209	-	212	2,494	1,655	4,570
- secured asset-backed
commercial paper	3,479	-	-	-	-	-	-	-	3,479
- secured ABS	-	-	-	-	-	-	914	436	1,350
- others	26	4	-	-	1,000	1,501	307	994	3,832

Subordinated liabilities 3 1,918 74 - 170 2,371 4,077

- subordinated debt securities 3 1,918 74 - 170 2,371 3,618

- preferred securities - - - - - - 459

At 31 Dec 2017 7,505 10,327 9,509 8,132 15,281 15,371 59,424

136 HSBC Holdings plc Annual Report and Accounts 2018

Contractual maturity of financial liabilities

The following table shows, on an undiscounted basis, all cash flows relating to principal and future coupon payments (except for trading liabilities and derivatives not treated as hedging derivatives). For this reason, balances in the following table do not agree directly with those in our consolidated balance sheet. Undiscounted cash flows payable in relation to hedging derivative liabilities are classified according to their contractual maturities. Trading liabilities and derivatives not treated as hedging derivatives are included in the 'On demand' time bucket and not by contractual maturity.

A maturity analysis of repos and debt securities in issue included in trading liabilities is presented in Note 29 on the Financial Statements.

In addition, loans and other credit-related commitments and financial guarantees are generally not recognised on our balance sheet. The undiscounted cash flows potentially payable under loan and other credit-related commitments and financial guarantees are classified on the basis of the earliest date they can be called.

Cash flows payable by HSBC under financial liabilities by remaining contractual maturities
(Audited)

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Report of the Directors | Risk

Cash flows payable by HSBC Holdings under financial liabilities by remaining contractual maturities
(Audited)

Footnotes

Amounts owed to HSBC undertakings

Financial liabilities designated at fair value

Derivatives

Debt securities in issue

Subordinated liabilities

Other financial liabilities

Loan commitments

Financial guarantees 8

At 31 Dec 2018

Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices, will reduce our income or the value of our portfolios. Exposure to market risk is separated into two portfolios:

· trading portfolios; and

· non-trading portfolios.

Market risk exposures arising from our insurance manufacturing operations are discussed on page 86.

A summary of our current policies and practices regarding the management of market risk is set out on page 81.

Global markets were characterised by robust economic sentiment at the start of the year. As the year progressed, economic activity diverged across the global economy against a backdrop of continuing trade and geopolitical tensions; concerns around slowing growth in China; and the continuing uncertainty around the shape of the UK's withdrawal from the EU.

Trading portfolios

Value at risk of the trading portfolios

Trading VaR predominantly resides within Global Markets where trading VaR was lower at 31 December 2018 compared with 31 December 2017. The contributions of each asset class were largely range bound during the year.

Monetary tightening started across the developed world. The US Federal Reserve raised official interest rates multiple times during the year and signalled it will raise rates more slowly in 2019. Bond yields started to increase but remained low by historical standards. In the eurozone, the European Central Bank ended its bond-buying programme, although softening growth and inflation prospects add to the uncertainty of the timing of the next interest rate hike.

Trading value at risk ('VaR') ended the year lower when compared with the previous year. The trading VaR composition remained largely the same, with interest rate trading VaR being the largest individual contributor to overall trading VaR.

Non-trading interest rate VaR ended the year lower when compared with the previous year as exposures were managed down.

The decrease in trading VaR from the equity and credit spread trading VaR components was partially offset by an increase in the interest rate and foreign exchange trading VaR components.

The effects of portfolio diversification reduced the overall trading VaR.

138 HSBC Holdings plc Annual Report and Accounts 2018

The daily levels of total trading VaR over the last year are set out in the graph below.

Daily VaR (trading portfolios), 99% 1 day ($m)

The Group trading VaR for the year is shown in the table below.

Trading VaR, 99% 1 day³⁵
(Audited)

Back-testing

In 2018, the Group experienced three back-testing exceptions against actual profit and loss: a profit exception in February, driven by gains on short positions on falling index and stock exposures; a profit exception in August, driven by volatility in Turkish lira spot; and a loss exception in December, driven by month-end adjustments that were not in scope of the market risk model.

