FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Report of Foreign Private Issuer

Pursuant to Rule 13a - 16 or 15d - 16 of

the Securities Exchange Act of 1934

 

For the month of August

HSBC Holdings plc

42nd Floor, 8 Canada Square, London E14 5HQ, England

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F).

Form 20-F X Form 40-F  

(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934).

Yes  No X

(If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-   ).

 

  

 

 http://www.rns-pdf.londonstockexchange.com/rns/6315V_1-2020-8-10.pdf

HSBC Holdings plc

Pillar 3 Disclosures at 30 June 2020

 

 

Contents
			Page
Introduction			2
Highlights			2
Regulatory framework for disclosures			2
Pillar 3 disclosures			2
Key metrics			3
Regulatory developments			3
Risk management response to Covid-19			4
Linkage to the Interim Report			5
Capital and RWAs			7
Own funds			7
Leverage ratio			9
Capital buffers			10
Pillar 1 minimum capital requirements and RWA flow			10
Minimum requirement for own funds and eligible liabilities			13
Credit risk			19
Credit quality of assets			19
Non-performing and forborne exposures			22
Defaulted exposures			27
Risk mitigation			27
Counterparty credit risk			37
Securitisation			42
Market risk			46
Other information			50
Abbreviations			50
Cautionary statement regarding forward-looking statements			51
Contacts			52
Tables
		Ref	Page
1	Key metrics (KM1/IFRS9-FL)	a	3
2	Reconciliation of balance sheets - financial accounting to regulatory scope of consolidation		6
3	Own funds disclosure	b	7
4	Leverage ratio common disclosure ('LRCom')	a	9
5	Summary reconciliation of accounting assets and leverage ratio exposures ('LRSum')	b	9
6	Leverage ratio - Split of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures) ('LRSpl')	a	10
7	Overview of RWAs ('OV1')	b	11
8	RWA flow statements of credit risk exposures under IRB ('CR8')		11
9	RWA flow statements of CCR exposures under IMM ('CCR7')		12
10	RWA flow statements of market risk exposures under IMA ('MR2-B')		12
11.i	Key metrics of the European resolution group ('KM2')	a	13
11.ii	Key metrics of the Asian resolution group ('KM2')		14
11.iii	Key metrics of the US resolution group ('KM2')		14
12	TLAC composition ('TLAC1')	a	15
13	HSBC Holdings plc creditor ranking ('TLAC3')		16
14	HSBC UK Bank plc creditor ranking ('TLAC2')		16
15	HSBC Bank plc creditor ranking ('TLAC2')		17
16	HSBC Asia Holdings Ltd creditor ranking ('TLAC3')		17
17	The Hongkong and Shanghai Banking Corporation Ltd creditor ranking ('TLAC2')		18
18	Hang Seng Bank Ltd creditor ranking ('TLAC2')		18
19	HSBC North America Holdings Inc. creditor ranking ('TLAC3')		18
20	Credit quality of exposures by exposure class and instrument ('CR1-A')		19
21	Credit quality of exposures by industry or counterparty types¹, ('CR1-B')		21
22	Credit quality of exposures by geography 1,2 ('CR1-C')		22
23	Credit quality of forborne exposures		23
24	Collateral obtained by taking possession and execution processes		23
25	Credit quality of performing and non-performing exposures by past due days		24
26	Performing and non-performing exposures and related provisions		25
27	Changes in stock of general and specific credit risk adjustments ('CR2-A')		27
28	Changes in stock of defaulted loans and debt securities ('CR2-B')		27
29	Credit risk mitigation techniques - overview ('CR3')		27
30	Standardised approach - credit conversion factor and credit risk mitigation ('CRM') effects ('CR4')	b	28
31	Standardised approach - exposures by asset classes and risk weights ('CR5')	b	29
32	IRB - Credit risk exposures by portfolio and PD range ('CR6')	a	30
33	IRB - Effect on RWA of credit derivatives used as CRM techniques ('CR7')		36
34	Specialised lending on slotting approach ('CR10')		36
35	Analysis of counterparty credit risk exposure by approach (excluding centrally cleared exposures) ('CCR1')		37
36	Credit valuation adjustment capital charge ('CCR2')		37
37	Standardised approach - CCR exposures by regulatory portfolio and risk weights ('CCR3')		37
38	IRB - CCR exposures by portfolio and PD scale ('CCR4')		38
39	Impact of netting and collateral held on exposure values ('CCR5-A')		40
40	Composition of collateral for CCR exposure ('CCR5-B')		40
41	Exposures to central counterparties ('CCR8')		40
42	Credit derivatives exposures ('CCR6')		41
43	Securitisation exposures in the non-trading book ('SEC1')		43
44	Securitisation exposures in the trading book ('SEC2')		44
45	Securitisation exposures in the non-trading book and associated regulatory capital requirements - bank acting as originator or as sponsor ('SEC3')		44
46	Securitisation exposures in the non-trading book and associated capital requirements - bank acting as investor  ('SEC4')		45
47	Market risk under standardised approach (MR1)		46
48	Market risk under IMA (MR2-A)		46
49	IMA values for trading portfolios (MR3)		47
50	Comparison of VaR estimates with gains/losses (MR4)		48

The Group has adopted the EU's regulatory transitional arrangements for IFRS 9 'Financial Instruments'. A number of tables in this document report under this arrangement as follows:

a.    Some figures have been prepared on an IFRS 9 transitional basis. Details are provided in the table footnotes.

b.   All figures have been prepared on an IFRS 9 transitional basis.

