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 | Risk trend since 2017 | Context | How these are mitigated/next steps |
| Extended trade tensions driven by geopolitics and trade imbalance
Potential impact: Likelihood: 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: Likelihood: 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: Likelihood: 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 | Risk trend since 2017 | Context | How these are mitigated/next steps |
| China slowdown
Potential impact: Likelihood: 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
Potential impact: Likelihood: 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 | Risk trend since 2017 | Context | How these are mitigated/next steps |
| Climate-related physical risks and transition risks1
Potential impact: Likelihood: 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 | Risk trend since 2017 | Context | How these are mitigated/next steps |
| Regulatory reviews and investigations, legal proceedings
Potential impact: Likelihood: 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: Likelihood: 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 | 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: Likelihood: 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
Potential impact: Likelihood: 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 |
|
| 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 |
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 | Credit risk management | Net exposure | Maximum exposure | Credit risk management | Net | ||||
| Collateral | Master netting agreements | Collateral | Master | ||||||
| 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 | Credit risk management | Net | ||
| Collateral | Master | |||
| 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 | Net carrying value | Gross balance1 $million | Total credit impairment | Net carrying value | Gross balance1 $million | Total credit impairment | Net carrying value | Gross balance1 $million | Total credit impairment | Net carrying value | ||||
| Loans and advances to banks (amortised cost) | 60,350 | (5) | 60,345 | | 1,070 | (1) | 1,069 | | - | - | - | | 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) | 1,059 | | 232 | (206) | 26 | | 9,519 | (216) | 9,303 |
| FVOCI2 | 110,488 | (20) | | | 5,847 | (28) | | | - | - | | | 116,335 | (48) | |
| Undrawn commitments3 | 137,783 | (69) | | | 13,864 | (39) | | | 63 | - | | | 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 | Net carrying value | Gross balance1 $million | Total credit impairment | Net carrying value | Gross balance1 $million | Total credit impairment | Net carrying value | Gross balance1 $million | Total credit impairment | Net carrying value | ||||
| Loans and advances to banks (amortised cost) | 59,926 | (6) | 59,920 | | 2,372 | (2) | 2,370 | | 9 | (4) | 5 | | 62,307 | (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) | 6,201 | | 995 | (16) | 979 | | 221 | (213) | 8 | | 7,420 | (232) | 7,188 |
| FVOCI3 | 101,104 | (23) | | | 7,307 | (42) | | | - | - | | | 108,411 | (65) | |
| Undrawn commitments4 | 138,804 | (66) | | | 14,982 | (90) | | | - | - | | | 153,786 | (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 | Customers | ||||||
| Corporate & Institutional Banking | Retail Banking | Commercial Banking | Private Banking | Central & other items | Customers | ||
| 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 | Customers | ||||||
| Corporate & Institutional Banking | Retail | Commercial Banking | Private Banking | Central & other items | Customers | ||
| 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 | Retail | Commercial Banking | Private Banking | Central & other items | Customers $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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | Total credit impairment | Net carrying amount | Gross balance | Total credit impairment | Net carrying amount | Gross balance | Total credit impairment | Net carrying amount | Gross balance | Total credit impairment | Net carrying amount | ||||
| 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 | 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 | Total credit impairment | Net carrying amount | Gross balance | Total credit impairment | Net carrying amount | Gross balance | Total credit impairment | Net carrying amount | Gross balance | Total credit impairment | Net carrying amount | ||||
| 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 | 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 | Past due | Individually impaired | Individual impairment provision | Total | | Movements in impairment | ||||
| Individual impairment provision | Net impairment charge/ | Amounts written | Individual impairment provision | |||||||
| 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 | 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 | 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 | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | ||||
| As at 1 January 2018 | 565,815 | (576) | 565,239 | | 52,387 | (742) | 51,645 | | 9,198 | (5,576) | 3,622 | | 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 | (1,309) | | 28,072 | 339 | 28,411 |
| Net remeasurement from stage changes | - | 139 | 139 | | - | (136) | (136) | | - | (529) | (529) | | - | (526) | (526) |
| Changes in risk parameters | - | 468 | 468 | | - | (275) | (275) | | - | 971) | (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 | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | ||||
| As at 1 January 2018 | 263,079 | (114) | 262,965 | | 29,576 | (409) | 29,167 | | 5,951 | (3,504) | 2,447 | | 298,606 | (4,027) | 294,579 |
| 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) | 12,686 | | (8,639) | 10 | (8,629) | | (1,064) | 377 | (687) | | 3,166 | 204 | 3,370 |
| Net remeasurement from stage changes | - | 46 | 46 | | - | (30) | (30) | | - | (277) | (277) | | - | (261) | (261) |
| Changes in risk parameters | - | 101 | 101 | | - | 140 | 140 | | - | (394) | (394) | | - | (153) | (153) |
| Write-offs | - | - | - | | - | - | - | | (1,208) | 1,208 | - | | (1,208) | 1,208 | - |
| Exchange translation differences and | (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 | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | ||||
| As at 1 January 2018 | 28,792 | (40) | 28,752 | | 5,382 | (95) | 5,287 | | 2,000 | (1,379) | 621 | | 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 | (199) | | 5,486 | 82 | 5,568 |
| Net remeasurement from stage changes | - | 12 | 12 | | - | (13) | (13) | | - | (217) | (217) | | - | (218) | (218) |
| Changes in risk parameters | - | 67 | 67 | | - | (33) | (33) | | - | (162) | (162) | | - | (128) | (128) |
| Write-offs | - | - | - | | - | - | - | | (293) | 293 | - | | (293) | 293 | - |
| Exchange translation differences and | (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 | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | Gross exposure | Total credit impairment | Net | ||||
| As at 1 January 2018 | 131,280 | (381) | 130,899 | | 7,964 | (178) | 7,786 | | 818 | (389) | 429 | | 140,062 | (948) | 139,114 |
| 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) | 9,841 | | (2,628) | 78 | (2,550) | | (398) | - | (398) | | 6,832 | 61 | 6,893 |
| Net remeasurement from stage changes | - | 72 | 72 | | - | (90) | (90) | | - | (12) | (12) | | - | (30) | (30) |
| Changes in risk parameters | - | 264 | 264 | | - | (373) | (373) | | - | (402) | (402) | | - | (511) | (511) |
| Write-offs | - | - | - | | - | - | - | | (575) | 575 | - | | (575) | 575 | - |
| Exchange translation differences and | (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 | 31.12.17 |
| 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 | Corporate & Institutional Banking | Retail Banking | Commercial Banking | Private Banking | Central & other items | Total | |
| 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 | Corporate & Institutional Banking | Retail | Commercial Banking | Private Banking | Central & other items | Total | |
| 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 | Corporate & Institutional Banking | Retail | Commercial Banking | Private Banking | Central & other items | Total | |
| 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 | ASEAN & | Africa & | Europe & Americas | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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: $0.8 billion).
Stage 3 cover ratio
The stage 3 cover ratio measures the proportion of stage 3 impairment provisions to gross stage 3 loans, and is a metric commonly used in considering impairment trends. This metric does not allow for variations in the composition of stage 3 loans and should be used in conjunction with other credit risk information provided, including the level of collateral cover.
The cover ratio before collateral for Corporate & Institutional Banking reduced from 59 per cent to 57 per cent due to debt sales and write-offs on clients who had a high level of provisions. The cover ratio for Retail Banking remained stable at 48 per cent and cover ratio including collateral improved to 87 per cent (1 January 2018: 74 per cent).
The Private Banking segment remains fully covered taking into account the collateral held.
The balance of stage 3 loans not covered by stage 3 impairment provisions represents the adjusted value of collateral held and the net outcome of any workout or recovery strategies.
Collateral provides risk mitigation to some degree in all client segments and supports the credit quality and cover ratio assessments post impairment provisions. Further information on collateral is provided in the credit risk mitigation section.
The table below presents the balance of the gross stage 3 loans to banks and customers, together with the provisions held, for all segments and the respective cover ratios. For the reconciliation between the non-performing loans under IAS 39 and under IFRS 9, refer to Note 41.
| Amortised cost | 31.12.18 | ||||
| Corporate & Institutional Banking | Retail | Commercial Banking | Private | Total | |
| Gross credit-impaired | 4,084 | 832 | 1,773 | 235 | 6,924 |
| Credit impairment provisions | (2,326) | (396) | (1,234) | (100) | (4,056) |
| Net credit-impaired | 1,758 | 436 | 539 | 135 | 2,868 |
| Cover ratio | 57% | 48% | 70% | 43% | 59% |
| Collateral ($ 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 | Retail | Commercial Banking | Private | Total | |
| 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 | Retail | Commercial Banking | Private | Total | |
| 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 | ASEAN & | Africa & | Europe & Americas | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | Retail | Commercial Banking | Private | 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 | Retail | Commercial Banking | Private | 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 | Stage 2 financial assets | Credit-impaired financial assets (S3) | Total3 | Stage 2 financial assets | Credit-impaired financial assets (S3) | Total | Stage 2 financial assets | Credit-impaired financial assets (S3) | |||
| 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 | Past due | Individually impaired | Total2 $million | Past due | Individually impaired | Total | Past due | Individually impaired | |||
| 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) |
| 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) |
| 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 | Partially secured | Unsecured | Total1 $million | Fully secured | Partially secured | Unsecured | 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 & | Africa & | 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 & | Africa & | Europe & | 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 | 2017 |
| 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 | One to five years | Over five years | Total | |
| 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 | One to five years | Over five years | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 |
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| 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 | 01.01.18 |
| 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) |
| 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 | 31.12.17 (IAS 39) |
| 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 | Notional | Carrying value | Fair value1 $million | Percentage | Notional | Carrying | Fair value1 $million | ||
| Residential mortgage-backed | 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 | 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 | Excluding non-linearity | 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
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.
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
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.
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').
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
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.
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 | More than | Total | Less than | More than | Total | ||
| 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 | High1 $million | Low1 $million | Actual2 $million | Average | 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 | High1 $million | Low1 $million | Actual2 $million | Average | 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 | High1 $million | Low1 $million | Actual2 $million | Average | 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 | High1 $million | Low1 $million | Actual2 $million | Average | 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 | 31.12.17 |
| 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 | Exposure to | Exposure to non-trading risk | | 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 | 01.01.18 | 31.12.17 |
| 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 | 31.12.17 |
| 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 | 31.12.171 |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | ASEAN & | Africa & | Europe & | Total | |
| 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 | Assets encumbered as a result of transactions with counterparties | | Other assets (comprising assets encumbered at the central bank and unencumbered assets) | ||||||||
| As a result of securitisations | Other | Total | Assets positioned at the central bank (i.e. pre-positioned plus encumbered) | Assets not positioned at the central bank | | ||||||
| Readily available for encumbrance | Other assets that are capable | Derivatives and reverse repo/stock lending | Cannot be encumbered | Total | |||||||
| 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 | 82,065 | 447 | - | 447 | | - | 45,623 | 13,918 | 20,698 | 1,379 | 81,618 |
| Loans and advances | 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 | 5,056 | - | - | - | | - | - | - | - | 5,056 | 5,056 |
| Property, plant | 6,490 | - | - | - | | - | - | 400 | - | 6,090 | 6,490 |
| Deferred tax assets | 1,047 | - | - | - | | - | - | - | - | 1,047 | 1,047 |
| Assets classified as | 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 | 31.12.17 (IAS 39) | |||||||||
| Assets encumbered as a result of transactions with counterparties | | Other assets (comprising assets encumbered at the central bank and | |||||||||
| As a result of securitisations | Other | Total | Assets positioned at the central bank (i.e. | Assets not positioned at the central bank | Total | ||||||
| Readily available for encumbrance | Other assets that are capable | Derivatives and | Cannot be encumbered | ||||||||
| 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 | 81,325 | - | - | - | | - | 47,380 | 5,333 | 21,260 | 7,352 | 81,325 |
| Loans and advances | 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 | 5,013 | - | - | - | | - | - | 352 | - | 4,661 | 5,013 |
| Property, plant | 7,211 | - | - | - | | - | - | 1,148 | - | 6,063 | 7,211 |
| Deferred tax assets | 1,177 | - | - | - | | - | - | - | - | 1,177 | 1,177 |
| Assets classified as | 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 | Between | Between three months and six months | Between | Between | Between | Between | More than | Total | |
| 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 | 177 | 715 | 1,030 | 16 | 1,395 | 26,080 |
| Other liabilities | 22,835 | 8,698 | 4,130 | 852 | 536 | 868 | 401 | 11,823 | 50,143 |
| Subordinated liabilities and other borrowed funds | 23 | 17 | - | - | - | 2,522 | 4,421 | 8,018 | 15,001 |
| Total liabilities | 398,478 | 79,684 | 43,052 | 21,179 | 16,089 | 16,430 | 21,435 | 42,063 | 638,410 |
| Net liquidity gap | (182,588) | 2,980 | 8,633 | 13,709 | 16,937 | 33,922 | 58,472 | 98,287 | 50,352 |
1 Loans and advances, investment securities, deposits by banks, customer accounts and debt securities in issue include financial instruments held at fair value through profit or loss, see Note 13 Financial instruments
2 Loans and advances include reverse repurchase agreements and other similar secured lending of $61.7 billion
3 Deposits by banks include repurchase agreements and other similar secured borrowing of $5 billion
4 Customer accounts include repurchase agreements and other similar secured borrowing of $39.4 billion
| | 31.12.17 | ||||||||
| One month | Between | Between | Between | Between | Between | Between | More than | Total | |
| Assets | | | | | | | | | |
| Cash and balances at central banks | 49,103 | - | - | - | - | - | - | 9,761 | 58,864 |
| Derivative financial instruments | 6,284 | 7,706 | 5,930 | 3,537 | 2,601 | 5,427 | 7,111 | 8,435 | 47,031 |
| Loans and advances to banks1,2 | 36,548 | 21,238 | 12,042 | 4,299 | 3,612 | 1,588 | 1,386 | 612 | 81,325 |
| Loans and advances to customers1,2 | 87,794 | 32,618 | 17,459 | 11,357 | 8,545 | 17,500 | 37,237 | 73,043 | 285,553 |
| Investment securities | 14,185 | 18,208 | 13,692 | 11,213 | 9,145 | 22,369 | 31,660 | 17,715 | 138,187 |
| Other assets | 19,349 | 4,466 | 2,521 | 105 | 247 | 138 | 127 | 25,588 | 52,541 |
| Total assets | 213,263 | 84,236 | 51,644 | 30,511 | 24,150 | 47,022 | 77,521 | 135,154 | 663,501 |
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Deposits by banks1,3 | 29,365 | 2,484 | 1,437 | 530 | 730 | 154 | 135 | 651 | 35,486 |
| Customer accounts1,4 | 327,434 | 37,178 | 19,716 | 10,775 | 9,321 | 3,115 | 1,746 | 2,439 | 411,724 |
| Derivative financial instruments | 8,018 | 8,035 | 6,068 | 3,544 | 2,685 | 5,057 | 7,794 | 6,900 | 48,101 |
| Senior debt | 67 | 273 | 1,801 | 53 | 1,937 | 5,053 | 4,747 | 5,585 | 19,516 |
| Other debt securities in issue1 | 4,139 | 10,616 | 9,954 | 2,005 | 779 | 1,091 | 794 | 4,508 | 33,886 |
| Other liabilities | 20,428 | 5,988 | 3,672 | 671 | 303 | 696 | 897 | 13,150 | 45,805 |
| Subordinated liabilities and other borrowed funds | - | 116 | 1,382 | - | - | - | 3,887 | 11,791 | 17,176 |
| Total liabilities | 389,451 | 64,690 | 44,030 | 17,578 | 15,755 | 15,166 | 20,000 | 45,024 | 611,694 |
| Net liquidity gap | (176,188) | 19,546 | 7,614 | 12,933 | 8,395 | 31,856 | 57,521 | 90,130 | 51,807 |
1 Loans and advances, investment securities, deposits by banks, customer accounts and debt securities in issue include financial instruments held at fair value through profit or loss, see Note 13 Financial instruments
2 Loans and advances include reverse repurchase agreements and other similar secured lending of $55.2 billion
3 Deposits by banks include repurchase agreements and other similar secured borrowing of $3.8 billion
4 Customer accounts include repurchase agreements and other similar secured borrowing of $36.0 billion
Behavioural maturity of financial assets and liabilities
The cash flows presented in the previous section reflect the cash flows that will be contractually payable over the residual maturity of the instruments. However, contractual maturities do not necessarily reflect the timing of actual repayments or cash flow. In practice, certain assets and liabilities behave differently from their contractual terms, especially for short-term customer accounts, credit card balances and overdrafts, which extend to a longer period than their contractual maturity. On the other hand, mortgage balances tend to have a shorter repayment period than their contractual maturity date. Expected customer behaviour is assessed and managed on a country basis using qualitative and quantitative techniques, including analysis of observed customer behaviour over time.
Maturity of financial liabilities on an undiscounted basis
The following table analyses the contractual cash flows payable for the Group's financial liabilities by remaining contractual maturities on an undiscounted basis. The financial liability balances in the table below will not agree to the balances reported in the consolidated balance sheet as the table incorporates all contractual cash flows, on an undiscounted basis, relating to both principal and interest payments. Derivatives not treated as hedging derivatives are included in the 'on demand' time bucket and not by contractual maturity.
Within the 'More than five years and undated' maturity band are undated financial liabilities, all of which relate to subordinated debt, on which interest payments are not included as this information would not be meaningful given the instruments are undated. Interest payments on these instruments are included within the relevant maturities up to five years.
| | 31.12.18 | ||||||||
| One month | Between | Between three months and six months | Between | Between | Between | Between | More than | Total | |
| Deposits by banks | 30,467 | 2,609 | 593 | 569 | 409 | 267 | 250 | 62 | 35,226 |
| Customer accounts | 332,115 | 51,845 | 24,686 | 11,094 | 11,780 | 3,700 | 1,226 | 3,552 | 439,998 |
| Derivative financial instruments1 | 45,665 | 137 | 141 | 9 | 91 | 31 | 679 | 456 | 47,209 |
| Debt securities in issue | 6,169 | 11,345 | 8,786 | 5,310 | 1,628 | 3,685 | 7,104 | 13,000 | 57,027 |
| Subordinated liabilities and other borrowed funds | 23 | - | 255 | - | 414 | 3,169 | 6,154 | 13,865 | 23,880 |
| Other liabilities | 19,746 | 8,757 | 4,129 | 892 | 520 | 885 | 407 | 12,302 | 47,638 |
| Total liabilities | 434,185 | 74,693 | 38,590 | 17,874 | 14,842 | 11,737 | 15,820 | 43,237 | 650,978 |
| | 31.12.17 | ||||||||
| One month | Between | Between | Between | Between | Between | Between | More than | Total | |
| Deposits by banks | 29,427 | 2,497 | 1,460 | 545 | 743 | 160 | 150 | 697 | 35,679 |
| Customer accounts | 327,501 | 37,353 | 20,720 | 10,901 | 9,463 | 3,178 | 1,840 | 2,919 | 413,875 |
| Derivative financial instruments1 | 47,267 | - | 3 | - | 153 | 166 | 246 | 266 | 48,101 |
| Debt securities in issue | 4,287 | 10,888 | 11,878 | 2,141 | 2,876 | 6,550 | 6,163 | 11,769 | 56,552 |
| Subordinated liabilities and | 126 | 207 | 1,490 | 210 | 166 | 657 | 3,726 | 19,356 | 25,938 |
| Other liabilities | 20,800 | 6,052 | 3,676 | 681 | 324 | 720 | 929 | 11,241 | 44,423 |
| Total liabilities | 429,408 | 56,997 | 39,227 | 14,478 | 13,725 | 11,431 | 13,054 | 46,248 | 624,568 |
1 Derivatives are on a discounted basis
Interest rate risk in the banking book (unaudited)
The following table provides the estimated impact on the Group's earnings of a 50bps parallel shock (up and down) across all yield curves. The sensitivities shown represent the estimated change in base case projected net interest income, plus the change in interest rate implied income and expense from FX swaps used to manage banking book currency positions, under the two interest rate shock scenarios.
The interest rate sensitivities are indicative and based on simplified scenarios, estimating the aggregate impact of an instantaneous 50bps parallel shock across all yield curves over a one-year horizon, including the time taken to implement changes to pricing before becoming effective. The assessment assumes that non-interest rate sensitive aspects of the size and mix of the balance sheet remain constant and that there are no specific management actions in response to the change in rates. No assumptions are made in relation to the impact on credit spreads in a changing rate environment.
Significant modelling and behavioural assumptions are made regarding scenario simplification, market competition, pass-through rates, asset and liability re-pricing tenors, and price flooring. In particular, the assumption that interest rates of all currencies and maturities shift by the same amount concurrently, and that no actions are taken to mitigate the impacts arising from this are considered unlikely. Reported sensitivities will vary over time due to a number of factors including changes in balance sheet composition, market conditions, customer behaviour and risk management strategy and should therefore not be considered an income or profit forecast.
| Estimated one-year impact to earnings from a parallel shift in yield curves at the beginning of the period of: | 31.12.18 | |||
| USD bloc | HKD, SGD & | Other | Total | |
| + 50bps | 10 | 110 | 90 | 210 |
| - 50bps | (20) | (70) | (90) | (180) |
| Estimated one-year impact to earnings from a parallel shift in yield curves at the beginning of the period of: | 31.12.17 | |||
| USD bloc | HKD, SGD & | Other | Total | |
| + 50bps | 70 | 120 | 140 | 330 |
| - 50bps | (50) | (100) | (140) | (290) |
As at 31 December 2018, the Group estimates the one-year impact of an instantaneous, parallel increase across all yield curves of 50bps to be an earnings benefit of $210 million. The corresponding impact from a parallel decrease of 50bps would result in an earnings reduction of $180 million.
The benefit from rising interest rates is primarily from reinvesting at higher yields and from assets re-pricing faster and to a greater extent than deposits. The current estimate for US dollar sensitivity has reduced since December 2017 on rising deposit sensitivity to changes in interest rates.
The US dollar sensitivity is also impacted by the dampening effect due to the asymmetry of funding trading book assets with banking book liabilities. The sensitivities include the cost of banking book liabilities used to fund the trading book, however the revenue associated with the trading book positions is recognised in net trading income. This asymmetry in both the up and down scenarios should be broadly offset within total operating income.
Operational risk (unaudited)
Operational risks arise from the processes executed within the Group. Risks associated with these processes are mapped into a Group Process Universe where the standardised Control Assessment Standards are applied. The standards are benchmarked against regulatory requirements.
A summary of our operational risk management approach is provided in the Risk management approach.
Operational risk profile
The operational risk profile is the Group's overall exposure to non-financial risk, at a given point in time, covering all Principal Risk Types. The operational risk profile comprises both operational risk events (including losses) and the current exposures to non-financial risks.
Operational risk events and losses
Operational losses are one indicator of the effectiveness and robustness of the non-financial risk control environment. As at 31 December 2018, recorded operational losses for 2018 are lower than 2017. Operational losses in 2018 comprise unrelated non-systemic events which were not individually significant.
Losses in 2017 include incremental events that were recognised in 2018 and reclassification of Basel event types and Basel business lines. As at 31 December 2018, the largest loss recorded for 2017 relates to an internal fraud loss of $21.7 million in the Retail Banking Basel business line.
The Group's profile of operational loss events in 2018 and 2017 is summarised in the table below. It shows the percentage distribution of gross operational losses by Basel business line. This does not include provision made for potential penalties relating to US investigation, the FCA decision and previously disclosed foreign trading issues, which will be assessed when settled. Further details are set out in Note 26.
| Distribution of operational losses by Basel business line | % Loss | |
| 31.12.18 | 31.12.17 | |
| Agency services | 1.4% | 2.4% |
| Commercial Banking | 6.7% | 13.8% |
| Corporate Finance | - | 3.4% |
| Corporate items | 5.5% | 3.2% |
| Payment and settlements | 14.6% | 1.4% |
| Retail Banking | 53.8% | 45.8% |
| Retail brokerage | 0.1% | 0.1% |
| Trading and sales | 17.9% | 29.9% |
The Group's profile of operational loss events in 2018 and 2017 is also summarised by Basel event type in the table below. It shows the percentage distribution of gross operational losses by Basel event type. This does not include provision made for potential penalties relating to US investigation, the FCA decision and previously disclosed foreign trading issues, which will be assessed when settled. Further details are set out in Note 26.
| Distribution of operational losses by Basel event type | % Loss | |
| 31.12.18 | 31.12.17 | |
| Business disruption and system failures | 5.8% | 0.4% |
| Clients products and business practices | 1.9% | 33.4% |
| Damage to physical assets | 0.1% | 0.0% |
| Employment practices and workplace safety | 0.2% | 0.1% |
| Execution delivery and process management | 53.1% | 31.5% |
| External fraud | 36.4% | 17.6% |
| Internal fraud | 2.5% | 17.0% |
Other principal risks (unaudited)
Losses arising from operational failures for other principal risks (for example: Compliance, Conduct, Reputational, Information and Cyber Security and Financial Crime) are reported as operational losses. Operational losses do not include operational risk-related credit impairments.
For further information on the Group's liquidity stress testing framework refer to the Risk Management Approach.
Capital review
The Capital review provides an analysis of the Group's capital and leverage position and requirements
Capital summary
The Group's capital and leverage position is managed within the Board-approved risk appetite. The Group is well capitalised with low leverage and high levels of loss-absorbing capacity.
| Capital, leverage and RWA | 31.12.18 | 31.12.17 |
| CET1 capital | 14.2% | 13.6% |
| Tier 1 capital | 16.8% | 16.0% |
| Total capital | 21.6% | 21.0% |
| UK leverage | 5.6% | 6.0% |
| Risk-weighted assets (RWA) $million | 258,297 | 279,748 |
The Group's Common Equity Tier 1 (CET1) capital and Tier 1 leverage position were ahead of both the current requirements and the expected end-state requirements for 2019. For further detail see the Standard Chartered PLC Pillar 3 Disclosures 2018 section on Capital.
The Group's current Pillar 2A requirement reduced in 2018 to 2.9 per cent of RWA, of which at least 1.6 per cent must be held in CET1. This requirement can vary over time.
The Group currently estimates its minimum requirement for own funds and eligible liabilities (MREL) at 21.8 per cent of RWA from 1 January 2022. The Group's combined buffer (the capital conservation, global systemically important institution (G-SII) and countercyclical buffers) is additive, resulting in a current estimate of its total loss absorbing capacity requirement of 25.7 per cent of RWA from 1 January 2022. The Group estimates that its MREL position was around 27.2 per cent of RWA and around 9.5 per cent of leverage exposure at 31 December 2018.
The Group continued its programme of MREL issuance from its holding company in 2018, issuing $5.0 billion of MREL eligible securities across senior debt and Tier 2 during the period including the Group's inaugural issuance of US dollar callable senior notes. As part of its proactive approach to capital management, the Group successfully conducted a liability management exercise to buy back British pound sterling denominated debt and improve the capital efficiency of the non-equity capital stock.
Regulatory update
The European Commission has proposed amendments to the Capital Requirements Directive, the Capital Requirements Regulation and the Bank Recovery and Resolution Directive. Any proposed reforms remain subject to change and until the proposals are in final form it is uncertain how they will affect the Group.
The Group remains a G-SII, with a 1.0 per cent G-SII CET1 buffer which phases in at a rate of 0.25 per cent per year and was fully implemented on 1 January 2019. The Standard Chartered PLC 2017 G-SII disclosure is published at: http://investors.sc.com/fullyearresults
In line with previous guidance, the decrease in the CET1 capital ratio on adoption of the IFRS 9 accounting standard was around 13 basis points (bps) after considering the offset against existing regulatory expected losses. Under transitional rules, the day-one impact on the CET1 ratio was negligible.
In the Bank of England's 2018 stress tests, under the hypothetical annual cyclical scenario, the Group exceeded all hurdle rates. The Group has a diverse and liquid balance sheet and these results demonstrate the Group's continued capital strength and increased resilience to stress.
Capital ratios (unaudited)
|
| 31.12.18 | 31.12.17 |
| CET1 | 14.2% | 13.6% |
| Tier 1 capital | 16.8% | 16.0% |
| Total capital | 21.6% | 21.0% |
CRD IV Capital base1
|
| 31.12.18 | 31.12.17 |
| CET1 instruments and reserves | |
|
| Capital instruments and the related share premium accounts | 5,617 | 5,603 |
| Of which: share premium accounts | 3,965 | 3,957 |
| Retained earnings | 25,377 | 25,316 |
| Accumulated other comprehensive income (and other reserves) | 11,878 | 12,766 |
| Non-controlling interests (amount allowed in consolidated CET1) | 686 | 850 |
| Independently reviewed interim and year-end profits | 1,072 | 1,227 |
| Foreseeable dividends net of scrip | (527) | (399) |
| CET1 capital before regulatory adjustments | 44,103 | 45,363 |
| CET1 regulatory adjustments | | |
| Additional value adjustments (prudential valuation adjustments) | (564) | (574) |
| Intangible assets (net of related tax liability) | (5,146) | (5,112) |
| Deferred tax assets that rely on future profitability (excludes those arising from temporary differences) | (115) | (125) |
| Fair value reserves related to net losses on cash flow hedges | 10 | 45 |
| Deduction of amounts resulting from the calculation of excess expected loss | (875) | (1,142) |
| Net gains on liabilities at fair value resulting from changes in own Credit Risk | (412) | (53) |
| Defined-benefit pension fund assets | (34) | (40) |
| Fair value gains arising from the institution's own Credit Risk related to derivative liabilities | (127) | (59) |
| Exposure amounts which could qualify for risk weighting of 1250% | (123) | (141) |
| Total regulatory adjustments to CET1 | (7,386) | (7,201) |
| CET1 capital | 36,717 | 38,162 |
| Additional Tier 1 capital (AT1) instruments | 6,704 | 6,719 |
| AT1 regulatory adjustments | (20) | (20) |
| Tier 1 capital | 43,401 | 44,861 |
| | | |
| Tier 2 capital instruments | 12,325 | 13,927 |
| Tier 2 regulatory adjustments | (30) | (30) |
| Tier 2 capital | 12,295 | 13,897 |
| Total capital | 55,696 | 58,758 |
| Total risk-weighted assets (unaudited) | 258,297 | 279,748 |
1 CRD IV capital is prepared on the regulatory scope of consolidation
Movement in total capital
| | 31.12.18 | 31.12.17 |
| CET1 at 1 January | 38,162 | 36,608 |
| Ordinary shares issued in the period and share premium | 14 | 6 |
| Profit for the period | 1,072 | 1,227 |
| Foreseeable dividends net of scrip deducted from CET1 | (527) | (399) |
| Difference between dividends paid and foreseeable dividends | (575) | (233) |
| Movement in goodwill and other intangible assets | (34) | (256) |
| Foreign currency translation differences | (1,161) | 1,363 |
| Non-controlling interests1 | (164) | 41 |
| Movement in eligible other comprehensive income2 | 60 | 80 |
| Deferred tax assets that rely on future profitability | 10 | 72 |
| Decrease/(increase) in excess expected loss1 | 267 | (402) |
| Additional value adjustments (prudential valuation adjustment) | 10 | 86 |
| IFRS 9 day-one transitional impact on regulatory reserves1 | (441) | - |
| Exposure amounts which could qualify for risk weighting | 18 | 27 |
| Other | 6 | (58) |
| CET1 at 31 December | 36,717 | 38,162 |
| | | |
| AT1 at 1 January | 6,699 | 5,684 |
| Issuances net of redemptions | - | 992 |
| Foreign currency translation difference | (15) | 23 |
| Other | - | - |
| AT1 at 31 December | 6,684 | 6,699 |
| | | |
| Tier 2 capital at 1 January | 13,897 | 15,146 |
| Regulatory amortisation | 166 | 779 |
| Issuances net of redemptions | (1,713) | (2,907) |
| Foreign currency translation difference | (215) | 676 |
| Tier 2 ineligible minority interest | 144 | 233 |
| Other | 16 | (30) |
| Tier 2 capital at 31 December | 12,295 | 13,897 |
| Total capital at 31 December | 55,696 | 58,758 |
1 See impact of IFRS 9 on CET1
2 Movement in eligible other comprehensive income includes own credit gains
The main movements in capital in the period were:
• The CET1 ratio increased to 14.2 per cent predominantly as a result of lower RWA
• CET1 capital decreased by $1.4 billion, mainly due to $1.1 billion of dividends paid along with foreseeable dividends, FX translation of $1.2 billion and IFRS 9 day-one transitional adjustment to retained earnings of $0.4 billion being offset, in part, by profit after tax of $1.1 billion
• AT1 remained at $6.7 billion during the period
• Tier 2 capital reduced by $1.6 billion to $12.3 billion as a result of redemptions and the impact of the liability management exercise more than offsetting the new issuance of $0.5 billion of Tier 2 in the period
Impact of IFRS 9 on CET1
| | 31.12.18 | 31.12.17 |
| IFRS 9 impact on regulatory reserves net of tax | (843) | N/A |
| IFRS 9 regulatory static transitional relief | 402 | N/A |
| IFRS 9 day-one transitional impact on regulatory reserves | (441) | N/A |
| | | |
| IFRS 9 impact on excess expected loss shield | 572 | N/A |
| IFRS 9 impact on non-controlling interest | (57) | N/A |
| Overall net day-one transitional impact of IFRS 9 on CET1 capital | 74 | N/A |
Risk-weighted assets by business (unaudited)
| | 31.12.18 | |||
| Credit Risk | Operational Risk | Market Risk | Total risk | |
| Corporate & Institutional Banking | 96,954 | 13,029 | 19,008 | 128,991 |
| Retail Banking | 35,545 | 7,358 | - | 42,903 |
| Commercial Banking | 27,711 | 2,770 | - | 30,481 |
| Private Banking | 5,103 | 758 | - | 5,861 |
| Central & other items | 45,825 | 4,135 | 101 | 50,061 |
| Total risk-weighted assets | 211,138 | 28,050 | 19,109 | 258,297 |
| | 31.12.17 | |||
| Credit Risk | Operational Risk | Market Risk | Total risk | |
| Corporate & Institutional Banking | 109,368 | 14,740 | 22,994 | 147,102 |
| Retail Banking | 36,345 | 7,761 | - | 44,106 |
| Commercial Banking | 29,712 | 3,356 | - | 33,068 |
| Private Banking | 5,134 | 809 | - | 5,943 |
| Central & other items | 45,671 | 3,812 | 46 | 49,529 |
| Total risk-weighted assets | 226,230 | 30,478 | 23,040 | 279,748 |
Risk-weighted assets by geographic region (unaudited)
| | 31.12.18 | 31.12.17 |
| Greater China & North Asia | 81,023 | 84,593 |
| ASEAN & South Asia | 87,935 | 96,733 |
| Africa & Middle East | 53,072 | 56,437 |
| Europe & Americas | 40,789 | 44,735 |
| Central & other items | (4,522) | (2,750) |
| Total risk-weighted assets | 258,297 | 279,748 |
Movement in risk-weighted assets (unaudited)
| | Credit Risk | Operational Risk | Market Risk | Total risk | |||||
| Corporate & Institutional Banking | Retail Banking | Commercial Banking | Private Banking | Central & other items | Total | ||||
| At 1 January 2017 | 106,834 | 33,210 | 27,553 | 5,129 | 41,149 | 213,875 | 33,693 | 21,877 | 269,445 |
| Assets (decline)/growth | (6,363) | 2,349 | 1,973 | 445 | 2,273 | 677 | - | - | 677 |
| Net credit migration | 4,035 | 74 | (465) | - | 9 | 3,653 | - | - | 3,653 |
| Risk-weighted assets efficiencies | (2,295) | - | - | - | - | (2,295) | - | - | (2,295) |
| Model, methodology and policy changes | 4,990 | (368) | - | (575) | 2,372 | 6,419 | - | (2,178) | 4,241 |
| Disposals | - | (710) | - | - | (443) | (1,153) | - | - | (1,153) |
| Foreign currency translation | 2,167 | 1,790 | 651 | 135 | 311 | 5,054 | - | - | 5,054 |
| Other non-Credit Risk movements | - | - | - | - | - | - | (3,215) | 3,341 | 126 |
| At 31 December 2017 | 109,368 | 36,345 | 29,712 | 5,134 | 45,671 | 226,230 | 30,478 | 23,040 | 279,748 |
| Assets (decline)/growth | (1,527) | 1,466 | (1,347) | 56 | 2,896 | 1,544 | - | - | 1,544 |
| Net credit migration | (2,120) | 25 | 237 | - | 494 | (1,364) | - | - | (1,364) |
| Risk-weighted assets efficiencies | (3,540) | (597) | - | - | (748) | (4,885) | - | - | (4,885) |
| Model, methodology and policy changes | (3,338) | (671) | 66 | - | 77 | (3,866) | - | (1,948) | (5,814) |
| Disposals | - | - | - | - | (626) | (626) | - | - | (626) |
| Foreign currency translation | (1,889) | (1,023) | (957) | (87) | (1,939) | (5,895) | - | - | (5,895) |
| Other non-Credit Risk movements | - | - | - | - | - | - | (2,428) | (1,983) | (4,411) |
| At 31 December 2018 | 96,954 | 35,545 | 27,711 | 5,103 | 45,825 | 211,138 | 28,050 | 19,109 | 258,297 |
Movements in risk-weighted assets
RWA decreased by $21.5 billion, or 7.7 per cent, from 31 December 2017 to $258.3 billion. This was principally due to a decrease in Credit Risk RWA of $15.1 billion, or 6.7 per cent, and reductions in both Market and Operational Risk RWA of $3.9 billion and $2.4 billion respectively.
