RNS Number : 0797R
Standard Chartered PLC
26 February 2019
 

Standard Chartered PLC - Additional Financial information

Highlights

Standard Chartered PLC (the Group) today releases its results for the year ended 31 December 2018. The following pages provide additional information related to the announcement.

Table of contents

Risk review and Capital review


Principal uncertainties

2

Enterprise Risk Management Framework

8

Principal risks

14

Risk profile

33

Capital review

88

Statement of directors' responsibilities

94

Financial statements


Consolidated income statement

95

Consolidated statement of comprehensive income

96

Consolidated balance sheet

97

Consolidated statement of changes in equity

98

Cash flow statement

99

Notes to the financial statements

100

Shareholder information

214



 

Risk review and Capital review

Principal uncertainties

In addition to our Principal Risk Types that we manage through Risk Type Frameworks, policies and Risk Appetite, we also maintain an inventory of our principal uncertainties. Principal uncertainties refer to unpredictable and uncontrollable outcomes from certain events which may have the potential to impact our business materially

In 2018, 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 item has been removed as a principal uncertainty:

•  Korean peninsula geopolitical tensions - Due to the denuclearisation discussions relating to the Korean peninsula, we believe this risk has decreased; however, we continue to conduct regular stress tests and assess contagion risks arising from risk levels and associated contingency plans

The following items have been amended or added as new principal uncertainties:

•  Extended trade tensions driven by geopolitics and trade imbalance - This risk was previously known as "Increase in trade protectionism driven by nationalist agenda" and has been renamed to cover increasing concerns on potential trade tensions and the adoption of protectionist policies

•  China slowdown and impact on regional economies with close ties to China - This risk was previously known as "Moderation of growth in key footprint markets led by China" and has been renamed to monitor and assess the impact from slowdown in China and associated regional economies

•  Emerging Markets - upcoming elections, interest rate rises and foreign exchange (FX) risks - This risk was previously known as "Sharp interest rate rises and asset price corrections" and has been broadened to cover Emerging Market (EM) risks

•  New technologies and digitisation - This risk has been split into two to adequately capture the opportunity or business disruption and obsolescence risk from new technologies and increased data privacy and security risks respectively which could impact many elements of banking

Based on our current knowledge and assumptions, our list of principal uncertainties is set out below, with our subjective assessment of their impact, likelihood and velocity of change. This reflects the latest internal assessment of material risks that the Group faces as identified by senior management. This list is not designed to be exhaustive and there may be additional risks which could materialise or have an adverse effect on the Group. Our mitigation approach for these risks may not be successful in completely eliminating them, but rather shows the Group's attempt to reduce or manage the risk. As certain risks develop and materialise over time, management will take appropriate incremental steps based on the materiality of the impact of the risk to the operations of the Group.



 

Geopolitical considerations (Risk ranked according to severity)

Principal
uncertainties

Risk trend since 2017

Context

How these are mitigated/next steps

Extended trade tensions driven by geopolitics and trade imbalance

 

Potential impact:
High

Likelihood:
High

Velocity of change: Moderate

ñ

•  Trade tensions between the United States and China continue to rise driven by trade imbalance as well as geopolitical tensions. The US imposed trade tariffs on a further $200 billion of imports from China in late September 2018 (China retaliated with tariffs on $60 billion of goods). A 25% tariff may be imposed if the two countries are unable to reach an agreement which could start another round of devaluation

•  A full-fledged and/or extended US-China trade tensions could destabilise the world economy. The adoption of protectionist policies driven by nationalist agendas could disrupt established supply chains and invoke retaliatory actions. Other countries could introduce tariffs on goods and services available domestically or from other economies. These would impact global trade

•  The Group has a significant revenue stream from supporting cross-border trade

•  A sharp slowdown in world trade and global growth is a feature of the Group stress scenarios including the Internal Capital Adequacy Assessment Process (ICAAP) and the annual Bank of England stress testing exercise. These stress tests provide visibility to key vulnerabilities so that management can implement timely interventions

Middle East political situation

 

Potential impact:
Medium

Likelihood:
Medium

Velocity of change: Moderate

ó

•  Qatar has adjusted to the trade and diplomatic embargo by the Gulf Cooperation Council (GCC). It is unlikely that the parties to the dispute will rush to pursue a diplomatic solution which may leave a lasting rift in the GCC

•  There is risk of escalation between Saudi Arabia and Turkey as events surrounding the death of journalist Jamal Kashoggi develop. The US congress is likely to sustain pressure on Saudi Arabia despite the efforts of the Trump administration and Saudi Arabia to de-escalate

•  With US sanctions against Iran having come into effect in November 2018, we anticipate that the stand-off between Iran and Saudi Arabia will continue

•  The Group has a material presence across the region

•  The impact of the Qatar diplomatic crisis on our portfolio has been limited so far. Risk Appetite and underwriting standards have been adjusted to reflect current conditions

•  There is constant monitoring at regional and country level to detect horizon risks and analyse any potential adverse developments. This included a planned Strategy and Portfolio Review of Saudi Arabia in November 2018

Brexit implications

 

Potential impact:
Low

Likelihood:
High

Velocity of change: Fast

ñ

•  The exit of the UK from the European Union (EU) (Brexit) could have implications on the economic outlook for the eurozone and the UK, which might in turn have global implications because of change in policy direction. The uncertainties linked to the Brexit negotiations process could delay corporate investment decisions until there is more clarity

•  There continues to be uncertainty on UK's exit from Europe

•  The first order impact of Brexit on the Group from a Credit Risk or portfolio perspective is limited given the nature of the Group's activities. However, as we have set up a new EU subsidiary, the operating environment and client migration to the new subsidiary are impacted given the uncertainty on Brexit negotiations

•  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 have also evaluated the potential implications from a transition and will continue monitoring the progress of the political negotiations

•  We have set up a new EU subsidiary and optimised 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. Set-up activities are progressing well and we have obtained the full banking licence to commence operations in March 2019

 



 

Macroeconomic considerations

Principal
uncertainties

Risk trend since 2017

Context

How these are mitigated/next steps

China slowdown
and impact
on regional economies with close
ties to China

 

Potential impact:
High

Likelihood:
Medium

Velocity of change: Steady

ó

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

•  China's economy has performed strongly since the beginning of 2018. However key focus remains on the government-led deleveraging efforts, economic reforms, state owned enterprises, and recent monitory policy actions to cut the reserve requirements for most banks

•  Macroeconomic environment in the Greater China/North Asia region is threatened by US-China trade tensions

•  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, North Asia 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 the ICAAP and Bank of England stress testing 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 run market and traded risk stress tests

•  We continue to monitor data from Greater China, North Asia and South-East Asia

Emerging Markets (EM) - upcoming elections, interest rate rises and
FX risks

 

Potential impact:
Medium

Likelihood:
High

Velocity of change: Moderate

ñ

•  EM equities officially entered a bear market in September 2018, following a 20 per cent decline from their peak in January 2018. Many EM currencies have weakened to multi-year lows against the US dollar (examples: Indian rupee and South African rand). South Africa also entered its first recession since the global financial crisis

•  Such increases in interest rates and weakening of local currencies in EMs 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

•  This could also 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

•  Of particular concern is the outlook for EMs, specifically the risk of capital outflows and weakening domestic currencies, with the associated increased domestic political volatility. We see increased political volatility, across EMs - like India, Nigeria, Thailand and Sri Lanka - with upcoming elections

•  We continue to monitor countries deemed to have a negative outlook and heightened probability of a downgrade to their internal Sovereign Risk rating, based on vulnerability to recent economic, business, political and/or social developments over a 12-month horizon

•  We continue to monitor tightening of monetary policy conditions intended to support domestic currencies in the ASEAN & South Asia region and a potential slowdown in economic growth, with recent policy rate hikes from central banks in Indonesia and Philippines

•  We continue to adjust our outlook and ratings based on political events and volatility

 



 

Environmental and social considerations

Principal
uncertainties

Risk trend since 2017

Context

How these are mitigated/next steps

Climate-related physical risks and transition risks1

 

Potential impact:
High

Likelihood:
High

Velocity of change: Moderate

ñ

•  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 2ºC 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

•  In September 2018, the Bank of England published a report 'Transition in thinking' on practices in the UK banking sector, finding that only 10 per cent of banks were taking a strategic approach to climate change

•  This was followed by a PRA consultation paper and draft supervisory statement in October 2018, proposing significant measures to be taken by banks

•  When the Group was reviewing its power generation position statement in 2018, it received significant engagement on climate change from large investors and civil society

•  We have participated, via a UN-led initiative, the United Nations Environment Programme Finance Initiative (UNEP-FI), in the development of pilot scenario analysis tools for physical and transition risks for energy utilities clients and other high-emitting sectors. We are using our experiences as we develop additional tools

•  We are also involved in a wide range of collaborative initiatives related to climate risk management, as well as opportunity identification

•  We are working to develop tools to measure, manage and ultimately reduce the emissions related to the financing of our clients

•  We have 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, and in September 2018 we announced that we would no longer provide financing for new coal-fired power plants anywhere in the world

•  We are developing a climate risk management framework

•  We have made a public commitment to fund and facilitate $4 billion toward clean technology between 2016 and 2020. In 2018, we funded $2.9 billion taking us to a cumulative total of $4.9 billion since January 2016

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



 

Legal considerations

Principal
uncertainties

Risk trend since 2017

Context

How these are mitigated/next steps

Regulatory reviews and investigations, legal proceedings

 

Potential impact:
High

Likelihood:
High

Velocity of change: Moderate

ó

•  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

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

•  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

•  We have invested in enhancing systems and controls, and implementing remediation programmes (where relevant)

•  We are cooperating with all relevant ongoing reviews, requests for information and investigations and actively managing legal proceedings with respect to legacy issues (refer to Note 26 - Legal and regulatory matters)

•  We continue to train and educate our people on conduct, conflicts of interest, information security and financial crime compliance in order to reduce our exposure to legal and regulatory proceedings

Regulatory changes

 

Potential impact:
Medium

Likelihood:
High

Velocity of change: Fast

ó

•  In July 2017, the CEO of the UK Financial Conduct Authority (FCA) announced that beyond 2021 the FCA would no longer encourage panel banks to submit quotes to LIBOR. While we do not submit to LIBOR, LIBOR is heavily relied upon by the Group as a reference rate, in various client products and for enterprise-level processes and funding. Regulators are trying to catalyse a voluntary transition to alternative risk-free rates (RFRs)

•  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 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

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

•  Increased sanctions risk due to the US exiting the Joint Comprehensive Plan of Action (JCPOA, or commonly known as the Iran Nuclear Deal)

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

•  A Group-wide programme is being established to manage the transition from LIBOR to alternate RFRs over the coming years

•  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

•  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

•  We are monitoring the potential changes to the Iran sanctions regime and will take actions accordingly to ensure compliance



 

Technological considerations

Principal
uncertainties

Risk trend since 2017

Context

How these are mitigated/next steps

New technologies and digitisation (including business disruption risk, responsible use of AI and obsolescence risk)

 

Potential impact:
High

Likelihood:
High

Velocity of change: Moderate

ñ

•  New technologies have continued to gather speed with a growing number of use cases that address evolving customer expectations

•  In Retail Banking, we continue to observe significant shifts in customer value propositions as markets deepen. Fintechs and existing payment players are increasing digital-only banking offerings to provide consumers with the convenience of banking on-the-go. There is growing usage of AI and machine learning to personalise customer experiences, e.g. virtual chatbots to provide digital financial advice and predictive analytics to cross-sell products.

•  In Corporate Banking, we observe an increasing focus on process digitisation to boost cost efficiencies. There are growing use cases for blockchain technologies, e.g. to streamline cross-border payments, automate Know Your Customer compliance processes. AI and machine learning have also been increasingly used in predictive risk modelling, e.g. loan default forecasts

•  Regulators are increasing emphasis on the importance of resilient technology infrastructure in terms of elimination of cyber risk and improving reliability. The challenge is in renewing the estate to reduce the risks presented by obsolescence when the demands of ongoing technology investment delivering into this tech estate and its required performance levels continue to rise significantly.

•  We continue to monitor emerging trends and new developments, opportunities and risks in the technology space, which may have implications on the banking sector

•  In 2017, the Group set up the SC Ventures unit to spearhead bank-wide digital advancement. The unit is gaining momentum to promote innovation, invest in disruptive technologies and deliver client digital solutions. SC Ventures focuses its activities in three key areas:

Catalysts: Internal consulting team to support the Group's business units in problem-solving and developing best practices in innovation

Investments: Professional investment team to manage the Group's minority investments in third-party fintechs

Ventures: Venture management unit to sponsor and oversee new wholly and partially owned ventures, with a focus on disrupting business models in the Group's operating markets

•  The Group has continued to make headway in harnessing new technologies to develop innovative solutions, e.g. blockchain-based cross-border wallet remittance service between Hong Kong and Philippines in partnership with Ant Financial. We have also invested in new machine learning technologies that rapidly analyse large datasets and fine-tune the accuracy of our financial crime surveillance tools

•  In addition, we are developing a framework to ensure Fairness, Ethics, Accountability and Transparency (FEAT) in the Group's usage of AI. We continue to deploy risk-minded controls to ensure that all cloud-based services adhere to a common governance model

•  We are actively targeting the reduction of obsolescent/end of support technology following a Technology & Innovation-led approach under the oversight of Risk Management and the Group's senior executives. The target is to address the Group's obsolescence risk, by evergreening and use of new technologies such as the Cloud. In addition, we also continue our client focus by delivering outage reductions, enhanced protection by raising cyber defences and efficiency by improvements to technology deployment

Increased
data privacy and security risks from strategic
and wider
use of data

 

Potential impact:
High

Likelihood:
High

Velocity of change: Fast

ñ

•  As digital technologies grow in sophistication and become further embedded across the banking and financial services industry, the potential impact profile with regards to data risk is changing. The cyber threat landscape is evolving in terms of scope and pace. Banks may become more susceptible to technology-related data security risks as well as customer privacy. The growing use of big data for analysis purposes and cloud computing solutions are examples of this

•  In addition, these risks represent an emerging and topical theme both from a regulatory and compliance perspective (i.e. the EU General Data Protection Regulation (GDPR) raises the profile of data protection compliance)

•  As the Group moves towards cloud computing solutions, the increasing use of big data for analysis purposes leads to increased susceptibility to data security and customer privacy risks

•  We have existing governance and control frameworks for the deployment of new technologies and services

•  To manage the risks posed by rapidly evolving cyber security threats and technology adoption, we have designed a programme to focus on security improvements and build a sustainable plan that will secure its information and technology assets for the long term. The programme is progressing with capability being built out in multiple areas including governance, investment prioritisation and execution risk management

•  We maintain a vigilant watch on legal and regulatory developments in relation to data protection and customer privacy to identify any potential impact to the business and to implement appropriate mechanisms to control this risk

•  For the Group, GDPR principally impacts Group locations and client segments in the EU, functions such as Human Resources and downstream suppliers such as hubs and external vendors that process personal data caught by the GDPR (EU personal data). A GDPR programme has been established to review and remediate vendor contracts and intra-group agreements that involve the processing of EU personal data



 

Enterprise Risk Management Framework

Effective risk management is essential in providing 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, generating returns for shareholders by taking and managing risk.

The Enterprise Risk Management Framework (ERMF), launched in January 2018, enables the Group to manage enterprise-wide risks, with the objective of maximising risk-adjusted returns while remaining within our Risk Appetite. The ERMF has been designed with the explicit goal of improving the Group's risk management. Over the year, awareness of the ERMF has increased significantly and we have made good progress in delivering the key initiatives started in 2017 to embed the framework across the organisation.

We will carry this momentum into 2019 as we continue to roll out the ERMF and Risk Type Frameworks across the Group, including the branches and subsidiaries, as well as launching training programmes to ensure awareness and stakeholder engagement.

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 in 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 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 ERMF 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 table on the next page.

Senior Managers Regime

Roles and responsibilities under the ERMF 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 ERMF and for identifying material risk types to which the Group may be potentially exposed. The Group Chief Risk Officer delegates effective implementation of the 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

•  Propose the risks required to undertake revenue-generating activities

•  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, set and execute remediation plans 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 on the effectiveness of controls that support the 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 under the FCA and PRA Senior Managers Regime (SMR)

The Risk function

The Risk function is responsible for the sustainability of our business through good management of risk across the Group, and ensuring that business is conducted in line with regulatory expectations.

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

•  Maintaining the ERMF, ensuring it remains relevant and appropriate to the Group's business activities, is effectively communicated and implemented across the Group and administering related governance and reporting processes

•  Upholding the overall integrity of the Group's risk and return decisions to ensure that risks are properly assessed, that these 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, and

•  Overseeing and challenging the management of Principal Risk Types under the ERMF

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

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

The Risk function supports the Group's commitment to be Here for good by building a sustainable framework that places regulatory and compliance standards, and a culture of appropriate conduct at the forefront of the Group's agenda in a manner proportionate to the nature, scale and complexity of the Group's business.

As of 1st January 2019, we have rebranded the Compliance function as Conduct, Financial Crime and Compliance (CFCC), reflecting the integration of the different areas within the function, under the Management Team leadership of the Group Head CFCC. CFCC works alongside the Risk function, within the framework of the ERMF, to deliver an aligned Second Line of Defence.



 

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 their 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 defined in accordance with risk management principles that inform 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, as well as facilitating 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, as well as 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.

To keep the Group's Risk profile within Risk Appetite (and therefore also risk capacity), we have cascaded critical Group Risk Appetite metrics across our Principal Risk Types to countries with significant business operations. These are supplemented by risk control tools such as granular level limits, policies, standards and other operational control parameters that are used to keep the Group's risk profile within Risk Appetite. 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. Country Risk Appetite is managed at a country level with Group and regional oversight.

The Group Risk Committee, the Group Financial Crime Risk Committee, the Group Non-Financial 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 potentially 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 considering potential threats and opportunities from the business and client perspectives. The Group maintains an inventory of the Principal Risk Types and sub-types that are inherent to the strategy and business model, near-term emerging risks that can be measured and mitigated to some extent, and uncertainties that are longer-term matters that should be on the radar but are not yet fully measurable.



 

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 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 traded and liquidity positions as described in the sections on Traded Risk and Liquidity 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 test submissions to the Bank of England 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 implement strategic actions to ensure that the Group Strategy remains within the Board-approved Risk Appetite.

Principal Risk Types

Principal Risk Types are risks that are inherent in our strategy and our business model and have been formally defined in the Group's ERMF. These risks are managed through distinct Risk Type Frameworks (RTF) which are approved by the Group Chief Risk Officer. The Principal Risk Types and associated Risk Appetite Statements are approved by the Board.

In 2018, through the development of the RTFs, we have revised the definition of certain Principal Risk Types to describe the risks or failures more explicitly. In addition, Market Risk has been renamed to Traded Risk to encompass all sensitivities to traded price risk. Traded risk now includes Market Risk, Counterparty Credit Risk, Issuer Risk, Valuation Adjustments, Pension Risk and Algorithmic Trading as risk sub-types. The table below shows the Group's current Principal Risk Types.

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 losses due to political or economic events in a country

Traded Risk

•  Potential for loss resulting from activities undertaken by the Group in financial markets

Capital and Liquidity Risk

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

•  Liquidity: potential for loss 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 (including legal risks)

Reputational Risk

•  Potential for damage to the franchise, resulting in loss of earnings or adverse impact on market capitalisation because of stakeholders taking a negative view of the organisation, its actions or inactions - leading stakeholders to change their behaviour

Compliance Risk

•  Potential for penalties or loss to the Group or for an adverse impact to our clients, stakeholders or to the integrity of the markets we operate in through a failure on our part to comply with laws or regulations

Conduct Risk

•  Risk of detriment to the Group's customers and clients, investors, shareholders, market integrity, competition and counterparties or from the inappropriate supply of financial services, including instances of willful or negligent misconduct

Information and Cyber Security Risk

•  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 Risk

•  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.



 

ERMF Effectiveness Reviews

The Group Chief Risk Officer is responsible for annually affirming the effectiveness of the ERMF to the Board Risk Committee. To facilitate this, an effectiveness review was carried out which follows the principle of evidence-based self-assessments, for all the Risk Type Frameworks and relevant policies.

The ERMF Effectiveness Review conducted in 2018 provides an objective baseline against which progress can be measured over the coming years. The 2018 Effectiveness Review has shown that:

•  The ERMF has been effectively designed to improve the Group's risk management practices through mechanisms which enable management to consistently assess the risk management practices across all risk types, proactively self-identify gaps or improvement opportunities, and develop action plans

•  Through the framework, the Group is now able to tangibly measure and monitor effectiveness of its risk management practices

•  Financial risks are managed more effectively on a relative basis as compared with the non-financial risks reflecting the maturity of these risk type frameworks

Over the course of 2019, the Group aims to further strengthen its risk management practices and work is underway to fully embed the Risk Type Frameworks for the non-financial risks.

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 ERMF based on the recommendation from the Board Risk Committee, which also recommends the Group Risk Appetite Statement other than sections related to Financial Crime Risk. Financial Crime 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 ERMF. The Group Chief Risk Officer, as Chair of the Group Risk Committee, approves the use of sub-committees to support the Group Risk Committee to ensure effective risk management across the Group.

The Board Risk Committee receives regular reports on risk management, including the Group's portfolio trends, policies and standards, stress testing, and 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 Group's Management Team. The Committee determines the ERMF 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 relevant 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 Group Non-Financial Risk Committee, chaired by the Group Head, Operational Risk, was established in 2018 to replace the Group Operational Risk Committee and ensures effective management of inherent non-financial principal risks throughout the Group. The non-financial Principal Risk Types in scope governed under the Group Non-Financial Risk Committee are Operational Risk, Compliance Risk, Conduct Risk, Information and Cyber Security Risk and Reputational Risk that is consequential in nature arising from the failure of all other principal risks (secondary Reputational Risk). The Committee also reviews and challenges the adequacy of the internal control systems across all Principal Risk Types.



 

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

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

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.

The Model Risk Committee, chaired by the Global Head, Enterprise Risk Management, ensures the effective measurement and management of model risk in support of the Group's strategy. The Committee also defines and approves the Group's model Risk Appetite, approves the Group's most material models and monitors the Group's model landscape and risk profile against the model Risk Appetite.

The Group Reputational Risk Committee, chaired by the Group Head, CFCC, oversees the effective management of Reputational Risk across the Group, including risks arising from decisions related to clients, products, transactions or pursuit of strategy at the time of decision-making (primary Reputational risk) and secondary Reputational Risk. The Committee takes decisions on material and thematic Reputational Risk issues.

The Corporate, Commercial & Institutional Banking Risk Committee (CCIBRC) covers risks arising from the Group's activities in Corporate & Institutional Banking and Commercial Banking globally and in the Europe & Americas region as well as Group-wide Traded risk, including oversight for Treasury Markets. The CCIBRC is chaired by the Chief Risk Officer, Corporate & Institutional Banking.

The Private Banking Process Governance and Risk Committee covers risks arising from the Group's activities in Private Banking and Wealth Management globally. It is jointly chaired by the Chief Risk Officer, Commercial Banking and Private Banking and the Global Head, Private Banking and Wealth Management.