Non-trading portfolios

Value at risk of the non-trading portfolios

Non-trading VaR of the Group includes contributions from all global businesses. There was no commodity risk in the non-trading portfolios. The non-trading VaR ended the year lower compared with the previous year, due to a reduction in the non-trading interest rate VaR component. This was caused by the reduction of the risk in our investment portfolio, specifically from reduced interest rate risk on US Treasuries and agency mortgage-backed securities.

The Group also experienced one back-testing profit exception against hypothetical profit and loss in August based on the same driver described above.

There was no evidence of model errors or control failures.

The back-testing result excludes exceptions due to changes in fair value adjustments.

Non-trading VaR includes the interest rate risk in the banking book transferred to and managed by Balance Sheet Management ('BSM') and the non-trading financial instruments held by BSM. The management of interest rate risk in the banking book and the role of BSM are described further in the following 'Net interest income sensitivity' section.

Non-trading VaR excludes the insurance operations, which are discussed further on page 143, and the interest rate risk in the banking book arising from HSBC Holdings.

The daily levels of total non-trading VaR over the last year are set out in the graph below.

HSBC Holdings plc Annual Report and Accounts 2018 139

Report of the Directors | Risk

Daily VaR (non-trading portfolios), 99% 1 day ($m)

The Group non-trading VaR for the year is shown in the table below.

Non-trading VaR, 99% 1 day
(Audited)

Balance at 31 Dec 2018 Average

Maximum

Minimum

140 HSBC Holdings plc Annual Report and Accounts 2018

Net structural foreign exchange exposures

Net interest income sensitivity

The following tables set out the assessed impact to a hypothetical base case projection of our net interest income ('NII') (excluding insurance) under the following scenarios:

· an immediate shock of 25 basis points ('bps') to the current market-implied path of interest rates across all currencies on 1 January 2019 (effects over one year and five years); and

· an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 January 2019 (effects over one year and five years).

The sensitivities shown represent our assessment of the change to a hypothetical base case NII, assuming a static balance sheet and no management actions from BSM. They incorporate the effect of interest rate behaviouralisation, managed rate product pricing assumptions and customer behaviour, for example, prepayment of mortgages or customer migration from non-interest-bearing to interest-bearing deposit accounts under the specific interest rate scenarios. The scenarios represent interest rate shocks to the current market implied path of rates.

The NII sensitivities shown are indicative and based on simplified scenarios. Immediate interest rate rises of 25bps and 100bps would increase projected net interest income for the 12 months to 31 December 2019 by $828m and

For footnotes, see page 147.

Shareholders' equity would decrease by $2,743m (2017: $2,659m) if euro and sterling foreign currency exchange rates weakened by 5% relative to the US dollar.

$2,778m, respectively. Conversely, falls of 25bps and 100bps would decrease projected net interest income for the 12 months to 31 December 2019 by $884m and $3,454m, respectively.

The sensitivity of NII for 12 months decreased by $521m and $747m comparing December 2018 with December 2017 in the plus and minus 100bps parallel shocks, respectively. These decreases were driven by movements in the US dollar amounts primarily due to changes in balance sheet composition and the migration of non-interest-bearing liabilities to interest-bearing liabilities as interest rates increased. By contrast, sterling NII sensitivity increased because of higher liquidity linked to UK structural reform and preparations surrounding the UK's exit from the European Union.

The change in NII sensitivity for five years is also driven by the factors above.

The structural sensitivity arising from the four global businesses, excluding Global Markets, is positive in a rising rate environment and negative in a falling rate environment. Both BSM and Global Markets have NII sensitivity profiles that offset this to some degree. The tables do not include BSM management actions or changes in Global Markets' net trading income that may further limit the offset.

The limitations of this analysis are discussed within the 'Risk management' section on page 73.

