RNS Number : 0453G
Standard Chartered PLC
27 February 2018
 

Standard Chartered PLC - Additional Financial information

The following pages provide additional information related to the announcement results for the year ended 31 December 2017.

 

TABLE OF CONTENTS

 

Risk review and Capital review




Principal uncertainties




Enterprise Risk Management Framework




Principal risks




Risk profile




Capital review




Statement of directors' responsibilities




Financial statements




Consolidated income statement




Consolidated statement of comprehensive income




Consolidated balance sheet




Consolidated statement of changes in equity




Cash flow statement




Notes to the financial statements




Shareholder information


 



 

Standard Chartered PLC - Risk review and Capital review

 

PRINCIPAL UNCERTAINTIES

 

In 2017 we undertook a thorough review of our principal uncertainties, using the approach described in the Enterprise Risk Management Framework section. The key results of the review are detailed below

Key changes to our principal uncertainties

The following items have been removed as principal uncertainties:

•  'Evolving financial crime and fraud' and 'cyber crime'. These form part of our Principal Risk Types which we control and mitigate through distinct risk type frameworks, policies and Board-approved Risk Appetite

•  'Operational performance eroding confidence in the Group' as the Group has a clear Strategic Plan on which it has now started to deliver

The following items have been added as new principal uncertainties:

•  'Climate-related physical risks and transition risks'. There is growing stakeholder interest in these risks, including investors, regulators and civil society, and it is anticipated that climate change will inform future regulatory approaches

•  'New technologies and digitisation. The rapid development of new technologies and digitisation, accompanied by changes in consumer behaviour, could disrupt many elements of banking

Our list of principal uncertainties, based on our current knowledge and assumptions, is set out below:

Geopolitical considerations (Risk ranked according to severity)

Principal
uncertainties

Risk trend since 2016

Context

How these are mitigated/next steps

Increase
in trade protectionism driven by nationalist agenda

1

Potential impact:
High

Likelihood:
Medium

Velocity of change: Steady

σ

•  Protectionist policies driven by nationalist agendas could disrupt established supply chains and invoke retaliatory actions. Countries could introduce tariffs on goods and services available domestically or from other economies. Such actions would impact global trade

•  Several authorities in our footprint continue to adopt stringent standards on outsourcing or offshoring activities and there is an increased focus on priority sector lending requirements

•  The Group has a significant revenue stream from supporting cross-border trade and material off-shore support operations

•  We assessed the impact of a severe world trade downturn triggered by rising protectionism as part of our 2017 stress tests. The insights gained as part of these were reviewed through internal governance and we continue to build measures to link stress test outcomes to business objectives in order to mitigate potential downside risk from trade disruption

Korean peninsula geopolitical tensions

2

Potential impact:
High

Likelihood:
Low

Velocity of change: Fast

ρ

•  Tensions could exacerbate weak investment spending and low growth in the developed world

•  The Group has a material presence in South Korea and nearby countries

•  Country level crisis management and contingency plans are in place for South Korea focused on the business activities, credit risk, liquidity and capital risk, operations and employee safety. We have enhanced the process for daily monitoring of key indicators and actively review geopolitical risk levels

•  A North Korea stress scenario is run weekly as part of the global stress test of market and traded risk

•  We are also assessing contagion risks arising from Korean geopolitical risk levels and associated contingency plans

•  Regular stress testing on exposures to South Korea and Japan are conducted to support any required action plans

Middle East political situation

3

Potential impact:
Medium

Likelihood:
Medium

Velocity of change: Steady

σ

•  In June 2017, the governments of Kingdom of Saudi Arabia, Bahrain, United Arab Emirates and Egypt announced that they were severing diplomatic ties with Qatar escalating tensions in the Middle East region

•  A number of prominent Saudi Arabian princes, government ministers, and business people were arrested in Saudi Arabia in November 2017

•  A decision by the US president to recognise Jerusalem as the capital of Israel, and start preparations for the US to move its embassy from Tel Aviv, has the potential to further increase tensions across the Middle East

•  The Group has a material presence across the region

•  The impact of the diplomatic crisis on our portfolio has been limited so far, however we are closely monitoring a small number of clients which have been affected.

•  Tightened controls over transactions and general governance have been put in place

•  Potential for further event risks is constantly monitored at country and regional level

Post-Brexit implications

4

Potential impact:
Low

Likelihood:
High

Velocity of change: Moderate

σ

•  The outcome of the UK referendum to leave the European Union (Brexit) could have implications on economic conditions globally because of changes in policy direction, which might in turn influence the economic outlook for the eurozone. The uncertainties linked to the Brexit negotiations process could delay corporate investment decisions until there is more clarity

•  Both the EU and UK have indicated their support for a transition period following the UK's formal departure from the EU in March 2019, although it is not clear how long this period will be for

•  The full implications of Brexit will only be known over the next 12-18 months as negotiations progress.

•  The first order impact of Brexit on the Group is limited given the nature of the Group's activity

•  We continue to assess and manage post-Brexit risk and the practical implications through the Brexit Executive Committee chaired by a Management Team Member

•  We are setting up a new European Union (EU) subsidiary and optimising our EU structure to mitigate any potential impact to our clients, our staff and the Group as a result of Brexit, including loss of EU passporting rights

Macroeconomic considerations

Principal
uncertainties

Risk trend since 2016

Context

How these are mititgated/next steps

Moderation
of growth in key footprint markets led by China

5

Potential impact:
High

Likelihood:
Medium

Velocity of change: Steady

σ

•  Asia remains the main driver of global growth supported by internal drivers, led by China

•  Debt levels in China and the pace of transition to more consumption-led growth remain a concern

•  Highly trade oriented economies such as Hong Kong and Singapore with close ties to China would weaken in the event of an economic slowdown in China. Regional supply chain economies such as Korea, Taiwan and Malaysia would be impacted from a fall in economic activity

•  Greater China and South East Asian economies remain key strategic regions for the Group

•  As part of our stress tests, severe stress in the global economy associated with a sharp slowdown in China was assessed in 2017 and a refreshed scenario will be run in 2018

•  Exposures that result in material loan impairment charges and risk-weighted assets inflation under stress tests are regularly reviewed and actively managed

•  A global downturn with shocks concentrated on China and countries with close trade links with China is one of the regular market and traded risk stress tests

Sharp interest rate rises and asset price corrections

6

Potential impact:
High

Likelihood:
Medium

Velocity of change: Moderate

ρ

•  Significant increases in interest rates from the historically low levels currently prevailing in many markets could have an impact on the highly leveraged corporate sector, as well as countries with high current account deficits or high foreign currency share of domestic debt. Property, commodities and asset prices would also come under pressure

•  Such sharp increases in interest rates could adversely impact the credit quality of the Group's exposures, and our ability to reprice these exposures in response to changes in the interest rate environment

•  We monitor on a centralised basis the contractual and behavioural interest rate risk exposures, and manage these within a clearly defined risk management framework and Risk Appetite

•  In many of our markets we have implemented loan-to-value and debt-to-income restrictions in response to rising property prices

•  The Group has been actively managing its commodities portfolio, including energy, metals and mining exposures over the last few years. For new business, we are focused on deals that are resilient to further price volatility

•  Relevant scenarios will be run as part of our stress test programme in 2018



 

Environmental and social considerations

Principal
uncertainties

Risk trend since 2016

Context

How these are mitigated/next steps

Climate-
related physical risks and transition
risks1

7

Potential impact:
Medium

Likelihood:
Medium

Velocity of change: Steady

NEW

•  National governments have, through the UN Framework Convention on Climate Change (UNFCCC) process and Paris Agreement, made commitments to enact policies which support the transition to a lower-carbon economy, limiting global warming to less than 2ΊC and therefore mitigating the most severe physical effects of climate change.

•  Such policies may however have significant impacts, for example, on energy infrastructure developed in our markets, and thus present 'transition' risks for our clients

•  Conversely, if governments fail to enact policies which limit global warming, the Group's markets are particularly susceptible to 'physical' risks of climate change such as droughts, floods, sea level change and average temperature change

•  There is growing stakeholder interest in these risks, including investors, regulators and civil society

•  We are developing an approach for assessing energy utilities clients' power generation assets against a range of physical and transition risks, under multiple climate scenarios and a range of time horizons. We are considering how we extend this to other sectors in 2018

•  We have, over time, reduced our Risk Appetite to carbon-intensive sectors by introducing technical standards for coal-fired power plants, and restrictions on new coal mining clients and projects. These standards are reviewed on a regular basis

•  We have made a public commitment to fund and facilitate $4 billion toward clean technology between 2016 and 2020

Legal considerations

Principal
uncertainties

Risk trend since 2016

Context

How these are mitigated/next steps

Regulatory reviews and investigations, legal proceedings

8

Potential impact:
High

Likelihood:
High

Velocity of change: Moderate

σ

•  The Group has been, and may continue to be, subject to regulatory actions, reviews, requests for information (including subpoenas and requests for documents) and investigations across our markets, the outcomes of which are generally difficult to predict and could be material to the Group

•  The Group is also party to legal proceedings from time to time, which may give rise to financial losses or adversely impact our reputation in the eyes of our customers, investors and other stakeholders

•  In recent years, authorities have exercised their discretion to impose increasingly severe penalties on financial institutions that have been accused of violated laws and regulations, and there can be no assurance that future penalties will not be of increased severity

•  We have invested in improving compliance controls, including increasing the capacity and capabilities of compliance resources, enhancing systems and controls, and implementing remediation programmes (where relevant)

•  We are cooperating with all relevant ongoing reviews, requests for information and investigations

1 Physical risk refers to the risk of increased extreme weather events while transition risk refers to the risk of changes to market dynamics due to governments' responses to climate change

Principal
uncertainties

Risk trend since 2016

Context

How these are mitigated/next steps

Regulatory changes and tax reforms

9

Potential impact:
Medium

Likelihood:
High

Velocity of change: Fast

σ

•  Revised rules have been defined in many key areas of regulation that could impact our business model and how we manage our capital and liquidity. In particular, the upcoming Basel III proposed changes to capital calculation methodology for credit and operational risk, revised framework for Securitisation and Credit Valuation Adjustment (CVA) risk, Fundamental Review of the Trading Book, Large Exposures and implementation of Margin Reforms, and Bank Recovery and Resolution Directive for Total Loss Absorbing Capacity (TLAC)

•  Increased global efforts in detecting tax evasion through the use of offshore bank accounts and facilitating cross-border tax compliance require the Group to comply with five extraterritorial client tax information regimes. These tax regimes impact the jurisdictions in which the Group operates, as well as all client segments and products

•  There may be implications on cross-border tax compliance for our clients following the recent US tax reform

•  There is increasing regulatory scrutiny and emphasis on local responsibilities of remotely booked business. The degree of reliance on global controls is reducing, and the focus is on local controls and governance

•  We actively monitor regulatory initiatives across our footprint to identify any potential impact and change to our business model

•  With respect to Basel III:

We are closely monitoring developments, and conducting sensitivity analyses on the potential headwinds and opportunities

We continuously review a menu of prospective capital accretive actions, along with impact to the Group Strategy and financial performance

•  We have established specific programmes to ensure effective and efficient implementation of changes required by new or existing tax regulations and reforms

•  Relevant product areas have implemented project management or programme oversight to review and improve the end-to-end process, including oversight and accountability, policies and standards, transparency and management information, permission and controls, legal-entity level limits and training

 



 

Technological considerations

Principal
uncertainties

Risk trend since 2016

Context

How these are mitigated/next steps

New technologies and digitisation

10

Potential impact:
High

Likelihood:
High

Velocity of change: Moderate

NEW

•  New technologies, accompanied by changes in consumer behaviour and digitisation, are likely to significantly disrupt both, the basis of competition and the economics of many elements of banking

•  The banking landscape for retail banking, for example, is witnessing a significant change where start-ups, Fintechs and existing payment players are able to offer traditional retail banking products and services in real-time with competitive pricing. In addition, regulators are also encouraging Fintechs and start-ups. The impact to the banking sector arises by way of migration of clients and balances to competition or Fintechs due to a more user-friendly client experience

•  There is a risk of business model disruption arising from inability or failure of the bank to adapt to changing client and regulatory requirements or expectations due to rapidly evolving product and technology innovation

•  We continuously monitor developments in the technology space which affect the banking sector, to keep abreast of the latest trends and announced partnerships. The Management Team has increased its focus on business innovation, given that a large driver of uncertainty is the possible disruption to banking from new entrants and the blurring of barriers between sectors

•  The Group continuously scans the market for innovative companies that can bring value to the bank through collaborations. Our Exellerator (the Group's innovation lab) in Singapore and Hong Kong engages with start-ups and established companies that can bring specific capabilities to support the Bank with our digitisation agenda. Our SC Studios in San Francisco identifies companies that we believe can bring significant advancements to our business

•  We also participate in industry-wide initiatives, such as the Ripple Consortium, to allow us to build our own capabilities and be able to capitalise on opportunities, should such technologies 'take-off'

 



 

ENTERPRISE RISK MANAGEMENT FRAMEWORK

 

Risk management is essential to consistent and sustainable performance for all of our stakeholders and is therefore a central part of the financial and operational management of the Group. The Group adds value to clients and therefore the communities in which they operate and generates returns for shareholders by taking and managing risk

Key changes

•  Refreshing our risk culture and Risk Appetite Statements for our Principal Risk Types

•  Changing our Principal Risk Types including:

Elevating Conduct, Compliance, Financial crime and Information and cyber security to Principal Risk Types

Broadening the scope of Country cross border risk to cover Country risk

Pension risk is now a risk sub-type of Market risk

Integrating Strategy risk as part of the overall Framework. See section on Strategic Risk Management on the right which explains how the Group approaches Strategic risk

Consolidating Capital and Liquidity risk types into one Principal Risk Type

•  Strengthening risk assessment by introducing a dynamic risk identification process

•  Further clarity on accountability and responsibility by strengthening of the three lines of defence and alignment with the objectives of the Senior Managers' Regime

Through our Enterprise Risk Management Framework we manage enterprise-wide risks, with the objective of maximising risk-adjusted returns while remaining within our risk appetite.

In 2017 we completed a thorough review of our Enterprise Risk Management Framework and the following key changes were approved by the Board:

The new revised Enterprise Risk Management Framework is effective from 22 January 2018 and will be further embedded in 2018.

Risk culture

The Group's risk culture provides guiding principles for the behaviours expected from our people when managing risk. The Board has approved a risk culture statement that encourages the following behaviours and outcomes:

•  An enterprise level ability to identify and assess current and future risks, openly discuss these and take prompt actions

•  The highest level of integrity by being transparent and proactive in disclosing and managing all types of risks

•  A constructive and collaborative approach in providing oversight and challenge, and taking decisions in a timely manner

•  Everyone to be accountable for their decisions and feel safe using their judgement to make these considered decisions

We acknowledge that banking inherently involves risk-taking and undesired outcomes will occur from time to time; however, we shall take the opportunity to learn from our experience and formalise what we can do to improve. We expect managers to demonstrate a high awareness of risk and control by self-identifying issues and managing them in a manner that will deliver lasting change.

Strategic risk management

The Group approaches strategic risk management by:

•  Including in the strategy review process an impact analysis on the risk profile from the growth plans, strategic initiatives and business model vulnerabilities with the aim of proactively identifying and managing new risks or existing risks that need to be reprioritised

•  Including in the strategy review process a confirmation that growth plans and strategic initiatives can be delivered within the approved Risk Appetite and/or proposing additional Risk Appetite for Board consideration

•  Validating the Corporate Plan against the approved or proposed Risk Appetite Statement to the Board. The Board approves the strategy review and the five year Corporate Plan with a confirmation from the Group Chief Risk Officer that it is aligned with the Enterprise Risk Management Framework and the Group Risk Appetite Statement where projections allow

Roles and responsibilities

Three Lines of Defence model

Roles and responsibilities for risk management are defined under a Three Lines of Defence model. Each line of defence has a specific set of responsibilities for risk management and control as shown in the following table.

Senior Managers' Regime

Roles and responsibilities under the revised Enterprise Risk Management Framework are aligned to the objectives of the Senior Managers' Regime. The Group Chief Risk Officer is responsible for the overall development and maintenance of the Group's Enterprise Risk Management Framework and for identifying material risk types to which the Group may be potentially exposed. The Group Chief Risk Officer delegates effective implementation of the Principal Risk Type frameworks to risk framework owners who provide Second Line of Defence oversight for the Principal Risk Types.

Lines of Defence

Definition

Key responsibilities include

1st

The businesses and functions engaged in or supporting revenue generating activities that own and manage risks

•  Identify, monitor and escalate risks and issues to the Second Line and senior management1 and promote a healthy risk culture and good conduct

•  Manage risks within Risk Appetite and ensure laws and regulations are being complied with

•  Ensure systems meet risk data aggregation, risk reporting and data quality requirements set by the Second Line

2nd

The control functions independent of the First Line that provide oversight and challenge of risk management to provide confidence to the Group Chief Risk Officer, the management team and the Board

•  Identify, monitor and escalate risks and issues to the Group Chief Risk Officer, senior management1 and the Board and promote a healthy risk culture and good conduct

•  Oversee and challenge First Line risk taking activities and review First Line risk proposals

•  Propose Risk Appetite to the Board, monitor and report adherence to Risk Appetite and intervene to curtail business if it is not in line with existing or adjusted Risk Appetite

•  Set risk data aggregation, risk reporting and data quality requirements

3rd

The independent assurance provided by the Group Internal Audit Function, of the effectiveness of controls that support First Line's risk management of business activities, and the processes maintained by the Second Line. Its role is defined and overseen by the Audit Committee of the Board

•  Independently assess whether management has identified the key risks in the business and whether these are reported and governed in line with the established risk management processes

•  Independently assess the adequacy of the design of controls and their operating effectiveness

1  Senior management in this table refers to individuals designated as Senior Management Functions (SMF) under the FCA and PRA Senior Managers' Regime (SMR)

The Risk and Compliance function

The Group Chief Risk Officer directly manages the Risk and Compliance function that is separate and independent from the origination, trading and sales functions of the businesses. The role of the function is:

•  To maintain the Enterprise Risk Management Framework, ensuring it remains appropriate to the Group's activities, is effectively communicated and implemented across the Group, and to administer related governance and reporting processes

•  To uphold the overall integrity of the Group's risk/return decisions, and in particular to ensure that risks are properly assessed, that risk/return decisions are made transparently on the basis of this proper assessment, and that risks are controlled in accordance with the Group's standards and Risk Appetite

•  To oversee and challenge the management of credit, country, market, operational, reputational, compliance, conduct, information and cyber security and financial crime risk types

The independence of the Risk and Compliance function is to ensure that the necessary balance in risk/return decisions is not compromised by short-term pressures to generate revenues.

In addition, the Risk and Compliance function is a centre of excellence that provides specialist capabilities of relevance to risk management processes in the broader organisation.

Risk Appetite and profile

We recognise the following constraints which determine the risks that we are willing to take in pursuit of our strategy and the development of a sustainable business:

•  Risk capacity is the maximum level of risk the Group can assume, given its current capabilities and resources, before breaching constraints determined by capital and liquidity requirements and internal operational capability (including but not limited to technical infrastructure, risk management capabilities, expertise), or otherwise failing to meet the expectations of regulators and law enforcement agencies

•  Risk Appetite is defined by the Group and approved by the Board. It is the maximum amount and type of risk the Group is willing to assume in pursuit of its strategy. Risk Appetite cannot exceed risk capacity

The Board has approved a Risk Appetite Statement, which is underpinned by a set of financial and operational control parameters known as Risk Appetite metrics and associated thresholds. These directly constrain the aggregate risk exposures that can be taken across the Group. The Risk Appetite Statement is supplemented by an overarching statement outlining the Group's Risk Appetite Principles.

Risk Appetite Principles

The Group Risk Appetite is in accordance with our overall approach to risk management and our risk culture. We follow the highest ethical standards required by our stakeholders and ensure a fair outcome for our clients, the effective operation of financial markets, while at the same time meeting expectations of regulators and law enforcement agencies. We set our Risk Appetite to enable us to grow sustainably and to avoid shocks to earnings or our general financial health and to manage our reputational risk in a way that does not materially undermine the confidence of our investors and all internal and external stakeholders.

Risk Appetite Statement

The Group will not compromise adherence to its Risk Appetite in order to pursue revenue growth or higher returns.

Risk control tools such as exposure limits, underwriting standards, scorecard cut-offs and policies and other operational control parameters are used to keep the Group's risk profile within risk appetite (and therefore also risk capacity). The Group's risk profile is its overall exposure to risk at a given point in time, covering all applicable risk types. Status against Risk Appetite is reported to the Board Risk Committee and the Group Risk Committee, including the status of breaches and remediation plans where applicable.

The Group Risk Committee, the Group Financial Crime Risk Committee, the Group Operational Risk Committee and the Group Asset and Liability Committee are responsible for ensuring that our risk profile is managed in compliance with the Risk Appetite set by the Board. The Board Risk Committee and the Board Financial Crime Risk Committee (for Financial Crime Compliance) advise the Board on the Risk Appetite Statement and monitor the Group's compliance with it.

Risk identification and assessment

Identification and assessment of potential adverse risk events is an essential first step in managing the risks of any business or activity. To ensure consistency in communication we use Principal Risk Types to classify our risk exposures. Nevertheless, we also recognise the need to maintain an overall perspective since a single transaction or activity may give rise to multiple types of risk exposure, risk concentrations may arise from multiple exposures that are closely correlated, and a given risk exposure may change its form from one risk type to another.

To facilitate the above, the Group maintains a dynamic risk scanning process with inputs on the internal and external risk environment, as well as potential threats and opportunities from the business and client perspectives.

Stress testing

The objective of stress testing is to support the Group in assessing that it:

•  Does not have a portfolio with excessive concentrations of risk that could produce unacceptably high losses under severe but plausible scenarios

•  Has sufficient financial resources to withstand severe but plausible scenarios

•  Has the financial flexibility to respond to extreme but plausible scenarios

•  Understands the Group's key business model risks, considers what kind of event might crystallise those risks - even if extreme with a low likelihood of occurring - and identifies, as required, actions to mitigate the likelihood or the impact

Enterprise stress tests include Capital and Liquidity Adequacy Stress Tests including in the context of recovery and resolution, and stress tests that assess scenarios where our business model becomes unviable, such as reverse stress tests.

Stress tests are performed at Group, country, business and portfolio level. Bespoke scenarios are applied to our market and liquidity positions as described in the sections Market risk and Liquidity and funding risk. In addition to these, our stress tests also focus on the potential impact of macroeconomic, geopolitical and physical events on relevant regions, client segments and risk types.

The Board delegates approval of stress tests to the Board Risk Committee, who reviews the recommendations from the Stress Testing Committee. The Stress Testing Committee is appointed by the Group Risk Committee to review and challenge the stress test scenarios, assumptions and results.

Based on the stress test results, the Group Chief Risk Officer and Group Chief Financial Officer can recommend strategic actions to ensure that the Group Strategy remains within the Board-approved Risk Appetite.

The individual Principal Risk Types' Risk Appetite Statements along with the key associated Risk Appetite metrics approved by the Board are set out in the Principal Risks section

Principal Risk Types

Principal risks are those risks that are inherent in our strategy and our business model. These risks are managed through distinct Risk Type Frameworks (RTF). The RTFs are approved by the Group Chief Risk Officer. The principal risks and associated Risk Appetite Statements are approved by the Board.

As part of the overall risk management framework review in 2017 we also reviewed our Principal Risk Types. The table below shows the current Group's principal risks.

Principal Risks Types

Definition

Credit risk

•  Potential for loss due to the failure of a counterparty to meet its agreed obligations to pay the Group

Country risk

•  Potential for default or losses due to political or economic events in a country

Market risk

•  Potential for loss of economic value due to adverse changes in financial market rates or prices

Capital & liquidity risk

•  Capital: potential for insufficient level or composition of capital to support our normal activities

•  Liquidity: potential for failure where we may not have sufficient stable or diverse sources of funding or financial resources to meet our obligations as they fall due

Operational risk

•  Potential for loss resulting from inadequate or failed internal processes and systems, human error, or from the impact of external events

Reputational risk

•  Potential for loss of earnings or market capitalisation as a result of stakeholders taking a negative view of the organisation or its actions

Compliance

•  Potential for regulatory sanctions or loss from a failure on our part to comply with laws or regulations

Conduct

•  Potential regulatory sanctions or loss from a failure on our part to abide by the Group's Conduct Risk Management Framework

Information and cyber security

•  Potential for loss from a breach of confidentiality, integrity and availability of the Group's information systems and assets through cyber attack, insider activity, error or control failure

Financial crime

•  Potential for legal or regulatory penalties, material financial loss or reputational damage resulting from the failure to comply with applicable laws and regulations relating to International Sanctions, Anti-Money Laundering and Anti-Bribery and Corruption

Further details of our principal risks and how these are being managed are set out in the Principal Risks section

Executive and Board risk oversight

Overview

The Board has ultimate responsibility for risk management and is supported by the six Board-level committees. The Board approves the Enterprise Risk Management Framework based on the recommendation from the Board Risk Committee, which also recommends the Group Risk Appetite Statement other than financial crime risk. Financial crime risk related Risk Appetite is reviewed and recommended to the Board by the Board Financial Crime Risk Committee.

The Board appoints the Standard Chartered Bank Court to maintain a sound system of internal control and risk management. The Group Risk Committee, through its authority received from the Court, oversees effective implementation of the Enterprise Risk Management Framework. The Group Chief Risk Officer, as Chair of the Group Risk Committee, approves the use of sub-committees to support the Group Risk Committee overseeing risk at Business, Regional, Country, or Principal Risk Type level.

The Board Risk Committee receives regular reports on risk management, including the Group's portfolio trends, policies and standards, stress testing, liquidity and capital adequacy, and is authorised to investigate or seek any information relating to an activity within its terms of reference. The Board Risk Committee also conducts deep dive reviews on a rolling basis of different sections of the consolidated risk information report that is provided at each scheduled committee meeting.

Group Risk Committee

The Group Risk Committee is responsible for ensuring the effective management of risk throughout the Group in support of the Group's strategy. The Group Chief Risk Officer chairs the Group Risk Committee, whose members are drawn from the management team. The Committee determines the overall Enterprise Risk Management Framework for the Group, including the delegation of any part of its authorities to appropriate individuals or properly constituted sub-committees.

The Committee requests and receives information to fulfil its governance mandates relating to the risks to which the Group is exposed. As with the Board Risk Committee, the Group Risk Committee and Group Asset and Liability Committee receive reports that include information on risk measures, Risk Appetite metrics and thresholds, risk concentrations, forward-looking assessments, updates on specific risk situations and actions agreed by these committees to reduce or manage risk.

Group Risk Committee sub-committees

The Corporate & Institutional Banking Risk Committee (CIBRC) covers risks arising from activities in Corporate & Institutional Banking globally and in the Europe & Americas region as well as Group-wide Market and Traded Credit Risk. The CIBRC is chaired by the Chief Risk Officer, Corporate & Institutional Banking.

The Private Banking Risk Committee covers risks arising in Private Banking globally including wealth management. It is chaired by the Chief Risk Officer, Commercial Banking and Private Banking.

The three regional risk committees, chaired by the Chief Risk Officer for each respective region, cover risks arising from their respective region including Commercial and Retail Banking.

The Group Reputational Risk Committee oversees the implementation of the reputational risk framework and takes decisions on material and thematic reputational risk issues.

The Group Operational Risk Committee, chaired by the Group Head, Operational Risk, ensures effective management of operational risk throughout the Group.

The Group Financial Crime Risk Committee, chaired by the Group Chief Risk Officer, provides oversight of the effectiveness of the Group's policies, procedures, systems, controls and assurance arrangements designed to identify, assess, manage, monitor, prevent and/or detect money laundering, non-compliance with sanctions, bribery, corruption and tax crime by third parties.

The Stress Testing Committee, chaired by the Global Head, Enterprise Risk Management, ensures the effective management of capital and liquidity related enterprise-wide stress testing in line with the Group's enterprise-wide stress testing policy and applicable regulatory requirements. The Committee also enforces model governance for Credit risk, Traded Credit risk and Market risk throughout the Group in line with Risk Appetite and in support of Group strategy. In addition, the Committee approves and provides oversight over stress testing models pertaining to Credit risk, Traded Credit and Market risk, Liquidity risk and valuation models.

The Group Information Management Governance Committee, chaired by the Group Chief Information Officer, ensures that an effective Group strategy and approach to data quality management framework, data quality management strategy, priorities, standards and metrics are in place and maintained taking into account the information-related requirements of internal and external stakeholders.

The IFRS 9 Impairment Committee, chaired by the Global Head, Enterprise Risk Management, ensures the effective management of expected credit loss computation as well as stage allocation of financial assets for quarterly financial reporting within the authorities set by the Group Risk Committee.

Group Asset and Liability Committee

Members of the Group Asset and Liability Committee are drawn principally from the Court. The Group Asset and Liability Committee is chaired by the Group Chief Financial Officer. The Group Asset and Liability Committee is responsible for determining the Group's approach to balance sheet management and ensuring that, in executing the Group's strategy, the Group operates within internally approved Risk Appetite and external requirements relating to capital, liquidity and leverage risk. It is also responsible for policies relating to balance sheet management, including management of our liquidity, capital adequacy and structural foreign exchange, and interest rate exposure and tax exposure.

Combined United States Operations Risk Committee

The Combined United States Operations Risk Committee was established in 2016 to comply with the Dodd-Frank Act section 165 Enhanced Prudential Standards (EPS Rules). The EPS Rules legislated a number of enhanced obligations on the US operations commensurate with its structure, risk profile, complexity, activities and size. The Committee receives its authority from the Court of Standard Chartered Bank and is chaired by the Group Chief Risk Officer with membership drawn from the Court of Standard Chartered Bank and one iNED of Standard Chartered PLC. Its responsibilities are drawn from the EPS Rules and pertain to liquidity, risk governance and oversight.



 

PRINCIPAL RISKS

 

We manage and control our Principal Risk Types through distinct risk type frameworks, policies and Board-approved Risk Appetite

Credit risk

The Group defines Credit risk as the potential for loss due to the failure of a counterparty to meet its agreed obligations to pay the Group

Risk Appetite Statement

The Group manages its credit exposures following the principle of diversification across products, geographies, client segments and industry sectors

Roles and responsibilities

The Credit Risk Framework for the Group is set by the Chief Risk Officers for the Corporate & Institutional Banking, Commercial Banking and Private Banking, and Retail Banking segments. The Credit Risk function is the second line control function that performs independent challenge, monitoring and oversight of the credit risk management practices of the business and functions engaged in or supporting revenue generating activities which constitute the first line of defence. The first and second lines of defence are supported by the organisation structure, job descriptions and delegated authorities. Additionally, to ensure that credit risks are properly assessed and are transparent, credit decisions are controlled in accordance with the Group's Risk Appetite and credit policies and procedures. All segment Credit Officers in Group, regional and country roles are accountable to the segment Chief Risk Officers for credit risk management strategy, policy and performance.

Mitigation

Group-wide credit policies and standards are established and approved by the Group Risk Committee or individuals with authority delegated by the Risk Authorities policy. The Group Risk Committee oversees the delegation of credit approval and loan impairment provisioning authorities. The principles for the delegation, review and maintenance of credit approval authorities are defined in the Risk Authorities policy. In addition, there are other Group-wide policies integral to credit risk management such as those relating to stress testing, risk measurement and impairment provisioning.

Policies and procedures specific to each customer segment are established by individuals authorised via the Risk Authorities policy. These are consistent with our Group-wide credit policies, but are more detailed and adapted to reflect the different risk characteristics across customer segments. Policies are regularly reviewed and monitored to ensure they remain effective and consistent with the risk environment and Risk Appetite.

The Group credit policies set out the key considerations for eligibility, enforceability and effectiveness of credit risk mitigation arrangements. Potential credit losses from any given account, client or portfolio are mitigated using a range of tools such as collateral, netting agreements, credit insurance, credit derivatives and guarantees. The reliance that can be placed on risk mitigants is carefully assessed in light of issues such as legal certainty and enforceability, market valuation, correlation and counterparty risk of the protection provider. The requirement for risk mitigation is, however, not a substitute for the ability to pay, which is the primary consideration for any lending decisions.

Collateral types that are eligible as risk mitigants include: cash; account receivables; residential, commercial and industrial property; fixed assets such as motor vehicles, aircraft, plant and machinery; marketable securities; commodities; risk participations; guarantees; derivatives; credit insurance; and standby letters of credit. Physical collateral, such as property, fixed assets and commodities, and financial collateral must be independently valued and an active secondary resale market must exist. The collateral must be valued prior to drawdown and regularly thereafter as required. The valuation frequency is at minimum annual, and more frequent valuations are driven by the level of price volatility of each type of collateral and the nature of the underlying product or risk exposure. For financial collateral to be eligible for recognition, the collateral must be sufficiently liquid, and its value over time sufficiently stable, to provide appropriate certainty as to the credit protection achieved. Risk mitigation benefits may be reduced or removed where the collateral value is not supported by a recent independent valuation.

Documentation must be held to enable the Group to realise the collateral without the cooperation of the obligor in the event that this is necessary. For certain types of lending, typically mortgages or asset financing where a first charge over the risk mitigant must be attained, the right to take charge over physical assets is significant in terms of determining appropriate pricing and recoverability in the event of default. Physical collateral is required to be insured at all times against risk of physical loss or damage.