The three regional risk committees, chaired by the Chief Risk Officer for each respective region, cover risks arising from their respective regions.

Group Asset and Liability Committee

The Group Asset and Liability Committee is chaired by the Group Chief Financial Officer. Its members are drawn principally from the Management Team. The 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 and capital adequacy, structural foreign exchange, interest rate 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 Standard Chartered Bank Court and is chaired by the Group Chief Risk Officer with membership drawn from the Standard Chartered Bank Court and one Independent Non-Executive Director 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 Type Frameworks for the Group are set and owned by the Chief Risk Officers for the Corporate & Institutional Banking, Commercial Banking, Private Banking, and Retail Banking segments. The Credit Risk function is the second line control function responsible for 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. In addition, 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 standards.

Credit policies and standards are established and approved by the Credit Risk Type Framework owners or by individuals with delegated authorities. Segment specific policies are in place for the management of Credit risk. For Corporate & Institutional Banking and Commercial Banking, policies address large exposures, credit initiation, approval, monitoring, credit grading and documentation. For Retail Banking, policies address management of retail and business banking lending, account and portfolio monitoring, collections management and forbearance programmes. 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.

Mitigation

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 not a substitute for the ability to pay, which is the primary consideration for any lending decision.

Collateral types that are eligible as risk mitigants include: cash; accounts receivable; 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 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.

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.

Where guarantees, credit insurance, standby letters 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 the Board level, the Board Risk Committee oversees the effective management of Credit Risk.

At the executive level, the Group Risk Committee appoints sub-committees for the management of Credit Risk - in particular the CCIBRC, the Private Banking Process Governance and Risk Committee, and the regional risk committees for Greater China & North Asia, ASEAN & South Asia and Africa & 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, as well as key internal developments and external trends, and ensure that appropriate action is taken.

The Group Risk Committee appoints sub-committees for effective management of enterprise stress testing, model governance for Credit Risk, and approval of impairment provisions computed under the IFRS 9 expected credit loss model to the Stress Testing Committee, the Model Risk Committee and the IFRS 9 Impairment Committee respectively.

Decision-making authorities and delegation

The Credit Risk Type Frameworks are the formal mechanism which delegate Credit Risk authorities to individuals such as the Group Chief Risk Officer, the segments' Chief Risk Officers and Global Heads of Risks based on their abilities and management responsibilities. Named individuals further delegate credit authorities to individual credit officers by applying delegated credit authority 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 into account the estimated maximum expected loss from a given customer or portfolio. Credit Risk authorities are reviewed at least annually to ensure they remain appropriate. In Corporate & Institutional Banking, Commercial Banking and Private Banking, the individuals delegating the Credit Risk authorities perform oversight by reviewing a sample of the limit applications approved by the delegated credit officers on a monthly basis. In Retail Banking, credit decision systems and tools (e.g. application scorecards) are used for credit decisioning. Where manual credit decisions are applied, these 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 subject to stricter minimum requirements and require escalation to a senior credit officer or authorised senior executives for approval.

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, underwriting standards, risk policy and procedures.

In Corporate & Institutional Banking and Commercial Banking, 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 (GSAM), which is our specialist recovery unit for Corporate & Institutional Banking, Commercial Banking and Private Banking that operates independently from our main business.

For Retail Banking exposures, portfolio delinquency trends are monitored on an ongoing basis. Account monitoring is based on behaviour scores and bureau performance (where available). Accounts that are past due (or perceived as high risk and not yet past due) are subject to a collections or recovery process managed by a specialist function independent from the origination 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 regulatory framework to calculate Credit Risk capital requirements.

A standard alphanumeric Credit Risk grade system 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 numeric credit grades are indicative of a lower likelihood of default. Credit Grades 1 to 12 are assigned to performing customers, while Credit Grades 13 and 14 are assigned to non-performing or defaulted customers.

Retail Banking internal ratings-based portfolios use application and behavioural 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 Model Risk Committee. Prior to review and approval, 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 for 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 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.

Credit impairment

Effective from 1 January 2018, we have adopted the impairment requirements of IFRS 9 Financial Instruments, where expected credit losses are determined for all financial assets that are classified as amortised cost or fair value through other comprehensive income. Expected credit losses are computed as an unbiased, probability-weighted amount determined by evaluating a range of plausible outcomes, the time value of money, and considering all reasonable and supportable information including that which is forward-looking. When determining forward looking expected credit losses, the Group also considers a set of critical global or country-specific macroeconomic variables that influence Credit Risk. Global macroeconomic variables include commodity prices such as crude oil, commodity indices, bond indices and others such as aircraft prices. Country-specific macroeconomic variables include foreign exchange rates, interest rates, fiscal indicators like government spending and government debt, country economic indicators such as real GDP, unemployment rate and consumer price indices, and property indicators like residential property indices.

At the time of origination or purchase of a non-credit-impaired financial asset (stage 1), expected credit losses represent cash shortfalls arising from possible default events up to 12 months into the future from the balance sheet date. Expected credit losses continue to be determined on this basis until there is a significant increase in the Credit Risk of the asset (stage 2), in which case, an expected credit loss provision is recognised for default events that may occur over the lifetime of the asset. If there is observed objective evidence of credit impairment or default (stage 3), expected credit losses continue to be measured on a lifetime basis.

The Group's definition of default is aligned with the regulatory definition of default as set out in European Capital Requirements Regulation (CRR178) and related guidelines, where the obligor is at least 90 days past due in respect of principal and/or interest. A loan is considered past due (or delinquent), when the customer has failed to make a principal or interest payment in accordance with the loan contract. Financial assets are also considered to be credit-impaired where the obligors are unlikely to pay on the occurrence of one or more observable events that have a detrimental impact on the estimated future cash flows of the financial asset.



 

In Corporate & Institutional Banking, Commercial Banking and Private Banking, a loan is considered credit-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. These credit-impaired accounts are managed by our specialist recovery unit (GSAM).

In Retail Banking, a loan is considered credit-impaired as soon as payment of interest or principal is 90 days overdue or meets other objective evidence of impairment such as bankruptcy, debt restructuring, fraud or death.

Financial assets are written off when there is no realistic prospect of recovery and the amount of loss has been determined. For Retail Banking assets, a financial asset is written off when it meets certain threshold conditions which 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.

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. 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. For more details on sensitivity analysis of expected credit losses under IFRS 9.

Stress testing

Stress testing is a forward-looking risk management tool that constitutes a key input into the identification, monitoring and mitigation of Credit Risk, as well as contributing to Risk Appetite calibration. Periodic stress tests are performed on the credit portfolio/segment to anticipate vulnerabilities from stressed conditions and initiate timely right-sizing and mitigation plans. Additionally, multiple enterprise-wide and country-level stress tests are mandated by regulators to assess the ability of the Group and its subsidiaries to continue to meet their capital requirements during a plausible, adverse shock to the business. These regulatory stress tests are conducted in line with the principles stated in the Enterprise Stress Testing Policy. The Group's enterprise stress testing programme adopted IFRS 9 in full in 2018 and all enterprise stress tests conducted during 2018 were performed on an IFRS 9 basis. Stress tests for key portfolios are reviewed by the Credit Risk Type Framework owners (or delegates) as part of portfolio oversight; and matters considered material to the Group are escalated to the Group Chief Risk Officer and respective regional risk committees.



 

Country Risk

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

Risk Appetite Statement

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

Roles and responsibilities

The Country Risk Type Framework provides clear accountability and roles for managing risk through the three lines of defence model. The Global Head, Enterprise Risk Management is responsible for the management and control of Country Risk across the Group and is 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 with policy or standards to the second line.

Mitigation

Standards are developed and deployed to implement requirements and controls that all countries must follow to ensure effective management of Country Risk. The standards outline the process for Country Risk limit setting, monitoring and reporting exposures. In response to growing concerns over the Country Risk outlook for a particular country, sovereign ratings may be downgraded and country limits may also be reduced.

Governance committee oversight

At the 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. At a country level, the Country Risk Committee (or Executive Risk Committee for subsidiaries) is responsible for monitoring all risk issues for the respective country, including Country Risk.

Decision-making authorities and delegation

The Country Risk Type Framework is the formal mechanism through which the delegation of Country Risk authorities is made. Decision-making and approval authorities are guided by country capacity levels, which are guidelines to set country limits in respect of Country Risk. The capacity levels are assessed by the Group Country Risk function and are derived from factors including: Group Tier 1 capital, transfer risk grade, Group strategy, portfolio composition (short and medium-term) and each country's total foreign currency earnings.

Monitoring

Monitoring and reporting of Country Risk is included in the standards and covers the monitoring of exposures relative to Risk Appetite thresholds and limits, as well as the reporting of material exposures to internal committees and externally where appropriate. The Group Risk Committee monitors Risk Appetite thresholds on a traffic-light indicator basis, and these provide an early warning signal 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 Country Risk exposures in excess of 1 per cent of total Group assets.

Stress testing

The Group Country Risk team produces stressed Sovereign ratings which are used by the relevant Credit and Traded Risk teams in calculating risk-weighted assets during described extreme but plausible stress scenarios.



 

Traded Risk

The Group defines Traded Risk as the potential for loss resulting from activities undertaken by the Group in financial markets

Risk Appetite Statement

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

Under the Enterprise Risk Management Framework, the introduction of the Traded Risk Type Framework (TRTF) in 2018 sought to bring together all risk types exhibiting risk features common to Traded Risk.

These risk types include Market Risk, Counterparty Credit Risk, Issuer Risk, XVA, Algorithmic Trading and Pension Risk. Traded Risk Management (TRM, formerly Market and Traded Credit Risk) is the core risk management function supporting market-facing businesses, specifically Financial Markets and Treasury Markets.

Roles and responsibilities

The TRTF, which sets the roles and responsibilities in respect of Traded Risk for the Group, is owned by the Global Head, Traded Risk Management. The front office, acting as first line of defence, are responsible for the effective management of risks within the scope of its direct organisational responsibilities set by the Board. The TRM function is the second line control function that performs independent challenge, monitoring and oversight of the Traded 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 Traded Risk control owners.

Mitigation

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

TRM has a framework, policies and standards in place ensuring that appropriate Traded Risk limits are implemented. The Group's Traded Risk exposure is aligned with its appetite for Traded Risk, and assessment of potential losses that might be incurred by the Group as a consequence of extreme but plausible events.

Traded Risk limits are applied as required by the TRTF and related standards. All businesses incurring Traded risk must do so in compliance with the TRTF. The TRTF requires that Traded Risk limits are defined at a level appropriate to ensure that the Group remains within Traded Risk Appetite. All exposures throughout the Group that the TRM function is responsible for aggregate up to TRM's Group-level reporting. This aggregation approach ensures that the limits structure across the Group is consistent with the Group's Risk Appetite.

The TRTF and Enterprise Stress Testing Policy ensure that adherence to stress-related Risk Appetite metrics is achieved. Stress testing aims at supplementing other risk metrics used within the Group 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 Traded 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 Traded 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, TRM annually to ensure their ongoing effectiveness and sustainability.

Governance committee oversight

At the Board level, the Board Risk Committee oversees the effective management of Traded Risk. At the executive level, the Group Risk Committee delegates responsibilities to the CCIBRC to act as the primary risk governance body for Traded Risk, and to the Stress Testing Committee for stress testing and the Model Risk Committee for model 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 with responsibility for Traded Risk limits, then tiered accordingly.

Subject to the Group's Risk Appetite for Traded Risk, the Group Risk Committee sets Group-level Traded Risk limits, via delegation to the GCRO. The GCRO delegates authority for the supervision of major business limits to the CRO, Corporate & Institutional Banking and for all other Traded Risk limits to the TRTF Owner (Global Head, TRM) who in turn delegates approval authorities to individual Traded Risk managers.

Additional limits are placed on specific instruments, positions, and portfolio concentrations where appropriate. Authorities are reviewed at least annually to ensure they remain appropriate and to assess the quality of decisions taken by the authorised person. Key risk-taking decisions are made only by certain individuals 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.

Market Risk - Value at Risk

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 outcomes.

VaR is calculated for expected movements over a minimum of one business day and to a confidence level of 97.5 per cent. 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.

The Group applies two VaR methodologies:

•  Historical simulation: this 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 VaRs

•  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.

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.

An analysis of VaR and backtesting results in 2018 is available in the Risk profile section.

Counterparty Credit Risk

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 factor or multi-risk factor stress test scenarios to identify and manage Counterparty Credit Risk across derivatives and securities financing transactions.

Underwriting

The limits for the underwriting of securities to be held for sale are approved by the Underwriting Committee, under the authority of the CCIBRC. The limits include the overall size of the securities inventory, the maximum holding period, the daily VaR, and sensitivities 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 TRM 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 TRM. 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 TRM.

Monitoring

TRM 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 TRMto review risk in light of performance.

Traded 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 Traded Risk manager with the appropriate delegated authority. Financial Markets traders may adjust their Traded Risk exposures within approved limits and assess risk and reward trade-offs according to market conditions.

TRM reports and monitors limits applied to stressed exposures. Stress scenario analysis is performed on all Traded Risk exposures in Financial Markets and in portfolios outside Financial Markets such as syndicated loans and principal finance. Stress loss excesses are discussed with the business and approved where appropriate based on delegated authority levels.

Stress testing

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 Traded 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 TRM 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, including XVA (CVA and FVA). Ad hoc scenarios are also prepared, reflecting specific market conditions and for particular concentrations of risk that arise within the business. Where required by local statute or regulation, TRM'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

The Group defines Capital Risk as the potential for insufficient level, composition or distribution of capital to support our normal activities, and Liquidity Risk as the risk that we may not have sufficient stable or diverse sources of funding to meet our obligations as they fall due

Risk Appetite Statement

The Group should maintain a strong capital position including the maintenance of management buffers sufficient to support its strategic aims and 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

Roles and responsibilities

The Treasurer is responsible for developing a risk type framework for Capital and Liquidity Risk and for complying with regulatory requirements at a Group level. The Treasury and Finance functions, as the Second Line of Defence, 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 Risk Type Framework.



 

Mitigation

The Group develops policies to address material Capital and Liquidity risks and aims to maintain its risk profile within Risk Appetite. Risk Appetite is set for the Group and cascaded down to the countries in the form of limits and management action triggers. The Group also maintains a Recovery Plan which is a live document to be used by management in a liquidity or solvency stress. The Recovery Plan includes a set of Recovery Indicators, an escalation framework and a set of management actions capable of being implemented in a 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, including loss absorbing capacity, 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 and how these might change

•  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, including ongoing capital accretion from the business

Structural FX risk

The Group's structural position results from the Group's non-US dollar 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 to partly cover its exposure to the Korean won, Chinese renminbi, Taiwanese dollar and Indian rupee to mitigate the FX impact of such positions on its capital ratios.

Liquidity Risk

At Group and country level we implement various business-as-usual and stress risk metrics and monitor these against limits and management action triggers. This ensures that the Group maintains an adequate and well-diversified liquidity buffer as well as a stable funding base. A funding plan is also developed for efficient liquidity projection to ensure that the Group is adequately funded, in the required currencies, to meet its obligations and client funding needs. The approach to managing the risks and the Board Risk Appetite is assessed annually through the Internal Liquidity Adequacy Assessment Process.

Interest rate risk in banking book

The Group defines interest rate risk in the banking book (IRRBB) as the potential for a reduction in future earnings or economic value due to changes in interest rates. This risk arises from differences in the re-pricing profile, interest rate basis, and optionality of banking book assets, liabilities and off-balance sheet items. The Group monitors IRRBB against a Board-approved Risk Appetite.

Governance committee oversight

At the 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 ensures the effective management of risk throughout the Group in support of the Group's strategy, and guides the Group's strategy on balance sheet optimisation and ensures that the Group operates within the internally approved Risk Appetite, as well as other external and internal capital and liquidity requirements. The Group Asset and Liability Committee delegates part of this responsibility to the Operational Balance Sheet Committee to ensure alignment with business objectives.

Country oversight under the capital and liquidity framework resides with country Asset and Liability Committees. Countries must ensure that 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 stress testing in line with the Group's Enterprise Stress Testing Policy and applicable regulatory requirements. The Stress Testing Committee reviews, challenges and approves stress scenarios, results and management actions for all enterprise stress tests. Insights gained from the stress tests are used to inform underwriting decisions, risk management, capital and liquidity planning and strategy.

Decision-making authorities and delegation

The Group Chief Financial Officer has responsibility for capital, funding and liquidity under the Senior Managers Regime. The Group Chief Financial Officer and Group Chief Risk Officer have delegated the Risk Framework Owner responsibilities associated with Capital and Liquidity Risk to the Treasurer. The Treasurer delegates second line oversight and challenge responsibilities to relevant and suitably qualified Treasury and Finance individuals.

Monitoring

On a day-to-day basis, the management of Capital and Liquidity Risk 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 and Finance with appropriate escalation processes in place.

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.

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 considers 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 this could be mitigated through appropriate management actions to ensure the Group remains within the approved Risk Appetite and regulatory limits.

 

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 (including legal risks)

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 Type Framework (ORTF) is set by the Group Head, Operational Risk and is applicable enterprise-wide. This Framework defines and collectively groups operational risks which have not been classified as Principal Risk Types into non-Principal Risk Types (non-PRTs) and sets standards for the identification, control, monitoring and treatment of risks. These standards are applicable across all PRTs and non-PRTs. The non-PRTs relate to execution capability, fraud, corporate governance, reporting and obligations, model, safety and security, legal enforceability, and operational resilience (including client service, third party vendor services, change management, and system availability).

The ORTF reinforces clear accountability for managing risk throughout the Group and delegates second line of defence responsibilities to identified subject matter experts. For each non-PRT, the expert sets policies for the organisation to comply with, and provides guidance, oversight and challenge over the activities of the Group. They ensure that key risk decisions are only taken by individuals with the requisite skills, judgement, and perspective to ensure that the Group's risk/return objectives are met.



 

Mitigation

The ORTF sets out the Group's overall approach to the management of Operational Risk in line with the Group's Operational Risk Appetite. This is supported by Control Assessment Standards (CAS) which define roles and responsibilities for the identification, control and monitoring of risks (applicable to all non-PRTs and PRTs).

The CAS are used to determine the design strength and reliability of each process, and require:

•  The recording of processes run by client segments, products, and functions into a process universe

•  The identification of potential breakdowns to these processes and the related risks of such breakdowns

•  An assessment of the impact of the identified risks based on a consistent scale

•  The design and monitoring of controls to mitigate prioritised risks

•  Assessments of residual risk and prompt actions for elevated risks

Risks that exceed the Group's Operational Risk Appetite require treatment plans to address underlying causes.

Governance committee oversight

At the Board level, the Board Risk Committee oversees the effective management of Operational risk. At the executive level, the Group Risk Committee delegates authority primarily to the Group Non-Financial Risk Committee (GNFRC) to monitor the Group's Operational Risk Appetite and to oversee the Group's Operational risk profile. The GNFRC has the authority to challenge, constrain and, if required, stop business activities where risks are not aligned with the Group's Operational Risk Appetite.

Regional, business segments and functional-committees also provide enterprise oversight of their respective processes and related operational risks. In addition, Country Non-Financial Risk Committees (CNFRCs) oversee the management of Operational risks at the country (or entity) level. In smaller countries, the responsibilities of the CNFRC may be exercised directly by the Country Risk Committee (for Branches) or Executive Risk Committee (for Subsidiaries).

Monitoring

To deliver services to clients and to participate in the financial services sector, the Group runs processes which are exposed to operational risks. The Group prioritises and manages risks which are significant to clients and to the financial services sectors. Control indicators are regularly monitored to determine the residual risk the Group is exposed to. The residual risk assessments and reporting of events form the Group's Operational Risk profile. The completeness of the Operational Risk profile ensures appropriate prioritisation and timeliness of risk decisions, including risk acceptances with treatment plans for risks that exceed acceptable thresholds.

The Board is informed on adherence to Operational Risk Appetite through metrics reported for selected risks. These metrics are monitored and escalation thresholds are devised based on the materiality and significance of the risk. These Operational Risk Appetite metrics are consolidated on a regular basis and reported at relevant Group committees. This provides senior management with the relevant information to inform their risk decisions.

Stress testing

Stress testing and scenario analysis are used to assess capital requirements for operational risks. This approach considers the impact of extreme but plausible scenarios on the Group's Operational Risk profile. A number of scenarios have been identified to test the robustness of the Group's processes, and assess the potential impact on the Group. These scenarios include anti-money laundering, sanctions, information and cyber security and external fraud.



 

Reputational Risk

The Group defines Reputational Risk as the potential for damage to the franchise, resulting in loss of earnings or adverse impact on market capitalisation because of stakeholders taking a negative view of the organisation, its actions or inactions - leading stakeholders to change their behaviour

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

The Global Head, Enterprise Risk Management is the Risk Framework Owner for Reputational Risk under the Group's Enterprise Risk Management Framework. For primary risks, the responsibility of Reputational Risk management at country level 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 Chief Executive Officers, Business Heads and Product Heads in respect of risk management activities of reputational-related risks. 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 Risk Framework Owners of each Principal Risk Type who are responsible for enhancing existing risk management frameworks to incorporate Reputational Risk management approaches.

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 primary and secondary 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 or decline the risk or impose conditions upon proposals, to protect the Group's reputation. Secondary Reputational Risk mitigation derives from the effective management of other Principal Risk Types.

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 ensures the effective management of primary Reputational Risk across the Group.

The Group Reputational Risk Committee's remit is to:

•  Challenge, constrain and, if required, 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 primary 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

The Group Non-Financial Risk Committee has oversight of the effective management of secondary Reputational Risk.

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 standards 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 standards. 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

Stress testing

Although Reputational Risk is not an explicit separate regulatory factor in enterprise stress tests, it 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.

 

Compliance Risk

The Group defines Compliance Risk as potential for penalties or loss to the Group or for an adverse impact to our clients, stakeholders or to the integrity to markets we operate in through 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; while recognising that regulatory non-compliance cannot be entirely avoided, the Group strives to reduce this to an absolute minimum

Roles and responsibilities

The Group Head, Conduct, Financial Crime and Compliance (CFCC), as Risk Framework Owner for Compliance Risk provides support to senior management on regulatory and compliance matters by:

•  Providing interpretation and advice on regulatory requirements and their impact on the Group;

•  Setting enterprise-wide standards for compliance, through the establishment and maintenance of a risk-based compliance framework, the Compliance Risk Type Framework (Compliance RTF);

•  Setting a programme for monitoring Compliance Risk

The Compliance RTF sets out the roles and responsibilities in respect of Compliance Risk for the Group. All activities that the Group engages in must be designed to comply with the applicable laws and regulations in the countries in which we operate. The CFCC function is the Second Line of Defence that ensures the overall operation of the framework and for significant areas of laws and regulations, provides oversight and challenge of the first line risk management activities that relate to Compliance Risk.

The Compliance RTF defines Compliance Risk sub-types and, where relevant, assigns responsibility for these to the most appropriate other Principal Risk Type Owner or control function. This ensures that effective oversight and challenge of the first line can be provided by the appropriate second line function. Each of these assigned second line functions sets policies for the organisation to comply with, and provides guidance, oversight, and challenge over the activities of the Bank. They ensure that key risk decisions are only taken by individuals with the requisite skills, judgement, and perspective to ensure that the Group's Compliance Risk is appropriately managed.