All other tables report numbers on the basis of the full adoption of IFRS 9.

This document should be read in conjunction with the Interim Report 2020, which has been published on our website www.hsbc.com

Certain defined terms

Unless the context requires otherwise, 'HSBC Holdings' means HSBC Holdings plc and 'HSBC', the 'Group', 'we', 'us' and 'our' refer to HSBC Holdings together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'. When used in the terms 'shareholders' equity' and 'total shareholders' equity', 'shareholders' means holders of HSBC Holdings ordinary shares and those preference shares and capital securities issued by HSBC Holdings classified as equity. The abbreviations '$m', '$bn' and '$tn' represent millions, billions (thousands of millions) and trillions of US dollars, respectively.

 

 

 

Introduction

 

Highlights

Common equity tier 1 ('CET1') ratio increased over 2Q20 to 15% due to higher CET1 capital, which included an increase from the cancellation of the 4Q19 dividend and the current suspension of dividends on ordinary shares, more than offsetting the impact of RWA growth.

 

 

Please click on the link below to view the following chart and Pillar 3 document in full:

http://www.rns-pdf.londonstockexchange.com/rns/6315V_1-2020-8-10.pdf

 

 

Common equity tier 1 ($bn and %)

        

Risk-weighted assets by risk type and global business ($bn)
Credit risk
Counterparty credit risk
Market risk
Operational risk

 

 

Commercial Banking

Global Banking and Markets

Wealth and Personal  Banking

Corporate Centre

  

 

Regulatory framework for disclosures

We are supervised on a consolidated basis in the UK by the Prudential Regulation Authority ('PRA'), which receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. Individual banking subsidiaries are directly regulated by their local banking supervisors, which set and monitor their local capital adequacy requirements. In most jurisdictions, non-banking financial subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.

At a consolidated Group level, capital is calculated for prudential regulatory reporting purposes using the Basel III framework of the Basel Committee on Banking Supervision ('Basel'), as implemented by the European Union ('EU') in the revisions to the Capital Requirements Regulation, as implemented ('CRR II'), and in the PRA Rulebook for the UK banking industry. The regulators of Group banking entities outside the EU are at varying stages of implementing the Basel III framework, so the Group may have been subject to local regulations in the first half of 2020 that were on the basis of the Basel I, II or III frameworks.

The Basel Committee's framework is structured around three 'pillars': Pillar 1, minimum capital requirements; Pillar 2, supervisory review process; and Pillar 3, market discipline. The aim of Pillar 3 is to produce disclosures that allow market participants to assess the scope of banks' application of the Basel Committee's framework. It also aims to assess their application of the rules in their jurisdiction, capital conditions, risk exposures and risk management processes, and hence their capital adequacy.

Pillar 3 disclosures

Our Pillar 3 Disclosures at 30 June 2020

comprises quantitative and qualitative information required under Pillar 3. They are made in accordance with Part Eight of the Capital Requirements Regulation, as implemented by CRR II and the European Banking Authority ('EBA') guidelines on disclosure requirements. These disclosures are supplemented by specific additional requirements of the PRA and discretionary disclosures on our part.

The Pillar 3 disclosures are governed by the disclosure policy framework approved by the Group Audit Committee.

To give insight into movements during the year, we provide comparative figures, commentary of variances and flow tables for capital requirements. In all tables where the term 'capital requirements' is used, this represents the minimum total capital charge set at 8% of risk-weighted assets ('RWAs') by article 92 of the Capital Requirements Regulation.

Where disclosures have been enhanced, or are new, we do not generally restate or provide comparatives. Wherever specific rows and columns in the tables prescribed by the EBA or Basel are not applicable or immaterial to our activities, we omit them and follow the same approach for comparatives.

Pillar 3 requirements may be met by inclusion in other disclosure media. Where we adopt this approach, references are provided to the relevant pages of the Interim Report 2020 or to other documents.

We continue to engage in the work of the UK authorities and industry associations to improve the transparency and comparability of UK banks' Pillar 3 disclosures.

 

Reporting and disclosure of exposures subject to measures applied in response to the Covid-19 outbreak

On 2 June, the EBA announced temporary additional reporting and disclosure requirements concerning payment moratoria and forbearance measures related to the Covid-19 outbreak.  

On 28 July, the PRA issued a statement setting out its  expectations on how the disclosure guidelines are to be applied, amending the EBA instructions and definitions to reflect the UK approach to payment deferrals.

We will publish these disclosures on or around 24 August 2020 on the HSBC website, hsbc.com.