Corporate & Institutional Banking
Credit Risk RWA decreased by $12.4 billion to $97.0 billion mainly due to:
• $3.5 billion decrease due to RWA efficiencies, mainly $2.4 billion in Financial Markets through novation, trade compressions and process enhancement in collateral recognition and $1.1 billion of savings from RWA efficiency initiatives on sovereign and financial institution exposures
• $3.3 billion decrease in model, methodology and policy changes, mainly due to $2.9 billion PRA-approved internal ratings-based (IRB) model changes relating to LGD parameters
• $2.1 billion decrease due to net credit migration principally in ASEAN & South Asia (ASA)
• $1.9 billion decrease from foreign currency translation due to depreciation of currencies in India, Europe and China against the US dollar
• $1.5 billion RWA decrease from asset balance reduction in Principal Finance and Transaction Banking
Retail Banking
Credit Risk RWA decreased by $0.8 billion to $35.5 billion mainly due to:
• $1.0 billion decrease from foreign currency translation mainly due to depreciation of currencies in Korea and India against the US dollar
• $0.7 billion RWA decrease due to model changes in mortgages in ASA
• $0.6 billion of benefit from RWA efficiency initiatives on exposures secured by residential real estate, partially offset by
• $1.5 billion RWA increase from asset balance growth, primarily in Greater China & North Asia (GCNA)
Commercial Banking
Credit Risk RWA decreased by $2.0 billion to $27.7 billion mainly due to:
• $1.3 billion RWA decrease from asset balance reductions in Transaction Banking and Corporate Finance
• $0.9 billion decrease from foreign currency translation mainly due to depreciation of currencies in India, Pakistan against the US dollar, partially offset by
• $0.2 billion increase due to net credit migration in GCNA
Private Banking
Credit Risk RWA is broadly flat at $5.1 billion. Decreases from foreign currency translation were mostly offset by changes in asset balance growth in Wealth Management products.
Central & other items
Central & other items RWA mainly relates to the Treasury Markets liquidity portfolio, the Group's principal joint venture investment, PT Bank Permata Tbk, equity investments and deferred/current tax assets.
Credit Risk RWA increased by $0.2 billion to $45.8 billion mainly due to:
• $2.9 billion increase in Credit Risk RWA mainly due to higher liquid assets over year end in Treasury Markets
• $0.5 billion increase due to net credit migration in Africa & Middle East (AME) on sovereign exposures
• $0.1 billion increase in model, methodology and policy changes, due to PRA approved IRB model changes relating to LGD parameters, partially offset by
• $1.9 billion decrease from foreign currency translation mainly due to depreciation of currencies in Indonesia, India and Pakistan against the US dollar
• $0.7 billion of benefit from RWA efficiency initiatives on sovereign exposures
• $0.6 billion saving from the disposal of an investment in ASA
Market Risk
Total Market Risk RWA (MRWA) decreased by $3.9 billion, or 17.1 per cent from 31 December 2017 to $19.1 billion. This change was due mainly to reduced trading book debt security holdings and to changes in internal models approach (IMA) scope and model.
Operational Risk
Operational Risk RWA reduced by $2.4 billion to $28.1 billion, due to a decrease in the average income over a rolling three-year time horizon, as lower 2017 income replaced higher 2014 income. This represents a 7.9 per cent year-on-year reduction in Operational Risk RWA.
UK leverage ratio
The Group's UK leverage ratio, which excludes qualifying claims on central banks in accordance with a PRA waiver, was 5.6 per cent, which is above the current minimum requirement of 3.6 per cent. The lower UK leverage ratio in the period was due to the combined impact of an increased exposure measure and lower Tier 1 capital (end point).
UK leverage ratio (unaudited)
| | 31.12.18 | 31.12.17 |
| Tier 1 capital (transitional) | 43,401 | 44,861 |
| Additional Tier 1 capital subject to phase out | (1,743) | (1,758) |
| Tier 1 capital (end point) | 41,658 | 43,103 |
| Derivative financial instruments | 45,621 | 47,031 |
| Derivative cash collateral | 10,323 | 9,513 |
| Securities financing transactions (SFTs) | 61,735 | 55,187 |
| Loans and advances and other assets | 571,083 | 551,770 |
| Total on-balance sheet assets | 688,762 | 663,501 |
| Regulatory consolidation adjustments1 | (45,521) | (31,712) |
| | | |
| Derivatives adjustments | | |
| Derivatives netting | (34,300) | (29,830) |
| Adjustments to cash collateral | (14,827) | (18,411) |
| Net written credit protection | 1,221 | 1,360 |
| Potential future exposure on derivatives | 28,498 | 30,027 |
| Total derivatives adjustments | (19,408) | (16,854) |
| Counterparty risk leverage exposure measure for SFTs | 8,281 | 13,238 |
| Off-balance sheet items | 115,335 | 96,260 |
| Regulatory deductions from Tier 1 capital | (6,847) | (7,089) |
| UK leverage exposure (end point) | 740,602 | 717,344 |
| UK leverage ratio (end point) | 5.6% | 6.0% |
| UK leverage exposure quarterly average | 734,976 | 723,508 |
| UK leverage ratio quarterly average | 5.8% | 6.0% |
| Countercyclical leverage ratio buffer | 0.1% | 0.1% |
| G-SII additional leverage ratio buffer | 0.3% | 0.2% |
1 Includes adjustment for qualifying central bank claims
Statement of directors' responsibilities
The directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare Group and Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the Company financial statements on the same basis.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of their profit or loss for that period. In preparing each of the Group and Company financial statements, the directors are required to:
• Select suitable accounting policies and then apply them consistently;
• Make judgements and estimates that are reasonable, relevant and reliable;
• State whether they have been prepared in accordance with IFRSs as adopted by the EU;
• Assess the Group and the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• Use the going concern basis of accounting unless they either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the directors in respect of the annual financial report
We confirm that to the best of our knowledge:
• The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
• The Strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face
We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.
By order of the Board
Andy Halford
Group Chief Financial Officer
26 February 2019
Consolidated income statement
For the year ended 31 December 2018
| | Notes | 31.12.18 | 31.12.17 |
| Interest income | | 17,264 | 14,435 |
| Interest expense | | (8,471) | (6,254) |
| Net interest income | 3 | 8,793 | 8,181 |
| Fees and commission income | | 4,029 | 3,942 |
| Fees and commission expense | | (537) | (430) |
| Net fee and commission income | 4 | 3,492 | 3,512 |
| Net trading income | 5 | 1,683 | 1,527 |
| Other operating income | 6 | 821 | 1,205 |
| Operating income | | 14,789 | 14,425 |
| Staff costs | | (7,074) | (6,758) |
| Premises costs | | (790) | (823) |
| General administrative expenses | | (2,926) | (2,007) |
| Depreciation and amortisation | | (857) | (829) |
| Operating expenses | 7 | (11,647) | (10,417) |
| Operating profit before impairment losses and taxation | | 3,142 | 4,008 |
| Credit impairment | 8 | (653) | (1,362) |
| Other impairment | | | |
| Goodwill | 9 | - | (320) |
| Other | 9 | (182) | (179) |
| Profit from associates and joint ventures | 32 | 241 | 268 |
| Profit before taxation | | 2,548 | 2,415 |
| Taxation | 10 | (1,439) | (1,147) |
| Profit for the year | | 1,109 | 1,268 |
| | | | |
| Profit attributable to: | | | |
| Non-controlling interests | 29 | 55 | 49 |
| Parent company shareholders | | 1,054 | 1,219 |
| Profit for the year | | 1,109 | 1,268 |
| | | cents | cents |
| Earnings per share: | | | |
| Basic earnings per ordinary share | 12 | 18.7 | 23.5 |
| Diluted earnings per ordinary share | 12 | 18.5 | 23.3 |
The Notes form an integral part of these financial statements.
Consolidated statement of comprehensive income
For the year ended 31 December 2018
| | Notes | 31.12.18 | 31.12.17 |
| Profit for the year | | 1,109 | 1,268 |
| Other comprehensive (loss)/income | | | |
| Items that will not be reclassified to income statement: | | 382 | (238) |
| Own credit gains/(losses) on financial liabilities designated at fair value through profit or loss | | 394 | (249) |
| Equity instruments at fair value through other comprehensive income | | 36 | - |
| Actuarial (losses)/gains on retirement benefit obligations | 30 | (19) | 32 |
| Taxation relating to components of other comprehensive income | 10 | (29) | (21) |
| | | | |
| Items that may be reclassified subsequently to income statement: | | (1,189) | 1,532 |
| Exchange differences on translation of foreign operations: | | | |
| Net (losses)/gains taken to equity | | (1,462) | 1,637 |
| Net gains/(losses) on net investment hedges | | 282 | (288) |
| Share of other comprehensive income/(loss) from associates and joint ventures | | 33 | (1) |
| Debt instruments at fair value through other comprehensive income/available-for-sale investments: | | | |
| Net valuation (losses)/gains taken to equity | | (128) | 369 |
| Reclassified to income statement | | 31 | (233) |
| Cash flow hedges: | | | |
| Net gains taken to equity | | 34 | 35 |
| Reclassified to income statement | 14 | 7 | 11 |
| Taxation relating to components of other comprehensive income | 10 | 14 | 2 |
| Other comprehensive (loss)/income for the year, net of taxation | | (807) | 1,294 |
| Total comprehensive income for the year | | 302 | 2,562 |
| | | | |
| Total comprehensive income attributable to: | | | |
| Non-controlling interests | 29 | 34 | 50 |
| Parent company shareholders | | 268 | 2,512 |
| Total comprehensive income for the year | | 302 | 2,562 |
Consolidated balance sheet
As at 31 December 2018
| | Notes | 31.12.18 | 31.12.17 |
| Assets | | | |
| Cash and balances at central banks | 13,35 | 57,511 | 58,864 |
| Financial assets held at fair value through profit or loss | 13 | 87,132 | 27,564 |
| Derivative financial instruments | 13,14 | 45,621 | 47,031 |
| Loans and advances to banks1 | 13,15 | 61,414 | 78,188 |
| Loans and advances to customers2 | 13,15 | 256,557 | 282,288 |
| Investment securities | 13 | 125,901 | 117,025 |
| Other assets | 20 | 35,401 | 33,490 |
| Current tax assets | 10 | 492 | 491 |
| Prepayments and accrued income | | 2,505 | 2,307 |
| Interests in associates and joint ventures | 32 | 2,307 | 2,307 |
| Goodwill and intangible assets | 17 | 5,056 | 5,013 |
| Property, plant and equipment | 18 | 6,490 | 7,211 |
| Deferred tax assets | 10 | 1,047 | 1,177 |
| Assets classified as held for sale | 21 | 1,328 | 545 |
| Total assets | | 688,762 | 663,501 |
| | | | |
| Liabilities | | | |
| Deposits by banks | 13 | 29,715 | 30,945 |
| Customer accounts | 13 | 391,013 | 370,509 |
| Repurchase agreements and other similar secured borrowing | 13,16 | 1,401 | 39,783 |
| Financial liabilities held at fair value through profit or loss | 13 | 60,700 | 16,633 |
| Derivative financial instruments | 13,14 | 47,209 | 48,101 |
| Debt securities in issue | 13,22 | 46,454 | 46,379 |
| Other liabilities | 23 | 38,309 | 35,257 |
| Current tax liabilities | 10 | 676 | 376 |
| Accruals and deferred income | | 5,393 | 5,493 |
| Subordinated liabilities and other borrowed funds | 13,27 | 15,001 | 17,176 |
| Deferred tax liabilities | 10 | 563 | 404 |
| Provisions for liabilities and charges | 24 | 1,330 | 183 |
| Retirement benefit obligations | 30 | 399 | 455 |
| Liabilities included in disposal groups held for sale | 21 | 247 | - |
| Total liabilities | | 638,410 | 611,694 |
| | | | |
| Equity | | | |
| Share capital and share premium account | 28 | 7,111 | 7,097 |
| Other reserves | | 11,878 | 12,767 |
| Retained earnings | | 26,129 | 26,641 |
| Total parent company shareholders' equity | | 45,118 | 46,505 |
| Other equity instruments | 28 | 4,961 | 4,961 |
| Total equity excluding non-controlling interests | | 50,079 | 51,466 |
| Non-controlling interests | 29 | 273 | 341 |
| Total equity | | 50,352 | 51,807 |
| Total equity and liabilities | | 688,762 | 663,501 |
1 Reverse repurchase agreements and other similar secured lending balances held at amortised cost of $3,815 million (31 December 2017: $20,694 million) have been included with loans and advances to banks
2 Reverse repurchase agreements and other similar secured lending balances held at amortised cost of $3,151 million (31 December 2017: $33,581 million) have been included with loans and advances to customers
The Notes form an integral part of these financial statements.
These financial statements were approved by the Board of directors and authorised for issue on 26 February 2019 and signed on its behalf by:
José Viñals Bill Winters Andy Halford
Chairman Group Chief Executive Group Chief Financial Officer
Consolidated statement of changes in equity
For the year ended 31 December 2018
| | Share capital and share premium account | Capital and merger reserves1 $million | Own credit adjustment reserve | Available -for-sale reserve | Fair value through other compre-hensive income reserve - debt | Fair value through other compre-hensive income reserve - equity | Cash flow hedge reserve | Translation reserve | Retained earnings | Parent company shareholders' equity | Other equity instruments | Non-controlling interests | Total |
| At 1 January 2017 | 7,091 | 17,129 | 289 | (4) | - | - | (85) | (5,805) | 25,753 | 44,368 | 3,969 | 321 | 48,658 |
| Profit after tax for the year | - | - | - | - | - | - | - | - | 1,219 | 1,219 | - | 49 | 1,268 |
| Other comprehensive (loss)/income | - | - | (235) | 87 | - | - | 40 | 1,351 | 502 | 1,293 | - | 1 | 1,294 |
| Distributions | - | - | - | - | - | - | - | - | - | - | - | (51) | (51) |
| Shares issued, net of expenses | 6 | - | - | - | - | - | - | - | - | 6 | - | - | 6 |
| Other equity instruments issued, net of expenses | - | - | - | - | - | - | - | - | - | - | 992 | - | 992 |
| Net own shares adjustment | - | - | - | - | - | - | - | - | 10 | 10 | - | - | 10 |
| Share option expense, net of taxation | - | - | - | - | - | - | - | - | 125 | 125 | - | - | 125 |
| Dividends3 | - | - | - | - | - | - | - | - | (445) | (445) | - | - | (445) |
| Other movements4 | - | - | - | - | - | - | - | - | (71) | (71) | - | 215 | (50) |
| As at 31 December 2017 | 7,097 | 17,129 | 54 | 83 | - | - | (45) | (4,454) | 26,641 | 46,505 | 4,961 | 341 | 51,807 |
| IFRS 9 reclassifications6 | - | - | - | (83) | (131) | 45 | - | - | 169 | - | - | - | - |
| IFRS 9 re-measurements6 | - | - | - | - | - | 4 | - | - | 31 | 35 | - | - | 35 |
| Expected credit loss, net | - | - | - | - | 65 | - | - | - | (1,074)7 | (1,009) | - | (8) | (1,017) |
| Tax impact | - | - | - | - | (11) | 5 | - | - | 179 | 173 | - | - | 173 |
| Impact of IFRS 9 on share of joint ventures and associates, net of tax | - | - | - | - | - | (1) | - | - | (51) | (52) | - | - | (52) |
| IFRS 9 transition adjustments | - | - | - | (83) | (77) | 53 | - | - | (746) | (853) | - | (8) | (861) |
| As at 1 January 2018 | 7,097 | 17,129 | 54 | - | (77) | 53 | (45) | (4,454) | 25,895 | 45,652 | 4,961 | 333 | 50,946 |
| Profit after tax for the year | - | - | - | - | - | - | - | - | 1,054 | 1,054 | - | 55 | 1,109 |
| Other comprehensive income/(loss) | - | - | 358 | - | (84) | 67 | 35 | (1,158) | (4)2 | (786) | - | (21) | (807) |
| Distributions | - | - | - | - | - | - | - | - | - | - | - | (97) | (97) |
| Shares issued, | 14 | - | - | - | - | - | - | - | - | 14 | - | - | 14 |
| Net own shares adjustment | - | - | - | - | - | - | - | - | 1 | 1 | - | - | 1 |
| Share option expense, net of taxation | - | - | - | - | - | - | - | - | 158 | 158 | - | - | 158 |
| Dividends3 | - | - | - | - | - | - | - | - | (975) | (975) | - | - | (975) |
| Other movements | - | - | - | - | - | - | - | - | - | - | - | 38 | 3 |
| As at 31 December 2018 | 7,111 | 17,129 | 412 | - | (161) | 120 | (10) | (5,612) | 26,129 | 45,118 | 4,961 | 273 | 50,352 |
1 Includes capital reserve of $5 million, capital redemption reserve of $13 million and merger reserve of $17,111 million
2 Comprises actuarial gain/(loss), net of taxation and share from associates and joint ventures $(4) million (31 December 2017: $50 million)
3 Comprises dividends paid net of scrip $539 million (31 December 2017: $nil) and dividends on preference shares classified as equity and Additional Tier 1 securities $436 million (31 December 2017: $445 million). (refer Note 11)
4 Other movements of $(71) million is mainly due to issue of shares by Nepal to its non-controlling interests including premium ($19 million) as the adjustment to the carrying value of Group's share of the issue. This is offset by other equity adjustments of $(90) million
5 Other movements of $21 million relates to issue of shares by Nepal to its non-controlling interests including premium ($12 million) as the increase in non-controlling interest. The remaining $9 million relates to an acquisition
6 As per Note 41 Transition to IFRS 9 Financial Instruments
7 The Group's initial estimate of credit impairment provisions 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 provisions has been revised down by $222 million to $6,498 million, and the net expected credit loss of $(1,296) million adjusted against retained earnings has similarly decreased by $222 million to $1,074 million
8 Mainly due to additional share capital issued by Angola subscribed by its non-controlling interests without change in shareholding percentage
The Notes form an integral part of these financial statements.
Cash flow statement
For the year ended 31 December 2018
| | Notes | Group | | Company | ||
| 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | |||
| Cash flows from operating activities: | | | | | | |
| Profit before taxation | | 2,548 | 2,415 | | 790 | 207 |
| Adjustments for non-cash items and other adjustments included within income statement | 34 | 2,635 | 3,241 | | 232 | 615 |
| Change in operating assets | 34 | (12,837) | (13,625) | | 61 | 459 |
| Change in operating liabilities | 34 | 33,859 | 5,819 | | (462) | 575 |
| Contributions to defined benefit schemes | 30 | (143) | (143) | | - | - |
| UK and overseas taxes paid | 10 | (770) | (915) | | - | (14) |
| Net cash from/(used in) operating activities | | 25,292 | (3,208) | | 621 | 1,842 |
| Cash flows from investing activities: | | | | | | |
| Purchase of property, plant and equipment | 18 | (171) | (165) | | - | - |
| Disposal of property, plant and equipment | | 85 | 29 | | - | - |
| Acquisition of investment in subsidiaries, associates, | 32 | - | (44) | | - | (1,000) |
| Dividends received from subsidiaries, associates | 32 | 67 | 2 | | 1,035 | 392 |
| Disposal of subsidiaries | | 7 | - | | - | - |
| Purchase of investment securities | | (276,388) | (265,186) | | - | - |
| Disposal and maturity of investment securities | | 263,983 | 261,316 | | 621 | 2,850 |
| Net cash (used in)/from investing activities | | (12,417) | (4,048) | | 1,656 | 2,242 |
| Cash flows from financing activities: | | | | | | |
| Issue of ordinary and preference share capital, | 28 | 14 | 6 | | 14 | 6 |
| Exercise of share options | | 9 | 10 | | 9 | 10 |
| Purchase of own shares | | (8) | - | | (8) | - |
| Issue of Additional Tier 1 capital, net of expenses | 28 | - | 992 | | - | 992 |
| Gross proceeds from issue of subordinated liabilities | 34 | 500 | - | | 500 | - |
| Interest paid on subordinated liabilities | 34 | (602) | (743) | | (507) | (353) |
| Repayment of subordinated liabilities | 34 | (2,097) | (2,984) | | (474) | (1,249) |
| Proceeds from issue of senior debts | 34 | 9,766 | 2,292 | | 4,552 | 1,501 |
| Repayment of senior debts | 34 | (7,030) | (4,162) | | (3,141) | (3,237) |
| Interest paid on senior debts | 34 | (507) | (896) | | (355) | (825) |
| Investment from non-controlling interests | | - | 21 | | - | - |
| Dividends paid to non-controlling interests | | (533) | (496) | | (436) | (445) |
| Dividends paid to ordinary shareholders | | (539) | - | | (539) | - |
| Net cash used in financing activities | | (1,027) | (5,960) | | (385) | (3,600) |
| Net increase/(decrease) in cash and cash equivalents | | 11,848 | (13,216) | | 1,892 | 484 |
| Cash and cash equivalents at beginning of the year | | 87,231 | 96,977 | | 15,714 | 15,230 |
| Effect of exchange rate movements on cash and | | (1,579) | 3,470 | | - | - |
| Cash and cash equivalents at end of the year | 35 | 97,500 | 87,231 | | 17,606 | 15,714 |
Notes to the financial statements
1. Accounting policies
Statement of compliance
The Group financial statements consolidate Standard Chartered PLC (the Company) and its subsidiaries (together referred to as the Group) and equity account the Group's interest in associates and jointly controlled entities.
The parent company financial statements present information about the Company as a separate entity.
Both the parent company financial statements and the Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee interpretations as endorsed by the European Union (EU). EU-endorsed IFRS may differ from IFRS published by the International Accounting Standards Board (IASB) if a standard has not been endorsed by the EU.
The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its individual statement of comprehensive income and related notes that form a part of these financial statements.
The following parts of the Risk review and Capital review form part of these financial statements:
a) From the start of Risk profile section to the end of other principal risks in the same section excluding:
• Credit quality by geographic region
• Credit quality by industry
• Forborne and other modified loans by region
• Credit-impaired (stage 3) loans by geographic region
• Industry and Retail products analysis by geographic region
• Asset-backed securities
• Country risk
• Risks not in VaR
• Backtesting
• Mapping of market risk items to the balance sheet
• Liquidity coverage ratio (LCR)
• Stressed coverage
• Net stable funding ratio (NSFR)
• Liquidity pool
• Encumbrance
• Interest rate risk in the banking book
• Operational risk
• Other principal risks
b) Capital review: from the start of 'Capital Requirements Directive (CRD) IV capital base' to the end of 'Impact of IFRS 9 on CET1', excluding capital ratios and risk-weighted assets (RWA)
Basis of preparation
The consolidated and Company financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of cash-settled share-based payments, fair value through other comprehensive income, and financial assets and liabilities (including derivatives) at fair value through profit or loss.
Significant accounting estimates and judgements
In determining the carrying amounts of certain assets and liabilities, the Group makes assumptions of the effects of uncertain future events on those assets and liabilities at the balance sheet date. The Group's estimates and assumptions are based on historical experience and expectation of future events and are reviewed periodically. Further information about key assumptions concerning the future, and other key sources of estimation uncertainty and judgement, are set out in the relevant disclosure notes for the following areas:
• Credit impairment (Note 8)
• Taxation (Note 10)
• Valuation of financial instruments held at fair value (Note 13)
• Goodwill impairment (Note 17)
• Provisions for liabilities and charges (Note 24)
• Retirement benefit obligations (Note 30)
• Investments in associates and joint ventures (Note 32)
IFRS and Hong Kong accounting requirements
As required by the Hong Kong Listing Rules, an explanation of the differences in accounting practices between EU-endorsed IFRS and Hong Kong Financial Reporting Standards is required to be disclosed. There would be no significant differences had these accounts been prepared in accordance with Hong Kong Financial Reporting Standards.
Comparatives
Prior period comparatives are presented on an IAS 39 - Financial Instruments: Recognition and Measurement basis (Refer to the 31 December 2017 audited financial statements for the IAS 39 accounting policies). Certain comparatives have been changed to align with current year disclosures. The main changes are in respect of IFRS 9 (see below).
Amortised cost reverse repurchase agreements and other similar lending balances have been included with Loans and advances to customers and Loans and advances to banks as appropriate.
In addition, the comparatives for commitments disclosed in Note 25 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. The Risk profile has similarly been updated. These changes have not resulted in any amendments to the reported income statement or balance sheet of the Group.
New accounting standards adopted by the Group
IFRS 9 Financial Instruments
On 1 January 2018, the Group adopted IFRS 9 Financial Instruments, and the corresponding disclosure amendments to IFRS 7 - Financial Instruments: Disclosures. IFRS 9 has been endorsed by the EU, replaces IAS 39 and introduces; new requirements for the classification and measurement of financial instruments; the recognition and measurement of credit impairment provisions; and provides for a simplified approach to hedge accounting.
The Group has further chosen:
• To continue to apply IAS 39 hedging requirements rather than those of IFRS 9. Hedging disclosures have, however, been updated to comply with new disclosure requirements
• To early adopt the 'Prepayment Features with Negative Compensation (Amendments to IFRS 9)' which was effective 1 January 2019 with early adoption permitted
• Not to restate comparative periods on the basis that it is not possible to do so without the use of hindsight
The Risk profile has been updated in accordance with the collateral and credit enhancement requirements of IFRS 7 Financial instruments: Disclosures, as amended for IFRS 9. The extent of collateral as a mitigant has been determined with reference to both the drawn and undrawn components of an exposure. Further, the collateral balances align to the expected credit loss methodology as this addresses the effects of collateral and other credit enhancements on the amounts arising from expected credit losses.
The new IFRS 9 accounting policies are stated in the Risk review, Note 8 Credit impairment and Note 13 Financial instruments.
Information on the transition from IAS 39 to IFRS 9 is stated in Note 41.
The Group's initial estimate of credit impairment provisions 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 provisions has been revised down by $222 million to $6,498 million, and the net expected credit loss of $(1,296) million adjusted against retained earnings has similarly decreased by $222 million to $(1,074) million. The relevant IFRS 9 disclosures in the Risk review and in Note 41 Transition to IFRS 9 Financial Instruments have been re-presented accordingly.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 is effective from 1 January 2018 and has been endorsed by the EU, and replaces IAS 18 Revenue. IFRS 15 is conceptually similar to IAS 18, but includes more granular guidance on how to recognise and measure revenue, and also introduces additional disclosure requirements. The Group performed an assessment of the new standard and concluded that the current treatment of revenue from contracts with customers is consistent with the new principles and there is no material transitional impact.
Going concern
These financial statements were approved by the Board of directors on 26 February 2019. The directors made an assessment of the Group's ability to continue as a going concern and confirm they are satisfied that the Group has adequate resources to continue in business for a period of at least 12 months from the date of approval of these financial statements. For this reason, the Group continues to adopt the going concern basis of accounting for preparing the financial statements.
New accounting standards in issue but not yet effective
IFRS 16 Leases
The effective date of IFRS 16 is 1 January 2019 and the standard was endorsed by the EU in November 2017. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17 Leases. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.
The significant judgements in the implementation were determining if a contact contained a lease, and the determination of whether the Group is reasonably certain that it will exercise extension options present in lease contracts. The significant estimates were the determination of incremental borrowing rates in the respective economic environments.
The impact of IFRS 16 on the Group is primarily where the Group is a lessee in property lease contracts. The Group has elected to adopt the simplified approach of transition and will not restate comparative information. On 1 January 2019 the Group will recognise a lease liability, being the remaining lease payments including extensions options where renewal is reasonably certain, discounted using the Group's incremental borrowing rate at the date of initial application in the economic environment of the lease. The corresponding right-of-use asset recognised will be the amount of the lease liability adjusted by prepaid or accrued lease payments related to those leases. Any difference will be recognised in retained earnings at the date of initial application. The balance sheet increase as a result of recognition of the lease liability and right-of-use asset as of 1 January 2019 will be approximately $1.4 billion. However, the actual impact may change as judgements and estimates are refined.
IFRIC 23 Uncertainty over Income Tax Treatments
IFRIC 23 is effective from 1 January 2019 and has been endorsed by the EU. It clarifies the accounting for uncertainties in income taxes and is not expected to result in a material impact to the Group's financial report.