 

Mitigation

The Compliance RTF sets the Group's overall approach to the management of Compliance Risk. In support of this, the Compliance function develops and deploys relevant policies and standards setting out requirements and controls for adherence by the Group to ensure continued compliance with applicable laws and regulations. Through a combination of risk assessment, control standard setting, control monitoring and compliance review activities, the Compliance Risk Framework Owner seeks to ensure that all policies are operating as expected to mitigate the risk that they cover. The installation of appropriate processes and controls is the primary tool for the mitigation of Compliance Risk. In this, the requirements of the Operational Risk Type Framework are followed to ensure a consistent approach to the management of processes and controls.

Governance committee oversight

Compliance risk and the risk of non-compliance with laws and regulations resulting from failed processes and controls are overseen by Business, Product and Function Non-Financial Risk Committees. The Conduct and Compliance Non-Financial 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 Non-Financial Risk Committee, Group Risk Committee and Board Audit Committee. Within each country, oversight of Compliance Risk is delegated through the Country Non-Financial Risk Committee where the Operational Risk Control Assessment Standards will form a primary part of the monitoring of Compliance Risk.

Decision-making authorities and delegation

Decision making and approval authorities follow the Enterprise Risk Management Framework approach and risk thresholds. The Group Head, CFCC has the authority to delegate second line responsibilities within the CFCC 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 other Principal Risk Type or control function for certain compliance risk sub-types.

Monitoring

The monitoring of controls designed to mitigate the risk of regulatory non-compliance in processes are governed in line with the Operational Risk Type Framework. The Group has a monitoring and reporting process in place for Compliance Risk, which includes the aggregation of compliance exposures from across the Group and escalation and reporting to Conduct and Compliance Non-Financial 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 of horizon scanning for emerging Compliance Risk. This protocol ensures that regulatory reforms with the potential to affect the Group in multiple markets are identified and steps taken in good time to ensure compliance with these.

Stress testing

Stress testing and scenario analysis are used to assess capital requirements for Compliance Risk and form part of the overall scenario analysis portfolio managed under the Operational Risk Type Framework. Specific scenarios are developed annually with collaboration between the business who own and manage the risk and the CFCC function who are second line to incorporate significant Compliance risk tail events. This approach considers the impact of extreme but plausible scenarios on the Group's Compliance Risk profile.

 



 

Conduct Risk

The Group defines Conduct Risk as the risk of detriment to the Group's customers and clients, investors, shareholders, market integrity, competition and counterparties or from the inappropriate supply of financial services, including instances of wilful or negligent misconduct

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 are doing the right thing in the way we do business

In addition to the Group's external stakeholders, Conduct Risk may also arise in respect to our behaviour towards each other as colleagues. The Group believes that everyone is entitled to a fair and safe working environment that is free from discrimination, exploitation, bullying, harassment or inappropriate language.

Roles and responsibilities

Conduct Risk management and abiding by the Group Code of Conduct is the responsibility of all employees across the organisation.

The first line of defence is required to ensure that potential conduct risks arising in the business, functions and countries are identified, assessed and managed appropriately. Senior management in the first line of defence are accountable for embedding the right culture relating to Conduct Risk. The CFCC function is the second line for Conduct Risk, and is responsible for providing independent guidance, oversight, and challenge to the first line, as well as setting the risk management standards that the first line must adhere to. The CFCC function owns the risk sub-types, and where relevant, they are delegated to other functions or Risk Framework Owners in the Group.

Conduct Plan

The Conduct Plan is a live document and must be kept regularly updated, including as and when there are potential or materialised conduct risks identified through other PRTs. Identified conduct risks and the corresponding mitigation should be monitored by relevant governance committees to ensure effective and timely resolution. The Conduct Plans should meet minimum standards as follows:

•  Conduct Plans are owned by the management of each country, region, business and function within the Group. As the first line of defence, management is responsible to ensure that the Conduct Plans are regularly reviewed and updated

•  The Compliance function as the second line of defence and Risk Framework Owner is responsible for challenging management on the quality and completeness of the plan, as well as the effectiveness and timeliness of the remediation strategy

•  The Conduct Plans highlight the key conduct risks that are inherent to the processes and activities performed or impacted within a country, region, business or function

•  The Group Conduct Management Principles, which highlight various conduct outcomes, should be used as a guide to help with the process of identifying relevant conduct risks

•  For each of the risks identified, appropriate remediation action, enhancements to the control environment, responsible action owners and timeframes for resolution must be clearly recorded within the Conduct Plan

•  Regular engagement should take place between owners of the Group and geographic Conduct Plans to ensure appropriate escalation and communications related to conduct risks and the mitigation strategy applied

•  Conduct Plans also reflect Conduct Risks based on one-off projects, adverse trends from conduct management information, internal conduct incidents, deficiencies identified through internal assurance activities across the three lines of defence, emerging risks/trends and external developments



 

Governance committee oversight

The Board Risk Committee, Brand Values and Conduct Committee, Group Risk Committee, Group Non-Financial Risk Committee and the Compliance Regulatory Risk Committee are responsible for ensuring that the Group effectively manages its Conduct risk. As Risk Framework Owner for Conduct Risk, Group Head, CFCC sets reporting thresholds for escalation of Conduct Risk to the Conduct and Compliance Risk Committee, Group Non-Financial 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 challenge and acceptance authority is exercised by the Group Head, CFCC and delegated within the CFCC function as second line.

Monitoring and mitigation

The Compliance Assurance team perform assurance reviews to monitor Conduct Risk outcomes. In limited or special circumstances, a specific thematic conduct review may be performed. This may be considered in scenarios where countries or businesses have significant and potentially systemic Conduct Risk issues, which may warrant a more focused assessment of the end-to-end controls.

These reviews supplement other compliance activities from a Second Line of Defence perspective. These activities include compliance stakeholder representation and challenge at first line governance committees and conduct forums; surveillance activity - such as trade surveillance, e-communication surveillance, and sales and suitability surveillance; Control Room management - such as outside business interests, personal account dealing, and information walls; and validating or challenging the Group performance scorecard for conduct.

Stress testing

The assessment of Conduct Risk vulnerabilities under stressed conditions or extreme events with a low likelihood of occurring are carried out through enterprise stress testing. This is currently covered primarily through Operational Risk and Financial Crime driven stress scenarios.

 

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 2018, the Group approved a Risk Type Framework (RTF) to formally set out the Group-wide strategy for managing Information and Cyber Security (ICS) Risk. The RTF has strengthened the role of the business for managing ICS Risk. As a result, through 2018 there has been significant expansion of first line responsibilities to ensure in-depth ownership and understanding of ICS Risk by the first line of defence.

The RTF defines the first line roles of Information Asset Owners, Information System Owners, and Information Custodians. information asset owners and Information System Owners are named individuals within each business who have accountability for classifying and managing risks to the information assets and systems they own respectively. Information Custodians are named individuals, typically within the Technology and Innovation (T&I) function, responsible for providing secure processing of information commensurate to the level specified by the Information Asset or Information System Owner. In addition, each business and region has recruited Heads of ICS to provide Information Asset and System Owners a centralised first line point of contact to ensure controls are embedded effectively and consistently across the Group. The business, alongside T&I Security Technology Services, is responsible for remediation activities to strengthen the Group's ICS Risk controls to protect against any new threats in an evolving environment.

The Chief Information Security Officer (CISO) has overall responsibility for strategy, governance and oversight of ICS Risk across the Group and operates as the second line of defence. The CISO defines policy for ICS Risk, overseeing and challenging the operational implementation of controls at the first line.



 

Mitigation

ICS Risk is managed through a structured ICS Policy Framework comprised of a risk assessment methodology and supporting policies, procedures and standards which are aligned to industry best practice models.

Information Asset Owners, Information System Owners, and Information Custodians are responsible for compliance with the ICS Policy Framework. This requires the first line to embed applicable ICS policy controls, and measure the performance of these controls with key indicators against thresholds set by the Board. Additional controls may be added by the business area to reflect any specific characteristics of the reporting area which may be relevant, depending on concurrence from the CISO.

The CISO function monitors compliance to the ICS Policy Framework through an assessment of each key control domain defined by the ICS RTF through the Risk profile report. Within the risk profile view, appropriate mitigating activity for each key control domain is identified, undertaken and reported against by the business.

All business units, group functions, countries and regions (Information Asset/System Owner and Information Custodians) complete a risk assessment of each relevant key control domain for their operational environment by completing a risk profile. These are submitted to the CISO and to relevant governance committees for continuous oversight and challenge against Risk Appetite requirements.

Governance committee oversight

The ICS Risk within the Group is currently governed via the Board Risk Committee who has responsibility for approving the definition of ICS Risk and the Group Risk Appetite. In addition, the Group Risk Committee has delegated authority to the Group Non-Financial Risk Committee (GNFRC) to ensure effective implementation of the ICS RTF. The GRC, and GNFRC retain responsibility for oversight of ICS Risk control domains rated very high and high respectively. Sub-committees of the GNFRC have oversight of the management of ICS risks arising from business and functional areas.

These governance committees have responsibility for providing oversight of ICS risks against Risk Appetite and measuring performance of ICS Risk management activities across the first line. Chairs of governance committees ensure adequate representation for all business units and countries across the Group who are responsible for managing ICS Risk. 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

The ICS RTF is the formal mechanism through which the delegation of ICS Risk authorities is made. The GCRO has delegated Risk Framework Owner authority to the CISO. The CISO has, where appropriate, delegated second line authority to information security officers to assume the responsibilities for approval for business, functions, and countries.

Approval of ICS Risk ratings follow an approval matrix defined by the ICS RTF where the GCRO and CISO sign off very high and high risks respectively.

Information Asset Owners, Information System Owners, and Information Custodians are responsible for the identification, creation and implementation of processes as required to comply with the ICS Policy Framework.

Monitoring

Monitoring and reporting on the Risk Appetite profile ensures that performance which falls outside the approved Risk Appetite is highlighted and reviewed at the appropriate governance committee or authority levels, and ensures that adequate remediation actions are in place where necessary. Identification of ICS risks are performed through the following processes:

•  Scanning of external environment: The dynamic risk identification process includes scanning of the external environment through industry and specialist activities; inputs from legal, regulatory, and mandatory bodies; changes to information and technology use in society, opportunities or incidents; and identifying emerging threats to our information assets and systems



 

•  ICS Risk profile assessment exercise: Risks to information assets and systems must be identified using the approach defined within the RTF and a risk rating ascertained. Risks identified within the key control domains defined in the RTF are documented within risk profiles and reviewed monthly as part of risk governance to ensure effective mitigation against the approved appetite. During these reviews, the status of each risk is assessed to identify any changes to materiality and likelihood, which in turn affect the overall risk score and rating. Risks which exceed defined thresholds are escalated to appropriate governance bodies. The CISO performs a consolidation of completed risk profiles for the Group and produces a holistic aggregated risk position with appropriate key control and risk indicators, which are used to govern the overall ICS Risk

•  Threat identification: During the risk identification process, the CISO works with the T&I function to ensure an accurate threat profile definition. Business areas report on their threat profile each month to the Business, Product and Functional level Non-Financial Risk Committees ensuring continuous monitoring of threat identification. This is then reported to the GNFRC, who reviews the reports at an enterprise level. Improvements to the Group's threat intelligence capability are being implemented through 2019.

Stress testing

The CISO will determine ICS Risk controls to be subjected to scenario-based resiliency stress testing and sensitivity analysis, which is aimed to either ensure robustness of control or ability to respond should a control fail. The Group's stress testing approach entails:

•  The CISO oversees all ICS Risk-related stress testing the Group carries out to meet regulatory requirements

•  Incident scenarios affecting information assets and systems are periodically tested to assess the incident management capability in the Group

•  Penetration testing and vulnerability scanning are performed against the Group's internet-facing services and critical information assets/systems

 

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

Risk Appetite Statement

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

Roles and responsibilities

The Global Head, Conduct, Financial Crime and Compliance (CFCC) 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 Risk. The Global Head, CFCC 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 Authority, including those set out in their handbook on systems and controls.

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 Risk Type Framework:

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

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

•  Sanctions as set out in the Group Sanctions Policy

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

•  Client due diligence, to meet Know Your Customer requirement

•  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 Type Framework, in addition to oversight by the Financial Crime Compliance Assurance and Group Internal Audit.

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 Risk 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 Financial Crime Risk Type Framework.

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, CFCC is the Risk Framework Owner for Financial Crime Risk under the Group's Enterprise Risk Management Framework, and has delegated authorities to effectively implement the Financial Crime Risk Type Framework, to the Co-Heads, Financial Crime Compliance.

Certain aspects of Financial Crime Compliance, second line oversight and challenge, are futher delegated within the CFCC function. Approval frameworks are in place to allow for risk-based decisions on client on-boarding, potential breaches of sanctions regulation or policy, and situations of potential anti-money laundering and anti-bribery and corruption.

Monitoring

The Group monitors Financial Crime Risk compliance 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.

Stress testing

The assessment of Financial Crime vulnerabilities under stressed conditions or extreme events with a low likelihood of occurring is carried out through Enterprise Stress Testing.



 

Risk profile

Our risk profile in 2018

Through our well-established risk governance structure and Enterprise Risk Management Framework (ERMF), 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 dynamic risk scanning process that provides a forward-looking view of the economic, business and credit conditions across the Group's key markets, enabling us to proactively manage our portfolio.

We continue to reposition the Group's corporate portfolio, exiting weaker credit or lower-returning clients and adding new clients selectively. We remain alert to broader geopolitical uncertainties that have affected sentiment in some of our markets, and we continue to focus on early identification of emerging risks across all our portfolios to manage any areas of potential weakness on a proactive basis. 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 2018

Stronger risk culture across the Three Lines of Defence from increased awareness of the ERMF

•  In 2018, we developed consistent and integrated Risk Type Frameworks for our ten Principal Risk Types

•  We formalised links between our Strategy, Risk Appetite and risk identification to integrate risk considerations into strategic decision-making

•  We enhanced our Risk Appetite coverage on non-financial Principal Risk Types

•  We established clear individual accountability for risk management across the three lines of defence

•  We aligned our risk committees to the ERMF

•  We augmented our risk scanning processes to enable more dynamic and forward-looking assessments of risk

•  We rolled out an ERMF Effectiveness Review process to measure progress in an objective manner

Corporate portfolios remain well diversified and exhibit improving credit quality

•  Credit impairment for the total ongoing business reduced by 38 per cent on 2017

•  We further reduced our liquidation portfolio by 39 per cent in the year through active management

•  Within the Corporate & Institutional Banking and Commercial Banking portfolios:

Exposure to investment grade clients has increased to 62 per cent of the total corporate book in 2018 (2017: 57 per cent)

The largest sector concentration are manufacturing at 17 per cent of loans and advances to customers, and financing, insurance and non-banking financial counterparties at 15 per cent. All other industry concentrations are at 12 per cent or lower of the total customer portfolio

•  Over 50 per cent of long-term sub-investment grade exposures within the corporate portfolio remain collateralised

•  Within the Retail Banking portfolio, secured lending remains our primary focus, with 84 per cent of the book continuing to be fully secured. Our overall loan-to-value ratio is low at 45 per cent

Robust capital and liquidity position

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

•  We have a strong advances-to-deposits ratio

•  We remain a net provider of liquidity to interbank markets and our customer deposit base is diversified by type and maturity

•  We have a substantial portfolio of marketable securities which can be realised in the event of a liquidity stress situation

Further details on the Enterprise Risk Management Framework can be found in the Risk management approach.



 

Credit Risk

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.

Loans and advances to customers comprise the ongoing portfolio and liquidation portfolio in this section unless otherwise separately identified.

Loans and advances to customers and banks held at amortised cost in this Risk profile section include reverse repurchase agreement balances held at amortised cost, per Note 16 Reverse repurchase and repurchase agreements including other similar secured lending and borrowing.

Credit risk overview

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

IFRS 9 changes and methodology

IFRS 9 came into effect on 1 January 2018. As a summary the primary changes for the Group are as follows:

New impairment model

IFRS 9 introduces a new impairment model that requires the recognition of expected credit losses (ECL) rather than incurred losses under IAS 39 on all financial debt instruments held at amortised cost, fair value through other comprehensive income (FVOCI), undrawn loan commitments and financial guarantees.

Staging of financial instruments

Financial instruments that are not already credit-impaired are originated into stage 1 and a 12-month expected credit loss provision is recognised.

Instruments will remain in stage 1 until they are repaid, unless they experience significant credit deterioration (stage 2) or they become credit-impaired (stage 3).

Instruments will transfer to stage 2 and a lifetime expected credit loss provision recognised when there has been a significant change in the credit risk compared with what was expected at origination.

The framework used to determine a significant increase in credit risk is set out below.

Instruments are classified as stage 3 when they become credit-impaired.

The Group has not restated comparative information. Accordingly, amounts prior to 1 January 2018 are prepared and disclosed on an IAS 39 basis. This primarily impacts the credit risk disclosures, where loan loss provisioning is determined on an expected credit loss basis under IFRS 9 compared with an incurred credit loss basis under IAS 39.

Where relevant, the 1 January 2018 balance sheet has been used for comparative purposes. The Group's initial estimate of credit impairment on adoption of IFRS 9 was $6,720 million. Following refinement of the Group's expected loss models, the estimate of the opening credit impairment was revised down by $222 million to $6,498 million, and the net expected credit loss of $(1,296) million adjusted against retained earnings was similarly decreased by $222 million to $(1,074) million. This was presented as part of the Group's 2018 interim financial statements.

A summary of the differences between IFRS 9 and IAS 39 is disclosed in Note 41 IFRS 9 Financial instruments.



 

IFRS 9 changes and methodology

The accounting policies under IFRS 9 are set out in Note 8 Credit impairment and Note 13 Financial instruments. The impact upon adoption of IFRS 9 as at 1 January 2018 is set out in Note 41 IFRS 9 Financial instruments. The main methodology principles and approach adopted by the Group are set out in the following table with cross references to other sections.

Title

Description

Supplementary information

Approach to determining expected credit losses

For material loan portfolios, the Group has adopted a statistical modelling approach for determining expected credit losses that makes extensive use of credit modelling. Where available, the Group has leveraged existing advanced Internal Ratings Based (IRB) regulatory models that have been used to determine regulatory expected loss.

For portfolios that follow a standardised regulatory approach, the Group has developed new models where these are material.

Credit risk methodology

Key differences between regulatory IFRS expected credit loss models

Determining lifetime expected credit loss for revolving products

Incorporation of forward-looking information

The determination of expected credit loss includes various assumptions and judgements in respect of forward-looking macroeconomic information.

Incorporation of forward-looking information and impact of non-linearity

Forecast of key macroeconomic variables underlying the expected credit loss calculation

Significant increase in credit risk (SICR)

Expected credit loss for financial assets will transfer from a 12-month basis to a lifetime basis when there is a significant increase in credit risk (SICR) relative to that which was expected at the time of origination, or when the asset becomes credit-impaired. On transfer to a lifetime basis, the expected credit loss for those assets will reflect the impact of a default event expected to occur over the remaining lifetime of the instrument rather than just over the 12 months from the reporting date.

SICR is assessed by comparing the risk of default of an exposure at the reporting date with the risk of default at origination (after considering the passage of time). 'Significant' does not mean statistically significant nor is it reflective of the extent of the impact on the Group's financial statements. Whether a change in the risk of default is significant or not is assessed using quantitative and qualitative criteria, the weight of which will depend on the type of product and counterparty.

Quantitative criteria

Significant increase in credit risk thresholds

Specific qualitative and quantitative criteria per segment:

Corporate & Institutional and Commercial Banking clients

Retail Banking clients

Private Banking clients

Debt securities

Assessment of credit-impaired financial assets

Credit-impaired financial assets comprise those assets that have experienced an observed credit event and are in default. Default represents those assets that are at least 90 days past due in respect of principal and interest payments and/or where the assets are otherwise considered unlikely to pay. This definition is consistent with internal credit risk management and the regulatory definition of default.

Unlikely to pay factors include objective conditions such as bankruptcy, debt restructuring, fraud or death. It also includes credit-related modifications of contractual cash flows due to significant financial difficulty (forbearance) where the Group has granted concessions that it would not ordinarily consider.

Retail Banking clients

Corporate & Institutional Banking clients

Commercial Banking and Private Banking clients

Modified financial assets

Where the contractual terms of a financial instrument have been modified, and this does not result in the instrument being derecognised, a modification gain or loss is recognised in the income statement representing the difference between the original cashflows and the modified cash flows, discounted at the effective interest rate. The modification gain/loss is directly applied to the gross carrying amount of the instrument.

If the modification is credit-related, such as forbearance or where the Group has granted concessions that it would not ordinarily consider, then it will be considered credit-impaired. Modifications that are not credit related will be subject to an assessment of whether the asset's credit risk has increased significantly since origination by comparing the remaining lifetime probability of default (PD) based on the modified terms to the remaining lifetime PD based on the original contractual terms.

Forbearance and other modified loans



 

Transfers between stages

Assets will transfer from stage 3 to stage 2 when they are no longer considered to be credit-impaired. Assets will not be considered credit-impaired only if the customer makes payments such that they are paid to current in line with the original contractual terms. In addition:

•  Loans that were subject to forbearance measures must remain current for 12 months before they can be transferred to stage 2

•  Retail loans that were not subject to forbearance measures must remain current for 180 days before they can be transferred to stage 2 or stage 1

Assets may transfer to stage 1 if they are no longer considered to have experienced a significant increase in credit risk. This will be immediate when the original PD based transfer criteria are no longer met (and as long as none of the other transfer criteria apply). Where assets were transferred using other measures, the assets will only transfer back to stage 1 when the condition that caused the significant increase in credit risk no longer applies (and as long as none of the other transfer criteria apply).

Movement in loan exposures and expected credit losses


156

Governance and application of expert credit judgement in respect of expected credit losses

The determination of expected credit losses requires a significant degree of management judgement which had an impact on governance processes, with the output of the expected credit models assessed by the IFRS 9 Impairment Committee.

Group Credit Model Assessment Committee

IFRS 9 Impairment Committee


179

179

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 2018, before and after taking into account any collateral held or other credit risk mitigation.

The Group's on-balance sheet maximum exposure to credit risk increased by $27 billion to $667 billion (1 January 2018: $640 billion). This was driven by a $10 billion increase in investment securities as the Group further strengthened its portfolio of high-quality liquid assets, as well as a $9 billion increase in reverse repos held at fair value through profit or loss primarily in the UK. Investment securities held at fair value through profit or loss increased by $1.8 billion as a result of deployment of funds in better quality assets. Further, other assets increased by $2.8 billion mainly driven by cash collateral and unsettled trades due to settlement timing differences.

Off-balance sheet credit risk exposures increased by $2 billion compared with 1 January 2018, primarily within contingent liabilities, offset by a decrease in documentary credits and short-term trade-related transactions.