Collateral values are, where appropriate, adjusted to reflect current market conditions, the probability of recovery and the period of time to realise the collateral in the event of liquidation. Stress tests are performed on changes in collateral values for key portfolios to assist senior management in managing the risks in those portfolios. The Group also seeks to diversify its collateral holdings across asset classes and markets.

Where guarantees, credit insurance, standby letter of credit or credit derivatives are used as credit risk mitigation, the creditworthiness of the protection provider is assessed and monitored using the same credit approval process applied to the obligor. The main types of guarantors include banks, insurance companies, parent companies, governments and export credit agencies.

Governance Committee Oversight

At a Board level, the Board Risk Committee oversees the effective management of Credit risk and the Board Audit Committee approves the Group Impairment provisioning policy and reviews judgements made by Management on key accounting issues and significant accounting estimates.

At the executive level, the Group Risk Committee delegates the authority for the management of credit risk to several committees - the Corporate & Institutional Banking Risk Committee, Private Banking Risk Committee as well as the regional risk committees for Greater China and North Asia, ASEAN and South Asia and Africa and Middle East. These committees are responsible for overseeing the credit risk profile of the Group within the respective business areas and regions. Meetings are held regularly and the committees monitor all material credit risk exposures, key internal developments and external trends, and ensure that appropriate action is taken.

In addition, there is a Credit Approval Committee and an Underwriting Committee.The Credit Approval Committee, appointed by the Group Risk Committee, reviews and approves major credit exposures to individual counterparties, groups of connected counterparties and portfolios of retail exposures. The Underwriting Committee, appointed by the Corporate & Institutional Banking Risk Committee, approves limits for the underwriting of securities to be held for sale, and ensures effective risk management of underwritten debt securities and syndicated loans.

Decision making authorities and delegation

Major credit exposures to individual counterparties, groups of connected counterparties and portfolios of retail exposures are reviewed and approved by the Credit Approval Committee.

All other credit approval authorities are delegated by the Group Risk Committee to individuals based both on their judgement and experience. These individuals further delegate credit authorities to individual credit officers by applying Group Risk Committee approved delegated Credit Authorities matrices by customer type or portfolio. These matrices establish the maximum limits that the delegated credit officers are authorised to approve, based on risk-adjusted scales which take account of the estimated maximum expected loss from a given customer or portfolio. In Corporate & Institutional Banking, Commercial & Private Banking, the individuals delegating the credit authorities perform oversight by reviewing on a monthly basis a sample of the limit applications approved by the delegated credit officers. In Retail Banking, credit decisions are subject to periodic quality control assessment and assurance checks.

All credit proposals are subject to a robust credit risk assessment. It includes a comprehensive evaluation of the client's credit quality, including willingness, ability and capacity to repay. The primary lending consideration is based on the client's credit quality and the repayment capacity from operating cashflows for counterparties; and personal income or wealth for individual borrowers. The risk assessment gives due consideration to the client's liquidity and leverage position. Where applicable, the assessment includes a detailed analysis of the credit risk mitigation arrangements to determine the level of reliance on such arrangements as the secondary source of repayment in the event of a significant deterioration in a client's credit quality leading to default. Lending activities that are considered as higher risk or non-standard are subjected to stricter minimum requirements and require escalation to a senior credit officer or authorised body.

Monitoring

We regularly monitor credit exposures, portfolio performance, and external trends that may impact risk management outcomes.

Internal risk management reports that are presented to risk committees contain information on key political and economic trends across major portfolios and countries; portfolio delinquency and loan impairment performance.

Credit risk committees meet regularly to assess the impact of external events and trends on the Group's credit risk portfolios and to define and implement our response in terms of the appropriate changes to portfolio shape, portfolio and underwriting standards, risk policy and procedures.

Clients or portfolios are subjected to additional review when they display signs of actual or potential weakness; for example, where there is a decline in the client's position within the industry, financial deterioration, a breach of covenants, non-performance of an obligation within the stipulated period, or there are concerns relating to ownership or management.

Such accounts and portfolios are subjected to a dedicated process overseen by the Credit Issues Committees in the relevant countries where client account strategies and credit grades are re-evaluated. In addition, remedial actions are agreed and monitored. Remedial actions include, but are not limited to, exposure reduction, security enhancement, exiting the account or immediate movement of the account into the control of Group Special Assets Management, our specialist recovery unit for Corporate & Institutional Banking, Commercial Banking & Private Banking.

For Retail Banking exposures, portfolio delinquency trends are monitored continuously at a detailed level. Individual customer behaviour is also tracked and considered for lending decisions. Accounts that are past due or charged-off are subject to a collections or recovery process respectively, and managed independently by the Risk function. In some countries, aspects of collections and recovery activities are outsourced.

Credit rating and measurement

Risk measurement plays a central role, along with judgement and experience, in informing risk-taking and portfolio management decisions.

Since 1 January 2008, we have used the advanced internal ratings-based approach under the Basel II regulatory framework to calculate credit risk capital requirements.

A standard alphanumeric credit risk grade system for Corporate & Institutional Banking and Commercial Banking is used. The numeric grades run from 1 to 14 and some of the grades are further sub-classified. Lower numeric credit grades are indicative of a lower likelihood of default. Credit grades 1 to 12 are assigned to performing customers, while credit grade 13 and 14 are assigned to non-performing or defaulted customers. An analysis by credit quality of those loans that are neither past due nor impaired is set out in the Risk Profile section.

Retail Banking internal ratings-based portfolios use application and behaviour credit scores that are calibrated to generate a probability of default and then mapped to the standard alphanumeric credit risk grade system. We refer to external ratings from credit bureaus (where these are available); however, we do not rely solely on these to determine Retail Banking credit grades.

Advanced internal ratings-based models cover a substantial majority of our exposures and are used in assessing risks at a customer and portfolio level, setting strategy and optimising our risk return decisions. Material internal ratings-based risk measurement models are approved by the Stress Testing Committee on the recommendation of the Credit Model Assessment Committee. The Credit Model Assessment Committee approves all other internal ratings-based risk measurement models, with key decisions noted to the Stress Testing Committee. Prior to review by the Credit Model Assessment Committee, all internal ratings-based models are validated in detail by a model validation team which is separate from the teams that develop and maintain the models. Models undergo annual validation by the model validation team. Reviews are also triggered if the performance of a model deteriorates materially against predetermined thresholds during the ongoing model performance monitoring process which takes place between the annual validations.

Credit concentration risk

Credit concentration risk may arise from a single large exposure to a counterparty or a group of connected counterparties, or from multiple exposures across the portfolio that are closely correlated. Large exposure concentration risk is managed through concentration limits set by a counterparty or a group of connected counterparties based on control and economic dependence criteria. Risk Appetite metrics are set at portfolio level and monitored to control concentrations, where appropriate, by industry, specific products, tenor, collateralisation level, top 20 concentration and exposure to holding companies. Single name credit concentration thresholds are set by a Client Group depending on credit grade, and by customer segment. For concentrations that are material at a Group level, breaches and potential breaches are monitored by the respective governance committees and reported to the Group Risk and Board Risk Committees.

Traded products

Credit risk from traded products derives from the positive mark-to?market value of the underlying instruments, and an additional component to cater for potential future market movements. This counterparty credit risk is managed within the Group's overall credit Risk Appetite for corporate and financial institutions. In addition to analysing potential future movements, the Group uses various single and multi-risk factor stress test scenarios to identify and manage counterparty credit risk across derivatives and securities financing transactions.

The Group uses bilateral and multilateral netting to reduce pre-settlement and settlement counterparty credit risk. Pre-settlement risk exposures are normally netted using bilateral netting documentation in legally approved jurisdictions. Settlement exposures are generally netted using Delivery versus Payments or Payment versus Payments systems. Master netting agreements are generally enforced only in the event of default. In line with International Accounting Standards (IAS) 32, derivative exposures are presented on a net basis in the financial statements only if there is a legal right to offset and there is intent to settle on a net basis or realise the assets and liabilities simultaneously.

In addition, the Group enters into credit support annexes (CSAs) with counterparties where collateral is deemed a necessary or desirable mitigant to the exposure. Further details on CSAs are set out in the Risk Profile section. The netting and collateral enforceability status of previously approved jurisdictions is periodically reviewed. This is undertaken as and when industry opinions are updated or where a change in the law or significant event in a relevant jurisdiction requires a re-assessment of the conclusions previously drawn under the existing opinion.

Wrong-way risk occurs when an exposure increase is coupled with a decrease in the credit quality of the obligor. Specifically, as the mark-to-market on a derivative contract or a repurchase agreement contract increases in favour of the Group, the driver of this mark-to-market change also reduces the ability of the counterparty to meet its payment, margin call or collateral posting requirements. The Group employs various policies and procedures to ensure that wrong-way risk exposures are identified, measured and managed.

Securities

The limits for the underwriting of securities to be held for sale are approved by the Underwriting Committee, under the authority of the Corporate & Institutional Banking Risk Committee. The limits contain the overall size of the securities inventory, the maximum holding period, the daily value at risk, the sensitivity to interest rate and credit spread moves. The Underwriting Committee approves individual proposals to underwrite new security issues for our clients.

Day-to-day credit risk management activities for traded securities are carried out by a specialist team within the Risk function whose activities include oversight and approval within the levels delegated by the Underwriting Committee. Issuer credit risk, including settlement and pre-settlement risk, and price risks are controlled by the Risk function. Where an underwritten security is held for a period longer than the target sell-down period, the final decision on whether to sell the position rests with the Risk function.

Loan impairment

A loan is impaired when we assess that we will not recover a portion of the contractual cashflows. Impaired loans are classified as follows:

•  In Corporate & Institutional Banking, Commercial Banking & Private Banking, a loan is considered impaired where analysis and review indicate that full payment of either interest or principal, including the timeliness of such payment, is questionable, or as soon as payment of interest or principal is 90 days overdue. Impaired accounts are managed by our Group Special Assets Management recovery unit, GSAM, which is independent from our main businesses

•  In Retail Banking, a loan is considered impaired when it meets certain defined threshold conditions in terms of overdue payments (contractual impairment) or meets other objective conditions such as bankruptcy, debt restructuring, fraud or death. A loan is considered delinquent (or past due), when the customer has failed to make a principal or interest payment in accordance with the loan contract. These threshold conditions are defined in policy and are set at the point where empirical evidence suggests that the client is unlikely to meet their contractual obligations or a loss of principal is expected

The Group's loan loss provisions are established to recognise incurred impairment losses either on specific loan assets or within a portfolio of loans and advances. Individually impaired loans are those loans against which individual impairment provisions (IIP) have been raised.

Provisions are taken in the form of:

•  Individually impaired provisions (IIP)

•  Portfolio impairment provisions (PIP) held to cover the inherent risk of losses which, although not identified, are known through experience to be present in any loan portfolio

More information on the components of these calculations for Corporate & Institutional Banking, Commercial Banking & Private Banking, as well as Retail Banking, can be found in note 8 of the financial statements.

Estimating the amount and timing of future recoveries involves significant judgement, and considers the assessment of matters such as future economic conditions and the value of collateral, for which there may not be a readily accessible market.

Loan losses that have been incurred but have not been separately identified at the balance sheet date are determined by taking into account past loss experience as a result of uncertainties arising from the economic environment, and defaults based on portfolio trends. Actual losses identified could differ significantly from the impairment provisions reported, for example, as a result of uncertainties arising from the economic environment.

The total amount of the Group's impairment provision is inherently uncertain, being sensitive to changes in economic and credit conditions across the regions in which the Group operates. Economic and credit conditions are interdependent within each geography and as a result there is no single factor to which the Group's loan impairment provisions as a whole are sensitive. It is possible that actual events over the next year will differ from the assumptions built into our model, resulting in material adjustments to the carrying amount of loans and advances.

Effective from 1 January 2018, the impairment requirements of IFRS 9 Financial Instruments are being adopted. More information can be found in note 41 of the financial statements.

Country risk

Risk Appetite Statement

The Group manages its country cross-border exposures following the principle of diversification across geographies and controls the business activities in line with the level of jurisdiction risk

The Group defines Country risk as the potential for default or losses due to political or economic events in a country

Roles and responsibilities

The Global Head, Enterprise Risk Management is responsible for the management and control of Country Risk across the Group with the day-to-day management and control activities delegated to the Global Head, Country Risk. They are supported by the Regional Chief Risk Officers and Country Chief Risk Officers who provide second line oversight and challenge to the first line country risk management activities. The first line ownership of country risk resides with the country CEOs who are responsible for the implementation of policy and allocation of approved country risk limits across relevant businesses and product lines, as well as the identification and measurement of country risks and communication of these and any non-compliance to policy to the second line.

Mitigation

Policies and procedures are developed and deployed to put in place standards and controls that all countries must follow to ensure effective management of country risk. The policies include standards for the acceptance and effective management of country risk in particular around identification, measurement, reporting and setting, and the calibration and allocation of country risk limits. The procedures outline the process for country risk limit setting, monitoring and reporting exposures.

Governance Committee Oversight

At a Board level, the Board Risk Committee oversees the effective management of Country risk. At the executive level, the Group Risk Committee is responsible for approving policies and control risk parameters, monitoring material risk exposures and directing appropriate action in response to material risk issues or themes that come to the Committee's attention that relate to Country risk. The Group Risk Committee delegates the management of Country risk to the Group Country Risk function. At a country level, the Country Risk Committee (or Executive Risk Committee for subsidiaries) is responsible for monitoring all risk issues for their given country, including Country risk.

Decision making authorities and delegation

Decision making and approval authorities are guided by reference levels for countries. Reference levels are guidelines to set country limits in respect of Country risk. The reference levels are assessed by the Group Country Risk function and are functionally derived from factors including: Group Tier 1 capital, sovereign risk grade, with adjustment for transfer risk; Group strategy, through Country tiering; portfolio composition (short and medium-term) and Country's total foreign currency earnings.

Monitoring

Monitoring and reporting is included in the policy and procedures and covers the monitoring of exposures relative to Risk Appetite thresholds and limits, and the reporting of material exposures to internal committees and externally. The Group Risk Committee monitors Risk Appetite thresholds on a traffic-light indicator basis which provide an early warning indicator of stress and concentration risk. An escalation process to the Board Risk Committee is in place based on the traffic-light indicators monitoring system. In addition, the Group Risk Committee and the Board Risk Committee receive regular reports on exposures in excess of 1 per cent of total Group assets.

Market risk

The Group defines Market risk as the potential for loss of economic value due to adverse changes in financial market rates or prices

Risk Appetite Statement

The Group should control its trading portfolio and activities to ensure that market risk losses (financial or reputational) do not cause material damage to the Group's franchise



 

Roles and responsibilities

The Market Risk Framework, which sets the roles and responsibilities in respect of Market risk for the Group, is owned by the Global Head, Market and Traded Credit Risk (MTCR). The front office acting as first line of defence is responsible for the effective management of market risks. The Market Risk Function is the second line control function that performs independent challenge, monitoring and oversight of the market risk management practices of the first line of defence. The first and second lines of defence are supported by the organisation structure, job descriptions and authorities delegated by market risk control owners.

Mitigation

The Group controls its trading portfolio and activities to ensure that market risk losses (financial or reputational) do not cause material damage to the Group's franchise by assessing the various market risk factors. These are captured and analysed using proprietary and custom built analytical tools, in addition to risk managers' specialist market and product knowledge.

MTCR has market risk policies and procedures in place ensuring that appropriate market risk limits are implemented. The Group's market risk exposure is aligned with its appetite for market risk and assessing potential losses that might be incurred by the Group as a consequence of extreme but plausible events.

Market risk limits are applied as required by the Market Risk Limits Policy and related procedures. All businesses incurring market risk must do so in compliance with the Market Risk Limits Policy. The Policy requires that market risk limits are defined at a level appropriate to ensure that the Group remains within market Risk Appetite. The market Risk Appetite metrics are defined in terms of VaR and stress loss, therefore all material market risks must be captured by these metrics. All exposures throughout the Group that the MTCR function is responsible for aggregate up to MTCR's Group-level reporting. This aggregation approach ensures that the limits structure across the Group is consistent with the Group's Risk Appetite.

The Market Risk Stress Testing Policy is designed to ensure that adherence to Group market risk stress appetite is achieved. Stress testing aims at supplementing other risk metrics used within the bank by providing a forward-looking view of positions and an assessment of their resilience to stressed market conditions. Stress testing is performed on all Group businesses with market risk exposures, either where the risk is actively traded or where material risk remains. This additional information is used to inform the management of the market risks taken within the Group. The outcome of stress tests is discussed across the various business lines and management levels so that existing and potential risks can be reviewed and related management actions can be decided upon where appropriate.

Policies are reviewed and approved by the Global Head, MTCR annually to ensure their ongoing effectiveness and sustainability.

Stress testing

Losses beyond the 97.5 per cent confidence interval are not captured by a VaR calculation, which therefore gives no indication of the size of losses in tail event situations.

The VaR measurement is complemented by weekly stress testing of market risk exposures to highlight the potential risk that may arise from extreme market events that are deemed rare but plausible.

Stress testing is an integral part of the market risk management framework and considers both historical market events and forward-looking scenarios. A consistent stress testing methodology is applied to trading and non-trading books. The stress testing methodology assumes that scope for management action would be limited during a stress event, reflecting the decrease in market liquidity that often occurs.

Stress scenarios are regularly updated to reflect changes in risk profile and economic events. The MTCR function reviews stress testing results and, where necessary, enforces reductions in overall market risk exposure. The Group Risk Committee considers the results of stress tests as part of its supervision of Risk Appetite.

Regular stress test scenarios are applied to interest rates, credit spreads, exchange rates, commodity prices and equity prices. This covers all asset classes in the Financial Markets banking and trading books.

Ad hoc scenarios are also prepared, reflecting specific market conditions and for particular concentrations of risk that arise within the business.

Governance Committee Oversight

At a Board level, the Board Risk Committee oversees the effective management of Market risk. At the executive level, the Group Risk Committee delegates responsibilities to the Corporate & Institutional Banking Risk Committee (CIBRC) to act as the primary risk governance body for market risk and to the Stress Testing Committee for stress testing and model risk. The Group Risk Committee also delegates limit authority to the Global Head, MTCR who is responsible for the market risk.

Decision making authorities and delegation

The Group's Risk Appetite Statement, along with the key associated Risk Appetite metrics, is approved by the Board, and responsibility for market risk limits is then tiered accordingly.

Subject to the Group's Risk Appetite for market risk, the Group Risk Committee sets Group-level market risk limits and delegates authority for the supervision of all other market risk limits to the CIBRC and Market & Traded Credit Risk.

Major business limits are reviewed and approved by the CIBRC. The committee is responsible for determining which major business limits meet the criteria for categorisation. The CIBRC is appointed by the Group Risk Committee.

All other market risk limit approval authorities are delegated by the Global Head, MTCR to individual market risk managers. Additional limits are placed on specific instruments and position concentrations where appropriate. Sensitivity measures are used in addition to VaR as risk management tools. Authorities are reviewed at least annually to ensure they remain appropriate and to assess the quality of decisions taken by the authorised individual. Key risk-taking decisions are made only by certain individuals or committees with the skills, judgement and perspective to ensure that the Group's control standards and risk-return objectives are met.

Authority delegators are responsible for monitoring the quality of the risk decisions taken by their delegates and the ongoing suitability of their authorities.

VaR

The Group applies VaR as a measure of the risk of losses arising from future potential adverse movements in market rates, prices and volatilities. VaR, in general, is a quantitative measure of market risk that applies recent historical market conditions to estimate the potential future loss in market value that will not be exceeded in a set time period at a set statistical confidence level. VaR provides a consistent measure that can be applied across trading businesses and products over time and can be set against actual daily trading profit and loss outcome.

VaR is calculated for expected movements over a minimum of one business day and to a confidence level of 97.5 per cent. This confidence level suggests that potential daily losses in excess of the VaR measure are likely to be experienced six times per year.

The Group applies two VaR methodologies:

•  Historical simulation: involves the revaluation of all existing positions to reflect the effect of historically observed changes in market risk factors on the valuation of the current portfolio. This approach is applied for general market risk factors and the majority of specific (credit spread) risk VaR;

•  Monte Carlo simulation: this methodology is similar to historical simulation but with considerably more input risk factor observations. These are generated by random sampling techniques, but the results retain the essential variability and correlations of historically observed risk factor changes. This approach is applied for some of the specific (credit spread) risk VaR in relation to idiosyncratic exposures in credit markets

In both methods a historical observation period of one year is chosen and applied.

VaR is calculated on our exposure as at the close of business, generally UK time. Intra-day risk levels may vary from those reported at the end of the day.

A small proportion of market risk generated by trading positions is not included in VaR or cannot be appropriately captured by VaR. This is recognised through a Risks-not-in-VaR framework, which estimates these risks and applies capital add-ons.

To assess their ongoing performance, VaR models are backtested against actual results.

See an analysis of VaR and backtesting results in 2017 in the Risk Profile section.

Monitoring

MTCR monitors the overall portfolio risk and ensures that it is within specified limits and therefore Risk Appetite. The annual and mid-year limit review processes provide opportunities for the business and MTCR to review risk in light of performance.

Market risk exposures are monitored daily against approved limits. Intra-day risk exposures may vary from those reported at the end of the day. Limit excess approval decisions are informed by factors such as an assessment of the returns that will result from an incremental increase to the business risk exposure. Limits and excesses can only be approved by a market risk manager with the appropriate delegated authority.

Stress testing is the basis for internal economic capital and economic profit reporting for market risk. Incremental Risk Charge is also used to reflect credit default and migration risk. Financial Markets traders may adjust their market risk exposures within approved limits and assess risk/reward trade-offs according to market conditions.

In addition, stress scenario analysis is performed on all market risk exposures in Financial Markets and in portfolios outside Financial Markets such as Syndicated Loans and Principal Finance. MTCR reports and monitors limits applied to stressed exposures. Stress loss excesses are discussed with the business and approved where appropriate based on delegated authority levels. Stress loss excesses are reported to CIBRC. Where required by local statute or regulation, MTCR's Group and business-wide stress and scenario testing will be supplemented by entity stress testing at a country level. This stress testing is coordinated at the country level and subject to the relevant local governance.

Capital and liquidity risk

Risk Appetite Statement

The Group maintains a strong capital position, including the maintenance of management buffers sufficient to support its strategic aims, and holds an adequate buffer of high quality liquid assets to survive extreme but plausible liquidity stress scenarios for at least 60 days without recourse to extraordinary central bank support

The Group defines capital risk as the potential for insufficient level or composition of capital to support our normal activities, and liquidity risk as the potential for failure where we may not have sufficient stable or diverse sources of funding or financial resources to meet our obligations as they fall due

Roles and responsibilities

The Treasurer is responsible for developing a risk framework for capital and liquidity risk and for complying with regulatory requirements at a Group level. The Treasury and Finance functions provide independent challenge and oversight of the first line risk management activities relating to capital and liquidity risk. In country, the Treasurer is supported by Treasury and Finance in implementing the capital and liquidity framework.

Mitigation

The Group develops policies to address material capital and liquidity risks and aims to constrain its risk profile within Risk Appetite. Risk Appetite is set for the Group and cascaded down to the countries as limits. The Group also maintains a Recovery Plan which is a live document to be used by management in a liquidity or solvency crisis. The Recovery Plan includes a set of Recovery Indicators, an escalation framework and a set of management actions that could be effectively implemented in a liquidity stress. A Recovery Plan is also maintained within each major country.

The approach to mitigation is detailed further below:

Capital Planning

On an annual basis, strategic business and capital plans are drawn up covering a five-year horizon and are approved by the Board. The capital plan ensures that adequate levels of capital and an efficient mix of the different components of capital are maintained to support our strategy and business plans. Treasury is responsible for the ongoing assessment of the demand for capital and the updating of the Group's capital plan.

Capital planning takes the following into account:

•  Current regulatory capital requirements and our assessment of future standards

•  Demand for capital due to the business and loan impairment outlook and potential market shocks or stresses

•  Available supply of capital and capital raising options

The Funding Plan is also developed to ensure we have a credible plan to manage the future demand and supply of funds in a prudent yet commercially effective manner.

Structural FX Risk

The Group's structural position results from the Group's non-USD investment in the share capital and reserves of subsidiaries and branches. The FX translation gains or losses are recorded in the Group's 'Translation Reserves' with a direct impact on the Group's CET1 ratio.

The Group contracts hedges to manage its structural FX position in accordance with a Board-approved Risk Appetite, and as a result the Group has taken net investment hedges (using a combination of derivative and non-derivative financial investments) to partly cover its exposure to the Korean won, Chinese renminbi and Taiwanese dollar to mitigate the FX impact of such positions on its capital ratios.

Liquidity and Funding Risk

At Group and country level we implement various business-as-usual and stress risk metrics and monitor these against limits. This ensures that the Group maintains an adequate and well-diversified liquidity buffer and stable funding base. The approach to managing the risks and the Board-approved Risk Appetite metrics are assessed annually through the Internal Liquidity Adequacy Assessment Process.

Earnings Risk

Interest rate re-pricing risk is managed centrally by Treasury Markets within market risk limits. The governance of Earnings Risk will develop through 2018 in line with regulatory guidelines for interest rate risk in the banking book. This will focus on implementing this risk type within the Group's Enterprise Risk Management Framework supported by formal delegations of authority, additional policies and methodologies, data and model governance, a broader suite of Risk Appetite metrics, limits, and ongoing reporting and monitoring of exposures against these.

Stress testing

Stress testing and scenario analysis are an integral part of the capital and liquidity framework, and are used to ensure that the Group's internal assessment of capital and liquidity consider the impact of extreme but plausible scenarios on its risk profile. They provide an insight into the potential impact of significant adverse events on the Group's capital and liquidity position and how these could be mitigated through appropriate management actions to ensure the Group remains within the approved Risk Appetite and regulatory limits.

Governance Committee Oversight

At a Board level, the Board Risk Committee oversees the effective management of Capital and Liquidity risk. At the executive level, the Group Asset and Liability Committee informs the Group's strategy on balance sheet matters and ensures that the Group operates within internally approved Risk Appetite and regulatory requirements. This relates to capital, loss absorbing capacity, liquidity, leverage, earnings risk and structural foreign exchange risk. The Group Asset and Liability Committee also ensures that the Group meets internal and external recovery and resolution planning requirements. The Group Asset and Liability Committee delegates responsibilities to the Operational Balance Sheet Committee to ensure that, in executing the Group's strategy, the Group operates within internal and regulatory requirements, with a focus on ensuring alignment with business objectives.

Country oversight under the capital and liquidity framework resides with country Asset and Liability Committees. Countries must ensure they remain in compliance with Group capital and liquidity policies and practices, as well as local regulatory requirements.

The Stress Testing Committee ensures the effective management of capital and liquidity related enterprise-wide stress testing in line with the Group's enterprise-wide stress testing policy and applicable regulatory requirements. The Stress Testing Committee reviews, challenges and approves stress scenarios, results and management actions as part of the Internal Capital Adequacy Assessment Process, as well as assumptions and results as part of the Internal Liquidity Adequacy Assessment Process.

Decision making authorities and delegation

The Group Chief Financial Officer has overall responsibility for determining the Group's approach to capital and liquidity risk management and delegates this authority to the Treasurer. The Treasurer has the authority to delegate second line responsibilities to the Treasury and Finance functions to relevant and suitably qualified individuals. This includes the delegation of policy and metric development, implementation and limit setting, as well as oversight and challenge of first line processes and controls and is delegated to the most appropriate individuals.

Monitoring

On a day-to-day basis the management of capital and liquidity is performed by the country Chief Executive Officer and Treasury Markets respectively. The Group regularly reports and monitors capital and liquidity risks inherent in its business activities and those that arise from internal and external events. The management of capital and liquidity is monitored by Treasury for the Group with appropriate escalation processes in place for any breach of limits.

Internal risk management reports covering the balance sheet and the capital and liquidity position of the Group are presented to the Operational Balance Sheet Committee and the Group Asset and Liability Committee. The reports contain key information on balance sheet trends, exposures against Risk Appetite and supporting risk measures which enable members to make informed decisions around the overall management of the Group's balance sheet. Oversight at a country level is provided by the country Asset and Liability Committee, with a focus on the local capital and liquidity risks, local prudential requirements and risks that arise from local internal and external events.

Operational risk

The Group defines Operational Risk as the potential for loss resulting from inadequate or failed internal processes and systems, human error, or from the impact of external events



 

Risk Appetite Statement

The Group aims to control operational risks to ensure that operational losses (financial or reputational), including any related to conduct of business matters, do not cause material damage to the Group's franchise

Roles and responsibilities

The Operational Risk Framework (ORF) is set by the Group Head, Operational Risk and approved by the Group Operational Risk Committee. Group Operational Risk, in its role as the second line of defence, develops the Operational Risk Framework and monitors its application across the Group. The Operational Risk function challenges process owners in ensuring the Group's operational risk profile is within Risk Appetite.

Mitigation

The ORF sets out the Group's overall approach to the management of operational risk in line with the Group's Risk Appetite. The approach reinforces the three lines of defence and serves to continually improve the Group's ability to anticipate and control material risks. It also requires the need for clear ownership and accountability for all processes across the Group. Risk assessment is used to determine the design strength and reliability of each process to prevent risks.

The operational risk management approach requires:

•  All processes and risks to be identified, owned, and recorded in the Process Universe

•  Control tolerance standards to be set for each control for quantity, materiality and timeliness of detection and rectification of defects

•  Monitoring of control performance against tolerance standards

•  Residual risks to be assessed by process owners and approved by risk framework owners

•  Prompt execution of treatment actions

The Group fulfills the requirements of the approach by defining and maintaining a process universe for all client segments, products, and functions. The Process Universe is the complete set of processes that collectively describe the activities of the Group and is the common reference for the approach to operational risk management. Each process is owned by a named individual who is responsible for the outcomes of the process and the design, monitoring and effectiveness of the control environment.

Potential failures in processes are identified by process owners and risk framework owners using their expert judgment. These potential failures are risk assessed against a pre-defined operational risk assessment matrix which must be approved by individuals delegated within the Risk Authorities policy. Risks that fall above the Group's Risk Appetite levels require a time-bound treatment plan to address the potential failures, and are monitored until the risk is reduced to within acceptable levels.

Stress testing

As part of the operational risk management approach, the Group conducts stress testing using scenario analysis. Fifteen scenarios are identified that test the robustness of the Group's processes, and assess the potential impact to the Group. These scenarios include anti-money laundering, sanctions, information and cyber security and external fraud.

In 2017, we also participated in the Bank of England stress test exercise and the annual Internal Capital Adequacy Assessment Process.

Governance Committee Oversight

At a Board level, the Board Risk Committee oversees the effective management of Operational risk. At the executive level, the Group Operational Risk Committee (GORC) oversees the operational risk profile of the Group within the boundaries of the Group's Risk Appetite and any limits and policies set by authorised bodies of the Group. The GORC has the authority to challenge, constrain and, if required, stop business activities where risks are not aligned with the Group's Risk Appetite.

The GORC is supported by Business Process Governance Committees (PGCs) and Function Operational Risk Committees (FORCs) which provide global oversight of all operational risks arising from processes within the Business and Function at the Group level. In addition, the Country Operational Risk Committees (CORCs) oversee the management of operational risks at the country (or entity) level.

The GORC monitors the effectiveness of the PGCs, FORCs and CORCs and challenges the risk decisions made within these committees to remain within the Group's Risk Appetite.

Decision making authorities and delegation

Authority to make risk-related decisions is delegated to individuals or committees with the requisite skills, judgement, and perspective to ensure that the Group's control standards and risk/return objectives are met. The Group has prescribed policies defining the scope and responsibility of the authorised individuals. The authorities are reviewed at least annually to ensure they remain appropriate to assess the quality of decisions taken by the authorised individual.

To ensure the appropriate infrastructure, people, processes, and controls are in place to support change and product management, including mitigation of all operational risks within Risk Appetite, minimum governance standards are set at the Group and Country levels. Significant changes to internal and external environments may give rise to operational risks. Such changes with impact to client segments, products and functions are subject to process governance at a PGC or FORC. Standards for business products are owned by Business Heads and Business PGCs. All products must be approved to the standards set out in the policy, including completion of an operational risk assessment.

Monitoring

Operational Risk Appetite metrics are set against each top risk. These are included as part of the operational risk profile which comprises the following elements:

•  Top Risk performance against Risk Appetite

•  Losses, near misses and related insights

•  Changes to the internal or external environment

•  Results of audit and regulatory reviews, or other independent findings

The operational risk profile is aggregated and reported at relevant committees defined at Group, business, regional, country and function level. This provides senior management with the relevant information to inform their risk decisions. The completeness of the operational risk profile ensures appropriate prioritisation and promptness of risk decisions, including risk acceptances with treatment plans for risks that are beyond the acceptable threshold.