NII sensitivity to an instantaneous change in yield curves (12 months)

227	179	147	50	203	806
(287)	(305)	(181)	8	(160)	(925)
845	711	600	412	731	3,299
(1,444)	(1,425)	(631)	31	(732)	(4,201)

The net interest income sensitivities arising from the scenarios presented in the tables above are not directly comparable. This is due to timing differences relating to interest rate changes and the repricing of assets and liabilities.

HSBC Holdings plc Annual Report and Accounts 2018 141

Report of the Directors | Risk

NII sensitivity to an instantaneous change in yield curves (5 years)

Year 1 Year 2 Year 3 Year 4 Year 5 Total

$m $m $m $m $m $m

Sensitivity of capital and reserves

Financial assets at fair value through other comprehensive income reserves are included as part of CET1 capital. We measure the potential downside risk to the CET1 ratio due to interest rate and credit spread risk in this portfolio using the portfolio's stressed VaR, with a 99% confidence level and an assumed holding period of one quarter. At December 2018, the stressed VaR of the portfolio was $2.9bn (2017: $2.6bn).

We monitor the sensitivity of reported cash flow hedging reserves to interest rate movements on a six-monthly basis by assessing the expected reduction in valuation of cash flow hedges due to parallel movements of plus or minus 100bps in all yield curves. These particular exposures form only a part of our overall interest rate exposure.

The following table describes the maximum and minimum sensitivity of our cash flow hedge reported reserves to the stipulated movements in yield curves during the year. The sensitivities are indicative and based on simplified scenarios.

Sensitivity of cash flow hedging reported reserves to interest rate movements

Maximum

Minimum

impact

$m $m

Defined benefit pension schemes

Market risk arises within our defined benefit pension schemes to the extent that the obligations of the schemes are not fully matched by assets with determinable cash flows.

Additional market risk measures applicable only to the parent company

For details of our defined benefit schemes, including asset allocation, see Note 6 on the Financial Statements, and for pension risk management see page 87.

HSBC Holdings uses VaR to monitor and manage foreign exchange risk. In order to manage interest rate risk, HSBC Holdings uses the projected

142 HSBC Holdings plc Annual Report and Accounts 2018

sensitivity of its net interest income to future changes in yield curves and the interest rate gap repricing tables.

Foreign exchange risk

Total foreign exchange VaR arising within HSBC Holdings in 2018 was as follows.

HSBC Holdings - foreign exchange VaR

The foreign exchange risk arises from loans to subsidiaries of a capital nature that are not denominated in the functional currency of either the provider or the recipient and that are accounted for as financial assets, and from structural foreign exchange hedges. Changes in the carrying amount of these

loans due to foreign exchange rate differences, and changes in the fair value of foreign exchange hedges are taken directly to HSBC Holdings' income statement.

Sensitivity of net interest income

HSBC Holdings monitors NII sensitivity over a five-year time horizon, reflecting the longer-term perspective on interest rate risk management appropriate to a financial services holding company. These sensitivities assume that any issuance where HSBC Holdings has an option to reimburse at a future call date is called at this date. The table below sets out the effect on HSBC Holdings' future NII over a five-year time horizon of incremental 25bps parallel falls or rises in all yield curves at the beginning of each quarter during the 12 months from 1 January 2018.

The NII sensitivities shown are indicative and based on simplified scenarios. Immediate interest rate rises of 25bps and 100bps would decrease projected net interest income for the 12 months to 31 December 2019 by $7m and $29m, respectively. Conversely, falls of 25bps and 100bps would increase projected net interest income for the 12 months to 31 December 2019 by $10m and $43m, respectively.

NII sensitivity to an instantaneous change in yield curves (12 months)

US dollar HK dollar Sterling Euro Other Total

$m $m $m $m $m $m

NII sensitivity to an instantaneous change in yield curves (5 years)

Year 1 Year 2 Year 3 Year 4 Year 5 Total

$m $m $m $m $m $m

The interest rate sensitivities in the preceding table are indicative and based on simplified scenarios. The figures represent hypothetical movements in NII based on our projected yield curve scenarios, HSBC Holdings' current interest rate risk profile and assumed changes to that profile during the next five years.