 


31.12.18


01.01.18

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

57,511



57,511


58,864



58,864

Loans and advances to banks1, 8

61,414

3,815


57,599


62,295

5,101


57,194

of which - reverse repurchase agreements and other similar secured lending7

3,815

3,815


-


5,101

5,101


-

Loans and advances to customers1, 8

256,557

109,326


147,231


251,507

118,132


133,375

of which - reverse repurchase agreements and other similar secured lending7

3,151

3,151


-


4,566

4,566


-

Investment securities - debt securities and other eligible bills2

125,638



125,638


115,599



115,599

Fair value through profit or loss3, 7

85,441

54,769

-

30,672


72,505

45,518

-

26,987

Loans and advances to banks

3,768



3,768


2,865



2,865

Loans and advances to customers

4,928



4,928


3,907



3,907

Reverse repurchase agreements and other similar lending7

54,769

54,769


-


45,518

45,518


-

Investment securities - debt securities and other eligible bills2

21,976



21,976


20,215



20,215

Derivative financial instruments4, 7

45,621

9,259

32,283

4,079


47,031

9,825

29,135

8,071

Accrued income

2,228



2,228


1,947



1,947

Assets held for sale

23



23


2



2

Other assets5

32,678



32,678


29,922



29,922

Total balance sheet

667,111

177,169

32,283

457,659


639,672

178,576

29,135

431,961

Off-balance sheet










Contingent liabilities6

41,952

-

-

41,952


37,639

-

-

37,639

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

147,728

-

-

147,728


147,978

-

-

147,978

Documentary credits and short-term trade-related transactions6

3,982

-

-

3,982


5,808

-

-

5,808

Total off-balance sheet

193,662

-

-

193,662


191,4259

-

-

191,425

Total

860,773

177,169

32,283

651,321


831,097

178,576

29,135

623,386

1 An analysis of credit quality is set out in the credit quality analysis section. Further details of collateral held by client segment and stage are set out in the collateral analysis section

2 Excludes equity and other investments $263 million (1 January 2018: $214 million)

3 Excludes equity and other investments $1,691 million (1 January 2018: $2,135 million)

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 ECL allowances which are reported under Provisions for liabilities and charges

7 Collateral capped at maximum exposure (over-collateralised)

8 Covered exposure at default (EAD), being the collateral considered to mitigate (cover) credit risk in the EAD calculation, has been used to understand the effect of collateral and other credit enhancements on the amounts arising from expected credit losses in accordance with IFRS 7 - Financial instrument disclosures

9 Contingent liabilities and commitments have been restated, as a result of the availability of more reliable, centralised information following the implementation of IFRS 9. The ageing of commitments is now based on residual rather than original maturity



 


31.12.17 (IAS 39)

Maximum
exposure
$million

Credit risk management

Net
exposure
$million

Collateral
$million

Master
netting
agreements
$million

On-balance sheet





Cash and balances at central banks

58,864

-

-

58,864

Loans and advances to banks1

78,188

20,694


57,494

of which - reverse repurchase agreements and other similar secured lending

20,694

20,694



Loans and advances to customers1

282,288

146,641


135,647

of which - reverse repurchase agreements and other similar secured lending

33,581

33,581



Investment securities - debt securities and other eligible bills2

116,131

-

-

116,131

Fair value through profit or loss3

26,113

912


25,201

Loans and advances to banks

2,572



2,572

Loans and advances to customers

2,918



2,918

Reverse repurchase agreements and other similar secured lending

912

912

-

-

Investment securities - debt securities and other eligible bills2

19,711



19,711

Derivative financial instruments4

47,031

9,825

29,135

8,071

Accrued income

1,947

-

-

1,947

Assets held for sale

2

-

-

2

Other assets5

29,922

-

-

29,922

Total balance sheet

640,486

178,072

29,135

433,279

Off-balance sheet




-

Contingent liabilities6

37,639

-

-

37,639

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

147,978

-

-

147,978

Documentary credits and short-term trade-related transactions6

5,808

-

-

5,808

Total off-balance sheet

191,425

-

-

191,425

Total

831,911

178,072

29,135

624,704

1 An analysis of credit quality is set out in the credit quality analysis section. Further details of collateral held by client segment and stage are set out in the collateral analysis section

2 Excludes equity and other investments $894 million

3 Excludes equity and other investments $1,451 million

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 Contingent liabilities and commitments have been restated, as a result of the availability of more reliable, centralised information following the implementation of IFRS 9

Analysis of financial instrument by stage

This table shows financial instruments and off-balance sheet commitments by stage, along with total credit impairment loss provision against each class of financial instrument.

The proportion of financial instruments held within stage 1 increased to 92 per cent, compared with 90 per cent at 1 January 2018. This increase was primarily within Corporate & Institutional Banking loans and advances where the proportion of stage 1 loans rated as 'Strong' has increased from 58 per cent to 62 per cent.

The proportion of stage 2 financial instruments decreased to 7 per cent from 8 per cent at 1 January 2018, primarily from reductions in loans and advances and undrawn commitments. This was largely due to an improvement in the credit quality of the Corporate & Institutional Banking portfolio. Loans held on non-purely precautionary early alert in the Corporate & Institutional Banking and Commercial Banking portfolios declined by $3.9 billion as accounts repaid or regularised. Loans classed as 'Higher risk' increased by 4 per cent primarily within the Commercial Banking segment. The stage 2 cover ratio declined to 2.4 per cent from 2.8 per cent at 1 January 2018 primarily due to improved credit quality together with more high-quality collateral.

The proportion of instruments classified as stage 3 declined by $1.6 billion. This was driven by a combination of repayments, debt sales, write-offs and upgrades within loans and advances to customers. The stage 3 cover ratio (excluding collateral) declined from 60 per cent to 59 per cent over the same period but remained stable including collateral.



 


31.12.18

Stage 1


Stage 2


Stage 3


Total

Gross balance1

$million

Total credit impairment
$million

Net carrying value
$million

Gross balance1

$million

Total credit impairment
$million

Net carrying value
$million

Gross balance1

$million

Total credit impairment
$million

Net carrying value
$million

Gross balance1

$million

Total credit impairment
$million

Net carrying value
$million

Loans and advances to banks (amortised cost)

60,350

(5)

60,345


1,070

(1)


-


61,420

(6)

61,414

Loans and advances to customers (amortised cost)

237,103

(426)

236,677


17,428

(416)

17,012


6,924

(4,056)

2,868


261,455

(4,898)

256,557

Debt securities and other eligible bills

118,713

(27)



6,909

(31)



232

(206)



125,854

(264)


Amortised cost

8,225

(7)

8,218


1,062

(3)


(206)


9,519

(216)

9,303

FVOCI2

110,488

(20)



5,847

(28)



-

-



116,335

(48)


Undrawn commitments3

137,783

(69)



13,864

(39)


-


151,710

(108)


Financial guarantees3

38,532

(4)



3,053

(13)



367

(156)



41,952

(173)


Total

592,481

(531)



42,324

(500)



7,586

(4,418)



642,391

(5,449)


1 Gross carrying amount for off-balance sheet refers to notional values

2 These instruments are held at fair value on the balance sheet. The ECL provision in respect of debt securities measured at FVOCI is held within reserves

3 These are off-balance sheet instruments. Only the ECL is recorded on-balance sheet as a financial liability and therefore there is no "net carrying amount". ECL allowances on off-balance sheet instruments are held as liability provisions to the extent that the drawn and undrawn components of loan exposures can be separately identified. Otherwise, they will be reported against the drawn component


01.01.18

Stage 1


Stage 2


Stage 3


Total

Gross balance1

$million

Total credit impairment
$million

Net carrying value
$million

Gross balance1

$million

Total credit impairment
$million

Net carrying value
$million

Gross balance1

$million

Total credit impairment
$million

Net carrying value
$million

Gross balance1

$million

Total credit impairment
$million

Net carrying value
$million

Loans and advances to banks (amortised cost)

59,926

(6)


(2)

2,370


9

(4)


(12)

62,295

Loans and advances to customers (amortised cost)

228,485

(472)

228,013


20,583

(576)

20,007


8,769

(5,282)

3,487


257,837

(6,330)

251,507

Debt securities and other eligible bills

107,308

(26)



8,302

(58)



221

(213)



115,831

(297)


Amortised cost2

6,204

(3)


(16)

979


221

(213)


(232)

7,188

FVOCI3

101,104

(23)



7,307

(42)



-

-



108,411

(65)


Undrawn commitments4

138,804

(66)


(90)



-

-


(156)


Financial guarantees4

31,292

(6)



6,148

(16)



199

(77)



37,639

(99)


Total

565,815

(576)



52,387

(742)



9,198

(5,576)



627,400

(6,894)


1 Gross carrying amount for off-balance sheet refers to notional values

2 Stage 3 gross balance and total credit impairment of debt securities and other eligible bills - amortised cost has increased by $208 million, with no impact on net carrying value. The balances have been restated to present securities with zero carrying value previously classified as available-for-sale under IAS 39 on a gross basis as required under IFRS 9

3 These instruments are held at fair value on the balance sheet. The ECL provision in respect of debt securities measured at fair value through other comprehensive income is held within reserves

4 These are off-balance sheet instruments. Only the ECL is recorded on-balance sheet as a financial liability and therefore there is no 'net carrying amount'. ECL allowances on off-balance sheet instruments are held as liability provisions to the extent that the drawn and undrawn components of loan exposures can be separately identified. Otherwise they will be reported against the drawn component. Contingent liabilities and commitments gross balances have been restated, as a result of the availability of more reliable, centralised information following the implementation of IFRS 9



 

Credit quality analysis

Credit quality by client segment

For Corporate & Institutional Banking and Commercial Banking portfolios, exposures are analysed by credit grade (CG), which plays a central role in the quality assessment and monitoring of risk. All loans are assigned a CG, which is reviewed periodically and amended in light of changes in the borrower's circumstances or behaviour. CGs 1 to 12 are assigned to stage 1 and stage 2 (performing) clients or accounts, while CGs 13 and 14 are assigned to stage 3 (non-performing or defaulted) clients. The mapping of credit quality is as follows.

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 Banking1


Retail Banking

Default grade mapping

S&P external ratings equivalent

Regulatory 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

1 For Private Banking, classes of risk represent the type of collateral held. Class I represents facilities with liquid collateral, such as cash and marketable securities. Class II represents unsecured/partially secured facilities and those with illiquid collateral, such as equity in private enterprises. Class III represents facilities with residential or commercial real estate collateral. Class IV covers margin trading facilities

The table overleaf sets out the gross loans and advances held at amortised cost, expected credit loss provisions and expected credit loss coverage by business segment and stage. Expected credit loss coverage represents the expected credit loss reported for each segment and stage as a proportion of the gross loan balance for each segment and stage.

Stage 1 loans increased by 4 per cent compared with 1 January 2018 and represent 91 per cent of total loans and advances to customers as of 31 December 2018. The largest increase of stage 1 loans in any region was $4.1 billion in Europe & Americas. Stage 1 loans in Greater China & North Asia increased by $3.4 billion while ASEAN & South Asia and Africa & Middle East were broadly stable over the year.

The proportion of Corporate & Institutional Banking loans held within stage 1 improved to 87 per cent from 81 per cent at 1 January 2018. This was concentrated in the 'Strong' category which increased from 58 per cent of stage 1 loans at 1 January 2018 to 62 per cent at 31 December 2018, as the Group continued to focus on the origination of investment grade lending.

In Commercial Banking, the proportion of stage 1 loans declined from 79 per cent to 78 per cent due to a small number of downgrades to stage 2. However, the proportion of stage 1 loans categorised as 'Strong' increased from 24 per cent to 25 per cent in line with the Group's strategy to increase the proportion of new loans to higher credit quality clients. Across Corporate & Institutional Banking and Commercial Banking, the largest industry contributors to the growth in stage 1 lending were the manufacturing sector, up $2.8 billion, and loans to governments, up $4.0 billion.

The proportion of Retail Banking stage 1 loans was slightly lower at 96 per cent of the total portfolio compared with 97 per cent at 1 January 2018, with the proportion rated as 'Strong' decreasing from 99 per cent to 98 per cent of total stage 1 loans mainly due to the decrease of the mortgage portfolio and the staging methodology change in the Korea Mortgage portfolio. Stage 1 mortgage loans declined by $4.4 billion, mainly due to tightened regulations in Korea and price competition in Hong Kong which resulted in a reduction in new booking. This was offset by growth of $3.8 billion in secured wealth products and $0.7 billion in credit cards and personal loans (CCPL) and other unsecured lending.

Stage 2 loans fell by $3.2 billion, or 15 per cent, compared with 1 January 2018, primarily driven by a decline in Corporate & Institutional Banking and Commercial Banking non-purely precautionary early alert balances.



 

In Corporate & Institutional Banking, 73 per cent of stage 2 loans were rated as 'Satisfactory' compared with 59 per cent at 1 January 2018. This does not represent a decline in overall credit quality as it is primarily driven by improvements in stage 2 investment grade loans which repaid or transferred back into stage 1. The majority of stage 2 loans within Commercial Banking continue to be classified as 'Satisfactory' (31 December 2018: 84 per cent; 1 January 2018: 82 per cent). Within Corporate & Institutional Banking and Commercial Banking, overall stage 2 loans decreased by $3.9 billion. The reduction spread across a number of sectors, with the manufacturing and financing and non-banking sectors seeing the largest decreases, $1.3 billion and $1.0 billion respectively, as early alert balances declined.

Retail Banking stage 2 loans increased by $0.7 billion, mainly driven by a change in the staging methodology in the Korea mortgage portfolio. 69 per cent are within the 'Strong' category, and the proportion of past due loans reduced from 34 per cent at 1 January 2018 to 31 per cent at 31 December 2018. Driven by an increase in the proportion of Mortgages held in Stage 2 and the rundown of the high-risk segments in the personal loans portfolio for ASEAN & South Asia, the requirement for ECL coverage has dropped from 7.8 per cent to 4.7 per cent.

Stage 3 loans fell by $1.8 billion, or 21 per cent, compared with 1 January 2018, with overall stage 3 provisions declining by $1.2 billion to $4.1 billion. The stage 3 cover ratio declined to 59 per cent from 60 per cent largely driven by the impact of write-offs and settlements in the liquidation portfolio.

All regions were lower compared with 1 January 2018, with the decline primarily in ASEAN & South Asia.

In Corporate & Institutional Banking and Commercial Banking, stage 3 loans fell by $1.9 billion compared with 1 January 2018 due to repayments, debt sales, write-offs and upgrades in Corporate & Institutional Banking. Provisions against Corporate & Institutional Banking and Commercial Banking loans also fell by $1.2 billion from $4.8 billion to $3.6 billion.

Inflows into stage 3 for Corporate & Institutional Banking were 65 per cent lower than 2017 reflecting the continued improvement in the Corporate & Institutional Banking portfolio. Stage 3 inflows increased for Commercial Banking, driven by exposures in Greater China & North Asia and Africa & Middle East with no specific industry concentration. The majority of new stage 3 counterparties in Corporate and Institutional Banking and Commercial Banking in 2018 had been on early alert for a period and do not indicate new areas of stress.

Retail stage 3 loans were broadly stable at $0.8 billion.



 

Loans and advances by client segment

Amortised cost

31.12.18

Banks
$million

Customers

Corporate & Institutional Banking
$million

Retail Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Customers
total
$million

Stage 1

60,350

93,848

98,393

21,913

12,705

10,244

237,103

- Strong

47,860

58,167

96,506

5,527

9,447

10,193

179,840

- Satisfactory

12,490

35,681

1,887

16,386

3,258

51

57,263

Stage 2

1,070

9,357

2,837

4,423

785

26

17,428

- Strong

403

1,430

1,956

270

713

-

4,369

- Satisfactory

665

6,827

500

3,732

-

26

11,085

- Higher risk

2

1,100

381

421

72

-

1,974

Of which (stage 2):








- Less than 30 days past due

27

232

500

198

-

-

930

- More than 30 days past due

-

190

381

99

3

-

673

Stage 3, credit-impaired financial assets

-

4,084

832

1,773

235

-

6,924

Gross balance1

61,420

107,289

102,062

28,109

13,725

10,270

261,455

Stage 1

(5)

(94)

(299)

(24)

(9)

-

(426)

- Strong

(2)

(32)

(149)

(1)

(9)

-

(191)

- Satisfactory

(3)

(62)

(150)

(23)

-

-

(235)

Stage 2

(1)

(192)

(132)

(92)

-

-

(416)

- Strong

-

(11)

(42)

(5)

-

-

(58)

- Satisfactory

(1)

(66)

(50)

(45)

-

-

(161)

- Higher risk

-

(115)

(40)

(42)

-

-

(197)

Of which (stage 2):








- Less than 30 days past due

-

(34)

(50)

(9)

-

-

(93)

- More than 30 days past due

-

(2)

(40)

(4)

-

-

(46)

Stage 3, credit-impaired financial assets

-

(2,326)

(396)

(1,234)

(100)

-

(4,056)

Total credit impairment

(6)

(2,612)

(827)

(1,350)

(109)

-

(4,898)

Net carrying value

61,414

104,677

101,235

26,759

13,616

10,270

256,557

Stage 1

0.0%

0.1%

0.3%

0.1%

0.1%

0.0%

0.2%

- Strong

0.0%

0.1%

0.2%

0.0%

0.1%

0.0%

0.1%

- Satisfactory

0.0%

0.2%

7.9%

0.1%

0.0%

0.0%

0.4%

Stage 2

0.1%

2.1%

4.7%

2.1%

0.0%

0.0%

2.4%

- Strong

0.0%

0.8%

2.1%

1.9%

0.0%

-

1.3%

- Satisfactory

0.2%

1.0%

10.0%

1.2%

-

0.0%

1.5%

- Higher risk

0.0%

10.5%

10.5%

10.0%

0.0%

-

10.0%

Of which (stage 2):








- Less than 30 days past due

0.0%

14.7%

10.0%

4.5%

-

-

10.0%

- More than 30 days past due

-

1.1%

10.5%

4.0%

0.0%

-

6.8%

Stage 3, credit-impaired financial assets

-

57.0%

47.6%

69.6%

42.6%

0.0%

58.6%

Cover ratio

0.0%

2.4%

0.8%

4.8%

0.8%

0.0%

1.9%









Fair value through profit or loss








Performing

20,651

41,886

400

479

-

4

42,769

- Strong

19,515

33,178

395

247

-

3

33,823

- Satisfactory

1,136

8,700

4

232

-

1

8,937

- Higher risk

-

8

1

-

-

-

9

Impaired

-

12

-

33

-

-

45

Gross balance2

20,651

41,898

400

512

-

4

42,814









Net carrying value (incl FVTPL)

82,065

146,575

101,635

27,271

13,616

10,274

299,371

1  Loans and advances includes reverse repurchase agreements and other similar secured lending of $3,151 million under Customers and of $3,815 million under Banks, held at amortised cost

2  Loans and advances includes reverse repurchase agreements and other similar secured lending of $37,886 million under Customers and of $16,883 million under Banks, held at fair value through profit or loss



 

Amortised cost

01.01.18

Banks
$million

Customers

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Customers
total
$million

Stage 1

59,926

83,575

99,971

23,130

12,481

9,328

228,485

- Strong

50,820

48,638

98,721

5,573

8,527

9,240

170,699

- Satisfactory

9,106

34,937

1,250

17,557

3,954

88

57,786

Stage 2

2,372

13,639

2,186

4,023

735

-

20,583

- Strong

1,942

4,398

1,432

394

693

-

6,917

- Satisfactory

376

8,113

349

3,306

-

-

11,768

- Higher risk

54

1,128

405

323

42

-

1,898

Of which (stage 2):








- Less than 30 days past due

246

493

349

153

-

-

993

- More than 30 days past due

25

232

405

123

5

-

767

Stage 3, credit-impaired financial assets

9

5,788

818

1,956

207

-

8,769

Gross balance1

62,307

103,002

102,975

29,109

13,423

9,328

257,837

Stage 1

(6)

(65)

(370)

(25)

(8)

(4)

(472)

- Strong

(4)

(12)

(324)

(5)

(8)

(4)

(353)

- Satisfactory

(2)

(53)

(46)

(20)

-

-

(119)

Stage 2

(2)

(326)

(170)

(79)

(1)

-

(576)

- Strong

(2)

(14)

(84)

-

(1)

-

(99)

- Satisfactory

-

(165)

(25)

(59)

-

-

(249)

- Higher risk

-

(147)

(61)

(20)

-

-

(228)

Of which (stage 2):








- Less than 30 days past due

-

(65)

(25)

(28)

-

-

(117)

- More than 30 days past due

-

(71)

(61)

(14)

-

-

(146)

Stage 3, credit-impaired financial assets

(4)

(3,433)

(389)

(1,369)

(91)

-

(5,282)

Total credit impairment

(12)

(3,824)

(929)

(1,473)

(100)

(4)

(6,330)

Net carrying value

62,295

99,178

102,046

27,636

13,323

9,324

251,507

ECL coverage








Stage 1

0.0%

0.1%

0.4%

0.1%

0.1%

0.0%

0.2%

- Strong

0.0%

0.0%

0.3%

0.1%

0.1%

0.0%

0.2%

- Satisfactory

0.0%

0.2%

3.7%

0.1%

0.0%

0.0%

0.2%

Stage 2

0.1%

2.4%

7.8%

2.0%

0.1%

-

2.8%

- Strong

0.1%

0.3%

5.9%

0.0%

0.1%

-

1.4%

- Satisfactory

0.0%

2.0%

7.2%

1.8%

-

-

2.1%

- Higher risk

0.0%

13.0%

15.1%

6.2%

0.0%

-

12.0%

Of which (stage 2):








- Less than 30 days past due

0.0%

13.2%

6.9%

18.3%

-

-

11.8%

- More than 30 days past due

0.0%

30.6%

15.0%

11.4%

0.0%

-

19.0%

Stage 3, credit-impaired financial assets

44.4%

59.3%

47.6%

70.0%

44.0%

-

60.2%

Cover ratio

0.0%

3.7%

0.9%

5.1%

0.7%

0.0%

2.5%









Fair value through profit or loss








Performing

19,022

32,209

539

457

-

-

33,205

- Strong

16,199

22,647

539

100

-

-

23,286

- Satisfactory

2,823

9,555

-

357

-

-

9,912

- Higher risk

-

7

-

-

-

-

7

Impaired

-

59

-

4

-

-

63

Gross balance2

19,022

32,268

539

461

-

-

33,268









Net carrying value (incl FVTPL)

81,317

131,446

102,585

28,097

13,323

9,324

284,775

1  Loans and advances includes reverse repurchase agreements and other similar secured lending of $4,566 million under Customers and of $5,101 million under Banks, held at amortised cost

2  Loans and advances includes reverse repurchase agreements and other similar secured lending of $29,361 million under Customers and of $16,157 million under Banks, held at fair value through profit or loss



 


31.12.17 (IAS 39)

Banks1

$million

Customers

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private Banking
$million

Central & other items
$million

Customers
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 or loss which are included within the table above.

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 or loss

3,137

3,049

-

216

-

-

3,265

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



 

 

Credit quality by geographic region (unaudited)

The following table sets out the credit quality for gross loans and advances to customers and banks, held at amortised cost, by geographic region and stage.