Other amendments and clarifications made to existing standards that are not yet effective are not expected to result in a material impact on the Group's financial report.
2. Segmental information
The Group's segmental reporting is in accordance with IFRS 8 Operating Segments and is reported consistently with the internal performance framework and as presented to the Group's Management Team. The four client segments are Corporate & Institutional Banking, Retail Banking, Commercial Banking and Private Banking. The four geographic regions are Greater China & North Asia, ASEAN & South Asia, Africa & Middle East, and Europe & Americas. Activities not directly related to a client segment and/or geographic region are included in Central & other items. These mainly include Corporate Centre costs, treasury markets, treasury activities, certain strategic investments and the UK bank levy.
The following should also be noted:
• Transactions and funding between the segments are carried out on an arm's-length basis
• Corporate Centre costs represent stewardship and central management services roles and activities that are not directly attributable to business or country operations
• Treasury markets, joint ventures and associate investments are managed in the regions and are included within the applicable region. However, they are not managed directly by a client segment and are therefore included in the Central & other items segment
• In addition to treasury activities, Corporate Centre costs and other Group related functions, Central & other items for regions includes globally run businesses or activities that are managed by the client segments but not directly by geographic management. These include Principal Finance and Portfolio Management
• The Group allocated central costs (excluding Corporate Centre costs) relating to client segments and geographic regions using appropriate business drivers (such as in proportion to the direct cost base of each segment before allocation of indirect costs) and these are reported within operating expenses
Basis of preparation
The analysis reflects how the client segments and geographic regions are managed internally. This is described as the Management View and is principally the location from which a client relationship is managed, which may differ from where it is financially booked and may be shared between businesses and/or regions. In certain instances this approach is not appropriate and a Financial View is disclosed, that is, the location in which the transaction or balance was booked. Typically the Financial View is used in areas such as the Market and Liquidity risk reviews where actual booking location is more important for an assessment. Segmental information is therefore on a Management View unless otherwise stated.
Restructuring items excluded from underlying results
The Group has made a provision of $900 million for potential penalties related to previously disclosed matters, namely, the US investigation relating to historical violation of US sanctions laws and regulations, the decision notice from the FCA concerning the Group's historical financial crime controls and investigations relating to foreign exchange trading issues. Further details of these and other legal and regulatory matters can be found in Note 26.
The Group incurred net restructuring charges of $478 million in 2018 of which $375 million related to Principal Finance and included a $160 million loss in the fourth quarter in respect of the announced spin-out of the business and the sale of the majority of the Group's related investment portfolios to a third party. A further $155 million related to planned initiatives to reduce ongoing costs and $34 million related to the Group's ship leasing business that the Group has decided to discontinue. These gross charges were partly offset by recoveries in relation to the liquidation portfolio.
A net gain of $69 million arose following the redemption of some GBP-denominated securities.
A reconciliation between underlying and statutory results is set out in the table below:
| | 31.12.18 | ||||||
| Underlying | Provision for regulatory matters | Restructuring | Gains arising on repurchase of senior and subordinated liabilities | Net gain on businesses disposed/held for sale | Goodwill impairment | Statutory | |
| Operating income | 14,968 | - | (248) | 69 | - | - | 14,789 |
| Operating expenses | (10,464) | (900) | (283) | - | - | - | (11,647) |
| Operating profit/(loss) before impairment losses and taxation | 4,504 | (900) | (531) | 69 | - | - | 3,142 |
| Credit impairment | (740) | - | 87 | - | - | - | (653) |
| Other impairment | (148) | - | (34) | - | - | - | (182) |
| Profit from associates and joint ventures | 241 | - | - | - | - | - | 241 |
| Profit/(loss) before taxation | 3,857 | (900) | (478) | 69 | - | - | 2,548 |
| | 31.12.17 | ||||||
| Underlying | Provision for regulatory matters | Restructuring | Gains arising | Net gain on businesses disposed/ | Goodwill impairment | Statutory | |
| Operating income | 14,289 | - | 58 | - | 78 | - | 14,425 |
| Operating expenses | (10,120) | - | (297) | - | - | - | (10,417) |
| Operating profit/(loss) before impairment losses | 4,169 | - | (239) | - | 78 | - | 4,008 |
| Credit impairment | (1,200) | - | (162) | - | - | - | (1,362) |
| Other impairment | (169) | - | (10) | - | - | (320) | (499) |
| Profit from associates and joint ventures | 210 | - | 58 | - | - | - | 268 |
| Profit/(loss) before taxation | 3,010 | - | (353) | - | 78 | (320) | 2,415 |
Underlying performance by client segment
| | 31.12.18 | |||||
| Corporate & Institutional Banking | Retail | Commercial Banking | Private | Central & | Total | |
| Operating income | 6,860 | 5,041 | 1,391 | 516 | 1,160 | 14,968 |
| Operating expenses | (4,396) | (3,736) | (923) | (530) | (879) | (10,464) |
| Operating profit/(loss) before impairment losses and taxation | 2,464 | 1,305 | 468 | (14) | 281 | 4,504 |
| Credit impairment | (242) | (267) | (244) | - | 13 | (740) |
| Other impairment | (150) | (5) | - | - | 7 | (148) |
| Profit from associates and joint ventures | - | - | - | - | 241 | 241 |
| Underlying profit/(loss) before taxation | 2,072 | 1,033 | 224 | (14) | 542 | 3,857 |
| Provision for regulatory matters | (50) | - | - | - | (850) | (900) |
| Restructuring | (350) | (68) | (12) | (24) | (24) | (478) |
| Gains arising on repurchase of senior and subordinated liabilities | 3 | - | - | - | 66 | 69 |
| Statutory profit/(loss) before taxation | 1,675 | 965 | 212 | (38) | (266) | 2,548 |
| Total assets | 308,496 | 103,780 | 31,379 | 13,673 | 231,434 | 688,762 |
| Of which: loans and advances to customers including FVTPL | 146,575 | 101,635 | 27,271 | 13,616 | 10,274 | 299,371 |
| loans and advances to customers | 104,677 | 101,235 | 26,759 | 13,616 | 10,270 | 256,557 |
| loans held at fair value through profit or loss | 41,898 | 400 | 512 | - | 4 | 42,814 |
| Total liabilities | 369,316 | 140,328 | 37,260 | 19,733 | 71,773 | 638,410 |
| Of which: customer accounts | 243,019 | 136,691 | 34,860 | 19,622 | 2,989 | 437,181 |
| | 31.12.17 | |||||
| Corporate & Institutional | Retail | Commercial Banking | Private | Central & | Total | |
| Operating income | 6,496 | 4,834 | 1,333 | 500 | 1,126 | 14,289 |
| Operating expenses | (4,409) | (3,585) | (881) | (500) | (745) | (10,120) |
| Operating profit before impairment losses and taxation | 2,087 | 1,249 | 452 | - | 381 | 4,169 |
| Credit impairment | (658) | (375) | (167) | (1) | 1 | (1,200) |
| Other impairment | (168) | (1) | (3) | - | 3 | (169) |
| Profit from associates and joint ventures | - | - | - | - | 210 | 210 |
| Underlying profit/(loss) before taxation | 1,261 | 873 | 282 | (1) | 595 | 3,010 |
| Restructuring | (275) | (19) | (13) | (15) | (31) | (353) |
| Net gains on businesses disposed/held for sale | - | - | - | - | 78 | 78 |
| Goodwill impairment | - | - | - | - | (320) | (320) |
| Statutory profit/(loss) before taxation | 986 | 854 | 269 | (16) | 322 | 2,415 |
| Total assets | 293,334 | 105,178 | 31,650 | 13,469 | 219,870 | 663,501 |
| Of which: loans and advances to customers | 131,738 | 103,013 | 28,108 | 13,351 | 9,343 | 285,553 |
| Total liabilities | 353,582 | 132,819 | 36,385 | 22,203 | 66,705 | 611,694 |
| Of which: customer accounts | 222,714 | 129,536 | 33,880 | 22,222 | 3,372 | 411,724 |
Underlying performance by region
| | 31.12.18 | |||||
| Greater China & North Asia | ASEAN & | Africa & | Europe & Americas | Central & | Total | |
| Operating income | 6,157 | 3,971 | 2,604 | 1,670 | 566 | 14,968 |
| Operating expenses | (3,812) | (2,711) | (1,810) | (1,453) | (678) | (10,464) |
| Operating profit/(loss) before impairment losses and taxation | 2,345 | 1,260 | 794 | 217 | (112) | 4,504 |
| Credit impairment | (71) | (322) | (262) | (83) | (2) | (740) |
| Other impairment | (110) | 6 | - | 17 | (61) | (148) |
| Profit from associates and joint ventures | 205 | 26 | - | 3 | 7 | 241 |
| Underlying profit/(loss) before taxation | 2,369 | 970 | 532 | 154 | (168) | 3,857 |
| Provision for regulatory matters | - | - | - | (50) | (850) | (900) |
| Restructuring | (106) | 105 | (100) | (8) | (369) | (478) |
| Gains arising on repurchase of senior and subordinated liabilities | - | - | - | 3 | 66 | 69 |
| Statutory profit/(loss) before taxation | 2,263 | 1,075 | 432 | 99 | (1,321) | 2,548 |
| Net interest margin | 1.44% | 2.06% | 3.03% | 0.47% | | 1.58% |
| Total assets | 269,765 | 147,049 | 57,800 | 201,912 | 12,236 | 688,762 |
| Of which: loans and advances to customers including FVTPL | 130,669 | 81,905 | 29,870 | 56,927 | - | 299,371 |
| Total liabilities | 238,249 | 127,478 | 36,733 | 198,853 | 37,097 | 638,410 |
| Of which: customer accounts | 196,870 | 96,896 | 29,916 | 113,499 | - | 437,181 |
| | 31.12.17 | |||||
| Greater China & North Asia | ASEAN & | Africa & | Europe & | Central & | Total | |
| Operating income | 5,616 | 3,833 | 2,764 | 1,601 | 475 | 14,289 |
| Operating expenses | (3,681) | (2,654) | (1,819) | (1,407) | (559) | (10,120) |
| Operating profit/(loss) before impairment losses and taxation | 1,935 | 1,179 | 945 | 194 | (84) | 4,169 |
| Credit impairment | (141) | (653) | (300) | (107) | 1 | (1,200) |
| Other impairment | (81) | (12) | (3) | (16) | (57) | (169) |
| Profit/(loss) from associates and joint ventures | 229 | (22) | - | - | 3 | 210 |
| Underlying profit/(loss) before taxation | 1,942 | 492 | 642 | 71 | (137) | 3,010 |
| Restructuring | 35 | (161) | (33) | (25) | (169) | (353) |
| Net gains on businesses disposed/held for sale | - | 19 | - | - | 59 | 78 |
| Goodwill impairment | - | - | - | - | (320) | (320) |
| Statutory profit/(loss) before taxation | 1,977 | 350 | 609 | 46 | (567) | 2,415 |
| Net interest margin | 1.36% | 1.92% | 3.34% | 0.51% | | 1.55% |
| Total assets | 257,692 | 148,467 | 59,166 | 185,345 | 12,831 | 663,501 |
| Of which: loans and advances to customers | 126,739 | 82,579 | 29,602 | 46,633 | - | 285,553 |
| Total liabilities | 228,093 | 128,165 | 39,413 | 177,525 | 38,498 | 611,694 |
| Of which: customer accounts | 186,517 | 95,310 | 31,797 | 98,100 | - | 411,724 |
Additional segmental information (statutory)
| | 31.12.18 | |||||
| Corporate & Institutional Banking | Retail | Commercial Banking | Private | Central & | Total | |
| Net interest income | 3,470 | 3,164 | 863 | 297 | 999 | 8,793 |
| Net fees and commission income | 1,496 | 1,579 | 284 | 192 | (59) | 3,492 |
| Other income | 1,640 | 298 | 243 | 29 | 294 | 2,504 |
| Operating income | 6,606 | 5,041 | 1,390 | 518 | 1,234 | 14,789 |
| | 31.12.17 | |||||
| Corporate & Institutional | Retail | Commercial Banking | Private | Central & | Total | |
| Net interest income | 3,225 | 3,006 | 802 | 286 | 862 | 8,181 |
| Net fees and commission income | 1,471 | 1,626 | 285 | 182 | (52) | 3,512 |
| Other income | 1,827 | 271 | 242 | 32 | 360 | 2,732 |
| Operating income | 6,523 | 4,903 | 1,329 | 500 | 1,170 | 14,425 |
| | 31.12.18 | |||||
| Greater China & North Asia | ASEAN & | Africa & | Europe & Americas | Central & | Total | |
| Net interest income | 3,351 | 2,561 | 1,493 | 692 | 696 | 8,793 |
| Other income | 2,799 | 1,431 | 1,112 | 987 | (333) | 5,996 |
| Operating income | 6,150 | 3,992 | 2,605 | 1,679 | 363 | 14,789 |
| | 31.12.17 | |||||
| Greater China & North Asia | ASEAN & | Africa & | Europe & | Central & | Total | |
| Net interest income | 2,950 | 2,402 | 1,619 | 692 | 518 | 8,181 |
| Other income | 2,663 | 1,468 | 1,145 | 904 | 64 | 6,244 |
| Operating income | 5,613 | 3,870 | 2,764 | 1,596 | 582 | 14,425 |
| | 31.12.18 | |||||||
| Hong Kong | Korea | China | Singapore | India | UAE | UK | US | |
| Net interest income | 1,854 | 672 | 648 | 1,049 | 646 | 365 | 294 | 243 |
| Other income | 1,893 | 337 | 171 | 499 | 290 | 272 | 534 | 424 |
| Operating income | 3,747 | 1,009 | 819 | 1,548 | 936 | 637 | 828 | 667 |
| | 31.12.17 | |||||||
| Hong Kong | Korea | China | Singapore | India | UAE | UK | US | |
| Net interest income | 1,564 | 625 | 540 | 965 | 577 | 394 | 428 | 158 |
| Other income | 1,823 | 340 | 163 | 470 | 406 | 339 | 314 | 517 |
| Operating income | 3,387 | 965 | 703 | 1,435 | 983 | 733 | 742 | 675 |
3. Net interest income
Accounting policy
Interest income for financial assets held at either fair value through other comprehensive income or amortised cost, and interest expense on all financial liabilities held at amortised cost is recognised in profit or loss using the effective interest method.
Interest income and expense on financial instruments held at fair value through profit or loss is recognised within net interest income using the effective interest method, with the exception of fair value elected structured notes and structured deposits for which all gains and losses are recognised within trading income.
The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example prepayment options) but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Where the estimates of cash flows have been revised, the carrying amount of the financial asset or liability is adjusted to reflect the actual and revised cash flows, discounted at the instruments original effective interest rate. The adjustment is recognised as interest income or expense in the period in which the revision is made.
Interest income for financial assets that are either held at fair value through other comprehensive income or amortised cost that have become credit-impaired subsequent to initial recognition (stage 3) and have had amounts written off, is recognised using the credit adjusted effective interest rate. This rate is calculated in the same manner as the effective interest rate except that expected credit losses are included in the expected cash flows. Interest income is therefore recognised on the amortised cost of the financial asset including expected credit losses. Should the credit risk on a stage 3 financial asset improve such that the financial asset is no longer considered credit-impaired, interest income recognition reverts to a computation based on the rehabilitated gross carrying value of the financial asset.
| | 31.12.18 | 31.12.17 |
| Balances at central banks | 364 | 287 |
| Loans and advances to banks | 2,293 | 1,955 |
| Loans and advances to customers | 10,527 | 8,845 |
| Listed debt securities | 1,913 | 928 |
| Unlisted debt securities | 1,227 | 1,501 |
| Other eligible bills | 849 | 836 |
| Accrued on impaired assets (discount unwind) | 91 | 83 |
| Interest income | 17,264 | 14,435 |
| | | |
| Deposits by banks | 811 | 891 |
| Customer accounts | 5,764 | 3,859 |
| Debt securities in issue | 1,129 | 756 |
| Subordinated liabilities and other borrowed funds | 767 | 748 |
| Interest expense | 8,471 | 6,254 |
| Net interest income | 8,793 | 8,181 |
| | | |
| Of which from financial instruments held at: | | |
| Amortised cost | 12,255 | 10,861 |
| Fair value through other comprehensive income/ available-for-sale investments | 2,845 | 2,657 |
| Fair value through profit or loss | 2,164 | 847 |
| Held-to-maturity | - | 70 |
| Interest income | 17,264 | 14,435 |
| | | |
| Of which from financial instruments held at: | | |
| Amortised cost | 7,384 | 6,128 |
| Fair value through profit or loss | 1,087 | 126 |
| Interest expense | 8,471 | 6,254 |
| Net interest income | 8,793 | 8,181 |
4. Net fees and commission
Accounting policy
Fees and commissions charged for services provided or received by the Group are recognised on an accrual basis when the service has been provided or significant act performed.
Loan syndication fees are recognised as revenue when the syndication has been completed and the Group retained no part of the loan package for itself, or retained a part at the same effective interest rate as for the other participants.
The Group can act as trustee or in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. The assets and income arising thereon are excluded from these financial statements, as they are not assets and income of the Group.
The determination of the services performed for the customer, the transaction price, and when the services are completed depends on the nature of the product with the customer. The main considerations on income recognition by product are as follows:
Transaction Banking
The Group recognises fee income associated with transactional Trade, Cash Management and Custody activities at the point in time the service is provided. The Group recognises income associated with Trade contingent risk exposures (such as letters of credit and guarantees) and periodic Custody activities over the period in which the service is provided.
Payment of fees is usually received at the same time the service is provided. In some cases, letters of credit and guarantees issued by the Group have annual upfront premiums, which are amortised on a straight-line basis to fee income over the year.
Financial Markets and Corporate Finance
The Group recognises fee income at the point in time the service is provided. Fee income is recognised for a significant non-lending service when the transaction has been completed and the terms of the contract with the customer entitle the Group to the fee. Fees are usually received shortly after the service is provided.
Syndication fees are recognised when the syndication is complete. Fees are generally received before completion of the syndication, or within 12 months of the transaction date.
Wealth Management
Commissions for bancassurance activities are recorded as they are earned. These commissions are received within a short time frame of the commission being earned.
Target-linked fees are accrued over the period in which the target is met, provided it is assessed as highly probable that the target will be met. Cash payment is received at a contractually specified date after achievement of a target has been confirmed.
Upfront and trailing commissions for managed investment placements are recorded as they are confirmed. Income from these activities is relatively even throughout the period, and cash is usually received within a short time frame after the commission is earned.
Retail Products
The Group recognises most income at the point in time the Group is entitled to the fee, since most services are provided at the time of the customer's request.
Credit card annual fees are recognised at the time the fee is received since in most of our retail markets there are contractual circumstances under which fees are waived, so income recognition is constrained until the uncertainties associated with the annual fee are resolved. The Group defers the fair value of reward points on its credit card reward programmes, and recognises income and costs associated with fulfilling the reward at the time of redemption.
| | 31.12.18 | 31.12.17 |
| Fees and commissions income | 4,029 | 3,942 |
| Fees and commissions expense | (537) | (430) |
| Net fees and commission | 3,492 | 3,512 |
Total fee income arising from financial instruments that are not fair valued through profit or loss is $1,478 million (31 December 2017: $1,067 million) and arising from trust and other fiduciary activities is $144 million (31 December 2017: $130 million).
Total fee expense arising from financial instruments that are not fair valued through profit or loss is $143 million (31 December 2017: $74 million) and arising from trust and other fiduciary activities is $27 million (31 December 2017: $22 million).
| | 31.12.18 | |||||
| Corporate & Institutional Banking | Retail | Commercial Banking | Private | Central & | Total | |
| Transaction Banking | 1,066 | 12 | 223 | - | - | 1,301 |
| Trade | 448 | 12 | 163 | - | - | 623 |
| Cash Management and Custody | 618 | - | 60 | - | - | 678 |
| Financial Markets | 206 | - | 25 | - | - | 231 |
| Corporate Finance | 181 | - | 21 | - | - | 202 |
| Lending and Portfolio Management | 57 | - | 13 | - | - | 70 |
| Principal Finance | (14) | - | - | - | - | (14) |
| Wealth Management | - | 1,167 | 2 | 190 | - | 1,359 |
| Retail Products | - | 403 | - | 2 | - | 405 |
| Treasury | - | - | - | - | (22) | (22) |
| Others | - | (3) | - | - | (37) | (40) |
| Net fees and commission | 1,496 | 1,579 | 284 | 192 | (59) | 3,492 |
| | 31.12.17 | |||||
| Corporate & Institutional | Retail | Commercial Banking | Private | Central & | Total | |
| Transaction Banking | 1,044 | 12 | 221 | - | - | 1,277 |
| Trade | 450 | 12 | 160 | - | - | 622 |
| Cash Management and Custody | 594 | - | 61 | - | - | 655 |
| Financial Markets | 167 | - | 26 | - | - | 193 |
| Corporate Finance | 207 | - | 19 | - | - | 226 |
| Lending and Portfolio Management | 36 | - | 15 | - | - | 51 |
| Principal Finance | 17 | - | - | - | - | 17 |
| Wealth Management | - | 1,171 | 4 | 180 | - | 1,355 |
| Retail Products | - | 441 | - | 2 | - | 443 |
| Treasury | - | - | - | - | (20) | (20) |
| Others | - | 2 | - | - | (32) | (30) |
| Net fees and commission | 1,471 | 1,626 | 285 | 182 | (52) | 3,512 |
Upfront bancassurance consideration amounts are amortised on a straight-line basis over the contractual period to which the consideration relates. Deferred income on the balance sheet in respect of these activities is $886 million (31 December 2017: $970 million). The income will be earned evenly over the next 10.5 years (31 December 2017: 11.5 years).
5. Net trading income
Accounting policy
Gains and losses arising from changes in the fair value of financial instruments held at fair value through profit or loss are included in the income statement in the period in which they arise.
Income is recognised from the sale and purchase of trading positions, margins on market making and customer business and fair value changes.
| | 31.12.18 | 31.12.17 |
| Net trading income | 1,683 | 1,527 |
| Significant items within net trading income include: | | |
| Gains on instruments held for trading | 1,756 | 1,716 |
| Losses on financial assets mandatorily at fair value through profit or loss | (104) | - |
| Gains on financial assets designated at fair value through profit or loss | 11 | 167 |
| Gains/(losses) on financial liabilities designated at fair value through profit or loss | 30 | (202) |
6. Other operating income
Accounting policy
Operating lease income is recognised on a straight-line basis over the period of the lease unless another systematic basis is more appropriate.
Dividends on equity instruments are recognised when the Group's right to receive payment is established.
On disposal of fair value through other comprehensive income financial instruments, the cumulative gain or loss recognised in other comprehensive income is recycled to the profit or loss in other operating income/expense.
When the Group loses control of the subsidiary or disposal group, the difference between the consideration received and the carrying amount of the subsidiary or disposal group is recognised as a gain or loss on sale of the business.
| | 31.12.18 | 31.12.17 |
| Other operating income includes: | | |
| Rental income from operating lease assets | 573 | 670 |
| Gains less losses on disposal of fair value through other comprehensive income/available-for-sale investments | (31) | 235 |
| Net gain on sale of businesses | 9 | 28 |
| Net gain on derecognition of investment in associate | - | 64 |
| Dividend income | 25 | 46 |
| Gains arising on repurchase of senior and subordinated liabilities1 | 69 | - |
| Other | 176 | 162 |
| | 821 | 1,205 |
1 On 14 June 2018, Standard Chartered PLC repurchased in part, £245.7 million of its £750 million 4.375 per cent senior debt 2038 and £372.5 million of its £900 million 5.125 per cent subordinated debt 2034. On the same date, Standard Chartered Bank repurchased in part, £95.1 million of its £200 million 7.75 per cent subordinated notes (callable 2022). This activity resulted in an overall gain of £69 million for the Group. Please refer to Note 27
7. Operating expenses
Accounting policy
Short-term employee benefits: salaries and social security expenses are recognised over the period in which the employees provide the service. Variable compensation is included within share-based payments costs and wages and salaries. Further details are disclosed in the Annual Report.
Pension costs: contributions to defined contribution pension schemes are recognised in profit or loss when payable. For defined benefit plans, net interest expense, service costs and expenses are recognised in the income statement. Further details are provided in Note 30.
Share-based compensation: the Group operates equity-settled and cash-settled share-based payment compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. Further details are provided in Note 31.
| | 31.12.18 | 31.12.17 |
| Staff costs: | | |
| Wages and salaries | 5,439 | 5,047 |
| Social security costs | 171 | 159 |
| Other pension costs (Note 30) | 365 | 357 |
| Share-based payment costs | 166 | 152 |
| Other staff costs | 933 | 1,043 |
| | 7,074 | 6,758 |
Other staff costs include redundancy expenses of $153 million (31 December 2017: $85 million). Further costs in this category include training, travel costs and other staff related costs.
The following table summarises the number of employees within the Group:
| | 31.12.18 | | 31.12.17 | ||||
| Business | Support services | Total | Business | Support services | Total | ||
| At 31 December | 38,621 | 46,781 | 85,402 | | 40,636 | 45,385 | 86,021 |
| Average for the year | 39,929 | 46,339 | 86,268 | | 41,806 | 44,988 | 86,794 |
The Company employed nil staff at 31 December 2018 (31 December 2017: nil) and it incurred costs of $5 million (31 December 2017: $5 million).
Details of directors' pay and benefits and interests in shares are disclosed in the Annual Report.
Transactions with directors, officers and other related parties are disclosed in Note 36.
| | 31.12.18 | 31.12.17 |
| Premises and equipment expenses: | | |
| Rental of premises | 374 | 379 |
| Other premises and equipment costs | 395 | 427 |
| Rental of computers and equipment | 21 | 17 |
| | 790 | 823 |
| | | |
| General administrative expenses: | | |
| UK bank levy | 324 | 220 |
| Provision for regulatory matters | 900 | - |
| Other general administrative expenses | 1,702 | 1,787 |
| | 2,926 | 2,007 |
| | | |
| Depreciation and amortisation: | | |
| Property, plant and equipment: | | |
| Premises | 86 | 85 |
| Equipment | 94 | 85 |
| Operating lease assets | 304 | 328 |
| | 484 | 498 |
| Intangibles: | | |
| Software | 363 | 320 |
| Acquired on business combinations | 10 | 11 |
| | 857 | 829 |
| Total operating expenses | 11,647 | 10,417 |
The UK bank levy is applied on the chargeable equities and liabilities on the Group's consolidated balance sheet. Key exclusions from chargeable equities and liabilities include Tier 1 capital, insured or guaranteed retail deposits, repos secured on certain sovereign debt and liabilities subject to netting. The rate of the levy for 2018 is 0.16 per cent for chargeable short-term liabilities, with a lower rate of 0.08 per cent generally applied to chargeable equity and long-term liabilities (i.e. liabilities with a remaining maturity greater than one year). The rates will be gradually reduced over the next two years, from 1 January 2021 they will be 0.10 per cent for short-term liabilities and 0.05 per cent for long-term liabilities. In addition, the scope of the bank levy will be restricted to the balance sheet of UK operations only from that date.
8. Credit impairment
Accounting policy
Significant accounting estimates and judgements
The Group's expected credit loss (ECL) calculations are outputs of complex models with a number of underlying assumptions. The significant judgements in determining expected credit loss include:
• The Group's criteria for assessing if there has been a significant increase in credit risk; and
• Development of expected credit loss models, including the choice of inputs relating to macroeconomic variables
The calculation of credit impairment provisions also involves expert credit judgement to be applied by the credit risk management team based upon counterparty information they receive from various sources including relationship managers and on external market information. Details on the approach for determining expected credit loss can be found in the Credit risk section, under IFRS 9 Methodology.
Estimates of forecasts of key macroeconomic variables underlying the expected credit loss calculation can be found with in the Risk review, Key assumptions and judgements in determining expected credit loss.
Expected credit losses
Expected credit losses are determined for all financial debt instruments that are classified at amortised cost or fair value through other comprehensive income, undrawn commitments and financial guarantees.
An expected credit loss represents the present value of expected cash shortfalls over the residual term of a financial asset, undrawn commitment or financial guarantee.
A cash shortfall is the difference between the cash flows that are due in accordance with the contractual terms of the instrument and the cash flows that the Group expects to receive over the contractual life of the instrument.
Measurement
Expected credit losses are computed as unbiased, probability-weighted amounts which are determined by evaluating a range of reasonably possible outcomes, the time value of money, and considering all reasonable and supportable information including that which is forward-looking.
For material portfolios, the estimate of expected cash shortfalls is determined by multiplying the probability of default (PD) with the loss given default (LGD) with the expected exposure at the time of default (EAD). There may be multiple default events over the lifetime of an instrument. Further details on the components of PD, LGD and EAD are disclosed in the Credit risk section. For less material Retail Banking loan portfolios, the Group has adopted simplified approaches based on historical roll rates or loss rates.
Forward-looking economic assumptions are incorporated into the PD, LGD and EAD where relevant and where they influence credit risk, such as GDP growth rates, interest rates, house price indices and commodity prices among others. These assumptions are incorporated using the Group's most likely forecast for a range of macroeconomic assumptions. These forecasts are determined using all reasonable and supportable information, which includes both internally developed forecasts and those available externally, and are consistent with those used for budgeting, forecasting and capital planning.
To account for the potential non-linearity in credit losses, multiple forward-looking scenarios are incorporated into the range of reasonably possible outcomes for all material portfolios. For example, where there is a greater risk of downside credit losses than upside gains, multiple forward-looking economic scenarios are incorporated into the range of reasonably possible outcomes, both in respect of determining the PD (and where relevant, the LGD and EAD) and in determining the overall expected credit loss amounts. These scenarios are determined using a Monte Carlo approach centred around the Group's most likely forecast of macroeconomic assumptions.
The period over which cash shortfalls are determined is generally limited to the maximum contractual period for which the Group is exposed to credit risk. However, for certain revolving credit facilities, which include credit cards or overdrafts, the Group's exposure to credit risk is not limited to the contractual period. For these instruments, the Group estimates an appropriate life based on the period that the Group is exposed to credit risk, which includes the effect of credit risk management actions such as the withdrawal of undrawn facilities.
For credit-impaired financial instruments, the estimate of cash shortfalls may require the use of expert credit judgement. As a practical expedient, the Group may also measure credit impairment on the basis of an instrument's fair value using an observable market price.
The estimate of expected cash shortfalls on a collateralised financial instrument reflects the amount and timing of cash flows that are expected from foreclosure on the collateral less the costs of obtaining and selling the collateral, regardless of whether foreclosure is deemed probable.
Cash flows from unfunded credit enhancements held are included within the measurement of expected credit losses if they are part of, or integral to, the contractual terms of the instrument (this includes financial guarantees, unfunded risk participations and other non-derivative credit insurance). Although non-integral credit enhancements do not impact the measurement of expected credit losses, a reimbursement asset is recognised to the extent of the expected credit losses recorded.
Cash shortfalls are discounted using the effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired instruments (POCI) on the financial instrument as calculated at initial recognition or if the instrument has a variable interest rate, the current effective interest rate determined under the contract.
| Instruments | Location of expected credit loss provisions |
| Financial assets held at amortised cost | Loss provisions: netted against gross carrying value1 |
| Financial assets held FVOCI - Debt instruments | Other comprehensive income (FVOCI expected credit loss reserve)2 |
| Loan commitments | Provisions for liabilities and charges3 |
| Financial guarantees | Provisions for liabilities and charges3 |
1 Purchased or originated credit-impaired assets do not attract an expected credit loss provision on initial recognition. An expected credit loss provision will be recognised only if there is an increase in expected credit losses from that considered at initial recognition
2 Debt and treasury securities classified as fair value through other comprehensive income (FVOCI) are held at fair value on the face of the balance sheet. The expected credit loss attributed to these instruments is held as a separate reserve within other comprehensive income (OCI) and is recycled to the profit and loss account along with any fair value measurement gains or losses held within FVOCI when the applicable instruments are derecognised
3 Expected credit loss on loan commitments and financial guarantees is recognised as a liability provision. Where a financial instrument includes both a loan (i.e. financial asset component) and an undrawn commitment (i.e. loan commitment component), and it is not possible to separately identify the expected credit loss on these components, expected credit loss amounts on the loan commitment are recognised together with expected credit loss amounts on the financial asset. To the extent the combined expected credit loss exceeds the gross carrying amount of the financial asset, the expected credit loss is recognised as a liability provision
Recognition
Expected credit losses are recognised at the time of initial recognition of a financial instrument and represent the lifetime 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 either a significant increase in the credit risk of an instrument or the instrument becomes credit-impaired. If an instrument is no longer considered to exhibit a significant increase in credit risk, expected credit losses will revert to being determined on a 12-month basis.
If a financial asset experiences a significant increase in credit risk (SICR) since initial recognition, an expected credit loss provision is recognised for default events that may occur over the lifetime of the asset.