The sensitivities represent our assessment of the change to a hypothetical base case based on a static balance sheet assumption, and do not take into account the effect of actions that could be taken to mitigate this interest rate risk.

Interest rate repricing gap table

The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included within the Group VaR, but is managed on a repricing gap basis. The following interest rate repricing gap table analyses the full-term structure of interest rate mismatches within HSBC Holdings' balance sheet where debt issuances are reflected based on either the next reprice date if floating rate or the maturity/call date (whichever is first) if fixed rate.

Repricing gap analysis of HSBC Holdings

Footnotes

Cash at bank and in hand:

- balances with HSBC undertakings	3,509 3,509 - - - -
Derivatives	707 - - - - 707

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Report of the Directors | Risk

Loans and advances to HSBC undertakings

Financial investments in HSBC undertakings

Investments in subsidiaries

Other assets

Total assets

Amounts owed to HSBC undertakings

Financial liabilities designated at fair values

Derivatives

Debt securities in issue

Other liabilities

Subordinated liabilities

Total equity

Total liabilities and equity

Off-balance sheet items attracting interest rate sensitivity

Net interest rate risk gap at 31 Dec 2018

Cumulative interest rate gap

Cash at bank and in hand:

Operational risk profile

Operational risk is the risk to achieving our strategy or objectives as a result of inadequate or failed internal processes, people and systems or from external events.

Responsibility for minimising operational risk lies with HSBC's employees. They are required to manage the operational risks of the business and operational activities for which they are responsible.

A summary of our current policies and practices regarding the management of operational risk is set out on page 84.

Operational risk exposures in 2018

In 2018, we continued our ongoing work to strengthen those controls that manage our most material risks. Among other measures, we:

· further enhanced our controls to help ensure that we know our customers, ask the right questions, monitor transactions and escalate concerns to detect, prevent and deter financial crime risk;

· implemented a number of initiatives to raise our standards in relation to the conduct of our business as described on page 84 of the 'Regulatory compliance risk management' section;

· increased monitoring and enhanced detective controls to manage fraud risks, which arise from new technologies and new ways of banking;

· strengthened internal security controls to help prevent cyber-attacks;

· improved controls and security to protect customers when using digital channels; and

· enhanced our third-party risk management capability to help enable the consistent risk assessment of any third-party service.

Further information on the nature of these risks is provided in 'Top and emerging risks' on page 69 and in 'Risk management' from pages 73 to 88.

Operational risk losses in 2018

Operational risk losses in 2018 were higher than in 2017, reflecting an increase in losses incurred relating to large legacy conduct-related events. For further details see Note 35 on the Financial Statements and on conduct-related costs included in significant items on page 66.

144 HSBC Holdings plc Annual Report and Accounts 2018


Insurance manufacturing operations risk profile Insurance manufacturing operations risk in 2018	Page 145	Key risk types	148
		- Market risk	148
		- Credit risk	149
		- Liquidity risk	149
HSBC's bancassurance model	145	- Insurance risk	149
Measurement	145

Insurance manufacturing operations risk in 2018

The majority of the risk in our insurance business derives from manufacturing activities and can be categorised as financial risk or insurance risk. Financial risks include market risk, credit risk and liquidity risk.

HSBC's bancassurance model

We operate an integrated bancassurance model that provides insurance products principally for customers with whom we have a banking relationship.

The insurance contracts we sell relate to the underlying needs of our banking customers, which we can identify from our point-of-sale contacts and customer knowledge. For the products we manufacture, the majority of sales are of savings, universal life and credit and term life contracts.

By focusing largely on personal and small and medium enterprises ('SME') lines of business, we are able to optimise volumes and diversify individual insurance risks. We choose to manufacture these insurance products in HSBC subsidiaries based on an assessment of operational scale and risk appetite. Manufacturing insurance allows us to retain the risks and rewards associated with writing insurance contracts by keeping part of the underwriting profit and investment income within the Group.

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

Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to the issuer (HSBC).