Loans and advances to customers

Amortised cost

31.12.18

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Stage 1

 118,422

 71,169

 23,598

 23,914

 237,103

Stage 2

 4,139

 7,628

 5,112

 549

 17,428

Gross stage 1 & stage 2 balance

 122,561

 78,797

 28,710

 24,463

 254,531

Stage 3, credit-impaired financial assets

 777

 2,730

 2,573

 844

 6,924

Gross loans1

 123,338

 81,527

 31,283

 25,307

 261,455

 

Amortised cost

01.01.18

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Stage 1

 114,990

 70,594

 23,120

 19,781

 228,485

Stage 2

 5,796

 7,578

 4,762

 2,447

 20,583

Gross stage 1 & stage 2 balance

 120,786

 78,172

 27,882

 22,228

 249,068

Stage 3, credit-impaired financial assets2

 806

 4,248

 2,657

 1,058

 8,769

Gross loans1

 121,592

 82,420

 30,539

 23,286

 257,837

1 Amounts gross of expected credit losses. Includes reverse repurchase agreements and other similar secured lending

2  Amounts do not include those purchased or originated credit-impaired financial assets

Amortised cost

31.12.17 (IAS 39)

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Neither past due nor individually impaired

125,565

79,175

27,774

45,997

278,511

Past due but not individually impaired

809

1,711

1,153

194

3,867

Individually impaired

806

4,233

2,654

1,184

8,877

Individual impairment provision

(312)

(2,361)

(1,858)

(706)

(5,237)

Portfolio impairment provisions

(129)

(179)

(121)

(36)

(465)

Net carrying value1

126,739

82,579

29,602

46,633

285,553

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

Loans and advances to banks

Amortised cost

31.12.18

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Stage 1

 27,801

 11,095

 5,374

 16,080

 60,350

Stage 2

 59

 582

 199

 230

 1,070

Gross stage 1 & stage 2 balance

 27,860

 11,677

 5,573

 16,310

 61,420

Stage 3, credit-impaired financial assets

-

-

-

-

-

Gross loans1

 27,860

 11,677

 5,573

 16,310

 61,420

 

Amortised cost

01.01.18

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Stage 1

 28,792

 11,853

 4,425

 14,856

 59,926

Stage 2

 1,212

 557

 169

 434

 2,372

Gross stage 1 & stage 2 balance

 30,004

 12,410

 4,594

 15,290

 62,298

Stage 3, credit-impaired financial assets2

-

-

-

 9

 9

Gross loans1

 30,004

 12,410

 4,594

 15,299

 62,307

1 Amounts gross of expected credit losses. Includes reverse repurchase agreements and other similar secured lending

2 Amounts do not include those purchased or originated credit-impaired financial assets



 

Amortised cost and FVTPL

31.12.17 (IAS 39)

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Neither past due nor individually impaired

33,096

16,482

7,328

24,143

81,049

Past due but not individually impaired

130

41

101

-

272

Individually impaired

-

-

-

9

9

Individual impairment provision

-

-

-

(4)

(4)

Portfolio impairment provision

-

-

(1)

-

(1)

Net carrying value1

33,226

16,523

7,428

24,148

81,325

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

Credit quality by industry (unaudited)

Loans and advances

This section provides an analysis of the Group's amortised cost portfolio by industry on a gross, total credit impairment and net basis.

The Group has reduced exposures across the energy and construction sectors primarily within stage 2 and stage 3, while increasing exposures in stage 1 across manufacturing, government and financing, insurance and non-banking.

Amortised cost

31.12.18

Stage 1


Stage 2


Stage 3


Total

Gross balance
$million

Total credit impairment
$million

Net carrying amount
$million

Gross balance
$million

Total credit impairment
$million

Net carrying amount
$million

Gross balance
$million

Total credit impairment
$million

Net carrying amount
$million

Gross balance
$million

Total credit impairment
$million

Net carrying amount
$million

Industry:













Energy

14,530

(18)

14,512


2,198

(46)

2,152


890

(554)

336


17,618

(618)

17,000

Manufacturing

21,627

(23)

21,604


1,932

(86)

1,846


719

(530)

189


24,278

(639)

23,639

Financing, insurance and non-banking

20,419

(7)

20,412


379

(10)

369


225

(119)

106


21,023

(136)

20,887

Transport, telecom and utilities

12,977

(21)

12,956


2,495

(25)

2,470


818

(474)

344


16,290

(520)

15,770

Food and household products

7,558

(7)

7,551


1,851

(15)

1,836


718

(376)

342


10,127

(398)

9,729

Commercial
real estate

13,516

(16)

13,500


1,299

(27)

1,272


342

(79)

263


15,157

(122)

15,035

Mining and quarrying

4,845

(7)

4,838


1,047

(29)

1,018


439

(309)

130


6,331

(345)

5,986

Consumer durables

7,328

(5)

7,323


906

(13)

893


534

(348)

186


8,768

(366)

8,402

Construction

2,565

(4)

2,561


512

(22)

490


636

(385)

251


3,713

(411)

3,302

Trading companies and distributors

2,512

(2)

2,510


385

(2)

383


353

(239)

114


3,250

(243)

3,007

Government

13,488

(1)

13,487


250

-

250


-

-

-


13,738

(1)

13,737

Other

4,639

(7)

4,632


552

(8)

544


183

(147)

36


5,374

(162)

5,212

Retail Products:
















Mortgage

73,437

(9)

73,428


1,936

(9)

1,927


343

(98)

245


75,716

(116)

75,600

CCPL and other unsecured lending

16,622

(277)

16,345


560

(117)

443


437

(263)

174


17,619

(657)

16,962

Auto

670

(2)

668


4

-

4


1

-

1


675

(2)

673

Secured wealth products

17,074

(18)

17,056


825

(5)

820


236

(112)

124


18,135

(135)

18,000

Other

3,296

(2)

3,294


297

(2)

295


50

(23)

27


3,643

(27)

3,616

Net carrying value (customers)1

237,103

(426)

236,677


17,428

(416)

17,012


6,924

(4,056)

2,868


261,455

(4,898)

256,557

1 Includes reverse repurchase agreements and other similar secured lending held at amortised cost of $3,151 million



 

Amortised cost

01.01.18

Stage 1


Stage 2


Stage 3


Total

Gross balance
$million

Total credit impairment
$million

Net carrying amount
$million

Gross balance
$million

Total credit impairment
$million

Net carrying amount
$million

Gross balance
$million

Total credit impairment
$million

Net carrying amount
$million

Gross balance
$million

Total credit impairment
$million

Net carrying amount
$million

Industry:











Energy

14,679

(15)

14,664


3,050

(78)

2,972


1,442

(913)

529


19,171

(1,006)

18,165

Manufacturing

18,848

(9)

18,839


3,254

(77)

3,177


801

(614)

187


22,903

(700)

22,203

Financing, insurance and non-banking

18,275

(17)

18,258


1,341

(9)

1,332


403

(179)

224


20,019

(205)

19,814

Transport, telecom and utilities

12,482

(11)

12,471


3,031

(89)

2,942


753

(397)

356


16,266

(497)

15,769

Food and household products

7,707

(7)

7,700


1,933

(41)

1,892


757

(423)

334


10,397

(471)

9,926

Commercial
real estate

13,452

(16)

13,436


919

(41)

878


385

(44)

341


14,756

(101)

14,655

Mining and quarrying

5,046

(3)

5,043


1,038

(11)

1,027


952

(674)

278


7,036

(688)

6,348

Consumer durables

7,108

(4)

7,104


1,155

(18)

1,137


728

(553)

175


8,991

(575)

8,416

Construction

2,546

(3)

2,543


792

(31)

761


786

(493)

293


4,124

(527)

3,597

Trading companies and distributors

1,862

(1)

1,861


290

2

292


463

(336)

127


2,615

(335)

2,280

Government

9,521

(1)

9,520


78

(1)

77


6

(1)

5


9,605

(3)

9,602

Other

4,507

(7)

4,500


781

(11)

770


268

(175)

93


5,556

(193)

5,363

Retail Products:
















Mortgage

77,858

(8)

77,850


758

-

758


280

(131)

149


78,896

(139)

78,757

CCPL and other unsecured lending

15,959

(337)

15,622


685

(163)

522


505

(234)

271


17,149

(734)

16,415

Auto

626

(3)

623


6

(1)

5


1

-

1


633

(4)

629

Secured wealth products

13,301

(14)

13,287


720

(1)

719


197

(93)

104


14,218

(108)

14,110

Other

4,708

(16)

4,692


752

(6)

746


42

(22)

20


5,502

(44)

5,458

Net carrying value (customers)1

228,485

(472)

228,013


20,583

(576)

20,007


8,769

(5,282)

3,487


257,837

(6,330)

251,507

1 Includes reverse repurchase agreements and other similar secured lending held at amortised cost of $4,566 million



 

Amortised cost and FVTPL

31.12.17 (IAS 39)

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
and 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

Gross carrying value (customers)1

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

Net carrying value (customers)





285,553


6,354

1,383

(2,035)

5,702

1 Includes loans held at fair value through profit or loss $2,918 million and reverse repurchase agreements held at amortised cost $33,581 million and fair value through profit or loss $347 million

Movement in gross exposures and credit impairment for loans and advances, debt securities, undrawn commitments and financial guarantees

The tables overleaf set out the movement in gross exposures and credit impairment by stage in respect of amortised cost loans to banks and customers, undrawn committed facilities, undrawn cancellable facilities, debt securities classified at amortised cost and FVOCI and financial guarantees. The tables are presented for the Group, and the Corporate & Institutional Banking, Commercial Banking and Retail Banking segments.

Methodology

The movement lines within the tables are an aggregation of monthly movements over the year and will therefore reflect the accumulation of multiple trades during the year. The credit impairment charge in the income statement comprises the amounts within the boxes in the table below less recoveries of amounts previously written off.

The approach for determining the key line items in the tables is set out below.

•  Transfers - transfers between stages are deemed to occur at the beginning of a month based on prior month closing balances

•  Net remeasurement from stage changes - the remeasurement of credit impairment provisions arising from a change in stage is reported within the stage that the assets are transferred to. For example, assets transferred into stage 2 are remeasured from a 12 month to a lifetime expected credit loss, with the effect of remeasurement reported in stage 2. For stage 3, this represents the initial remeasurement from specific provisions recognised on individual assets transferred into stage 3 in the year



 

•  Net changes in exposures - comprises new business written less repayments in the year. Within stage 1, new business written will attract up to 12 months of expected credit loss charges. Repayments of non-amortising loans (primarily within Corporate & Institutional Banking and Commercial Banking) will have low amounts of expected credit loss provisions attributed to them, due to the release of provisions over the term to maturity. In stages 2 and 3, the amounts principally reflect repayments although stage 2 may include new business written where clients are on non-purely precautionary early alert, are a credit grade 12, or when non-investment grade debt securities are acquired

•  Changes in risk parameters - for stages 1 and 2, this reflects changes in the probability of default (PD), loss given default (LGD) and exposure at default (EAD) of assets during the year, which includes the impact of releasing provisions over the term to maturity. It also includes the effect of changes in forecasts of macroeconomic variables during the year. In stage 3, this line represents additional specific provisions recognised on exposures held within stage 3

Movements during the year

For Corporate & Institutional Banking and Commercial Banking businesses, the gross exposures in stage 1 increased from $292 billion at 1 January 2018 to $305 billion at 31 December 2018, primarily due to new business written within Corporate & Institutional Banking. This contributed to the increase in stage 1 provisions from $154 million to $181 million offset by improvements in credit quality across the portfolio. Within stage 2 gross exposures and credit impairment provisions declined compared with 1 January 2018, largely driven by a lower level of exposures within Corporate & Institutional Banking on non-purely precautionary early alert, which either repaid or transferred back to stage 1.

Retail Banking stage 1 exposures increased by $2 billion to $133 billion at 31 December 2018, driven by increased lending of secured wealth products, which along with portfolio quality improvements resulted in stage 1 provisions reducing from $381 million to $313 million. Stage 2 exposures increased from $8 billion at 1 January 2018 to $8.9 billion at 31 December 2018, largely due to increased inflows of mortgages, which contributed to a reduction in stage 2 provisions from $178 million at 1 January 2018 to $132 million at 31 December 2018. The increase in provisions from 'Changes in risk parameters' within stage 2 reflects the normal flow of accounts and is not in itself an indicator that there is a significant weakness in the portfolio.

Across both stage 1 and stage 2 for all segments, the improvement in macroeconomic forecasts during the year reduced stage 1 and 2 provisions by $42 million within an overall benign environment.

Across all segments, at 31 December 2018 approximately 35 per cent of gross exposures held in stage 2 are as a result of meeting the PD significant increase in credit risk thresholds, 24 per cent as a result of having 'higher risk' credit quality, 13 per cent due to being on non-purely precautionary early alert, 11 per cent being more than 30 days past due with the remainder primarily relating to Private Banking and other factors.

Stage 3 exposures fell from $9.2 billion at 1 January 2018 to $7.6 billion at 31 December, primarily due to repayments and write-offs within Corporate & Institutional Banking and Commercial Banking, and this was also reflected in lower stage 3 provisions, which fell from $5.6 billion at 1 January 2018 to $4.4 billion at 31 December 2018.



 

All segments

Amortised cost and FVOCI

Stage 1


Stage 2


Stage 3


Total

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

As at 1 January 2018

565,815

(576)

565,239


52,387

(742)

51,645


9,198

(5,576)


627,400

(6,894)

620,506

Transfers to stage 1

59,776

(627)

59,149


(59,776)

627

(59,149)


-

-

-


-

-

-

Transfers to stage 2

(73,589)

136

(73,453)


73,809

(136)

73,673


(220)

-

(220)


-

-

-

Transfers to stage 3

(293)

7

(286)


(2,338)

264

(2,074)


2,631

(271)

2,360


-

-

-

Net change in exposures

50,249

(282)

49,967


(20,341)

94

(20,247)


(1,836)

527


28,072

339

28,411

Net remeasurement from stage changes

-

139

139


-

(136)

(136)


-

(529)


-

(526)

(526)

Changes in risk parameters

-

468

468


-

(275)

(275)


-

971)


-

(778)

(778)

Write-offs

-

-

-


-

-

-


(2,075)

2,075

-


(2,075)

2,075

-

Exchange translation differences and other movements1

(9,477)

204

(9,273)


(1,417)

(196)

(1,613)


(112)

327

215


(11,006)

335

(10,671)

As at 31 December 2018

592,481

(531)

591,950


42,324

(500)

41,824


7,586

(4,418)

3,168


642,391

(5,449)

636,942
















Income statement ECL (charge)/release


325




(317)




(973)




(965)


Recoveries of amounts previously written off










312




312


Total credit impairment (charge)/release


325




(317)




(661)




(653)


1 Includes fair value adjustments and amortisation on debt securities

Corporate & Institutional Banking

Amortised cost and FVOCI

Stage 1


Stage 2


Stage 3


Total

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

As at 1 January 2018

263,079

(114)


29,576

(409)

29,167


5,951

(3,504)

2,447


298,606

(4,027)

Transfers to stage 1

40,196

(156)

40,040


(40,196)

156

(40,040)


-

-

-


-

-

-

Transfers to stage 2

(39,490)

30

(39,460)


39,692

(30)

39,662


(202)

-

(202)


-

-

-

Transfers to stage 3

-

-

-


(1,129)

85

(1,044)


1,129

(85)

1,044


-

-

-

Net change in exposures

12,869

(183)


(8,639)

10

(8,629)


(1,064)

377

(687)


3,166

204

Net remeasurement from stage changes

-

46


-

(30)

(30)


-

(277)

(277)


-

(261)

Changes in risk parameters

-

101


-

140

140


-

(394)

(394)


-

(153)

Write-offs

-

-

-


-

-

-


(1,208)

1,208

-


(1,208)

1,208

-

Exchange translation differences and
other movements

(3,418)

131

(3,287)


(252)

(157)

(409)


(133)

209

76


(3,803)

183

(3,620)

As at 31 December 2018

273,236

(145)

273,091


19,052

(235)

18,817


4,473

(2,466)

2,007


296,761

(2,846)

293,915















Income statement ECL (charge)/release


(36)




120




(294)




(210)


Recoveries of amounts previously written off










77




77


Total credit impairment (charge)/release


(36)




120




(217)




(133)




 

Commercial Banking

Amortised cost and FVOCI

Stage 1


Stage 2


Stage 3


Total

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

As at 1 January 2018

28,792

(40)

28,752


5,382

(95)

5,287


2,000

(1,379)


36,174

(1,514)

34,660

Transfers to stage 1

12,675

(64)

12,611


(12,675)

64

(12,611)


-

-

-


-

-

-

Transfers to stage 2

(11,152)

26

(11,126)


11,171

(26)

11,145


(19)

-

(19)


-

-

-

Transfers to stage 3

(11)

-

(11)


(606)

14

(592)


617

(14)

603


-

-

-

Net change in exposures

2,163

(65)

(2,098)


3,660

9

3,669


(337)

138


5,486

82

5,568

Net remeasurement from stage changes

-

12

12


-

(13)

(13)


-

(217)


-

(218)

(218)

Changes in risk parameters

-

67

67


-

(33)

(33)


-

(162)


-

(128)

(128)

Write-offs

-

-

-


-

-

-


(293)

293

-


(293)

293

-

Exchange translation differences and
other movements

(1,047)

29

(1,018)


(223)

(20)

(243)


(155)

93

(62)


(1,425)

102

(1,323)

As at 31 December 2018

31,420

(35)

31,385


6,709

(100)

6,609


1,813

(1,248)

565


39,942

(1,383)

38,559
















Income statement ECL (charge)/release


14




(37)




(241)




(264)


Recoveries of amounts previously written off










21




21


Total credit impairment (charge)/release


14




(37)




(220)




(243)


Retail Banking

Amortised cost and FVOCI

Stage 1


Stage 2


Stage 3


Total

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

Gross exposure
$million

Total credit impairment
$million

Net
$million

As at 1 January 2018

131,280

(381)


7,964

(178)

7,786


818

(389)

429


140,062

(948)

Transfers to stage 1

5,570

(388)

5,182


(5,570)

388

(5,182)


-

-

-


-

-

-

Transfers to stage 2

(9,954)

74

(9,880)


9,954

(74)

9,880


-

-

-


-

-

-

Transfers to stage 3

(281)

8

(273)


(511)

164

(347)


792

(172)

620


-

-

-

Net change in exposures

9,858

(17)


(2,628)

78

(2,550)


(398)

-

(398)


6,832

61

Net remeasurement from stage changes

-

72


-

(90)

(90)


-

(12)

(12)


-

(30)

Changes in risk parameters

-

264


-

(373)

(373)


-

(402)

(402)


-

(511)

Write-offs

-

-

-


-

-

-


(575)

575

-


(575)

575

-

Exchange translation differences and
other movements

(2,989)

55

(2,934)


(322)

(47)

(369)


195

6

201


(3,116)

14

(3,102)

As at 31 December 2018

133,484

(313)

133,171


8,887

(132)

8,755


832

(394)

438


143,203

(839)

142,364















Income statement ECL (charge)/release


319




(385)




(414)




(480)


Recoveries of amounts previously written off










214




214


Total credit impairment (charge)/release


319




(385)




(200)




(266)




 

Credit impairment charge

The total ongoing credit impairment charge decreased significantly to $740 million in 2018 (2017: $1.2 billion), down 38 per cent primarily due to improvements in portfolio quality driven by significant actions taken since 2016 to improve the Group's credit quality.

The ongoing business credit impairment charge in Corporate & Institutional Banking of $229 million for 2018 is 65 per cent lower than 2017. This was due to lower stage 3 impairment which was driven by lower losses particularly in ASEAN & South Asia and recoveries from a small number of major exposures in India and the Middle East.

Commercial Banking ongoing business credit impairment charge increased by 45 per cent (2018: $244 million, 2017: $168 million) compared to 2017, which saw a release of $63 million of portfolio impairment provisions held against certain sectors of the portfolios that were no longer required. Africa & Middle East contributed 60 per cent of the full-year 2018 charge.

Retail Banking credit impairment reduced 29 per cent (2018: $267 million, 2017: $374 million), mainly driven by continued improvement in portfolio shape and performance, particularly within the unsecured portfolios, as well as one-off provision releases in Korea and Indonesia.

Stage 3 reductions were partly offset by lower releases of $12 million in stage 1 and 2 compared to Portfolio Impairment Provisions (PIP under IAS 39) as 2017 benefited from material releases of PIP specific risk adjustments of $190 million.

In the liquidation portfolio, there was a net release of $79 million due to loan disposals and repayments.


31.12.18
$million
(IFRS 9)

31.12.17
$million
(IAS 39)

Ongoing business portfolio



Corporate & Institutional Banking

2291

657

Retail Banking

267

374

Commercial Banking

244

168

Private Banking

-

1

Credit impairment charge

740

1,200




Restructuring business portfolio



Liquidation portfolio

(79)

120

Others

(8)

42

Credit impairment charge

(87)

162




Total credit impairment charge

653

1,362

1 Credit impairment recovery of $13 million in Central & other items is included in Corporate & Institutional Banking



 

Problem credit management and provisioning

Forborne and other modified loans by client segment

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 stage 2 and stage 3 loans with forbearance measures by segment.

Amortised cost

31.12.18

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

-

1,445

376

709

-

-

2,530

Credit impairment (stage 3)

-

(517)

(174)

(427)

-

-

(1,118)

Net carrying value

-

928

202

282

-

-

1,412

Included within the above table








Gross performing forborne loans

-

286

23

71

-

-

380

Modification of terms and conditions1

-

273

23

64

-

-

360

Refinancing2

-

13

-

7

-

-

20

Collateral

-

16

23

28

-

-

67

Gross non-performing forborne loans

-

1,159

353

638

-

-

2,150

Modification of terms and conditions1

-

1,092

353

610

-

-

2,055

Refinancing2

-

67

-

28

-

-

95

Impairment provisions

-

(517)

(174)

(427)

-

-

(1,118)

Modification of terms and conditions1

-

(489)

(174)

(409)

-

-

(1,072)

Refinancing2

-

(28)

-

(18)

-

-

(46)

Net non-performing forborne loans

-

642

179

211

-

-

1,032

Collateral

-

225

163

107

-

-

495

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

Amortised cost

01.01.18

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

612

-

-

3,558

Credit impairment (stage 3)

-

(802)

(176)

(394)

-

-

(1,372)

Net balance

6

1,341

621

218

-

-

2,186

Included within the above table








Gross performing forborne loans

2

480

353

31

-

-

866

Modification of terms and conditions1

2

480

353

28

-

-

863

Refinancing2

-

-

-

3

-

-

3

Collateral

-

4

2

-

-

-

6

Gross non-performing forborne loans

4

1,663

384

581

-

-

2,632

Modification of terms and conditions1

4

1,314

384

524

-

-

2,226

Refinancing2

-

349

-

57

-

-

406

Impairment provisions

-

(802)

(116)

(394)

-

-

(1,312)

Modification of terms and conditions1

-

(554)

(116)

(364)

-

-

(1,034)

Refinancing2

-

(248)

-

(30)

-

-

(278)

Net non-performing forborne loans

4

861

268

187

-

-

1,320

Collateral

-

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



 


31.12.17 (IAS 39)

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








Gross performing forborne loans

2

480

353

31

-

-

866

Modification of terms and conditions1

2

480

353

28

-

-

863

Refinancing2

-

-

-

3

-

-

3

Collateral

-

4

2

-

-

-

6

Gross non-performing forborne loans

4

1,663

384

616

-

-

2,667

Modification of terms and conditions1

4

1,314

384

559

-

-

2,261

Refinancing2

-

349

-

57

-

-

406

Impairment provisions

-

(802)

(116)

(430)

-

-

(1,348)

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

-

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 and other modified loans by region (unaudited)

Amortised cost

31.12.18

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe & Americas
$million

Total
$million

Not impaired

114

109

113

44

380

Impaired

233

344

179

276

1,032

Total forborne loans

347

453

292

320

1,412

 

Amortised cost

31.12.17 (IAS 39)

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

Credit-impaired (stage 3) loans and advances by client segment

Gross credit-impaired (stage 3) loans for the Group are down 21 per cent in the year, to $6.9 billion (1 January 2018: $8.8 billion) with significant reductions in the liquidation portfolio as we continued to exit these exposures. Gross stage 3 loans in the ongoing business decreased to $5.6 billion (1 January 2018: $6.5 billion), driven by repayments, debt sales, write-offs and transfers to stage 2 in Corporate & Institutional Banking.