Reputational risk

The Group defines reputational risk as the potential for loss of earnings or market capitalisation as a result of stakeholders taking a negative view of the organisation or its actions

Risk Appetite Statement

The Group aims to protect the franchise from material damage to its reputation by ensuring that any business activity is satisfactorily assessed and managed by the appropriate level of management and governance oversight

Roles and responsibilities

In February 2017, second line ownership of reputational risk was transferred from the Group Head, Corporate Affairs to the Group Chief Risk Officer, with responsibility delegated to the Global Head, Enterprise Risk Management. At country level, the responsibility of reputational risk management is delegated to Country Chief Risk Officers. Both the Global Head, Enterprise Risk Management and Country Chief Risk Officers constitute the second line of defence, overseeing and challenging the first line which resides with the CEOs, Business Heads and Product Heads in respect of risk management activities of reputational-related risks.

Mitigation

The Group's reputational risk policy sets out the principal sources of reputational risk and the responsibilities and procedures for identifying, assessing and escalating reputational risks. The policy also defines the control and oversight standards to effectively manage reputational risk.

The Group takes a structured approach to the assessment of risks associated with how individual client, transaction, product and strategic coverage decisions may affect perceptions of the organisation and its activities. Wherever a potential for stakeholder concerns is identified, issues are subject to prior approval by a management authority commensurate with the materiality of matters being considered. Such authorities may accept, decline the risk or impose conditions upon proposals, to protect the Group's reputation. The Group recognises that there is also the potential for consequential reputational risk should it fail to control other Principal Risk Types. Such secondary reputational risks are managed by the owners of each Principal Risk Type.

Stress testing

Reputational risk is incorporated into the Group's stress testing scenarios. For example, the Group may consider what impact a hypothetical event leading to loss of confidence among liquidity providers in a particular market might have, or what the implications might be for supporting part of the organisation in order to protect the brand.

Governance Committee Oversight

The Brand, Values and Conduct Committee retains Board level oversight responsibility for reputational risk. Oversight from an operational perspective falls under the remit of the Group Risk Committee and the Board Risk Committee. The Group Reputational Risk Committee appointed by the Group Risk Committee in May 2017 ensures the effective management of Reputational Risk across the Group. The Group Reputational Risk Committee's remit is to:

•  Challenge, constrain and if required, to stop business activities where risks are not aligned with the Group's Risk Appetite

•  Make decisions on reputational risk matters assessed as high or very high based on the Group's reputational risk materiality assessment matrix, and matters escalated from the Regions or Client Businesses

•  Provide oversight of material reputational risk and/or thematic issues arising from the potential failure of other risk types

Decision making authorities and delegation

The Group Risk Committee provides Group-wide oversight on reputational risk, approves policy and monitors material risks. The Group Reputational Risk Committee is authorised to approve or decline reputational risk aspects of any business transaction, counterparty, client, product, line of business and market within the boundaries of the Group's Risk Appetite, and any limits and policies set by authorised bodies of the Group.

Monitoring

Reputational risk policies and procedures are applicable to all Group entities. However local regulators in some markets may impose additional requirements on how banks manage and track reputational risk. In such cases, these are complied with in addition to Group policies and procedures. Exposure to reputational risk is monitored through:

•  A requirement that process owners establish triggers to prompt consideration of reputational risk and escalation where necessary

•  The tracking of risk acceptance decisions

•  The tracking of thematic trends in secondary risk arising from other Principal Risk Types

•  The analysis of prevailing stakeholder concerns

Compliance risk

The Group defines compliance risk as the potential for regulatory sanctions or loss from a failure on our part to comply with laws or regulations

Risk Appetite Statement

The Group has no appetite for breaches in laws and regulations; whilst recognising that regulatory non-compliance cannot be always entirely avoided, the Group strives to reduce this to an absolute minimum

Roles and responsibilities

The Group Head, Compliance sets standards for compliance, establishes and maintains risk-based compliance frameworks and a programme for monitoring compliance; provides support to senior management on regulatory and compliance matters; and is the Risk Framework Owner for Compliance Risk.

The Compliance Risk Framework sets out the roles and responsibilities in respect of compliance risk for the Group. Businesses and functions acting as the first line of defence are responsible for ensuring that their processes operate in a way that ensures continued compliance with all applicable laws and regulations. The compliance function is the second line that provides oversight and challenge of the first line risk management activities that relate to compliance risk.

The Compliance Risk Framework defines risk sub-types and delegates these to the most appropriate control function to ensure that the Compliance function as second line, can effectively provide oversight and challenge of the first line risk management activities.

Mitigation

The Compliance function develops and deploys relevant policies and procedures setting out standards and controls for adherence by the Group to ensure continued compliance with applicable laws and regulations. Through a combination of control monitoring and attestation, the Compliance Risk Framework Owner seeks to ensure that all policies are operating as expected to mitigate the risk that they cover.



 

Governance Committee Oversight

Compliance risk and the risk of non-compliance with laws and regulations resulting from failed processes and controls are overseen by Process Governance Committees and Functional Operational Risk Committees, and Country Operational Risk Committees that are in place for each business, function and country. The Compliance and Regulatory Risk Committee has a consolidated view of these risks and ensures that appropriate governance is in place for these. In addition, the Committee ensures that elevated levels of Compliance Risk are reported to the Group Operational Risk Committee, Group Risk Committee and Board Audit Committee.

Decision making authorities and delegation

Decision making and approval authorities follow the Enterprise Risk Management Framework approach and risk thresholds. The Group Head, Compliance has the authority to delegate second line responsibilities within the Compliance function to relevant and suitably qualified individuals. In addition, second line responsibilities including policy development, implementation and validation as well as oversight and challenge of first line processes and controls are delegated based on the most appropriate control function for certain compliance risk sub-types.

Monitoring

The monitoring of controls designed to mitigate the risk of regulatory non-compliance in processes is carried out in line with the Operational Risk Framework. The Group has a monitoring and reporting process in place for compliance Risk Appetite metrics, which includes escalation and reporting to Compliance and Regulatory Risk Committee, Group Risk Committee and Board Risk Committee as appropriate. In addition, there is a Group Regulatory Reform team set up to monitor regulatory reforms in key markets and establish a protocol for horizon scanning.

Conduct risk

The Group defines Conduct Risk as the potential regulatory sanctions or loss from a failure on our part to abide by the Group's Conduct Risk Management Framework

Risk Appetite Statement

The Group strives to maintain the standards in our Code of Conduct and outcomes of our Conduct Framework, by continuously demonstrating that we "Do The Right Thing" in the way we conduct business

Roles and responsibilities

Conduct risk management and abiding by the Group Code of Conduct is the responsibility of all employees in the Group. The first line businesses and functions are responsible for reviewing their processes and identifying conduct-related outcomes and ensuring controls are in place to mitigate these risks. The compliance function as second line for conduct risk is responsible for providing oversight and challenge to the first line to ensure the adequacy of the conduct risk management and that we remain within Risk Appetite.

Mitigation

The Group Conduct Risk Management Framework is designed to enable dynamic risk control implementation and risk-based decision making in line with the Group's Enterprise Risk Management Framework. The framework is supported by policies including the Group conduct management policy and the Group code of conduct as well as a range of other policies and procedures which address conduct related aspects in further granular detail. The management of conduct risk includes the monitoring of Risk Appetite metrics and limits that are reported to relevant governance committees.

Conduct risk identification and mitigation are embedded in businesses and functions through an end-to-end review of the Bank's critical processes. Controls are put in place for conduct related risks that have been identified within these processes. In-country workshops are conducted to assist CEOs and management teams to identify conduct related risks in their businesses and country strategies while leader-led training on conduct issues and dilemmas are rolled out across businesses and functions as we seek to ensure conduct is seen in the broader context, as opposed to behavioural conduct.

Governance Committee Oversight

The Board Risk Committee, Brand Values and Conduct Committee, Group Risk Committee, Group Operational Risk Committee and the Compliance Regulatory Risk Committee are responsible for ensuring that the Group remains within conduct Risk Appetite. As Risk Framework Owner for conduct risk, compliance sets reporting thresholds for escalation of conduct risks to the Group Operational Risk Committee and Group Risk Committee. The Board Risk Committee and the Brand Values and Conduct Committee receive periodic reports on conduct risk assurance against businesses and functions.



 

Decision making authorities and delegation

Conduct risk authority is delegated through the Group ensuring appropriate spans of control and suitable persons holding roles. Responsibilities are clearly articulated and ensure the split between 'doing' and 'oversight'.

Monitoring

The Group regularly monitors the effectiveness of mitigating controls and performance against Risk Appetite. Risk Appetite metrics are defined at granular levels and take into consideration measures such as the outcome of speaking up cases in individual countries and collectively as a group. To further support managers with their responsibilities in respect of conduct risk, a conduct dashboard is in development which will provide managers with a snapshot of each respective business and function.

Information and cyber security risk

The Group defines Information and cyber security risk as the potential for loss from a breach of confidentiality, integrity or availability of the Group's information systems and assets through cyber attack, insider activity, error or control failure

Risk Appetite Statement

The Group seeks to avoid risk and uncertainty for our critical information assets and systems and has a low appetite for material incidents affecting these or the wider operations and reputation of the Group

Roles and responsibilities

In 2017 we introduced the Chief Information Security Officer function in Risk & Compliance and announced a revised operating model to address information and cyber security as a business risk, incorporating this into our overall risk management strategy. The Chief Information Security Officer (CISO) has overall responsibility for strategy, governance and oversight of information and cyber security across the Group and operates as the second line of defence.

The CISO defines policy for information and cyber security overseeing and challenging the operational implementation of controls at the first line, which includes both technical and business responsibilities. The Technology Information Security Office (TISO) operate within the ITO function at the first line, ensuring security of the Group's technology applications and infrastructure.

Mitigation

Information and cyber security risk is managed through a structured framework comprised of a risk assessment methodology and supporting policies, procedures and standards which are aligned to industry best practice models.

The Chief Information Security Officer function is responsible for the information and cyber security risk framework and associated policy documents. The framework model and policy documents must be reviewed and updated at least biennially and / or following material change to a control environment.

Stress testing

Stress testing of technical controls relating to information and cyber security risk are performed annually by an external independent party. Results of these stress tests are reported to the Chief Information Security Officer function for consideration and action. Identified actions are overseen to appropriate conclusion by the Chief Information Security Officer function with progress reports provided to the Group Operational Risk Committee.

Governance Committee Oversight

The information and cyber security risk within the bank is currently governed via the Board Risk Committee who has responsibility for approving the definition of information and cyber risk and the Group appetite. Close and continuous oversight of information and cyber security risk in the Bank is performed by the Technology Operations Risk Committee (TORC) and the Group Operational Risk Committee (GORC), with the GORC being appointed by the Group Risk Committee. Escalation of risks which fall outside the defined appetite for the Group are overseen by these committees to ensure effective mitigation.

Decision making authorities and delegation

Measurement and decision making relating to the approval and or sign off of information and cyber security risk follows the below principles:

•  All first line and second line process owner roles in Information and cyber security must be covered, leaving no gaps in risk management and regulatory compliance

•  Delegation authority must be consistent with the Group Enterprise Risk Management Framework, apply to IT and non-IT processes impacting in-country information and cyber security risk, cover local and Group processes impacting in-country cyber risk

•  Must consider the cost to the Group and take into account any regulatory requirements

•  Geographic resource span of control must be consistent with Group models

Monitoring

Following the introduction of the Chief Information Security Officer function in 2017, we are extending monitoring capability for information and cyber security risk with further enhancements planned to take place during 2018.

We have a range of roles and activities in both the Chief Information Security Officer function and the TISO that look at monitoring information and cyber security risks.

CISO activities include:

•  The Business Information Security Officers who support business activities relating to information and cyber security at a country or operation level

•  Control testing (e.g. phishing simulation exercises)

•  Strategic assurance activities (e.g. enterprise-wide security risk assessment)

•  Dispensation assessment and approval

•  Deployment of the Third Party Security Assessment model

TISO activities include:

•  Operation of technical controls (e.g. email monitoring)

•  Security Incident response, etc.

Financial crime risk

The Group defines Financial crime risk as the potential for legal or regulatory penalties, material financial loss or reputational damage resulting from the failure to comply with applicable laws and regulations relating to International Sanctions, Anti-Money Laundering and Anti-Bribery and Corruption

Risk Appetite Statement

The Group has no appetite for breaches in laws and regulations related to Financial Crime, recognising that whilst incidents are unwanted, they cannot be entirely avoided

Roles and responsibilities

The Global Head, Financial Crime Compliance has overall responsibility for financial crime risk and is responsible for the establishment and maintenance of effective systems and controls to meet legal and regulatory obligations in respect of Financial Crime. The Global Head, Financial Crime Compliance is the Group's Money Laundering Reporting Officer and performs the Financial Conduct Authority controlled function and senior management function in accordance with the requirements set out by the Financial Conduct Authority1, including those set out in their 'Systems and Controls' Handbook.

As the first line, the business unit process owners have responsibility for the application of policy controls and the identification and measurement of risks relating to financial crime. Business units must communicate risks and any policy non-compliance to the second line for review and approval following the model for delegation of authority.

Mitigation

There are three Group policies in support of the Financial crime compliance Risk Type Framework:

•  Anti-bribery and corruption as set out in the Group Anti-Bribery and Corruption Policy

•  Anti-money laundering as set out in the Group Anti-Money Laundering and Terrorist Financing Policy

•  Sanctions as set out in the Group Sanctions Policy.

These policies are approved by the Global Head, Financial Crime Compliance.

The Group operates risk-based controls in support of its Financial Crime programme, including (but not limited to):

•  Client Due Diligence, to meet "Know Your Customer" requirements

•  Surveillance, including Transaction Screening, Name Screening and Transaction Monitoring

•  Global Risk Assessment; to understand and quantify the Inherent and Residual Financial Crime risk across the organisation

The strength of these controls are tested and assessed through the Group's Operational Risk Framework, in addition to oversight by the Financial Crime Compliance Assurance and Group Internal Audit functions.

Governance Committee Oversight

Financial crime risk within the Group is governed by the Group Financial Crime Risk Committee which is appointed by and reports into the Group Risk Committee. The Group Financial Crime Risk Committee is responsible for ensuring the effective management of operational risk relating to Financial crime compliance throughout the Group in support of the Group's strategy and in line with the Group's Risk Appetite, Enterprise Risk Management Framework and Group Operational Risk Procedures.

The Board Financial Crime Risk Committee is appointed by the Board, to provide oversight of the effectiveness of the Group's policies, procedures, systems, controls and assurance mechanism designed to identify, assess, manage, monitor, detect or prevent money laundering, non-compliance with sanctions, bribery, corruption, and tax crime by third parties.

Decision making authorities and delegation

The Global Head, Financial Crime Compliance is the Risk Framework Owner for financial crime under the Group's Enterprise Risk Management Framework, and has been allocated overall responsibility within the Group for the establishment and maintenance of effective systems and controls to meet legal and regulatory obligations in relation to Financial crime. Certain aspects of Financial crime compliance second line oversight and challenge are delegated within the Financial Crime Compliance function.

Approval frameworks are in place to allow for risk-based decisions on client on-boarding, for potential breaches of Sanctions regulation or Policy, and for situations of potential Money Laundering and Anti-Bribery and Corruption concerns.

Monitoring

The Group monitors Financial crime compliance risk against a set of Risk Appetite metrics that are approved by the Board. These metrics are reviewed periodically and reported regularly to both the Group Financial Crime Risk Committee and Board Financial Crime Risk Committee.

1  MLRO is a controlled/Senior Management function (SMF 17 - Money Laundering Reporting Function) under Section 59 of the Financial Services and Markets Act 2000 ("FSMA")



 

RISK PROFILE

Our risk profile in 2017

Through our well-established risk governance structure and risk management framework, we closely manage our risks with the objective of maximising risk-adjusted returns while remaining in compliance with the Risk Appetite Statement. We manage uncertainties through a framework that provides a forward-looking 12 to 18 month view of the economic, business and credit conditions across the Group's key markets, enabling us to proactively manage our portfolio.

We continue to take action to reposition the Group's corporate portfolio, exiting weaker credit or lower-returning clients and adding new clients selectively. The Group's portfolio is well diversified across dimensions such as industries, geographies and products.

The table below highlights the Group's overall risk profile associated with our business strategy.

Our risk profile in 2017

Revised Enterprise Risk Management Framework and experienced senior team

•  In 2017 we reviewed and significantly enhanced our Enterprise Risk Management Framework, in particular around risk culture, the control framework, strategic risk management and Principal Risk Types

•  We also embarked on a key initiative to build out the Enterprise Risk Management function, allowing the Group to identify and manage risks holistically, with appropriate governance, oversight and information in place to run a safe, secure and well-controlled organisation

•  We have a clear Risk Appetite Statement which is aligned to the Group's strategy; it is approved by the Board and informs the more granular risk parameters within which our businesses operate, with a particular focus on reducing concentrations

•  We have an experienced senior risk team and our risk committees are staffed by the Group's most senior leaders

•  We continuously monitor our risk profile to ensure it remains within our risk appetite, conduct regular stress tests, and adjust our exposures, underwriting standards and limits

Increasingly diversified short tenor portfolio with reducing concentrations

•  Our balance sheet remains resilient and well diversified across a wide range of geographies, industries and products which serves to mitigate risk

•  Within the Corporate & Institutional and Commercial Banking portfolios:

Loans and advances to the financing, insurance and non-banking industry are 27 per cent of the total customer portfolio, and are mostly to investment grade institutions. All other industry concentrations are at or below 13 per cent of the total customer portfolio

The loan portfolio remains predominantly short-dated, with 70 per cent of loans and advances to customers maturing in under one year

Our top 20 corporate exposures have reduced to 50 per cent of Tier 1 capital in 2017 (2016: 55 per cent)

Exposure to investment grade clients has increased to 57 per cent of the total corporate book in 2017 (2016: 56 per cent).

•  We hold a diverse mix of collateral and 55 per cent of long-term sub-investment grade exposures within the corporate portfolio are collateralised

•  More than 40 per cent of customer loans and advances are in Retail Products. 68 per cent of the Retail Products are mortgages where the overall loan-to-value ratio is less than 47 per cent

•  Within the Retail Banking portfolio, we maintain minimal exposure outside of our core markets.

Strong capital and liquidity position

•  We remain well capitalised and our balance sheet remains highly liquid

•  We have a strong advances-to-deposits ratio, and remain a net provider of liquidity to interbank markets

•  Our customer deposit base is diversified by type and maturity

•  We have a substantial portfolio of liquid assets which can be realised if a liquidity stress occurs

Further details on the Enterprise Risk Management Framework can be found in the Risk Management Approach

Basis of preparation

Unless otherwise stated the balance sheet and income statement information presented within this section is based on the Group's management view. This is principally the location from which a client relationship is managed, which may differ from where it is financially booked and may be shared between businesses and/or regions. This view reflects how the client segments and regions are managed internally.

Credit risk

This section details the Group's credit risk exposure, split as follows:

•  Overall exposure to credit risk, for on-balance sheet and off-balance sheet financial instruments, before and after taking into account credit risk mitigation

•  Credit quality, which provides an analysis of the loan portfolio by client segment categorised by Strong, Satisfactory and Higher risk, forborne loans, and credit quality by region, and credit quality by industry

•  Problem credit management and provisioning, which provides an analysis of non-performing loans and impaired loans

•  Credit risk mitigation, which provides analysis of collateral held by client segment and collateral type, and details of loan-to-value ratios and other forms of credit risk mitigation

•  Other portfolio analysis, which provides maturity analysis by client segment, and industry and retail products analysis by region

•  Selected portfolios, which provide further detail on debt securities and treasury bills and asset backed securities

Credit risk is the potential for loss due to the failure of a counterparty to meet its obligations to pay the Group in accordance with agreed terms. Credit exposures arise from both the banking and trading books.

A summary of our current policies and practices regarding credit risk management is provided in the risk management approach.

Maximum exposure to credit risk

The table below presents the Group's maximum exposure to credit risk for its on-balance sheet and off-balance sheet financial instruments as at 31 December 2017, before and after taking into account any collateral held or other credit risk mitigation.

For on-balance sheet instruments, the maximum exposure to credit risk is the carrying amount reported on the balance sheet. For off-balance sheet instruments, the maximum exposure to credit risk generally represents the contractual notional amounts.

The Group's maximum exposure to credit risk is spread across its markets and is affected by the general economic conditions in the regions in which it operates. The Group sets limits on the exposure to any counterparty, and credit risk is spread over a variety of different personal, commercial and institutional customers.

The Group's gross maximum exposure to credit risk has increased by $29 billion when compared to 2016, driven by the increase in both on-balance sheet and off-balance sheet exposure. Cash and balances at central banks have decreased by $11.8 billion reflecting lower fluctuating liquidity. Loans and advances to customers and banks have increased by $36.3 billion, mainly driven by customer loan growth and expansion of the reverse repo business in response to client demand and improving the quality of our funding base. Off-balance sheet exposures, mainly arising from trade finance, increased by $13.2 billion, reflecting the business growth.

Investment securities increased by $14.6 billion due to increased holdings benefitting from the higher government yields in the UK and the treasury and liquidity management activities. The Group's credit risk exposure before risk mitigation arising from derivatives decreased by $18.5 billion.



 

Maximum exposure to credit risk

 

2017

 

2016

Maximum exposure
$million

Credit risk management

Net exposure
$million

Maximum exposure
$million

Credit risk management

Net
exposure
$million

Collateral
$million

Master netting agreements
$million

Collateral
$million

Master
netting agreements
$million

On balance sheet

 

 

 

 

 

 

 

 

 

Cash and balances at central banks

58,864

-

-

58,864

 

70,706

-

-

70,706

Loans and advances to customers held at:1

 

 

 

 

 

 

 

 

 

Fair value through profit or loss

3,265

 

 

 

 

3,177

 

 

 

Amortised cost

282,288

 

 

 

 

252,719

 

 

 

 

285,553

 

 

 

 

255,896

 

 

 

Loans and advances to banks held at:1

 

 

 

 

 

 

 

 

 

Fair value through profit or loss

3,137

 

 

 

 

2,060

 

 

 

Amortised cost

78,188

 

 

 

 

72,609

 

 

 

 

81,325

 

 

 

 

74,669

 

 

 

Total loans and advances to banks and customers2

366,878

168,247

-

198,631

 

330,565

151,310

-

179,255

Investment securities3

 

 

 

 

 

 

 

 

 

As per balance sheet

117,025

-

-

117,025

 

108,972

-

-

108,972

Held at fair value through profit or loss

21,162

-

-

21,162

 

14,840

-

-

14,840

Less: equity securities

(2,345)

-

-

(2,345)

 

(2,564)

-

-

(2,564)

 

135,842

-

-

135,842

 

121,248

-

-

121,248

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments4

47,031

9,825

29,135

8,071

 

65,509

9,624

40,391

15,494

Accrued income

1,947

 

 

1,947

 

1,639

 

 

1,639

Assets held for sale

2

 

 

2

 

1,102

 

 

1,102

Other assets5

29,922

 

 

29,922

 

33,942

 

 

33,942

Total balance sheet

640,486

178,072

29,135

433,279

 

624,711

160,934

40,391

423,386

 

 

 

 

 

 

 

 

 

 

Off-balance sheet

 

 

 

 

 

 

 

 

 

Contingent liabilities

43,521

-

-

43,521

 

38,3027

-

-

38,302

Undrawn irrevocable standby facilities, credit lines and other commitments to lend6

63,890

-

-

63,890

 

55,655

-

-

55,655

Documentary credits and short-term trade-related transactions

3,880

-

-

3,880

 

4,120

-

-

4,120

Forward asset purchases and forward deposits

-

-

-

-

 

6

-

-

6

Total off- balance sheet

111,291

-

-

111,291

 

98,083

-

-

98,083

Total

751,777

178,072

29,135

544,570

 

722,794

160,934

40,391

521,469

1  An analysis of credit quality is set out in the credit quality analysis section. Further details of collateral held by client segment and held for past due and individually impaired loans are set out in the collateral analysis section

2  Loans and advances include reverse repurchase agreements and other similar secured lending of $55,187 million for 2017 and $44,916 million for 2016

3  Equity shares are excluded as they are not subject to credit risk

4  The Group enters into master netting agreements, which in the event of default result in a single amount owed by or to the counterparty through netting the sum of the positive and negative mark-to-market values of applicable derivative transactions.

5  Other assets include Hong Kong certificates of indebtedness, cash collateral, and acceptances, in addition to unsettled trades and other financial assets

6  Excludes unconditionally cancellable facilities

7  Total contingent liabilities of the Group in 2016 were $37.4 billion and have been restated to $38.3 billion

Credit quality analysis

An overall breakdown of the loan portfolio by client segment is provided in the client segment analysis section differentiating between the performing and non-performing book.

Within the performing book, there is an analysis:

•  By credit quality, which plays a central role in the quality assessment and monitoring of risk

•  Of loans and advances past due but not impaired: a loan is considered past due if payment of principal or interest has not been made on its contractual due date

•  Of loans and advances where an impairment provision has been raised: these represent certain forborne Retail accounts that have complied with their revised contractual terms for more than 180 days and on which no further loss of principal is expected

Credit grade migration

Performing loans constitute 99 per cent of customer loans, which is consistent with the prior period.

A breakdown of the performing loans by credit quality is provided in the credit quality analysis section.

Risk measurement plays a central role in risk-quantification and portfolio management decisions. The Group uses the advanced internal ratings-based (IRB) approach under the Basel regulatory framework to calculate credit risk capital for the majority of its portfolios.

A standard credit risk grade (CG) scale is used for Corporate & Institutional Banking and Commercial Banking. The numeric grades run from 1 to 14 and some of the grades are further sub-classified. Lower numbered credit grades are indicative of a lower likelihood of default. CG 1 to 12 are assigned to performing clients, while CG 13 and 14 are assigned to non-performing or defaulted clients. Further details can be found in the Risk Management Approach.

The Group uses an internal risk mapping to determine the credit quality for loans, as shown in the table below.

Year-on-year, the overall portfolio credit quality of the Group has improved as a result of active portfolio management and steps taken to improve the quality of origination over the last two years. The new originations are in line with our granular risk appetite and diversified across industries, geographies and products. The proportion of Group loans and advances classified as strong has increased from 67 per cent to 70 per cent in 2017, with an increase in strong credit quality exposures observed across all business segments.

In Corporate & Institutional Banking, the strong credit quality category has increased by $12 billion due to increased lending to corporate clients across multiple industries. The largest increases were from financing, insurance & non-banking ($3.0 billion), commercial real estate ($1.8 billion), manufacturing ($1.8 billion) and transportation ($1.7 billion). The satisfactory credit quality category has decreased by $2.6 billion due to actions taken to reduce single name concentration and commodities exposure.

For the rest of the portfolio, the credit quality composition across most sectors and countries is broadly consistent with the prior year, although there has been some deterioration in India and Africa.

In Commercial Banking, the strong credit quality category has increased by $1.2 billion and satisfactory credit quality category has increased by $2.9 billion. This growth was well diversified across multiple countries and industries with an average of $0.1 billion increase per country or per industry.

Retail Banking credit quality remained stable over the past year with overall performing loans growing by 10 per cent ($9.5 billion), predominantly in the strong credit quality category. The implementation of the Risk Decision Framework has continued to show improvements through 2016 and 2017, shaping the portfolio towards preferred segments such as priority and employee banking, and better credit quality customers with optimum risk-return profiles.

The credit quality composition for loans to banks is also consistent with prior periods, with the majority of the growth in this period observed in the strong and satisfactory category.

Performing loans and advances that are past due but not impaired decreased by $0.7 billion in 2017. The past due balances arise substantially in the 'up to 30 days past due' category. In the Corporate & Institutional Banking and Commercial Banking segments, across all past due categories, approximately 70 per cent (2016: 73 per cent) of the amounts past due were regularised by 31 January 2018.

Mapping of credit quality

The Group uses the following internal risk mapping to determine the credit quality for loans.

Credit quality description

Corporate & Institutional Banking and Commercial Banking

 

Private Banking

 

Retail Banking

Default Grade mapping

S&P external ratings equivalent

PD range

Internal ratings

Number of days past due

Strong

Grades 1-5

AAA/AA+ to BB+/BBB-

0.000-0.425

 

Class I and Class IV

 

Current loans (no past dues nor impaired)

Satisfactory

Grades 6-8

BB+ to BB-/B+

0.426-2.350

 

Class II and Class III

 

Loans past due till 29 days

Grades 9-11

B+/B to B-/CCC

2.351-15.750

Higher Risk

Grade 12

B-/CCC

15.751-50.000

 

GSAM managed

 

Past due loans 30 days and over till 90 days

Non-performing loans (NPLs)

An NPL is any loan that is more than 90 days past due or is otherwise individually impaired. This excludes Retail Banking loans renegotiated at or after 90 days past due, but on which there has been no default in interest or principal payments for more than 180 days since renegotiation, and against which no loss of principal is expected.

NPLs are analysed, net of individual impairment provisions, between what is past due but not impaired and what is impaired.

NPLs (net of individual impairment provisions) have reduced to $3.5 billion compared to 2016 ($3.9 billion). This is driven primarily by the liquidation portfolio in the Corporate & Institutional Banking segment.

NPLs (net of individual impairment provisions) for the ongoing business have increased to $2.8 billion from $2.5 billion due to the deterioration of a small number of exposures booked in the UAE and UK in the Corporate & Institutional Banking book.

Liquidation portfolio NPLs (net of individual impairment provisions) have decreased from $1,386 million to $653 million in 2017 primarily due to sales and writedowns.

Total Corporate & Institutional Banking NPLs (net of individual impairment provisions) remained stable at $2.5 billion (2016: $2.5 billion).

Retail Banking NPL (net of individual impairment provisions) decreased by 19 per cent compared to 2016 (2017: $274 million; 2016: $339 million) particularly in Korea, India and China.

By client segment

 

2017

Loans to banks1
$million

Loans to customers

Corporate & Institutional Banking
$million

Retail Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Total1
$million

Performing loans

 

 

 

 

 

 

 

- Strong

68,958

75,672

100,687

6,072

9,220

9,253

200,904

- Satisfactory

12,309

52,610

1,586

21,216

3,951

90

79,453

- Higher risk

54

1,128

405

323

42

-

1,898

 

81,321

129,410

102,678

27,611

13,213

9,343

282,255

 

 

 

 

 

 

 

 

Impaired forborne loans, net of provisions

-

-

269

-

-

-

269

Non-performing loans, net of provisions

5

2,484

274

596

140

-

3,494

Total loans

81,326

131,894

103,221

28,207

13,353

9,343

286,018

Portfolio impairment provision

(1)

(156)

(208)

(99)

(2)

-

(465)

Total net loans

81,325

131,738

103,013

28,108

13,351

9,343

285,553

The following table further analyses total loans included within the table above:

Included in performing loans

 

 

 

 

 

 

 

Neither past due nor impaired

 

 

 

 

 

 

 

- Strong

68,740

75,482

100,687

6,058

9,220

9,251

200,698

- Satisfactory

12,255

51,846

-

20,831

3,866

90

76,633

- Higher risk

54

899

-

239

42

-

1,180

 

81,049

128,227

100,687

27,128

13,128

9,341

278,511

Past due but not impaired

 

 

 

 

 

 

 

- Up to 30 days past due

247

951

1,586

360

69

-

2,966

- 31 - 60 days past due

25

32

278

49

16

-

375

- 61 - 90 days past due

-

200

127

74

-

2

403

 

272

1,183

1,991

483

85

2

3,744

Total performing loans

81,321

129,410

102,678

27,611

13,213

9,343

282,255

of which, forborne loans amounting to

2

480

84

31

-

-

595

 

 

 

 

 

 

 

 

Included in non-performing loans

 

 

 

 

 

 

 

Past due but not impaired

 

 

 

 

 

 

 

- 91 - 120 days past due

-

-

67

-

-

-

67

-121 - 150 days past due

-

-

56

-

-

-

56

 

-

-

123

-

-

-

123

Individually impaired loans, net of provisions

5

2,484

151

596

140

-

3,371

 

 

 

 

 

 

 

 

Total non-performing loans

5

2,484

274

596

140

-

3,494

of the above, forborne loans

4

861

268

186

-

-

1,315

 



 

The following table sets out loans held at fair value through profit and loss which are included within the table above:

 

2017

Loans to banks1
$million

Loans to customers

Corporate & Institutional Banking
$million

Retail Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Total1
$million

Neither past due nor impaired

 

 

 

 

 



- Strong

2,081

1,451

-

30

-

-

1,481

- Satisfactory

1,056

1,572

-

186

-

-

1,758

- Higher risk

-

7

-

-

-

-

7

 

3,137

3,030

-

216

-

-

3,246

Individually impaired loans

-

19

-

-

-

-

19

 

 

 

 

 

 

 

 

Total loans held at fair value through profit and loss

3,137

3,049

-

216

-

-

3,265

1  Loans and advances include reverse repurchase agreements and other similar secured lending of $55,187 million.

 

2016

Loans to banks1
$million

Loans to customers

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Total1
$million

Performing loans

 

 

 

 

 

 

 

- Strong

66,954

63,547

91,186

4,851

7,816

4,023

171,423

- Satisfactory

7,682

55,207

1,560

18,296

3,767

233

79,063

- Higher risk

34

1,223

410

264

38

-

1,935

 

74,670

119,977

93,156

23,411

11,621

4,256

252,421

 

 

 

 

 

 

 

 

Impaired forborne loans, net of provisions

-

-

251

-

-

-

251

Non-performing loans, net of provisions

-

2,515

339

768

289

-

3,911

Total loans

74,670

122,492

93,746

24,179

11,910

4,256

256,583

Portfolio impairment provision

(1)

(261)

(258)

(166)

(2)

-

(687)

Total net loans

74,669

122,231

93,488

24,013

11,908

4,256

255,896

The following table further analyses total loans included within the table above:

Included in performing loans

 

 

 

 

 

 

 

Neither past due nor impaired

 

 

 

 

 

 

 

- Strong

66,600

63,416

91,186

4,812

7,816

4,023

171,253

- Satisfactory

7,580

53,791

-

17,728

3,690

233

75,442

- Higher risk

34

1,121

-

188

18

-

1,327

 

74,214

118,328

91,186

22,728

11,524

4,256

248,022

Past due but not impaired

 

 

 

 

 

 

 

- Up to 30 days past due

456

1,402

1,560

539

91

-

3,592

- 31 - 60 days past due

-

100

282

111

-

-

493

- 61 - 90 days past due

-

147

128

33

6

-

314

 

456

1,649

1,970

683

97

-

4,399

Total performing loans

74,670

119,977

93,156

23,411

11,621

4,256

252,421

of which, forborne loans amounting to 2

1

760

224

104

-

-

1,088

 

 

 

 

 

 

 

 

Included in non-performing loans

 

 

 

 

 

 

 

Past due but not impaired

 

 

 

 

 

 

 

- 91 - 120 days past due

-

-

72

5

-

-

77

-121 - 150 days past due

-

-

60

12

-

-

72

 

-

-

132

17

-

-

149

Individually impaired loans, net of provisions

-

2,515

207

751

289

-

3,762

 

 

 

 

 

 

 

 

Total non-performing loans

-

2,515

339

768

289

-

3,911

of the above, forborne loans 2

-

858

135

182

-

-

1,175

 



 

The following table sets out loans held at fair value through profit and loss which are included within the table above:

 

2016

Loans to banks1
$million

Loans to customers

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Total1
$million

Neither past due nor impaired

 

 

 

 

 



- Strong

1,659

1,769

-

-

-

-

1,769

- Satisfactory

401

1,346

-

47

-

-

1,393

- Higher risk

-

-

-

-

-

-

-

 

2,060

3,115

-

47

-

-

3,162

Individually impaired loans

-

15

-

-

-

-

15

 

 

 

 

 

 

 

 

Total loans held at fair value through profit and loss

2,060

3,130

-

47

-

-

3,177

1  Loans and advances include reverse repurchase agreements and other similar secured lending of $44,916 million

2  The 2016 comparatives have been represented to reflect the forbearance policy change

Forborne loans

A forborne loan arises when a concession has been made to the contractual terms of a loan in response to a customer's financial difficulties. The table below presents performing and non-performing loans with forbearance measures by segment. In 2017, the Group changed its policy to allow for curing of forborne loans, which has been applied retrospectively. Refer to note 8 of the financial statements on impairment losses on loans and advances and other credit risk provisions.