Significant increase in credit risk is assessed by comparing the risk of default of an exposure at the reporting date to the risk of default at origination (after taking into account the passage of time). Significant does not mean statistically significant nor is it assessed in the context of changes in expected credit loss. Whether a change in the risk of default is significant or not is assessed using a number of quantitative and qualitative factors, the weight of which depends on the type of product and counterparty. Financial assets that are 30 or more days past due and not credit-impaired will always be considered to have experienced a significant increase in credit risk. For less material portfolios where a loss rate or roll rate approach is applied to compute expected credit loss, significant increase in credit risk is primarily based on 30 days past due.
Quantitative factors include an assessment of whether there has been significant increase in the forward-looking probability of default (PD) since origination. A forward-looking PD is one that is adjusted for future economic conditions to the extent these are correlated to changes in credit risk. We compare the residual lifetime PD at the balance sheet date to the residual lifetime PD that was expected at the time of origination for the same point in the term structure and determine whether both the absolute and relative change between the two exceeds predetermined thresholds. To the extent that the differences between the measures of default outlined exceed the defined thresholds, the instrument is considered to have experienced a significant increase in credit risk.
Qualitative factors assessed include those linked to current credit risk management processes, such as lending placed on non-purely precautionary early alert (and subject to closer monitoring).
A non-purely precautionary early alert account is one which 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.
Financial assets that are credit-impaired (or in default) represent those that are at least 90 days past due in respect of principal and/or interest. 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. It may not be possible to identify a single discrete event but instead the combined effect of several events may cause financial assets to become credit-impaired.
Evidence that a financial asset is credit-impaired includes observable data about the following events:
• Significant financial difficulty of the issuer or borrower;
• Breach of contract such as default or a past due event;
• For economic or contractual reasons relating to the borrower's financial difficulty, the lenders of the borrower have granted the borrower concession/s that lenders would not otherwise consider. This would include forbearance actions;
• Pending or actual bankruptcy or other financial reorganisation to avoid or delay discharge of the borrower's obligation/s;
• The disappearance of an active market for the applicable financial asset due to financial difficulties of the borrower;
• Purchase or origination of a financial asset at a deep discount that reflects incurred credit losses
Irrevocable lending commitments to a credit-impaired obligor that have not yet been drawn down are also included within the stage 3 credit impairment provision to the extent that the commitment cannot be withdrawn.
Loss provisions against credit-impaired financial assets are determined based on an assessment of the recoverable cash flows under a range of scenarios, including the realisation of any collateral held where appropriate. The loss provisions held represent the difference between the present value of the cash flows expected to be recovered, discounted at the instrument's original effective interest rate, and the gross carrying value of the instrument prior to any credit impairment. 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.
Expert credit judgement
For Corporate & Institutional, Commercial and Private Banking, borrowers are graded by credit risk management on a credit grading (CG) scale from CG1 to CG14. Once a borrower starts to exhibit credit deterioration, it will move along the credit grading scale in the performing book and when it is classified as CG12 the credit assessment and oversight of the loan will normally be performed by Group Special Assets Management (GSAM).
Borrowers graded CG12 exhibit well-defined weaknesses in areas such as management and/or performance but there is no current expectation of a loss of principal or interest. Where the impairment assessment indicates that there will be a loss of principal on a loan, the borrower is graded a CG14 while borrowers of other credit-impaired loans are graded CG13. Instruments graded CG13 or CG14 are regarded as non-performing loans, i.e. stage 3 or credit-impaired exposures.
For individually significant financial assets within stage 3, GSAM will consider all judgements that have an impact on the expected future cash flows of the asset. These include: the business prospects, industry and geo political climate of the customer, quality of realisable value of collateral, the Group's legal position relative to other claimants and any renegotiation/ forbearance/ modification options. The difference between the loan carrying amount and the discounted expected future cash flows will result in the stage 3 credit impairment amount. The future cash flow calculation involves significant judgements and estimates. As new information becomes available and further negotiations/forbearance measures are taken the estimates of the future cash flows will be revised, and will have an impact on the future cash flow analysis.
For financial assets which are not individually significant, such as the Retail Banking portfolio or small business loans, which comprise a large number of homogenous loans that share similar characteristics, statistical estimates and techniques are used, as well as credit scoring analysis.
Retail Banking clients are considered credit-impaired where they are more than 90 days past due. Retail Banking products are also considered credit-impaired if the borrower files for bankruptcy or other forbearance programme, the borrower is deceased or the business is closed in the case of a small business, or if the borrower surrenders the collateral, or there is an identified fraud on the account. Additionally, if the account is unsecured and the borrower has other credit accounts with the Group that are considered credit-impaired, the account may be also be credit-impaired.
Techniques used to compute impairment amounts use models which analyse historical repayment and default rates over a time horizon. Where various models are used, judgement is required to analyse the available information provided and select the appropriate model or combination of models to use.
Expert credit judgement is also applied to determine whether any post-model adjustments are required for credit risk elements which are not captured by the models.
Modified financial instruments
Where the original contractual terms of a financial asset have been modified for credit reasons and the instrument has not been derecognised (an instrument is derecognised when a modification results in a change in cash flows that the Group would consider substantial), the resulting modification loss is recognised within credit impairment in the income statement with a corresponding decrease in the gross carrying value of the asset. If the modification involved a concession that the bank would not otherwise consider, the instrument is considered to be credit-impaired and is considered forborne.
Expected credit loss for modified financial assets that have not been derecognised and are not considered to be credit-impaired will be recognised on a 12-month basis, or a lifetime basis, if there is a significant increase in credit risk. These assets are assessed to determine whether there has been a significant increase in credit risk subsequent to the modification. Although loans may be modified for non-credit reasons, a significant increase in credit risk may occur. In addition to the recognition of modification gains and losses, the revised carrying value of modified financial assets will impact the calculation of expected credit losses, with any increase or decrease in expected credit loss recognised within impairment.
Forborne loans
Forborne loans are those loans that have been modified in response to a customer's financial difficulties. Forbearance strategies assist clients who are temporarily in financial distress and are unable to meet their original contractual repayment terms. Forbearance can be initiated by the client, the Group or a third-party including government sponsored programmes or a conglomerate of credit institutions. Forbearance may include debt restructuring such as new repayment schedules, payment deferrals, tenor extensions, interest only payments, lower interest rates, forgiveness of principal, interest or fees, or relaxation of loan covenants.
Forborne loans that have been modified (and not derecognised) on terms that are not consistent with those readily available in the market and/or where we have granted a concession compared to the original terms of the loans are considered credit-impaired if there is a detrimental impact on cash flows. The modification loss (see Classification and measurement - Modifications) is recognised in the profit or loss within credit impairment and the gross carrying value of the loan reduced by the same amount. The modified loan is disclosed as 'Loans subject to forbearance - credit-impaired'.
Loans that have been subject to a forbearance modification, but which are not considered credit-impaired (not classified as CG13 or CG14), are disclosed as 'Forborne - not credit-impaired'. This may include amendments to covenants within the contractual terms.
Write-offs of credit-impaired instruments and reversal of impairment
To the extent a financial debt instrument is considered irrecoverable, the applicable portion of the gross carrying value is written off against the related loan provision. Such loans are written off after all the necessary procedures have been completed, it is decided that there is no realistic probability of recovery and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement. If, in a subsequent period, the amount of the credit impairment loss decreases and the decrease can be related objectively to an event occurring after the credit impairment was recognised (such as an improvement in the debtor's credit rating), the previously recognised credit impairment loss is reversed by adjusting the provision account. The amount of the reversal is recognised in the income statement.
Loss provisions on purchased or originated credit-impaired instruments (POCI)
The Group measures expected credit loss on a lifetime basis for POCI instruments throughout the life of the instrument. However, expected credit loss is not recognised in a separate loss provision on initial recognition for POCI instruments as the lifetime expected credit loss is inherent within the gross carrying amount of the instruments. The Group recognises the change in lifetime expected credit losses arising subsequent to initial recognition in the income statement and the cumulative change as a loss provision. Where lifetime expected credit losses on POCI instruments are less than those at initial recognition, then the favourable differences are recognised as impairment gains in the income statement (and as impairment loss where the expected credit losses are greater).
Improvement in credit risk/curing
A period may elapse from the point at which instruments enter lifetime expected credit losses (stage 2 or stage 3) and are reclassified back to 12-month expected credit losses (stage 1). For financial assets that are credit-impaired (stage 3), a transfer to stage 2 or stage 1 is only permitted where the instrument is no longer considered to be credit-impaired. An instrument will no longer be considered credit-impaired when there is no shortfall of cash flows compared to the original contractual terms.
For financial assets within stage 2, these can only be transferred to stage 1 when they are no longer considered to have experienced a significant increase in credit risk.
Where significant increase in credit risk was determined using quantitative measures, the instruments will automatically transfer back to stage 1 when the original PD based transfer criteria are no longer met. Where instruments were transferred to stage 2 due to an assessment of qualitative factors, the issues that led to the reclassification must be cured before the instruments can be reclassified to stage 1. This includes instances where management actions led to instruments being classified as stage 2, requiring that action to be resolved before loans are reclassified to stage 1.
A forborne loan can only be removed from the disclosure (cured) if the loan is performing (stage 1 or 2) and a further two-year probation period is met.
In order for a forborne loan to become performing, the following criteria have to be satisfied:
• At least a year has passed with no default based upon the forborne contract terms
• The customer is likely to repay its obligations in full without realising security
• The customer has no accumulated impairment against amount outstanding
Subsequent to the criteria above, a further two-year probation period has to be fulfilled, whereby regular payments are made by the customer and none of the exposures to the customer are more than 30 days past due.
| | 31.12.18 | 31.12.17 |
| Net credit impairment against profit on loans and advances to banks and customers | 607 | 1,365 |
| Net credit impairment against profit or loss during the period relating to debt securities | 7 | 20 |
| Net credit impairment relating to financial guarantees and loan commitments | 39 | (23) |
| Credit impairment1 | 653 | 1,362 |
1 No material POCI assets
9. Other impairment
Accounting policy
Refer to the below referenced notes for the relevant accounting policy
| | 31.12.18 | 31.12.17 |
| Impairment of goodwill (Note 17) | - | 320 |
| | | |
| Impairment of fixed assets (Note 18) | 150 | 137 |
| Impairment losses on available-for-sale equity shares1 | - | 16 |
| Impairment of other intangible assets (Note 17) | 46 | 23 |
| Other impairment - Other | (14) | 3 |
| Other impairment | 182 | 179 |
| | 182 | 499 |
1 31 December 2017 equity shares impairment disclosed on an IAS 39 basis. 31 December 2018 equity shares disclosed on an IFRS 9 basis. Under IFRS 9, equity shares are either measured at FVTPL or FVOCI with fair value movements recognised accordingly
10. Taxation
Accounting policy
Income tax payable on profits is based on the applicable tax law in each jurisdiction and is recognised as an expense in the period in which profits arise.
Deferred tax is provided on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted as at the balance sheet date, and that are expected to apply when the related deferred tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised. Where permitted, deferred tax assets and liabilities are offset on an entity basis and not by component of deferred taxation.
Current and deferred tax relating to items which are charged or credited directly to equity, is credited or charged directly to equity and is subsequently recognised in the income statement together with the current or deferred gain or loss.
Significant accounting estimates and judgements
• Determining the Group's tax charge for the year involves estimation and judgement, which includes an interpretation of local tax laws and an assessment of whether the tax authorities will accept the position taken. These judgements take account of external advice where appropriate, and the Group's view on settling with the relevant tax authorities
• The Group provides for current tax liabilities at the best estimate of the amount that is expected to be paid to the tax authorities where an outflow is probable. In making its estimates the Group assumes that the tax authorities will examine all the amounts reported to them and have full knowledge of all relevant information
The recoverability of the Group's deferred tax assets is based on management's judgement of the availability of future taxable profits against which the deferred tax assets will be utilised.
The following table provides analysis of taxation charge in the year:
| | 31.12.18 | 31.12.17 |
| The charge for taxation based upon the profit for the year comprises: | | |
| Current tax: | | |
| United Kingdom corporation tax at 19 per cent (2017: 19.25 per cent): | | |
| Current tax charge on income for the year | 1 | - |
| Adjustments in respect of prior years (including double tax relief) | 49 | 1 |
| Foreign tax: | | |
| Current tax charge on income for the year | 1,109 | 977 |
| Adjustments in respect of prior years | (105) | (13) |
| | 1,054 | 965 |
| Deferred tax: | | |
| Origination/reversal of temporary differences | 254 | 156 |
| Adjustments in respect of prior years | 131 | 26 |
| | 385 | 182 |
| Tax on profits on ordinary activities | 1,439 | 1,147 |
| Effective tax rate | 56.5% | 47.5% |
| | | |
| Tax on profits on ordinary activities excluding the impact of US Tax Reform | 1,439 | 927 |
| Effective tax rate excluding the impact of US Tax Reform | 56.5% | 38.4% |
The US Tax Cuts and Jobs Act of 2017, effective 1 January 2018, reduced the US corporate tax rate from 35 per cent to 21 per cent and introduced a Base Erosion and Anti Abuse Tax. The combined impact of these changes in the tax rates reduced the 2017 US deferred tax asset, increasing the 2017 deferred tax charge by $220 million.
The tax charge for the year of $1,439 million (31 December 2017: $1,147 million) on a profit before tax of $2,548 million (31 December 2017: $2,415 million) reflects the impact of non-deductible regulatory provisions and other non-deductible expenses, non-creditable withholding taxes and the impact of countries with tax rates higher or lower than the UK, the most significant of which is India.
Foreign tax includes current tax of $169 million (31 December 2017: $167 million) on the profits assessable in Hong Kong.
Deferred tax includes origination or reversal of temporary differences of $17 million (31 December 2017: $5 million) provided at a rate of 16.5 per cent (31 December 2017: 16.5 per cent) on the profits assessable in Hong Kong.
Tax rate: The tax charge for the year is higher than the charge at the rate of corporation tax in the UK, 19 per cent. The differences are explained below:
| | 31.12.18 | 31.12.17 |
| Profit on ordinary activities before tax | 2,548 | 2,415 |
| Tax at 19 per cent (2017: 19.25 per cent) | 484 | 465 |
| Lower tax rates on overseas earnings | (66) | (17) |
| Higher tax rates on overseas earnings | 354 | 284 |
| Non-creditable withholding taxes | 158 | 67 |
| Tax free income | (113) | (130) |
| Share of associates and joint ventures | (39) | (45) |
| Non-deductible expenses | 322 | 217 |
| Provision for regulatory matters | 164 | - |
| Bank levy | 62 | 42 |
| Non-taxable losses on investments | 79 | 9 |
| Payments on financial instruments in reserves | (68) | - |
| Non-taxable gains on disposals of businesses | - | (12) |
| Goodwill impairment | - | 63 |
| US Tax Reform | - | 220 |
| Deferred tax not recognised | 2 | 39 |
| Adjustments to tax charge in respect of prior years | 75 | 14 |
| Other items | 25 | (69) |
| Tax on profit on ordinary activities | 1,439 | 1,147 |
Factors affecting the tax charge in future years: The Group's tax charge, and effective tax rate in future years could be affected by several factors including acquisitions, disposals and restructuring of our businesses, the mix of profits across jurisdictions with different statutory tax rates, changes in tax legislation and tax rates and resolution of uncertain tax positions.
The evaluation of uncertain tax positions involves an interpretation of local tax laws which could be subject to challenge by a tax authority, and an assessment of whether the tax authorities will accept the position taken. The Group does not currently consider that assumptions or judgements made in assessing tax liabilities have a significant risk of resulting in a material adjustment within the next financial year.
| | 31.12.18 | | 31.12.17 | ||||
| Current tax | Deferred tax | Total | Current tax | Deferred tax | Total | ||
| Tax recognised in other comprehensive income | | | | | | | |
| Fair value through other comprehensive income/available-for-sale assets | - | 21 | 21 | | 1 | 7 | 8 |
| Cash flow hedges | - | (6) | (6) | | - | (6) | (6) |
| Own credit adjustment | 9 | (45) | (36) | | - | 14 | 14 |
| Retirement benefit obligations | - | 6 | 6 | | - | (35) | (35) |
| | | | | | | | |
| Total tax credit/(charge) recognised in equity | 9 | (24) | (15) | | 1 | (20) | (19) |
Current tax: The following are the movements in current tax during the year:
| Current tax comprises: | 31.12.18 | 31.12.17 |
| Current tax assets | 491 | 474 |
| Current tax liabilities | (376) | (327) |
| Net current tax opening balance before transition | 115 | 147 |
| IFRS 9 transition | 11 | - |
| Net current tax opening balance after transition | 126 | 147 |
| Movements in income statement | (1,054) | (965) |
| Movements in other comprehensive income | 9 | 1 |
| Taxes paid | 770 | 915 |
| Other movements | (35) | 17 |
| Net current tax balance as at 31 December | (184) | 115 |
| Current tax assets | 492 | 491 |
| Current tax liabilities | (676) | (376) |
| Total | (184) | 115 |
Deferred tax: The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the year:
| | At | Exchange | (Charge)/credit | (Charge)/credit | At |
| Deferred tax comprises: | | | | | |
| Accelerated tax depreciation | (413) | 4 | (85) | - | (494) |
| Impairment provisions on loans and advances | 1,206 | (99) | (146) | - | 961 |
| Tax losses carried forward | 290 | (4) | (20) | - | 266 |
| Fair value through other comprehensive income assets | (21) | 4 | (1) | 21 | 3 |
| Cash flow hedges | (2) | 1 | - | (6) | (7) |
| Own credit adjustment | 11 | 1 | - | (45) | (33) |
| Retirement benefit obligations | 38 | (2) | (2) | 6 | 40 |
| Share-based payments | 16 | - | (1) | - | 15 |
| Other temporary differences | (190) | 53 | (130) | - | (267) |
| Net deferred tax assets | 935 | (42) | (385) | (24) | 484 |
| | At | Exchange | (Charge)/credit | (Charge)/credit | At | IFRS 9 | At |
| Deferred tax comprises: | | | | | | | |
| Accelerated tax depreciation | (399) | (12) | (2) | - | (413) | - | (413) |
| Impairment provisions on loans and advances | 934 | 36 | 101 | - | 1,071 | 135 | 1,206 |
| Tax losses carried forward | 396 | 8 | (114) | - | 290 | - | 290 |
| Fair value through other comprehensive income/ available-for-sale assets | (27) | (2) | - | 7 | (22) | 1 | (21) |
| Cash flow hedges | 5 | (1) | - | (6) | (2) | - | (2) |
| Own credit adjustment | - | (3) | - | 14 | 11 | - | 11 |
| Retirement benefit obligations | 76 | 3 | (6) | (35) | 38 | - | 38 |
| Share-based payments | 16 | - | - | - | 16 | - | 16 |
| Other temporary differences | (60) | 5 | (161) | - | (216) | 26 | (190) |
| Net deferred tax assets | 941 | 34 | (182) | (20) | 773 | 162 | 935 |
Deferred tax comprises assets and liabilities as follows:
| | 31.12.18 | | 01.01.18 | | 31.12.17 | ||||||
| Total | Asset | Liability | Total | Asset | Liability | Total | Asset | Liability | |||
| Deferred tax comprises: | | | | | | | | | | | |
| Accelerated tax depreciation | (494) | 7 | (501) | | (413) | 17 | (430) | | (413) | 17 | (430) |
| Impairment provisions on loans and advances | 961 | 938 | 23 | | 1,206 | 1,148 | 58 | | 1,071 | 1,037 | 34 |
| Tax losses carried forward | 266 | 126 | 140 | | 290 | 134 | 156 | | 290 | 134 | 156 |
| Fair value through other comprehensive income/ available-for-sale assets | 3 | (2) | 5 | | (21) | (7) | (14) | | (22) | (8) | (14) |
| Cash flow hedges | (7) | (12) | 5 | | (2) | (7) | 5 | | (2) | (7) | 5 |
| Own credit adjustment | (33) | (18) | (15) | | 11 | (2) | 13 | | 11 | (2) | 13 |
| Retirement benefit obligations | 40 | 40 | - | | 38 | 38 | - | | 38 | 38 | - |
| Share-based payments | 15 | 15 | - | | 16 | 16 | - | | 16 | 16 | - |
| Other temporary differences | (267) | (47) | (220) | | (190) | (29) | (161) | | (216) | (48) | (168) |
| | 484 | 1,047 | (563) | | 935 | 1,308 | (373) | | 773 | 1,177 | (404) |
At 31 December 2018, the Group has net deferred tax assets of $484 million (31 December 2017: $773 million). The recoverability of the Group's deferred tax assets is based on management's judgement of the availability of future taxable profits against which the deferred tax assets will be utilised.
Of the Group's total deferred tax assets, $266 million relates to tax losses carried forward. These tax losses have arisen in individual legal entities and will be offset as future taxable profits arise in those entities.
• $139 million of the deferred tax assets relating to losses has arisen in Ireland, where there is no expiry date for unused tax losses. These losses relate to aircraft leasing and are expected to be fully utilised over the useful economical life of the assets being up to 18 years
• $33 million of the deferred tax assets relating to losses has arisen in Korea. These losses have no expiry date, and there is a defined profit stream against which they are forecast to be utilised
• $27 million of the deferred tax assets relating to losses has arisen in the US. Management forecasts show that the losses are expected to be fully utilised over a period of nine years. The tax losses expire after 20 years
• $25 million of the deferred tax assets relating to losses has arisen in Taiwan. Management forecasts show that the losses are expected to be fully utilised over a period of one year. The tax losses expire after 10 years
The remaining deferred tax assets of $42 million relating to losses has arisen in other jurisdictions and is expected to be recovered in less than 10 years.
| | 31.12.18 | 31.12.17 |
| No account has been taken of the following potential deferred tax assets/(liabilities): | | |
| Withholding tax on unremitted earnings from overseas subsidiaries | (281) | (343) |
| Foreign exchange movements on investments in branches1 | - | - |
| Tax losses | 1,283 | 1,311 |
| Held over gains on incorporation of overseas branches | (413) | (399) |
| Other temporary differences | 79 | 47 |
1 No potential deferred tax is included for foreign exchange movements on investments in branches as any branch disposals would be covered by the Branch Profits Exemptions and would not give rise to a tax liability or asset. The amount as at 31 December 2017, previously disclosed as $339 million, has been restated to nil
11. Dividends
Accounting policy
Dividends on ordinary shares and preference shares classified as equity are recognised in equity in the year in which they are declared.
Dividends on ordinary equity shares are recorded in the year in which they are declared and, in respect of the final dividend, have been approved by the shareholders.
The Board considers a number of factors prior to dividend declaration which includes the rate of recovery in the Group's financial performance, the macroeconomic environment, and opportunities to further invest in our business and grow profitably in our markets.
Ordinary equity shares
| | 31.12.18 | | 31.12.17 | ||
| Cents per share | $million | Cents per share | $million | ||
| 2017/2016 final dividend declared and paid during the year1 | 11.00 | 363 | | - | - |
| 2018/2017 interim dividend declared and paid during the year1 | 6.00 | 198 | | - | - |
1 The amounts are gross of scrip adjustments
Dividends on ordinary equity shares are recorded in the period in which they are declared and, in respect of the final dividend, have been approved by the shareholders. Accordingly, the final ordinary equity share dividends set out above relate to the respective prior years. The 2017 final dividend of 11 cents per ordinary share ($363 million) was paid to eligible shareholders on 17 May 2018 and the 2018 interim dividend of six cents per ordinary share ($198 million) was paid to eligible shareholders on 22 October 2018.
2018 recommended final ordinary equity share dividend
The 2018 ordinary equity share dividend recommended by the Board is 15 cents per share. The financial statements for the year ended 31 December 2018 do not reflect this dividend as this will be accounted for in shareholders' equity as an appropriation of retained profits in the year ending 31 December 2019.
The dividend will be paid in either pounds sterling, Hong Kong dollars or US dollars on 16 May 2019 to shareholders on the UK register of members at the close of business in the UK on 8 March 2019. The dividend will be paid in Indian rupees on 16 May 2019 to Indian Depository Receipt holders on the Indian register at the close of business in India on 8 March 2019.
Preference shares and Additional Tier 1 securities
Dividends on these preference shares and securities classified as equity are recorded in the period in which they are declared.
| | | 31.12.18 | 31.12.17 |
| Non-cumulative redeemable preference shares: | 7.014 per cent preference shares of $5 each | 53 | 53 |
| | 6.409 per cent preference shares of $5 each | 26 | 39 |
| | | 79 | 92 |
| Additional Tier 1 securities: $5 billion fixed rate resetting perpetual subordinated contingent convertible securities | 357 | 353 | |
| | | 436 | 445 |
| Dividends on these preference shares are treated as interest expense and accrued accordingly | | | |
| Non-cumulative irredeemable preference shares: | 7 3/8 per cent preference shares of £1 each | 9 | 10 |
| | 8 1/4 per cent preference shares of £1 each | 10 | 11 |
| | | 19 | 21 |
12. Earnings per ordinary share
Accounting policy
The Group measures earnings per share on an underlying basis. This differs from earnings defined in IAS 33 Earnings per share. Underlying earnings is profit/(loss) attributable to ordinary shareholders adjusted for profits or losses of a capital nature; amounts consequent to investment transactions driven by strategic intent; and other infrequent and/or exceptional transactions that are significant or material in the context of the Group's normal business earnings for the period.
The table below provides the basis of underlying earnings.
| | 31.12.18 | 31.12.17 |
| Profit for the period attributable to equity holders | 1,109 | 1,268 |
| Non-controlling interest | (55) | (49) |
| Dividend payable on preference shares and AT1 classified as equity | (436) | (445) |
| Profit for the period attributable to ordinary shareholders | 618 | 774 |
| | | |
| Items normalised: | | |
| Provision for regulatory matters | 900 | - |
| Restructuring | 478 | 353 |
| Gains arising on repurchase of subordinated liabilities | (69) | - |
| Goodwill impairment (Note 9) | - | 320 |
| Net gain on businesses disposed and available-for-sale financial instruments (included within Note 6) | - | (78) |
| Impact of US Tax Reform (Note 10) | - | 220 |
| Tax on normalised items1 | 104 | (36) |
| Underlying profit | 2,031 | 1,553 |
| | | |
| Basic - Weighted average number of shares (millions) | 3,306 | 3,293 |
| Diluted - Weighted average number of shares (millions) | 3,340 | 3,325 |
| | | |
| Basic earnings per ordinary share (cents) | 18.7 | 23.5 |
| Diluted earnings per ordinary share (cents) | 18.5 | 23.3 |
| Underlying basic earnings per ordinary share (cents) | 61.4 | 47.2 |
| Underlying diluted earnings per ordinary share (cents) | 60.8 | 46.7 |
1 No tax is included in respect of the impairment of goodwill as no tax relief is available
13. Financial instruments
Classification and measurement
Accounting policy
The Group classifies its financial assets into the following measurement categories: amortised cost; fair value through other comprehensive income; and fair value through profit or loss. Financial liabilities are classified as either amortised cost, or held at fair value through profit or loss. Management determines the classification of its financial assets and liabilities at initial recognition of the instrument or, where applicable, at the time of reclassification.
Financial assets held at amortised cost and fair value through other comprehensive income
Debt instruments held at amortised cost or held at fair value through other comprehensive income (FVOCI) have contractual terms that give rise to cash flows that are solely payments of principal and interest (SPPI characteristics). Principal is the fair value of the financial asset at initial recognition but this may change over the life of the instrument as amounts are repaid. Interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period and for other basic lending risks and costs, as well as a profit margin.
In assessing whether the contractual cash flows have SPPI characteristics, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers:
• Contingent events that would change the amount and timing of cash flows
• Leverage features
• Prepayment and extension terms
• Terms that limit the Group's claim to cash flows from specified assets (e.g. non-recourse asset arrangements); and
• Features that modify consideration of the time value of money - e.g. periodical reset of interest rates
Whether financial assets are held at amortised cost or at FVOCI depend on the objectives of the business models under which the assets are held. A business model refers to how the Group manages financial assets to generate cash flows.
The Group makes an assessment of the objective of a business model in which an asset is held at the individual product business line and, where applicable, within business lines depending on the way the business is managed and information is provided to management. Factors considered include:
• How the performance of the product business line is evaluated and reported to the Group's management
• How managers of the business model are compensated, including whether management is compensated based on the fair value of assets or the contractual cash flows collected
• The risks that affect the performance of the business model and how those risks are managed
• The frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations about future sales activity
The Group's business model assessment is as follows:
| Business model | Business objective | Characteristics | Businesses | Products |
| Hold to collect | Intent is to originate financial assets and hold them to maturity, collecting the contractual cash flows over the term of the instrument | • Providing financing and originating assets to earn interest income as primary income stream • Performing credit risk management activities • Costs include funding costs, transaction costs and | • Corporate Lending • Corporate Finance • Transaction Banking • Retail Lending • Treasury Markets (Loans and Borrowings) • Financial Markets (selected) | • Loans and advances • Debt securities |
| Hold to collect and sell | Business objective met through both hold to | • Portfolios held for liquidity needs; or where a certain interest yield profile • Income streams come from interest income, fair value changes, and impairment losses | • Treasury Markets | • Derivatives • Debt securities |
| Fair value through profit or loss | All other business objectives, including trading and managing financial assets on a fair value basis | • Assets held for trading • Assets that are originated, • Performance of the portfolio is evaluated on a fair value basis. • Income streams are from fair value changes or trading gains or losses. | • All other business lines | • Derivatives • Trading portfolios • Financial Markets reverse repos |
Financial assets which have SPPI characteristics and that are held within a business model whose objective is to hold financial assets to collect contractual cash flows ('hold to collect') are recorded at amortised cost. Conversely, financial assets which have SPPI characteristics but are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets ('hold to collect and sell') are classified as held at FVOCI.
Both hold to collect business and a hold to collect and sell business model involve holding financial assets to collect the contractual cash flows. However, the business models are distinct by reference to the frequency and significance that asset sales play in meeting the objective under which a particular group of financial assets is managed. Hold to collect business models are characterised by asset sales that are incidental to meeting the objectives under which a group of assets is managed. Sales of assets under a hold to collect business model can be made to manage increases in the credit risk of financial assets but sales for other reasons should be infrequent or insignificant.
Cash flows from the sale of financial assets under a hold to collect and sell business model by contrast are integral to achieving the objectives under which a particular group of financial assets are managed. This may be the case where frequent sales of financial assets are required to manage the Group's daily liquidity requirements or to meet regulatory requirements to demonstrate liquidity of financial instruments. Sales of assets under hold to collect and sell business models are therefore both more frequent and more significant in value than those under the hold to collect model.
Equity instruments designated as held at FVOCI
Non-trading equity instruments acquired for strategic purposes rather than capital gain may be irrevocably designated at initial recognition as held at FVOCI on an instrument by instrument basis. Dividends received are recognised in profit or loss. Gains and losses arising from changes in the fair value of these instruments, including foreign exchange gains and losses, are recognised directly in equity and are never reclassified to profit or loss even on derecognition.
Financial assets and liabilities held at fair value through profit or loss
Financial assets which are not held at amortised cost or that are not held at fair value through other comprehensive income are held at fair value through profit or loss. Financial assets and liabilities held at fair value through profit or loss are either mandatorily classified fair value through profit or loss or irrevocably designated at fair value through profit or loss at initial recognition.
Mandatorily classified at fair value through profit or loss
Financial assets and liabilities which are mandatorily held at fair value through profit or loss are split between two subcategories as follows:
Trading, including;
• Financial assets and liabilities held for trading, which are those acquired principally for the purpose of selling in the short-term; and
• Derivatives
Non-trading mandatorily at fair value through profit or loss, including;
• Instruments in a business which has a fair value business model (see the Group's business model assessment) which are not trading or derivatives;
• Hybrid financial assets that contain one or more embedded derivatives;
• Financial assets that would otherwise be measured at amortised cost or FVOCI but which do not have SPPI characteristics;
• Equity instruments that have not been designated as held at FVOCI; and
• Financial liabilities that constitute contingent consideration in a business combination.
Designated at fair value through profit or loss
Financial assets and liabilities may be designated at fair value through profit or loss when the designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities on a different basis ('accounting mismatch').
Interest rate swaps have been acquired by the Group with the intention of significantly reducing interest rate risk on certain debt securities with fixed rates of interest. To significantly reduce the accounting mismatch between assets and liabilities and measurement bases, these debt securities have been designated at fair value through profit or loss.
Similarly, to reduce accounting mismatches, the Group has designated certain financial liabilities at fair value through profit or loss where the liabilities either:
• Have fixed rates of interest and interest rate swaps or other interest rate derivatives have been entered with the intention of significantly reducing interest rate risk; or
• Are exposed to foreign currency risk and derivatives have been acquired with the intention of significantly reducing exposure to market changes; or
• Have been acquired to fund trading asset portfolios or assets
Financial liabilities may also be designated at fair value through profit or loss where they are managed on a fair value basis or have a embedded derivative where the Group is not able to bifurcate and separately value the embedded derivative component.