The inflows of stage 3 loans in Corporate & Institutional Banking were also significantly lower, at around 35 per cent of the level seen in 2017 (2018: $0.8 billion; 2017: $2.3 billion), reflecting the continued improvement in the Corporate & Institutional Banking portfolio. Stage 3 inflows in Commercial Banking were higher (2018: $0.6 billion; 2017: $0.4 billion), driven by exposures in Greater China & North Asia and Africa & Middle East. Stage 3 loans in Retail Banking were broadly stable (31 December 2018: $0.8 billion; 1 January 2018: $0.8 billion).



 

Stage 3 cover ratio

The stage 3 cover ratio measures the proportion of stage 3 impairment provisions to gross stage 3 loans, and is a metric commonly used in considering impairment trends. This metric does not allow for variations in the composition of stage 3 loans and should be used in conjunction with other credit risk information provided, including the level of collateral cover.

The cover ratio before collateral for Corporate & Institutional Banking reduced from 59 per cent to 57 per cent due to debt sales and write-offs on clients who had a high level of provisions. The cover ratio for Retail Banking remained stable at 48 per cent and cover ratio including collateral improved to 87 per cent (1 January 2018: 74 per cent).

The Private Banking segment remains fully covered taking into account the collateral held.

The balance of stage 3 loans not covered by stage 3 impairment provisions represents the adjusted value of collateral held and the net outcome of any workout or recovery strategies.

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.

The table below presents the balance of the gross stage 3 loans to banks and customers, together with the provisions held, for all segments and the respective cover ratios. For the reconciliation between the non-performing loans under IAS 39 and under IFRS 9, refer to Note 41.

Amortised cost

31.12.18

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Total
$million

Gross credit-impaired

4,084

832

1,773

235

6,924

Credit impairment provisions

(2,326)

(396)

(1,234)

(100)

(4,056)

Net credit-impaired

1,758

436

539

135

2,868

Cover ratio

57%

48%

70%

43%

59%

Collateral ($ million)

802

324

302

135

1,563

Cover ratio (after collateral)

77%

87%

87%

100%

81%







Of the above, included in the liquidation portfolio:






Gross credit-impaired

1,029

-

89

157

1,275

Credit impairment provisions

(780)

-

(89)

(93)

(962)

Net credit-impaired

249

-

 -

64

313

Cover ratio

76%

-

100%

59%

75%

Collateral ($ million)

159

-

 -

64

223

Cover ratio (after collateral)

91%

-

100%

100%

93%

 

Amortised cost

01.01.18

Corporate & Institutional
Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Total
$million

Gross credit-impaired

5,797

818

1,956

207

8,778

Credit impairment provisions

(3,437)

(389)

(1,369)

(91)

(5,286)

Net credit-impaired

2,360

429

587

116

3,492

Cover ratio

59%

48%

70%

44%

60%

Collateral ($ million)

1,111

218

277

203

1,809

Cover ratio (after collateral)

78%

74%

84%

100%

81%







Of the above, included in the liquidation portfolio:






Gross credit-impaired

1,945

 -

125

156

2,226

Credit impairment provisions

(1,417)

 -

(123)

(86)

(1,626)

Net credit-impaired

528

 -

2

70

600

Cover ratio

73%

-

98%

55%

73%

Collateral ($ million)

237

 -

 -

96

333

Cover ratio (after collateral)

85%

-

98%

100%

88%



 

Amortised cost and FVTPL

31.12.17 (IAS 39)

Corporate & Institutional
Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Total
$million

Gross non-performing loans

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%

Cover ratio (excluding PIP)

58%

44%

71%

32%

60%

Collateral ($ million)

1,111

218

277

203

1,809

Cover ratio (after collateral)

77%

89%

84%

100%

81%







Of the above, included in the liquidation portfolio:






Gross credit-impaired

1,945

-

125

156

2,226

Credit impairment provisions

(1,388)

-

(123)

(62)

(1,573)

Net credit-impaired

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

Credit-impaired (stage 3) loans and advances by geographic region (unaudited)

Stage 3 loans decreased by $1.9 billion or 21 per cent compared with 1 January 2018. The largest decrease was in the ASEAN & South Asia region ($1.5 billion), primarily due to settlement and write-offs.

Amortised cost

31.12.18

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe & Americas
$million

Total
$million

Gross credit-impaired

777

2,730

2,573

844

6,924

Credit impairment provisions

(282)

(1,705)

(1,726)

(343)

(4,056)

Net credit-impaired

495

1,025

847

501

2,868

Cover ratio

36%

62%

67%

41%

59%

 

Amortised cost

01.01.18

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Gross credit-impaired

806

4,248

2,657

1,067

8,778

Credit impairment provisions

(308)

(2,500)

(1,846)

(632)

(5,286)

Net credit-impaired

498

1,748

811

435

3,492

Cover ratio

38%

59%

69%

59%

60%

 

Amortised cost and FVTPL

31.12.17 (IAS 39)

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Gross non-performing

895

3,948

2,692

1,144

8,679

Individual impairment provision

(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%

Cover ratio (excluding portfolio impairment provision)





60%



 

Movement of credit-impaired (stage 3) loans and advances provisions by client segment

Credit impairment provisions as at 31 December 2018 were $4,056 million, compared with $5,286 million as at 1 January 2018, with the decrease largely due to material reductions in Corporate & Institutional Banking.

The Corporate & Institutional Banking credit impairment provisions as at 31 December 2018 decreased by 32 per cent ($1,111 million) compared with 1 January 2018 driven by write-offs and lower new provisions taken in 2018.

The following table shows the movement of credit-impaired (stage 3) provisions for each client segment:

Amortised cost

31.12.18

Corporate & Institutional Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Total1

$million

Gross credit-impaired loans at 31 December

4,084

832

1,773

235

6,924

Credit impairment allowances at 1 January

3,437

389

1,369

91

5,286

Exchange translation difference

(188)

16

(86)

3

(255)

Amounts written off

(1,179)

(575)

(291)

-

(2,045)

Discount unwind

(39)

(20)

(16)

(5)

(80)

New provisions charge

189

12

218

3

422

Repayment

(379)

-

(136)

(5)

(520)

Net transfers into and out of stage 3

85

172

14

-

271

Changes due to risk parameters

400

402

162

13

977

Credit impairment allowances at 31 December

2,326

396

1,234

100

4,056

Net credit impairment

1,758

436

539

135

2,868

1  Excludes credit impairment relating to loan commitments and financial guarantees

Amortised cost

31.12.17 (IAS 39)

Corporate & Institutional
Banking
$million

Retail
Banking
$million

Commercial Banking
$million

Private
Banking
$million

Total1

$million

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)

Transfer to assets held for sale

-

(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

1  Excludes credit impairment relating to loan commitments and financial guarantees

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.



 

Collateral

The requirement for collateral is not a substitute for the ability to pay, which is the primary consideration for any lending decisions.

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 $265 billion (2017: $247 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. Following the adoption of IFRS 9 on 1 January 2018, the extent of over-collateralisation has been determined with reference to both the drawn and undrawn components of exposure as this best reflects the effect of collateral and other credit enhancements on the amounts arising from expected credit losses. The 2017 comparatives have not been restated, as the effect of collateral on IAS 39 impairment provisions was based on the drawn component only.

We have remained prudent in the way we assess the value of collateral, which is calibrated for a severe downturn and backtested 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 $23 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 decreased by $2 billion in 2018. This is in line with the overall movement of the secured portfolio.

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 and for the effect of over-collateralisation.

Collateral held on loans and advances

The table below details collateral held against exposures, separately disclosing stage 3 exposure and corresponding collateral.

Amortised cost

31.12.18

Amount outstanding


Collateral


Net exposure

Total
$million

Stage 2 financial assets
$million

Credit-impaired financial assets (S3)
$million

Total3
$million

Stage 2 financial assets
$million

Credit-impaired financial assets (S3)
$million

Total
$million

Stage 2 financial assets
$million

Credit-impaired financial assets (S3)
$million

Corporate & Institutional Banking1

166,091

10,234

1,758


15,882

1,314

802


147,622

8,920

956

Retail Banking

101,235

2,705

436


74,485

2,092

324


26,735

613

112

Commercial Banking

26,759

4,331

539


6,767

3,966

302


19,946

365

237

Private Banking

13,616

785

135


9,729

783

135


3,887

2

-

Central & other items

10,270

26

-


6,278

-

-


3,992

26

-

Total2

317,971

18,081

2,868


113,141

8,155

1,563


202,182

9,926

1,305

1  Includes loans and advances to banks

2  Excludes FVTPL

3  Excludes collateral held against FVTPL exposures, and is adjusted for over-collateralisation based on the drawn and undrawn components of exposures

Amortised cost and FVTPL

31.12.17 (IAS 39)

Maximum exposure


Collateral


Net exposure

Total
$million

Past due
but not individually impaired
loans
$million

Individually impaired
loans
$million

Total2

$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

Corporate & Institutional Banking1

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

1  Includes loans and advances to banks

2  Includes collateral held against FVTPL exposures, and is adjusted for over-collateralisation based on the drawn component of exposures



 

Collateral - Corporate & Institutional Banking and Commercial Banking

Collateral held against Corporate & Institutional Banking and Commercial Banking exposures amounted to $23 billion. Following the adoption of IFRS 9, on 1 January 2018 $44.6 billion of reverse repurchase loans, with associated collateral, was classified and measured at fair value through profit and loss. 2017 comparatives have not been restated.

Collateral taken for longer-term and sub-investment grade corporate loans continues to be high at 51 per cent.

Our underwriting standards encourage taking specific charges on assets and we consistently seek high-quality, investment grade collateral. 83 per cent of tangible collateral held comprises physical assets or is property based, with the remainder largely in cash and investment securities.

Non-tangible collateral such as guarantees and standby letters of credit is also 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

Amortised cost

31.12.181

$million

31.12.172

(IAS 39)
$million

Maximum exposure

166,091

193,442

Property

5,557

7,014

Plant, machinery and other stock

1,067

3,612

Cash

2,019

5,742

Reverse repos

528

49,736

AAA

-

1,027

A- to AA+

321

40,421

BBB- to BBB+

207

6,448

Lower than BBB-

-

915

Unrated

-

925

Financial guarantees and insurance3

3,697

-

Commodities

90

162

Ships and aircraft

2,924

4,233

Total value of collateral

15,882

70,499

Net exposure

150,209

122,943

1 Excludes collateral held against FVTPL exposures, and is adjusted for over-collateralisation based on the drawn and undrawn components of exposures

2 Includes collateral held against FVTPL exposures, and is adjusted for over-collateralisation based on the drawn component of exposures

3 Included in 2018 as it is taken into account when determining expected credit losses

Commercial Banking

Amortised cost

31.12.181

$million

31.12.172

(IAS 39)
$million

Maximum exposure

26,759

29,602

Property

4,557

4,642

Plant, machinery and other stock

992

767

Cash

486

923

Reverse repos

72

-

A- to AA+

1

-

BBB- to BBB+

71

-

Financial guarantees and insurance3

502

-

Commodities

11

4

Ships and aircraft

147

234

Total value of collateral

6,767

6,570

Net exposure

19,992

23,032

1 Excludes collateral held against FVTPL exposures, and is adjusted for over-collateralisation based on the drawn and undrawn components of exposures

2 Includes collateral held against FVTPL exposures, and is adjusted for over-collateralisation based on the drawn component of exposures

3 Included in 2018 as it is taken into account when determining expected credit losses



 

Collateral - 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 broadly stable at 15 per cent and the remaining 1 per cent is partially secured.

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

Amortised cost

31.12.18


31.12.17 (IAS 39)

Fully secured
$million

Partially secured
$million

Unsecured
$million

Total1

$million

Fully secured
$million

Partially secured
$million

Unsecured
$million

Total2

$million

Maximum exposure

96,534

1,383

16,934

114,851


97,523

1,301

17,750

116,574

Loans to individuals










Mortgages

75,386

191

23

75,600


78,755

23

-

78,778

CCPL

168

102

16,692

16,962


240

86

17,209

17,535

Auto

671

-

2

673


630

-

3

633

Secured wealth products

17,721

107

172

18,000


13,903

156

95

14,154

Other

2,588

983

45

3,616


3,995

1,036

443

5,474

Total collateral3




84,214





85,839

Net exposure




30,637





30,735

Percentage of total loans

84%

1%

15%



84%

1%

15%


1 Amounts net of ECL / individual impairment provisions and excludes FVTPL

2 Includes FVTPL

3 Collateral values are adjusted where appropriate in accordance with our risk mitigation policy and for the effect of over-collateralisation

Mortgage loan-to-value ratios by geography

Loan-to-value (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 low at 45 per cent. Hong Kong, which represents 37 per cent of the Retail Banking mortgage portfolio has an average LTV of 39.2 per cent. All of our other key markets continue to have low portfolio LTVs, (Korea, Singapore and Taiwan at 43.5 per cent, 54.7 per cent and 51.6 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.

Amortised cost

31.12.18

Greater China & North Asia
%

ASEAN &
South Asia
%

Africa &
Middle East
%

Europe & Americas
%

Total
%

Less than 50 per cent

67.7

41.5

20.9

19.6

58.5

50 per cent to 59 per cent

14.9

18.8

15.3

21.0

16.0

60 per cent to 69 per cent

10.7

22.0

21.8

30.2

14.4

70 per cent to 79 per cent

5.0

16.0

21.6

26.8

8.8

80 per cent to 89 per cent

1.3

1.5

12.0

2.4

1.7

90 per cent to 99 per cent

0.3

0.1

4.7

-

0.3

100 per cent and greater

0.1

0.1

3.8

-

0.2

Average portfolio loan-to-value

42.0

51.5

65.2

54.2

44.8

Loans to individuals - mortgages ($ million)

52,434

19,156

2,126

1,884

75,600

 

Amortised cost

31.12.17 (IAS 39)

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



 

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 fair value through other comprehensive income, and the related loan written off.

The carrying value of collateral possessed and held by the Group as at 31 December 2018 is $18.2 million (2017: $24.1 million).

The decrease in collateral value is largely due to the reduction in cash collateral following utilisation to settle customer outstanding.


2018
$million

2017
$million

Property, plant and equipment

8.7

14.9

Equity shares

-

0.2

Guarantees

8.6

4.0

Cash

0.6

4.6

Other

0.3

0.4

Total

18.2

24.1

Other credit risk mitigation

Other forms of credit risk mitigation are set out below.

Credit default swaps

The Group has entered into credit default swaps for portfolio management purposes, referencing loan assets with a notional value of $21 billion (2017: $16 billion). These credit default swaps are accounted for as financial guarantees as per IFRS 9. 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.

Derivative 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. These are set out in more detail under Derivative financial instruments credit risk mitigation.

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 of loans and advances by client segment

The loans and advances to the Corporate & Institutional Banking and Commercial Banking segments remain predominantly short-term, with 60 per cent of loans and advances to customers in the segments maturing in less than one year, a decrease compared with December 2017, and 96 per cent of loans to banks maturing 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 70 per cent of the loans maturing over five years as mortgages constitute the majority of this portfolio.



 

Amortised cost

31.12.18

One year or less
$million

One to five years
$million

Over five years
$million

Total
$million

Corporate & Institutional Banking

60,794

36,164

10,330

107,288

Retail Banking

16,372

14,091

71,600

102,063

Commercial Banking

21,085

5,660

1,364

28,109

Private Banking

12,710

396

618

13,724

Central & other items

10,265

7

-

10,272

Gross loans and advances to customers

121,226

56,318

83,912

261,456

Impairment provisions

(4,329)

(294)

(276)

(4,899)

Net loans and advances to customers

116,897

56,024

83,636

256,557

Net loans and advances to banks

58,784

2,597

33

61,414

 

Amortised cost and FVTPL

31.12.17 (IAS 39)

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

Net of individual impairment provisions

158,238

54,737

73,043

286,018

Portfolio impairment provision




(465)

Net carrying value (customers)




285,553

Net carrying value (banks)

77,739

2,974

612

81,325

Industry and Retail Products analysis of loans and advances by geographic region (unaudited)

This section provides an analysis of the Group's amortised cost loan portfolio, net of provisions, by industry and region.

In the Corporate & Institutional Banking and Commercial Banking segments our largest industry exposure is manufacturing, which constitutes 17 per cent of Corporate & Institutional Banking and Commercial Banking loans and advances to customers (1 January 2018: 16 per cent). The manufacturing sector 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 4,639 clients.

The financing, insurance and non-banking industry group constitutes 15 per cent of Corporate & Institutional Banking and Commercial Banking loans and advances to customers. Clients are mostly investment grade institutions and this lending forms part of the liquidity management of the Group.

Loans and advances to the energy sector have dropped by 1 per cent to 12 per cent of total loans and advances to Corporate & Institutional Banking and Commercial Banking (1 January 2018: 13 per cent). The energy sector lending is spread across five subsectors and over 438 clients.

The Group provides loans to commercial real estate counterparties of $15 billion, which represents 6 per cent of total customer loans and advances. In total, $8.8 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 commercial real estate 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 portfolio has increased to 43 per cent, compared with 41 per cent in 2017. The proportion of loans with an LTV greater than 80 per cent has remained at 1 per cent during the same period.

The mortgage portfolio continues to be the largest portion of the Retail Products portfolio, at 66 per cent. CCPL and other unsecured lending remain broadly stable at 15 per cent of total Retail Products loans and advances.



 

Industry and Retail products analysis by geographic region

Amortised cost

31.12.18

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Industry:






Energy

2,778

5,279

2,793

6,150

17,000

Manufacturing

10,531

6,298

3,209

3,601

23,639

Financing, insurance and non-banking

8,657

4,653

915

6,662

20,887

Transport, telecom and utilities

5,712

4,177

4,703

1,178

15,770

Food and household products

1,945

4,011

2,798

975

9,729

Commercial real estate

8,148

4,865

1,854

168

15,035

Mining and quarrying

1,683

2,283

1,088

932

5,986

Consumer durables

4,892

2,255

731

524

8,402

Construction

831

1,094

1,225

152

3,302

Trading companies and distributors

1,976

624

391

16

3,007

Government

1,726

8,815

3,113

83

13,737

Other

1,686

1,899

803

824

5,212

Retail Products:






Mortgages

52,434

19,156

2,126

1,884

75,600

CCPL and other unsecured lending

10,269

4,234

2,459

-

16,962

Auto

-

522

150

1

673

Secured wealth products

6,912

9,055

310

1,723

18,000

Other

2,616

320

679

1

3,616

Net loans and advances to customers

122,796

79,540

29,347

24,874

256,557

Net loans and advances to banks

27,858

11,676

5,573

16,307

61,414

 

Amortised cost

01.01.18

Greater China & North Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Industry:






Energy

2,841

5,874

3,188

6,262

18,165

Manufacturing

10,885

6,290

3,145

1,883

22,203

Financing, insurance and non-banking

7,096

4,996

1,242

6,480

19,814

Transport, telecom and utilities

6,396

3,870

4,508

995

15,769

Food and household products

2,173

4,100

2,485

1,168

9,926

Commercial real estate

8,047

5,084

1,472

52

14,655

Mining and quarrying

1,878

2,857

1,033

580

6,348

Consumer durables

4,214

2,536

975

691

8,416

Construction

987

1,097

1,275

238

3,597

Trading companies and distributors

1,153

573

426

128

2,280

Government

1,669

6,585

1,184

164

9,602

Other

1,831

1,884

1,069

579

5,363

Retail Products:






Mortgages

54,602

20,099

2,273

1,783

78,757

CCPL and other unsecured lending

9,585

3,935

2,893

2

16,415

Auto

-

399

230

-

629

Secured wealth products

5,268

6,973

212

1,657

14,110

Other

2,349

2,409

696

4

5,458

Net carrying value (customers)

120,974

79,561

28,306

22,666

251,507

Net carrying value (banks)

30,002

12,408

4,595

15,290

62,295



 

Amortised cost and FVTPL

31.12.17 (IAS 39)

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 & 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)

Net carrying value (customers)

126,739

82,579

29,602

46,633

285,553

 

 

 

 

 

 

Net carrying value (banks)

33,226

16,523

7,428

24,148

81,325

Debt securities and other eligible bills

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

Amortised cost and FVOCI

31.12.18
Debt securities and other
eligible bills
$million

01.01.18
Debt securities
and other
eligible bills
$million

12-month expected credit losses (stage 1)

118,713

107,308

AAA

55,205

30,759

AA- to AA+

35,685

48,206

A- to A+

13,803

11,016

BBB- to BBB+

9,639

9,431

Lower than BBB-

30

257

Unrated

4,351

7,639

Lifetime expected credit losses (stage 2)

6,909

8,302

AAA

156

71

AA- to AA+

115

416

A- to A+

54

242

BBB- to BBB+

5,486

4,838

Lower than BBB-

292

403

Unrated

806

2,332

Credit-impaired financial assets (stage 3)

232

221

Lower than BBB-

-

-

Unrated

232

221




Gross balance1

125,854

115,831

1  Excludes fair value through profit or loss



 

Amortised cost and FVTPL

31.12.17 (IAS 39)
Debt securities
and other
eligible bills
$million

Net impaired securities:

45

Impaired securities

421

Impairment

(376)

Securities neither past due nor impaired:

135,797

AAA

35,937

AA- to AA+

51,914

A- to A+

13,305

BBB- to BBB+

17,498

Lower than BBB-

5,333

Unrated

11,810



Net carrying value

135,842

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.

Debt securities in the AAA rating category increased during the year by $24.5 billion to $55.2 billion. In line with the balance sheet growth, the Group strengthened its portfolio of liquid assets by holding more highly rated securities mainly issued by the US and UK governments. The increase in holdings of debt securities rated A- to A+ under stage 1 is mainly due to China sovereign rating downgrade from AA- to A+ by Standard & Poor's. Stage 1 unrated debt securities have reduced by $3.3 billion mainly due to securities reported as unrated in prior years having now been given a rating or maturing in 2018.