 

 

 

 

 

Key metrics
Table 1: Key metrics (KM1/IFRS9-FL)
			At
			30 Jun		31 Mar		31 Dec		30 Sep		30 Jun
Ref*		Footnotes	2020		2020		2019		2019		2019
	Available capital ($bn)1	2
1	Common equity tier 1 ('CET1') capital	^	128.4		125.2		124.0		123.8		126.9
2	CET1 capital as if IFRS 9 transitional arrangements had not been applied		127.4		124.5		123.1		122.9		126.0
3	Tier 1 capital	^	152.5		149.2		148.4		149.7		152.8
4	Tier 1 capital as if IFRS 9 transitional arrangements had not been applied		151.4		148.5		147.5		148.8		151.9
5	Total capital	^	177.2		174.0		172.2		175.1		178.3
6	Total capital as if IFRS 9 transitional arrangements had not been applied		176.1		173.3		171.3		174.2		177.4
	Risk-weighted assets ('RWAs') ($bn)
7	Total RWAs		854.6		857.1		843.4		865.2		886.0
8	Total RWAs as if IFRS 9 transitional arrangements had not been applied		854.1		856.7		842.9		864.7		885.5
	Capital ratios (%)	2
9	CET1	^	15.0		14.6		14.7		14.3		14.3
10	CET1 as if IFRS 9 transitional arrangements had not been applied		14.9		14.5		14.6		14.2		14.2
11	Tier 1	^	17.8		17.4		17.6		17.3		17.2
12	Tier 1 as if IFRS 9 transitional arrangements had not been applied		17.7		17.3		17.5		17.2		17.2
13	Total capital	^	20.7		20.3		20.4		20.2		20.1
14	Total capital as if IFRS 9 transitional arrangements had not been applied		20.6		20.2		20.3		20.1		20.0
	Additional CET1 buffer requirements as a percentage of RWA (%)
	Capital conservation buffer requirement		2.50		2.50		2.50		2.50		2.50
	Countercyclical buffer requirement		0.20		0.22		0.61		0.69		0.68
	Bank G-SIB and/or D-SIB additional requirements		2.00		2.00		2.00		2.00		2.00
	Total of bank CET1 specific buffer requirements		4.70		4.72		5.11		5.19		5.18
	Total capital requirement (%)	3
	Total capital requirement		11.1		11.0		11.0		11.0		11.0
	CET1 available after meeting the bank's minimum capital requirements		8.8		8.4		8.5		8.1		8.1
	Leverage ratio	4
15	Total leverage ratio exposure measure ($bn)		2,801.4		2,782.7		2,726.5		2,708.2		2,786.5
16	Leverage ratio (%)	^	5.3		5.3		5.3		5.4		5.4
17	Leverage ratio as if IFRS 9 transitional arrangements had not been applied (%)		5.3		5.2		5.3		5.4		5.3
	Liquidity coverage ratio ('LCR')	5
	Total high-quality liquid assets ($bn)		654.4		617.2		601.4		513.2		532.8
	Total net cash outflow ($bn)		442.9		395.0		400.5		378.0		391.0
	LCR ratio (%)		147.8		156.3		150.2		135.8		136.3

*     The references in this and subsequent tables identify lines prescribed in the relevant EBA template where applicable and where there is a value.

^     Figures have been prepared on an IFRS 9 transitional basis.

1     Where applicable, our reporting throughout this document also reflects government relief schemes intended to mitigate the impact of the Covid-19 outbreak.

2     Capital figures and ratios are reported on a CRR II transitional basis for capital instruments.

3     Total capital requirement is defined as the sum of Pillar 1 and Pillar 2A capital requirements set by the PRA. The minimum requirements represent the total capital requirement to be met by CET1.

4     Leverage ratio is calculated using the CRR II end point basis for capital.

5     The EU's regulatory transitional arrangements for IFRS 9 'Financial Instruments' in article 473a of the Capital Requirements Regulation do not apply to liquidity coverage measures. LCR is calculated as at the end of each period rather than using average values. For further details, refer to page 83 of the Interim Report 2020.

 

 

 

We have adopted the regulatory transitional arrangements for IFRS 9 'Financial Instruments', including paragraph four within article 473a of the Capital Requirements Regulation, published by the EU on 27 December 2017. These transitional arrangements permit banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances during the first five years of use. The impact of IFRS 9 on loan loss allowances is defined as:

●    the increase in loan loss allowances on day one of IFRS 9 adoption; and

●    any subsequent increase in expected credit losses ('ECL') in the non-credit-impaired book thereafter.

Any add-back must be tax affected and accompanied by a recalculation of capital deduction thresholds, exposure and RWAs. The impact is calculated separately for portfolios using the standardised ('STD') and internal-ratings based ('IRB') approaches. For IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses.

The EU's CRR 'Quick Fix' relief package enacted in June 2020

increased from 70% to 100% the relief that banks may take for

loan loss allowances recognised since 1 January 2020 on the

non-credit-impaired book.

In the current period, the add-back to the capital base amounted to $1.4bn under the STD approach with a tax impact of $0.3bn.

At 31 December 2019, the add-back to the capital base under the STD approach was $1.0bn with a tax impact of $0.2bn.

 

Regulatory developments

Covid-19

The current Covid-19 pandemic has created an unprecedented challenge to the global economy. Governments, central banks and regulatory authorities have responded to this challenge with a number of regulatory measures. The substance of the announcements and the pace of response varies by jurisdiction, but broadly these have included a number of customer support measures, operational capacity measures and amendments to the RWAs, capital and liquidity frameworks.