Financial liabilities held at amortised cost
Financial liabilities that are not financial guarantees or loan commitments and that are not classified as financial liabilities held at fair value through profit or loss are classified as financial liabilities held at amortised cost.
Preference shares which carry a mandatory coupon that represents a market rate of interest at the issue date, or which are redeemable on a specific date or at the option of the shareholder, are classified as financial liabilities and are presented in other borrowed funds. The dividends on these preference shares are recognised in the income statement as interest expense on an amortised cost basis using the effective interest method.
Financial guarantee contracts and loan commitments
The Group issues financial guarantee contracts and loan commitments in return for fees. Under a financial guarantee contract, the Group undertakes to meet a customer's obligations under the terms of a debt instrument if the customer fails to do so. Loan commitments are firm commitments to provide credit under prespecified terms and conditions. Financial guarantee contracts and loan commitments issued at below market interest rates are initially recognised as liabilities at fair value, while financial guarantees and loan commitments issued at market rates are recorded off-balance sheet. Subsequently, these instruments are measured at the higher of the expected credit loss provision, and the amount initially recognised less the cumulative amount of income recognised in accordance with the principles of IFRS 15 Revenue from Contracts with Customers. Refer to Note 8 for expected credit loss on loan commitments and financial guarantees.
Fair value of financial assets and liabilities
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market to which the Group has access at the date. The fair value of a liability includes the risk that the bank will not be able to honour its obligations.
The fair value of financial instruments is generally measured on the basis of the individual financial instrument. However, when a group of financial assets and financial liabilities is managed on the basis of its net exposure to either market risk or credit risk, the fair value of the group of financial instruments is measured on a net basis.
The fair values of quoted financial assets and liabilities in active markets are based on current prices. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If the market for a financial instrument, and for unlisted securities, is not active, the Group establishes fair value by using valuation techniques.
Initial recognition
Purchases and sales of financial assets and liabilities held at fair value through profit or loss, and debt securities classified as financial assets held at fair value through other comprehensive income, are initially recognised on the trade-date (the date on which the Group commits to purchase or sell the asset). Loans and advances and other financial assets held at amortised cost are recognised on the settlement date (the date on which cash is advanced to the borrowers).
All financial instruments are initially recognised at fair value, which is normally the transaction price, plus directly attributable transaction costs for financial assets which are not subsequently measured at fair value through profit or loss.
In certain circumstances, the initial fair value may be based on a valuation technique which may lead to the recognition of profits or losses at the time of initial recognition. However, these profits or losses can only be recognised when the valuation technique used is based solely on observable market data. In those cases where the initially recognised fair value is based on a valuation model that uses unobservable inputs, the difference between the transaction price and the valuation model is not recognised immediately in the income statement but is amortised or released to the income statement as the inputs become observable, or the transaction matures or is terminated.
Subsequent measurement
Financial assets and financial liabilities held at amortised cost
Financial assets and financial liabilities held at amortised cost are subsequently carried at amortised cost using the effective interest method (see Interest income and expense). Foreign exchange gains and losses are recognised in the income statement.
Where a financial instrument carried at amortised cost is the hedged item in a qualifying fair value hedge relationship, its carrying value is adjusted by the fair value gain or loss attributable to the hedged risk.
Financial assets held at FVOCI
Debt instruments held at FVOCI are subsequently carried at fair value, with all unrealised gains and losses arising from changes in fair value (including any related foreign exchange gains or losses) recognised in other comprehensive income and accumulated in a separate component of equity. Foreign exchange gains and losses on the amortised cost are recognised in income. Changes in expected credit losses are recognised in the profit or loss and are accumulated in equity. On derecognition, the cumulative fair value gains or losses, net of the cumulative expected credit loss reserve, are transferred to the profit or loss.
Equity investments designated at FVOCI are subsequently carried at fair value with all unrealised gains and losses arising from changes in fair value (including any related foreign exchange gains or losses) recognised in other comprehensive income and accumulated in a separate component of equity. On derecognition, the cumulative reserve is transferred to retained earnings and is not recycled to profit or loss.
Financial assets and liabilities held at fair value through profit or loss
Financial assets and liabilities mandatorily held at fair value through profit or loss and financial assets designated at fair value through profit or loss are subsequently carried at fair value, with gains and losses arising from changes in fair value recorded in the net trading income line in the profit or loss unless the instrument is part of a cash flow hedging relationship. Contractual interest income on financial assets held at fair value through profit or loss is recognised as interest income in a separate line in the profit or loss.
Financial liabilities designated at fair value through profit or loss
Financial liabilities designated at fair value through profit or loss are held at fair value, with changes in fair value recognised in the net trading income line in the profit or loss, other than that attributable to changes in credit risk. Fair value changes attributable to credit risk are recognised in other comprehensive income and recorded in a separate category of reserves unless this is expected to create or enlarge an accounting mismatch, in which case the entire change in fair value of the financial liability designated at fair value through profit or loss is recognised in profit or loss.
Derecognition of financial instruments
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. If substantially all the risks and rewards have been neither retained nor transferred and the Group has retained control, the assets continue to be recognised to the extent of the Group's continuing involvement.
Where financial assets have been modified, the modified terms are assessed on a qualitative and quantitative basis to determine whether a fundamental change in the nature of the instrument has occurred, such as whether the derecognition of the pre-existing instrument and the recognition of a new instrument is appropriate.
On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of the consideration received (including any new asset obtained less any new liability assumed) and any cumulative gain or loss that had been recognised in other comprehensive income is recognised in profit or loss except for equity instruments elected FVOCI (see above) and cumulative fair value adjustments attributable to the credit risk of a liability that are held in other comprehensive income.
Financial liabilities are derecognised when they are extinguished. A financial liability is extinguished when the obligation is discharged, cancelled or expires and this is evaluated both qualitatively and quantitatively. However, where a financial liability has been modified, it is derecognised if the difference between the modified cash flows and the original cash flows is more than 10 per cent.
If the Group purchases its own debt, it is derecognised and the difference between the carrying amount of the liability and the consideration paid is included in 'Other income' except for the cumulative fair value adjustments attributable to the credit risk of a liability that are held in other comprehensive income which are never recycled to the profit or loss.
Modified financial instruments
Financial assets and financial liabilities whose original contractual terms have been modified, including those loans subject to forbearance strategies, are considered to be modified instruments. Modifications may include changes to the tenor, cash flows and/or interest rates among other factors.
Where derecognition of financial assets is appropriate (see Derecognition), the newly recognised residual loans are assessed to determine whether the assets should be classified as purchased or originated credit-impaired assets (POCI).
Where derecognition is not appropriate, the gross carrying amount of the applicable instruments is recalculated as the present value of the renegotiated or modified contractual cash flows discounted at the original effective interest rate (or credit adjusted effective interest rate for POCI financial assets). The difference between the recalculated values and the pre-modified gross carrying values of the instruments are recorded as a modification gain or loss in the profit or loss.
Gains and losses arising from modifications for credit reasons are recorded as part of 'Credit impairment' (see credit Impairment policy). Modification gains and losses arising for non-credit reasons are recognised either as part of 'Credit impairment' or within income depending on whether there has been a change in the credit risk on the financial asset subsequent to the modification. Modification gains and losses arising on financial liabilities are recognised within income. The movements in the applicable expected credit loss loan positions are disclosed in further detail in Risk review.
Reclassifications
Financial liabilities are not reclassified subsequent to initial recognition. Reclassifications of financial assets are made when, and only when, the business model for those assets changes. Such changes are expected to be infrequent and arise as a result of significant external or internal changes such as the termination of a line of business or the purchase of a subsidiary whose business model is to realise the value of pre-existing held for trading financial assets through a hold to collect model.
Financial assets are reclassified at their fair value on the date of reclassification and previously recognised gains and losses are not restated. Moreover, reclassifications of financial assets between financial assets held at amortised cost and financial assets held at fair value through other comprehensive income do not affect effective interest rate or expected credit loss computations.
Reclassified from amortised cost
Where financial assets held at amortised cost are reclassified to financial assets held at fair value through profit or loss, the difference between the fair value of the assets at the date of reclassification and the previously recognised amortised cost is recognised in profit or loss.
For financial assets held at amortised cost that are reclassified to fair value through other comprehensive income, the difference between the fair value of the assets at the date of reclassification and the previously recognised gross carrying value is recognised in other comprehensive income. Additionally, the related cumulative expected credit loss amounts relating to the reclassified financial assets are reclassified from loan loss provisions to a separate reserve in other comprehensive income at the date of reclassification.
Reclassified from fair value through other comprehensive income
Where financial assets held at fair value through other comprehensive income are reclassified to financial assets held at fair value through profit or loss, the cumulative gain or loss previously recognised in other comprehensive income is transferred to the profit or loss.
For financial assets held at fair value through other comprehensive income that are reclassified to financial assets held at amortised cost, the cumulative gain or loss previously recognised in other comprehensive income is adjusted against the fair value of the financial asset such that the financial asset is recorded at a value as if it had always been held at amortised cost. In addition, the related cumulative expected credit losses held within other comprehensive income are reversed against the gross carrying value of the reclassified assets at the date of reclassification.
Reclassified from fair value through profit or loss
Where financial assets held at fair value through profit or loss are reclassified to financial assets held at fair value through other comprehensive income or financial assets held at amortised cost, the fair value at the date of reclassification is used to determine the effective interest rate on the financial asset going forward. In addition, the date of reclassification is used as the date of initial recognition for the calculation of expected credit losses. Where financial assets held at fair value through profit or loss are reclassified to financial assets held at amortised cost, the fair value at the date of reclassification becomes the gross carrying value of the financial asset. The Group's classification of its financial assets and liabilities is summarised in the following tables.
IFRS 9
| Assets | Notes | Assets at fair value | Assets | Total | |||||
| Trading | Derivatives held for hedging | Non-trading mandatorily at fair value through profit or loss | Designated at fair value through profit or loss | Fair value through other comprehensive income | Total financial assets at | ||||
| Cash and balances at | | - | - | - | - | - | - | 57,511 | 57,511 |
| Financial assets held at fair value through profit or loss | | | | | | | | | |
| Loans and advances | | 146 | - | 3,622 | - | - | 3,768 | - | 3,768 |
| Loans and advances | | 1,074 | - | 3,854 | - | - | 4,928 | - | 4,928 |
| Reverse repurchase agreements and other similar secured lending | 16 | - | - | 54,769 | - | - | 54,769 | - | 54,769 |
| Debt securities and other eligible bills | | 21,246 | - | 393 | 337 | - | 21,976 | - | 21,976 |
| Equity shares | | 1,347 | - | 233 | 111 | - | 1,691 | - | 1,691 |
| | | 23,813 | - | 62,871 | 448 | - | 87,132 | - | 87,132 |
| Derivative financial instruments | 14 | 45,108 | 513 | - | - | - | 45,621 | - | 45,621 |
| Loans and advances to banks1 | 15 | - | - | - | - | - | - | 61,414 | 61,414 |
| of which: reverse repurchase agreements and other similar secured lending | 16 | - | - | - | - | - | - | 3,815 | 3,815 |
| Loans and advances to customers1 | 15 | - | - | - | - | - | - | 256,557 | 256,557 |
| of which: reverse repurchase agreements and other similar secured lending | 16 | - | - | - | - | - | - | 3,151 | 3,151 |
| Investment securities | | | | | | | | | |
| Debt securities and other eligible bills | | - | - | - | - | 116,335 | 116,335 | 9,303 | 125,638 |
| Equity shares | | - | - | - | - | 263 | 263 | - | 263 |
| | | - | - | - | - | 116,598 | 116,598 | 9,303 | 125,901 |
| Other assets | 20 | - | - | - | - | - | - | 32,678 | 32,678 |
| Assets held for sale | 21 | 78 | - | 358 | 451 | - | 887 | 135 | 1,022 |
| Total at 31 December 2018 | | 68,999 | 513 | 63,229 | 899 | 116,598 | 250,238 | 417,598 | 667,836 |
1 Further analysed in Risk review and Capital review
IFRS 9
| Assets | Notes | Assets at fair value | Assets | Total | |||||
| Trading | Derivatives held for hedging | Non-trading mandatorily | Designated | Fair value | Total | ||||
| Cash and balances at | | - | - | - | - | - | - | 58,864 | 58,864 |
| Financial assets held at fair value through profit or loss | | | | | | | | | |
| Loans and advances | | 320 | - | 2,545 | - | - | 2,865 | - | 2,865 |
| Loans and advances | | 1,689 | - | 2,179 | 39 | - | 3,907 | - | 3,907 |
| Reverse repurchase agreements and other similar secured lending | 16 | - | - | 45,518 | - | - | 45,518 | - | 45,518 |
| Debt securities and other eligible bills | | 19,318 | - | 504 | 393 | - | 20,215 | - | 20,215 |
| Equity shares | | 718 | - | 684 | 733 | - | 2,135 | - | 2,135 |
| | | 22,045 | - | 51,430 | 1,165 | - | 74,640 | - | 74,640 |
| Derivative financial instruments | | 46,333 | 698 | - | - | - | 47,031 | - | 47,031 |
| Loans and advances to banks1 | | - | - | - | - | - | - | 62,295 | 62,295 |
| of which: reverse repurchase agreements and other similar secured lending | 16 | - | - | - | - | - | - | 5,101 | 5,101 |
| Loans and advances to customers1 | | - | - | - | - | - | - | 251,507 | 251,507 |
| of which: reverse repurchase agreements and other similar secured lending | 16 | - | - | - | - | - | - | 4,566 | 4,566 |
| Investment securities | | | | | | | | | |
| Debt securities and other eligible bills | | - | - | - | - | 108,411 | 108,411 | 7,188 | 115,599 |
| Equity shares | | - | - | - | - | 214 | 214 | - | 214 |
| | | - | - | - | - | 108,625 | 108,625 | 7,188 | 115,813 |
| Other assets | | - | - | - | - | - | - | 29,922 | 29,922 |
| Assets held for sale | | - | - | - | 466 | - | 466 | 62 | 528 |
| Total at 1 January 2018 | | 68,378 | 698 | 51,430 | 1,631 | 108,625 | 230,762 | 409,838 | 640,600 |
1 Further analysed in Risk review and Capital review
The table above is the representation as at 1 January 2018 of the balances after the implementation of IFRS 9.
IAS 39
| Assets | Notes | Assets at fair value | | Assets at amortised cost | Total | |||||
| Trading | Derivatives held for hedging | Designated | Available- | Total financial assets at | Loans and receivables | Held-to- maturity | ||||
| Cash and balances at | | - | - | - | - | - | | 58,864 | - | 58,864 |
| Financial assets held at fair value through profit or loss | | | | | | | | | | |
| Loans and advances | | 320 | - | 2,252 | - | 2,572 | | - | - | 2,572 |
| Loans and advances | | 1,689 | - | 1,229 | - | 2,918 | | - | - | 2,918 |
| Reverse repurchase agreements and other | 16 | 454 | - | 458 | - | 912 | | - | - | 912 |
| Debt securities and other eligible bills | | 19,318 | - | 393 | - | 19,711 | | - | - | 19,711 |
| Equity shares | | 718 | - | 733 | - | 1,451 | | - | - | 1,451 |
| | | 22,499 | - | 5,065 | - | 27,564 | | - | - | 27,564 |
| Derivative financial instruments | 14 | 46,333 | 698 | - | - | 47,031 | | - | - | 47,031 |
| Loans and advances to banks1 | 15 | - | - | - | - | - | | 78,188 | - | 78,188 |
| of which: reverse repurchase agreements and other similar secured lending | 16 | - | - | - | - | - | | 20,694 | - | 20,694 |
| Loans and advances | 15 | - | - | - | - | - | | 282,288 | - | 282,288 |
| of which: reverse repurchase agreements and other similar secured lending | 16 | - | - | - | - | - | | 33,581 | - | 33,581 |
| Investment securities | | | | | | | | | | |
| Debt securities and other eligible bills | | - | - | - | 109,161 | 109,161 | | 2,630 | 4,340 | 116,131 |
| Equity shares | | - | - | - | 894 | 894 | | - | - | 894 |
| | | - | - | - | 110,055 | 110,055 | | 2,630 | 4,340 | 117,025 |
| Other assets | 20 | - | - | - | - | - | | 29,922 | - | 29,922 |
| Assets held for sale | 21 | - | - | 466 | - | 466 | | 62 | - | 528 |
| Total at 31 December 2017 | | 68,832 | 698 | 5,531 | 110,055 | 185,116 | | 451,954 | 4,340 | 641,410 |
1 Further analysed in Risk review and Capital review
IFRS 9
| Liabilities | Notes | Liabilities at fair value | Amortised cost | Total | |||
| Trading | Derivatives held for hedging | Designated at fair value through profit or loss | Total financial liabilities at fair value | ||||
| Financial liabilities held at fair value through | | | | | | | |
| Deposits by banks | | - | - | 318 | 318 | - | 318 |
| Customer accounts | | - | - | 6,751 | 6,751 | - | 6,751 |
| Repurchase agreements and other similar | 16 | - | - | 43,000 | 43,000 | - | 43,000 |
| Debt securities in issue | 22 | - | - | 7,405 | 7,405 | - | 7,405 |
| Short positions | | 3,226 | - | - | 3,226 | - | 3,226 |
| | | 3,226 | - | 57,474 | 60,700 | - | 60,700 |
| Derivative financial instruments | 14 | 45,580 | 1,629 | - | 47,209 | - | 47,209 |
| Deposits by banks | | - | - | - | - | 29,715 | 29,715 |
| Customer accounts | | - | - | - | - | 391,013 | 391,013 |
| Repurchase agreements and other similar | 16 | - | - | - | - | 1,401 | 1,401 |
| Debt securities in issue | 22 | - | - | - | - | 46,454 | 46,454 |
| Other liabilities | 23 | - | - | - | - | 37,945 | 37,945 |
| Subordinated liabilities and other borrowed funds | 27 | - | - | - | - | 15,001 | 15,001 |
| Liabilities included in disposal groups held for sale | 21 | 198 | - | - | 198 | - | 198 |
| Total at 31 December 2018 | | 49,004 | 1,629 | 57,474 | 108,107 | 521,529 | 629,636 |
IFRS 9
| Liabilities | Notes | Liabilities at fair value | Amortised cost | Total | |||
| Trading | Derivatives held for hedging | Designated | Total | ||||
| Financial liabilities held at fair value through | | | | | | | |
| Deposits by banks | | - | - | 737 | 737 | - | 737 |
| Customer accounts | | - | - | 5,236 | 5,236 | - | 5,236 |
| Repurchase agreements and other similar | 16 | - | - | 38,140 | 38,140 | - | 38,140 |
| Debt securities in issue | | - | - | 7,023 | 7,023 | - | 7,023 |
| Short positions | | 3,637 | - | - | 3,637 | - | 3,637 |
| | | 3,637 | - | 51,136 | 54,773 | - | 54,773 |
| Derivative financial instruments | | 46,558 | 1,543 | - | 48,101 | - | 48,101 |
| Deposits by banks | | - | - | - | - | 30,945 | 30,945 |
| Customer accounts | | - | - | - | - | 370,509 | 370,509 |
| Repurchase agreements and other similar | 16 | - | - | - | - | 1,639 | 1,639 |
| Debt securities in issue | | - | - | - | - | 46,379 | 46,379 |
| Other liabilities | | - | - | - | - | 34,982 | 34,982 |
| Subordinated liabilities and other borrowed funds | | - | - | - | - | 17,176 | 17,176 |
| Total at 1 January 2018 | | 50,195 | 1,543 | 51,136 | 102,874 | 501,630 | 604,504 |
The table above is the representation as at 1 January 2018 of the balances after the implementation of IFRS 9.
IAS 39
| Liabilities | Notes | Liabilities at fair value | Amortised cost | Total | |||
| Trading | Derivatives held for hedging | Designated | Total | ||||
| Financial liabilities held at fair value through | | | | | | | |
| Deposits by banks | | - | - | 737 | 737 | - | 737 |
| Customer accounts | | - | - | 5,236 | 5,236 | - | 5,236 |
| Debt securities in issue | 22 | - | - | 7,023 | 7,023 | - | 7,023 |
| Short positions | | 3,637 | - | - | 3,637 | - | 3,637 |
| | | 3,637 | - | 12,996 | 16,633 | - | 16,633 |
| Derivative financial instruments | 14 | 46,558 | 1,543 | - | 48,101 | - | 48,101 |
| Deposits by banks | | - | - | - | - | 30,945 | 30,945 |
| Customer accounts | | - | - | - | - | 370,509 | 370,509 |
| Repurchase agreements and other similar | 16 | - | - | - | - | 39,783 | 39,783 |
| Debt securities in issue | 22 | - | - | - | - | 46,379 | 46,379 |
| Other liabilities | 23 | - | - | - | - | 34,982 | 34,982 |
| Subordinated liabilities and other borrowed funds | 27 | - | - | - | - | 17,176 | 17,176 |
| Total at 31 December 2017 | | 50,195 | 1,543 | 12,996 | 64,734 | 539,774 | 604,508 |
Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.
In practice, for credit mitigation, the Group is able to offset assets and liabilities which do not meet the IAS 32 netting criteria set out above. Such arrangements include master netting arrangements for derivatives and global master repurchase agreements for repurchase and reverse repurchase transactions. These agreements generally allow that all outstanding transactions with a particular counterparty can be offset but only in the event of default or other predetermined events.
In addition, the Group also receives and pledges readily realisable collateral for derivative transactions to cover net exposure in the event of a default. Under repurchase and reverse repurchase agreements the Group pledges (legally sells) and obtains (legally purchases) respectively, highly liquid assets which can be sold in the event of a default.
The following tables set out the impact of netting on the balance sheet. This comprises derivative transactions settled through an enforceable netting agreement where we have the intent and ability to settle net and which are offset on the balance sheet.
| | 31.12.18 | ||||||
| Gross amounts | Impact of | Net amounts | | Related amount not offset | Net amount | ||
| Financial instruments | Financial | ||||||
| Assets | | | | | | | |
| Derivative financial instruments | 55,274 | (9,653) | 45,621 | | (32,283) | (9,259) | 4,079 |
| Reverse repurchase agreements and other similar secured lending | 65,191 | (3,456) | 61,735 | | - | (61,735) | - |
| At 31 December 2018 | 120,465 | (13,109) | 107,356 | | (32,283) | (70,994) | 4,079 |
| | | | | | | | |
| Liabilities | | | | | | | |
| Derivative financial instruments | 56,862 | (9,653) | 47,209 | | (32,283) | (10,323) | 4,603 |
| Repurchase agreements and other similar secured borrowing | 47,857 | (3,456) | 44,401 | | - | (44,401) | - |
| At 31 December 2018 | 104,719 | (13,109) | 91,610 | | (32,283) | (54,724) | 4,603 |
| | 31.12.17 | ||||||
| Gross amounts | Impact of | Net amounts | | Related amount not offset | Net amount | ||
| Financial instruments | Financial | ||||||
| Assets | | | | | | | |
| Derivative financial instruments | 54,619 | (7,588) | 47,031 | | (29,135) | (9,825) | 8,071 |
| Reverse repurchase agreements and other similar secured lending | 61,520 | (6,333) | 55,187 | | - | (55,187) | - |
| At 31 December 2017 | 116,139 | (13,921) | 102,218 | | (29,135) | (65,012) | 8,071 |
| | | | | | | | |
| Liabilities | | | | | | | |
| Derivative financial instruments | 55,689 | (7,588) | 48,101 | | (29,135) | (9,513) | 9,453 |
| Repurchase agreements and other similar secured borrowing | 46,116 | (6,333) | 39,783 | | - | (39,783) | - |
| At 31 December 2017 | 101,805 | (13,921) | 87,884 | | (29,135) | (49,296) | 9,453 |
Related amounts not offset in the balance sheet comprises:
• Financial instruments not offset in the balance sheet, but covered by an enforceable netting arrangement. This comprises master netting arrangements held against derivative financial instruments and excludes the effect of over-collateralisation
• Financial collateral - this comprises cash collateral pledged and received for derivative financial instruments and collateral bought and sold for reverse repurchase and repurchase agreements respectively and excludes the effect of over-collateralisation
Loans and advances designated at fair value through profit or loss
The maximum exposure to credit risk for loans and advances to banks and customers and reverse repurchase and other similar secured lending designated at fair value through profit or loss was $nil million (1 January 2018: $39 million and 31 December 2017: $3,939 million). The net fair value gain on loans and advances to banks and customers and reverse repurchase and other similar secured lending designated at fair value through profit or loss was $nil million (1 January 2018: $nil million and 31 December 2017: $23 million). Of this, $nil million (1 January 2018: $nil million and 31 December 2017: $1 million) relates to changes in credit risk. The cumulative fair value loss attributable to changes in credit risk was $nil million (1 January 2018: $nil million and 31 December 2017: $1 million). Further details of the Group's valuation technique is described in this Note.
Financial liabilities designated at fair value through profit or loss
| | 31.12.18 | 01.01.18 | 31.12.17 |
| Carrying balance aggregate fair value | 57,474 | 51,136 | 12,996 |
| Amount contractually obliged to repay at maturity | 57,974 | 51,192 | 13,052 |
| Difference between aggregate fair value and contractually obliged to repay at maturity | (500) | (56) | (56) |
| Cumulative change in fair value accredited to credit risk difference | 476 | 82 | 82 |
The net fair value gain on financial liabilities designated at fair value through profit or loss was $30 million for the year (31 December 2017: net loss of $202 million). Further details of the Group's own credit adjustment (OCA) valuation technique is described later in this Note.
Valuation of financial instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal market or, in the absence of this, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects the Group's non-performance risk. The fair value of financial instruments is generally measured on the basis of the individual financial instrument. However, when a group of financial assets and financial liabilities is managed on the basis of its net exposure to either market risks or credit risk, the fair value of the group of financial instruments is measured on a net basis.
The fair values of quoted financial assets and liabilities in active markets are based on current prices. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Wherever possible, fair values have been calculated using unadjusted quoted market prices in active markets for identical instruments held by the Group. Where quoted market prices are not available, or are unreliable because of poor liquidity, fair values have been determined using valuation techniques which, to the extent possible, use market observable inputs, but in some cases use non-market observable inputs. Valuation techniques used include discounted cash flow analysis and pricing models and, where appropriate, comparison with instruments that have characteristics similar to those of the instruments held by the Group.
The Valuation Control function is responsible for independent price verification, oversight of fair value and prudent value adjustments and escalation of valuation issues. Independent price verification is the process of determining that the valuations incorporated into the financial statements are validated independent of the business area responsible for the product. The Valuation Control function has oversight of the fair value adjustments to ensure the financial instruments are priced to exit. These are key controls in ensuring the material accuracy of the valuations incorporated in the financial statements. The market data used for price verification may include data sourced from recent trade data involving external counterparties or third parties such as Bloomberg, Reuters, brokers and consensus pricing providers. Valuation Control performs a semi-annual review of the suitability of the market data used for price testing. Price verification uses independently sourced data that is deemed most representative of the market the instruments trade in. To determine the quality of the market data inputs, factors such as independence, relevance, reliability, availability of multiple data sources and methodology employed by the pricing provider are taken into consideration.
The Valuation and Benchmarks Committee (VBC) is the valuation governance forum consisting of representatives from Group Market Risk, Product Control, Valuation Control and the business, which meets monthly to discuss and approve the independent valuations of the inventory. For Principal Finance, the Investment Committee meeting is held on a quarterly basis to review investments and valuations.
Significant accounting estimates and judgements
The Group evaluates the significance of financial instruments and material accuracy of the valuations incorporated in the financial statements as they involve a high degree of judgement and estimation uncertainty in determining the carrying values of financial assets and liabilities at the balance sheet date.