Movement in net carrying value of debt securities and other eligible bills

Amortised cost and FVOCI

31.12.18
Net carrying value
$million

31.12.17 (IAS 39)
Net carrying
value
$million

As at 1 January 2018

115,534

107,584

Exchange translation differences and other movements

(2,794)

3,463

Additions

276,394

265,126

Maturities and disposals

(263,996)

(260,271)

Transfers to assets held for sale

 -

(60)

Impairment, net of recoveries on disposal

(7)

(20)

Changes in fair value (including the effect of fair value hedging)

84

17

Amortisation of discounts and premiums

375

292

As at 31 December 2018

125,590

116,131



 

Asset-backed securities (unaudited)


31.12.18


01.01.18

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

59%

4,369

4,369

4,356


44%

2,814

2,812

2,812

Collateralised debt obligations (CDOs)

2%

155

150

150


1%

75

70

69

Commercial mortgage-backed
securities (CMBS)

1%

94

94

94


1%

63

29

29

Other asset-backed securities (other ABS)3

38%

2,855

2,849

2,846


54%

3,518

3,517

3,519


100%

7,473

7,462

7,446


100%

6,470

6,428

6,429

Of which:










Financial assets held at fair value through profit or loss

11%

823

816

819


14%

887

885

890

Financial assets held at non trading mandatorily fair value through profit or loss

4%

282

278

278


7%

453

410

410

Financial assets held at amortised cost

34%

2,559

2,556

2,556


17%

1,078

1,079

1,072

Investment securities - FVOCI

51%

3,809

3,812

3,793


63%

4,052

4,054

4,057


100%

7,473

7,462

7,446


100%

6,470

6,428

6,429

1  Fair value reflects the value of the entire portfolio, including assets redesignated to loans at amortised cost

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 (2017: 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 71 per cent of the overall portfolio rated as AAA. Residential mortgage-backed securities (RMBS) make up 59 per cent of the overall portfolio and have a weighted averaged credit rating of AAA (AAA in 2017).

Other ABS includes auto ABS, comprising 22 per cent of the overall portfolio, and credit card ABS (3 per cent). Both maintain a weighted average credit rating of AAA. The balance of Other ABS mainly includes securities backed by consumer loans, CLOs, CMBS, diversified payment rights and receivables ABS.

IFRS 9 methodology

Approach for determining expected credit losses

Credit loss terminology

Component

Definition

Probability of default (PD)

The probability that a counterparty will default, over the next 12 months from the reporting date (stage 1) or over the lifetime of the product (stage 2) and incorporating the impact of forward-looking economic assumptions that have an effect on credit risk, such as interest rates, unemployment rates and GDP forecasts.

The PD estimates will fluctuate in line with the economic cycle. The lifetime (or term structure) PDs are based on statistical models, calibrated using historical data and adjusted to incorporate forward-looking economic assumptions.

Loss given default (LGD)

The loss that is expected to arise on default, incorporating the impact of forward-looking economic assumptions where relevant, which represents the difference between the contractual cash flows due and those that the bank expects to receive.

The Group estimates LGD based on the history of recovery rates and considers the recovery of any collateral that is integral to the financial asset, taking into account forward-looking economic assumptions where relevant.

Exposure at default (EAD)

The expected balance sheet exposure at the time of default, taking into account the expected change in exposure over the lifetime of the exposure. This incorporates the impact of drawdowns of committed facilities, repayments of principal and interest, amortisation and prepayments, together with the impact of forward-looking economic assumptions where relevant.

To determine the expected credit loss, these components are multiplied together (PD for the reference period (up to 12 months or lifetime) x LGD at the beginning of the period x EAD at the beginning of the period) and discounted to the balance sheet date using the effective interest rate as the discount rate.

Although the IFRS 9 models leverage the existing Basel advanced IRB risk components, several significant adjustments are required to ensure the resulting outcome is in line with the IFRS 9 requirements.



 

Key differences between regulatory and IFRS expected credit loss models


Basel advanced IRB expected loss

IFRS 9 Expected credit loss

Rating philosophy

Point-in-time, through-the-cycle or hybrid, depending on the relevant regulatory requirements

Point-in-time

Parameters calibration

Often conservative, due to regulatory floors and downturn calibration

Unbiased estimate, based on conditions known at the balance sheet date

- PD


Inclusion of forward-looking information and removal of conservatism and bias

- LGD


Removal of regulatory floors, exclusion of non-direct costs

- EAD

Floored at outstanding amount

Recognises ability to have a reduction in exposure from the balance sheet date to the default date

Timeframe

12-month period

Up to 12 months and lifetime

Discounting applied

Discounting at the weighted average cost of capital to the time of default

Discounting at the effective interest rate (EIR) to the balance sheet reporting date

IFRS 9 expected credit loss models have been developed for the Corporate & Institutional Banking and Commercial Banking businesses on a global basis, in line with their respective portfolios. However, for some of the most material countries, country-specific models have also been developed.

The calibration of forward-looking information is assessed at a country or region level to take into account local macroeconomic conditions.

Retail Banking expected credit loss models are country and product specific given the local nature of the Retail Banking business.

For less material Retail Banking loan portfolios, the Group has adopted simplified approaches based on historical roll rates or loss rates:

•  For medium-sized Retail Banking portfolios, a roll rate model is applied, which uses a matrix that gives average loan migration rate from delinquency states from period to period. A matrix multiplication is then performed to generate the final PDs by delinquency bucket over different time horizons

•  For smaller Retail Banking portfolios, loss rate models are applied. These use an adjusted gross charge-off rate, developed using monthly write-off and recoveries over the preceding 12 months and total outstanding balances

For a limited number of exposures, proxy parameters or approaches are used where the data is not available to calculate the origination PDs and a proxy approach is taken to apply the SICR criteria; or for some retail portfolios where a full history of LGD data is not available and estimates based on the loss experience from similar portfolios are used. The use of proxies is monitored and will reduce over time.

Application of lifetime

Expected credit loss is estimated based on the shorter of the expected life and the maximum contractual period for which the Group is exposed to credit risk. For Retail Banking credit cards and Corporate & Institutional Banking overdraft facilities, however, the Group does not typically enforce the contractual period. As a result, for these instruments, the lifetime of the exposure is based on the period the Group is exposed to credit risk. This period has been determined by reference to expected behavioural life of the exposure and the extent to which credit risk management actions curtail the period of exposure. For credit cards, this has resulted in an average life of between 3 and 10 years across our footprint markets. Overdraft facilities have a 22-month lifetime.

Key assumptions and judgements in determining expected credit loss

Incorporation of forward-looking information

The evolving economic environment is a key determinant of the ability of a bank's clients to meet their obligations as they fall due. It is a fundamental principle of IFRS 9 that the provisions banks hold against potential future credit risk losses should depend not just on the health of the economy today, but should also take into account potential changes to the economic environment. For example, if a bank were to anticipate a sharp slowdown in the world economy over the coming year, it should hold more provisions today to absorb the credit losses likely to occur in the near future.

To capture the effect of changes to the economic environment, the PDs and LGDs used to calculate expected credit loss, incorporate forward-looking information in the form of forecasts of the values of economic variables and asset prices that are likely to have an effect on the repayment ability of the Group's clients.

The 'Base Forecast' of the economic variables and asset prices is based on management's view, supported by projections from the Group's in-house research team and outputs from models that project specific economic variables and asset prices.



 

Forecast of key macroeconomic variables underlying the expected credit loss calculation and the impact on non-linearity

The Base Forecast - management's view of the most likely outcome - is that the synchronised expansion of the global economy will continue over the coming years alongside a normalisation of monetary policy in the developed world and the successful rebalancing of the Chinese economy, with US-China trade tensions putting China's export sectors under some pressure.

While this Base Forecast is the premise for the Group's strategic plan, one of the key requirements of IFRS 9 is that the assessment of provisions should be based on a range of potential outcomes for the future economic environment. For example, the global economy may grow more quickly or more slowly than the Base Forecast, and these variations would have different implications for the provisions that the Group should hold today. As the negative impact of an economic downturn on credit losses tends to be greater than the positive impact of an economic upturn, if the Group sets provisions only on the expected credit loss under the Base Forecast, it might not end up with a level of provisions that appropriately considers the range of potential outcomes. To address this skewness (or non-linearity) in expected credit loss, IFRS 9 requires the ECL to be the probability-weighted amount calculated for a range of possible outcomes.

To take account of the potential non-linearity in expected credit loss, the Group simulates a set of 50 scenarios around the Base Forecast and calculates the expected credit loss under each of them. These scenarios are generated by a Monte Carlo simulation, which considers the degree of uncertainty (or volatility) around economic outcomes and how these outcomes have tended to move in relation to one another (or correlation). The use of Monte Carlo simulation is motivated by the number and spread of countries in which the Group operates. This implies that the number of countries' macroeconomic variables to forecast is large, but more importantly the observation that a downturn in one part of the world is never perfectly synchronised with downturns everywhere else means that the Group may be challenged to capture a full range of scenarios with a handful of manually tuned scenarios.

While the 50 scenarios do not each have a specific narrative, they reflect a range of plausible hypothetical alternative outcomes for the global economy. Some imply an unwinding of the current shocks and uncertainty leading to higher global economic activity and higher asset prices, while others represent an intensification of current shocks or introduction of new shocks that raise uncertainty, leading to lower global economic activity and lower asset prices.

The table below provides a summary of the Group's Base Forecast, alongside the corresponding range seen across the multiple scenarios.

Over the medium term - five years ahead - there has been relatively little change in the forecast level of activity relative to the start of the year. At the margin, the ongoing trade policy tensions between the US and China have reduced prospective export growth in China, particularly in the near term. The effect of the external trade shock is expected to be offset by moderate domestic policy stimulus by Chinese authorities and so average real GDP growth projections over the medium term have been revised downwards only marginally, to 6.0 per cent from 6.1 per cent. Some policy stimulus was provided during 2018, for example an easing of monetary policy by the People's Bank of China (PBoC). This policy stance is expected to persist and so the projected average three-month interbank interest rate over the medium term has been revised down materially to 3.1 per cent from 4.2 per cent.

In contrast to the Chinese economy, the US economy continued to grow above trend during 2018, prompting the Federal Reserve to raise US policy interest rates faster than expected. For those countries where the monetary policy framework is based on managing the level of the currency in reference to the US dollar - either as a currency board (Hong Kong) or as a currency basket (Singapore) - domestic interest rates rise, to some degree, with US interest rates. The revised outlook for short-term interbank interest rates is not expected to have a material effect on activity, property price inflation or unemployment in those countries over the medium term.

The most material revision in the base forecast is to the oil price. At the start of the year oil prices were expected to average around US$61/barrel over the medium term, but by the end of the year that projection had been revised up to around US$85. While current prices have been impacted by speculative movements out of oil, a number of supply and demand factors together determine the oil price. The most important driver of the rise in projected oil prices over the medium term was the decision by the US government not to renew waivers on certain sanctions on Iran, including the export of oil.



 

31.12.2018

 China


Hong Kong


Korea


Singapore


India

Base forecast

Low2

High3

Base forecast

Low2

High3

Base forecast

Low2

High3

Base forecast

Low2

High3

Base forecast

Low2

High3

GDP growth (YoY%)

6.0

4.3

7.7


3.0

0.6

5.6


2.9

0.4

5.3


2.4

(1.7)

6.4


7.7

5.6

10.1

Unemployment (%)

4.0

3.8

4.2


3.4

2.4

4.6


3.2

2.4

4.0


3.0

2.3

3.7


N/A

N/A

N/A

3-month interest rates (%)

3.1

2.0

4.3


3.0

1.8

4.2


2.6

1.4

4.0


2.4

1.3

3.8


6.9

5.1

8.9

House prices (YoY%)

5.8

3.4

8.5


2.3

(8.1)

12.1


3.5

1.3

6.1


4.4

(1.5)

10.6


8.4

1.4

15.1

 

01.01.2018

 China


Hong Kong


Korea


Singapore


India

Base forecast

Low2

High3

Base forecast

Low2

High3

Base forecast

Low2

High3

Base forecast

Low2

High3

Base forecast

Low2

High3

GDP growth (YoY%)

 6.1

 4.5

 7.6


 3.0

 0.3

 5.4


 2.9

 0.8

 5.6


 2.3

 (2.0)

 6.1


 7.5

 5.4

 9.7

Unemployment (%)

 4.0

 3.8

 4.2


 3.6

 2.4

 4.8


 3.3

 2.5

 4.6


 2.8

 2.2

 3.5


N/A1

N/A1

N/A1

3-month interest rates (%)

 4.2

 2.9

 5.6


 1.7

 1.0

 3.7


 2.3

 1.4

 4.3


 1.7

 1.2

 3.9


 6.2

 5.3

 9.0

House prices (YoY%)

 5.4

 3.5

 8.0


 2.0

 (7.5)

 12.3


 3.5

 1.4

 6.0


 3.8

 (1.8)

 9.2


 8.5

 1.3

 15.5

 

31.12.2018

Base forecast

Low2

High3

Crude price Brent, $ pb

85

40

118

 

01.01.2018

Base forecast

Low2

High3

Crude price Brent, $ pb

61

35

92

1 Not available

2 Represents the 10th percentile in the range used to determine non-linearity

3 Represents the 90th percentile in the range used to determine non-linearity

The final expected credit loss reported by the Group is a simple average of the expected credit loss for each of the 50 scenarios. The impact of non-linearity on expected credit loss is set out in the table below:


Including non-linearity
$million

Excluding non-linearity
$million

Difference
%

Total expected credit loss1

1,163

1,139

2.1

1  Total modelled expected credit loss comprises stage 1 and stage 2 balances of $1,031 million and $132 million of modelled expected credit loss on stage 3 loans

The average expected credit loss under multiple scenarios is 2.1 per cent higher than the expected credit loss calculated using only the most likely scenario (the Base Forecast). Portfolios that are more sensitive to non-linearity include those with greater leverage and/or a longer tenor, such as Project and Shipping Finance portfolios. Other portfolios display minimal non-linearity owing to limited their responsiveness to macroeconomic impacts for structural reasons such as significant collateralisation as with the Retail Banking mortgage portfolios.

Credit-impaired assets managed by Group Special Assets Management (GSAM) incorporate forward-looking economic assumptions in respect of the recovery outcomes identified and are assigned individual probability weightings. These assumptions are not based on a Monte Carlo simulation but are informed by the Base Forecast.

Sensitivity of expected credit loss calculation to macroeconomic variables

The expected credit loss calculation relies on multiple variables and is inherently non-linear and portfolio-dependent, which implies that no single analysis can fully demonstrate the sensitivity of the expected credit loss to changes in the macroeconomic variables. The Group has conducted a series of analyses with the aim of identifying the macroeconomic variables which might have the greatest impact on overall expected credit loss. These encompassed single variable and multi-variable exercises, using simple up/down variation and extracts from actual calculation data, as well as bespoke scenario design and assessment.

The primary conclusion of these exercises is that no individual macroeconomic variable is materially influential - that is, likely to result in an impact of at least 1 per cent of the Group's expected credit loss. The Group believes this is plausible, because the number of variables used in the expected credit loss calculation is large. This does not mean that macroeconomic variables are uninfluential; rather, that the Group believes that consideration of macroeconomics should involve whole scenarios, as this aligns with the multi-variable nature of the calculation.



 

As the Group has two principal uncertainties related to the macroeconomic outlook, a sensitivity analysis of ECL was undertaken to explore the combined effect of these: extended trade tensions that could lead to a China slowdown with spillovers to emerging markets. In this scenario, current trade policy tensions between the US and China increase dramatically. The US targets trading partners with which it has a material trade deficit and pushes through highly protectionist measures, initiating trade tensions with Asia focused on China. Indirectly, economies reliant on global trade flows are vulnerable to the trade shock. The escalating trade tensions create uncertainty which reduces risk appetite, leading to a decline in asset prices and lower consumption and investment across developed and emerging markets. This leads to a global slowdown and a sharp fall in commodity prices. As an indication, China annual real GDP growth troughs at circa. 4 per cent, representing a marked divergence from the base forecast growth of around 6 per cent, while China exports growth dips negative for the first time since 2009. US GDP slows from a trend rate of about 2 per cent down to 1 per cent. Crude oil prices fall, and residential property indices in China and Hong Kong dip negative. To contextualise this scenario relative to the Monte Carlo generated scenarios, the China and US GDP dips approach the lowest growth boundary of the 50 scenarios in 2019, crude oil remains closer to the middle than to the bottom edge, but the China property price index falls well below the simulated lower bound over a period of years.

Applying this scenario, modelled stage 1 and 2 expected credit loss provisions would be approximately $362 million higher than the reported base case expected credit loss provision (excluding the impact of non-linearity). This includes the impact of exposures transferring to stage 2 from stage 1 but does not consider an increase in stage 3 defaults. The proportion of exposures in stage 2 would increase from 8 per cent to 10 per cent. As expected, this has an impact on our corporate exposures in China, Hong Kong and Singapore. Within Retail Banking, the Group's credit card portfolios in Hong Kong and Singapore were impacted. Note that the actual outcome of any scenario may be materially different due to, amongst other factors, the effect of management actions to mitigate potential increases in risk and changes in the underlying portfolio.

Significant increase in credit risk

Quantitative criteria

SICR is assessed by comparing the risk of default at the reporting date to the risk of default at origination. Whether a change in the risk of default is significant or not is assessed using quantitative and qualitative criteria. These quantitative significant deterioration thresholds have been separately defined for each business and where meaningful are consistently applied across business lines.

Assets are considered to have experienced SICR if they have breached both relative and absolute thresholds for the change in the average annualised lifetime probability of default over the residual term of the exposure.

The absolute measure of increase in credit risk is used to capture instances where the PDs on exposures are relatively low at initial recognition as these may increase by several multiples without representing a significant increase in credit risk. Where PDs are relatively high at initial recognition, a relative measure is more appropriate in assessing whether there is a significant increase in credit risk, as the PDs increase more quickly.

The SICR thresholds have been calibrated based on the following principles:

•  Stability - The thresholds are set to achieve a stable stage 2 population at a portfolio level, trying to minimise the number of accounts moving back and forth between stage 1 and stage 2 in a short period of time

•  Accuracy - The thresholds are set such that there is a materially higher propensity for stage 2 exposures to eventually default than is the case for stage 1 exposures

•  Dependency from backstops - The thresholds are stringent enough such that a high proportion of accounts transfer to stage 2 due to movements in forward-looking PD rather than relying on backward-looking backstops such as arrears

•  Relationship with business and product risk profiles - The thresholds reflect the relative risk differences between different products, and are aligned to business processes

For Corporate & Institutional Banking and Commercial Banking clients, the relative threshold is a 100 per cent increase in PD and the absolute change in PD is between 50 and 100 bps.

For Retail Banking clients, the relative threshold is a 100 per cent increase in PD and the absolute change in PD is between 100 and 350 bps depending on the product. Certain countries have a higher absolute threshold reflecting the lower default rate within their personal loan portfolios compared with the Group's other personal loan portfolios.

Private Banking clients are assessed qualitatively, based on a delinquency measure relating to collateral top-ups or sell-downs.

Debt securities with an internal credit rating mapped to an investment grade equivalent are allocated to stage 1 and all other debt securities to stage 2.



 

Qualitative criteria

Qualitative factors that indicate that there has been a significant increase in credit risk include processes linked to current risk management, such as placing loans on non-purely precautionary early alert.

Backstop

Across all portfolios, accounts that are 30 or more days past due (DPD) on contractual payments of principal and/or interest that have not been captured by the criteria above are considered to have experienced a significant increase in credit risk.

Expert credit judgement may be applied in assessing significant increase in credit risk to the extent that certain risks may not have been captured by the models or through the above criteria. Such instances are expected to be rare, for example due to events arising close to the reporting date.

Corporate & Institutional Banking and Commercial Banking clients

Quantitative criteria

Exposures are assessed based on both the absolute and the relative movement in the PD from origination to the reporting date as described above.

To account for the fact that the mapping between internal credit grades (used in the origination process) and PDs is non-linear (e.g. a one-notch downgrade in the investment grade universe results in a much smaller PD increase than in the sub-investment grade universe), the absolute thresholds have been differentiated by credit quality at origination, as measured by internal credit grades being investment grade or sub-investment grade.

Qualitative criteria

All assets of clients that have been placed on early alert (for non-purely precautionary reasons) are deemed to have experienced a significant increase in credit risk.

An account is placed on non-purely precautionary early alert if it exhibits risk or potential weaknesses of a material nature requiring closer monitoring, supervision or attention by management. Weaknesses in such a borrower's account, if left uncorrected, could result in deterioration of repayment prospects and the likelihood of being downgraded. Indicators could include a rapid erosion of position within the industry, concerns over management's ability to manage operations, weak/deteriorating operating results, liquidity strain and overdue balances among other factors.

All client assets that have been assigned a CG12 rating, equivalent to 'higher risk', are deemed to have experienced a significant increase in credit risk. Accounts rated CG12 are managed by the GSAM unit. All Corporate & Institutional Banking and Commercial Banking clients are placed on CG12 when they are 30 DPD unless they are granted a waiver through a strict governance process.

Retail Banking clients

Quantitative criteria

Material portfolios (defined as a combination of country and product, for example Hong Kong mortgages, Taiwan credit cards), for which a statistical model has been built, are assessed based on both the absolute and relative movement in the PD from origination to the reporting date as described previously. For these portfolios, the original lifetime PD term structure is determined based on the original application score or risk segment of the client.

Qualitative criteria

Accounts that are 30 DPD that have not been captured by the quantitative criteria are considered to have experienced a significant increase in credit risk. For less material portfolios, which are modelled based on a roll rate or loss rate approach, significant increase in credit risk is primarily assessed through the 30 DPD trigger.

Private Banking clients

For Private Banking clients, significant increase in credit risk is assessed by referencing the nature and the level of collateral against which credit is extended (known as 'Classes of risk').

Qualitative criteria

For all Private Banking classes, in line with risk management practice, an increase in credit risk is deemed to have occurred where margining or LTV covenants have been breached.

For Class I assets, if these margining requirements have not been met within 30 days of a trigger, a significant increase
in credit risk is assumed to have occurred.



 

For Class I and Class III assets, a significant increase in credit risk is assumed to have occurred where the bank is unable to 'sell down' the applicable assets to meet revised collateral requirements within five days of a trigger.

Class II assets are typically unsecured or partially secured, or secured against illiquid collateral such as shares in private companies. Significant credit deterioration of these assets is deemed to have occurred when any early alert trigger has been breached.

Debt securities

Quantitative criteria

The bank is utilising the low credit risk simplified approach. All debt securities with an internal credit rating mapped to an investment grade equivalent are allocated to stage 1 and all other debt securities are allocated to stage 2.

Qualitative criteria

Debt securities utilise the same qualitative criteria as the Corporate & Institutional Banking and Commercial Banking client segments, including being placed on early alert or being classified as CG12.