In the EU, the relief measures have included a package known as the 'CRR Quick Fix' that was enacted in June 2020. The package represents an acceleration of some of the beneficial elements of the amendments to CRR II that were originally scheduled for June 2021, together with other amendments to mitigate the potential volatility in capital ratios arising from the pandemic. The material changes that were finalised in June, include:

●    a resetting of the transitional provisions in relation to recognising IFRS 9 provisions in CET1 capital;

●    the acceleration of the timetable for the changes to the CET1 deduction of software assets so that once the EBA finishes its current consultation on the new methodology, the rules can go live;

●    the CRR II changes to the small and medium-sized enterprises ('SME') supporting factor and the new infrastructure supporting factor; and

●    the CRR II change to the netting in the leverage ratio exposure measure of regular-way purchases and sales.

The PRA has published a statement in response to the package, stating that it will be undertaking a quantitative analysis of the benefits, which will be used to inform its supervisory approach. This will include an assessment of whether further action is necessary in Pillar 2. The accelerated application of the revised SME and infrastructure supporting factors will be implemented by the Group in the second half of 2020.

In addition to the CRR Quick Fix package, there were other changes to the regime in response to the Covid-19 outbreak. These included the enactment by the EU of beneficial changes to the CET1 deduction for prudent valuation adjustments, which will remain in place until 1 January 2021, and the PRA announcing that it is setting all Pillar 2A requirements in 2020 and 2021 as a nominal amount, instead of as a percentage of total RWAs.

 

The Basel Committee

In December 2017, the Basel Committee ('Basel') published the Basel III Reforms. The package was finalised in July 2020 when Basel published the final revisions to the credit valuation adjustment ('CVA') framework.

In March 2020, Basel announced a one-year delay to the implementation of the package. It is now to be implemented on 

1 January 2023, with a five-year transitional provision for the output floor. This floor ensures that, at the end of the transitional period, banks' total RWAs will be no lower than 72.5% of those generated by the standardised approaches. The final standards will need to be transposed into the relevant local law before coming into effect. The EU, the UK and Hong Kong authorities have already indicated that they will apply the new timetable.

There remains a significant degree of uncertainty about the impact of these changes due to the number of national discretions within Basel's reforms and the need for further supporting technical standards to be developed. Furthermore, any impact needs to be viewed in light of the possibility of offsets against Pillar 2, which may arise as shortcomings within Pillar 1 are addressed.

 

The Capital Requirements Regulation amendments

In June 2019, the EU enacted CRR II. This is the EU's implementation of changes to the own funds regime and to the Financial Stability Board's ('FSB') requirements for total loss-absorbing capacity ('TLAC'), known in the EU as the minimum requirements for own funds and eligible liabilities ('MREL'). CRR II will also implement the first tranche of changes to the EU's legislation to reflect the Basel III Reforms, including the changes to market risk ('FRTB') rules, revisions to the standardised approach for measuring counterparty risk, changes to the equity investments in funds rules and the new leverage ratio rules. The CRR II rules will follow a phased implementation with significant elements entering into force in 2021, in advance of Basel's timeline.

 

The EU's implementation of the Basel III Reforms

The remaining elements of the Basel III Reforms will be implemented in the EU by a further set of amendments to the Capital Requirements Regulation. In 2019, the European Commission began consulting on its implementation, which will include reforms to the credit and operational risk rules and a new output floor. However, draft legislative text has not yet been published. The EU implementation will be subject to an extensive negotiation process with the EU Council and Parliament. As a result, the final form of the rules remains unclear.

 

The UK's withdrawal from the EU

The UK left the EU on 31 January 2020. In order to smooth the transition, the UK remains subject to EU law during an implementation period, which will end on 31 December 2020. The PRA has announced its intention that, save for in certain limited circumstances, the changes to the prudential framework arising as a result of the UK's withdrawal will be delayed until 31 March 2022.

In June, Her Majesty's Treasury ('HMT') published an update on the framework to implement future prudential changes in the UK. This will be in the form of a Financial Services Bill in which powers will be delegated to the PRA for detailed rule making. The UK has stated that it intends to implement its own version of CRR II to the same timetable as the EU.

At the same time, HMT published a consultation on the implementation of the amendments to the Bank Recovery and Resolution Directive, the main EU regulation overseeing resolution and MREL standards. It also subsequently published a consultation on aspects of the amendments to the Capital Requirements Directive ('CRD V'). HMT proposes to implement in UK law only those elements of the Bank Recovery and Resolution Directive and CRD V that will be live on 31 December 2020.

In July 2020, the PRA also issued a consultation on implementing parts of CRD V, which includes its requirements for Pillar 2, remuneration and governance. In the autumn, the PRA will consult on the remaining elements of CRD V and the CRR II elements that apply from December 2020.

 

Other developments

In July 2020, the PRA published its final policy on reducing Pillar 2A to reflect the additional resilience associated with the higher countercyclical capital buffer ('CCyB') in a standard risk environment proposed by the Bank of England's Financial Policy Committee. However, reflecting the reduction of the UK's CCyB to 0% and the fact that the UK's structural CCyB rate set in a standard risk environment has not changed, the PRA introduced a requirement to temporarily increase the PRA buffer to offset some of the reductions in Pillar 2A that firms receive under this proposal. The rules take immediate effect.

Also in July, the PRA published a statement outlining its views on the implications of London interbank offered rate ('Libor') transition for contracts in scope of its resolution-related rules. The EBA also published its final guidelines on the treatment of structural foreign exchange positions, which will apply from 

1 January 2022, one year later than originally planned.

On 1 July, the PRA sent a letter to CEOs outlining its expectations of firms in managing climate-related financial risks and advising firms that they must have fully embedded their approaches to managing such risk by the end of 2021.