• Fair value of financial instruments are determined using valuation techniques and estimates (see below) which, to the extent possible, use market observable inputs, but in some cases use non-market observable inputs. Changes in the observability of significant valuation inputs can materially affect the fair values of financial instruments
• When establishing the exit price of a financial instrument using a valuation technique, the Group estimates valuation adjustments in determining the fair value
• In determining the valuation of financial instruments, the Group makes judgements on the amounts reserved to cater for model and valuation risks, which cover both Level 2 and Level 3 assets, and the significant valuation judgements in respect of Level 3 instruments
• Where the estimate measurement of fair value is more judgemental in respect of Level 3 assets, these are valued based on models that use a significant degree of non-market-based unobservable inputs
Valuation techniques
Refer to the fair value hierarchy explanation - Level 1, 2 and 3
• Financial instruments held at fair value
- Debt securities - asset-backed securities: Asset-backed securities are valued based on external prices obtained from consensus pricing providers, broker quotes, recent trades, arrangers' quotes, etc. Where an observable price is available for a given security, it is classified as Level 2. In instances where third-party prices are not available or reliable, the security is classified as Level 3. The fair value of Level 3 securities is estimated using market standard cash flow models with input parameter assumptions which include prepayment speeds, default rates, discount margins derived from comparable securities with similar vintage, collateral type, and credit ratings. Therefore, once external pricing has been verified, an assessment is made of whether each security is traded with significant liquidity based on its credit rating and sector. If a security is of high credit rating and is traded in a liquid sector, it will be classified as Level 2, otherwise it will be classified as Level 3
- Debt securities in issue: These debt securities relate to structured notes issued by the Group. Where independent market data is available through pricing vendors and broker sources these positions are classified as Level 2. Where such liquid external prices are not available, valuations of these debt securities are implied using input parameters such as bond spreads and credit spreads, and are classified as Level 3. These input parameters are determined with reference to the same issuer (if available) or proxies from comparable issuers or assets
- Derivatives: Derivative products are classified as Level 2 if the valuation of the product is based upon input parameters which are observable from independent and reliable market data sources. Derivative products are classified as Level 3 if there are significant valuation input parameters which are unobservable in the market, such as products where the performance is linked to more than one underlying variable. Examples are foreign exchange basket options, equity options based on the performance of two or more underlying indices and interest rate products with quanto payouts. In most cases these unobservable correlation parameters cannot be implied from the market, and methods such as historical analysis and comparison with historical levels or other benchmark data must be employed
- Equity shares - private equity: The majority of private equity unlisted investments are valued based on earning multiples - Price-to-Earnings (P/E) or enterprise value to earnings before income tax, depreciation and amortisation (EV/EBITDA) ratios - of comparable listed companies. The two primary inputs for the valuation of these investments are the actual or forecast earnings of the investee companies and earning multiples for the comparable listed companies. To ensure comparability between these unquoted investments and the comparable listed companies, appropriate adjustments are also applied (for example, liquidity and size) in the valuation. In circumstances where an investment does not have direct comparables or where the multiples for the comparable companies cannot be sourced from reliable external sources, alternative valuation techniques (for example, discounted cash flow models), which use predominantly unobservable inputs or Level 3 inputs, may be applied. Even though earning multiples for the comparable listed companies can be sourced from third-party sources (for example, Bloomberg), and those inputs can be deemed Level 2 inputs, all unlisted investments (excluding those where observable inputs are available, for example, over-the-counter (OTC) prices) are classified as Level 3 on the basis that the valuation methods involve judgements ranging from determining comparable companies to discount rates where the discounted cash flow method is applied
- Loans and advances: These primarily include loans in the global syndications business which were not syndicated as of the balance sheet date and other financing transactions within Financial Markets and loans and advances including reverse repurchase agreements that do not have SPPI cash flows or are managed on a fair value basis. These loans are generally bilateral in nature and, where available, their valuation is based on market observable credit spreads. If observable credit spreads are not available, proxy spreads based on comparable loans with similar credit grade, sector and region, are used. Where observable credit spreads and market standard proxy methods are available, these loans are classified as Level 2. Where there are no recent transactions or comparable loans, these loans are classified as Level 3
- Other debt securities: These debt securities include convertible bonds, corporate bonds, credit and structured notes. Where quoted prices are available through pricing vendors, brokers or observable trading activities from liquid markets, these are classified as Level 2 and valued using such quotes. Where there are significant valuation inputs which are unobservable in the market, due to illiquid trading or the complexity of the product, these are classified as Level 3. The valuations of these debt securities are implied using input parameters such as bond spreads and credit spreads. These input parameters are determined with reference to the same issuer (if available) or proxied from comparable issuers or assets
• Financial instruments held at amortised cost
The following sets out the Group's basis for establishing fair values of amortised cost financial instruments and their classification between Levels 1, 2 and 3. As certain categories of financial instruments are not actively traded, there is a significant level of management judgement involved in calculating the fair values:
- Cash and balances at central banks: The fair value of cash and balances at central banks is their carrying amounts
- Debt securities in issue, subordinated liabilities and other borrowed funds: The aggregate fair values are calculated based on quoted market prices. For those notes where quoted market prices are not available, a discounted cash flow model is used based on a current market related yield curve appropriate for the remaining term to maturity
- Deposits and borrowings: The estimated fair value of deposits with no stated maturity is the amount repayable on demand. The estimated fair value of fixed interest-bearing deposits and other borrowings without quoted market prices is based on discounted cash flows using the prevailing market rates for debts with a similar credit risk and remaining maturity
- Investment securities: For investment securities that do not have directly observable market values, the Group utilises a number of valuation techniques to determine fair value. Where available, securities are valued using input proxies from the same or closely related underlying (for example, bond spreads from the same or closely related issuer) or input proxies from a different underlying (for example, a similar bond but using spreads for a particular sector and rating). Certain instruments cannot be proxies as set out above, and in such cases the positions are valued using non-market observable inputs. This includes those instruments held at amortised cost and predominantly relates to asset-backed securities. The fair value for such instruments is usually proxies from internal assessments of the underlying cash flows
- Loans and advances to banks and customers: For loans and advances to banks, the fair value of floating rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed interest-bearing deposits is based on discounted cash flows using the prevailing money market rates for debts with a similar credit risk and remaining maturity. The Group's loans and advances to customers' portfolio is well diversified by geography and industry. Approximately a quarter of the portfolio reprices within one month, and approximately half re-prices within 12 months. Loans and advances are presented net of provisions for impairment. The fair value of loans and advances to customers with a residual maturity of less than one year generally approximates the carrying value. The estimated fair value of loans and advances with a residual maturity of more than one year represents the discounted amount of future cash flows expected to be received, including assumptions relating to prepayment rates and credit risk. Expected cash flows are discounted at current market rates to determine fair value. The Group has a wide range of individual instruments within its loans and advances portfolio and as a result providing quantification of the key assumptions used to value such instruments is impractical
- Other assets: Other assets comprise primarily of cash collateral and trades pending settlement. The carrying amount of these financial instruments is considered to be a reasonable approximation of fair value as they are either short-term in nature or reprice to current market rates frequently
Fair value adjustments
When establishing the exit price of a financial instrument using a valuation technique, the Group considers adjustments to the modelled price which market participants would make when pricing that instrument. The main valuation adjustments (described further below) in determining fair value for financial assets and financial liabilities are as follows:
| | 31.12.18 | 31.12.17 |
| Bid-offer valuation adjustment | 67 | 82 |
| CVA | 196 | 229 |
| DVA | (143) | (66) |
| Model valuation adjustment | 6 | 6 |
| FVA | 60 | 79 |
| Others (including day one) | 159 | 148 |
| Total | 345 | 478 |
• Bid-offer valuation adjustment: Where market parameters are marked on a mid-market basis in the revaluation systems, a bid-offer valuation adjustment is required to quantify the expected cost of neutralising the business' positions through dealing away in the market, thereby bringing long positions to bid and short positions to offer. The methodology to calculate the bid-offer adjustment for a derivative portfolio involves netting between long and short positions and the grouping of risk by strike and tenor based on the hedging strategy where long positions are marked to bid and short positions marked to offer in the systems
• Credit valuation adjustment (CVA): The Group makes CVA adjustment against the fair value of derivative products. CVA is an adjustment to the fair value of the transactions to reflect the possibility that our counterparties may default and we may not receive the full market value of the outstanding transactions. It represents an estimate of the adjustment a market participant would include when deriving a purchase price to acquire our exposures. CVA is calculated for each subsidiary, and within each entity for each counterparty to which the entity has exposure and takes account of any collateral we may hold. The Group calculates the CVA by using estimates of future positive exposure, market-implied probability of default (PD) and recovery rates. Where market-implied data is not readily available, we use market-based proxies to estimate the PD. Wrong-way risk occurs when the exposure to a counterparty is adversely correlated with the credit quality of that counterparty, and the Group has implemented a model to capture this impact for certain key wrong-way exposures. The Group also captures the uncertainties associated with wrong-way risk in its Prudential Valuation Adjustments
• Day one profit and loss: In certain circumstances the initial fair value may be based on a valuation technique which may lead to the recognition of profits or losses at the time of initial recognition. However, these profits or losses can only be recognised when the valuation technique used is based primarily on observable market data. In those cases where the initially recognised fair value is based on a valuation model that uses inputs which are not observable in the market, the difference between the transaction price and the valuation model is not recognised immediately in the income statement. The difference is amortised to the income statement until the inputs become observable, or the transaction matures or is terminated
• Debit valuation adjustment (DVA): The Group calculates DVA adjustments on its derivative liabilities to reflect changes in its own credit standing. The Group's DVA adjustments will increase if its credit standing worsens and conversely, decrease if its credit standing improves. For derivative liabilities, a DVA adjustment is determined by applying the Group's probability of default to the Group's negative expected exposure against the counterparty. The Group's probability of default and loss expected in the event of default is derived based on bond spreads associated with the Group's issuances and market standard recovery levels. The expected exposure is modelled based on the simulation of the underlying risk factors over the life of the deal booked against the particular counterparty. This simulation methodology incorporates the collateral posted by the Group and the effects of master netting agreements
• Funding valuation adjustment (FVA): The Group makes FVA adjustments against derivative products. FVA reflects an estimate of the adjustment to its fair value that a market participant would make to incorporate funding costs that could arise in relation to the exposure. FVA is calculated by determining the net expected exposure at a counterparty level and then applying a funding rate to those exposures that reflect the market cost of funding. The FVA for collateralised derivatives is based on discounting the expected future cash flows at the relevant overnight indexed swap (OIS) rate after taking into consideration the terms of the underlying collateral agreement with the counterparty. The FVA for uncollateralised (including partially collateralised) derivatives incorporates the estimated present value of the market funding cost or benefit associated with funding these transactions
• Model valuation adjustment: Valuation models may have pricing deficiencies or limitations that require a valuation adjustment. These pricing deficiencies or limitations arise due to the choice, implementation and calibration of the pricing model
In addition, the Group calculates own credit adjustment (OCA) on its issued debt designated at fair value, including structured notes, in order to reflect changes in its own credit standing. The Group's OCA adjustments will increase if its credit standing worsens and conversely, decrease if its credit standing improves. The Group's OCA adjustments will reverse over time as its liabilities mature. For issued debt and structured notes designated at fair value, an OCA adjustment is determined by discounting the contractual cash flows using a yield curve adjusted for market observed secondary senior unsecured credit spreads. The OCA at 31 December 2018 is $476 million, other comprehensive income gain $394 million (31 December 2017: $82 million, other comprehensive income loss $249 million).
Fair value hierarchy - financial instruments held at fair value
Assets and liabilities carried at fair value or for which fair values are disclosed have been classified into three levels according to the observability of the significant inputs used to determine the fair values. Changes in the observability of significant valuation inputs during the reporting period may result in a transfer of assets and liabilities within the fair value hierarchy. The Group recognises transfers between levels of the fair value hierarchy when there is a significant change in either its principal market or the level of observability of the inputs to the valuation techniques as at the end of the reporting period.
• Level 1: Fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities
• Level 2: Fair value measurements are those with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable
• Level 3: Fair value measurements are those where at least one input which could have a significant effect on the instrument's valuation is not based on observable market data
The following tables show the classification of financial instruments held at fair value into the valuation hierarchy:
IFRS 9
| Assets | Level 1 | Level 2 | Level 3 | Total |
| Financial instruments held at fair value through profit or loss | | | | |
| Loans and advances to banks | - | 3,768 | - | 3,768 |
| Loans and advances to customers | - | 4,436 | 492 | 4,928 |
| Reverse repurchase agreements and other similar secured lending | - | 54,769 | - | 54,769 |
| Debt securities and other eligible bills | 8,097 | 13,562 | 317 | 21,976 |
| Of which: | | | | |
| Government bonds and treasury bills | 6,699 | 6,851 | - | 13,550 |
| Issued by corporates other than financial institutions | 178 | 3,241 | 317 | 3,736 |
| Issued by financial institutions | 1,220 | 3,470 | - | 4,690 |
| | | | | |
| Equity shares | 1,364 | - | 327 | 1,691 |
| | | | | |
| Derivative financial instruments | 907 | 44,702 | 12 | 45,621 |
| Of which: | | | | |
| Foreign exchange | 149 | 31,242 | 7 | 31,398 |
| Interest rate | 4 | 12,237 | 5 | 12,246 |
| Commodity | 754 | 882 | - | 1,636 |
| Credit | - | 252 | - | 252 |
| Equity and stock index | - | 89 | - | 89 |
| | | | | |
| Investment securities | | | | |
| Debt securities and other eligible bills | 67,624 | 48,299 | 412 | 116,335 |
| Of which: | | | | |
| Government bonds and treasury bills | 52,329 | 17,928 | 412 | 70,669 |
| Issued by corporates other than financial institutions | 8,366 | 9,839 | - | 18,205 |
| Issued by financial institutions | 6,929 | 20,532 | - | 27,461 |
| | | | | |
| Equity shares | 29 | 4 | 230 | 263 |
| | | | | |
| Total financial instruments at 31 December 20181 | 78,021 | 169,540 | 1,790 | 249,351 |
| | | | | |
| Liabilities | | | | |
| Financial instruments held at fair value through profit or loss | | | | |
| Deposits by banks | - | 314 | 4 | 318 |
| Customer accounts | - | 6,751 | - | 6,751 |
| Repurchase agreements and other similar secured borrowing | - | 43,000 | - | 43,000 |
| Debt securities in issue | - | 6,966 | 439 | 7,405 |
| Short positions | 1,999 | 1,227 | - | 3,226 |
| | | | | |
| Derivative financial instruments | 809 | 45,995 | 405 | 47,209 |
| Of which: | | | | |
| Foreign exchange | 137 | 32,655 | 7 | 32,799 |
| Interest rate | 15 | 12,583 | 355 | 12,953 |
| Commodity | 657 | 452 | - | 1,109 |
| Credit | - | 273 | 8 | 281 |
| Equity and stock index | - | 32 | 35 | 67 |
| | | | | |
| Total financial instruments at 31 December 20181 | 2,808 | 104,253 | 848 | 107,909 |
1 The above table does not include held for sale assets of $887 million and liabilities of $198 million. These are reported in Note 21 together with their fair value hierarchy
There were no significant changes to valuation or levelling approaches in 2018.
There were no significant transfers of financial assets and liabilities measured at fair value between Level 1 and Level 2 during the year.
IFRS 9
| Assets | Level 1 | Level 2 | Level 3 | Total |
| Financial instruments held at fair value through profit or loss | | | | |
| Loans and advances to banks | - | 2,794 | 71 | 2,865 |
| Loans and advances to customers | - | 3,190 | 717 | 3,907 |
| Reverse repurchase agreements and other similar secured lending | - | 45,518 | - | 45,518 |
| Debt securities and other eligible bills | 5,860 | 13,924 | 431 | 20,215 |
| Of which: | | | | |
| Government bonds and treasury bills | 4,988 | 5,529 | - | 10,517 |
| Issued by corporates other than financial institutions | 171 | 4,115 | 280 | 4,566 |
| Issued by financial institutions | 701 | 4,280 | 151 | 5,132 |
| | | | | |
| Equity shares | 1,035 | - | 1,100 | 2,135 |
| | | | | |
| Derivative financial instruments | 402 | 46,589 | 40 | 47,031 |
| Of which: | | | | |
| Foreign exchange | 97 | 35,641 | 17 | 35,755 |
| Interest rate | 2 | 10,065 | 7 | 10,074 |
| Commodity | 303 | 609 | 2 | 914 |
| Credit | - | 249 | - | 249 |
| Equity and stock index | - | 25 | 14 | 39 |
| | | | | |
| Investment securities | | | | |
| Debt securities and other eligible bills | 61,083 | 47,010 | 318 | 108,411 |
| Of which: | | | | |
| Government bonds and treasury bills | 51,095 | 21,417 | 318 | 72,830 |
| Issued by corporates other than financial institutions | 5,647 | 7,061 | - | 12,708 |
| Issued by financial institutions | 4,341 | 18,532 | - | 22,873 |
| | | | | |
| Equity shares | 59 | 5 | 150 | 214 |
| | | | | |
| Total financial instruments at 1 January 2018 | 68,439 | 159,030 | 2,827 | 230,296 |
| | | | | |
| Liabilities | | | | |
| Financial instruments held at fair value through profit or loss | | | | |
| Deposits by banks | - | 668 | 69 | 737 |
| Customer accounts | - | 5,236 | - | 5,236 |
| Repurchase agreements and other similar secured borrowing | - | 38,140 | - | 38,140 |
| Debt securities in issue | - | 6,581 | 442 | 7,023 |
| Short positions | 1,495 | 2,142 | - | 3,637 |
| | | | | |
| Derivative financial instruments | 470 | 47,606 | 25 | 48,101 |
| Of which: | | | | |
| Foreign exchange | 90 | 36,149 | - | 36,239 |
| Interest rate | 9 | 9,851 | 18 | 9,878 |
| Commodity | 371 | 590 | - | 961 |
| Credit | - | 871 | 2 | 873 |
| Equity and stock index | - | 145 | 5 | 150 |
| | | | | |
| Total financial instruments at 1 January 2018 | 1,965 | 100,373 | 536 | 102,874 |
The table above is the representation as at 1 January 2018 of the balances after the implementation of IFRS 9.
IAS 39
| Assets | Level 1 | Level 2 | Level 3 | Total |
| Financial instruments held at fair value through profit or loss | | | | |
| Loans and advances to banks | - | 2,501 | 71 | 2,572 |
| Loans and advances to customers | - | 2,792 | 126 | 2,918 |
| Reverse repurchase agreements and other similar secured lending | - | 912 | - | 912 |
| Debt securities and other eligible bills | 5,860 | 13,800 | 51 | 19,711 |
| Of which: | | | | |
| Government bonds and treasury bills | 4,988 | 5,531 | - | 10,519 |
| Issued by corporates other than financial institutions | 171 | 4,017 | 48 | 4,236 |
| Issued by financial institutions | 701 | 4,252 | 3 | 4,956 |
| | | | | |
| Equity shares | 725 | - | 726 | 1,451 |
| | | | | |
| Derivative financial instruments | 402 | 46,589 | 40 | 47,031 |
| Of which: | | | | |
| Foreign exchange | 97 | 35,641 | 17 | 35,755 |
| Interest rate | 2 | 10,065 | 7 | 10,074 |
| Commodity | 303 | 609 | 2 | 914 |
| Credit | - | 249 | - | 249 |
| Equity and stock index | - | 25 | 14 | 39 |
| | | | | |
| Investment securities | | | | |
| Debt securities and other eligible bills | 61,246 | 47,511 | 404 | 109,161 |
| Of which: | | | | |
| Government bonds and treasury bills | 51,257 | 21,364 | 318 | 72,939 |
| Issued by corporates other than financial institutions | 5,648 | 7,590 | 86 | 13,324 |
| Issued by financial institutions | 4,341 | 18,557 | - | 22,898 |
| | | | | |
| Equity shares | 369 | 5 | 520 | 894 |
| | | | | |
| Total financial instruments at 31 December 20171 | 68,602 | 114,110 | 1,938 | 184,650 |
| | | | | |
| Liabilities | | | | |
| Financial instruments held at fair value through profit or loss | | | | |
| Deposits by banks | - | 668 | 69 | 737 |
| Customer accounts | - | 5,236 | - | 5,236 |
| Debt securities in issue | - | 6,581 | 442 | 7,023 |
| Short positions | 1,495 | 2,142 | - | 3,637 |
| | | | | |
| Derivative financial instruments | 470 | 47,606 | 25 | 48,101 |
| Of which: | | | | |
| Foreign exchange | 90 | 36,149 | - | 36,239 |
| Interest rate | 9 | 9,851 | 18 | 9,878 |
| Commodity | 371 | 590 | - | 961 |
| Credit | - | 871 | 2 | 873 |
| Equity and stock index | - | 145 | 5 | 150 |
| | | | | |
| Total financial instruments at 31 December 2017 | 1,965 | 62,233 | 536 | 64,734 |
1 The above table does not include held for sale assets of $466 million. This is reported in Note 21 together with the fair value hierarchy
There were no significant changes to valuation or levelling approaches in 2017.
There were no significant transfers of financial assets and liabilities measured at fair value between Level 1 and Level 2 during 2017.
Fair value hierarchy - financial instruments measured at amortised cost
The following table shows the carrying amounts and incorporates the Group's estimate of fair values of those financial assets and liabilities not presented on the Group's balance sheet at fair value. These fair values may be different from the actual amount that will be received or paid on the settlement or maturity of the financial instrument. For certain instruments, the fair value may be determined using assumptions for which no observable prices are available.
IFRS 9
| | Carrying value | Fair value | |||
| Level 1 | Level 2 | Level 3 | Total | ||
| Assets | | | | | |
| Cash and balances at central banks1 | 57,511 | - | 57,511 | - | 57,511 |
| Loans and advances to banks | 61,414 | - | 61,357 | - | 61,357 |
| of which: reverse repurchase agreements and other similar secured lending | 3,815 | - | 3,842 | - | 3,842 |
| Loans and advances to customers | 256,557 | - | 18,514 | 238,797 | 257,311 |
| of which: reverse repurchase agreements and other similar secured lending | 3,151 | - | 2,409 | 744 | 3,153 |
| Investment securities | 9,303 | - | 8,953 | 8 | 8,961 |
| Other assets1 | 32,678 | - | 32,673 | - | 32,673 |
| Assets held for sale | 135 | - | 135 | - | 135 |
| At 31 December 2018 | 417,598 | - | 179,143 | 238,805 | 417,948 |
| Liabilities | | | | | |
| Deposits by banks | 29,715 | - | 29,715 | - | 29,715 |
| Customer accounts | 391,013 | - | 391,018 | - | 391,018 |
| Repurchase agreements and other similar secured borrowing | 1,401 | - | 1,401 | - | 1,401 |
| Debt securities in issue | 46,454 | 17,009 | 29,195 | - | 46,204 |
| Subordinated liabilities and other borrowed funds | 15,001 | 14,505 | 23 | - | 14,528 |
| Other liabilities1 | 37,945 | - | 37,945 | - | 37,945 |
| At 31 December 2018 | 521,529 | 31,514 | 489,297 | - | 520,811 |
IFRS 9
| | Carrying value | Fair value | |||
| Level 1 | Level 2 | Level 3 | Total | ||
| Assets | | | | | |
| Cash and balances at central banks1 | 58,864 | - | 58,864 | - | 58,864 |
| Loans and advances to banks | 62,295 | - | 62,273 | 4 | 62,277 |
| of which: reverse repurchase agreements and other similar secured lending | 5,101 | - | 5,107 | - | 5,107 |
| Loans and advances to customers | 251,507 | - | 17,684 | 234,568 | 252,252 |
| of which: reverse repurchase agreements and other similar secured lending | 4,566 | - | 2,399 | 2,174 | 4,573 |
| Investment securities | 7,188 | - | 7,133 | 86 | 7,219 |
| Other assets1 | 29,922 | - | 29,911 | - | 29,911 |
| Assets held for sale | 62 | - | 62 | - | 62 |
| At 1 January 2018 | 409,838 | - | 175,927 | 234,658 | 410,585 |
| Liabilities | | | | | |
| Deposits by banks | 30,945 | - | 30,939 | - | 30,939 |
| Customer accounts | 370,509 | - | 370,489 | - | 370,489 |
| Repurchase agreements and other similar secured borrowing | 1,639 | - | 1,639 | - | 1,639 |
| Debt securities in issue | 46,379 | 15,264 | 30,158 | - | 45,422 |
| Subordinated liabilities and other borrowed funds | 17,176 | 17,456 | 161 | - | 17,617 |
| Other liabilities1 | 34,982 | - | 34,982 | - | 34,982 |
| At 1 January 2018 | 501,630 | 32,720 | 468,368 | - | 501,088 |
1 The carrying amount of these financial instruments is considered to be a reasonable approximation of fair value as they are short-term in nature or reprice to current market rates frequently
The table above is the representation as at 1 January 2018 of the balances after the implementation of IFRS 9.
IAS 39
| | Carrying value | Fair value | |||
| Level 1 | Level 2 | Level 3 | Total | ||
| Assets | | | | | |
| Cash and balances at central banks1 | 58,864 | - | 58,864 | - | 58,864 |
| Loans and advances to banks | 78,188 | - | 78,069 | 23 | 78,092 |
| of which: reverse repurchase agreements and other | 20,694 | - | 20,681 | 19 | 20,700 |
| Loans and advances to customers | 282,288 | - | 17,031 | 266,011 | 283,042 |
| of which: reverse repurchase agreements and other | 33,581 | - | 2,387 | 31,199 | 33,586 |
| Investment securities | 6,970 | - | 6,955 | 36 | 6,991 |
| Other assets1 | 29,922 | - | 29,922 | - | 29,922 |
| Assets held for sale | 62 | - | 62 | - | 62 |
| At 31 December 2017 | 456,294 | - | 190,903 | 266,070 | 456,973 |
| Liabilities | | | | | |
| Deposits by banks | 30,945 | - | 30,939 | - | 30,939 |
| Customer accounts | 370,509 | - | 370,489 | - | 370,489 |
| Repurchase agreements and other similar secured borrowing | 39,783 | - | 39,783 | - | 39,783 |
| Debt securities in issue | 46,379 | 15,264 | 30,158 | - | 45,422 |
| Subordinated liabilities and other borrowed funds | 17,176 | 17,456 | 161 | - | 17,617 |
| Other liabilities1 | 34,982 | - | 34,982 | - | 34,982 |
| At 31 December 2017 | 539,774 | 32,720 | 506,512 | - | 539,232 |
1 The carrying amount of these financial instruments is considered to be a reasonable approximation of fair value as they are short-term in nature or reprice to current market rates frequently
Loans and advances to customers by client segment1
IFRS 9
| | 31.12.18 | ||||||
| Carrying value | | Fair value | |||||
| Stage 3 | Stage 1 and | Total | Stage 3 | Stage 1 and | Total | ||
| Corporate & Institutional Banking | 1,758 | 102,919 | 104,677 | | 1,818 | 102,791 | 104,609 |
| Retail Banking | 436 | 100,799 | 101,235 | | 447 | 101,810 | 102,257 |
| Commercial Banking | 539 | 26,220 | 26,759 | | 652 | 25,989 | 26,641 |
| Private Banking | 135 | 13,481 | 13,616 | | 134 | 13,442 | 13,576 |
| Central & other items | - | 10,270 | 10,270 | | - | 10,228 | 10,228 |
| At 31 December 2018 | 2,868 | 253,689 | 256,557 | | 3,051 | 254,260 | 257,311 |
IFRS 9
| | 01.01.18 | ||||||
| Carrying value | | Fair value | |||||
| Stage 3 | Stage 1 and | Total | Stage 3 | Stage 1 and | Total | ||
| Corporate & Institutional Banking | 2,355 | 96,823 | 99,178 | | 3,729 | 95,528 | 99,257 |
| Retail Banking | 429 | 101,617 | 102,046 | | 465 | 102,232 | 102,697 |
| Commercial Banking | 587 | 27,049 | 27,636 | | 687 | 26,970 | 27,657 |
| Private Banking | 116 | 13,207 | 13,323 | | 116 | 13,196 | 13,312 |
| Central & other items | - | 9,324 | 9,324 | | - | 9,329 | 9,329 |
| At 1 January 2018 | 3,487 | 248,020 | 251,507 | | 4,997 | 247,255 | 252,252 |
1 Loans and advances includes reverse repurchase agreements and other similar secured lending: carrying value $3,151 million and fair value $3,153 million (1 January 2018: $4,566 million and $4,573 million; 31 December 2017: $33,581 million and $33,586 million respectively)
IAS 39
| | 31.12.17 | ||||||
| Carrying value | | Fair value | |||||
| Impaired | Not impaired | Total | Impaired | Not impaired | Total | ||
| Corporate & Institutional Banking | 2,465 | 126,224 | 128,689 | | 2,491 | 126,695 | 129,186 |
| Retail Banking | 420 | 102,593 | 103,013 | | 422 | 102,828 | 103,250 |
| Commercial Banking | 596 | 27,296 | 27,892 | | 646 | 27,269 | 27,915 |
| Private Banking | 140 | 13,211 | 13,351 | | 140 | 13,202 | 13,342 |
| Central & other items | - | 9,343 | 9,343 | | - | 9,349 | 9,349 |
| At 31 December 2017 | 3,621 | 278,667 | 282,288 | | 3,699 | 279,343 | 283,042 |
1 Loans and advances includes reverse repurchase agreements and other similar secured lending: carrying value $3,151 million and fair value $3,153 million (1 January 2018: $4,566 million and $4,573 million; 31 December 2017: $33,581 million and $33,586 million respectively)
Level 3 summary and significant unobservable inputs
The following table presents the Group's primary Level 3 financial instruments which are held at fair value. The table also presents the valuation techniques used to measure the fair value of those financial instruments, the significant unobservable inputs, the range of values for those inputs and the weighted average of those inputs:
| Instrument | Value at 31 December 2018 | | Principal valuation technique | Significant unobservable inputs | Range1 | Weighted | |
| Assets | Liabilities | ||||||
| Loans and advances to customers | 492 | - | | Comparable pricing/yield | Price/yield | N/A | N/A |
| | | | Discounted cash flows | Recovery rates | 25.5% - 100% | 94.7% | |
| Debt securities | 73 | - | | Comparable pricing/yield | Price/yield | 5.4% - 6.3% | 5.6% |
| Asset-backed securities | 244 | - | | Discounted cash flows | Price/yield | 1.0% - 11.0% | 3.4% |
| Deposits by banks | - | 4 | | Discounted cash flows | Credit spreads | 1.0% - 1.0% | 1.0% |
| Debt securities in issue | - | 439 | | Discounted cash flows | Credit spreads | 0.4% - 4.0% | 1.4% |
| - | - | | Internal pricing model | Equity correlation | 4.5% - 89.5% | N/A | |
| - | - | | | Equity-FX correlation | -80.0% - 80.0% | N/A | |
| Government bonds and treasury bills | 412 | - | | Discounted cash flows | Price/yield | 2.9% - 38.1% | 11.2% |
| Derivative financial instruments of which: | | | | | | | |
| Foreign exchange | 7 | 7 | | Option pricing model | Foreign exchange option implied volatility | 5.2% - 5.4% | 5.4% |
| | | | Discounted cash flows | Foreign exchange curves | -0.4% - 3.7% | 0.4% | |
| Interest rate | 5 | 355 | | Discounted cash flows | Interest rate curves | 6.4% - 16.8% | 8.3% |
| Credit | - | 8 | | Discounted cash flows | Credit spreads | 0.3% - 3.0% | 0.9% |
| Equity | - | 35 | | Internal pricing model | Equity correlation | 4.5% - 89.5% | N/A |
| | | | | Equity-FX correlation | -80.0% - 80.0% | N/A | |
| Equity shares (includes private equity investments)3 | 557 | - | | Comparable pricing/yield | EV/EBITDA multiples | 5.2x - 9.1x | 8.5x |
| | | | | P/E multiples | 14.5x | 14.5x | |
| | | | | P/B multiples | 0.6x - 1.0x | 1.0x | |
| | | | | P/S multiples | N/A | N/A | |
| | | | | Liquidity discount | 10.0% - 20.0% | 14.8% | |
| | | | Discounted cash flows | Discount rates | 7.3% - 13.2% | 9.6% | |
| Total | 1,790 | 848 | | | | | |
1 The ranges of values shown in the above table represent the highest and lowest levels used in the valuation of the Group's Level 3 financial instruments as at 31 December 2018. The ranges of values used are reflective of the underlying characteristics of these Level 3 financial instruments based on the market conditions at the balance sheet date. However, these ranges of values may not represent the uncertainty in fair value measurements of the Group's Level 3 financial instruments
2 Weighted average for non-derivative financial instruments has been calculated by weighting inputs by the relative fair value. Weighted average for derivatives has been provided by weighting inputs by the risk relevant to that variable. N/A has been entered for the cases where weighted average is not a meaningful indicator
3 The Group has an equity investment in the Series B preferred shares of Ripple Labs, Inc., which owns a digital currency (XRP) and is being carried at a fair value based on the shares' initial offering price. The shares will continue to be valued at the initial offering price until such time as a reliable means of valuing the cash flows and underlying assets is possible or additional sales are observable
The following section describes the significant unobservable inputs identified in the valuation technique table:
• Commodities correlation: This refers to the correlation between two commodity underlyings over a specified time
• Comparable price/yield is a valuation methodology in which the price of a comparable instrument is used to estimate the fair value where there are no direct observable prices. Yield is the interest rate that is used to discount the future cash flows in a discounted cash flow model. Valuation using comparable instruments can be done by calculating an implied yield (or spread over a liquid benchmark) from the price of a comparable instrument, then adjusting that yield (or spread) to derive a value for the instrument. The adjustment should account for relevant differences in the financial instruments such as maturity and/or credit quality. Alternatively, a price-to-price basis can be assumed between the comparable instrument and the instrument being valued in order to establish the value of the instrument (for example, deriving a fair value for a junior unsecured bond from the price of a senior secured bond). An increase in price, in isolation, would result in a favourable movement in the fair value of the asset. An increase in yield, in isolation, would result in an unfavourable movement in the fair value of the asset
• Correlation is the measure of how movement in one variable influences the movement in another variable. An equity correlation is the correlation between two equity instruments while an interest rate correlation refers to the correlation between two swap rates
• Credit spread represents the additional yield that a market participant would demand for taking exposure to the credit risk of an instrument
• Discount rate refers to the rate of return used to convert expected cash flows into present value
• EV/EBITDA ratio multiples: This is the ratio of Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA). EV is the aggregate market capitalisation and debt minus the cash and cash equivalents. An increase in EV/EBITDA multiples in isolation, will result in a favourable movement in the fair value of the unlisted firm
• Interest rate curves is the term structure of interest rates and measure of future interest rates at a particular point in time
• Liquidity discounts in the valuation of unlisted investments: A liquidity discount is primarily applied to the valuation of unlisted firms' investments to reflect the fact that these stocks are not actively traded. An increase in liquidity discount will result in unfavourable movement in the fair value of the unlisted firm
• Price-Book (P/B) multiple: This is the ratio of the market value of equity to the book value of equity. An increase in P/B multiple will result in a favourable movement in the fair value of the unlisted firm
• Price-Earnings (P/E) multiples: This is the ratio of the market capitalisation to the net income after tax. The multiples are determined from multiples of listed comparables, which are observable. An increase in P/E multiple will result in a favourable movement in the fair value of the unlisted firm
• Price-Sales (P/S) multiple: This is the ratio of the market value of equity to sales. An increase in P/S multiple will result in a favourable movement in the fair value of the unlisted firm
• Recovery rates are the expectation of the rate of return resulting from the liquidation of a particular loan. As the probability of default increases for a given instrument, the valuation of that instrument will increasingly reflect its expected recovery level assuming default. An increase in the recovery rate, in isolation, would result in a favourable movement in the fair value of the loan
• Volatility represents an estimate of how much a particular instrument, parameter or index will change in value over time. Generally, the higher the volatility, the more expensive the option will be
Level 3 movement tables - financial assets
The table below analyses movements in Level 3 financial assets carried at fair value.
| Assets | Held at fair value through profit or loss | Derivative financial instruments | Investment securities | Total | |||||
| Loans and advances to banks | Loans and advances to customers | Reverse repurchase agreements and other similar secured lending | Debt securities and other eligible bills | Equity shares | Debt securities and other eligible bills | Equity shares | |||
| At 31 December 2017 - IAS 39 | 71 | 126 | - | 51 | 726 | 40 | 404 | 520 | 1,938 |
| Transfer due to IFRS 91 | - | 591 | - | 380 | 374 | - | (86) | (370) | 889 |
| At 1 January 2018 - IFRS 9 | 71 | 717 | - | 431 | 1,100 | 40 | 318 | 150 | 2,827 |
| Total gains/(losses) recognised | 2 | 13 | - | (44) | (10) | (3) | 22 | - | (20) |
| Net trading income | 2 | 13 | - | (44) | (10) | (3) | - | - | (42) |
| Other operating income | - | - | - | - | - | - | 22 | - | 22 |
| Total (losses)/gains recognised | - | - | - | - | - | - | (2) | 40 | 38 |
| Fair value through OCI reserve | - | - | - | - | - | - | - | 41 | 41 |
| Exchange difference | - | - | - | - | - | - | (2) | (1) | (3) |
| Purchases | - | 328 | 55 | 120 | 143 | 70 | 445 | 38 | 1,199 |
| Sales | - | (254) | - | (215) | (176) | (40) | - | (5) | (690) |
| Settlements | (71) | (261) | - | (6) | - | (14) | (210) | - | (562) |
| Transfers out2 | (101) | (112) | (55) | (8) | (743) | (43) | (161) | (1) | (1,224) |
| Transfers in3 | 99 | 61 | - | 39 | 13 | 2 | - | 8 | 222 |
| At 31 December 2018 | - | 492 | - | 317 | 327 | 12 | 412 | 230 | 1,790 |
| Total unrealised (losses)/gains recognised in the income statement, within net trading income, relating to change in | - | (2) | - | - | 22 | (3) | - | - | 17 |
1 The increase in Level 3 instruments is a result of loans and debt securities that failed SPPI, with unobservable valuation inputs. Further, Level 3 equity shares which were classified as available-for-sale equity under IAS 39 are now classified as fair value through profit or loss under IFRS 9
2 Transfers out include loans and advances, reverse repurchase agreements, debt securities and other eligible bills, equity shares and derivative financial instruments where the valuation parameters became observable during the year, and were transferred to Level 1 and Level 2. Transfers out further relates to $743 million equity shares held for sale
3 Transfers in primarily relate to loans and advances, debt securities and other eligible bills, equity shares and derivative financial instruments where the valuation parameters become unobservable during the year
The table below analyses movements in Level 3 financial assets carried at fair value.