The performing forborne loans have decreased by $474 million to $866 million in 2017 (2016: $1,340 million). The Corporate & Institutional Banking segment decreased by $280 million to $480 million in 2017 (2016: $760 million) primarily due to repayments from clients in the Africa & Middle East region. The Retail Banking segment decreased by $122 million to $353 million in 2017 (2016: $475 million).

The net non-performing forborne loans have increased by $144 million to $1,319 million in 2017 (2016: $1,175 million); this increase was in the Retail Banking segment on account of a change in accounting policy on forborne loans.

Forborne loans

 

2017

Loans to banks
$million

Corporate & Institutional Banking
$million

Retail Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Total
$million

All loans with forbearance measures

6

2,143

797

647

-

-

3,593

Accumulated impairment

-

(802)

(176)

(430)

-

-

(1,408)

Net balance

6

1,341

621

217

-

-

2,185

Included within the above table

Performing loans with forbearance measures:

 

2017

Loans to banks
$million

Corporate & Institutional Banking
$million

Retail Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Total
$million

All performing forborne loans

2

480

353

31

-

-

866

of which: modification of terms and conditions1

2

480

353

28

-

-

863

Refinancing2

-

-

-

3

-

-

3

Collateral held on performing forborne loans

-

4

2

-

-

-

6

 



 

Non-performing loans with forbearance measures:

 

2017

Loans to banks
$million

Corporate & Institutional Banking
$million

Retail Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Total
$million

All non-performing forborne loans

4

1,663

384

616

-

-

2,667

of which: modification of terms and conditions1

4

1,314

384

559

-

-

2,261

Refinancing2

-

349

-

57

-

-

406

Accumulated impairment

-

(802)

(116)

(430)

-

-

(1,348)

of which: modification of terms and conditions1

-

(554)

(116)

(400)

-

-

(1,070)

Refinancing2

-

(248)

-

(30)

-

-

(278)

Net non-performing forborne loans

4

861

268

186

-

-

1,319

Collateral held on non-performing forborne loans

-

52

20

34

-

-

106

1 Modification of terms is any contractual change apart from refinancing, as a result of credit stress of the counterparty, i.e. interest reductions, loan covenant waivers

2 Refinancing is a new contract to a lender in credit stress, such that they are refinanced and can pay other debt contracts that they were unable to honour

 

Forborne loans

 

2016

Loans to banks
$million

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Total
$million

All loans with forbearance measures

1

2,528

725

598

-

-

3,852

Accumulated impairment

-

(910)

(115)

(312)

-

-

(1,337)

Net balance

1

1,618

610

286

-

-

2,515

Included within the above table

Performing loans with forbearance measures:

 

2016

Loans to banks
$million

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Total
$million

All performing forborne loans

1

760

475

104

-

-

1,340

of which: modification of terms and conditions1

1

760

475

65

-

-

1,301

Refinancing2

-

-

-

39

-

-

39

Collateral held on performing forborne loans

-

54

-

36

-

-

90

Non-performing loans with forbearance measures:

 

2016

Loans to banks
$million

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Total
$million

All non-performing forborne loans

-

1,768

195

494

-

-

2,457

of which: modification of terms and conditions1

-

1,609

195

398

-

-

2,202

Refinancing2

-

159

-

96

-

-

255

Accumulated impairment

-

(910)

(60)

(312)

-

-

(1,282)

of which: modification of terms and conditions1

-

(813)

(60)

(264)

-

-

(1,137)

Refinancing2

-

(97)

-

(48)

-

-

(145)

Net non-performing forborne loans

-

858

135

182

-

-

1,175

Collateral held on non-performing forborne loans

-

215

-

42

-

-

257

1.   Modification of terms is any contractual change apart from refinancing, as a result of credit stress of the counterparty, i.e. interest reductions, loan covenant waivers

2.   Refinancing is a new contract to a lender in credit stress, such that they are refinanced and can pay other debt contracts that they were unable to honour



 

The table below shows an analysis of forborne loans by region. Refer to note 8 of the financial statements for the accounting policy on forborne loans.

 

2017

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe & Americas
$million

Total
$million

Not impaired

56

40

395

106

597

Impaired

353

778

202

255

1,588

Total forborne loans

409

818

597

361

2,185

 

 

2016

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Not impaired

159

237

584

109

1,089

Impaired

327

718

243

138

1,426

Total forborne loans1

486

955

827

247

2,515

1  The 2016 comparatives have been represented to reflect the forbearance policy change

Credit quality by geographic region

The following tables set out an analysis of the loans to customers and banks, split between those loans that are neither past due nor impaired, those that are past due but not impaired, those that are impaired, the impairment provision and net impairment charge by geographic region.

Loans and advances to customers

 

2017

Balance sheet1

 

Profit and loss1

Neither
past due nor individually impaired
$million

Past due
but not individually impaired
$million

Individually impaired
$million

Individual impairment provision
$million

Portfolio impairment provision
$million

Total
$million

Net individual impairment provision
$million

Portfolio impairment provision/ (release)
$million

Net loan impairment charge
$million

Greater China & North Asia

125,565

809

806

(312)

(129)

126,739

 

169

(79)

90

ASEAN & South Asia

79,175

1,711

4,233

(2,361)

(179)

82,579

 

871

(66)

805

Africa & Middle East

27,774

1,153

2,654

(1,858)

(121)

29,602

 

308

(5)

303

Europe & Americas

45,997

194

1,184

(706)

(36)

46,633

 

233

(90)

143

 

278,511

3,867

8,877

(5,237)

(465)

285,553

 

1,581

(240)

1,341

 

 

2016

Balance sheet1

 

Profit and loss1

Neither
past due nor individually impaired
$million

Past due
but not individually impaired
$million

Individually impaired
$million

Individual impairment provision
$million

Portfolio impairment provision
$million

Total
$million

Net
individual impairment provision
$million

Portfolio impairment provision/ (release)
$million

Net loan impairment charge
$million

Greater China & North Asia

109,250

901

1,115

(535)

(198)

110,533

 

484

(53)

431

ASEAN & South Asia

69,652

1,648

4,665

(2,568)

(236)

73,161

 

984

6

990

Africa & Middle East

25,846

1,720

2,682

(1,981)

(127)

28,140

 

594

7

601

Europe & Americas

43,274

279

1,218

(583)

(126)

44,062

 

491

92

583

 

248,022

4,548

9,680

(5,667)

(687)

255,896

 

2,553

52

2,605

1  Excludes impairment charges relating to debt securities classified as loans and receivables, refer to note 8 of the financial statements for details

Loans and advances to banks

 

2017

Balance sheet1

 

Profit and loss1

Neither
past due nor individually impaired
$million

Past due
but not individually impaired
$million

Individually impaired
$million

Individual impairment provision
$million

Portfolio impairment provision
$million

Total
$million

Net individual impairment provision
$million

Portfolio impairment provision/ (release)
$million

Net loan impairment charge
$million

Greater China & North Asia

33,096

130

-

-

-

33,226

 

-

-

-

ASEAN & South Asia

16,482

41

-

-

-

16,523

 

-

-

-

Africa & Middle East

7,328

101

-

-

(1)

7,428

 

-

-

-

Europe & Americas

24,143

-

9

(4)

-

24,148

 

-

-

-

 

81,049

272

9

(4)

(1)

81,325

 

-

-

-

 



 

 

2016

Balance sheet1

 

Profit and loss1

Neither
past due nor individually impaired
$million

Past due
but not individually impaired
$million

Individually impaired
$million

Individual impairment provision
$million

Portfolio impairment provision
$million

Total
$million

Net
individual impairment provision
$million

Portfolio impairment provision/ (release)
$million

Net loan impairment charge
$million

Greater China & North Asia

31,930

309

-

-

-

32,239

 

-

-

-

ASEAN & South Asia

14,722

17

163

(163)

(1)

14,738

 

-

-

-

Africa & Middle East

7,492

61

-

-

-

7,553

 

-

-

-

Europe & Americas

20,070

69

-

-

-

20,139

 

-

-

-

 

74,214

456

163

(163)

(1)

74,669

 

-

-

-

1  Excludes impairment charges relating to debt securities classified as loans and receivables, refer to note 8 of the financial statements for details

Credit quality analysis by industry

 

2017

Neither
past due nor individually impaired
$million

Past due
but not individually impaired
$million

Individually impaired
$million

Individual impairment provision
$million

Total
$million

Movements in impairment

Individual impairment provision
held as at
1 Jan 2017
$million

Net impairment charge/
(release)
$million

Amounts written
off/other movements
$million

Individual impairment provision
held as at
31 Dec 2017
$million

Industry:

 

 

 

 

 

 

 

 

 

Energy

18,090

116

1,217

(879)

18,544

814

208

(143)

879

Manufacturing

22,085

397

860

(611)

22,731

644

250

(283)

611

Financing, insurance and non-banking

44,439

314

444

(213)

44,984

409

79

(275)

213

Transport, telecom and utilities

15,640

123

777

(376)

16,164

218

230

(72)

376

Food and household products

9,543

179

756

(422)

10,056

561

75

(214)

422

Commercial real estate

14,574

199

400

(34)

15,139

33

9

(8)

34

Mining and quarrying

6,063

64

1,297

(783)

6,641

1,140

26

(383)

783

Consumer durables

8,792

132

725

(583)

9,066

523

124

(64)

583

Construction

3,346

60

781

(484)

3,703

553

59

(128)

484

Trading companies & distributors

2,155

43

458

(331)

2,325

310

46

(25)

331

Government

14,390

25

6

(1)

14,420

-

(1)

2

1

Other

5,579

16

252

(176)

5,671

195

37

(54)

178

Retail Products:

 

 

 

 

 

 

 

 

 

Mortgage

77,279

1,340

276

(117)

78,778

104

34

(21)

117

CCPL and other unsecured lending

16,700

610

360

(135)

17,535

140

398

(405)

133

Auto

588

45

-

-

633

-

1

(1)

-

Secured Wealth products

13,969

57

198

(70)

14,154

4

28

38

70

Other

5,279

147

70

(22)

5,474

19

19

(16)

22

Loans and advances to customers

278,511

3,867

8,877

(5,237)

286,018

 

 

 

 

Individual impairment provision

 

 

 

 

 

5,667

1,622

(2,052)

5,237

Portfolio impairment provision

 

 

 

 

(465)

687

(239)

17

465

Total

 

 

 

 

285,553

6,354

1,383

(2,035)

5,702

 

 

 

 

 

 

 

 

 

 

Loans and advances to banks

81,049

272

9

(4)

81,326

-

-

-

-

Individual impairment provision

 

 

 

 

 

163

-

(159)

4

Portfolio impairment provision

 

 

 

 

(1)

1

-

-

1

Total

 

 

 

 

81,325

164

-

(159)

5

 



 

Credit quality analysis by industry continued

 

2016

Neither
past due nor individually impaired
$million

Past due
but not individually impaired
$million

Individually impaired
$million

Individual impairment provision
$million

Total
$million

Movements in impairment

Individual impairment provision
held as at
1 Jan 2016
$million

Net impairment charge/
(release)
$million

Amounts written
off/other movements
$million

Individual impairment provision
held as at
31 Dec 2016
$million

Industry:

 

 

 

 

 

 

 

 

 

Energy

18,110

287

1,194

(814)

18,777

1,679

288

(1,153)

814

Manufacturing

18,840

477

1,069

(644)

19,742

563

259

(178)

644

Financing, insurance and non-banking

40,425

314

903

(409)

41,233

423

63

(77)

409

Transport, telecom and utilities

15,032

176

509

(218)

15,499

519

113

(414)

218

Food and household products

9,562

253

798

(561)

10,052

373

215

(27)

561

Commercial real estate

10,920

323

74

(33)

11,284

20

14

(1)

33

Mining and quarrying

7,326

149

1,489

(1,140)

7,824

854

230

56

1,140

Consumer durables

8,854

122

917

(523)

9,370

426

394

(297)

523

Construction

3,348

69

952

(553)

3,816

332

258

(37)

553

Trading companies & distributors

2,098

94

507

(310)

2,389

320

67

(77)

310

Government

6,313

-

2

-

6,315

-

-

-

-

Other

4,484

85

252

(195)

4,626

174

59

(38)

195

Retail Products:

 

 

 

 

 

 

 

 

 

Mortgage

72,071

1,296

244

(104)

73,507

125

26

(47)

104

CCPL and other unsecured lending

15,262

669

415

(140)

16,206

195

458

(513)

140

Auto

600

38

-

-

638

-

1

(1)

-

Secured wealth products

10,757

46

281

(4)

11,080

4

64

(64)

4

Other

4,020

150

74

(19)

4,225

16

45

(42)

19

Loans and advances to customers

248,022

4,548

9,680

(5,667)

256,583

 

 

 

 

Individual impairment provision

 

 

 

 

 

6,023

2,554

(2,910)

5,667

Portfolio impairment provision

 

 

 

 

(687)

657

53

(23)

687

Total

 

 

 

 

255,896

6,680

2,607

(2,933)

6,354

 

 

 

 

 

 

 

 

 

 

Loans and advances to banks

74,214

456

163

(163)

74,670

-

-

-

-

Individual impairment provision

 

 

 

 

 

163

-

-

163

Portfolio impairment provision

 

 

 

 

(1)

1

-

-

1

Total

 

 

 

 

74,669

164

-

-

164

Problem credit management and provisioning

Impairments

At a Group level, total loan impairment including the liquidation portfolio was $1,362 million, representing 50 basis points (bps) of average customer loans and advances, down from $2,791 million (107 bps) in 2016.

Loan impairment in the Group's ongoing business improved from the elevated levels seen in 2015 and 2016. The ongoing business loan impairment of $1,200 million in 2017 is significantly lower than in previous years (2016: $2,382 million, 2015: $2,381 million).

The ongoing business loan impairment in Corporate & Institutional Banking decreased to $657 million in 2017 (2016: $1,401 million). This was due to lower loan impairment in the commodities and diamond and jewellery sectors. Loan impairment in 2017 was primarily driven by a small number of India related exposures, with ASEAN & South Asia contributing to 60 per cent of the total Corporate & Institutional Banking impairment charge.

Commercial Banking ongoing business loan impairment fell by 66 per cent to $168 million in 2017 (2016: $491 million). This was driven by lower losses across all regions, reflecting improvements in credit and account management, but the Group remains vigilant of emerging risks.

By industry, loan impairment related to the commodities sector has decreased significantly. Total commodities (excluding oil and gas related exposures) loan impairment for Corporate & Institutional Banking and Commercial Banking fell to $18 million (2016: $536 million).

In India, ongoing business loan impairment in Corporate & Institutional Banking was down 32 per cent to $193 million (2016: $284 million) mainly due to reductions in the commodities sector. Commercial Banking ongoing business loan impairment in India decreased by 64 per cent to $37 million (2016: $103 million).

Retail Banking loan impairment reduced by 24 per cent to $374 million in 2017, (2016: $489 million), driven by improved portfolio performance and the implementation of the Risk Decision Framework, although in the fourth quarter of 2017 we took a one-off provision of $40 million due to a change in Personal Debt Rehabilitation Scheme regulation in Korea. The framework targets higher quality sustainable growth and lower volatility in the unsecured asset portfolio. Improvements have been observed, particularly in key markets such as Korea, Hong Kong, Singapore and Malaysia.

During the last quarter of 2017, a net impairment charge of $57 million was taken on the liquidation portfolio bringing the yearly total to $120 million (2016: $409 million). This resulted from the resolution of some cases and other reassessments of realisable value. Further restructuring impairment also includes a $30 million impairment relating to the non-strategic Principal Finance business in Corporate & Institutional Banking.

The following table provides details of the impairment charge for the period.

 

2017
$million

2016
$million

Ongoing business portfolio loan impairment

 

 

Corporate & Institutional Banking

657

1,401

Retail Banking

374

489

Commercial Banking

168

491

Private Banking

1

1

Impairment on loans and advances and other credit risk provisions

1,200

2,382

 

 

 

Restructuring

 

 

 Liquidation portfolio

120

409

 Others

42

-

Impairment on loans and advances and other credit risk provisions

162

409

Total Loan Impairment

1,362

2,791

Non-performing loans by client segment

Gross NPLs decreased by $1,008 million, or 10 per cent, compared to 2016, as increases in the ongoing business were more than offset by planned reductions in the liquidation portfolio. NPLs in the Corporate & Institutional Banking liquidation portfolio decreased by $1,388 million in 2017 to $1,945 million (2016: $3,333 million) on account of loan disposals, write-offs and repayments.

Corporate & Institutional Banking ongoing business NPLs increased by $869 million in 2017 primarily due to the deterioration of a few accounts in the oil & gas support services and India. New NPLs were mainly accounts that had been closely monitored over a period of time and include a large exposure that was repaid in full, and some others that are highly collateralised.

For sectors with previously high NPL exposures, specifically commodities and diamond & jewellery, NPL inflows were muted in 2017 relative to 2016.

NPLs in Commercial Banking reduced by $343 million (14 per cent) relative to 2016. This was largely due to write-offs and recoveries in India, Hong Kong and the United Arab Emirates (UAE). Commercial Banking NPL inflows were down 28 per cent in 2017 at $460 million (2016: $642 million).

Gross NPLs in Retail Banking reduced by 11 per cent compared to 2016, benefiting from the risk decision framework implemented in 2015.

The movement of gross NPLs to banks and customers, together with the provisions held and the respective cover ratios for all segments, is presented in the next table.

Provisions

The Group's loan loss provisions are established to recognise incurred impairment losses either on specific loan assets or within a portfolio of loans and advances.

Provisions are taken in the form of:

•  Individually impaired provisions (IIP);

•  Portfolio impairment provisions (PIP), which cover the inherent losses in the portfolio that exist at the balance sheet date but have not yet been individually identified.

Individual impairment provisions

Corporate & Institutional and Commercial Banking individual impairment provisions decreased by $493 million and $171 million respectively in 2017. These were primarily driven by a reduction of provision charges in the commodities and diamond and jewellery sectors, as well as writedowns.

Retail Banking individual impairment provision as a percentage of loans and advances remained broadly stable at 0.2 per cent.



 

Portfolio impairment provisions

Portfolio impairment provision balances for the Group have decreased by $222 million from 2016 due to reductions in Corporate & Institutional Banking of $105 million, Commercial Banking of $67 million and Retail Banking of $50 million. These decreases were on account of judgemental risk adjustments to the modelled number which has now reduced due to improvement in portfolio credit quality and receipt of expected repayments in certain stress portfolios.

Cover ratio

The cover ratio measures the proportion of total impairment provisions to gross NPLs, and is a metric commonly used in considering impairment trends. This metric does not allow for variations in the composition of NPLs and should be used in conjunction with other credit risk information provided, including the level of collateral cover.

The cover ratio for the Group currently stands at 65 per cent (2016: 67 per cent). With collateral, the cover ratio has improved to 81 per cent (2016: 76 per cent).

The cover ratio for the Group's ongoing portfolio has reduced from 69 per cent in 2016 to 63 per cent in 2017 and with collateral, the cover ratio improved to 79 per cent from 74 per cent.

By client segment, the cover ratio for Corporate & Institutional Banking reduced from 65 per cent to 61 per cent. The cover ratio including collateral improved from 72 per cent to 77 per cent.

The cover ratio for Commercial Banking remained relatively flat at 75 per cent and 84 per cent including collateral. The cover ratio for Retail Banking improved from 85 per cent to 87 per cent, and including collateral increased from 85 per cent to 89 per cent.

The balance of NPLs not covered by individual impairment provisions represents the adjusted value of collateral held and the Group's estimate of the net outcome of any workout or recovery strategy.

Collateral provides risk mitigation to some degree in all client segments and supports the credit quality and cover ratio assessments post impairment provisions. Further information on collateral is provided in the Credit risk mitigation section.

 

2017

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Total
$million

Gross non-performing loans at 1 January

6,477

547

2,370

294

9,688

Exchange translation differences

86

28

45

4

163

Classified as non-performing during the year

2,316

572

460

20

3,368

Recoveries on loans and advances previously written off

83

16

64

1

164

Additions

2,399

588

524

21

3,532

Transferred to assets held for sale

-

-

-

-

-

Transferred to performing during the year

-

(47)

(21)

(3)

(71)

Net repayments

(1,145)

(130)

(362)

(104)

(1,741)

Amounts written off

(888)

(481)

(400)

-

(1,769)

Disposals of loans

(807)

(16)

(130)

(5)

(958)

Other movement

(165)

-

-

-

(165)

Reductions

(3,005)

(674)

(913)

(112)

(4,704)

 

 

 

 

 

 

Gross non-performing loans at 31 December

5,957

489

2,026

207

8,679

Individual impairment provisions1

(3,468)

(215)

(1,430)

(67)

(5,180)

Net non-performing loans

2,489

274

596

140

3,499

Portfolio impairment provision

(157)

(208)

(99)

(2)

(466)

Total

2,332

66

497

138

3,033

Cover ratio

61%

87%

75%

33%

65%

Collateral ($ million)

1,111

218

277

203

1,809

Cover ratio (after collateral)

77%

89%

84%

100%

81%

 

 

 

 

 

 

Of the above, included in liquidation portfolio:

 

 

 

 

 

Gross non-performing loans at 31 December

1,945

-

125

156

2,226

Individual impairment provisions

(1,388)

-

(123)

(62)

(1,573)

Net non-performing loans

557

-

2

94

653

Cover ratio

71%

-

98%

40%

71%

Collateral ($ million)

237

-

-

96

333

Cover ratio (after collateral)

84%

-

98%

100%

86%

1  The difference to total individual impairment provision reflects provisions against forborne loans that are not included within non-performing loans as they have been performing for 180 days



 

 

2016

Corporate & Institutional
Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Total
$million

Gross non-performing loans at 1 January

9,128

747

2,559

325

12,759

Exchange translation differences

(68)

(12)

(59)

(2)

(141)

Classified as non-performing during the year

1,800

864

642

103

3,409

Recoveries on loans and advances previously written off

13

63

51

-

127

Additions

1,813

927

693

103

3,536

Transferred to assets held for sale

-

(47)

-

-

(47)

Transferred to performing during the year

(39)

(147)

(5)

-

(191)

Net repayments

(2,416)

(180)

(300)

-

(2,896)

Amounts written off

(1,390)

(722)

(480)

(63)

(2,655)

Disposals of loans

(552)

(18)

(39)

(69)

(678)

Reductions

(4,397)

(1,114)

(824)

(132)

(6,467)

 

 

 

 

 

 

Gross non-performing loans at 31 December

6,476

548

2,369

294

9,687

Individual impairment provisions1

(3,961)

(209)

(1,601)

(5)

(5,776)

Net non-performing loans

2,515

339

768

289

3,911

Portfolio impairment provision

(262)

(258)

(166)

(2)

(688)

Total

2,253

81

602

287

3,223

Cover ratio

65%

85%

75%

2%

67%

Collateral ($ million)

702

255

358

290

1,605

Cover ratio (after collateral)

72%

85%

83%

100%

76%

 

 

 

 

 

 

Of the above, included in liquidation portfolio:

 

 

 

 

 

Gross non-performing loans at 31 December

3,333

-

213

261

3,807

Individual impairment provisions

(2,267)

-

(154)

-

(2,421)

Net non-performing loans

1,066

-

59

261

1,386

Cover ratio

68%

-

72%

-

64%

Collateral ($ million)

356

-

-

261

617

Cover ratio (after collateral, excluding PIP)

79%

-

72%

100%

80%

1  The difference to total individual impairment provision reflects provisions against forborne loans that are not included within non-performing loans as they have been performing for 180 days

Non-performing loans by geographic region

Gross non-performing loans decreased by $1,008 million compared to 2016. The largest reductions were observed in the ASEAN & South Asia ($763 million) and Greater China & North Asia ($275 million) regions, primarily driven by planned reductions in the liquidation portfolio.

The following tables present a breakdown of total non-performing loans to banks and customers by geographic regions:

 

2017

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe & Americas
$million

Total
$million

Loans and advances

 

 

 

 

 

Gross non-performing

895

3,948

2,692

1,144

8,679

Individual impairment provisions1

(396)

(2,389)

(1,675)

(720)

(5,180)

Non-performing loans net of individual impairment provision

499

1,559

1,017

424

3,499

Portfolio impairment provision

(129)

(180)

(121)

(36)

(466)

Net non-performing loans and advances

370

1,379

896

388

3,033

Cover ratio

59%

65%

67%

66%

65%

1  The difference to total individual impairment provision reflects provisions against forborne loans that are not included within non-performing loans as they have been performing for 180 days



 

 

2016

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Loans and advances

 

 

 

 

 

Gross non-performing

1,170

4,711

2,739

1,067

9,687

Individual impairment provision1

(600)

(2,659)

(1,847)

(670)

(5,776)

Non-performing loans net of individual impairment provision

570

2,052

892

397

3,911

Portfolio impairment provision

(198)

(236)

(128)

(126)

(688)

Net non-performing loans and advances

372

1,816

764

271

3,223

Cover ratio

68%

61%

72%

75%

67%

1  The difference to total individual impairment provision reflects provisions against forborne loans that are not included within non-performing loans as they have been performing for 180 days

Individual and portfolio impairment provision

The present value of estimated future cashflows, discounted at the asset's original effective interest rate, is used to determine the amount of any impairment. In the case of the liquidation portfolio, the effect and timing of the disposal strategy is included in the estimate of future cashflows.

The reduction in individual impairment provisions is predominantly due to write offs from the liquidation portfolio.

The portfolio impairment provisions reduced primarily due to an improvement in overall portfolio credit quality and receipt of expected repayments in certain stress portfolios.

Amounts written off are significantly lower although this is due to 2016 seeing elevated levels in the liquidation portfolio and ongoing business, mainly in India.

 

2017

 

2016

Individual impairment provisions
$million

Portfolio impairment provisions
$million

Total
$million

Individual impairment provisions
$million

Portfolio
impairment provisions
$million

Total
$million

Provisions held at 1 January

5,830

688

6,518

 

6,186

658

6,844

Exchange translation differences

102

14

116

 

(68)

(9)

(77)

Amounts written off

(2,160)

-

(2,160)

 

(2,745)

-

(2,745)

Releases of acquisition fair values

(1)

-

(1)

 

-

-

-

Recoveries of amounts previously written off

234

-

234

 

177

-

177

Discount unwind

(83)

-

(83)

 

(287)

-

(287)

Transferred to assets held for sale

(6)

3

(3)

 

(16)

(13)

(29)

Disposal of business units

-

-

-

 

-

-

-

New provisions - restructuring

162

-

162

 

409

-

409

New provisions - excluding restructuring

2,094

57

2,151

 

2,582

205

2,787

New provisions

2,256

57

2,313

 

2,991

205

3,196

Recoveries/provisions no longer required

(652)

(296)

(948)

 

(438)

(153)

(591)

Net impairment charge/(releases) against profit

1,604

(239)

1,365

 

2,553

52

2,605

Other movements

(279)

-

(279)

 

30

-

30

Provisions held at 31 December

5,241

466

5,707

 

5,830

688

6,518

Individually impaired loans by client segment

Gross individually impaired loans decreased by 10 per cent in 2017, primarily driven by the Corporate & Institutional Banking segment which reduced by $519 million on account of loan disposals and settlements, mainly in the ASEAN & South Asia region.

Gross impaired loans in the Retail Banking book have shown modest improvement with a decrease of 3 per cent year-on-year.



 

The following table shows the movement of individually impaired loans and provisions for each client segment:

 

2017

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Total
$million

Gross impaired loans at 1 January

6,476

720

2,353

294

9,843

Exchange translation differences

87

48

45

4

184

Classified as individually impaired during the year

2,293

421

380

20

3,114

Transferred to not impaired during the year

-

(31)

(21)

(3)

(55)

Other movements1

(2,899)

(463)

(730)

(108)

(4,200)

Gross impaired loans at 31 December

5,957

695

2,027

207

8,886

 

 

 

 

 

 

Provisions held at 1 January

3,961

262

1,602

5

5,830

Exchange translation differences

55

15

31

1

102

Amounts written off

(1,139)

(577)

(444)

-

(2,160)

Releases of acquisition fair values

(1)

-

-

-

(1)

Recoveries of amounts previously written off

27

153

22

32

234

Discount unwind

(41)

(23)

(19)

-

(83)

Disposal of business units

-

(6)

-

-

(6)

New provisions

1,197

669

327

63

2,256

Recoveries/provisions no longer required

(314)

(218)

(86)

(34)

(652)

Net individual impairment charge against profit

883

451

241

29

1,604

Other movements2

(277)

-

(2)

-

(279)

Individual impairment provisions held at 31 December

3,468

275

1,431

67

5,241

Net individually impaired loans

2,489

420

596

140

3,645

 

 

2016

Corporate & Institutional
Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Total
$million

Gross impaired loans at 1 January

9,128

831

2,546

325

12,830

Exchange translation differences

(75)

(11)

(59)

(1)

(146)

Classified as individually impaired during the year

1,801

769

573

103

3,246

Transferred to not impaired during the year

(39)

(87)

(2)

-

(128)

Other movements1

(4,339)

(782)

(705)

(133)

(5,959)

Gross impaired loans at 31 December

6,476

720

2,353

294

9,843

 

 

 

 

 

 

Provisions held at 1 January

4,230

337

1,616

3

6,186

Exchange translation differences

(77)

(3)

12

-

(68)

Amounts written off

(1,439)

(722)

(520)

(64)

(2,745)

Recoveries of amounts previously written off

8

164

5

-

177

Discount unwind

(230)

(26)

(31)

-

(287)

Transferred to assets held for sale

-

(16)

-

-

(16)

New provisions

1,574

763

587

67

2,991

Recoveries/provisions no longer required

(134)

(235)

(68)

(1)

(438)

Net individual impairment charge against profit

1,440

528

519

66

2,553

Other movements2

29

-

1

-

30

Individual impairment provisions held at 31 December

3,961

262

1,602

5

5,830

Net individually impaired loans

2,515

458

751

289

4,013

1 Other movements include repayments, amounts written off and disposals of loans

2 Other movements include provisions for liabilities and charges that have been drawn down and are now part of loan impairment

Credit risk mitigation

Potential credit losses from any given account, customer or portfolio are mitigated using a range of tools such as collateral, netting arrangements, credit insurance and credit derivatives, taking into account expected volatility and guarantees.

The reliance that can be placed on these mitigants is carefully assessed in light of issues such as legal certainty and enforceability, market valuation correlation and counterparty risk of the guarantor. Our overall approach to credit risk mitigation is further discussed in Risk Management Approach.