 

Risk management response to Covid-19

The first half of 2020 was marked by unprecedented global economic events, leading to banks playing an expanded role to support society and customers. The Covid-19 outbreak and its impact on the global economy have impacted many of our customers' business models and income, requiring significant levels of support from both governments and banks. In response, we have enhanced our approach to the management of risk in this rapidly changing environment.

Throughout the Covid-19 outbreak, we have supported our customers and adapted our operational processes. Our people, processes and systems have responded to the changes needed and increased the workload in serving our customers through this time. To meet the additional challenges, we supplemented our existing approach to risk management with additional tools and practices. We increased our focus on the quality and timeliness of the data used to inform management decisions, through measures such as early warning indicators, prudent active risk management against our risk appetite, and ensuring regular communication with our Board and other key stakeholders. This section sets out how we have managed our key risks resulting from the outbreak and its impacts.

 

Capital and liquidity management

The management of capital was a key focus in 1H20 to ensure the Group responded to unprecedented customer and capital demands arising from Covid-19 outbreak. All major entities remained in excess of their capital risk appetite.

In response to a written request from the PRA, we cancelled the fourth interim dividend for 2019 of $0.21 per ordinary share. Similar requests were also made to other UK incorporated banking groups. We also announced that until the end of 2020, we will make no quarterly or interim dividend payments or accruals in respect of ordinary shares. We also plan to suspend share buy-backs in respect of ordinary shares in 2020 and 2021.

The reduction of the UK countercyclical buffer rate to 0% was reflected in the Group's risk appetite statement, and together with other regulatory relief, resulted in a reduction to Group CET1 and leverage ratio requirements.

In 1H20, all entities remained within the CET1 risk appetite and the Group continues to maintain the appropriate resources required to adequately support risks to which it is exposed. This has been further informed by additional internal stress tests carried out in response to the Covid-19 outbreak. Capital risk management practices continued to be enhanced across the Group through the capital risk management function, focusing on both adequacy of capital and sufficiency of returns.

The management of liquidity risk was enhanced during 1H20 in response to the Covid-19 pandemic to ensure the Group anticipated, monitored and responded to the impacts both at Group and entity level. Liquidity levels were impacted by drawdown of committed facilities and buy-backs of short-term debt. However, this was offset by an increase in deposits, use of central bank facilities where appropriate and the ability to issue in the short-term markets as they stabilised. As a result of these liability enhancing actions, the Group and all entities have significant surplus liquidity, resulting in heightened liquidity coverage ratios ('LCR') in 1H20.

 

Prudential valuation adjustment

To achieve the degree of certainty prescribed for prudent valuation, banks must adjust fair valued exposures for valuation uncertainties and deduct the resulting prudent valuation adjustment ('PVA') charge from CET1. Market turmoil caused by the Covid-19 outbreak resulted in a significant increase in asset price dispersion, bid-offer spreads and subsequent hypothetical exit costs, leading to a material increase of the PVA charge in 1Q20 when compared with 4Q19. For 2Q20, the charge materially reduced from bid offer spreads and price dispersion reduction as market volatility reduced, as well as from the application of a higher diversification benefit temporarily permitted by regulators.

 

Credit risk management

During 1Q20, a number of relief programmes were initiated across the Group in response to the Covid-19 outbreak. These remained in place during the second quarter, with some programmes extended to support our customers where required.

Enhanced model monitoring has been established to detect any trends, shifts in key risk drivers or early performance indicators that could signal that our IRB models are no longer performing as expected. Using the latest available data from May 2020 for our retail models, the monitoring outputs indicate there have been limited impacts on the performance of IRB models as a direct consequence of the outbreak. Within wholesale, the most recent financial data received from customers do not always reflect current business performance during the outbreak, so we apply appropriate levels of judgemental overrides to the model outputs. As better information emerges on the outbreak's impact on the credit quality of loan portfolios and the creditworthiness of groups of borrowers, credit risk evaluations will be modified accordingly. We will continue to monitor the credit risk within our business and take the appropriate mitigating actions to help support our customers and our franchise.

For further details of the customer relief programmes that we are participating in, see page 66 of the Interim Report 2020.

 

Non-financial risk

As a result of the Covid-19 outbreak, business continuity plans have been implemented successfully. Despite high levels of working from home, the majority of service level agreements are being maintained. We have experienced no major impacts to the supply chain from our third-party service providers. The risk of damage or theft to our physical assets or criminal injury to our employees remains unchanged. No significant incidents have impacted our buildings or staff. Expedited decisions to ensure the continuity of critical customer services are being documented through governance.

 

Market risk management

We managed market risk prudently in the first half of 2020. Sensitivity exposures remained within appetite as the business pursued its core market-making activity in support of our customers during the pandemic. We have also undertaken hedging activities to protect the business from potential future deterioration in credit conditions. Market risk continued to be managed using a complementary set of exposure measures and limits, including stress and scenario analysis.

 

Linkage to the Interim Report

 

Structure of the regulatory group

Assets, liabilities and post-acquisition reserves of subsidiaries engaged in insurance activities are excluded from the regulatory consolidation. Our investments in these insurance subsidiaries are recorded at cost and deducted from CET1 capital, subject to thresholds.