Assessment of credit-impaired financial assets

Retail Banking clients

The core components in determining credit-impaired expected credit loss provisions are the value of gross charge-off and recoveries. Gross charge-off and/or loss provisions are recognised when it is established that the account is unlikely to pay through the normal process. Recovery of unsecured debt post credit impairment is recognised based on actual cash collected, either directly from clients or through the sale of defaulted loans to third-party institutions. Release of credit impairment provisions for secured loans 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).

Corporate & Institutional Banking, Commercial Banking and Private Banking clients

Credit-impaired accounts are managed by the Group's specialist recovery unit, Group Special Assets Management (GSAM), which is independent from its main businesses. Where any amount is considered irrecoverable, a stage 3 credit impairment provision is raised. This stage 3 provision is the difference between the loan-carrying amount and the probability-weighted present value of estimated future cash flows, reflecting a range of scenarios (typically the best, worst and most likely recovery outcomes). Where the cash flows include realisable collateral, the values used will incorporate the impact of forward-looking economic information.

The individual circumstances of each client are considered when GSAM estimates future cash flows and timing of future recoveries which involve significant judgement. 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.

Write-offs

Where it is considered that there is no realistic prospect of recovering a portion of an exposure against which an impairment provision has been raised, that amount will be written off.

Governance and application of expert credit judgement in respect of expected credit losses

The models used in determining expected credit losses are reviewed and approved by the Group Credit Model Assessment Committee (CMAC), which is appointed by the Model Risk Committee. The CMAC has the responsibility to assess and approve the use of models and to review all IFRS 9 interpretations related to models. The CMAC also provides oversight on operational matters related to model development, performance monitoring and model validation activities including standards, regulatory and Group Internal Audit matters.

Prior to submission to the CMAC for approval, the models have been validated by Group Model Validation (GMV), a function which is independent of the business and the model developers. GMV's analysis comprises review of model documentation, model design and methodology; data validation; review of model development and calibration process; out-of-sample performance testing; and assessment of compliance review against IFRS 9 rules and internal standards.

Key inputs into the calculation and resulting expected credit loss provisions are subject to review and approval by the IFRS 9 Impairment Committee which is appointed by the Group Risk Committee. The IFRS 9 Impairment Committee consists of senior representatives from Risk, Finance, and Group Economic Research. It meets at least twice every quarter, once before the models are run to approve key inputs into the calculation, and once after the models are run to approve the expected credit loss provisions and any judgemental override that may be necessary.



 

The IFRS 9 Impairment Committee:

•  Oversees the appropriateness of all Business Model Assessment and Solely Payments of Principal and Interest (SPPI) tests

•  Reviews and approves expected credit loss for financial assets classified as stages 1, 2 and 3 for each financial reporting period

•  Reviews and approves stage allocation rules and thresholds

•  Approves material adjustments in relation to expected credit loss for FVOCI and amortised cost financial assets

•  Reviews, challenges and approves base macroeconomic forecasts and (the multiple macroeconomic scenarios approach) that are utilised in the forward-looking expected credit loss calculations

The IFRS 9 Impairment Committee is supported by an Expert Panel which reviews and challenges the full extended version of base case projections and multiple macroeconomic scenarios. The Expert Panel consists of members of Enterprise Risk Management (which includes the Scenario Design team), Finance, Group Economic Research and country representatives of major jurisdictions.

Stage 3

•  Credit-impaired

•  Non-performing

Stage 2

•  Lifetime expected credit loss

•  Performing but has exhibited significant increase in credit risk (SICR)

Stage 1

•  12-month expected credit loss

•  Performing

Country Risk (unaudited)

Country cross-border risk is the risk that the Group will be unable to obtain payment from counterparties on their contractual obligations as a result of certain 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 2018 remained consistent with its strategic focus on core franchise countries. Changes in the pace of economic activity and portfolio management activity had an impact on the growth of cross-border exposure for certain territories.

Country cross-border exposure to China remains predominantly short-term (85 per cent of exposure had a tenor of less than one-year). During 2018, the Group's cross-border exposure to China decreased, primarily driven by a loan portfolio reduction, as well as repayment of some large-scale term and bridge loans.

Country cross-border exposure to Hong Kong rose marginally, with strong loan book growth largely offset by a decline in trade finance exposures; reflecting a more subdued global trade environment and domestic economic headwinds.

Singapore's cross-border exposure declined during 2018 due to a reduction in exposure from corporate business loans and structured finance transactions, partially offset by an uptick in interbank exposures.

The increase in United Arab Emirates cross-border exposure reflects growth in the loan book and trade finance. Growth is supported by new exposures to Abu Dhabi government-related entities and core Dubai corporates, increased refinancing activities and bridging loans to acquisition transactions.

The decrease in cross-border exposure to South Korea reflects a reduction in marketable securities held, as well as economic and external headwinds stemming from uncertainty around the ongoing trade tensions and monetary tightening in the United States.

India's cross-border exposure declined, primarily driven by facility roll-offs on the loan book, as well as a reduction in both issuer risk and private bank exposures.



 

Cross-border exposure to developed countries in which the Group does not have a major presence, predominantly relates to treasury and liquidity management activities, which can change significantly from period to period. Exposure to such markets also represents global corporate business for customers with interests in our footprint. The increase in exposures to the United States, Germany and Australia are all largely attributed to Group liquidity management operations during the year.

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.


31.12.18


31.12.17

Less than
one year
$million

More than
one year
$million

Total
$million

Less than
one year
$million

More than
one year
$million

Total
$million

China1

37,039

6,458

43,497


38,676

6,204

44,880

United States

15,369

8,986

24,355


10,068

9,524

19,592

Hong Kong1

11,451

8,819

20,270


11,686

7,964

19,650

Singapore

12,799

5,921

18,720


13,555

5,955

19,510

United Arab Emirates

8,531

9,139

17,670


7,932

8,341

16,273

South Korea

12,210

4,550

16,760


14,513

4,331

18,844

India

10,536

5,674

16,210


11,687

5,819

17,506

Germany

3,236

7,080

10,316


3,022

4,505

7,527

Australia

2,495

5,335

7,830


1,916

4,045

5,961

1 Cross-border exposures for 31.12.17 (IAS 39) relating to China and Hong Kong have been restated to reflect methodology amendments:

•  China - Less than one-year bucket restated from $40,351 million to $38,676 million. Consequently the total is restated from $46,455 million to $44,880 million

•  Hong Kong - More than one-year bucket restated from $7,867 million to $7,964 million. Consequently the total is restated from $19,552 million to $19,650 million

Traded risk

Traded risk is the potential for loss resulting from activities undertaken by the bank in financial markets. Under the Enterprise Risk Management Framework, the introduction of the Traded Risk Framework in 2018 sought to bring together all risk types exhibiting risk features common to traded risk.

These risk types include Market risk, Counterparty Credit risk, Issuer risk, XVA, Algorithmic trading and Pension risk. Traded Risk Management (TRM, formerly Market and Traded Credit Risk) is the core risk management function supporting market-facing businesses, specifically Financial Markets and Treasury Markets.

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, 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

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

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

•  Equity risk: arising from changes in the prices of equities, equity indices, equity baskets and implied volatilities on related options



 

Market risk changes

The average level of total trading and non-trading VaR in 2018 was 20 per cent lower than in 2017, but the actual level of total VaR as at year end 2018 was 14 per cent higher than in 2017. The reduction in the total average VaR was driven by the non-trading book, where the duration of the portfolio in the first half of 2018 was reduced. However, during the fourth quarter of 2018 the non-trading VaR increased, driven by both an increase in the bond inventory size in high-quality assets from Treasury Markets and reduced portfolio diversification.

For the trading book, the average level of VaR in 2018 was lower than in 2017 by 19 per cent. Trading activities have remained relatively unchanged and client-driven.

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

Trading and non-trading

31.12.18


31.12.17

Average
$million

High1

$million

Low1

$million

Actual2

$million

Average
$million

High1

$million

Low1

$million

Actual2

$million

Interest rate risk3

19.2

25.9

16.6

25.9


22.6

28.5

18.1

18.7

Foreign exchange risk

4.4

8.6

2.5

7.7


5.5

12.3

3.0

6.0

Commodity risk

1.3

2.1

0.8

1.2


1.2

2.0

0.6

1.0

Equity risk

4.8

6.8

2.6

2.7


7.7

8.4

6.4

6.7

Total4

20.6

26.1

16.4

25.5


25.7

32.4

20.3

22.3

 

Trading5

31.12.18


31.12.17

Average
$million

High1

$million

Low1

$million

Actual2

$million

Average
$million

High1

$million

Low1

$million

Actual2

$million

Interest rate risk3

8.0

11.7

6.0

7.9


10.1

13.1

7.7

8.5

Foreign exchange risk

4.4

8.6

2.5

7.7


5.5

12.3

3.0

6.0

Commodity risk

1.3

2.1

0.8

1.2


1.2

2.0

0.6

1.0

Equity risk

0.1

0.1

-

-


0.1

0.4

0.1

0.1

Total4

9.8

13.8

7.5

13.6


12.1

15.7

8.3

10.9

 

Non-trading

31.12.18


31.12.17

Average
$million

High1

$million

Low1

$million

Actual2

$million

Average
$million

High1

$million

Low1

$million

Actual2

$million

Interest rate risk3

16.8

20.7

14.1

20.7


19.5

23.1

14.4

14.4

Equity risk6

4.7

6.8

2.6

2.7


7.6

8.1

6.2

6.6

Total4

17.2

21.3

15.3

21.3


21.7

27.6

16.3

16.3

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 accounted as FVTPL or FVOCI

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

6  Non-trading equity risk VaR includes only listed equities

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


31.12.18


31.12.17

Average
$million

High1

$million

Low1

$million

Actual2

$million

Average
$million

High1

$million

Low1

$million

Actual2

$million

Trading and non-trading

20.6

26.1

16.4

25.5


25.7

32.4

20.3

22.3

Trading4










Rates

5.0

7.1

3.8

5.8


5.9

8.6

4.4

5.1

Global foreign exchange

4.4

8.6

2.5

7.7


5.5

12.3

3.0

6.0

Credit trading and capital markets

3.8

6.1

1.8

2.9


4.6

6.9

2.6

4.9

Commodities

1.3

2.1

0.8

1.2


1.2

2.0

0.6

1.0

Equities

0.1

0.1

-

-


0.1

0.4

0.1

0.1

XVA

3.1

4.1

2.3

3.5


5.5

8.3

3.0

3.0

Total3

9.8

13.8

7.5

13.6


12.1

15.7

8.3

10.9

Non-trading










Treasury markets

16.8

20.7

14.1

20.7


19.5

23.1

14.4

14.4

Listed private equity

4.7

6.8

2.6

2.7


7.6

8.1

6.2

6.6

Total3

17.2

21.3

15.3

21.3


21.7

27.6

16.3

16.3

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



 

Risks not in VaR (unaudited)

In 2018, 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 basis risks where historical market price data for VaR is sometimes more limited, and therefore proxied, generating a potential basis risk. 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 2018 section on market risk.

Backtesting (unaudited)

Regulatory backtesting is applied at both Group and Solo levels. In 2018, there have been two negative exceptions at Group level and three at Solo level (in 2017, there was one exception at Group level and one exception at Solo level).

Group and Solo exceptions occurred on 16 August 2018 driven by RMB which appreciated sharply due to PBoC intervention following a period of decline. Additionally, Group and Solo exceptions occurred on 2 November 2018 driven by TWD and RMB exposures when Asian currencies strengthened on talk of a draft trade deal between the US and China. On 15 November 2018 a Solo exception was driven by GBP and USD. GBP depreciated as the draft Brexit agreement ran into difficulties, and US treasury yields fell as a result of safe haven purchases. Three exceptions 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 profit and loss of each day given the actual market movement without taking into account any intra-day trading activity.

Financial Markets loss days


31.12.18

31.12.17

Number of loss days reported for Financial Markets trading book total product income1

8

15

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

Average daily income earned from market risk related activities1

Trading

31.12.18
$million

31.12.17
$million

Interest rate risk

3.1

3.5

Foreign exchange risk

3.9

3.7

Commodity risk

0.8

0.6

Equity risk

-

-

Total

7.8

7.8




Non-trading



Interest rate risk

2.4

2.4

Equity risk

0.4

0.3

Total

2.8

2.7

1  Includes the 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 7.4 per cent of the Group's regulatory capital risk-weighted asset (RWA) requirement (refer to risk-weighted assets tables). As highlighted in the VaR disclosure, during 2018 the majority of market risk was managed within Treasury Markets and Financial Markets, which span both the 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

45,621

45,386

235


Interest rate, foreign exchange, commodity or equity risk

Loans and advances to banks

82,065

19,319

62,746


Interest rate or foreign exchange risk

Loans and advances to customers

299,371

42,436

256,935


Interest rate or foreign exchange risk

Debt securities and other eligible bills

147,614

22,494

125,120


Interest rate mainly, but also foreign exchange or equity risk

Equities

1,954

1,347

607


Equities risk mainly, but also interest or foreign exchange risk

Other assets

35,401

6,666

28,735


Interest rate, foreign exchange, commodity or equity risk

Total

612,026

137,648

474,378









Financial liabilities






Deposits by banks

35,017

-

35,017


Interest rate or foreign exchange risk

Customer accounts

437,181

-

437,181


Interest rate or foreign exchange risk

Debt securities in issue

53,859

-

53,859


Interest rate mainly, but also foreign exchange or equity risk

Derivative financial instruments

47,209

46,839

370


Interest rate, foreign exchange, commodity or equity risk

Short positions

3,226

3,226

-


Interest rate, foreign exchange, commodity or equity risk

Total

576,492

50,065

526,427



Structural foreign exchange exposures

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


31.12.18
$million

01.01.18
$million

31.12.17
$million

Hong Kong dollar

7,792

7,028

7,119

Indian rupee

3,819

4,782

4,806

Renminbi

2,900

3,767

3,784

Singapore dollar

2,852

2,874

2,972

Korean won

2,148

2,284

2,361

Taiwanese dollar

1,238

1,569

1,589

UAE dirham

1,852

1,785

1,842

Malaysian ringgit

1,513

1,453

1,512

Thai baht

1,304

1,277

1,277

Indonesian rupiah

999

1,073

1,090

Pakistani rupee

458

545

543

Other

3,999

3,909

4,000


30,874

32,346

32,895

As at 31 December 2018, the Group had taken net investment hedges using derivative financial investments of $2,137 million (2017: $2,003 million) to partly cover its exposure to the Korean won, $800 million (2017: $792 million) to partly cover its exposure to the Taiwanese dollar, $1,606 million (2017: $490 million) to partly cover its exposure to the Renminbi and $712 million to partly cover its exposure to the Indian rupee. 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 an increase of $336 million (2017: $357 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.

Counterparty credit risk

Counterparty credit risk is the potential for loss in the event of the default of a derivative counterparty, after taking into account the value of eligible collaterals and risk mitigation techniques. The Group's counterparty credit exposures are included in the Credit risk section.



 

Derivative financial instruments credit risk mitigation

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 $32,283 million (2017: $29,135 million).

In addition, the Group enters 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 $6,834 million (2017: $6,562 million) under CSAs.

Liquidity and Funding risk

Liquidity and Funding risk is the risk that we may not have sufficient stable or diverse sources of funding to meet our obligations as they fall due.

The Group's liquidity and funding risk approach 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.

Since the beginning of the year, there were no significant changes in treasury policies as disclosed in the 2017 Annual Report and Accounts.

The Group has relatively low levels of sterling and euro funding and exposures within the context of the overall Group balance sheet.

The result of the UK referendum to leave the EU has therefore not had a material first order liquidity impact.

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.

In 2018, the Group issued approximately $4.6 billion of senior debt securities and $0.5 billion of subordinated debt securities from its holding company (HoldCo) Standard Chartered PLC (2017: $1.5 billion of term senior debt and $1 billion of Additional Tier 1).

Debt refinancing levels are low. In the next 12 months approximately $3.9 billion of the Group's HoldCo senior debt is 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 63.5 per cent of total liabilities as at 31 December 2018, 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 44.9 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 (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 154 per cent (2017: 146 per cent) with a prudent surplus to both Board-approved Risk Appetite and regulatory requirements. The ratio increased 8 per cent year-on-year due to an increase in our liquidity buffer partially aligned to the growth in our overall balance sheet as we continued to focus on high-quality liquidity across our businesses. We also held adequate liquidity across our footprint to meet all local prudential LCR requirements, where applicable.


31.12.18
$million

31.12.17
$million

Liquidity buffer

149,602

132,251

Total net cash outflows

97,443

90,691

Liquidity coverage ratio

154%

146%

For a more detailed Group LCR disclosure, refer to Section 6 of the Group's 2018 Pillar 3 Disclosures.

Stressed coverage (unaudited)

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

Our approach to managing liquidity and funding is reflected in the following Board-level 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 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 2018 i.e. respective countries are able to survive for a period of time as defined under each scenario. The Combined scenario at 31 December 2018 showed the Group maintained liquidity resources to survive greater than 60 days, as per our Board 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 2018 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 2018, the estimated contractual outflow of a two-notch long-term ratings downgrade is $1.6 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 Board 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 (2018: 64.9 per cent) decreased from the previous year (2017: 67.0 per cent).

Loans and advances to customers have increased 3 per cent since the end of 2017 to $258 billion. This growth was largely due to higher Corporate Finance balances in Hong Kong as well as growth in our Transaction Banking and Wealth Management businesses. This growth was partially offset by a reduction in lending and retail mortgages primarily due to unfavourable foreign exchange movements in Korea, Singapore and Hong Kong.

Customer accounts have also increased 6 per cent from the end of 2017 to $398 billion as the Group focused on high-quality liquidity across its businesses with an emphasis on Retail Banking, Transaction Banking and other deposits with high liquidity and regulatory value.


31.12.18
$million

31.12.171
$million

Total loans and advances to customers2

258,334

 251,625

Total customer accounts3

397,764

375,745

Advances-to-deposits ratio

64.9%

67.0%

1 The 2017 comparatives have been represented to exclude reverse repurchase agreements of $33,928 million and repurchase agreements of $35,979 million

2 Excludes reverse repurchase agreement and other similar secured lending of $3,151 million and includes loans and advances to customers held at fair value through profit and loss of $4,928 million

3 Includes customer accounts held at fair value through profit or loss of $6,751 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 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 final recommendation from the Basel Committee on Banking Supervision (BCBS).

The NSFR is a balance sheet metric which requires institutions to maintain a stable funding profile in relation to the characteristics of their assets and off-balance sheet activities over a one-year horizon. It is the ratio between the amount of available stable funding (ASF) and the amount of required stable funding (RSF). ASF factors are applied to balance sheet liabilities and capital, based on their perceived stability and the amount of stable funding they provide. Likewise, RSF factors are applied to assets and off-balance sheet exposures according to the amount of stable funding they require. 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 $150 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 increased $17 billion year-on-year, reflecting overall balance sheet growth as we continued to improve the quality of our funding base and focus on growing quality and RWA efficient assets. Our liquidity pool composition also changed over the period as we increased our holdings of Level 2A LCR eligible securities.


31.12.18

Greater China & North East Asia
$million

ASEAN &
South Asia
$million

Africa &
Middle East
$million

Europe &
Americas
$million

Total
$million

Level 1 securities






Cash and balances at central banks

16,267

2,645

1,416

28,232

48,560

Central banks, governments/public sector entities

33,462

9,900

1,540

30,166

75,068

Multilateral development banks and international organisations

1,543

1,451

195

8,487

11,676

Other

-

-

-

1,125

1,125

Total Level 1 securities

51,272

13,996

3,151

68,010

136,429

Level 2A securities

3,943

1,083

60

5,296

10,382

Level 2B securities

-

1,264

-

1,527

2,791

Total LCR eligible assets

55,215

16,343

3,211

74,833

149,602

 


31.12.17

Greater China & North East 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

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 a 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 that have not been pledged and cannot be used to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, as assessed by the Group.



 

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.


31.12.18

Assets
$million

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 (i.e. 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

57,511

-

-

-


8,152

49,359

-

-

-

57,511

Derivative financial instruments

45,621

-

-

-


-

-

-

45,621

-

45,621

Loans and advances
to banks

82,065

447

-

447


-

45,623

13,918

20,698

1,379

81,618

Loans and advances
to customers

299,371

497

7

504


-

-

243,802

41,037

14,028

298,867

Investment securities

149,568

-

7,521

7,521


-

95,523

40,591

-

5,933

142,047

Other assets

35,401

-

16,287

16,287


-

-

11,440

-

7,674

19,114

Current tax assets

492

-

-

-


-

-

-

-

492

492

Prepayments and accrued income

2,505

-

-

-


-

-

1,356

-

1,149

2,505

Interests in associates and joint ventures

2,307

-

-

-


-

-

-

-

2,307

2,307

Goodwill and
intangible assets

5,056

-

-

-


-

-

-

-

5,056

5,056

Property, plant
and equipment

6,490

-

-

-


-

-

400

-

6,090

6,490

Deferred tax assets

1,047

-

-

-


-

-

-

-

1,047

1,047

Assets classified as
held for sale

1,328

-

-

-


-

-

-

-

1,328

1,328

Total

688,762

944

23,815

24,759


8,152

190,505

311,507

107,356

46,483

664,003



 


Assets
$million

31.12.17 (IAS 39)

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 (i.e.
pre-
positioned plus encumbered)
$million

Assets not positioned at the central bank

Total
$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

58,864

 -

-

-


9,761

49,103

 -

 -

 -

58,864

Derivative financial instruments

47,031

 -

 -

-


 -

 -

 -

47,031

 -

47,031

Loans and advances
to banks

81,325

 -

 -

-


 -

47,380

5,333

21,260

7,352

81,325

Loans and advances
to customers

285,553

11

 -

11


 -

 -

232,328

33,928

19,286

285,542

Investment securities

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

The Group received $85,768 million (2017: $72,982 million) as collateral under reverse repurchase agreements, that was eligible for repledging; of this the Group sold or repledged $40,552 million (2017: $34,018 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 cashflows.

Within the tables below, cash and balances with central banks, interbank placements and investment securities that are fair value through other comprehensive income are used by the Group principally for liquidity management purposes.

As 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.



 


31.12.18

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

49,359

-

-

-

-

-

-

8,152

57,511

Derivative financial instruments

6,902

5,861

5,827

3,509

2,333

4,458

8,079

8,652

45,621

Loans and advances to banks1,2

38,331

20,549

11,209

5,214

2,835

2,584

1,064

279

82,065

Loans and advances to customers1,2

84,846

33,756

18,133

11,641

10,321

17,519

39,306

83,849

299,371

Investment securities

15,297

13,589

14,131

14,300

17,402

25,695

31,303

17,851

149,568

Other assets

21,155

8,909

2,385

224

135

96

155

21,567

54,626

Total assets

215,890

82,664

51,685

34,888

33,026

50,352

79,907

140,350

688,762











Liabilities










Deposits by banks1,3

30,368

2,593

572

553

397

244

230

60

35,017

Customer accounts1,4

331,633

51,553

23,643

10,966

11,634

3,631

1,154

2,967

437,181

Derivative financial instruments

7,467

6,072

6,136

3,544

2,140

5,257

8,886

7,707

47,209

Senior debt

1,259

959

509

5,087

667

2,878

6,327

10,093

27,779

Other debt securities in issue1

4,893

9,792

8,062