Collateral

The requirement for collateral is not a substitute for the ability to pay, which is the primary consideration for any lending decisions. As a result of reinforcing our collateralisation requirements, the fair value of collateral held as a percentage of amount outstanding has remained stable in 2017.

The unadjusted market value of collateral across all asset types, in respect of Corporate & Institutional Banking and Commercial Banking, without adjusting for over-collateralisation, was $247 billion (2016: $229 billion).

The collateral values in the table below are adjusted where appropriate in accordance with our risk mitigation policy and for the effect of over-collateralisation. 47 per cent of clients that have placed collateral with the Group are over-collateralised. The average amount of over-collateralisation is 41 per cent.

We have remained conservative in the way we assess the value of collateral, which is calibrated for a severe downturn and back-tested against our prior experience. On average, across all types of non-cash collateral, the value ascribed is approximately half of its current market value. Collateral held against Corporate & Institutional Banking and Commercial Banking exposures amounted to $77 billion (2016: $64 billion).

In the Retail Banking and Private Banking segments, a secured loan is one where the borrower pledges an asset as collateral of which the Group is able to take possession in the event that the borrower defaults. The collateral level for Retail Banking has increased by $3.2 billion in 2017.

For loans and advances to customers and banks (including those held at fair value through profit or loss), the table below sets out the fair value of collateral held by the Group, adjusted where appropriate in accordance with the risk mitigation policy as outlined in Risk Management Approach and for the effect of over-collateralisation.

 

 

Maximum exposure

 

Collateral

 

Net expsoure1,2

Total
$million

Past due
but not individually impaired loans
$million

Individually impaired loans
$million

Total
$million

Past due
but not individually impaired loans
$million

Individually impaired loans
$million

Total
$million

Past due
but not individually impaired loans
$million

Individually impaired loans
$million

As at 31 December 2017

 

 

 

 

 

 

 

 

 

 

 

Corporate & Institutional Banking

193,442

1,455

5,957

 

70,499

160

1,111

 

122,943

1,295

4,846

Retail Banking

103,371

2,114

695

 

76,543

1,514

218

 

26,828

600

477

Commercial Banking

29,602

483

2,027

 

6,570

247

277

 

23,032

236

1,750

Private Banking

13,359

85

207

 

9,296

82

203

 

4,063

3

4

Central & other items

27,570

2

-

 

5,339

-

-

 

22,231

2

-

Total

367,344

4,139

8,886

 

168,247

2,003

1,809

 

199,097

2,136

7,077

As at 31 December 2016

 

 

 

 

 

 

 

 

 

 

 

Corporate & Institutional Banking

174,877

2,105

6,476

 

57,378

93

702

 

117,499

2,012

5,774

Retail Banking

93,846

2,102

720

 

73,352

1,527

255

 

20,494

575

465

Commercial Banking

25,042

700

2,353

 

7,084

393

358

 

17,958

307

1,995

Private Banking

11,926

97

294

 

7,584

94

290

 

4,342

3

4

Central & other items

25,562

-

-

 

5,912

-

-

 

19,650

-

-

Total

331,253

5,004

9,843

 

151,310

2,107

1,605

 

179,943

2,897

8,238

1  Includes loans held at fair value through profit or loss

2  Includes loans and advances

 

Corporate & Institutional Banking and Commercial Banking

Collateral held against Corporate & Institutional Banking and Commercial Banking exposures amounted to $77 billion (2016: $64 billion). The increase of $13 billion was primarily in reverse repurchase (repo) collateral due to increased liquidity management activity by the Group. The proportion of investment grade securities in reverse repos collateral has increased from 85 per cent in 2016 to 96 per cent in 2017. The average residual maturity of the reverse repo collateral is 8.3 years.

Collateral taken for longer-term and sub-investment grade Corporate loans continues to be high at 55 per cent (2016: 55 per cent).

Our underwriting standards encourage taking specific charges on assets and we consistently seek high quality, investment grade collateral. 27 per cent of collateral held comprises physical assets or is property-based (2016: 29 per cent), with the remainder largely in cash and investment securities.

Non-tangible collateral such as guarantees and standby letters of credit may also be held against corporate exposures, although the financial effect of this type of collateral is less significant in terms of recoveries. However, this type of collateral is considered when determining probability of default and other credit-related factors. Collateral is also held against off-balance sheet exposures, including undrawn commitments and trade-related instruments.

The following table provides an analysis of the types of collateral held against Corporate & Institutional Banking and Commercial Banking loan exposures.

Corporate & Institutional Banking

 

2017
$million

2016
$million

Maximum exposure

193,442

174,877

 

 

 

Property

7,014

5,920

Plant, machinery and other stock

3,612

3,574

Cash

5,742

7,778

Reverse repos

49,736

35,930

AAA

1,027

327

A- to AA+

40,421

27,660

BBB- to BBB+

6,448

2,657

Lower than BBB-

915

854

Unrated

925

4,432

Commodities

162

772

Ships and aircraft

4,233

3,404

Total value of collateral

70,499

57,378

Net exposure

122,943

117,499

 

Commercial Banking

 

2017
$million

2016
$million

Maximum exposure

29,602

25,042

 

 

 

Property

4,642

4,843

Plant, machinery and other stock

767

935

Cash

923

1,064

Reverse repos

-

-

AAA

-

-

A- to AA+

-

-

BBB- to BBB+

-

-

Lower than BBB-

-

-

Unrated

-

-

Commodities

4

4

Ships and aircraft

234

238

Total value of collateral

6,570

7,084

Net exposure

23,032

17,958

 

Retail Banking and Private Banking

In Retail Banking and Private Banking, 84 per cent of the portfolio is fully secured. The proportion of unsecured loans remains unchanged at 15 per cent.

LTV ratios measure the ratio of the current mortgage outstanding to the current fair value of the properties on which they are secured.

In mortgages the value of property held as security significantly exceeds the value of mortgage loans. The average LTV of the overall mortgage portfolio is less than 47 per cent, a decrease from the end of 2016 (49 per cent). Hong Kong, which represents 37 per cent of the Retail Banking mortgage portfolio has an average LTV of 38.6 per cent. All of our other key markets continue to have low portfolio LTVs, with Korea, Singapore and Taiwan at 48.0 per cent, 59.5 per cent and 50.4 per cent respectively.

An analysis of LTV ratios by geography for the mortgage portfolio is presented in the mortgage LTV ratios by geography table below.

The following table presents an analysis of loans to individuals by product split between fully secured, partially secured and unsecured.



 

 

2017

 

2016

Fully secured
$million

Partially secured
$million

Unsecured
$million

Total1
$million

Fully
secured
$million

Partially secured
$million

Unsecured
$million

Total1
$million

Maximum exposure

97,523

1,301

17,750

116,574

 

88,450

1,632

15,574

105,656

Loans to individuals

 

 

 

 

 

 

 

 

 

Mortgages

78,755

23

-

78,778

 

73,484

23

-

73,507

CCPL

240

86

17,209

17,535

 

360

690

15,156

16,206

Auto

630

-

3

633

 

635

-

3

638

Secured wealth products

13,903

156

95

14,154

 

11,036

44

-

11,080

Other

3,995

1,036

443

5,474

 

2,935

875

415

4,225

Total collateral

 

 

 

85,839

 

 

 

 

80,936

Net exposure

 

 

 

30,735

 

 

 

 

24,720

Percentage of total loans

84%

1%

15%

 

 

83%

2%

15%

 

1  Amounts net of individual impairment provisions

Mortgage loan-to-value ratios by geography

The following table provides an analysis of LTV ratios by region for the mortgages portfolio:

 

2017

Greater China & North Asia
%

ASEAN &
South Asia
%

Africa &
Middle East
%

Europe & Americas
%

Total
%

Less than 50 per cent

62.9

36.1

21.6

28.4

54.7

50 per cent to 59 per cent

16.4

17.5

16.9

23.4

16.8

60 per cent to 69 per cent

15.3

18.7

22.6

31.4

16.6

70 per cent to 79 per cent

4.5

22.8

20.8

13.7

9.5

80 per cent to 89 per cent

0.7

4.3

11.2

2.0

1.9

90 per cent to 99 per cent

0.1

0.3

3.9

0.4

0.3

100 per cent and greater

0.1

0.3

3.0

0.8

0.2

Average portfolio loan-to-value

43.5

55.0

63.9

52.1

46.8

Loans to individuals - mortgages ($million)

54,609

20,105

2,279

1,785

78,778

 

 

2016

Greater China & North Asia
%

ASEAN &
South Asia
%

Africa &
Middle East
%

Europe &
Americas
%

Total
%

Less than 50 per cent

55.9

36.9

22.3

36.7

49.9

50 per cent to 59 per cent

18.2

16.8

16.9

37.4

18.1

60 per cent to 69 per cent

17.3

18.8

20.5

16.2

17.8

70 per cent to 79 per cent

6.4

17.6

20.7

8.3

9.7

80 per cent to 89 per cent

1.9

8.8

11.3

0.9

3.9

90 per cent to 99 per cent

0.2

0.7

4.2

0.5

0.5

100 per cent and greater

0.1

0.4

4.1

-

0.3

Average portfolio loan-to-value

46.6

54.7

64.9

44.4

49.0

Loans to individuals - mortgages ($million)

51,219

18,903

2,245

1,140

73,507

 

Collateral and other credit enhancements possessed or called upon

The Group obtains assets by taking possession of collateral or calling upon other credit enhancements (such as guarantees). Repossessed properties are sold in an orderly fashion. Where the proceeds are in excess of the outstanding loan balance the excess is returned to the borrower. Certain equity securities acquired may be held by the Group for investment purposes and are classified as available-for-sale, and the related loan written off.

The carrying value of collateral possessed and held by the Group as at 31 December 2017 is $24.1 million (2016: $51.1 million). The decrease in collateral value is largely due to the reduction in cash collateral following utilisation to settle customer outstanding.

 

2017
$million

2016
$million

Property, plant and equipment

14.9

13.0

Equity shares

0.2

0.1

Guarantees

4.0

11.5

Cash

4.6

26.1

Other

0.4

0.4

Total

24.1

51.1



 

Other credit risk mitigation

 

Other forms of credit risk mitigation are set out below.

Securitisation

The Group has transferred to third-parties by way of securitisation, the rights to any collection of principal and interest on client loan assets with a face value of $11 million (2016: $21 million). The Group continues to recognise these assets in addition to the proceeds and related liability of $13 million (2016: $15 million) arising from the securitisations. The Group considers the above client loan assets to be encumbered. Further details of encumbered assets are provided in the Encumbered assets section.?

Credit default swaps

The Group has entered into credit default swaps for portfolio management purposes, referencing loan assets with a notional value of $16 billion (2016: $17.5 billion). These credit default swaps are accounted for as guarantees as they meet the accounting requirements set out in International Accounting Standards (IAS) 39. The Group continues to hold the underlying assets referenced in the credit default swaps and it continues to be exposed to related credit and foreign exchange risk on these assets.

Derivatives financial instruments

The Group enters into master netting agreements, which in the event of default result in a single amount owed by or to the counterparty through netting the sum of the positive and negative mark-to-market values of applicable derivative transactions. The value of exposure under master netting agreements is $29,135 million (2016: $40,391 million).

In addition, we enter into credit support annexes (CSAs) with counterparties where collateral is deemed a necessary or desirable mitigant to the exposure. Cash collateral includes collateral called under a variation margin process from counterparties if total uncollateralised mark-to-market exposure exceeds the threshold and minimum transfer amount specified in the CSA. With certain counterparties, the CSA is reciprocal and requires us to post collateral if the overall mark-to-market values of positions are in the counterparty's favour and exceed an agreed threshold. The Group holds $6,562 million (2016: $7,280 million) under CSAs.

Off-balance sheet exposures

For certain types of exposures, such as letters of credit and guarantees, the Group obtains collateral such as cash depending on internal credit risk assessments, as well as in the case of letters of credit holding legal title to the underlying assets should a default take place.

Other portfolio analysis

This section provides maturity analysis by business segment and industry and Retail Products analysis by region.

Maturity analysis by client segment

The loans and advances to the Corporate & Institutional Banking and Commercial Banking segments remain predominantly short-term, with 70 per cent of loans and advances to customers in the segments maturing in less than one year, a decrease compared to December 2016. 96 per cent of loans to banks mature in less than one year. Shorter maturity gives us the flexibility to respond promptly to events and rebalance or reduce our exposure to clients or sectors that are facing increased pressure or uncertainty.

The Private Banking loan book also demonstrates a short-term bias, typical for loans that are secured on wealth management assets.

The Retail Banking loan book continues to be longer-term in nature with 60 per cent of the loans maturing over five years as mortgages constitute the majority of the Retail Banking loan book.

 

2017

One year or less
$million

One to five years
$million

Over five years
$million

Total
$million

Corporate & Institutional Banking

90,613

31,827

9,454

131,894

Retail Banking

24,200

17,341

61,680

103,221

Commercial Banking

21,683

5,293

1,231

28,207

Private Banking

12,407

270

676

13,353

Central & other items

9,335

6

2

9,343

Loans and advances to customers net of individual impairment provision

158,238

54,737

73,043

286,018

Portfolio impairment provision

 

 

 

(465)

Net loans and advances to customers

 

 

 

285,553

Net loans and advances to banks

77,739

2,974

612

81,325



 

 

2016

One year or less
$million

One to five years
$million

Over five years
$million

Total
$million

Corporate & Institutional Banking

84,199

29,919

8,374

122,492

Retail Banking

15,510

16,725

61,511

93,746

Commercial Banking

19,125

4,048

1,006

24,179

Private Banking

10,802

249

859

11,910

Central & other items

4,215

39

2

4,256

Loans and advances to customers net of individual impairment provision

133,851

50,980

71,752

256,583

Portfolio impairment provision

 

 

 

(687)

Net loans and advances to customers

 

 

 

255,896

Net loans and advances to banks

71,867

2,644

158

74,669

Industry and Retail Products analysis by geographic region

This section provides analysis of the Group's loan portfolio by Industry and Region.

In the Corporate & Institutional Banking and Commercial Banking segments our largest industry exposure is financing, insurance and non-banking, which constitutes 27 per cent of Corporate & Institutional Banking and Commercial Banking loans and advances to customers (2016: 27 per cent). Lending to financing, insurance and non-banking clients is mostly to investment grade institutions and is part of the liquidity management of the Group.

The manufacturing sector makes up 13 per cent of the Corporate & Institutional Banking and Commercial Banking loans and advances (2016: 13 per cent). The manufacturing industry group is spread across a diverse range of industries, including automobiles and components, capital goods, pharmaceuticals, biotech and life sciences, technology hardware and equipment, chemicals, paper products and packaging, with lending spread over 3,900 clients.

Loans and advances to the energy sector have remained stable and constitute 11 per cent (2016: 12 per cent) of total loans and advances to Corporate & Institutional Banking and Commercial Banking. The energy sector lending is spread across five subsectors and over 350 clients.

The Group provides loans to commercial real estate (CRE) counterparties of $15.1 billion (2016: $11.3 billion), which represents 5 per cent of total customer loans and advances. In total, $8.0 billion of this lending is to counterparties where the source of repayment is substantially derived from rental or sale of real estate and is secured by real estate collateral. The remaining CRE loans comprise working capital loans to real estate corporates, loans with non-property collateral, unsecured loans and loans to real estate entities of diversified conglomerates. The average LTV ratio of the commercial real estate (CRE) portfolio has increased to 41 per cent, compared with 39 per cent in 2016. The proportion of loans with an LTV greater than 80 per cent has remained at 1 per cent during the same period.

Credit cards and personal loans (CCPL) and other unsecured lending of total Retail Products loans and advances remains broadly stable at 15 per cent.



 

 

2017

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe & Americas
$million

Total
$million

Industry:

 

 

 

 

 

Energy

2,855

6,097

3,303

6,289

18,544

Manufacturing

10,919

6,685

3,221

1,906

22,731

Financing, insurance and non-banking

8,213

6,421

1,308

29,042

44,984

Transport, telecom and utilities

6,456

3,965

4,707

1,036

16,164

Food and household products

2,174

4,126

2,577

1,179

10,056

Commercial real estate

8,429

5,169

1,479

62

15,139

Mining and quarrying

2,079

2,903

1,089

570

6,641

Consumer durables

4,432

2,544

1,300

790

9,066

Construction

989

1,118

1,358

238

3,703

Trading companies and distributors

1,192

573

432

128

2,325

Government

4,864

6,728

1,430

1,398

14,420

Other

1,839

2,174

1,075

583

5,671

Retail Products:

 

 

 

 

 

Mortgages

54,609

20,105

2,279

1,785

78,778

CCPL and other unsecured lending

10,175

4,336

3,022

2

17,535

Auto

-

399

234

-

633

Secured wealth products

5,278

7,005

213

1,658

14,154

Other

2,365

2,410

696

3

5,474

 

126,868

82,758

29,723

46,669

286,018

Portfolio impairment provision

(129)

(179)

(121)

(36)

(465)

Total loans and advances to customers

126,739

82,579

29,602

46,633

285,553

Total loans and advances to banks

33,226

16,523

7,428

24,148

81,325

 

 

2016

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Industry:

 

 

 

 

 

Energy

2,781

5,334

4,076

6,586

18,777

Manufacturing

8,807

5,944

3,161

1,830

19,742

Financing, insurance and non-banking

7,959

5,007

1,451

26,816

41,233

Transport, telecom and utilities

5,562

4,570

3,659

1,708

15,499

Food and household products

1,932

4,624

2,408

1,088

10,052

Commercial real estate

5,580

4,555

1,122

27

11,284

Mining and quarrying

2,063

3,568

1,234

959

7,824

Consumer durables

4,356

2,321

1,432

1,261

9,370

Construction

1,027

1,313

1,392

84

3,816

Trading companies and distributors

938

535

657

259

2,389

Government

2,290

3,053

468

504

6,315

Other

1,437

1,644

1,015

530

4,626

Retail Products:

 

 

 

 

 

Mortgages

51,219

18,903

2,245

1,140

73,507

CCPL and other unsecured lending

9,265

3,838

3,012

91

16,206

Auto

-

315

323

-

638

Secured wealth products

3,725

5,965

90

1,300

11,080

Other

1,790

1,908

522

5

4,225

 

110,731

73,397

28,267

44,188

256,583

Portfolio impairment provision

(198)

(236)

(127)

(126)

(687)

Total loans and advances to customers

110,533

73,161

28,140

44,062

255,896

Total loans and advances to banks

32,239

14,739

7,552

20,139

74,669

 



 

Selected portfolios

 

Debt securities and other eligible bills

This section provides further detail on debt securities and treasury bills and asset backed securities.

Debt securities and other eligible bills are analysed as follows:

 

2017

 

2016

Debt securities
and other
eligible bills
$million

Debt securities
and other
eligible bills
$million

Net impaired securities:

 

 

 

Impaired securities

421

 

406

Impairment

(376)

 

(400)

 

45

 

6

 

 

 

 

Securities neither past due nor impaired:

 

 

 

AAA

35,937

 

44,815

AA- to AA+

51,914

 

34,112

A- to A+

13,305

 

15,316

BBB- to BBB+

17,498

 

12,598

Lower than BBB-

5,333

 

5,361

Unrated

11,810

 

9,040

 

135,797

 

121,242

Total

135,842

 

121,248

Of which:

 

 

 

Assets at fair value

 

 

 

Trading

19,318

 

13,310

Designated at fair value

393

 

354

Available-for-sale

109,161

 

104,308

 

128,872

 

117,972

Assets at amortised cost

 

 

 

Loans and receivables

2,630

 

3,106

Held-to-maturity

4,340

 

170

 

6,970

 

3,276

Total

135,842

 

121,248

 

The above table analyses debt securities and treasury bills that are neither past due nor impaired by external credit rating.

The standard credit ratings used by the Group are those used by Standard & Poor's or its equivalent. Debt securities held that have a short-term rating are reported against the long-term rating of the issuer. For securities that are unrated, the Group applies an internal credit rating, as described under the credit rating and measurement section.

Net impaired debt securities increased during the year, primarily due to a new impairment in Singapore.

Debt securities in the AAA rating category decreased during the year by $8.9 billion to $35.9 billion, mainly driven by a downgrade of UK-held Treasury Bills to the AA- to AA+ rating category. The resulting increase in the AA- to AA+ rating category was further enhanced by the purchase of government securities in Asia.

Unrated securities have primarily related to corporate issuers, but during 2017 the Group also purchased unrated government securities.

Using internal credit ratings, $9,109 million (2016: $7,013 million) of these securities are considered to be equivalent to investment grade.



 

Asset backed securities (unaudited)

Total exposures to asset backed securities

 

2017

 

2016

Percentage
of notional value of portfolio
$million

Notional
$million

Carrying
value
$million

Fair value1

$million

Percentage
of notional value of portfolio
$million

Notional
$million

Carrying
value
$million

Fair value1

$million

Residential mortgage backed securities (RMBS)2

44%

2,814

2,812

2,812

 

37%

2,248

2,248

2,244

Collateralised debt obligations (CDOs)

1%

75

70

69

 

0%

28

8

7

Commercial mortgage backed securities (CMBS)

1%

63

29

29

 

1%

50

19

18

Other asset backed securities (other ABS)3

54%

3,518

3,517

3,519

 

62%

3,717

3,716

3,716

 

100%

6,470

6,428

6,429

 

100%

6,043

5,991

5,985

Of which included within:

 

 

 

 

 

 

 

 

 

Financial assets held at fair value through profit or loss

14%

887

885

885

 

3%

172

172

172

Investment securities - available-for-sale

64%

4,145

4,106

4,109

 

72%

4,380

4,331

4,331

Investment securities - loans and receivables

22%

1,438

1,437

1,435

 

25%

1,491

1,488

1,482

 

100%

6,470

6,428

6,429

 

100%

6,043

5,991

5,985

1  Fair value reflects the value of the entire portfolio, including assets redesignated to loans and receivables.

2  RMBS includes Other UK, Dutch, Australia and Korea RMBS

3  Other asset backed securities includes auto loans, credit cards, student loans, future flows and trade receivables

The carrying value of asset-backed securities (ABS) represents 1 per cent (2016: 1 per cent) of the Group's total assets.

The credit quality of the ABS portfolio remains strong, with over 99 per cent of the overall portfolio rated investment grade, and 68 per cent of the overall portfolio is rated as AAA. The portfolio is broadly diversified across asset classes and geographies, with an average credit grade of AA. Residential mortgage-backed securities (RMBS) make up 43 per cent of the overall portfolio and have a weighted averaged credit rating of AAA (AAA in 2016).

Other ABS includes Auto ABS, comprising 30 per cent of the overall portfolio, and credit card ABS (13 per cent); both maintain a weighted average credit rating of AAA. The balance of Other ABS mainly includes securities backed by diversified payment rights, and receivables ABS. ?

Country risk (unaudited)

Country risk is defined as the potential for default or losses due to political or economic events in a country. A key component of Country Risk is Country cross-border risk, which is the risk that the Group will be unable to obtain payment from counterparties on their contractual obligations as a result of actions taken by foreign governments, chiefly relating to convertibility and transferability of foreign currency.

The profile of the Group's country cross-border exposures as at 31 December 2017 remained consistent with its strategic focus on core franchise countries, and with the scale of the larger markets in which it operates.

Country cross-border exposure to China remains predominantly short-term; 87 per cent of exposure had a tenor of less than 12 months. During 2017, the Group's cross-border exposure to China from lending and trade finance increased, driven by robust economic growth in China and support to China's Belt and Road initiative. The significant increase in China cross-border exposure was predominantly short-term in tenor and related to trade and lending facilities as well as interbank placements with strategic clients.

Country cross-border risk exposure to Hong Kong declined during 2017 with a reduction in exposure from liquidity management activity, interbank placements, and corporate business loans.

The increase in cross border exposure to South Korea in 2017 reflects an expansion of export volumes and improved economic growth compared to the previous year.

The overall size of cross-border exposure to India reflects the size of the Group's franchise in the country, and the facilitation of overseas investment and trade flows supported by parent companies in India. The increase in India cross-border exposure relates to new or expanded arrangements with chosen counterparties and product categories that are accretive to the India franchise.

Cross-border exposure to developed countries in which the Group does not have a major presence predominantly relates to short-dated money market treasury and liquidity management activities, which can change significantly from period to period. Exposure also represents global corporate business for customers with interests in our footprint. This is a key factor explaining the significant cross-border exposure to the US, Japan and Germany.

The table below, which is based on the Group's internal country cross-border risk reporting requirements, shows cross-border exposures that exceed 1 per cent of total assets.

 

 

2017

 

20161

Less than
one year
$million

More than
one year
$million

Total
$million

Less than
one year
$million

More than
one year
$million

Total
$million

China

40,351

6,204

46,555

 

29,727

4,414

34,142

US

10,068

9,524

19,592

 

9,675

10,255

19,930

Hong Kong

11,685

7,867

19,553

 

15,517

7,738

23,255

Singapore

13,555

5,955

19,510

 

15,101

5,086

20,187

South Korea

14,513

4,331

18,844

 

11,436

5,124

16,559

India

11,687

5,819

17,506

 

9,280

4,589

13,869

United Arab Emirates

7,932

8,341

16,272

 

7,523

7,730

15,253

Germany

3,022

4,505

7,527

 

2,600

3,536

6,136

Japan

5,272

1,555

6,827

 

8,625

1,669

10,294

1  2016 cross-border exposure data has been restated as a result of a recalibration and enhancement to the internal methodology for reporting country cross-border risk. Methodology changes have been implemented in line with BCBS239 principles.

Market risk

Market risk is the potential for loss of economic value due to adverse changes in financial market rates or prices. The Group's exposure to market risk arises predominantly from the following sources:

•  Trading book: The Group provides clients access to financial markets, the facilitation of which entails the Group taking moderate market risk positions. All trading teams support client activity; there are no proprietary trading teams. Hence, income earned from market risk-related activities is primarily driven by the volume of client activity rather than risk-taking

•  Non-trading book:

The Treasury Markets desk is required to hold a liquid assets buffer much of which is held in high-quality marketable debt securities

The Group has capital invested and related income streams denominated in currencies other than US dollars. To the extent that these are not hedged, the Group is subject to structural foreign exchange risk which is reflected in reserves

A summary of our current policies and practices regarding market risk management is provided in the Principal Risks section.

The primary categories of market risk for the Group are:

•  Interest rate risk: arising from changes in yield curves, credit spreads and implied volatilities on interest rate options

•  Currency exchange rate risk: arising from changes in exchange rates and implied volatilities on foreign exchange options

•  Commodity price risk: arising from changes in commodity prices and implied volatilities on commodity options; covering energy, precious metals, base metals and agriculture

•  Credit spread risk: arising from changes in the credit spread of the Group's derivative counterparties through CVA accounting.

Market risk changes

The average level of total trading and non-trading VaR in 2017 was 19 per cent lower than in 2016 and the actual level of total VaR as at year end 2017 was 25 per cent lower than in 2016. These declines were driven by reduced market volatility in the historical time series. In 2016 the VaR had been elevated by events such as the devaluation of the Chinese renminbi in August 2015 and uncertainty about the timing of anticipated US interest rate rises.

Trading book interest rate VaR and trading book total VaR results are not comparable year-on-year as the 2017 figures include the XVA desk VaR but the 2016 figures do not. The average level of VaR for the XVA desk in 2017 was 44 per cent lower than in 2016 at $5.5 million (2016 $9.8 million).



 

Daily value at risk (VaR at 97.5%, one day)

Trading and non-trading

2017

 

2016

Average
$million

High1
$million

Low1
$million

Actual2
$million

Average
$million

High1
$million

Low1
$million

Actual2
$million

Interest rate risk3,6

22.6

28.5

18.1

18.7

 

27.7

32.7

24.1

25.3

Foreign exchange risk

5.5

12.3

3.0

6.0

 

6.3

12.2

3.7

9.4

Commodity risk

1.2

2.0

0.6

1.0

 

1.9

3.1

1.0

1.4

Equity risk

7.7

8.4

6.4

6.7

 

10.0

13.1

6.9

8.1

Total4,6

25.7

32.4

20.3

22.3

 

31.6

38.8

26.4

29.9

 

Trading5

2017

 

2016

Average
$million

High1
$million

Low1
$million

Actual2
$million

Average
$million

High1
$million

Low1
$million

Actual2
$million

Interest rate risk3,6

10.1

13.1

7.7

8.5

 

6.7

10.3

4.7

6.8

Foreign exchange risk

5.5

12.3

3.0

6.0

 

6.3

12.2

3.7

9.4

Commodity risk

1.2

2.0

0.6

1.0

 

1.9

3.1

1.0

1.4

Equity risk

0.1

0.4

0.06

0.14

 

0.4

1.3

0.1

0.1

Total4,6

12.1

15.7

8.3

10.9

 

10.6

18.7

7.5

11.6

 

Non-trading

2017

 

2016

Average
$million

High1
$million

Low1
$million

Actual2
$million

Average
$million

High1
$million

Low1
$million

Actual2
$million

Interest rate risk3

19.5

23.1

14.4

14.4

 

26.3

31.4

21.5

22.8

Equity risk

7.6

8.1

6.2

6.6

 

9.8

12.5

6.9

8.1

Total4

21.7

27.6

16.3

16.3

 

30.7

35.1

24.6

27.3

1  Highest and lowest VaR for each risk factor are independent and usually occur on different days

2  Actual one day VaR at year end date

3  Interest rate risk VaR includes credit spread risk arising from securities held for trading or available-for-sale.

4  The total VaR shown in the tables above is not a sum of the component risks due to offsets between them

5  Trading book for market risk is defined in accordance with the EU Capital Requirements Regulation (CRDIV/CRR) Part 3 Title I Chapter 3 which restricts the positions permitted in the trading book. This regulatory definition is narrower than the accounting definition of the trading book within IAS39 'Financial Instruments: Recognition and Measurement

6  XVA (Credit and Funding Valuation Adjustment): In 2016 the XVA desk VaR was incompletely reflected in the related total VaR lines as follows:

•  Total trading and non-trading VaR and total trading and non-trading interest rate VaR reflected XVA desk VaR but only from 1 August 2016 onwards

•  Total trading VaR and trading interest rate VaR figures did not reflect XVA VaR at all in 2016

The following table sets out how trading and non-trading VaR is distributed across the Group's products:

 

2017

 

2016

Average
$million

High1
$million

Low1
$million

Actual2
$million

Average
$million

High1
$million

Low1
$million

Actual2
$million

Trading and non-trading

25.7

32.4

20.3

22.3

 

31.6

38.8

26.4

29.9

Trading4

 

 

 

 

 

 

 

 

 

Rates

5.9

8.6

4.4

5.1

 

5.2

8.6

3.3

5.8

Global foreign exchange

5.5

12.3

3.0

6.0

 

6.3

12.2

3.7

9.4

Credit trading and capital markets

4.6

6.9

2.6

4.9

 

3.0

5.3

2.2

3.2

Commodities

1.2

2.0

0.6

1.0

 

1.9

3.1

1.0

1.4

Equities

0.1

0.4

0.1

0.1

 

0.4

1.3

0.1

0.1

XVA5

5.5

8.3

3.0

3.0

 

9.8

12.0

6.6

6.6

Total3

12.1

15.7

8.3

10.9

 

10.6

18.7

7.5

11.6

Non-trading

 

 

 

 

 

 

 

 

 

Asset & liability management

19.5

23.1

14.4

14.4

 

26.3

31.4

21.5

22.8

Listed private equity

7.6

8.1

6.2

6.6

 

9.8

12.5

6.9

8.1

Total3

21.7

27.6

16.3

16.3

 

30.7

35.1

24.6

27.3

1  Highest and lowest VaR for each risk factor are independent and usually occur on different days

2  Actual one day VaR at year end date

3  The total VaR shown in the tables above is not a sum of the component risks due to offsets between them

4  Trading book for market risk is defined in accordance with the EU Capital Requirements Regulation (CRDIV/CRR) Part 3 Title I Chapter 3 which restricts the positions permitted in the trading book. This regulatory definition is narrower than the accounting definition of the trading book within IAS39 'Financial Instruments: Recognition and Measurement'

5  XVA (Credit and Funding Valuation Adjustment): In 2016 the XVA desk VaR reflects a period from 1 August 2016 to 30 December 2016

Risks not in VaR (unaudited)

In 2017 the main market risk not reflected in VaR was currency risk where the exchange rate is currently pegged or managed. The historical one-year VaR observation period does not reflect the future possibility of a change in the currency regime such as sudden depegging. The other material market risk not reflected in VaR was associated with off-the-run bonds. Newly issued bonds are actively traded (on-the-run), however off-the-run bonds are less frequently traded, meaning that historical market price data for VaR is sometimes more limited. Additional capital is set aside to cover such 'risks not in VaR'. For further details on market risk capital see the Standard Chartered PLC Pillar 3 Disclosures 2017 section on market risk.

Backtesting (unaudited)?

Regulatory backtesting is applied at both Group and Solo levels. In 2017 there has been one negative exception at both Group level and Solo level (in 2016 there was one exception at Group level and two at Solo level).

This exception occurred on 18 December due to yield curve moves in Nigeria. The Central Bank of Nigeria restarted their liquidity management open market operations unexpectedly, filling Nigerian treasury bill auctions below the lowest bid yields. This move caused the market to sell-off and Nigerian Naira yields to rise sharply. One exception in a year due to market events is within the 'green zone' applied internationally to internal models by bank supervisors
(Basel Committee on Banking Supervision: 'Supervisory framework for the use of backtesting in conjunction with the internal models approach to market risk capital requirements', January 1996).