A summary of our current policies and practices regarding the management of insurance risk is set out on page 86.

We have life insurance manufacturing subsidiaries in nine countries and territories (Hong Kong, France, Singapore, UK, mainland China, Malta, Mexico, Argentina and Malaysia). We also have a life insurance manufacturing associate in India.

Where we do not have the risk appetite or operational scale to be an effective insurance manufacturer, we engage with a small number of leading external insurance companies in order to provide insurance products to our customers through our banking network and direct channels. These arrangements are generally structured with our exclusive strategic partners and earn the Group a combination of commissions, fees and a share of profits. We distribute insurance products in all of our geographical regions.

Insurance products are sold worldwide, predominantly by RBWM, CMB and GPB through our branches and direct channels.

ratio (economic net asset value divided by the economic capital requirement) is a key risk appetite measure.

The business has a current appetite to remain above 140% with a tolerance of 110%. In addition to economic capital, the regulatory solvency ratio is also a metric used to manage risk appetite on an entity basis.

The following tables show the composition of assets and liabilities by contract type and by geographical region.

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Report of the Directors | Risk

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

- trading assets	- 15,533 286 29,302 15,280 4,711	- 8,814 - - - 267	- 2,951 13 6,396 4,836 653	- 1,259 41 3,331 1,877 154	- 28,557 340 39,029 21,993 5,785
- financial assets designated at fair value
- derivatives
- financial investments - HTM 44
- financial investments - AFS 44
- other financial assets 41

Reinsurance assets		1,108	274	1,154	-	2,536
PVIF	42	-	-	-	6,610	6,610
Other assets and investment properties		1,975	2	164	1,126	3,267
Total assets		68,195	9,357	16,167	14,398	108,117
Liabilities under investment contracts designated at fair value		-	1,750	3,885	-	5,635
Liabilities under insurance contracts		67,137	7,548	10,982	-	85,667
Deferred tax	43	14	6	9	1,230	1,259
Other liabilities		-	-	-	3,325	3,325
Total liabilities		67,151	9,304	14,876	4,555	95,886
Total equity		-	-	-	12,231	12,231
Total liabilities and equity at 31 Dec 2017		67,151	9,304	14,876	16,786	108,117
For footnotes, see page 147.

Balance sheet of insurance manufacturing subsidiaries by geographical region⁴⁵ (Audited)

Footnotes

Financial assets	28,631 66,793 1,320 96,744
- trading assets	- 13,142 121 296 12,453 2,619	- 15,774 116 48,595 440 1,868	- 326 - 522 441 31	- 29,242 237 49,413 13,334 4,518
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss
- derivatives
- financial investments - at amortised cost
- financial investments - at fair value through other comprehensive income
- other financial assets 41
Reinsurance assets	249 2,438 5 2,692

PVIF 42

Other assets and investment properties

Total assets

Liabilities under investment contracts designated at fair value
Liabilities under insurance contracts

Deferred tax 43

Other liabilities

Total liabilities

Total equity

Total liabilities and equity at 31 Dec 2018

Financial assets 30,231 63,973 1,500 95,704

- trading assets	- 12,430 169 - 15,144 2,488	- 15,633 171 38,506 6,393 3,270	- 494 - 523 456 27	- 28,557 340 39,029 21,993 5,785
- financial assets designated at fair value
- derivatives
- financial investments - HTM 44
- financial investments - AFS 44
- other financial assets 41

Reinsurance assets		469	2,063	4	2,536
PVIF	42	773	5,709	128	6,610
Other assets and investment properties		1,666	1,577	24	3,267
Total assets		33,139	73,322	1,656	108,117
Liabilities under investment contracts designated at fair value		739	4,896	-	5,635
Liabilities under insurance contracts		28,416	56,047	1,204	85,667
Deferred tax	43	217	1,033	9	1,259
Other liabilities		2,043	1,209	73	3,325
Total liabilities		31,415	63,185	1,286	95,886
Total equity		1,724	10,137	370	12,231
Total liabilities and equity at 31 Dec 2017		33,139	73,322	1,656	108,117

146 HSBC Holdings plc Annual Report and Accounts 2018

For footnotes, see page 147.