The regulatory consolidation also excludes special purpose entities ('SPEs') where significant risk has been transferred to third parties. Exposures to these SPEs are risk weighted as securitisation positions for regulatory purposes.

Participating interests in banking associates are proportionally consolidated for regulatory purposes by including our share of assets, liabilities, profits and losses, and RWAs in accordance with the PRA's application of EU legislation. Non-participating significant investments along with non-financial associates are deducted from capital, subject to thresholds.

For further explanation of the differences between the accounting and regulatory scope of consolidation and their definition of exposure, see pages 8 to 13 of the Pillar 3 Disclosures at 31 December 2019.

 

Table 2: Reconciliation of balance sheets - financial accounting to regulatory scope of consolidation
		Accounting balance sheet		Deconsolidation of insurance/ other entities		Consolidation of banking associates		Regulatory balance sheet
	Ref †	$m		$m		$m		$m
Assets
Cash and balances at central banks		249,673		(10	)	323		249,986
Items in the course of collection from other banks		6,289		-		-		6,289
Hong Kong Government certificates of indebtedness		39,519		-		-		39,519
Trading assets		208,964		(810	)	-		208,154
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss		41,785		(31,488	)	535		10,832
-  of which: debt securities eligible as tier 2 issued by Group Financial Sector Entities ('FSEs') that are outside the regulatory scope of consolidation	r	-		597		-		597
Derivatives		313,781		(169	)	160		313,772
Loans and advances to banks		77,015		(2,071	)	1,248		76,192
Loans and advances to customers		1,018,681		(1,074	)	12,306		1,029,913
-  of which: lending eligible as tier 2 to Group FSEs outside the regulatory scope of consolidation	r	-		411		-		411
expected credit losses on IRB portfolios	h	(10,630	)	-		-		(10,630
Reverse repurchase agreements - non-trading		226,345		2,078		161		228,584
Financial investments		494,109		(70,116	)	4,625		428,618
-  of which: lending eligible as tier 2 to Group FSEs outside the regulatory scope of consolidation	r	-		369		-		369
Capital invested in insurance and other entities		-		2,286		-		2,286
Prepayments, accrued income and other assets		197,425		(6,414	)	452		191,463
-  of which: retirement benefit assets	j	9,894		-		-		9,894
Current tax assets		821		(69	)	14		766
Interests in associates and joint ventures		24,800		(410	)	(4,626	)	19,764
-  of which: positive goodwill on acquisition	e	478		(12	)	-		466
Goodwill and intangible assets	e	19,438		(9,651	)	1,222		11,009
Deferred tax assets	f	4,153		128		16		4,297
Total assets at 30 Jun 2020		2,922,798		(117,790	)	16,436		2,821,444
Liabilities and equity
Hong Kong currency notes in circulation		39,519		-		-		39,519
Deposits by banks		82,715		(29	)	624		83,310
Customer accounts		1,532,380		3,432		14,656		1,550,468
Repurchase agreements - non-trading		112,799		-		-		112,799
Items in the course of transmission to other banks		6,296		-		-		6,296
Trading liabilities		79,612		-		-		79,612
Financial liabilities designated at fair value		156,608		(4,396	)	-		152,212
-  of which: included in tier 2	o, q, i	10,054		-		-		10,054
Derivatives		303,059		72		229		303,360
-  of which: debit valuation adjustment	i	138		-		-		138
Debt securities in issue		110,114		(1,611	)	-		108,503
Accruals, deferred income and other liabilities		173,181		(2,823	)	640		170,998
Current tax liabilities		1,141		(28	)	106		1,219
Liabilities under insurance contracts		98,832		(98,832	)	-		-
Provisions		3,209		(7	)	55		3,257
-  of which: credit-related contingent liabilities and contractual commitments on IRB portfolios	h	687		-		-		687
Deferred tax liabilities		4,491		(1,455	)	8		3,044
Subordinated liabilities		23,621		1		118		23,740
-  of which:
included in tier 1	l, n	1,763		-		-		1,763
included in tier 2	o, q	20,168		-		-		20,168
Total liabilities at 30 Jun 2020		2,727,577		(105,676	)	16,436		2,638,337
Equity
Called up share capital	a	10,346		-		-		10,346
Share premium account	a, l	14,268		-		-		14,268
Other equity instruments	k	20,914		-		-		20,914
Other reserves	c, g	(301	)	1,888		-		1,587
Retained earnings	b, c	141,809		(12,851	)	-		128,958
Total shareholders' equity		187,036		(10,963	)	-		176,073
Non-controlling interests	d, m, n, p	8,185		(1,151	)	-		7,034
Total equity at 30 Jun 2020		195,221		(12,114	)	-		183,107
Total liabilities and equity at 30 Jun 2020		2,922,798		(117,790	)	16,436		2,821,444

†     The references (a)-(r) identify balance sheet components that are used in the calculation of regulatory capital in Table 3: Own funds disclosure. This table shows such items at their accounting values, which may be subject to analysis or adjustment in the calculation of regulatory capital shown in Table 3.