The graph below illustrates the performance of the VaR model used in capital calculations. It compares the 99 percentile loss confidence level given by the VaR model with the Hypothetical P&L of each day given the actual market movement without taking into account any intra-day trading activity.

Financial Markets loss days

 

2017

2016

Number of loss days reported for Financial Markets trading book total product income 1

15

30

1  Reflects total product income for Financial Markets:

•  Including CVA and FVA risk.

•  Excluding Treasury-Markets business (non-trading) and periodic valuation changes for Capital Markets, expected loss provisions and OIS discounting.

There were fewer Financial Markets loss days in 2017 as market volatility dropped following the events of 2016 which saw a collapse in oil prices, a Chinese equities sell-off, the UK referendum to leave the European Union (Brexit) and the US presidential election.

Average daily income earned from market risk related activities1

Trading

2017
$million

2016
$million

Interest rate risk

3.5

4.5

Foreign exchange risk

3.7

4.6

Commodity risk

0.6

0.7

Equity risk

-

-

Total

7.8

9.8

 

 

 

Non-trading

 

 

Interest rate risk

2.4

1.8

Equity risk

0.3

(0.2)

Total

2.7

1.6

1  Reflects total product income which is the sum of Client Income and Own Account Income. Includes elements of Trading Income, Interest Income and Other Income which are generated from market risk related activities. XVA income is included under Interest rate risk

Mapping of market risk items to the balance sheet (unaudited)

Market risk contributes only 8.2 per cent of the Group's regulatory capital risk-weighted asset (RWA) requirement, as shown in the risk-weighted assets tables. As highlighted in the VaR disclosure, during 2017 the majority of market risk was managed within Treasury Markets and Financial Markets, which span both trading book and non-trading book. The non-trading equity market risk is generated by listed private equity holdings within Principal Finance. Treasury manages the market risk associated with debt and equity capital issuance.



 

 

Amounts as
per financial statements
$million

Exposure to trading risk
$million

Exposure to
non-trading risk
$million

Market risk type

Financial assets

 

 

 

 

Derivative financial instruments

47,031

46,855

176

Interest rate, foreign exchange, commodity and/or equity risk

Loans and advances to banks

81,325

19,305

62,020

Interest rate and/or foreign exchange risk

Loans and advances to customers

285,553

33,707

251,846

Interest rate and/or foreign exchange risk

Debt securities and other eligible bills

135,842

19,493

116,349

Interest rate mainly, but also foreign exchange and/or equity risk

Equities

2,345

718

1,627

Equities risk mainly, but also interest and/or foreign exchange risk

Other assets

33,490

6,266

27,224

Interest rate, foreign exchange, commodity and/or equity risk

Total

585,586

126,344

459,242

 

 

 

 

 

 

Financial liabilities

 

 

 

 

Deposits by banks

35,486

-

35,486

Interest rate and/or foreign exchange risk

Customer accounts

411,724

-

411,724

Interest rate and/or foreign exchange risk

Debt securities in issue

53,402

-

53,402

Interest rate mainly, but also foreign exchange and/or equity risk

Derivatives financial instruments

48,101

47,652

449

Interest rate, foreign exchange, commodity and/or equity risk

Short positions

3,637

3,608

29

Interest rate, foreign exchange, commodity and/or equity risk

Total

552,350

51,260

501,090

 

 

Structural foreign exchange exposures

The table below sets out the principal structural foreign exchange exposures (net of investment hedges) of the Group.

 

2017
$million

2016
$million

Hong Kong dollar

 7,119

6,452

Indian rupee

4,806

4,450

Renminbi

3,784

3,370

Singapore dollar

2,972

2,505

Korean won

2,361

2,460

Taiwanese dollar

1,589

2,140

UAE dirham

1,842

1,556

Malaysian ringgit

1,512

1,330

Thai baht

1,277

1,290

Indonesian rupiah

1,090

1,090

Pakistani rupee

543

573

Other

4,000

3,595

 

32,895

30,811

As at 31 December 2017, the Group had taken net investment hedges (using a combination of derivative and non-derivative financial investments) of $2,003 million (2016: $1,313 million) to partly cover its exposure to the Korean won. An analysis has been performed on these exposures to assess the impact of a 1 per cent fall in the US dollar exchange rates, adjusted to incorporate the impacts of correlations of these currencies to the US dollar. The impact on the positions above would be a decrease of $357 million (2016: $225 million). Changes in the valuation of these positions are taken to reserves.

For analysis of the Group's capital position and requirements, refer to the Capital Review

Liquidity and funding risk

Liquidity and funding risk is the potential that the Group does not have sufficient financial resources or stable sources of funding in the medium or long term, to meet its obligations as they fall due, or can access these financial resources only at excessive cost.

The Group's liquidity and funding risk framework requires each country to ensure that it operates within predefined liquidity limits and remain in compliance with Group liquidity policies and practices, as well as local regulatory requirements.

The Group achieves this through a combination of setting risk appetite and associated limits, policy formation, risk measurement and monitoring, prudential and internal stress testing, governance and review.

For further information on the Group's liquidity and funding risk framework, refer to the Risk Management Approach.

In 2017, the Group issued approximately $1.5 billion of senior debt securities and $1 billion of Additional Tier 1 (AT1) securities from its holding company Standard Chartered PLC (2016: $4.4 billion of term senior debt, $1.25 billion of subordinated debt and $2 billion of AT1).

Since the beginning of the year, there were no significant changes in treasury policies as disclosed in the 2016 Annual Report and Accounts.

Primary sources of funding

The Group's funding strategy is largely driven by its policy to maintain adequate liquidity at all times, in all geographic locations and for all currencies, and hence to be in a position to meet all obligations as they fall due. The Group's funding profile is therefore well diversified across different sources, maturities and currencies.

A substantial portion of our assets are funded by customer deposits aligned with our policy to fund customer assets predominantly using customer deposits. Wholesale funding is diversified by type and maturity and represents a stable source of funds for the Group.

We maintain access to wholesale funding markets in all major financial centres in which we operate. This seeks to ensure that we have market intelligence, maintain stable funding lines and can obtain optimal pricing when performing our interest rate risk management activities.

Debt refinancing levels are low. In the next 12 months approximately $5.6 billion of the Group's holding company senior debt and subordinated debt are falling due for repayment either contractually or callable by the Group.

The information presented in the Liquidity Pool section is on a financial view. This is the location in which the transaction or balance was booked and provides a more accurate view of where liquidity risk is actually located.

The chart below shows the composition of liabilities in which customer deposits make up 62.1 per cent of total equity and liabilities as at 31 December 2017, the majority of which are current accounts, savings accounts and time deposits. Our largest customer deposit base by geography is Greater China & North Asia (in particular Hong Kong), which holds 45.2 per cent of Group customer accounts.

Liquidity and funding risk metrics

We monitor key liquidity metrics regularly, both on a country basis and in aggregate across the Group.

The following Liquidity and Funding Board Risk Appetite metrics define the maximum amount and type of risk that the Group is willing to assume in pursuit of its strategy: liquidity coverage ratio (LCR), liquidity stress survival horizons, external wholesale borrowing and advances to deposits ratio.

Liquidity coverage ratio (LCR) (unaudited)

The LCR is a regulatory requirement set to ensure that the Group has sufficient unencumbered high quality liquid assets to meet its liquidity needs in a 30-calendar-day liquidity stress scenario.

The Group monitors and reports its liquidity position under European Commission Delegated Regulation 2015/ 61 and has maintained its liquidity position above the prudential requirement.

At the reporting date, the Group LCR was 146 per cent (2016: 133 per cent) with a prudent surplus to both Board-approved Risk Appetite and regulatory requirements. The ratio increased 13 per cent year-on-year due to a reduction in net cash outflows as we focused on high quality liquidity across our businesses. We also held adequate liquidity across our footprint to meet all local prudential LCR requirements, where applicable.

For a more detailed Group LCR disclosure, refer to Section 6 of the Group's 2017 Pillar 3 Disclosures.

 

2017
$million

2016
$million

Liquidity buffer

132,251

136,291

Total net cash outflows

90,691

102,263

Liquidity coverage ratio

146%

133%

Stressed coverage (unaudited)

The Group intends to maintain a prudent and sustainable funding and liquidity position, in all presence countries and currencies, such that it can withstand a severe but plausible liquidity stress.

Our approach to managing liquidity and funding risk is reflected in the following Risk Appetite statement.

"The Group should hold an adequate buffer of high quality liquid assets to survive extreme but plausible liquidity stress scenarios for at least 60 days without recourse to extraordinary central bank support."

The Group's internal liquidity stress testing framework covers the following stress scenarios:

•  Standard Chartered-specific - this scenario captures the liquidity impact from an idiosyncratic event affecting Standard Chartered only, i.e. the rest of the market is assumed to operate normally

•  Market-wide - this scenario captures the liquidity impact from a market-wide crisis affecting all participants in a country, region or globally

•  Combined - this scenario assumes both Standard Chartered-specific and Market- Wide events affecting the Group simultaneously, and is hence the most severe scenario

All scenarios include, but are not limited to, modelled outflows for retail and wholesale funding, off-balance sheet funding risk, cross-currency funding risk, intraday risk, franchise risk and risks associated with a deterioration of a firm's credit rating.

Stress testing results show that a positive surplus was maintained under all scenarios at 31 December 2017, i.e. the respective countries included were able to survive for a period of time as defined under each scenario. The combined scenario at 31 December 2017 showed the Group maintaining liquidity resources to survive greater than 60 days, as per our Risk Appetite. The results take into account currency convertibility and portability constraints across all major presence countries.

Standard Chartered Bank's credit ratings as at 31 December 2017 were A+ with stable outlook (Fitch), A with stable outlook (S&P) and A1 with stable outlook (Moody's). A downgrade in the Group's long-term credit ratings would increase derivative collateral requirements and outflows due to rating-linked liabilities. At 31 December 2017, the estimated contractual outflow of a two-notch long term ratings downgrade is $1.3 billion (unaudited).

External wholesale borrowing

The Board sets a risk limit to prevent excessive reliance on wholesale borrowing. Limits are applied to all branches and operating subsidiaries in the Group and as at the reporting date the Group remained within the Board-approved Risk Appetite.

Advances-to-deposits ratio

This is defined as the ratio of total loans and advances to customers relative to total customer accounts. An advances-to-deposits ratio of below 100 per cent demonstrates that customer deposits exceed customer loans as a result of the emphasis placed on generating a high level of funding from customers.

The advances-to-deposits ratio (2017: 69.4 per cent) increased from the previous year (2016: 67.6 per cent).

Loans and advances to customers have increased 12 per cent since the end of 2016 to $286 billion. This growth was largely due to higher Corporate Finance balances in Hong Kong and increased retail mortgage lending in Singapore and Korea, benefiting in part from favourable foreign exchange movement. Our repo business also grew over the period as we benefitted from our deep client franchise and balance sheet strength.

Customer accounts have also increased 9 per cent from the end of 2016 to $412 billion as the Group focused on high-quality liquidity across its businesses with an emphasis on Retail, Transaction Banking and other deposits with high liquidity and regulatory value. Retail current and savings account balances increased significantly over the period along with growth in time deposits.

 

2017
$million

2016
$million

Loans and advances to customers1,2

285,553

255,896

Customer accounts3

411,724

378,302

Advances-to-deposits ratio

69.4%

67.6%

1.   See note 13 of the financial statements

2. Includes reverse repurchase agreements and other similar secured lending of $55,187 million

3. Includes repurchase agreements and other similar secured borrowing of $39,783 million

Net stable funding ratio (NSFR) (unaudited)

On 23 November 2016 the European Commission, as part of a package of risk-reducing measures, proposed a binding requirement for stable funding (Net Stable Funding Ratio (NSFR)) at European Union level. The proposal aims to implement the European Banking Authority's interpretation of the Basel standard on NSFR (BCBS295).

Pending implementation of the final rules, the Group continues to monitor NSFR in line with the BCBS' final recommendation (BCBS295), At the last reporting date, the Group NSFR remained above 100 per cent.

Liquidity pool (unaudited)

The liquidity value of the Group's LCR eligible liquidity pool at the reporting date was $132 billion. The figures in the below table account for haircuts, currency convertibility and portability constraints and therefore are not directly comparable with the consolidated balance sheet. The pool is held to offset stress outflows as defined in European Commission Delegated Regulation 2015/ 61.

The pool decreased $4 billion year-on-year, reflecting the improved quality of our funding base and redeployment of surplus liquidity, held primarily in Europe & Americas, into commercial assets. Our liquidity pool composition also changed over the period as we increased our holdings of Level 1 LCR eligible securities and reduced cash and central bank reserves.



 

 

2017

Greater China & North Asia
$ million

ASEAN &
South Asia
$ million

Africa &
Middle East
$ million

Europe & Americas
$ million

Total
$ million

Level 1 securities

 

 

 

 

 

Cash and balances at central banks

13,779

2,400

1,708

33,191

51,078

Central banks, governments/public sector entities

28,187

12,265

1,064

24,464

65,980

Multilateral development banks and international organisations

 -

563

159

8,568

9,290

Other

 -

 -

 -

130

130

Total Level 1 securities

41,966

15,228

2,931

66,353

126,478

Level 2A securities

2,234

825

113

1,147

4,319

Level 2B securities

 -

246

3

1,206

1,455

Total LCR eligible assets

44,200

16,299

3,047

68,706

132,252

 

 

2016

Greater China & North Asia
$ million

ASEAN &
South Asia
$ million

Africa &
Middle East
$ million

Europe &
Americas
$ million

Total
$ million

Level 1 securities

 

 

 

 

 

Cash and balances at central banks

14,206

2,878

1,452

45,054

63,590

Central banks, governments/public sector entities

28,304

10,430

1,709

16,271

56,714

Multilateral development banks and international organisations

178

1,362

169

9,178

10,887

Other

 -

 -

 -

200

200

Total Level 1 securities

42,688

14,670

3,330

70,703

131,391

Level 2A securities

-

1,848

152

1,597

3,597

Level 2B securities

 -

59

 -

1,244

1,303

Total LCR eligible assets

42,688

16,577

3,482

73,544

136,291

Encumbrance (unaudited)

Encumbered assets

Encumbered assets represent on-balance sheet assets pledged or subject to any form of arrangement to secure, collateralise or credit enhance any transaction from which it cannot be freely withdrawn. Cash collateral pledged against derivatives and Hong Kong government certificates of indebtedness, which secure the equivalent amount of Hong Kong currency notes in circulation, are included within Other assets.

Unencumbered - readily available for encumbrance

Unencumbered assets that are considered by the Group to be readily available in the normal course of business to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for these purposes.

Unencumbered - other assets capable of being encumbered

Unencumbered assets that, in their current form, are not considered by the Group to be readily realisable in the normal course of business to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for these purposes. Included within this category are loans and advances which would be suitable for use in secured funding structures such as securitisations.

Unencumbered - cannot be encumbered

Unencumbered assets are assets that have not been pledged and we have assessed that cannot be used to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements.

Derivatives, reverse repurchase assets and stock lending

These assets are shown separately as these on-balance sheet amounts cannot be pledged. However, these assets can give rise to off-balance sheet collateral, which can be used to raise secured funding or meet additional funding requirements.

The following table provides a reconciliation of the Group's encumbered assets to total assets.



 

 

Assets
$million

2017

Assets encumbered as a result of transactions with counterparties other than central banks

 

Other assets (comprising assets encumbered at the central bank
and unencumbered assets)

As a result of securitisations
$million

Other
$million

Total
$million

Assets positioned at the central bank (ie pre-positioned plus encumbered)
$million

Assets not positioned at the central bank

 

Readily available for encumbrance
$million

Other assets that are capable of being encumbered
$million

Derivatives and reverse repo/stock lending
$million

Cannot be encumbered
$million

Total
$million

Cash and balances at central banks

58,864

 -

-

-

 

9,761

49,103

 -

 -

 -

58,864

Derivative financial instruments

47,031

 -

 -

-

 

 -

 -

 -

47,031

 -

47,031

Loans and advances
to banks1

81,325

 -

 -

-

 

 -

47,380

5,333

21,260

7,352

81,325

Loans and advances
to customers1

285,553

11

 -

11

 

 -

 -

232,328

33,928

19,286

285,542

Investment securities1

138,187

 -

8,213

8,213

 

178

91,928

29,967

 -

7,901

129,974

Other assets

33,490

 -

14,930

14,930

 

 -

-

11,604

 -

6,956

18,560

Current tax assets

491

 -

 -

-

 

 -

 -

 -

 -

491

491

Prepayments and accrued income

2,307

 -

 -

-

 

 -

 -

1,503

 -

804

2,307

Interests in associates and joint ventures

2,307

 -

 -

-

 

 -

 -

 -

 -

2,307

2,307

Goodwill and intangible assets

5,013

 -

 -

-

 

 -

 -

352

 -

4,661

5,013

Property, plant and equipment

7,211

 -

 -

-

 

 -

 -

1,148

 -

6,063

7,211

Deferred tax assets

1,177

 -

 -

-

 

 -

 -

 -

 -

1,177

1,177

Assets classified as
held for sale

545

 -

 -

-

 

 -

 -

 -

 -

545

545

Total

663,501

11

23,143

23,154

 

9,939

188,411

282,235

102,219

57,543

640,347

1  Includes assets held at fair value through profit or loss and reverse repurchase agreements and other similar secured lending

 

Assets
$million

2016

Assets encumbered as a result of transactions with counterparties
other than central banks

 

Other assets (comprising assets encumbered at the central bank
and unencumbered assets)

As a result of securitisations
$million

Other
$million

Total
$million

Assets not positioned at the central bank

Total
$million

Assets positioned at the central bank (ie pre-
positioned
plus encumbered)
$million

Readily available for encumbrance
$million

Other assets that are capable of being encumbered
$million

Derivatives and reverse repo/stock lending
$million

Cannot be encumbered
$million

Cash and balances at central banks

70,706

-

-

-

 

8,648

62,058

-

-

-

70,706

Derivative financial instruments

65,509

-

-

-

 

-

-

-

65,509

-

65,509

Loans and advances
to banks1

74,669

-

-

-

 

-

50,561

4,092

18,568

1,448

74,669

Loans and advances
to customers1

255,896

21

-

21

 

-

-

214,354

26,348

15,173

255,875

Investment securities1

123,812

-

5,868

5,868

 

35

78,535

33,083

-

6,291

117,944

Other assets

36,940

-

19,674

19,674

 

-

-

10,637

-

6,629

17,266

Current tax assets

474

-

-

-

 

-

-

-

-

474

474

Prepayments and accrued income

2,238

-

-

-

 

-

-

887

-

1,351

2,238

Interests in associates and joint ventures

1,929

-

-

-

 

-

-

-

-

1,929

1,929

Goodwill and
intangible assets

4,719

-

-

-

 

-

-

109

-

4,610

4,719

Property, plant
and equipment

7,252

-

-

-

 

-

-

1,039

-

6,213

7,252

Deferred tax assets

1,294

-

-

-

 

-

-

-

-

1,294

1,294

Assets classified as
held for sale

1,254

-

-

-

 

-

-

-

-

1,254

1,254

Total2

646,692

21

25,542

25,563

 

8,683

191,154

264,201

110,425

46,666

621,129

1  Includes assets held at fair value through profit or loss and reverse repurchase agreements and other similar secured lending

2  The 2016 comparatives have been represented to split unencumbered assets to enhance disclosures

The Group received $72,982 million (2016: $54,473 million) as collateral under reverse repurchase agreements that was eligible for repledging; of this, the Group sold or repledged $34,018 million (2016: $33,053 million) under repurchase agreements. ?

Liquidity analysis of the Group's balance sheet

Contractual maturity of assets and liabilities

The following table presents assets and liabilities by maturity groupings based on the remaining period to the contractual maturity date as at the balance sheet date on a discounted basis. Contractual maturities do not necessarily reflect actual repayments or cashflow.

Within the tables below, cash and balances with central banks, interbank placements and investment securities that are available-for-sale are used by the Group principally for liquidity management purposes.

At the reporting date, assets remain predominantly short-dated, with 61 per cent maturing in under one year. Our less than three month cumulative net funding gap increased from the previous year, largely due to an increase in customer accounts as the Group focused on improving the quality of its deposit base. In practice, these deposits are recognised as stable and have behavioural profiles that extend beyond their contractual maturities.

 

2017

One month
or less
$million

Between
one month and three months
$million

Between three
months and six months
$million

Between
six months and nine months
$million

Between
nine months and one
year
$million

Between
one year
and two
years
$million

Between
two years
and five
years
$million

More than
five years
and undated
$million

Total
$million

Assets

 

 

 

 

 

 

 

 

 

Cash and balances at central banks

49,103

-

-

-

-

-

-

9,761

58,864

Derivative financial instruments

6,284

7,706

5,930

3,537

2,601

5,427

7,111

8,435

47,031

Loans and advances to banks1,2

36,548

21,238

12,042

4,299

3,612

1,588

1,386

612

81,325

Loans and advances to customers1,2

87,794

32,618

17,459

11,357

8,545

17,500

37,237

73,043

285,553

Investment securities

14,185

18,208

13,692

11,213

9,145

22,369

31,660

17,715

138,187

Other assets

19,349

4,466

2,521

105

247

138

127

25,588

52,541

Total assets

213,263

84,236

51,644

30,511

24,150

47,022

77,521

135,154

663,501

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Deposits by banks1,3

29,365

2,484

1,437

530

730

154

135

651

35,486

Customer accounts1,4

327,434

37,178

19,716

10,775

9,321

3,115

1,746

2,439

411,724

Derivative financial instruments

8,018

8,035

6,068

3,544

2,685

5,057

7,794

6,900

48,101

Senior debt

67

273

1,801

53

1,937

5,053

4,747

5,585

19,516

Other debt securities in issue1

4,139

10,616

9,954

2,005

779

1,091

794

4,508

33,886

Other liabilities

20,428

5,988

3,672

671

303

696

897

13,150

45,805

Subordinated liabilities and
other borrowed funds

-

116

1,382

-

-

-

3,887

11,791

17,176

Total liabilities

389,451

64,690

44,030

17,578

15,755

15,166

20,000

45,024

611,694

Net liquidity gap

(176,188)

19,546

7,614

12,933

8,395

31,856

57,521

90,130

51,807

1  Loans and advances, investment securities, deposits by banks, customer accounts and debt securities in issue include financial instruments held at fair value through profit or loss, see note 13 of the financial statements

2  Loans and advances include reverse repurchase agreements and other similar secured lending borrowing of $55.2 billion

3  Deposits by banks include repurchase agreements and other similar secured borrowing of $3.8 billion

4  Customer accounts include repurchase agreements and other similar secured lending borrowing of $36 billion



 

 

2016

One month
or less
$million

Between
one month and three months
$million

Between
three
months and six months
$million

Between
six months and nine months
$million

Between
nine months and one
year
$million

Between
one year
and two
years
$million

Between
two years
and five
years
$million

More than
five years
and undated
$million

Total
$million

Assets

 

 

 

 

 

 

 

 

 

Cash and balances at central banks

62,058

-

-

-

-

-

-

8,648

70,706

Derivative financial instruments

7,749

10,562

8,263

5,317

4,580

8,472

10,798

9,768

65,509

Loans and advances to banks1,2

32,231

23,388

10,667

3,041

2,540

1,240

1,404

158

74,669

Loans and advances to customers1,2

71,483

27,977

17,948

7,917

7,839

18,365

32,615

71,752

255,896

Investment securities1

8,600

16,894

11,796

10,496

11,764

19,272

32,626

12,364

123,812

Other assets

23,357

5,379

2,857

195

1,007

60

113

23,132

56,100

Total assets

205,478

84,200

51,531

26,966

27,730

47,409

77,556

125,822

646,692

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Deposits by banks1,3

31,340

2,912

1,115

665

573

629

146

232

37,612

Customer accounts1,4

280,329

46,060

25,258

11,135

8,942

2,577

2,119

1,882

378,302

Derivative financial instruments

8,709

9,911

7,661

6,058

4,797

8,969

11,275

8,332

65,712

Senior debt

96

173

1,212

1,500

981

3,347

8,849

3,433

19,591

Other debt securities in issue1

5,916

11,188

6,883

2,687

447

860

748

4,050

32,779

Other liabilities

19,262

6,163

5,003

687

604

1,368

847

10,581

44,515

Subordinated liabilities and
other borrowed funds

22

31

-

1,710

-

978

785

15,997

19,523

Total liabilities

345,674

76,438

47,132

24,442

16,344

18,728

24,769

44,507

598,034

Net liquidity gap

(140,196)

7,762

4,399

2,524

11,386

28,681

52,787

81,315

48,658

1  Loans and advances, investment securities, deposits by banks, customer accounts and debt securities in issue include financial instruments held at fair value through profit or loss, see note 13 of the financial statements

2  Loans and advances include reverse repurchase agreements and other similar secured lending borrowing of $44.9 billion

3  Deposits by banks include repurchase agreements and other similar secured borrowing of $4 billion

4  Customer accounts include repurchase agreements and other similar secured lending borrowing of $33.7 billion

 

Behavioural maturity of financial assets and liabilities

The cashflows presented in the previous section reflect the cashflows that will be contractually payable over the residual maturity of the instruments. However, contractual maturities do not necessarily reflect the timing of actual repayments or cashflow. In practice, certain assets and liabilities behave differently from their contractual terms, especially for short-term customer accounts, credit card balances and overdrafts, which extend to a longer period than their contractual maturity. On the other hand, mortgage balances tend to have a shorter repayment period than their contractual maturity date. Expected customer behaviour is assessed and managed on a country basis using qualitative and quantitative techniques, including analysis of observed customer behaviour over time.

Maturity of financial liabilities on an undiscounted basis

The following table analyses the contractual cashflows payable for the Group's financial liabilities by remaining contractual maturities on an undiscounted basis. The financial liability balances in the table below will not agree to the balances reported in the consolidated balance sheet as the table incorporates all contractual cashflows, on an undiscounted basis, relating to both principal and interest payments. Derivatives not treated as hedging derivatives are included in the "On demand" time bucket and not by contractual maturity.

Within the 'More than five years and undated' maturity band are undated financial liabilities, all of which relate to subordinated debt, on which interest payments are not included as this information would not be meaningful given the instruments are undated. Interest payments on these instruments are included within the relevant maturities up to five year.

 

2017

One month
or less
$million

Between
one month and three months
$million

Between three months and six months
$million

Between
six months and nine months
$million

Between
nine months and one
year
$million

Between
one year
and two
years
$million

Between
two years
and five
years
$million

More than
five years
and undated
$million

Total
$million

Deposits by banks

29,427

2,497

1,460

545

743

160

150

697

35,679

Customer accounts

327,501

37,353

20,720

10,901

9,463

3,178

1,840

2,919

413,875

Derivative financial instruments1

47,267

-

3

-

153

166

246

266

48,101

Debt securities in issue

4,287

10,888

11,878

2,141

2,876

6,550

6,163

11,769

56,552

Subordinated liabilities and
other borrowed funds

126

207

1,490

210

166

657

3,726

19,356

25,938

Other liabilities

20,800

6,052

3,676

681

324

720

929

11,241

44,423

Total liabilities

429,408

56,997

39,227

14,478

13,725

11,431

13,054

46,248

624,568

 

2016

One month
or less
$million

Between
one month and three months
$million

Between
three months and six months
$million

Between
six months and nine months
$million

Between
nine months and one
year
$million

Between
one year
and two
years
$million

Between
two years
and five
years
$million

More than
five years
and undated
$million

Total
$million

Deposits by banks

31,412

2,923

1,123

671

576

644

154

257

37,760

Customer accounts

280,731

46,268

25,539

11,289

9,074

2,622

2,177

2,548

380,248

Derivative financial instruments1

62,917

10

-

-

876

11

472

1,426

65,712

Debt securities in issue

6,159

11,361

8,228

4,240

1,606

4,574

10,271

9,362

55,801

Subordinated liabilities and
other borrowed funds

173

86

163

1,949

77

1,691

2,724

23,228

30,091

Other liabilities

21,139

6,905

5,059

769

612

1,391

915

11,459

48,249

Total liabilities

402,531

67,553

40,112

18,918

12,821

10,933

16,713

48,280

617,861

1.   Derivatives are on the discounted basis

Earnings sensitivity (unaudited)

The following table provides the estimated impact on the Group's earnings of a 50 basis point parallel shock (up and down) across all yield curves. The sensitivities shown represent the estimated change in base case projected net interest income (NII), plus the change in interest rate implied income and expense from FX swaps used to manage banking book currency positions, under the two interest rate shock scenarios.

The interest rate sensitivities are indicative and based on simplified scenarios, estimating the aggregate impact of an instantaneous 50 basis point parallel shock across all yield curves over a one-year horizon, including the time taken to implement changes to pricing before becoming effective. The assessment assumes that non-interest rate-sensitive aspects of the size and mix of the balance sheet remain constant and that there are no specific management actions in response to the change in rates. No assumptions are made in relation to the impact on credit spreads in a changing rate environment.

Significant modelling and behavioural assumptions are made regarding scenario simplification, market competition, pass-through rates, asset and liability re-pricing tenors, and price flooring. In particular, the assumption that interest rates of all currencies and maturities shift by the same amount concurrently, and that no actions are taken to mitigate the impacts arising from this are considered unlikely. Reported sensitivities will vary over time due to a number of factors including changes in balance sheet composition, market conditions, customer behaviour and risk management strategy and should therefore not be considered an income or profit forecast.

Estimated one-year impact to earnings from a parallel shift in yield curves
at the beginning of the period of:

2017

USD bloc
$million

HKD, SGD &
KRW bloc
$million

Other
currency bloc
$million

Total
$million

+ 50 basis points

70

120

140

330

- 50 basis points

(50)

(100)

(140)

(290)

As at 31 December 2017, the Group estimates the one-year impact of an instantaneous, parallel increase across all yield curves of 50 basis points would result in an earnings benefit of $330 million. The corresponding impact from a parallel decrease of 50 basis points would result in an earnings reduction of $290 million.

The benefit from rising interest rates is primarily from reinvesting at higher yields and from assets re-pricing faster and to a greater extent than deposits. The current estimate indicates that the majority of the earnings benefit would come from our GCNA region and from non-USD currencies.

The USD sensitivity is impacted by the dampening effect due to the asymmetry of funding Trading Book assets with Banking Book liabilities. The sensitivities include the cost of Banking Book liabilities used to fund the Trading Book, however the revenue associated with the Trading Book positions is recognised in net trading income. This asymmetry in both the up and down scenarios should be broadly offset within total operating income.

Operational risk (unaudited)

Operational risks arise from the broad scope of activities carried out across the Group. Risks associated with these activities are mapped into a Group Process Universe where a standardised operational risk management approach is applied to mitigate the risks. We benchmark practices against industry standards and regulatory requirements.

A summary of our operational risk management approach is provided in the Risk management approach.

Operational risk profile

The operational risk profile is the Group's overall exposure to operational risk, at a given point in time, covering all applicable operational risk sub-types. The operational risk profile comprises both operational risk events and losses that have already occurred and the current exposures to operational risks which, at an aggregate level, includes the consideration of top risks and emerging risks.

Operational risk events and losses

Operational losses are one indicator of the effectiveness and robustness of the operational risk control environment. In addition, lessons learnt reviews and root cause analyses from external and internal loss events, including near misses, are used to improve processes and controls.

As at 31 December 2017, recorded operational losses for 2017 are lower than 2016. Operational losses in 2017 comprise of unrelated non-systemic events which were not individually significant. The largest operational loss recognised as at 31 December 2017 relates to the Group's $17.2 million settlement arising from a US class action brought against a number of banks concerning foreign exchange benchmark rates.

Losses in 2016 include incremental events that were recognised in 2017 and reclassification of Basel event types and Basel business lines. As at 31 December 2017, the largest loss recorded for 2016 relates to a credit loan impairment of $24.5 million in the Commercial Banking Basel business line.

The Group's profile of operational loss events in 2017 and 2016 is summarised in the table below. It shows the percentage distribution of gross operational losses by Basel business line.

Distribution of operational losses by Basel business line

% Loss

2017

20161

Agency services

3.2%

2.5%

Commercial Banking

7.2%

25.3%

Corporate Finance

4.6%

0.0%

Corporate items

3.8%

10.7%

Payment and settlements

1.6%

7.0%

Retail Banking

39.6%

30.6%

Retail brokerage

0.1%

4.4%

Trading and sales

39.9%

19.5%

1 2016 losses are restated to reflect incremental losses recorded.

The Group's profile of operational loss events in 2017 and 2016 is also summarised by Basel event type in the table below. It shows the percentage distribution of gross operational losses by Basel event type:

Distribution of operational losses by Basel event type

% Loss

2017

20161

Business disruption and system failures

0.6%

2.1%

Client products and business practices

41.8%

10.6%

Damage to physical assets

0.1%

0.0%

Employment practices and workplace safety

0.0%

0.4%

Execution delivery and process management

36.0%

50.7%

External fraud

20.7%

34.2%

Internal fraud

0.8%

2.0%

1  2016 losses are restated to reflect incremental losses recorded

Operational losses are one indicator of the effectiveness and robustness of the operational risk control environment. In addition, lessons learnt reviews and root cause analyses from external and internal loss events, including near misses, are used to improve processes and controls.