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Report of the Directors | Risk

Key risk types

The key risks for the insurance operations are market risks (in particular interest rate and equity) and credit risks, followed by insurance underwriting

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.

risk and operational risks. Liquidity risk, while significant for the bank, is minor for our insurance operations.

In addition, in some scenarios the asset returns can become insufficient to cover the policyholders' financial guarantees, in which case the shortfall has to be met by HSBC. Reserves are held against the cost of such guarantees, calculated by stochastic modelling.

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 decreased to $669m (2017: $696m) primarily due to sales of new products with lower guarantees in Hong Kong and updates to modelling assumptions.

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.

148 HSBC Holdings plc Annual Report and Accounts 2018

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.

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 2018. The liquidity risk exposure is

The amounts outstanding at the balance sheet date in respect of these items are shown in the table on page 143.

The credit quality of the reinsurers' share of liabilities under insurance contracts is assessed as 'satisfactory' or higher (as defined on page 79), with 100% of the exposure being neither past due nor impaired (2017: 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 100. 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.

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 2018 remained comparable with 2017.

The remaining contractual maturity of investment contract liabilities is included in Note 29 on page 280.

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

1,119	2,932	2,684	1,962	8,697
7,459	27,497	46,217	55,989	137,162

969	3,041	4,695	6,814	15,519
6,916	26,453	43,784	45,334	122,487
7,885	29,494	48,479	52,148	138,006

Insurance risk

Description and exposure

Insurance risk is the risk of loss through adverse experience, in either timing or amount, of insurance underwriting parameters (non-economic assumptions). These parameters include mortality, morbidity, longevity, lapses and unit costs.

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 analysis
(Audited)

The principal risk we face is that, over time, the cost of the contract, including claims and benefits, may exceed the total amount of premiums and investment income received.

The tables on pages 143 and 145 analyse our life insurance risk exposures by type of contract and by geographical region.

The insurance risk profile and related exposures remain largely consistent with those observed at 31 December 2017.

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.

Effect on profit after tax and total equity at 31 Dec

10% increase in mortality and/or morbidity rates

10% decrease in mortality and/or morbidity rates

10% increase in lapse rates

10% decrease in lapse rates

10% increase in expense rates

10% decrease in expense rates

HSBC Holdings plc Annual Report and Accounts 2018 149

Report of the Directors | Risk

Footnotes to Risk

1 Customer risk rating ('CRR').

2 12-month point-in-time ('PIT') probability-weighted probability of default ('PD').

3 The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not

included in the Group VaR. The management of this risk is described on page 132.

4 BSM, for external reporting purposes, forms part of Corporate Centre while daily operations and risk are managed within GB&M.

5 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.

6 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 216 includes both financial and non-financial assets.

7 31 December 2017 balances have been restated to include $44bn of loan commitments (unsettled reverse repurchase agreements) not previously identified for disclosure.

8 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied.

9 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

10 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.

11 Purchased or originated credit-impaired ('POCI').

12 Days past due ('DPD'). Up to date accounts in Stage 2 are not shown in amounts.

13 Excludes ECL and financial instruments relating to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios.

14 Includes off-balance sheet financial instruments that are subject to significant measurement uncertainty.

15 Includes low credit-risk financial instruments such as Debt instruments at FVOCI, which have low ECL coverage ratios under all the above scenarios. Coverage ratios on loans and advances to customers including loan commitments and financial guarantees are typically higher. For example, in the UK the coverage ratio for reported ECL is 0.39%, UK AD1 0.43% and UK AD2-3 0.72-0.81%. For US, the coverage ratio for these instruments for reported ECL is 0.11% and for Hong Kong 0.06% for the reported ECL and 0.20% for the trade Downside scenario.

16 ECL sensitivities exclude portfolios utilising less complex modelling approaches.

17 ECL sensitivity includes only on-balance sheet financial instruments to which IFRS 9 impairment requirements are applied.