 

 

 

Capital and RWAs

 

Capital management

Approach and policy

Our approach to capital management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim 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 process culminates in the annual Group capital plan, which is approved by the Board. HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity and loss-absorbing capital where necessary. These investments are substantially funded by HSBC Holdings' issuance of equity and non-equity capital and by profit retention. As part of its capital management process, HSBC

Holdings seeks to maintain a balance between the composition of its capital and its investment in subsidiaries, including management of double leverage.

The main features of capital securities issued by the Group, categorised as tier 1 ('T1') capital and tier 2 ('T2') capital, are set out on the HSBC website, www.hsbc.com.

The values disclosed are the IFRS balance sheet carrying amounts, not the amounts that these securities contribute to regulatory capital. For example, the IFRS accounting and the regulatory treatments differ in their approaches to issuance costs, regulatory amortisation and regulatory eligibility limits prescribed by the relevant regulatory legislation.

A list of the main features of our capital instruments, in accordance with Annex III of Commission Implementing Regulation 1423/2013, is also published on our website. This is in addition to the full terms and conditions of our securities, also available on our website.

For further details on our management of capital, see page 77 of the Interim Report 2020.

 

 

 

Own funds

 

Table 3: Own funds disclosure
			At
			30 Jun	31 Dec
			2020	2019
		Ref †	$m	$m
	Common equity tier 1 ('CET1') capital: instruments and reserves
1	Capital instruments and the related share premium accounts		23,209	22,873
	-  ordinary shares	a	23,209	22,873
2	Retained earnings	b	127,989	127,188
3	Accumulated other comprehensive income (and other reserves)	c	2,594	1,735
5	Minority interests (amount allowed in consolidated CET1)	d	4,036	4,865
5a	Independently reviewed interim net profits net of any foreseeable charge or dividend	b	1,729	(3,381
6	Common equity tier 1 capital before regulatory adjustments		159,557	153,280
	Common equity tier 1 capital: regulatory adjustments
7	Additional value adjustments1		(1,162	(1,327
8	Intangible assets (net of related deferred tax liability)	e	(11,181	(12,372
10	Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)	f	(1,505	(1,281
11	Fair value reserves related to gains or losses on cash flow hedges	g	(426	(41
12	Negative amounts resulting from the calculation of expected loss amounts	h	(1,191	(2,424
14	Gains or losses on liabilities valued at fair value resulting from changes in own credit standing	i	5	2,450
15	Defined-benefit pension fund assets	j	(7,409	(6,351
16	Direct and indirect holdings of own CET1 instruments2		(40	(40
19	Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions)3		(8,202	(7,928
28	Total regulatory adjustments to common equity tier 1		(31,111	(29,314
29	Common equity tier 1 capital		128,446	123,966
	Additional tier 1 ('AT1') capital: instruments
30	Capital instruments and the related share premium accounts		20,914	20,871
31	-  classified as equity under IFRSs	k	20,914	20,871
33	Amount of qualifying items and the related share premium accounts subject to phase out from AT1	l	2,305	2,305
34	Qualifying tier 1 capital included in consolidated AT1 capital (including minority interests not included in CET1) issued by subsidiaries and held by third parties	m, n	872	1,277
35	-  of which: instruments issued by subsidiaries subject to phase out	m	812	1,218
36	Additional tier 1 capital before regulatory adjustments		24,091	24,453
	Additional tier 1 capital: regulatory adjustments
37	Direct and indirect holdings of own AT1 instruments2		(60	(60
43	Total regulatory adjustments to additional tier 1 capital		(60	(60
44	Additional tier 1 capital		24,031	24,393
45	Tier 1 capital (T1 = CET1 + AT1)		152,477	148,359

 

 

 

Table 3: Own funds disclosure (continued)
			At
			30 Jun	31 Dec
			2020	2019
		Ref †	$m	$m
	Tier 2 capital: instruments and provisions
46	Capital instruments and the related share premium accounts	o	21,338	20,525
	-  of which: instruments grandfathered under CRR II		7,572	7,067
48	Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in CET1 or AT1) issued by subsidiaries and held by third parties	p, q	4,843	4,667
49	-  of row 48: instruments issued by subsidiaries subject to phase out	q	2,172	2,251
	-  of row 48: instruments issued by subsidiaries grandfathered under CRR II		1,500	1,452
51	Tier 2 capital before regulatory adjustments		26,181	25,192
	Tier 2 capital: regulatory adjustments
52	Direct and indirect holdings of own T2 instruments		(40	(40
55	Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions)	r	(1,376	(1,361
57	Total regulatory adjustments to tier 2 capital		(1,416	(1,401
58	Tier 2 capital		24,765	23,791
59	Total capital (TC = T1 + T2)		177,242	172,150
60	Total risk-weighted assets		854,552	843,395
	Capital ratios and buffers
61	Common equity tier 1		15.0%	14.7%
62	Tier 1		17.8%	17.6%
63	Total capital		20.7%	20.4%
64	Institution specific buffer requirement		4.70%	5.11%
65	-  capital conservation buffer requirement		2.50%	2.50%
66	-  countercyclical buffer requirement		0.20%	0.61%
67a	-  Global Systemically Important Institution ('G-SII') buffer		2.00%	2.00%
68	Common equity tier 1 available to meet buffers		8.8%	8.5%
	Amounts below the threshold for deduction (before risk weighting)
72	Direct and indirect holdings of the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions)		2,425	2,938
73	Direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount below 10% threshold and net of eligible short positions)		13,556	13,189
75	Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability)		3,915	4,529
	Applicable caps on the inclusion of provisions in tier 2
77	Cap on inclusion of credit risk adjustments in T2 under standardised approach		2,035	2,163
79	Cap for inclusion of credit risk adjustments in T2 under IRB approach		3,233	3,128
	Capital instruments subject to phase out arrangements (only applicable between 1 Jan 2013 and 1 Jan 2022)
82	Current cap on AT1 instruments subject to phase out arrangements		3,461	5,191
83	Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities)		51	122
84	Current cap on T2 instruments subject to phase out arrangements		1,825	2,737