| Assets | Held at fair value through profit or loss | Derivative financial instruments | Investment securities | Total | ||||
| Loans and advances to banks | Loans and advances to customers | Debt securities | Equity | Debt securities | Equity | |||
| At 1 January 2017 | - | 179 | 4 | 995 | 360 | 199 | 549 | 2,286 |
| Total (losses)/gains recognised in | (1) | (11) | (2) | 121 | (4) | (15) | (9) | 79 |
| Net interest income | - | - | - | - | - | (15) | - | (15) |
| Net trading income | (1) | (11) | (2) | 121 | (4) | - | (1) | 102 |
| Other operating income | - | - | - | - | - | - | 9 | 9 |
| Impairment charge | - | - | - | - | - | - | (17) | (17) |
| Total gains recognised in other | - | - | - | - | - | 7 | 54 | 61 |
| Available-for-sale reserve | - | - | - | - | - | - | 41 | 41 |
| Exchange difference | - | - | - | - | - | 7 | 13 | 20 |
| Purchases | - | - | 94 | 1113 | 6 | 399 | 22 | 632 |
| Sales | - | - | (20) | (254) | (13) | (1) | (91) | (379) |
| Settlements | - | - | - | - | (250) | (169) | - | (419) |
| Transfers out1 | - | (72) | (25) | (247)3 | (61) | (16) | (5) | (426) |
| Transfers in2 | 72 | 30 | - | - | 2 | - | - | 104 |
| At 31 December 2017 | 71 | 126 | 51 | 726 | 40 | 404 | 520 | 1,938 |
| Total unrealised losses recognised in the income statement, within net interest income, relating to change in fair value of assets held | - | - | - | - | - | (15) | - | (15) |
| Total unrealised (losses)/gains recognised in the income statement, within net trading income, relating to change in fair value of assets held at 31 December 2017 | (1) | (5) | (2) | 65 | (7) | - | (1) | 49 |
| Total unrealised losses recognised in the income statement, within impairment charges at 31 December 2017 | - | - | - | - | - | - | (17) | (17) |
1 Transfers out include debt securities, equity shares and derivative financial instruments where the valuation parameters became observable during the year, and were transferred to Level 1 and Level 2. Transfers out further relate to equity shares and debt securities held at fair value through profit or loss which are now presented under held for sale
2 Transfers in during the year primarily relate to loans and advances and derivative financial instruments where the valuation parameters become unobservable during the year
3 When an entity is consolidated through a step up in ownership, the additional equity shares acquired are disclosed in the Purchases line. Subsequently these shares are eliminated on consolidation and disclosed in the Transfers out line. Any underlying Level 3 financial instruments which are recognised as a result of the consolidation are disclosed in the Transfers in line
Level 3 movement tables - financial liabilities
| | 31.12.18 | |||
| Deposits | Debt securities | Derivative financial instruments | Total | |
| At 1 January 2018 | 69 | 442 | 25 | 536 |
| Total losses/(gains) recognised in income statement - net trading income | 1 | (22) | 30 | 9 |
| Issues | 4 | 167 | 439 | 610 |
| Settlements | (70) | (148) | (103) | (321) |
| Transfers out1 | - | - | (2) | (2) |
| Transfers in2 | - | - | 16 | 16 |
| At 31 December 2018 | 4 | 439 | 405 | 848 |
| Total unrealised (gains)/losses recognised in the income statement, within net trading income, relating to change in fair value of liabilities held at 31 December 2018 | - | (5) | 8 | 3 |
| | 31.12.17 | |||
| Deposits | Debt securities | Derivative | Total | |
| At 1 January 2017 | - | 530 | 316 | 846 |
| Total gains recognised in income statement - net trading income | - | (9) | (24) | (33) |
| Issues | 79 | 274 | 1 | 354 |
| Settlements | (10) | (353) | (266) | (629) |
| Transfers out1 | - | - | (2) | (2) |
| At 31 December 2017 | 69 | 442 | 25 | 536 |
| Total unrealised gains recognised in the income statement, within net trading income, relating to change in fair value of liabilities held at 31 December 2017 | - | - | (17) | (17) |
1 Transfers out during the year primarily relate to derivative financial instruments where the valuation parameters became observable during the year and were transferred to Level 2 financial liabilities
2 Transfers in during the year primarily relate to derivative financial instruments where the valuation parameters become unobservable during the year
Sensitivities in respect of the fair values of Level 3 assets and liabilities
Sensitivity analysis is performed on products with significant unobservable inputs. The Group applies a 10 per cent increase or decrease on the values of these unobservable inputs, to generate a range of reasonably possible alternative valuations. The percentage shift is determined by statistical analyses performed on a set of reference prices based on the composition of our Level 3 assets. Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a result of varying the levels of the unobservable parameters. This Level 3 sensitivity analysis assumes a one-way market move and does not consider offsets for hedges.
| | Held at fair value through profit or loss | | Fair value through other comprehensive income/available-for-sale | ||||
| Net | Favourable | Unfavourable | Net | Favourable | Unfavourable | ||
| Financial instruments held at fair value | | | | | | | |
| Debt securities and other eligible bills | 317 | 339 | 295 | | 412 | 415 | 409 |
| Equity shares | 327 | 360 | 294 | | 230 | 253 | 207 |
| Loans and advances | 492 | 498 | 481 | | - | - | - |
| Derivative financial instruments | (393) | (376) | (410) | | - | - | - |
| Deposits by banks | (4) | (4) | (4) | | - | - | - |
| Debt securities in issue | (439) | (417) | (461) | | - | - | - |
| At 31 December 2018 | 300 | 400 | 195 | | 642 | 668 | 616 |
| | | | | | | | |
| Financial instruments held at fair value | | | | | | | |
| Debt securities and other eligible bills | 51 | 56 | 46 | | 404 | 415 | 393 |
| Equity shares | 726 | 799 | 653 | | 520 | 572 | 468 |
| Loans and advances | 197 | 201 | 194 | | - | - | - |
| Derivative financial instruments | 15 | 17 | 12 | | - | - | - |
| Deposits by banks | (69) | (68) | (70) | | - | - | - |
| Debt securities in issue | (442) | (434) | (450) | | - | - | - |
| At 31 December 2017 | 478 | 571 | 385 | | 924 | 987 | 861 |
The reasonably possible alternatives could have increased or decreased the fair values of financial instruments held at fair value through profit or loss and those classified as fair value through other comprehensive income by the amounts disclosed below.
| Financial instruments | Fair value changes | 31.12.18 | 31.12.17 |
| Held at fair value through profit or loss | Possible increase | 100 | 93 |
| Possible decrease | (105) | (93) | |
| Fair value through other comprehensive income/available-for-sale | Possible increase | 26 | 63 |
| Possible decrease | (26) | (63) |
14. Derivative financial instruments
Accounting policy
Accounting for derivatives: Derivatives are financial instruments that derive their value in response to changes in interest rates, financial instrument prices, commodity prices, foreign exchange rates, credit risk and indices. Derivatives are categorised as trading unless they are designated as hedging instruments.
Derivatives are initially recognised and subsequently measured at fair value, with revaluation gains recognised in profit or loss (except where cash flow or net investment hedging has been achieved, in which case the effective portion of changes in fair value is recognised within other comprehensive income).
Fair values may be obtained from quoted market prices in active markets, recent market transactions, and valuation techniques, including discounted cash flow models and option pricing models, as appropriate. Where the initially recognised fair value of a derivative contract is based on a valuation model that uses inputs which are not observable in the market, it follows the same initial recognition accounting policy as for other financial assets and liabilities. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
The tables below analyse the notional principal amounts and the positive and negative fair values of derivative financial instruments. Notional principal amounts are the amounts of principal underlying the contract at the reporting date.
| Derivatives | 31.12.18 | | 31.12.17 | ||||
| Notional | Assets | Liabilities | Notional | Assets | Liabilities | ||
| Foreign exchange derivative contracts: | | | | | | | |
| Forward foreign exchange contracts | 2,080,513 | 16,457 | 17,264 | | 1,825,488 | 18,905 | 19,702 |
| Currency swaps and options | 856,660 | 14,941 | 15,535 | | 724,0211 | 16,850 | 16,537 |
| Exchange traded futures and options | - | - | - | | 100 | - | - |
| | 2,937,173 | 31,398 | 32,799 | | 2,549,609 | 35,755 | 36,239 |
| Interest rate derivative contracts: | | | | | | | |
| Swaps | 3,693,897 | 10,800 | 11,331 | | 2,831,025 | 8,603 | 8,414 |
| Forward rate agreements and options | 489,943 | 1,325 | 1,511 | | 153,697 | 1,351 | 1,364 |
| Exchange traded futures and options | 775,518 | 121 | 111 | | 637,883 | 120 | 100 |
| | 4,959,358 | 12,246 | 12,953 | | 3,622,605 | 10,074 | 9,878 |
| Credit derivative contracts | 39,343 | 252 | 281 | | 34,772 | 249 | 873 |
| Equity and stock index options | 2,960 | 89 | 67 | | 2,520 | 39 | 150 |
| Commodity derivative contracts | 69,601 | 1,636 | 1,109 | | 74,133 | 914 | 961 |
| Total derivatives | 8,008,435 | 45,621 | 47,209 | | 6,283,639 | 47,031 | 48,101 |
1 Currency swaps and options were previously reported on a gross basis. In line with industry practice, these are now reported on a single leg basis. Prior year comparatives have been re-presented accordingly
The Group limits exposure to credit losses in the event of default by entering into master netting agreements with certain market counterparties. As required by IAS 32, exposures are only presented net in these accounts where they are subject to legal right of offset and intended to be settled net in the ordinary course of business.
The Derivatives and Hedging sections of the Risk review and Capital review explain the Group's risk management of derivative contracts and application of hedging.
Derivatives held for hedging
Hedge accounting: The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either:
a) Hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedge)
b) Hedges of highly probable future cash flows attributable to a recognised asset or liability, or a forecasted transaction (cash flow hedge)
c) Hedges of the net investment of a foreign operation (net investment hedges)
Hedge accounting is used for derivatives designated in this way, provided certain criteria are met.
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Expected effectiveness should be close to 100 per cent and actual results of the hedge using regression analysis, are expected to be within a range of 80-125 per cent.
The Group may enter into economic hedges that do not qualify for IAS 39 hedge accounting treatment. Where these economic hedges use derivatives to offset risk, the derivatives are fair valued, with fair value changes recognised in profit or loss.
Fair value hedge: Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are recorded in the income statement, within trading income, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the income statement over the period to maturity or derecognition.
The Group's approach to managing market risk, including interest rate and currency risk is discussed in Market risk.
Included in the table above are derivatives held for hedging purposes as follows:
| | 31.12.18 | | 31.12.17 | ||||
| Notional | Assets | Liabilities | Notional | Assets | Liabilities | ||
| Derivatives designated as fair value hedges: | | | | | | | |
| Interest rate swaps | 63,675 | 306 | 573 | | 45,420 | 456 | 272 |
| Currency swaps | 8,963 | 30 | 942 | | 14,3951 | 174 | 899 |
| | 72,638 | 336 | 1,515 | | 59,815 | 630 | 1,171 |
| Derivatives designated as cash flow hedges: | | | | | | | |
| Interest rate swaps | 10,733 | 59 | 67 | | 13,348 | 43 | 48 |
| Forward foreign exchange contracts | 184 | - | 18 | | 356 | 2 | 29 |
| Currency swaps | 2,701 | 57 | 22 | | 2,987 | 23 | 107 |
| | 13,618 | 116 | 107 | | 16,691 | 68 | 184 |
| Derivatives designated as net investment hedges: | | | | | | | |
| Forward foreign exchange contracts | 5,200 | 61 | 7 | | 3,470 | - | 188 |
| Total derivatives held for hedging | 91,456 | 513 | 1,629 | | 79,976 | 698 | 1,543 |
1 Currency swaps were previously reported on a gross basis. In line with industry practice, these are now reported on a single leg basis. Prior year comparatives have been re-presented accordingly
Fair value hedges
The Group uses interest rate swaps to exchange fixed rates for floating rates on funding to match floating rates received on assets, or exchange fixed rates on assets to match floating rates paid on funding. These include fixed rate issued notes, loans and advances to customer and debt securities and other eligible bills.
For qualifying hedges, the fair value changes of the derivative are substantially matched by corresponding fair value changes of the hedged item, both of which are recognised in profit or loss. All qualifying hedges were effective. Included in net losses and net gains below is an adjustment in respect of hedge ineffectiveness. The main source of hedge ineffectiveness is due to basis risk on hedged currencies.
At 31 December 2018 the Group held the following interest rate swaps as hedging instruments in fair value hedges of interest risk.
Maturity of hedging instruments
| Risk category | 31.12.18 | ||||
| Less than | More than | One to | More than | Total | |
| Interest rate and currency risk | | | | | |
| Hedge of issued notes | | | | | |
| Notional amount of issued notes | 1,030 | 2,160 | 15,298 | 7,937 | 26,461 |
| | | | | | |
| Hedge of loans and advances, debt securities and other | | | | | |
| Notional of loans and advances | - | 489 | 1,206 | 62 | 1,757 |
| Notional of debt securities and other eligible bills | 322 | 14,495 | 28,744 | 859 | 44,420 |
| Total derivatives designated as fair value hedges | 1,352 | 17,144 | 55,248 | 8,894 | 72,638 |
Effects on hedge accounting on financial position and performance
Hedging instruments and ineffectiveness
| Interest rate and currency risk | 31.12.18 | ||||
| Notional | Carrying Amount | Change in fair value used to calculate hedge ineffectiveness | Ineffectiveness recognised in profit or loss | ||
| Asset | Liability | ||||
| Interest rate swaps - issued notes | 19,112 | 270 | 311 | (73) | - |
| Cross currency swaps - subordinated notes issued | 7,350 | - | 937 | (622) | (93) |
| Interest rate swaps - loans and advances | 309 | 1 | 2 | (2) | - |
| Cross currency swaps - loans and advances | 1,448 | 3 | 5 | (4) | - |
| Interest rate swaps - debt securities and other eligible bills | 42,805 | 32 | 256 | (164) | (3) |
| Cross currency swaps - debt securities and other eligible bills | 1,614 | 30 | 4 | 14 | 1 |
| Total interest and currency risk derivatives | 72,638 | 336 | 1,515 | (851) | (95) |
Hedged items
| | 31.12.18 | ||||||
| Carrying amount | | Accumulated amount of fair value hedge adjustments included in the carrying amount | Change in the value used for calculating hedge ineffectiveness | Accumulated amortising amount of fair value hedge adjustments no longer designated as hedges | |||
| Asset | Liability | Asset | Liability | ||||
| Issued notes | - | 26,646 | | - | 982 | 602 | 443 |
| Debt securities and other eligible bills | 44,885 | - | | 129 | - | 155 | 37 |
| Loans and advances to customers | 1,147 | - | | 5 | - | 1 | 7 |
| Total assets and liabilities being hedged | 46,032 | 26,646 | | 134 | 982 | 758 | 487 |
Net trading income impact
| | 31.12.18 | 31.12.17 |
| Net losses on hedging instruments | (449) | (154) |
| Net gains on hedged items1 | 358 | 81 |
1 Includes amortisation of fair value adjustments in respect of hedges no longer qualifying for hedge accounting
Cash flow hedges
The Group uses interest rate swaps to manage the variability in future cash flows on assets and liabilities that have floating rates of interest by exchanging the floating rates for fixed rates. It also uses foreign exchange contracts and currency swaps to manage the variability in future exchange rates on its assets and liabilities and costs in foreign currencies.
Gains and losses arising on the effective portion of the hedges are deferred in equity until the variability on the cash flow affects profit or loss, at which time the gains or losses are transferred to profit or loss.
Hedging instruments and ineffectiveness
| | 31.12.18 | ||||||
| Notional | Carrying amount | Change in | Changes in the value of the hedging instrument recognised in OCI | Ineffectiveness recognised in profit or loss | Amount reclassified from reserves to income | ||
| Asset | Liability | ||||||
| Interest rate risk | | | | | | | |
| Interest rate swaps | 10,733 | 59 | 67 | 17 | 17 | - | (1) |
| | | | | | | | |
| Currency risk | | | | | | | |
| Forward foreign exchange contract | 184 | - | 18 | 9 | 9 | - | - |
| Cross currency swaps | 2,701 | 57 | 22 | 57 | 57 | - | 8 |
| Total derivatives designated as cash flow hedges | 13,618 | 116 | 107 | 83 | 83 | - | 7 |
Hedged items
| | 31.12.18 | ||
| Change in | Cash flow | Balances remaining in | |
| Customer accounts | (66) | 18 | 33 |
| Debt securities and other eligible bills | (9) | (3) | (1) |
| Loans and advances to customers | (9) | (39) | (12) |
| Total change in assets and liabilities designated in cash flow hedges | (84) | (24) | 20 |
Impact on profit and loss and other comprehensive income
| | 31.12.18 | 31.12.17 |
| Losses reclassified from reserves to income statement | (7) | (11) |
| Losses recognised in operating costs | - | (4) |
| Gains recognised in other comprehensive income | 34 | 35 |
The Group has hedged the following cash flows which are expected to impact the income statement in the following years:
| | 31.12.18 | ||||||
| Less than | One to | Two to | Three to | Four to | Over | Total | |
| Forecast receivable cash flows | 78 | 30 | 25 | 11 | 2 | - | 146 |
| Forecast payable cash flows | (199) | (76) | (60) | (57) | (43) | (125) | (560) |
| Total expected cash flows by maturity | (121) | (46) | (35) | (46) | (41) | (125) | (414) |
| | 31.12.17 | ||||||
| Less than | One to | Two to | Three to | Four to | Over | Total | |
| Forecast receivable cash flows | 122 | 40 | 30 | 22 | 8 | - | 222 |
| Forecast payable cash flows | (97) | (83) | (51) | (49) | (48) | (134) | (462) |
| Total expected cash flows by maturity | 25 | (43) | (21) | (27) | (40) | (134) | (240) |
Net investment hedges
A foreign currency exposure arises from a net investment in subsidiaries that have a different functional currency from that of the Group. This risk arises from the fluctuation in spot exchange rates between the functional currency of the subsidiaries and the Group's functional currency, which causes the amount of the investment to vary.
The Group uses a combination of foreign exchange contracts and non-derivative financial assets to manage the variability in future exchange rates on its net investments in foreign currencies. Gains and losses arising on the effective portion of the hedges are deferred in equity until the net investment is disposed of.
Hedging instruments and ineffectiveness
| | 31.12.18 | ||||||
| Notional | Carrying amount | Change in | Changes in the value of the hedging instrument recognised in OCI | Ineffectiveness recognised in profit or loss | Amount reclassified from reserves to income | ||
| Asset | Liability | ||||||
| Derivative forward currency contracts1 | 5,200 | 61 | 7 | 54 | 54 | - | - |
1 These derivative forward currency contracts have a maturity of less than one year
Hedged items
| | 31.12.18 | ||
| Change in | Translation | Balances remaining in | |
| Net investments | (54) | 54 | - |
Impact on other comprehensive income
| | 31.12.18 | 31.12.17 |
| Gains/(losses) recognised in other comprehensive income | 282 | (288) |
15. Loans and advances to banks and customers
Accounting policy
Refer to Note 13 Financial instruments for the relevant accounting policy.
| | 31.12.18 | 31.12.17 |
| Loans and advances to banks | 61,420 | 78,193 |
| Individual impairment provision | - | (4) |
| Portfolio impairment provision | - | (1) |
| Expected credit loss | (6) | - |
| | 61,414 | 78,188 |
| | | |
| Loans and advances to customers | 261,455 | 287,990 |
| Individual impairment provision | - | (5,237) |
| Portfolio impairment provision | - | (465) |
| Expected credit loss | (4,898) | - |
| | 256,557 | 282,288 |
| Total loans and advances to banks and customers | 317,971 | 360,476 |
The Group has outstanding residential mortgage loans to Korea residents of $16.9 billion (31 December 2017: $18.5 billion) and Hong Kong residents of $27.8 billion (31 December 2017: $28.3 billion).
Analysis of loans and advances to customers by geographic region and client segments and related impairment provisions as set out within the Risk review and Capital review.
16. Reverse repurchase and repurchase agreements including other similar secured lending and borrowing
Accounting policy
The Group purchases securities (a reverse repurchase agreement - 'reverse repo') typically with financial institutions subject to a commitment to resell or return the securities at a predetermined price. These securities are not included in the balance sheet as the Group does not acquire the risks and rewards of ownership, however they are recorded off-balance sheet as collateral received. Consideration paid (or cash collateral provided) is accounted for as a loan asset at amortised cost, unless it is managed on a fair value basis or designated at fair value through profit or loss.
The Group also sells securities (a repurchase agreement - 'repo') subject to a commitment to repurchase or redeem the securities at a predetermined price. The securities are retained on the balance sheet as the Group retains substantially all the risks and rewards of ownership and these securities are disclosed as pledged collateral. Consideration received (or cash collateral received) is accounted for as a financial liability at amortised cost, unless it is either mandatorily classified as fair value through profit or loss or irrevocably designated at fair value through profit or loss at initial recognition.
Financial assets are pledged as collateral as part of sales and repurchases, securities borrowing and securitisation transactions under terms that are usual and customary for such activities. The Group is obliged to return equivalent securities.
Repo and reverse repo transactions typically entitle the Group and its counterparties to have recourse to assets similar to those provided as collateral in the event of a default. Securities sold subject to repos, either by way of a Global Master Repurchase Agreement (GMRA), or through a securities sale and Total Return Swap (TRS) continue to be recognised on the balance sheet as the Group retains substantially the associated risks and rewards of the securities (the TRS is not recognised). The counterparty liability is included in deposits by banks or customer accounts, as appropriate. Assets sold under repurchase agreements are considered encumbered as the Group cannot pledge these to obtain funding.
Reverse repurchase agreements and other similar secured lending
| | 31.12.18 | 01.01.18 | 31.12.17 |
| Banks | 20,698 | 21,257 | 21,259 |
| Customers | 41,037 | 33,928 | 33,928 |
| | 61,735 | 55,185 | 55,187 |
| | | | |
| Of which: | | | |
| Fair value through profit or loss | 54,769 | 45,518 | 912 |
| Banks | 16,883 | 16,157 | 565 |
| Customers | 37,886 | 29,361 | 347 |
| Held at amortised cost | 6,966 | 9,667 | 54,275 |
| Banks | 3,815 | 5,101 | 20,694 |
| Customers | 3,151 | 4,566 | 33,581 |
| | | | |
Under reverse repurchase and securities borrowing arrangements, the Group obtains securities on terms which permit it to repledge or resell the securities to others. Amounts on such terms are:
| | 31.12.18 | 01.01.18 | 31.12.17 |
| Securities and collateral received (at fair value) | 84,557 | 75,088 | 75,088 |
| Securities and collateral which can be repledged or sold (at fair value) | 82,534 | 72,982 | 72,982 |
| Amounts repledged/transferred to others for financing activities, to satisfy liabilities under sale | 40,552 | 34,018 | 34,018 |
Repurchase agreements and other similar secured borrowing
| | 31.12.18 | 01.01.18 | 31.12.17 |
| Banks | 4,984 | 3,804 | 3,804 |
| Customers | 39,417 | 35,975 | 35,979 |
| | 44,401 | 39,779 | 39,783 |
| | | | |
| Of which: | | | |
| Fair value through profit or loss | 43,000 | 38,140 | - |
| Banks | 4,777 | 3,352 | - |
| Customers | 38,223 | 34,788 | - |
| Held at amortised cost | 1,401 | 1,639 | 39,783 |
| Banks | 207 | 451 | 3,804 |
| Customers | 1,194 | 1,188 | 35,979 |
| | | | |
The tables below set out the financial assets provided as collateral for repurchase and other secured borrowing transactions:
| Collateral pledged against repurchase agreements | 31.12.18 | ||||
| Fair value | Fair value | Amortised | Off-balance | Total | |
| On-balance sheet | | | | | |
| Debt securities and other eligible bills | 2,060 | 1,974 | 49 | - | 4,083 |
| Off-balance sheet | | | | | |
| Repledged collateral received | - | - | - | 40,552 | 40,552 |
| At 31 December 2018 | 2,060 | 1,974 | 49 | 40,552 | 44,635 |
| Collateral pledged against repurchase agreements | 01.01.18 | ||||
| Fair value | Fair value | Amortised | Off-balance | Total | |
| On-balance sheet | | | | | |
| Debt securities and other eligible bills | 2,178 | 3,618 | - | - | 5,796 |
| Off-balance sheet | | | | | |
| Repledged collateral received | - | - | - | 34,018 | 34,018 |
| At 1 January 2018 | 2,178 | 3,618 | - | 34,018 | 39,814 |
| Collateral pledged against repurchase agreements | 31.12.17 | ||||
| Fair value | Available | Loans and receivables | Off-balance | Total | |
| On-balance sheet | | | | | |
| Debt securities and other eligible bills | 2,178 | 3,618 | - | - | 5,796 |
| Off-balance sheet | | | | | |
| Repledged collateral received | - | - | - | 34,018 | 34,018 |
| At 31 December 2017 | 2,178 | 3,618 | - | 34,018 | 39,814 |
17. Goodwill and intangible assets
Accounting policy
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the identifiable net assets and contingent liabilities of the acquired subsidiary, associate or joint venture at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in Intangible assets. Goodwill on acquisitions of associates is included in Investments in associates. Goodwill included in intangible assets is assessed at each balance sheet date for impairment and carried at cost less any accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Detailed calculations are performed based on discounting expected cash flows of the relevant cash generating units (CGUs) and discounting these at an appropriate discount rate, the determination of which requires the exercise of judgement. Goodwill is allocated to CGUs for the purpose of impairment testing. CGUs represent the lowest level within the Group which generate separate cash inflows and at which the goodwill is monitored for internal management purposes. These are equal to or smaller than the Group's reportable segments (as set out in Note 2) as the Group views its reportable segments on a global basis. The major CGUs to which goodwill has been allocated are set out in the CGU table.
Significant accounting estimates and judgements
The carrying amount of goodwill is based on the application of judgements including the basis of goodwill impairment calculation assumptions. Judgement is also applied in determination of cash generating units.
Estimates include forecasts used for determining cash flows for CGUs and discount rates which factor in country risk free rates and applicable risk premiums. The Group undertakes an annual assessment to evaluate whether the carrying value of goodwill on-balance sheet is impaired. The estimation of future cash flows and the level to which they are discounted is inherently uncertain and requires significant judgement and subject to potential change over time.
Acquired intangibles
At the date of acquisition of a subsidiary or associate, intangible assets which are deemed separable and that arise from contractual or other legal rights are capitalised and included within the net identifiable assets acquired. These intangible assets are initially measured at fair value, which reflects market expectations of the probability that the future economic benefits embodied in the asset will flow to the entity, and are amortised on the basis of their expected useful lives (4 to 16 years). At each balance sheet date, these assets are assessed for indicators of impairment. In the event that an asset's carrying amount is determined to be greater than its recoverable amount, the asset is written down immediately.
Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Direct costs of the development of separately identifiable internally generated software are capitalised where it is probable that future economic benefits attributable to the asset will flow from its use (internally generated software). These costs include salaries and wages, materials, service providers and contractors, and directly attributable overheads. Costs incurred in the ongoing maintenance of software are expensed immediately when incurred. Internally generated software is amortised over a three to five year time period.
| | 31.12.18 | | 31.12.17 | ||||||
| Goodwill | Acquired intangibles | Computer software $million | Total | Goodwill | Acquired intangibles | Computer software | Total | ||
| Cost | | | | | | | | | |
| At 1 January | 3,252 | 578 | 2,529 | 6,359 | | 3,456 | 505 | 1,881 | 5,842 |
| Exchange translation differences | (105) | (24) | (67) | (196) | | 85 | 38 | 152 | 275 |
| Additions | - | 1 | 695 | 696 | | 31 | 44 | 704 | 779 |
| Disposals | - | - | - | - | | - | - | (2) | (2) |
| Impairment | - | - | - | - | | (320) | - | - | (320) |
| Amounts written off | - | (5) | (322) | (327) | | - | (9) | (206) | (215) |
| Classified as held for sale | (31) | (40) | - | (71) | | - | - | - | - |
| At 31 December | 3,116 | 510 | 2,835 | 6,461 | | 3,252 | 578 | 2,529 | 6,359 |
| Provision for amortisation | | | | | | | | | |
| At 1 January | - | 470 | 876 | 1,346 | | - | 431 | 692 | 1,123 |
| Exchange translation differences | - | (22) | (21) | (43) | | - | 35 | 42 | 77 |
| Amortisation | - | 10 | 363 | 373 | | - | 11 | 320 | 331 |
| Impairment charge | - | - | 46 | 46 | | - | 2 | 21 | 23 |
| Disposals | - | - | - | - | | - | - | (2) | (2) |
| Amounts written off | - | - | (317) | (317) | | - | (9) | (197) | (206) |
| At 31 December | - | 458 | 947 | 1,405 | | - | 470 | 876 | 1,346 |
| Net book value | 3,116 | 52 | 1,888 | 5,056 | | 3,252 | 108 | 1,653 | 5,013 |
At 31 December 2018, accumulated goodwill impairment losses incurred from 1 January 2005 amounted to $2,801 million (31 December 2017: $2,801 million), of which $nil million was recognised in 2018 (31 December 2017: $320 million).
Goodwill
CGU structure
When considering the generation of independent cash inflows and appropriate level of management, Corporate Finance, Private Banking and Transaction Banking are managed on a global basis, while Retail Banking, Commercial Banking, Central and others including Treasury Market activities are managed on a country basis.
Testing of goodwill for impairment
An annual assessment is made as to whether the current carrying value of goodwill is impaired. For the purposes of impairment testing, goodwill is allocated at the date of acquisition to a CGU. Goodwill is considered to be impaired if the carrying amount of the relevant CGU exceeds its recoverable amount. Indicators of impairment include changes in the economic performance and outlook of the region including geopolitical changes, changes in market value of regional investments, large credit defaults and strategic decisions to exit certain regions. The recoverable amounts for all the CGUs were measured based on value-in-use (ViU). The calculation of ViU for each CGU is calculated using five-year cash flow projections and an estimated terminal value based on a perpetuity value after year five. The cash flow projections are based on forecasts approved by management up to 2023. The perpetuity terminal value amount is calculated using year five cash flows using long-term GDP growth rates. All cash flows are discounted using discount rates which reflect market rates appropriate to the CGU.