18 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.

19 Revocable loan and other commitments of $188bn which are out-of-scope of IFRS 9 are presented within the strong credit quality classification.

20 12 month point in time (PiT) adjusted for multiple economic scenarios

21 Real estate lending within this disclosure corresponds solely to the industry of the borrower. Commercial real estate on page 108 includes borrowers in multiple industries investing in income producing assets and to a lesser extent, their construction and development.

22 US mortgage-backed securities.

23 31 December 2017 balances have been restated to include $3bn of performance and other guarantees not previously identified for disclosure.

24 The disclosure is a comparative for the 2018 'Total wholesale lending for loans and advances to banks and customers by stage distribution table' and was not presented in the Annual Report and Accounts 2017.

25 The HSBC UK Liquidity Group shown comprises four legal entities: HSBC Bank plc (including all overseas branches, and SPEs consolidated by HSBC Bank plc for Financial Statement purposes), Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the UK PRA.

26 The HSBC UK Liquidity Group shown comprises four legal entities: HSBC UK Bank plc (including the Dublin branch), Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the UK PRA.

27 HSBC Bank plc includes all overseas branches, and SPEs consolidated by HSBC Bank plc for Financial Statements purposes.

28 The Hongkong and Shanghai Banking Corporation - Hong Kong branch and The Hongkong and Shanghai Banking Corporation - Singapore branch represent the material activities of The Hongkong and Shanghai Banking Corporation. Each branch is monitored and controlled for liquidity and funding risk purposes as a stand-alone operating entity.

29 The comparative figures have been re-presented to reflect revised data.

30 HSBC France and HSBC Canada represent the consolidated banking operations of the Group in France and Canada, respectively. HSBC France and HSBC Canada are each managed as single distinct operating entities for liquidity purposes.

31 In adopting the NSFR (BCBS 295) as a key internal risk management metric, the HSBC Group has, until such time that the NSFR becomes a binding regulatory requirement on the Group or the operating entity locally, permitted entities to reduce the amount of required stable funding requirement ('RSF') for listed equities where the valuation risk has been hedged through an exchange traded daily cash margined derivative, due to management's view as to the speed at which these assets could be monetised under stress and the mitigation of the valuation risk. At 31 December 2018, only HSBC Bank plc were applying a lower RSF to such equities. The NSFRs presented seek to reflect the internal management view of funding risk.

32 The total shown for other principal HSBC operating entities represents the combined position of all the other operating entities overseen directly by the Risk Management Meeting of the GMB.

33 Structured liabilities have moved from 'Trading liabilities' to 'Financial liabilities

designated at fair value'. Comparatives have not been restated. See Note 37 for further detail.

34 The undiscounted cash flows potentially payable under financial guarantees are classified on the basis of the earliest date they can be called. Application of this policy throughout the Group was improved in 2018, and therefore comparative information has been represented.

35 Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.

36 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types; for example, interest rate, equity and foreign exchange, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.

37 The total VaR is non-additive across risk types due to diversification effects.

38 At 31 December, we had forward foreign exchange contracts of $5bn (2017: $5bn) in order to manage our sterling structural foreign exchange exposure.

39 Investments in subsidiaries and equity have been allocated based on call dates for any callable bonds. The prior year figures have been amended to reflect this.

40 'Other Contracts' includes term insurance, credit life insurance, universal life insurance and investment contracts not included in the 'Unit-linked' or 'With DPF' columns.

41 Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.

42 Present value of in-force long-term insurance business.

43 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.

44 Financial investments held to maturity ('HTM') and available for sale ('AFS').

45 HSBC has no insurance manufacturing subsidiaries in Middle East and North Africa or North America.

46 A block of contracts in France with guaranteed nominal annual returns in the range 1.25%-3.72% is reported entirely in the 2.1%-4.0% category in line with the average guaranteed return of 2.6% offered to policyholders by these contracts.

150 HSBC Holdings plc Annual Report and Accounts 2018

HSBC Holdings plc Annual Report and Accounts 2018 151

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