 

†     The references (a)-(r) identify balance sheet components in Table 2: Reconciliation of balance sheets - financial accounting to regulatory scope of consolidation which is used in the calculation of regulatory capital. This table shows how they contribute to the regulatory capital calculation. Their contribution may differ from their accounting value in Table 2 as a result of adjustment or analysis to apply regulatory definitions of capital.

1     Additional value adjustments are deducted from CET1. These are calculated on assets measured at fair value.

2     The deduction for holdings of own CET1, T1 and T2 instruments is set by the PRA.

3     The threshold deduction for significant investments relates to balances recorded on numerous lines on the balance sheet and includes: investments in insurance subsidiaries and non-consolidated associates, other CET1 equity held in financial institutions, and connected funding of a capital nature etc.

 

At 30 June 2020, our common equity tier 1 ('CET1') capital ratio increased to 15.0% from 14.7% at 31 December 2019.

CET1 capital increased in 1H20 by $4.5bn, mainly as a result of:

●    the cancellation of the 4Q19 unpaid dividend of $3.4bn at the PRA's request;

●    a $1.8bn increase as a result of lower deductions for excess expected loss. ECL against IRB exposures rose by $4.3bn compared with 31 December 2019, while regulatory expected losses rose by $2.5bn;

●    capital generation of $1.7bn through profits, net of dividends relating to other equity instruments; and

●    a $1.5bn increase in the fair value through other comprehensive income reserve.

These increases were partly offset by:

●     foreign currency translation differences of $3.7bn; and

●    a $0.8bn fall in allowable non-controlling interests in CET1. This partly reflected the acquisition in May 2020 of additional shares representing 18.66% of the capital of HSBC Trinkaus & Burkhardt AG from Landesbank Baden-Württemberg, the principal minority shareholder.

At 30 June 2020, our Pillar 2A requirement was $26.3bn,  equivalent to 3.1% of RWAs. Of this, 1.7% was met by CET1. Pillar 2A requirements are set by the PRA as part of our total capital requirement.

 

 

Leverage ratio

The risk of excessive leverage is managed as part of HSBC's global risk appetite framework and monitored using a leverage ratio metric within our risk appetite statement ('RAS'). The RAS articulates the aggregate level and types of risk that HSBC is willing to accept in its business activities in order to achieve its strategic business objectives.

The RAS is monitored via the risk appetite profile report, which includes comparisons of actual performance against the risk appetite and tolerance thresholds assigned to each metric. This is to ensure that any excessive risk is highlighted, assessed and mitigated appropriately. The risk appetite profile report is presented monthly to the Risk Management Meeting of the Group Management Board and the Group Risk Committee.

Our approach to risk appetite is described on page 73 of the Annual Report and Accounts 2019.

 

 

 

Table 4: Leverage ratio common disclosure ('LRCom')
			At
			30 Jun	31 Dec
			2020	2019
		Footnotes	$bn	$bn
	On-balance sheet exposures (excluding derivatives and SFTs)
1	On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral)		2,232.1	2,119.1
2	(Asset amounts deducted in determining tier 1 capital)		(29.6	(30.5
3	Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets)		2,202.5	2,088.6
	Derivative exposures
4	Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)		85.4	53.5
5	Add-on amounts for potential future exposure associated with all derivatives transactions (mark-to-market method)		146.3	162.1
6	Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to IFRSs		13.3	8.3
7	(Deductions of receivables assets for cash variation margin provided in derivatives transactions)		(58.5	(43.1
8	(Exempted central counterparty ('CCP') leg of client-cleared trade exposures)		(80.3	(53.2
9	Adjusted effective notional amount of written credit derivatives		153.6	159.4
10	(Adjusted effective notional offsets and add-on deductions for written credit derivatives)		(147.1	(150.4
11	Total derivative exposures		112.7	136.6
	Securities financing transaction exposures
12	Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions		483.0	451.0
13	(Netted amounts of cash payables and cash receivables of gross SFT assets)		(228.3	(196.1
14	Counterparty credit risk exposure for SFT assets		10.7	10.7
16	Total securities financing transaction exposures		265.4	265.6
	Other off-balance sheet exposures
17	Off-balance sheet exposures at gross notional amount		859.9	865.5
18	(Adjustments for conversion to credit equivalent amounts)		(639.1	(629.8
19	Total off-balance sheet exposures		220.8	235.7
	Capital and total exposures
20	Tier 1 capital	1	149.4	144.8
21	Total leverage ratio exposure		2,801.4	2,726.5
22	Leverage ratio (%)	1	5.3	5.3
EU-23	Choice of transitional arrangements for the definition of the capital measure		Fully phased-in	Fully phased-in