Top risks and emerging risks

A top risk is a risk exposure, or a group of highly correlated risk exposures, that has the highest potential to breach the Group's risk capacity. The objective is to identify those risks that can materially impact the Group's risk capacity, and to calibrate metrics as early warning indicators against undesirable outcomes and performance under stress. Top risk candidates are identified through a top-down assessment of concentration of exposures or aggregation of risks.

Emerging risks are also considered, both internally from the Group's internal operational risk profile and from external events. Given their significance, top risks attract closer scrutiny from management and governance committees. Top risks change over time based on the top-down assessments by management.

The Group's operational top risks as at 31 December 2017 are shown in the table below.

Top risks

Macro-prudential, regulatory, and external risks

•  Regulatory non-compliance

•  Anti-money laundering and terrorist financing

•  International sanctions

•  External fraud

•  Market misconduct

•  Information and cyber security

•  Critical third-party vendors

•  Additional conduct matters

•  Anti-bribery and corruption

Internal processes, systems, and change risks

•  Change management

•  Data management

•  Major systems failure

•  Significant business interruption

•  Rogue trading

•  Internal fraud

•  Mis-selling

•  Product management

•  Collateral and Document management

For further information on the Group's liquidity stress testing framework refer to the Risk Management Approach.



 

CAPITAL REVIEW

The Capital review provides an analysis of the Group's capital and leverage position and requirements

Capital summary

The Group's capital and leverage position is managed within the Board-approved Risk Appetite. The Group is well capitalised with low leverage and high levels of loss-absorbing capacity.

Capital, leverage and RWA

2017

 2016

CET1 capital %

 13.6

 13.6

Tier 1 capital %

 16.0

 15.7

Total capital %

 21.0

 21.3

UK leverage %

 6.0

 6.0

RWA ($ million)

 279,748

 269,445

The Group's Common Equity Tier 1 (CET1) capital and leverage position was ahead of both the current requirements and the expected end-state requirements for 2019. For further detail see the Standard Chartered PLC Pillar 3 Disclosures 2017 section on Capital.

The Group was advised during the period that its Pillar 2A requirement, as reviewed regularly by the PRA for all banks, has increased. The Group's current Pillar 2A requirement is 3.1 per cent of RWA of which at least 1.7 per cent must be held in CET1. This requirement is expected to vary over time.

In January 2017, the Group issued $1 billion of Additional Tier 1 (AT1) capital and currently has 2.4 per cent of RWA in AT1. The Group continued its programme of senior issuance from the holding company, with around $1.5 billion issued during the year, including Standard Chartered PLC's inaugural issuance of callable senior notes.

The Bank of England (BoE) confirmed the Group's non-binding, indicative minimum requirement for own funds and eligible liabilities (MREL). As at 31 December 2017 the Group estimates that its MREL requirement is 16.0 per cent of RWA in 2019 rising to 19.1 per cent of RWA in 2020 and 22.2 per cent of RWA from 1 January 2022.

The Group's combined buffer (comprising the capital conservation, global systemically important institution (G-SII) and countercyclical buffers) sits above any MREL requirement, resulting in a total loss-absorbing capacity requirement of 26.0 per cent of RWA from 1 January 2022 based on the Group's CRD IV capital buffers that are known at this time.

The Group currently estimates that its MREL position was around 25.5 per cent of RWA and around 10.0 per cent of leverage exposure at 31 December 2017.

In November 2017, the Bank of England released the results of the 2017 stress test exercise. The 2017 annual cyclical scenario (ACS) incorporated a severe and synchronised global macroeconomic and financial market stress with growth in China, Hong Kong and Singapore particularly impacted. The results showed that, under the ACS, the Group exceeded all hurdle rates and systemic reference points after strategic management actions. The Group has a strong and liquid balance sheet and these results demonstrate the benefits of the actions recently undertaken by the Group
to improve its resilience to an extreme stress scenario.

Regulatory update

The Group has been in discussions with the Prudential Regulation Authority (PRA) about changes to the treatment of certain exposures where the country-specific default experience is not deemed sufficient for modelling purposes, including the application of various loss given default (LGD) floors based on the Foundation IRB approach.

Following an agreement reached in the third quarter with the PRA, as of September 2017 the Group has applied a LGD floor to certain financial institutions exposures, which resulted in a RWA increase equivalent to about a 35 basis points reduction in the Group's CET1 ratio. Similar model changes relating to certain corporate exposures will be introduced during the first half of 2018. These changes are expected to have a lower impact on the Group's CET1 ratio than the changes taken in 2017.

The European Commission is proposing amendments to the Capital Requirements Regulation, CRD IV, the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation. Any proposed reforms remain subject to change and until the proposals are in final form it is uncertain how they will affect the Group.

The Group remains a G-SII with a 1.0 per cent G-SII CET1 buffer which began to be phased in from 1 January 2016 and will be fully implemented by 1 January 2019. The buffer phases in at a rate of 0.25 per cent per year. The Standard Chartered PLC 2016 G-SII disclosure is published at: investors.sc.com/fullyearresults

IFRS 9

Under IFRS 9 it is estimated that on day 1 the Group's CET1 ratio would not be impacted after applying 95 per cent transitional relief. The day 1 end point impact (with no transitional relief) reduces CET1 by an estimated 15 basis points, which is attributed to the following factors:

•  The increase in IFRS 9 expected credit loss (ECL) allowances for AIRB portfolios has been mostly offset by the existing regulatory excess expected loss (EL) deduction

•  The increase in IFRS 9 ECL for standardised portfolios directly impacts CET1 as there is no existing regulatory deduction to absorb the increase

•  The increase in deferred tax assets recognised from IFRS 9 re-measurements and the increase in asset fair values as a result of classification and measurement partially mitigates the impact of ECL.

CET1 ratio (phasing in of transition)

13.6

IAS 39 at 31 December 2017

13.5

IFRS 9 at 1 January 2018 before transitional relief

13.6

IFRS 9 at 1 January 2018 after transitional relief

Transitional relief relates to the phasing in of the impact of the initial adoption of the ECL component of IFRS 9 into CET1, as permitted by Regulation (EU) 2017/2395 of the European Parliament and of the Council. Under this approach, the balance of ECL allowances in excess of the regulatory excess EL and standardised portfolios are phased into the CET1 capital base over 5 years.
The proportion phased in for the balance at each reporting period is: 2018 5 per cent; 2019 15 per cent; 2020 30 per cent; 2021 50 per cent; 2022 75 per cent. From 2023 onwards there is no transitional relief.

Capital ratios

 

2017

2016

CET1

13.6%

13.6%

Tier 1 capital

16.0%

15.7%

Total capital

21.0%

21.3%

CRD IV Capital base

 

2017
$million

2016
$million

CET1 instruments and reserves

 

 

Capital instruments and the related share premium accounts

5,603

5,597

Of which: share premium accounts

3,957

3,957

Retained earnings1

25,316

26,000

Accumulated other comprehensive income (and other reserves)

12,766

11,524

Non-controlling interests (amount allowed in consolidated CET1)

850

809

Independently reviewed interim and year-end profits/(losses)

1,227

(247)

Foreseeable dividends net of scrip

(399)

(212)

CET1 capital before regulatory adjustments

45,363

43,471

CET1 regulatory adjustments

 

 

Additional value adjustments (prudential valuation adjustments)

(574)

(660)

Intangible assets (net of related tax liability)

(5,112)

(4,856)

Deferred tax assets that rely on future profitability (excludes those arising from temporary differences)

(125)

(197)

Fair value reserves related to net losses on cash flow hedges

45

85

Deduction of amounts resulting from the calculation of excess expected loss

(1,142)

(740)

Net gains on liabilities at fair value resulting from changes in own credit risk

(53)

(289)

Defined-benefit pension fund assets

(40)

(18)

Fair value gains arising from the institution's own credit risk related to derivative liabilities

(59)

(20)

Exposure amounts which could qualify for risk weighting of 1,250%

(141)

(168)

Total regulatory adjustments to CET1

(7,201)

(6,863)

CET1 capital

38,162

36,608

Additional Tier 1 capital (AT1) instruments

6,719

5,704

AT1 regulatory adjustments

(20)

(20)

Tier 1 capital

44,861

42,292

 

 

 

Tier 2 capital instruments

13,927

15,176

Tier 2 regulatory adjustments

(30)

(30)

Tier 2 capital

13,897

15,146

Total capital

58,758

57,438

Total risk-weighted assets (unaudited)

279,748

269,445

1. CET1 capital before regulatory adjustments is prepared on the regulatory scope of consolidation

Movement in total capital

 

2017
$million

2016
$million

CET1 at 1 January

36,608

38,182

Ordinary shares issued in the year and share premium

6

1

Profit/(loss) for the year

1,227

(247)

Foreseeable dividends net of scrip deducted from CET1

(399)

(212)

Difference between dividends paid and foreseeable dividends

(233)

(116)

Movement in goodwill and other intangible assets

(256)

(36)

Foreign currency translation differences

1,363

(779)

Non-controlling interests

41

227

Movement in eligible other comprehensive income

119

(579)

Deferred tax assets that rely on future profitability

72

15

(Increase) / decrease in excess expected loss

(402)

(171)

Additional value adjustments (Prudential Valuation Adjustment)

86

(96)

Own credit gains

(39)

342

Exposure amounts which could qualify for risk weighting

27

31

Other

(58)

46

CET1 at 31 December

38,162

36,608

 

 

 

AT1 at 1 January

5,684

4,591

Issuances net of redemptions

992

1,010

Foreign currency translation difference

23

(47)

Other

-

130

AT1 at 31 December

6,699

5,684

 

 

 

Tier 2 capital at 1 January

15,146

16,248

Regulatory amortisation

779

(181)

Issuances net of redemptions

(2,907)

(697)

Foreign currency translation difference

676

(577)

Tier 2 ineligible minority interest

233

374

Other

(30)

(21)

Tier 2 capital at 31 December

13,897

15,146

Total capital at 31 December

58,758

57,438

The main movements in capital in 2017 were:

•  The CET1 ratio remained flat at 13.6 per cent with a $10.3 billion increase in RWA offsetting a $1.6 billion increase in CET1 capital as described below

•  CET1 capital increased by $1.6 billion as underlying profits and favourable foreign currency translation were offset in part by distributions and higher regulatory adjustments

•  AT1 capital increased to $6.7 billion due to the issuance of $1 billion of AT1 securities in the period

•  Tier 2 reduced by $1.2 billion to $13.9 billion as calls and maturities were not replaced by new issuance. This was in part offset by foreign currency translation and the net impact of regulatory amortisation and deductions.

Risk-weighted assets by business

 

2017

Credit risk
$million

Operational risk
$million

Market risk
$million

Total risk
$million

Corporate & Institutional Banking

109,368

14,740

22,994

147,102

Retail Banking

36,345

7,761

-

44,106

Commercial Banking

29,712

3,356

-

33,068

Private Banking

5,134

809

-

5,943

Central and other items

45,671

3,812

46

49,529

Total risk-weighted assets

226,230

30,478

23,040

279,748



 

 

2016

Credit risk
$million

Operational risk
$million

Market risk
$million

Total risk
$million

Corporate & Institutional Banking

106,834

16,703

19,228

142,765

Retail Banking

33,210

8,953

-

42,163

Commercial Banking

27,553

4,385

-

31,938

Private Banking

5,129

959

-

6,088

Central and other items

41,149

2,693

2,649

46,491

Total risk-weighted assets

213,875

33,693

21,877

269,445

Risk-weighted assets by geographic region1

 

2017
$million

2016
$million

Greater China & North Asia

84,593

76,665

ASEAN & South Asia

96,733

96,673

Africa & Middle East

56,437

52,849

Europe & Americas

44,735

43,487

Central & other items

(2,750)

(229)

Total risk weighted assets

279,748

269,445

1  Risk-weighted assets by geographic region is presented on a basis consistent with Note 2 Segmental information

Movement in risk weighted assets

 

Credit risk

Operational risk
$million

Market risk
$million

Total risk
$million

Corporate & Institutional Banking
$million

Retail Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Total
$million

At 1 January 2016

127,528

38,007

30,825

6,302

42,740

245,402

35,610

21,913

302,925

Assets (decline)/growth

(15,860)

(1,221)

(3,221)

(1,120)

493

(20,929)

 

 

(20,929)

Net credit migration

156

116

(61)

-

(179)

32

-

-

32

Risk-weighted assets efficiencies

(2,722)

-

-

-

-

(2,722)

-

-

(2,722)

Model, methodology and policy changes

(917)

(2,708)

437

-

(1,316)

(4,504)

-

5,500

996

Disposals

-

(471)

-

-

-

(471)

-

-

(471)

Foreign currency translation

(1,351)

(513)

(427)

(53)

(589)

(2,933)

 

 

(2,933)

Other non-credit risk movements

-

-

-

-

-

-

(1,917)

(5,536)

(7,453)

At 31 December 2016

106,834

33,210

27,553

5,129

41,149

213,875

33,693

21,877

269,445

Assets (decline)/growth

(6,363)

2,349

1,973

445

2,273

677

-

-

677

Net credit migration

4,035

74

(465)

-

9

3,653

-

-

3,653

Risk-weighted assets efficiencies

(2,295)

-

-

-

-

(2,295)

-

-

(2,295)

Model, methodology and policy changes

4,990

(368)

-

(575)

2,372

6,419

-

(2,178)

4,241

Disposals

-

(710)

-

-

(443)

(1,153)

-

-

(1,153)

Foreign currency translation

2,167

1,790

651

135

311

5,054

-

-

5,054

Other non-credit risk movements

-

-

-

-

-

-

(3,215)

3,341

126

At 31 December 2017

109,368

36,345

29,712

5,134

45,671

226,230

30,478

23,040

279,748

RWA increased by $10.3 billion, or 3.8 per cent from 31 December 2016 to $279.7 billion. This was due to a $12.4 billion increase in credit risk RWA and a $1.2 billion increase in market risk RWA partly offset by a $3.2 billion decrease in operational risk RWA.

Corporate & Institutional Banking

Credit risk RWA increased by $2.5 billion to $109.4 billion mainly due to:

•  $4.0 billion increase due to credit migration in the AME and GCNA regions

•  $5.0 billion increase in model, methodology and policy changes, of which $5.2 billion was due to PRA approved IRB model changes in financial institutions relating to LGD floors

•  Financial markets and corporate finance asset decline of $6.4 billion driven by asset reduction and change in product mix

•  $2.3 billion reduction from efficiencies in financial markets through optimisation and process enhancements, including CVA RWA saves

•  $2.2 billion increase from foreign currency translation due to appreciation of currencies in Europe, India, and China



 

Retail Banking

Credit risk RWA increased by $3.1 billion to $36.3 billion, due to:

•  $2.3 billion increase from mortgage and secured lending growth

•  $0.4 billion RWA save due to model, methodology and policy changes

•  $0.7 billion due to the disposal of our Thailand retail portfolio

•  $1.8 billion increase from foreign currency translation due to appreciation of currencies in Korea, Singapore and India

Commercial Banking

Credit risk RWA increased by $2.2 billion to $29.7 billion mainly due to:

•  $2.0 billion increase from new business, with growth in transaction banking and lending

•  Credit migration reduction of $0.5 billion due to increased provisions in the ASA and GCNA regions

•  $0.7 billion increase from foreign currency translation due to appreciation of currencies in Korea, India and Europe

Private Banking

Credit risk RWA is broadly flat at $5.1 billion year on year. Changes in asset balances and foreign currency translation in Europe and Singapore, were offset by RWA saves achieved through recognition of eligible collateral.

Central & other items

Credit risk RWA increased by $4.5 billion to $45.7 billion due to:

•  An increase of $2.3 billion in credit RWA mainly due to treasury activities, offset in part by lower RWA balances for investments in Associates

•  $2.4 billion increase due to PRA approved IRB model changes in financial institutions relating to LGD floors in treasury markets

•  $0.4 billion saving from the disposal of an investment in the GCNA region

•  $0.3 billion increase from foreign currency translation due to appreciation of currencies in India, Korea and China

Market risk

Total market risk RWA increased by $1.2 billion, or 5.3 per cent from 31 December 2016 to $23.0 billion. This was mainly due to increases in trading book debt security holdings partly offset by lower market volatility. Methodology and policy changes contributed RWA savings of $2.2 billion.

Operational risk

Operational risk RWA reduced by $3.2 billion to $30.5 billion, due to a decrease in the average income over a rolling three-year time horizon, as lower 2016 income replaced higher 2013 income. This represents a 9.5 per cent year-on-year reduction in operational risk RWA.

UK leverage ratio

The Group's UK leverage ratio, which excludes qualifying claims on central banks in accordance with a PRA waiver, was 6.0 per cent, which is above the current minimum requirement of 3.5 per cent.

The UK leverage ratio in the period remained flat as the increase in Tier 1 capital (end point) was offset by an increase in the UK leverage exposure measure.



 

UK leverage ratio (unaudited)

 

2017
$million

2016
$million

Tier 1 capital (transitional)

44,861

42,292

Additional Tier 1 capital subject to phase out

(1,758)

(1,735)

Tier 1 capital (end point)

43,103

40,557

Derivative financial instruments

47,031

65,509

Derivative cash collateral

9,513

14,230

Securities financing transactions (SFTs)

55,187

44,916

Loans and advances and other assets

551,770

522,037

Total on-balance sheet assets

663,501

646,692

Regulatory consolidation adjustments1

(31,712)

(31,491)

 

 

 

Derivatives adjustments

 

 

Derivatives netting

(29,830)

(38,737)

Adjustments to cash collateral

(18,411)

(23,449)

Net written credit protection

1,360

7,311

Potential future exposure on derivatives

30,027

49,607

Total derivatives adjustments

(16,854)

(5,268)

Counterparty risk leverage exposure measure for SFTs

13,238

10,412

Off-balance sheet items

96,260

60,535

Regulatory deductions from Tier 1 capital

(7,089)

(6,553)

UK leverage exposure (end point)

717,344

674,327

UK leverage ratio (end point)

6.0%

6.0%

UK leverage exposure quarterly average

723,508

N/A

UK leverage ratio quarterly average

6.0%

N/A

Countercyclical leverage ratio buffer

0.1%

0.0%

G-SII additional leverage ratio buffer

0.2%

0.1%

1 Includes adjustment for qualifying central bank claims



 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare Group and Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the Company financial statements on the same basis.

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of their profit or loss for that period. In preparing each of the Group and Company financial statements, the directors are required to:

•  Select suitable accounting policies and then apply them consistently;

•  Make judgements and estimates that are reasonable, relevant and reliable;

•  State whether they have been prepared in accordance with IFRSs as adopted by the EU;

•  Assess the Group and the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

•  Use the going concern basis of accounting unless they either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the directors in respect of the annual financial report

We confirm that to the best of our knowledge:

•  The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and

•  The Strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

By order of the Board

 

Andy Halford

Group Chief Financial Officer

27 February 2018



FINANCIAL STATEMENTS

 

Consolidated income statement

For the year ended 31 December 2017


Notes

2017
$million

2016
$million

Interest income

 

14,435

13,010

Interest expense

 

(6,254)

(5,216)

Net interest income

3

8,181

7,794

Fees and commission income

 

3,942

3,671

Fees and commission expense

 

(430)

(440)

Net fee and commission income

4

3,512

3,231

Net trading income

5

1,527

1,886

Other operating income

6

1,205

1,149

Operating income

 

14,425

14,060

Staff costs

 

(6,758)

(6,303)

Premises costs

 

(823)

(797)

General administrative expenses

 

(2,007)

(2,372)

Depreciation and amortisation

 

(829)

(739)

Operating expenses

7

(10,417)

(10,211)

Operating profit before impairment losses and taxation

 

4,008

3,849

Impairment losses on loans and advances and other credit risk provisions

8

(1,362)

(2,791)

Other impairment

 

 

 

Goodwill

9

(320)

(166)

Other

9

(179)

(446)

Profit/(loss) from associates and joint ventures

32

268

(37)

Profit before taxation

 

2,415

409

Taxation

10

(1,147)

(600)

Profit/(loss) for the year

 

1,268

(191)

 

 

 

 

Profit/(loss) attributable to:

 

 

 

Non-controlling interests

29

49

56

Parent company shareholders

 

1,219

(247)

Profit/(loss) for the year

 

1,268

(191)

 

 

 

cents

cents

Earnings per share:

 

 

 

Basic earnings/(loss) per ordinary share

12

23.5

(14.5)

Diluted earnings/(loss) per ordinary share

12

23.3

(14.5)

The notes form an integral part of these financial statements.



 

Consolidated statement of comprehensive income

For the year ended 31 December 2017

 

Notes

2017
$million

2016
$million

Profit/(loss) for the year

 

1,268

(191)

Other comprehensive income/(loss)

 

 

 

Items that will not be reclassified to income statement:

 

(238)

(445)

Own credit losses on financial liabilities designated at fair value through profit or loss

 

(249)

(372)

Actuarial gains/(losses) on retirement benefit obligations

30

32

(105)

Taxation relating to components of other comprehensive income

10

(21)

32

 

 

 

 

Items that may be reclassified subsequently to income statement:

 

1,532

(968)

Exchange differences on translation of foreign operations:

 

 

 

Net gains/(losses) taken to equity

 

1,637

(817)

Net (losses)/gains on net investment hedges

 

(288)

30

Share of other comprehensive loss from associates and joint ventures

 

(1)

(11)

Available-for-sale investments:

 

 

 

Net valuation gains taken to equity

 

369

48

Reclassified to income statement

 

(233)

(188)

Cash flow hedges:

 

 

 

Net gains/(losses) taken to equity

 

35

(79)

Reclassified to income statement

14

11

57

Taxation relating to components of other comprehensive income

10

2

(8)

Other comprehensive income/(loss) for the year, net of taxation

 

1,294

(1,413)

Total comprehensive income/(loss) for the year

 

2,562

(1,604)

 

 

 

 

Total comprehensive income/(loss) attributable to:

 

 

 

Non-controlling interests

29

50

45

Parent company shareholders

 

2,512

(1,649)

 

 

2,562

(1,604)

 



 

Consolidated balance sheet

As at 31 December 2017


Notes

2017
$million

2016
$million

Assets

 

 

 

Cash and balances at central banks

13,35

58,864

70,706

Financial assets held at fair value through profit or loss

13

27,564

20,077

Derivative financial instruments

13,14

47,031

65,509

Loans and advances to banks

13

57,494

54,538

Loans and advances to customers

13

248,707

226,693

Reverse repurchase agreements and other similar secured lending

13,17

54,275

44,097

Investment securities

13,15

117,025

108,972

Other assets

21

33,490

36,940

Current tax assets

10

491

474

Prepayments and accrued income

 

2,307

2,238

Interests in associates and joint ventures

32

2,307

1,929

Goodwill and intangible assets

18

5,013

4,719

Property, plant and equipment

19

7,211

7,252

Deferred tax assets

10

1,177

1,294

Assets classified as held for sale

21

545

1,254

Total assets

 

663,501

646,692

 

 

 

 

Liabilities

 

 

 

Deposits by banks

13

30,945

32,872

Customer accounts

13

370,509

338,185

Repurchase agreements and other similar secured borrowing

13,17

39,783

37,692

Financial liabilities held at fair value through profit or loss

13

16,633

16,598

Derivative financial instruments

13,14

48,101

65,712

Debt securities in issue

13,22

46,379

46,700

Other liabilities

23

35,257

33,146

Current tax liabilities

10

376

327

Accruals and deferred income

 

5,493

5,223

Subordinated liabilities and other borrowed funds

13,27

17,176

19,523

Deferred tax liabilities

10

404

353

Provisions for liabilities and charges

24

183

213

Retirement benefit obligations

30

455

525

Liabilities included in disposal groups held for sale

23

-

965

Total liabilities

 

611,694

598,034

 

 

 

 

Equity

 

 

 

Share capital and share premium account

28

7,097

7,091

Other reserves

 

12,767

11,524

Retained earnings

 

26,641

25,753

Total parent company shareholders' equity

 

46,505

44,368

Other equity instruments

28

4,961

3,969

Total equity excluding non-controlling interests

 

51,466

48,337

Non-controlling interests

29

341

321

Total equity

 

51,807

48,658

Total equity and liabilities

 

663,501

646,692

The notes form an integral part of these financial statements.

These financial statements were approved by the Board of directors and authorised for issue on 27 February 2018 and signed on its behalf by:

Josι Viρals                                           Bill Winters                                           Andy Halford

Group Chairman                                    Group Chief Executive                            Group Chief Financial Officer



 

Consolidated statement of changes in equity

For the year ended 31 December 2017


Share capital
and share premium account
$million

Capital and merger reserves1
$million

Own credit adjustment reserve
$million

Available-for-sale reserve
$million

Cash flow hedge reserve
$million

Translation reserve
$million

Retained earnings
$million

Parent company shareholders' equity
$million

Other
equity instruments
$million

Non-controlling interests
$million

Total
$million

At 1 January 2016

7,088

17,122

-

132

(46)

(5,026)

26,934

46,204

1,987

321

48,512

Transfer of own credit adjustment, net of taxation2

-

-

631

-

-

-

(631)

-

-

-

-

(Loss)/profit for the year

-

-

-

-

-

-

(247)

(247)

-

56

(191)

Other comprehensive loss

-

-

(342)

(136)

(39)

(779)

(106)3

(1,402)

-

(11)

(1,413)

Distributions

-

-

-

-

-

-

-

-

-

(37)

(37)

Shares issued, net of expenses

3

7

-

-

-

-

-

10

-

-

10

Other equity instruments issued, net of expenses

-

-

-

-

-

-

-

-

1,982

-

1,982

Net own shares adjustment

-

-

-

-

-

-

(46)

(46)

-

-

(46)

Share option expense, net of taxation

-

-

-

-

-

-

80

80

-

-

80

Dividends4

-

-

-

-

-

-

(231)

(231)

-

-

(231)

Other movements5

-

-

-

-

-

-

-

-

-

(8)

(8)

As at 31 December 2016

7,091

17,129

289

(4)

(85)

(5,805)

25,753

44,368

3,969

321

48,658

Profit for the year

-

-

-

-

-

-

1,219

1,219

-

49

1,268

Other comprehensive (loss)/income

-

-

(235)

87

40

1,351

503

1,293

-

1

1,294

Distributions

-

-

-

-

-

-

-

-

-

(51)

(51)

Shares issued, net of expenses

6

-

-

-

-

-

-

6

-

-

6

Other equity instruments issued, net of expenses

-

-

-

-

-

-

-

-

992

-

992

Net own shares adjustment

-

-

-

-

-

-

10

10

-

-

10

Share option expense, net of taxation

-

-

-

-

-

-

125

125

-

-

125

Dividends4

-

-

-

-

-

-

(445)

(445)

-

-

(445)

Other movements6

-

-

-

-

-

-

(71)

(71)

-

21

(50)

As at 31 December 2017

7,097

17,129

54

83

(45)

(4,454)

26,641

46,505

4,961

341

51,807

1  Includes capital reserve of $5 million, capital redemption reserve of $13 million and merger reserve of $17,111 million

2  The Group early adopted IFRS 9 Financial Instruments to present own credit adjustments within Other comprehensive income (rather than Net trading income)

3  Comprises actuarial gain/(loss), net of taxation and share from associates and joint ventures $50 million (2016: $(106) million)

4  Comprises of dividends on preferences shares classified as equity and Additional Tier 1 securities $445 million (2016: $231 million)

5  Mainly due to completion of sale of businesses with non-controlling interest in Pakistan and issuance of shares to non-controlling interest in Angola

6  Mainly due to additional share capital issued including the premium by Nepal to its non-controlling interests of $31 million, non-controlling interest with respect to an acquisition during 2017 of $9 million and offset by other equity adjustments of $90 million

The notes form an integral part of these financial statements.



 

Cash flow statement

For the year ended 31 December 2017


Notes

Group

 

Company

2017
$million

2016
$million

2017
$million

2016
$million

Cash flows from operating activities:

 

 

 

 

 

 

Profit before taxation

 

2,415

409

 

207

192

Adjustments for non-cash items and other adjustments included within income statement

34

3,241

4,615

 

615

703

Change in operating assets

34

(13,625)

(8,286)

 

459

110

Change in operating liabilities

34

5,819

13,080

 

575

(619)

Contributions to defined benefit schemes

30

(143)

(98)

 

-

-

UK and overseas taxes paid

10

(915)

(1,287)

 

(14)

(12)

Net cash (used in)/from operating activities

 

(3,208)

8,433

 

1,842

374

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property, plant and equipment

19

(165)

(195)

 

-

-

Disposal of property, plant and equipment

 

29

23

 

-

-

Acquisition of investment in subsidiaries, associates, and joint ventures, net of cash acquired

32

(44)

(238)

 

(1,000)

(5,500)

Dividends received from subsidiaries, associates and joint ventures

32

2

3

 

392

204

Disposal of subsidiaries

 

-

636

 

-

-

Purchase of investment securities

15

(265,186)

(207,274)

 

-

(4,000)

Disposal and maturity of investment securities

 

261,316

210,857

 

2,850

1,300

Net cash (used in)/from investing activities

 

(4,048)

3,812

 

2,242

(7,996)

Cash flows from financing activities:

 

 

 

 

 

 

Issue of ordinary and preference share capital, net of expenses

28

6

10

 

6

10

Exercise of share options

 

10

5

 

10

5

Purchase of own shares

 

-

(51)

 

-

(51)

Issue of Additional Tier 1 capital, net of expenses

28

992

1,982

 

992

1,982

Gross proceeds from issue of subordinated liabilities

34

-

1,250

 

-

1,250

Interest paid on subordinated liabilities

34

(743)

(920)

 

(353)

(604)

Repayment of subordinated liabilities

34

(2,984)

(2,666)

 

(1,249)

(105)

Proceeds from issue of senior debts

34

2,292

5,453

 

1,501

4,385

Repayment of senior debts

34

(4,162)

(6,470)

 

(3,237)

(3,941)

Interest paid on senior debts

34

(896)

(454)

 

(825)

(365)

Investment from/(repayment to) non-controlling interests

 

21

(8)

 

-

-

Dividends paid to non-controlling interests and preference shareholders

 

(496)

(268)

 

(445)

(231)

Net cash (used in)/from financing activities

 

(5,960)

(2,137)

 

(3,600)

2,335

Net (decrease)/increase in cash and cash equivalents

 

(13,216)

10,108

 

484

(5,287)

Cash and cash equivalents at beginning of the year

 

96,977

88,428

 

15,230

20,517

Effect of exchange rate movements on cash and cash equivalents

 

3,470

(1,559)

 

-

-

Cash and cash equivalents at end of the year

35

87,231

96,977

 

15,714

15,230

The notes form an integral part of these financial statements.



 

Notes to the financial statements

1. Accounting policies

Statement of compliance

The Group financial statements consolidate Standard Chartered PLC (the Company) and its subsidiaries (together referred to as the Group) and equity account the Group's interest in associates and jointly controlled entities.

The parent company financial statements present information about the Company as a separate entity.

Both the parent company financial statements and the Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee interpretations as endorsed by the European Union (EU). EU-endorsed IFRS may differ from IFRS published by the International Accounting Standards Board (IASB) if a standard has not been endorsed by the EU.

The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its individual statement of comprehensive income and related notes that form a part of these financial statements.

The following parts of the Risk review and Capital review form part of these financial statements:

a) From the start of Risk profile section to the end of Top risks and emerging risks in the same section excluding:

•  Asset backed securities

•  Country risk

•  Market risk changes - risks not in value at risk

•  Market risk changes - backtesting

•  Mapping of market risk items to the balance sheet

•  Stressed coverage and liquidity coverage ratio

•  Net stable funding ratio

•  Liquidity pool

•  Encumbrance

•  Earnings sensitivity

•  Operational risk

b) From the start of Principal risks to the end of Capital and Liquidity risk, excluding Country risk

c) From the start of the CRD IV capital base section to the end of Movement in total capital section

Basis of preparation

The consolidated and Company financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of cash-settled share-based payments, available-for-sale assets, and financial assets and liabilities (including derivatives) at fair value through profit or loss.

Significant accounting estimates and judgements

In determining the carrying amounts of certain assets and liabilities, the Group makes assumptions of the effects of uncertain future events on those assets and liabilities at the balance sheet date. The Group's estimates and assumptions are based on historical experience and expectation of future events and are reviewed periodically. Further information about key assumptions concerning the future, and other key sources of estimation uncertainty and judgement, are set out in the relevant disclosure notes for the following areas:

•  Impairment of loans and advances (note 8)

•  Taxation (note 10)

•  Valuation of financial instruments held at fair value (note 13)

•  Goodwill impairment (note 18)

•  Provisions for liabilities and charges (note 24)

•  Retirement benefit obligations (note 30)

•  Investments in associates and joint ventures (note 32)



 

IFRS and Hong Kong accounting requirements

As required by the Hong Kong Listing Rules, an explanation of the differences in accounting practices between EU-endorsed IFRS and Hong Kong Financial Reporting Standards is required to be disclosed. There would be no significant differences had these accounts been prepared in accordance with Hong Kong Financial Reporting Standards.

Comparatives

Certain comparatives have been changed to comply with current year disclosures.

Reverse repurchase and repurchase agreements including other similar secured lending and borrowing have been separated from loans and advances to banks and customers and deposits by banks and customer accounts on the balance sheet.

Details of these changes are set out in the relevant notes below:

•  Liquidity and funding risk

•  Note 13 Financial instruments

•  Note 15 Investment securities

•  Note 18 Goodwill and intangible assets

•  Note 25 Contingent liabilities and commitments

•  Note 27 Subordinated liabilities and other borrowed funds

•  Note 33 Structured entities

These changes have not resulted in any amendments to the reported income statement or balance sheet of the Group.

New accounting standards adopted by the Group

There were no new standards applied during the year ended 31 December 2017.

The accounting policies used by the Group are detailed in the relevant note to the financial statements, except those set out below. All have been applied consistently across the Group and to all years presented in these financial statements.

Foreign currencies

Items included in the Group financial statements for each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency of that entity). Both the Group and Company financial statements are presented in millions of US dollars ($ million), which is the functional and presentation currency of the Company and the presentation currency of the Group.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the transaction date. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement. Non-monetary assets and liabilities are translated at historical exchange rates if held at historical cost, or year-end exchange rates if held at fair value, and the resulting foreign exchange gains and losses are recognised in either the income statement or shareholders' equity depending on the treatment of the gain or loss on the asset or liability.

Foreign currency translation

The results and financial position of all the entities included in the Group financial statements that have a functional currency different from the Group's presentation currency are accounted for as follows:

•  Assets and liabilities for each balance sheet presented are translated at the closing rate at the balance sheet date

•  Income and expenses for each income statement are translated at average exchange rates or at rates on the date of the transaction where exchange rates fluctuate significantly

•  All resulting exchange differences arising since 1 January 2004 are recognised as a separate component of equity

On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to other comprehensive income. When a foreign operation is sold or capital repatriated they are recognised in the income statement as part of the gain or loss on disposal. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

New accounting standards in issue but not yet effective

The following new standards are effective for periods beginning on or after 1 January 2018 and have not been applied in preparing these consolidated financial statements:

IFRS 9 Financial Instruments

IFRS 9 was issued in July 2014 and has an effective date of 1 January 2018. It was endorsed by the EU in November 2016.

In October 2017, the IASB published an amendment to IFRS 9, Prepayment Features with Negative Compensation, which is effective from 1 January 2019, with earlier application permitted.

This has not yet been endorsed by the EU. The amendment amends the existing requirements regarding termination rights in order to allow measurement at amortised cost (or fair value through OCI) even in the case of negative compensation payments. This is consistent with Management's treatment of these clauses.

IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement, introducing new requirements for the classification and measurement of financial instruments, the recognition and measurement of credit impairment provisions, and providing for a simplified approach to hedge accounting. The Group has elected to continue hedge accounting in line with the IAS 39 requirements and has not therefore applied the IFRS 9 hedging requirements. The Group will, however, adopt these revised disclosures set out in IFRS 7, which includes those relating to hedge accounting. The changes in measurement arising on initial application of IFRS 9 will be incorporated through an adjustment to the opening reserves and retained earnings position as at 1 January 2018.

Although IFRS 9 will be retrospectively applied, the Group is only permitted to restate comparatives if, and only if, it is possible without the use of hindsight.

The Group does not consider it possible to restate comparatives for impairment without the use of hindsight. For further details on the effect and implementation of IFRS 9 refer to note 41.

IFRS 15 Revenue from Contracts with Customers

The effective date of IFRS 15 is 1 January 2018 and the standard has been endorsed by the EU in September 2016. The standard provides a more detailed principles-based approach for income recognition than the current standard IAS 18 Revenue, with revenue being recognised as or when promised services are transferred to customers. The standard applies to 'fees and commission income' but not to financial instruments or lease contracts. IFRS 15 will
not have a material impact on the Group's consolidated financial statements and there will not be an adjustment to retained earnings in respect of adoption.

IFRS 16 Leases

The effective date of IFRS 16 is 1 January 2019 and the standard was endorsed by the EU in November 2017. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17 Leases. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. The work to assess the impact of the standard is ongoing and it is not yet practicable to quantify the effect of IFRS 16 on these consolidated financial statements. The Group will have a balance sheet increase in lease liabilities and right-of-use assets on adoption of IFRS 16.

2. Segmental information

The Group's segmental reporting is in accordance with IFRS 8 Operating Segments and is reported consistently with the internal performance framework and as presented to the Group's Management Team. The four client segments are Corporate & Institutional Banking, Retail Banking, Commercial Banking and Private Banking. The four geographic regions are Greater China & North Asia, ASEAN & South Asia, Africa & Middle East, and Europe & America. Activities not directly related to a client segment and/or geographic region are included in Central & other items. These mainly include Corporate Centre costs, Asset and Liability Management, treasury activities, certain strategic investments and the UK bank levy.

The following should also be noted:

•  Transactions and funding between the segments are carried out on an arm's-length basis

•  Corporate Centre costs represent stewardship and central management services roles and activities that are not directly attributable to business or country operations

•  Asset and Liability Management, joint ventures and associate investments are managed in the regions and are included within the applicable region. However, they are not managed directly by a client segment and therefore included in the Central & other items segment

•  In addition to treasury activities, Corporate Centre costs and other Group related functions, Central & other items for regions includes globally run businesses or activities that are managed by the client segments but not directly by geographic management. These include Principal Finance and Portfolio Management

•  The Group allocated central costs (excluding Corporate Centre costs) relating to client segments and geographic regions using appropriate business drivers (such as in proportion to the direct cost base of each segment before allocation of indirect costs) and these are reported within operating expenses

An analysis of the Group's performance by client segment and region is set out in the Strategic report.

Basis of preparation

The analysis reflects how the client segments and geographic regions are managed internally. This is described as the Management View and is principally the location from which a client relationship is managed, which may differ from where it is financially booked and may be shared between businesses and/or regions. In certain instances this approach is not appropriate and a Financial View is disclosed, that is, the location in which the transaction or balance was booked. Typically the Financial View is used in areas such as the Market and Liquidity Risk reviews where actual booking location is more important for an assessment. Segmental information is therefore on a Management View unless otherwise stated.

Restructuring items excluded from underlying results

Income, costs and impairment relating to identifiable business units, products or portfolios from the date that have been approved for restructuring, disposal, wind down or redundancy as a consequence of the Strategy Review announced 3 November 2015 are presented as restructuring and excluded from the underlying results of the Group. This includes realised and unrealised gains and losses from management's decisions to dispose of assets as well as residual income, direct costs and impairment of related legacy assets of those identifiable business units, products or portfolios.

A reconciliation between underlying and statutory results is set out in the table below:


2017

Underlying
$million

Restructuring
$million

Net gain on businesses disposed/
held for sale
$million

Goodwill impairment
$million

Statutory
$million

Operating income

14,289

58

78

-

14,425

Operating expenses

(10,120)

(297)

-

-

(10,417)

Operating profit/(loss) before impairment losses and taxation

4,169

(239)

78

-

4,008

Impairment losses on loans and advances and other credit
risk provisions

(1,200)

(162)

-

-

(1,362)

Other impairment

(169)

(10)

-

(320)

(499)

Profit from associates and joint ventures

210

58

-

-

268

Profit/(loss) before taxation

3,010

(353)

78

(320)

2,415

 


2016

Underlying
$million

Restructuring
$million

Net gain on businesses disposed/
held for sale
$million

Goodwill impairment
$million

Gains arising on repurchase of subordinated liabilities
$million

Statutory
$million

Operating income

13,808

(85)

253

-

84

14,060

Operating expenses

(9,975)

(236)

-

-

-

(10,211)

Operating profit/(loss) before impairment losses and taxation

3,833

(321)

253

-

84

3,849

(2,382)

(409)

-

-

-

(2,791)

(383)

(63)

-

(166)

-

(612)

Profit from associates and joint ventures

25

(62)

-

-

-

(37)

Profit/(loss) before taxation

1,093

(855)

253

(166)

84

409

 



 

Underlying performance by client segment


2017

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Central &
other items
$million

Total
$million

Operating income

6,496

4,834

1,333

500

1,126

14,289

Operating expenses

(4,409)

(3,585)

(881)

(500)

(745)

(10,120)

Operating profit before impairment losses and taxation

2,087

1,249

452

-

381

4,169

(658)

(375)

(167)

(1)

1

(1,200)

(168)

(1)

(3)

-

3

(169)

Profit from associates and joint ventures

-

-

-

-

210

210

Underlying profit/(loss) before taxation

1,261

873

282

(1)

595

3,010

(275)

(19)

(13)

(15)

(31)

(353)

-

-

-

-

78

78

Goodwill impairment

-

-

-

-

(320)

(320)

Statutory profit/(loss) before taxation

986

854

269

(16)

322

2,415

Total assets

293,334

105,178

31,650

13,469

219,870

663,501

131,738

103,013

28,108

13,351

9,343

285,553

353,582

132,819

36,385

22,203

66,705

611,694

Of which: customer accounts

222,714

129,536

33,880

22,222

3,372

411,724

 


2016

Corporate & Institutional
Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Central &
other items
$million

Total
$million

Operating income

6,472

4,669

1,295

496

876

13,808

Operating expenses

(4,268)

(3,413)

(929)

(463)

(902)

(9,975)

Operating profit/(loss) before impairment losses and taxation

2,204

1,256

366

33

(26)

3,833

(1,401)

(489)

(491)

(1)

-

(2,382)

(368)

(1)

5

-

(19)

(383)

Profit from associates and joint ventures

-

-

-

-

25

25

Underlying profit/(loss) before taxation

435

766

(120)

32

(20)

1,093

(459)

(47)

(26)

(73)

(250)

(855)

-

-

-

-

253

253

-

-

-

-

(166)

(166)

Gains arising on repurchase of subordinated liabilities

-

-

-

-

84

84

Statutory (loss)/profit before taxation

(24)

719

(146)

(41)

(99)

409

Total assets

289,183

96,834

27,151

11,974

221,550

646,692

122,231

93,488

24,013

11,908

4,256

255,896

347,865

121,015

35,576

21,840

71,738

598,034

Of which: customer accounts

204,279

117,355

32,570

21,767

2,331

378,302

 



 

Underlying performance by region


2017

Greater China & North Asia
$million

ASEAN &
South Asia
$million

 Africa &
Middle East
$million

Europe & Americas
$million

Central &
other items
$million

Total
$million

Operating income

5,616

3,833

2,764

1,601

475

14,289

Operating expenses

(3,681)

(2,654)

(1,819)

(1,407)

(559)

(10,120)

Operating profit/(loss) before impairment losses and taxation

1,935

1,179

945

194

(84)

4,169

Impairment (losses)/release on loans
and advances

(141)

(653)

(300)

(107)

1

(1,200)

Other impairment

(81)

(12)

(3)

(16)

(57)

(169)

Profit/(loss) from associates and joint ventures

229

(22)

-

-

3

210

Underlying profit/(loss) before taxation

1,942

492

642

71

(137)

3,010

Restructuring

35

(161)

(33)

(25)

(169)

(353)

Net gains on businesses disposed/
held for sale

-

19

-

-

59

78

Goodwill impairment

-

-

-

-

(320)

(320)

Statutory profit/(loss) before taxation

1,977

350

609

46

(567)

2,415

Net interest margin

1.4%

1.9%

3.3%

0.5%

 

1.6%

Total assets

257,692

148,467

59,166

185,345

12,831

663,501

Of which: loans and advances to customers

126,739

82,579

29,602

46,633

-

285,553

Total liabilities

228,093

128,165

39,413

177,525

38,498

611,694

Of which: customer accounts

186,517

95,310

31,797

98,100

-

411,724

 


2016

Greater China & North Asia
$million

ASEAN &
South Asia
$million

 Africa &
Middle East
$million

Europe &
Americas
$million

Central &
other items
$million

Total
$million

Operating income

5,190

4,052

2,742

1,664

160

13,808

Operating expenses

(3,546)

(2,518)

(1,730)

(1,302)

(879)

(9,975)

Operating profit/(loss) before impairment losses and taxation

1,644

1,534

1,012

362

(719)

3,833

(424)

(762)

(563)

(511)

(122)

(2,382)

(47)

3

(18)

1

(322)

(383)

Profit/(loss) from associates and joint ventures

167

(146)

-

-

4

25

Underlying profit/(loss) before taxation

1,340

629

431

(148)

(1,159)

1,093

(137)

(443)

(82)

(113)

(80)

(855)

253

-

-

-

-

253

-

-

-

-

(166)

(166)

Gains arising on repurchase of subordinated liabilities

-

-

-

-

84

84

Statutory profit/(loss) before taxation

1,456

186

349

(261)

(1,321)

409

Net interest margins

1.3%

2.0%

3.2%

0.5%

 

1.5%

239,740

143,704

56,980

195,937

10,331

646,692

110,533

73,161

28,140

44,062

-

255,896

210,795

126,701

38,020

181,639

40,879

598,034

Of which: customer accounts

169,957

88,141

29,931

90,273

-

378,302

 



 

Additional segmental information (statutory)


2017

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Central &
other items
$million

Total
$million

Net interest income

3,225

3,006

802

286

862

8,181

Other income

3,298

1,897

527

214

308

6,244

Operating income

6,523

4,903

1,329

500

1,170

14,425

 


2016

Corporate & Institutional
Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Central &
other items
$million

Total
$million

Net interest income

3,051

2,977

782

287

697

7,794

Other income

3,437

1,692

511

209

417

6,266

Operating income

6,488

4,669

1,293

496

1,114

14,060

 


2017

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe & Americas
$million

Central &
other items
$million

Total
$million

Net interest income

2,950

2,402

1,619

692

518

8,181

Other income

2,663

1,468

1,145

904

64

6,244

Operating income

5,613

3,870

2,764

1,596

582

14,425

 


2016

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Central &
other items
$million

Total
$million

Net interest income

2,684

2,485

1,566

744

315

7,794

Other income

2,698

1,557

1,171

911

(71)

6,266

Operating income

5,382

4,042

2,737

1,655

244

14,060

 


2017

Hong Kong
$million

Korea
$million

China
$million

Singapore
$million

India
$million

UAE
$million

UK
$million

US
$million

Net interest income

1,564

625

540

965

577

394

428

158

Other income

1,823

340

163

470

406

339

314

517

Operating income

3,387

965

703

1,435

983

733

742

675

 


2016

Hong Kong
$million

Korea
$million

China
$million

Singapore
$million

India
$million

UAE
$million

UK
$million

US
$million

Net interest income

1,375

586

505

817

680

392

451

179

Other income

1,959

295

187

683

275

357

331

482

Operating income

3,334

881

692

1,500

955

749

782

661

3. Net interest income

Accounting policy

Interest income and expense on available-for-sale assets, held-to-maturity assets and financial assets and liabilities held at amortised cost, is recognised using the effective interest method.

Interest income and expense on financial instruments held at fair value through profit or loss is recognised within net interest income.

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Where the estimates of cash flows have been revised, the carrying amount of the financial asset or liability is adjusted to reflect the actual and revised cash flows, discounted at the instruments original effective interest rate. The adjustment is recognised as interest income or expense in the period in which the revision is made.

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.


2017
$million

2016
$million

Balances at central banks

287

213

Loans and advances to banks

1,955

1,282

Loans and advances to customers

8,845

8,461

Listed debt securities

928

604

Unlisted debt securities

1,501

1,569

Other eligible bills

836

593

Accrued on impaired assets (discount unwind)

83

288

Interest income

14,435

13,010

 

 

 

Deposits by banks

891

494

Customer accounts

3,859

3,187

Debt securities in issue

756

700

Subordinated liabilities and other borrowed funds

748

835

Interest expense

6,254

5,216

Net interest income

8,181

7,794

 

 

 

Of which from financial instruments held at:

 

 

Amortised cost

10,861

10,040

Available-for-sale

2,657

2,291

Fair value through profit or loss

847

663

Held-to-maturity

70

16

Interest income

14,435

13,010

 

 

 

Of which from financial instruments held at:

 

 

Amortised cost

6,128

5,107

Fair value through profit or loss

126

109

Interest expense

6,254

5,216

Net interest income

8,181

7,794



 

4. Net fees and commission

Accounting policy

Fees and commissions charged for services provided or received by the Group are recognised on an accrual basis when the service has been provided or significant act performed.

Loan syndication fees are recognised as revenue when the syndication has been completed and the Group retained no part of the loan package for itself, or retained a part at the same effective interest rate as for the other participants.

The Group can act as trustee or in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. The assets and income arising thereon are excluded from these financial statements, as they are not assets and income of the Group.


2017
$million

2016
$million

Fees and commissions income

3,942

3,671

Fees and commissions expense

(430)

(440)

Net fees and commission

3,512

3,231

 

 

 

Transaction Banking

1,277

1,194

Financial Markets

193

(62)

Corporate Finance

226

521

Wealth Management

1,355

1,089

Retail Products

443

464

Lending and Portfolio Management

51

50

Principal Finance

17

3

Treasury1

(20)

(30)

Others1

(30)

2

Net fees and commission

3,512

3,231

1  Treasury net fees and commission comprises items previously reported under Asset and Liability Management ($(22) million) and Treasury-related aspects of Other income ($(8) million). This reflects the reorganisation of the Group's balance sheet, liquidity, and capital management activities such that they are now managed within one Treasury function.
2016 has been re-presented as a result

Total fee income arising from financial instruments that are not fair valued through profit or loss is $1,067 million (2016: $1,035 million) and arising from trust and other fiduciary activities of $130 million (2016: $115 million).

Total fee expense arising from financial instruments that are not fair valued through profit or loss is $74 million (2016: $56 million) and arising from trust and other fiduciary activities of $22 million (2016: $17 million).

5. Net trading income

Accounting policy

Gains and losses arising from changes in the fair value of financial instruments held at fair value through profit or loss are included in the income statement in the period in which they arise.

Income is recognised from the sale and purchase of trading positions, margins on market making and customer business and fair value changes.


2017
$million

2016
$million

Net trading income

1,527

1,886

Significant items within net trading income include:

 

 

Gains on instruments held for trading

1,716

2,106

Gains/(losses) on financial assets designated at fair value through profit or loss

167

(73)

Losses on financial liabilities designated at fair value through profit or loss

(202)

(178)

6. Other operating income

Accounting policy

Operating lease income is recognised on a straight line basis over the period of the lease unless another systematic basis is more appropriate.

Dividends on equity instruments are recognised when the Group's right to receive payment is established.

On disposal of available-for-sale financial instruments, the cumulative gain or loss recognised in other comprehensive income is recycled to the profit or loss in other operating income/expense.

When the Group loses control of the subsidiary or disposal group, the difference between the consideration received and the carrying amount of the subsidiary or disposal group is recognised as a gain or loss on sale of the business.


2017
$million

2016
$million

Other operating income includes:

 

 

Rental income from operating lease assets

670

561

Gains less losses on disposal of available-for-sale financial instruments

235

192

Net gain on sale of businesses

28

284

Net gain on derecognition of Investment in associate

64

-

Dividend income

46

52

Other

162

60

 

1,205

1,149

7. Operating expenses

Accounting policy

Short-term employee benefits: salaries and social security expenses are recognised over the period in which the employees provide the service. Variable compensation is included within share-based payments costs and wages and salaries. Further details are disclosed in the Annual report.

Pension costs: contributions to defined contribution pension schemes are recognised in profit or loss when payable. For defined benefit plans, net interest expense, service costs and expenses are recognised to the income statement. Further details are provided in note 30.

Share-based compensation: the group operates equity-settled and cash-settled share-based payment compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. Further details are provided in note 31.


2017
$million

2016
$million

Staff costs:

 

 

Wages and salaries

5,047

4,713

Social security costs

159

145

Other pension costs (note 30)

357

316

Share-based payment costs (note 31)

152

100

Other staff costs

1,043

1,029

 

6,758

6,303

Other staff costs include redundancy and other restructuring expenses of $85 million (2016: $236 million). Further costs in this category include training, travel costs and other staff-related costs.

The following table summarises the number of employees within the Group:


2017

 

2016

Business

Support services

Total

Business

Support services

Total

At 31 December

40,636

45,385

86,021

 

43,286

43,407

86,693

Average for the year

41,806

44,988

86,794

 

42,605

42,311

84,916

The Company employed nil staff at 31 December 2017 (2016: nil) and it incurred costs of $5 million (2016: $3 million).

Details of directors' pay and benefits and interests in shares are disclosed in the Annual report.

Transactions with directors, officers and other related parties are disclosed in note 36.


2017
$million

2016
$million

Premises and equipment expenses:

 

 

Rental of premises

379

400

Other premises and equipment costs

427

379

Rental of computers and equipment

17

18

 

823

797

 

 

 

General administrative expenses:

 

 

UK bank levy

220

383

Other general administrative expenses

1,787

1,989

 

2,007

2,372

 

 

 

Depreciation and amortisation:

 

 

Property, plant and equipment (note 19):

 

 

Premises

85

98

Equipment

85

84

Operating lease assets

328

271

 

498

453

Intangibles (note 18):

 

 

Software

320

272

Acquired on business combinations

11

14

 

829

739

The UK bank levy is applied on the chargeable equities and liabilities on the Group's consolidated balance sheet. Key exclusions from chargeable equities and liabilities include Tier 1 capital, insured or guaranteed retail deposits, repos secured on certain sovereign debt and liabilities subject to netting. The 2017 charge was lower than expected after updating estimates made in previous years. The rate of the levy for 2017 is the blended rate of 0.17 per cent for chargeable short-term liabilities, with a lower rate of 0.085 per cent generally applied to chargeable equity and long-term liabilities (i.e. liabilities with a remaining maturity greater than one year). The rates will be gradually reduced over the next five years, from 1 January 2021 they will be 0.10 per cent for short-term liabilities and 0.05 per cent for long-term liabilities. In addition, the scope of the bank levy will be restricted to the balance sheet of UK operations only from that date.

8. Impairment losses on loans and advances and other credit risk provisions

Accounting policy

Significant accounting estimates and judgements

The calculation of impairment involves key judgements to be made by the Group:

•  Loan loss provisions are management's best estimate of incurred loss in the loan portfolio at the balance sheet date. Management has to exercise judgement in making assumptions and estimates of the loan portfolio on both individually and collectively assessed loan and advances

•  For individually significant financial assets, the Group will consider judgements that have an impact on the expected future cash flows of the asset. These include: the business prospects, industry and geopolitical climate of the customer, quality of realisable value of collateral, the Group's legal position relative to other claimants and any renegotiation/forbearance options. Many of the key judgement factors have a degree of interdependency, therefore a higher level of judgement is required for loans to borrowers showing signs of financial difficulty/failure to pay in market sectors experiencing economic stress, particularly where the likelihood of repayment is affected by the ability of the client to refinance or sell a specified asset

•  The difference between the loan carrying amount and the discounted expected future cash flows will result in the impairment amount. The future cash flow calculation involves significant judgements and estimates. As new information becomes available and further negotiations/forbearance measures are taken, the estimates of the future cash flows will be revised, and will have an impact on the future cash flow analysis

•  For financial assets which are not individually significant, such as the Retail Banking portfolio or small business loans, which comprise a large number of homogenous loans that share similar characteristics, statistical estimates and techniques are used, as well as credit scoring analysis. These techniques use models which analyse historical repayment and default rates over a time horizon. Where various models are used, management's judgement is required to analyse the available information provided and to select the appropriate model or combination of models to use. Further judgement is required to determine whether the current economic climate, behavioural and credit conditions are such that the actual level of incurred losses, and losses inherent in the collective portfolio is likely to be greater or less than historical experience, and is not fully reflective in the allowance estimated through the use of statistical models and historical data. Factors are applied in different geographical regions and countries to reflect local economic conditions, geopolitical risk, laws and regulations (e.g. new industry debt relief programme), credit bureau data, analysis of credit grade migration and delinquency trends. Further judgement is required to determine overlays on the models (described below in Retail Banking)

Objective evidence of impairment

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events occurring after the initial recognition of the asset (a loss event), and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The Group considers the following factors in assessing objective evidence of impairment:

•  Whether the counterparty is in default of principal or interest payments

the disappearance of an active market for that financial asset because of financial difficulties

significant financial difficulty of the issuer or obligor

•  When a counterparty files for bankruptcy protection (or the local equivalent) and this would avoid or delay discharge of its obligation

•  Where the Group files to have the counterparty declared bankrupt or files a similar order in respect of a credit obligation

•  Where the Group consents to a restructuring of the obligation, resulting in a diminished financial obligation, demonstrated by a material forgiveness of debt or postponement of scheduled payments

•  Where the Group sells a credit obligation at a material credit-related economic loss; or where there is observable data indicating that there is a measurable decrease in the estimated future cash flows of a group of financial assets, although the decrease cannot yet be identified with specific individual financial assets

Assets at amortised cost

Corporate & Institutional Banking and Commercial Banking

The assessment of the credit risk of corporate and commercial loans is done by the Credit Risk department, based upon counterparty information they receive from various sources including relationship managers and on external market information, or as soon as payment of interest or principal is 90 days overdue.

Once a loan starts to exhibit credit deterioration, it will move along the credit grading scale in the performing book and when it is classified as Credit Grade (CG) 12 as defined in the Risk review and Capital review, the credit assessment and oversight of the loan will be performed by Group Special Asset Management (GSAM).

Where GSAM's assessment indicates that a loan is impaired, GSAM will calculate an Individual Impairment Provision (IIP) based on estimated cash flows revised to reflect anticipated recoveries. GSAM's assessment and calculation of impairment involves a significant level of judgement.

If there is objective evidence that an impairment loss on a loan and receivable or a held-to-maturity asset has occurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred), discounted at the asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. If a loan and receivable or held-to-maturity asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price.

The individual circumstances of each client are taken into account when GSAM estimates future cash flows. All available sources, such as cash flow arising from operations, selling assets or subsidiaries, realising collateral or payments under guarantees are considered. In any decision relating to the raising of provisions, the Group attempts to balance economic conditions, local knowledge and experience, and the results of independent asset reviews.

The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure, less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

Further details on collateral held by the Group is discussed in the Risk review and Capital review.

In cases where the impairment assessment indicates that there will be a loss of principal, the loan is graded CG 14 while other impaired loans will be graded CG 13. Loans graded CG 13-CG 14 are classified as non-performing loans.

The performing loan portfolio is subject to a Portfolio Impairment Provision (PIP) to cover latent losses i.e. those that are not specifically identified but are known, by experience, to be present in any performing portfolio. The PIP is based on models using risk sizing (including probability of default and loss given default), environmental parameters and exceptional adjustment overlays. The calculation of the PIP uses regulatory expected credit loss (ECL) models. ECL is subject to an emergence risk factor that is generally understood as the hypothetical amount of time between a loss event occurrence and the bank recognition of impairment. The emergence risk factor is the principal means of translating a risk position to an impairment estimate, and the main scaling factor to adjust the conservative regulatory Expected Loss to
an effective PIP level, as the regulatory ECL models are more punitive than the incurred loss model under IAS 39. On a portfolio basis, the emergence risk factor ranges between 2 and 3 months based on structural economic drivers that might influence the accurate and timely discovery of credit issues in each country.

Retail Banking

An IIP is recognised for Retail Banking when an account meets a defined threshold condition in terms of overdue payments ('contractual default') or meets other objective conditions (such as bankruptcy, debt restructuring, fraud or death) as further described above in the assessment factors. The threshold conditions are set at the point where empirical evidence suggests that the client is unlikely to meet their contractual obligations or a loss of principal is expected.

A credit obligation in Retail Banking clients portfolio that is more than 150 Days Past Due (DPD) or, a credit obligation secured by Wealth Management products that is 90 DPD, is recognised as 'impaired' and IIP is provided for accordingly. There are, however, exceptions to this rule for portfolios where empirical evidence suggests that they should be set more conservatively. In addition, the credit account is recognised as 'impaired' immediately if the borrower files for bankruptcy or other equivalent forbearance programme, or the borrower is deceased, or the business is closed in the case of small business clients, or the borrower's other credit accounts with the Group are impaired. The core components of the IIP calculation are the value of gross charge-off and recoveries. Gross charge-off and/or provisions are recognised when it is established that the account is unlikely to pay. Recovery of unsecured debt post-impairment is recognised based on actual cash collected, either directly from clients or through the sale of defaulted loans to third-party institutions. Provision release of secured loans post-impairment is recognised if the loan outstanding is paid in full (release of full provision), or the provision is higher than the loan outstanding (release of the excess provision), or the loan is paid to current and remains in current for more than 180 days (release of full provision).

Retail Banking PIP, covering the inherent losses in the portfolio that exist at the balance sheet date but have not been individually identified,
is computed on performing loans (no IIP), using EL rates, to determine latent losses in the portfolio. The EL utilises probability of default and loss given default inherent within the portfolio of impaired loans or receivables and the historical loss experience for assets with credit risk characteristics similar to those in the Group. For defaulted yet non-impaired accounts (greater than 90 days past due) full EL is used, while for non-defaulted accounts, a three month emergence period is applied. An adjustment is added to the PIP calculation to take into the account instances where the EL-based PIP is deemed imprecise due to under-prediction or over-prediction of EL by underlying models. An overlay in the form of Special Risk Adjustment (SRA) is added to the EL-based PIP calculation to take into account instances where EL-based PIP is deemed insufficient to incorporate the impact of a specific credit event. An overlay in the form of Business Cycle Adjustment (BCA) is taken to account for the impact of cyclical volatility in the operating environment, which is not adequately covered in the underlying models.

The assessment and calculation of the Retail Banking IIP and PIP involve a significant level of judgement.

Write-off and reversal of impairment

To the extent a loan is irrecoverable, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed, it is decided that there is no realistic probability of recovery and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to
an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement during
the period.

Forborne loans

A forborne loan arises when a concession has been made to the contractual terms of a loan in response to a customer's financial difficulties.

In certain circumstances, the Group may renegotiate client loans. Loans that are renegotiated for commercial reasons, such as when a client had a credit rating upgrade, are not included as part of forborne loans because they are not indicative of any credit stress or event.

Forbearance strategies assist clients who are temporarily in financial distress and are unable to meet their original contractual repayment terms. Forbearance can be initiated by the client, the Bank or a third party (including government-sponsored programmes or a conglomerate of credit institutions) and includes debt restructuring such as a new repayment schedule, payment deferrals, tenor extensions and interest-only payments.

Loans that are renegotiated on terms that are not consistent with those readily available in the market and/or where we have granted a concession compared with the original terms of the loans, are considered for impairment. If the terms of the renegotiation are such that, where the present value of the new cash flows is lower than the present value of the original cash flows, the loan would be considered to be impaired and, at a minimum, a discount provision would be raised and are disclosed as 'Loans subject to forbearance - impaired', which
is a subset of impaired loans. All other loans that have been subject to a forbearance contract amendment, but which are not considered impaired (not classified as CG 13 or 14) are classified as 'Forborne - not impaired' (previously disclosed as 'other renegotiated loans').

If a loan enters the forbearance process and the terms are substantially modified, the original loan will be derecognised, and a new loan will be recognised.

For Retail Banking clients, all forborne loans are managed within a separate portfolio. If such loans subsequently become past due, charge-off and IIP is accelerated to 90 days past due for unsecured loans and automobile finance or 120 days past due for secured loans. The accelerated loss rates applied to this portfolio are derived from experience with other forborne loans, rather than the Retail Banking clients portfolio as a whole, to recognise the greater degree of inherent risk.

For Corporate & Institutional Banking, Commercial Banking and Private Banking clients, forbearance is applied on a case-by-case basis and is not subject to business-wide programmes. In some cases, the asset is derecognised and a new loan is granted as part of the restructure. In others, the contractual terms and repayment of the existing loans are changed or extended (for example, interest only for a period). Loans classified as subject to forbearance are managed by GSAM and are kept under close review to assess the client's ability to adhere to the restructured repayment strategy and to identify any events that could result in a deterioration in the client's ability to repay.

Curing of forborne loans

During the year the Group changed its methodology, to allow curing of forborne loans. Comparatives have been re-presented.

A forborne loan can only be removed from the disclosure (cured) if the loan is performing and a further two year probation period is met.

In order for a forborne loan to become performing, the following criteria have to be satisfied:

•  At least a year has passed with no default based upon the forborne contract terms

•  The customer is likely to repay its obligations in full without realising security

•  The customer has no accumulated impairment against amount outstanding

Subsequent to the criteria above, a further two year probation period has to be fulfilled, whereby regular payments are made by the customer and none of the exposures to the customer are more than 30 days past due.

Forborne loans are disclosed by client segments.

Further details on the application of these policies are set out in the Risk review and Capital review.

The following table reconciles the charge for impairment provisions on loans and advances to the total impairment charge and other credit risk provision:


2017
$million

2016
$million

Net charge against profit on loans and advances:

 

 

Individual impairment charge

1,604

2,553

Portfolio impairment (release)/charge

(239)

52

 

1,365

2,605

Impairment (release)/charges related to credit commitments

(23)

45

Impairment charges relating to debt securities classified as loans and receivables

20

97

Impairment charges relating to credit risk mitigation instruments

-

44

Total impairment losses and other credit risk provisions on loans and advances

1,362

2,791

Impairment charges relating to credit risk mitigation instruments

The Group executed funded credit mitigation transactions related to the Liquidation Portfolio, which did not achieve derecognition and are recorded as liabilities on an amortised cost basis. The liability balances are adjusted for revisions to the impairment estimates for the l