The goodwill allocated to each CGU and key assumptions used in determining the recoverable amounts are set out below and are solely estimates for the purposes of assessing impairment of acquired goodwill.
| Cash generating unit | 31.12.18 | | 31.12.17 | ||||
| Goodwill | Pre-tax | Long-term | Goodwill | Pre-tax | Long-term | ||
| Country CGUs | | | | | | | |
| Greater China & North Asia | 887 | | | | 913 | | |
| Hong Kong | 357 | 13.2 | 3.0 | | 357 | 14.9 | 3.0 |
| Taiwan | 530 | 13.0 | 2.1 | | 556 | 13.9 | 2.1 |
| Africa & Middle East | 520 | | | | 569 | | |
| Pakistan | 194 | 22.8 | 3.4 | | 242 | 21.3 | 5.8 |
| UAE | 204 | 9.0 | 3.3 | | 204 | 10.8 | 3.2 |
| Others (5)1 | 122 | 10.6-19.0 | 2.6-5.3 | | 123 | 11.5-19.6 | 2.0-6.1 |
| ASEAN & South Asia | 734 | | | | 790 | | |
| India | 262 | 19.9 | 7.7 | | 289 | 18.9 | 7.9 |
| Singapore | 339 | 15.9 | 2.7 | | 343 | 11.8 | 2.6 |
| Others (6)2 | 133 | 15.4-20.5 | 4.4-7.0 | | 158 | 15.2-19.0 | 4.0-7.0 |
| Global CGUs | 975 | | | | 980 | | |
| Global Private Banking | 84 | 10.3 | 3.6 | | 84 | 10.2 | 3.7 |
| Global Corporate Finance | 213 | 10.3 | 3.6 | | 219 | 10.3 | 3.7 |
| Global Transaction Banking | 678 | 10.3 | 3.6 | | 677 | 10.3 | 3.7 |
| | | | | | | | |
| | 3,116 | | | | 3,252 | | |
1 Bahrain, Ghana, Jordan, Oman and Qatar
2 Bangladesh, Brunei, Indonesia, Nepal, Sri Lanka and Vietnam
The Group has performed sensitivity analysis on the key assumptions for each CGU's recoverable amount. None of the CGUs are sensitive to reasonable adverse changes in key assumptions (10 per cent fall in cash flow, 1 per cent increase in the discount rate or 1 per cent fall in GDP rates). The following CGUs are considered sensitive to the key variables and any movements up to the levels disclosed below would eliminate the current headroom.
| CGU | Goodwill | Cash flow reduction | Discount rate increase | GDP growth |
| Taiwan | 530 | 26% | 3% | 5% |
| India | 262 | 33% | 3% | 5% |
| Pakistan | 194 | 30% | 5% | 10% |
Acquired intangibles
These primarily comprise those items recognised as part of the acquisitions of Union Bank (now amalgamated into Standard Chartered Bank (Pakistan) Limited), Hsinchu (now amalgamated into Standard Chartered Bank (Taiwan) Limited), Pembroke, American Express Bank and ABSA's custody business in Africa. Maintenance intangible assets represent the value in the difference between the contractual right under acquired leases to receive aircraft in a specified maintenance condition at the end of the lease and the actual physical condition of the aircraft at the date of acquisition.
The acquired intangibles are amortised over periods from four years to a maximum of 16 years. The constituents are as follows:
| | 31.12.18 | 31.12.17 |
| Acquired intangibles comprise: | | |
| Aircraft maintenance | 24 | 24 |
| Brand names | - | 31 |
| Core deposits | 2 | 2 |
| Customer relationships | 19 | 32 |
| Licences | 7 | 19 |
| Net book value | 52 | 108 |
18. Property, plant and equipment
Accounting policy
All property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the assets. Subsequent costs are included in the asset's carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably.
At each balance sheet date the assets' residual values and useful lives are reviewed, and adjusted if appropriate, including assessing for indicators of impairment. In the event that an asset's carrying amount is determined to be greater than its recoverable amount, the asset is written down to the recoverable amount. Gains and losses on disposals are included in the income statement.
Repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
Land and buildings comprise mainly branches and offices. Freehold land is not depreciated although it is subject to impairment testing.
Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
• Buildings up to 50 years
• Leasehold improvements life of lease up to 50 years
• Equipment and motor vehicles three to 15 years
• Aircraft up to 18 years
• Ships up to 15 years
Where the Group is a lessee under finance leases, the leased assets are capitalised and included in Property, plant and equipment with a corresponding liability to the lessor recognised in Other liabilities. Finance charges payable are recognised over the period of the lease based on the interest rate implicit in the lease to give a constant periodic rate of return.
All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
| | 31.12.18 | | 31.12.17 | ||||||
| Premises | Equipment | Operating lease assets | Total | Premises | Equipment | Operating lease assets | Total | ||
| Cost or valuation | | | | | | | | | |
| At 1 January | 2,216 | 767 | 7,000 | 9,983 | | 2,117 | 699 | 6,982 | 9,798 |
| Exchange translation differences | (80) | (38) | (8) | (126) | | 119 | 31 | 2 | 152 |
| Additions | 461 | 1251 | 866 | 1,037 | | 61 | 104 | 1,603 | 1,768 |
| Disposals and fully depreciated assets written off | (92)2 | (87)2 | (1,244) | (1,423) | | (75) | (66) | (1,587) | (1,728) |
| Transfers to assets held for sale | (20) | (1) | (291) | (312) | | (6) | (1) | - | (7) |
| As at 31 December | 2,070 | 766 | 6,323 | 9,159 | | 2,216 | 767 | 7,000 | 9,983 |
| Depreciation | | | | | | | | | |
| Accumulated at 1 January | 753 | 513 | 1,506 | 2,772 | | 713 | 474 | 1,359 | 2,546 |
| Exchange translation differences | (25) | (26) | (9) | (60) | | 27 | 21 | 1 | 49 |
| Charge for the year | 86 | 94 | 304 | 484 | | 85 | 85 | 328 | 498 |
| Impairment (release)/charge | (5) | - | 1553 | 150 | | (8) | - | 145 | 137 |
| Attributable to assets sold, transferred | (91)2 | (86)2 | (358) | (535) | | (58) | (65) | (327) | (450) |
| Transfers to assets held for sale | (12) | (1) | (129) | (142) | | (6) | (2) | - | (8) |
| Accumulated at 31 December | 706 | 494 | 1,469 | 2,669 | | 753 | 513 | 1,506 | 2,772 |
| Net book amount at 31 December | 1,364 | 272 | 4,854 | 6,490 | | 1,463 | 254 | 5,494 | 7,211 |
1 Refer to the cash flow statement premises and equipment under the investing activities segment $171 million (31 December 2017: $165 million) for purchase of property, plant and equipment
2 Disposals for property, plant and equipment during the period $85 million (31 December 2017: $29 million) in the cash flow statement would include the gains and losses incurred as part of other operating income (Note 6) on disposal of assets during the period and the net book value disposed
3 During the year, an impairment charge of $155 million (31 December 2017: $145 million) was recognised in respect of aircraft and ships held as operating lease assets, as the ViU or current market value (CMV) of the assets was lower than the net book value
Operating lease assets
Assets leased to customers under operating leases consist of commercial aircraft and ships which are included within property, plant and equipment. At 31 December 2018, these assets had a net book value of $4,854 million (31 December 2017: $5,494 million).
| | 31.12.18 | 31.12.17 |
| Within one year | 527 | 564 |
| Later than one year and not later than five years | 1,712 | 1,881 |
| After five years | 997 | 1,228 |
| | 3,236 | 3,673 |
19. Operating lease commitments
Accounting policy
The leases entered into by the Group are primarily operating leases. An operating lease is a lease where substantially all of the risks and rewards of the leased assets remain with the lessor. The Group leases various premises under non-cancellable lease arrangements. The total payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which the termination takes place.
If an operating lease contains a reinstatement clause, a provision will be raised for the best estimate of the expenses to be incurred at the end of the lease to reinstate the property to its original condition. This cost is amortised over the life of the lease.
| | 31.12.18 | | 31.12.17 | ||
| Premises | Equipment | Premises | Equipment | ||
| Commitments under non-cancellable operating leases expiring: | | | | | |
| Within one year | 266 | 2 | | 255 | 2 |
| Later than one year and not later than five years | 498 | 1 | | 603 | 3 |
| After five years | 140 | - | | 189 | - |
| | 904 | 3 | | 1,047 | 5 |
During the year $288 million (31 December 2017: $340 million) was recognised as an expense in the income statement in respect of operating leases. The Group leases various premises and equipment under non-cancellable operating lease agreements. The leases have various terms, escalation clauses and renewal rights. The total future minimum sublease payments expected to be received under non-cancellable subleases at 31 December 2018 is $12 million (31 December 2017: $9 million).
20. Other assets
Accounting policy
Refer to Note 13 Financial instruments for the relevant accounting policy.
Commodities represent physical holdings where the Group has title and exposure to the market risk associated with the holding. Commodities are fair valued with the fair value derived from observable spot or short-term futures prices from relevant exchanges.
Other assets include:
| | 31.12.18 | 31.12.17 |
| Financial assets held at amortised cost (Note 13): | | |
| Hong Kong SAR Government certificates of indebtedness (Note 23)1 | 5,964 | 5,417 |
| Cash collateral | 10,323 | 9,513 |
| Acceptances and endorsements | 4,923 | 5,096 |
| Unsettled trades and other financial assets | 11,468 | 9,896 |
| | 32,678 | 29,922 |
| Non-financial assets: | | |
| Commodities2 | 2,488 | 3,263 |
| Other assets | 235 | 305 |
| | 35,401 | 33,490 |
1 The Hong Kong SAR Government certificates of indebtedness are subordinated to the claims of other parties in respect of bank notes issued
2 Commodities are carried at fair value and classified as Level 2
21. Assets held for sale and associated liabilities
Accounting policy
Financial instruments can be reclassified as held for sale if they are non-current assets or if they are part of a disposal group; however, the measurement provisions for the financial instruments remain governed by the requirements of IFRS 9 Financial Instruments: Recognition and Measurement. Refer to Note 13 Financial instruments for the relevant accounting policy.
Non-current assets are classified as held for sale and measured at the lower of their carrying amount and fair value less cost to sell when:
a) Their carrying amounts will be recovered principally through sale
b) They are available for immediate sale in their present condition
c) Their sale is highly probable
Immediately before the initial classification as held for sale, the carrying amounts of the assets are measured in accordance with the applicable accounting policies related to the asset or liability before reclassification as held for sale.
The assets below have been presented as held for sale following the approval of Group management and the transactions are expected to complete in 2019.
The financial assets held at fair value through profit or loss reported below are classified under Level 1 $82 million, Level 2 $14 million and Level 3 $791 million (31 December 2017: $466 million).
| Assets held for sale | 31.12.18 | 31.12.17 |
| Debt securities | 14 | 47 |
| Equity shares | 873 | 419 |
| Financial assets held at fair value through profit or loss1 | 887 | 466 |
| | | |
| Loans and advances to banks | 112 | - |
| Loans and advances to customers | 23 | 2 |
| Debt securities held at amortised cost | - | 60 |
| Financial assets held at amortised cost | 135 | 62 |
| | | |
| Goodwill and intangible assets | 71 | - |
| Property, plant and equipment2 | 170 | 13 |
| Others | 65 | 4 |
| | 1,328 | 545 |
1 Principal Finance assets of $887 million (31 December 2017: $216 million), classified as financial assets held at fair value through profit or loss comprising of debt securities ($14 million) and equity shares ($873 million), is expected to be disposed of by the end of 2019
2 Aircraft classified as held for sale by Pembroke Air Leasing Finance for $162 million (31 December 2017: nil) is included within property, plant and equipment
Reported below are the associated financial liabilities held for sale of the Principal Finance business amounting to $198 million (31 December 2017: nil), all of which are classified under Level 3. The transactions are expected to complete in 2019.
| Liabilities held for sale | 31.12.18 | 31.12.17 |
| Derivative financial instruments1 | 198 | |
| Financial liabilities held at fair value through profit or loss | 198 | - |
| | | |
| Other liabilities | 48 | - |
| Provisions for liabilities and charges | 1 | - |
| | 247 | - |
1 The derivative liability is a fixed price forward sale contract to sell the Principal Finance assets
22. Debt securities in issue
Accounting policy
Refer to Note 13 Financial instruments for the relevant accounting policy.
| | 31.12.18 | | 31.12.17 | ||||
| Certificates | Other debt securities | Total | Certificates | Other debt securities | Total | ||
| Debt securities in issue | 20,949 | 25,505 | 46,454 | | 20,460 | 25,919 | 46,379 |
| Debt securities in issue included within: | | | | | | | |
| Financial liabilities held at fair value through profit or loss (Note 13) | - | 7,405 | 7,405 | | 117 | 6,906 | 7,023 |
| Total debt securities in issue | 20,949 | 32,910 | 53,859 | | 20,577 | 32,825 | 53,402 |
In 2018, the Company issued a total of $4.6 billion senior notes for general business purposes of the Group as shown below:
| Securities | $million |
| $1,400 million callable fixed rate senior notes due 2023 | 1,400 |
| $1,250 million callable fixed rate senior notes due 2024 | 1,250 |
| JPY 111 billion callable fixed rate senior notes due 2024 | 1,011 |
| $600 million callable floating rate senior notes due 2023 | 600 |
| JPY 18.9 billion fixed rate senior notes due 2025 | 172 |
| $28 million fixed rate senior notes due 2026 | 28 |
| JPY 10 billion callable fixed rate senior notes due 2029 | 91 |
23. Other liabilities
Accounting policy
Refer to Note 13 Financial instruments for the relevant accounting policy.
| | 31.12.18 | 31.12.17 |
| Financial liabilities held at amortised cost (Note 13) | | |
| Notes in circulation1 | 5,964 | 5,417 |
| Acceptances and endorsements | 4,923 | 5,096 |
| Cash collateral | 9,259 | 9,825 |
| Unsettled trades and other financial liabilities | 17,799 | 14,644 |
| | 37,945 | 34,982 |
| Non-financial liabilities | | |
| Cash-settled share-based payments | 32 | 39 |
| Other liabilities | 332 | 236 |
| | 38,309 | 35,257 |
1 Hong Kong currency notes in circulation of $5,964 million (31 December 2017: $5,417 million) that are secured by the Government of Hong Kong SAR certificates of indebtedness
of the same amount included in other assets (Note 20)
24. Provisions for liabilities and charges
Accounting policy
The Group recognises a provision for a present legal or constructive obligation resulting from a past event when it is more likely than not that it will be required to transfer economic benefits to settle the obligation and the amount of the obligation can be estimated reliably. Where a liability arises based on participation in a market at a specified date, the obligation is recognised in the financial statements on that date and is not accrued over the period.
Significant accounting estimates and judgements
The recognition and measurement of provisions for liabilities and charges requires significant judgement and the use of estimates about uncertain future conditions or events.
Estimates include the best estimate of the probability of outflow of economic resources, cost of settling a provision and timing of settlement. Judgements are required for inherently uncertain areas such as legal decisions (including external advice obtained), and outcome of regulator reviews.
| | 31.12.18 | | 31.12.17 | ||||
| Provision | Other | Total | Provision | Other | Total | ||
| At 31 December IAS 39 | 83 | 100 | 183 | | 109 | 104 | 213 |
| IFRS 9 expected credit loss | 176 | - | 176 | | - | - | - |
| At 1 January IFRS 9 | 259 | 100 | 359 | | 109 | 104 | 213 |
| Exchange translation differences | (9) | (1) | (10) | | (2) | 1 | (1) |
| Transfer | - | 39 | 39 | | - | - | - |
| Charge/(release) against profit | 39 | 956 | 995 | | (23) | 83 | 60 |
| Provisions utilised | (8) | (45) | (53) | | (1) | (88) | (89) |
| At 31 December | 281 | 1,049 | 1,330 | | 83 | 100 | 183 |
Provision for credit commitment comprises those undrawn contractually committed facilities where there is doubt as to the borrowers' ability to meet their repayment obligations.
Other provisions consists mainly of provisions for regulatory settlements and legal claims (including provisions for potential penalties relating to the US investigation, the FCA decision and the previously disclosed foreign exchange trading issues), the nature of which are described in Note 26.
25. Contingent liabilities and commitments
Accounting policy
Contingent liabilities are possible obligations arising from past events, whose existence will be confirmed only by uncertain future events or present obligations arising from past events that are not recognised because either an outflow of economic benefits is not probable or the amount of the obligation cannot be reliably measured. Contingent liabilities are not recognised but information about them is disclosed unless the possibility of any outflow of economic benefits in settlement is remote.
Where the Group undertakes to make a payment on behalf of its customers for guarantees issued such as for performance bonds or as irrevocable letters of credit as part of the Group's Transaction Banking business, for which an obligation to make a payment has not arisen at the reporting date, those are included in these financial statements as contingent liabilities.
Other contingent liabilities primarily include revocable letters of credit and bonds issued on behalf of customers to customs officials, for bids or offers and as shipping guarantees.
Commitments are where the Group has confirmed its intention to provide funds to a customer or on behalf of a customer in the form of loans, overdrafts, future guarantees whether cancellable or not or letters of credit and the Group has not made payments at the balance sheet date; those instruments are included in these financial statement as commitments.
Capital commitments are contractual commitments the Group has entered into to purchase non-financial assets.
The table below shows the contract or underlying principal amounts and risk-weighted amounts of unmatured off-balance sheet transactions at the balance sheet date. The contract or underlying principal amounts indicate the volume of business outstanding and do not represent amounts at risk.
| | 31.12.18 | 31.12.171 $million |
| Contingent liabilities | | |
| Guarantees and irrevocable letters of credit | 36,511 | 31,429 |
| Other contingent liabilities | 5,441 | 6,210 |
| | 41,952 | 37,639 |
| Commitments | | |
| Documentary credits and short-term trade-related transactions | 3,982 | 5,808 |
| Undrawn formal standby facilities, credit lines and other commitments to lend | | |
| One year and over | 71,467 | 77,033 |
| Less than one year | 37,041 | 30,122 |
| Unconditionally cancellable | 39,220 | 40,823 |
| | 151,710 | 153,786 |
1 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
| Capital commitments | | |
| Contracted capital expenditure approved by the directors but not provided for in these accounts1 | 450 | 468 |
1 of which: the Group has commitments totalling $439 million to purchase aircraft for delivery in 2019 (31 December 2017: $458 million). Pre-delivery payments of $5 million have been made to date in respect of these aircraft
The Group's share of contingent liabilities and commitments relating to joint ventures is $0.2 billion (31 December 2017: $0.2 billion). As set out in Note 26, the Group has contingent liabilities in respect of certain legal and regulatory matters for which it is not practicable to estimate the financial impact as there are many factors that may affect the range of possible outcomes.
26. Legal and regulatory matters
Accounting policy
Where appropriate, the Group recognises a provision for liabilities when it is probable that an outflow of economic resources embodying economic benefits will be required and for which a reliable estimate can be made of the obligation. The uncertainties inherent in legal and regulatory matters affect the amount and timing of any potential outflows with respect to which provisions have been established.
Claims and other proceedings
The Group receives legal claims against it in a number of jurisdictions and is subject to regulatory investigations and proceedings arising in the normal course of business.
Apart from the matters described below, the Group currently considers none of these claims, investigations or proceedings to be material. However, in light of the uncertainties involved in such matters there can be no assurance that the outcome of a particular matter or matters currently not considered to be material may not ultimately be material to the Group's results in a particular reporting period depending on, among other things, the amount of the loss resulting from the matter(s) and the results otherwise reported for such period.
2012 Settlements with certain US authorities
In 2012, the Group reached settlements with certain US authorities regarding US sanctions compliance in the period 2001 to 2007, involving a Consent Order by the New York Department of Financial Services (NYDFS), a Cease and Desist Order by the Board of Governors of the Federal Reserve System (Fed), Deferred Prosecution Agreements (DPAs) with each of the Department of Justice (DOJ) and the New York County District Attorney's Office (DANY) and a Settlement Agreement with the Office of Foreign Assets Control (together, the 'Settlements' and together the foregoing authorities, the 'US authorities'). In addition to the civil penalties totalling $667 million, the terms of these Settlements include a number of conditions and ongoing obligations with regard to improving sanctions, Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) controls such as remediation programmes, reporting requirements, compliance reviews and programmes, banking transparency requirements, training measures, audit programmes, disclosure obligations and, in connection with the NYDFS Consent Order, the appointment of an independent monitor (Monitor).
In December 2014, the Group announced that the DOJ, DANY and the Group had agreed to a three-year extension of the DPAs, resulting in the subsequent retention of the Monitor to evaluate and make recommendations regarding the Group's sanctions compliance programme. The DPAs (and the term of the independent monitor) have been subject to subsequent extensions and currently expire on 31 March 2019.
2014 Settlement with NYDFS
In August 2014, the Group announced that it had reached a final settlement with the NYDFS regarding deficiencies in the AML transaction surveillance system in its New York branch (the 'Branch'). The system, which is separate from the sanctions screening process, is one part of the Group's overall financial crime controls and is designed to alert the Branch to unusual transaction patterns that require further investigation on a post-transaction basis.
The settlement provisions included a civil monetary penalty of $300 million; various remediation requirements and the appointment of the Monitor which eventually expired on 31 December 2018.
In November 2018, the Group announced it had agreed to engage an independent consultant selected by the NYDFS for up to one year with a possible extension for up to one additional year to provide guidance in connection with tasks necessary to complete the remediation contemplated by the 2012 and 2014 Consent Orders.
2019 Settlement relating to FX trading
In January 2019, the Group reached a settlement with the NYDFS regarding past control failures and improper conduct related to the Group's FX trading and sales business between 2007 and 2013. As part of this settlement the Group agreed to pay a civil monetary penalty of $40 million to the NYDFS. A provision has been made in these financial statements for the previously disclosed investigations relating to the FX trading issues including the January 2019 settlement with the NYDFS.
Investigations into legacy financial crime controls issues
The Group has received a decision notice from the Regulatory Decisions Committee of the Financial Conduct Authority (FCA) relating to the previously disclosed investigation by the FCA concerning the Group's historical financial crime control issues, and is considering its options in relation to this decision notice, including the possibility of an appeal. The decision notice imposes a penalty of £102 million (net of early settlement discount) on the Group. This investigation had been focused on the effectiveness and governance of those historical financial crime controls from 2009 through 2014 within the correspondent banking business carried out by the Group's London branch, particularly in relation to the business carried on with respondent banks from outside the European Economic Area, and the effectiveness and governance of those controls in one of the Group's overseas branches and the oversight exercised at Group level over those controls.
The Group continues its discussions relating to the potential resolution of an investigation by the US authorities relating to historical violations of US sanctions laws and regulations. In contrast to the 2012 settlements, which focused on the period before the Group's 2007 decision to stop doing new business with known Iranian parties, this investigation is focused on examining the extent to which conduct and control failures permitted clients with Iranian interests to conduct transactions through Standard Chartered Bank after 2007. The vast majority of the issues under investigation pre-date 2012 and none occurred after 2014.
The resolution of the US investigation may involve a range of civil and criminal penalties including substantial monetary penalties combined with other compliance measures such as remediation requirements and/or business restrictions.
A provision has been made in these financial statements for the penalty in the FCA decision notice and potential penalties relating to the investigation by the US authorities. This provision reflects management's current view of the appropriate level of provision. Resolution of the US investigation and the FCA process might ultimately result in a different level of penalties.
Other proceedings
Since November 2014, seven lawsuits have been filed in the United States District Courts for the Southern and Eastern Districts of New York against a number of banks (including Standard Chartered Bank) on behalf of plaintiffs who are, or are relatives of, victims of various terrorist attacks in Iraq. Five of the lawsuits were filed in late December 2018. The plaintiffs allege that the defendant banks aided and abetted the unlawful conduct of US sanctioned parties in breach of the US Anti-Terrorism Act. The lawsuits are at an early procedural stage, with motions to dismiss pending in two of the seven lawsuits. Based on the facts currently known, it is not possible for the Group to predict the outcome of these lawsuits.
The Director of Public Prosecutions (DPP) and related agencies in Kenya are investigating Standard Chartered Kenya Limited (SCBK) and other banks in connection with the alleged theft of funds from Kenya's State Department of Public Service, Youth and Gender Affairs. This investigation follows fines being imposed on those banks, including SCBK, by the Central Bank of Kenya regarding adequacy of controls related to the processing of the allegedly stolen funds. The DPP has announced that it has received recommendations from the Kenyan Directorate of Criminal Investigations that charges should be brought against a number of banks, including SCBK, bank officials and other individuals. The Group does not know whether any charges will be brought, but there may be penalties or other financial consequences for SCBK in connection with this investigation.
27. Subordinated liabilities and other borrowed funds
Accounting policy
Subordinated liabilities and other borrowed funds are classified as financial instruments. Refer to Note 13 Financial instruments for the accounting policy.
All subordinated liabilities are unsecured, unguaranteed and subordinated to the claims of other creditors including without limitation, customer deposits and deposits by banks. The Group has the right to settle these debt instruments in certain circumstances as set out in the contractual agreements.
| | 31.12.18 | 31.12.17 |
| Subordinated loan capital - issued by subsidiary undertakings | | |
| £700 million 7.75 per cent subordinated notes 20181 | - | 956 |
| £675 million 5.375 per cent undated step up subordinated notes (callable 2020)1 | 296 | 327 |
| £200 million 7.75 per cent subordinated notes (callable 2022)1 | 53 | 221 |
| $750 million 5.875 per cent subordinated notes 20202 | 754 | 768 |
| $700 million 8.0 per cent subordinated notes 20311 | 405 | 426 |
| BWP 127.26 million 8.2 per cent subordinated notes 2022 (callable)3 | 12 | 13 |
| BWP 70 million floating rate subordinated notes 2021 (callable)3 | 7 | 7 |
| BWP 50 million floating rate notes 2022 (callable)3 | 5 | 5 |
| JPY 10 billion 3.35 per cent subordinated notes 2023 (callable 2018)1 | - | 89 |
| KRW 90 billion 6.05 per cent subordinated debt 20184 | - | 85 |
| SGD 450 million 5.25 per cent subordinated notes 2023 (callable 2018)1 | - | 339 |
| | 1,532 | 3,236 |
| Subordinated loan capital - issued by the Company5 | | |
| Primary capital floating rate notes: | | |
| $400 million | 16 | 16 |
| $300 million (Series 2) | 69 | 69 |
| $400 million (Series 3) | 50 | 50 |
| $200 million (Series 4) | 26 | 26 |
| £150 million | 15 | 16 |
| £900 million 5.125 per cent subordinated debt 2034 | 797 | 1,498 |
| $2 billion 5.7 per cent subordinated debt 2044 | 2,387 | 2,395 |
| $2 billion 3.95 per cent subordinated debt 2023 | 1,941 | 1,959 |
| $1 billion 5.7 per cent subordinated notes 2022 | 1,003 | 1,004 |
| $1 billion 5.2 per cent subordinated debt 2024 | 1,001 | 1,014 |
| $750 million 5.3 per cent subordinated debt 2043 | 787 | 787 |
| €1.25 billion 4 per cent subordinated debt 2025 (callable 2020) | 1,472 | 1,565 |
| €750 million 3.625 per cent subordinated notes 2022 | 907 | 958 |
| €500 million 3.125 per cent subordinated debt 2024 | 587 | 613 |
| SGD 700 million 4.4 per cent subordinated notes 2026 (callable 2021) | 516 | 531 |
| $1.25 billion4.3 per cent subordinated debt 2027 | 1,129 | 1,144 |
| $500 million 4.886 per cent subordinated debt 2033 | 498 | - |
| Other subordinated borrowings - issued by the Company6 | 268 | 295 |
| | 13,469 | 13,940 |
| Total for Group | 15,001 | 17,176 |
1 Issued by Standard Chartered Bank
2 Issued by Standard Chartered Bank (Hong Kong) Limited
3 Issued by Standard Chartered Bank Botswana Limited
4 Issued by Standard Chartered Bank Korea Limited
5 In the balance sheet of the Company the amount recognised is $13,436 million (2017: $13,882 million), with the difference being the effect of hedge accounting achieved on a Group basis
6 Other subordinated borrowings includes irredeemable preference shares (Note 28)
| | 31.12.18 | ||||
| USD | GBP | EUR | Others | Total | |
| Fixed rate subordinated debt | 9,905 | 1,414 | 2,966 | 528 | 14,813 |
| Floating rate subordinated debt | 161 | 15 | - | 12 | 188 |
| Total | 10,066 | 1,429 | 2,966 | 540 | 15,001 |
| | 31.12.17 | ||||
| USD | GBP | EUR | Others | Total | |
| Fixed rate subordinated debt | 9,497 | 3,297 | 3,136 | 1,057 | 16,987 |
| Floating rate subordinated debt | 161 | 16 | - | 12 | 189 |
| Total | 9,658 | 3,313 | 3,136 | 1,069 | 17,176 |
Redemptions and repurchases during the period
On 19 March 2018, Standard Chartered Bank Korea Limited redeemed KRW90 billion 6.05 per cent subordinated debt 2018 on its maturity.
On 3 April 2018, Standard Chartered Bank redeemed £700m 7.75 per cent subordinated notes 2018 on its maturity.
On 10 April 2018, Standard Chartered Bank exercised its right to redeem SGD450 million 5.25 per cent subordinated notes 2023 (callable 2018).
On 18 April 2018, Standard Chartered Bank exercised its right to redeem JPY10 billion 3.35 per cent subordinated notes 2023 (callable 2018).
On 14 June 2018, Standard Chartered Bank repurchased in part, £95.1 million of its £200 million 7.75 per cent subordinated notes (callable 2022).
On 14 June 2018, Standard Chartered PLC repurchased in part, £372.5 million of its £900 million 5.125 per cent subordinated debt 2034.
Issuances during the period
On 15 March 2018, Standard Chartered PLC issued $500 million 4.866 per cent subordinated debt 2033 (callable 2028).
28. Share capital, other equity instruments and reserves
Accounting policy
Financial instruments issued are classified as equity when there is no contractual obligation to transfer cash, other financial assets or issue available number of own equity instruments. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
Securities which carry a discretionary coupon and have no fixed maturity or redemption date are classified as other equity instruments. Interest payments on these securities are recognised, net of tax, as distributions from equity in the period in which they are paid.
Where the Company or other members of the consolidated Group purchase the Company's equity share capital, the consideration paid is deducted from the total shareholders' equity of the Group and/or of the Company as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders' equity of the Group and/or the Company.
| | Number of | Ordinary | Share | Total share | Other equity instruments |
| At 1 January 2017 | 3,284 | 1,642 | 5,449 | 7,091 | 3,969 |
| Shares issued | 12 | 6 | - | 6 | 992 |
| At 31 December 2017 | 3,296 | 1,648 | 5,449 | 7,097 | 4,961 |
| Capitalised on scrip dividend | 2 | 1 | (1) | - | - |
| Shares issued | 10 | 5 | 9 | 14 | - |
| At 31 December 2018 | 3,308 | 1,654 | 5,457 | 7,111 | 4,961 |
1 Issued and fully paid ordinary shares of 50 cents each
2 Includes $1,494 million of share premium relating to preference capital
Ordinary share capital
In accordance with the Companies Act 2006 the Company does not have authorised share capital. The nominal value of each ordinary share is 50 cents.
On 17 May 2018, the Company issued 1,354,700 new ordinary shares instead of the 2017 final dividend. On 22 October 2018, the Company issued 876,126 new ordinary shares instead of the 2018 interim dividend.
During the period 10,008,515 shares were issued under employee share plans at prices between nil and 620 pence.
Preference share capital
At 31 December 2018, the Company has 15,000 $5 non-cumulative redeemable preference shares in issue, with a premium of $99,995 making a paid up amount per preference share of $100,000. The preference shares are redeemable at the option of the Company and are classified in equity.
The available profits of the Company are distributed to the holders of the issued preference shares in priority to payments made to holders of the ordinary shares and in priority to, or pari passu with, any payments to the holders of any other class of shares in issue. On a winding up, the assets of the Company are applied to the holders of the preference shares in priority to any payment to the ordinary shareholders and in priority to, or pari passu with, the holders of any other shares in issue, for an amount equal to any dividends accrued and/or payable and the nominal value of the shares together with any premium as determined by the Board. The redeemable preference shares are redeemable at the paid up amount (which includes premium) at the option of the Company in accordance with the terms of the shares. The holders of the preference shares are not entitled to attend or vote at any general meeting except where any relevant dividend due is not paid in full or where a resolution is proposed varying the rights of the preference shares.
Other equity instruments
On 2 April 2015, Standard Chartered PLC issued $2,000 million Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities as Additional Tier 1 (AT1) securities, raising $1,987 million after issue costs. On 18 August 2016, Standard Chartered PLC issued a further $2,000 million Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities as AT1 securities, raising $1,982 million after issue costs. On 18 January 2017, Standard Chartered PLC issued a further $1,000 million Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities as AT1 securities, raising $992 million after issue costs. All the issuances were made for general business purposes and to increase the regulatory capital base of the Group.
The principal terms of the AT1 securities are described below:
• The securities are perpetual and redeemable, at the option of Standard Chartered PLC in whole but not in part, on the first interest reset date and each date falling five years after the first reset date
• The securities are also redeemable for certain regulatory or tax reasons on any date at 100 per cent of their principal amount together with any accrued but unpaid interest up to (but excluding) the date fixed for redemption. Any redemption is subject to Standard Chartered PLC giving notice to the relevant regulator and the regulator granting permission to redeem
• The interest rate in respect of the securities issued on 2 April 2015 for the period from (and including) the issue date to (but excluding) 2 April 2020 is a fixed rate of 6.50 per cent per annum. The first reset date for the interest rate is 2 April 2020 and each date falling five, or an integral multiple of five years after the first reset date
• The interest rate in respect of the securities issued on 18 August 2016 for the period from (and including) the issue date to (but excluding) 2 April 2022 is a fixed rate of 7.50 per cent per annum. The first reset date for the interest rate is 2 April 2022 and each date falling five years, or an integral multiple of five years, after the first reset date
• The interest rate in respect of the securities issued on 18 January 2017 for the period from (and including) the issue date to (but excluding) 2 April 2023 is a fixed rate of 7.75 per cent per annum. The first reset date for the interest rate is 2 April 2023 and each date falling five years, or an integral multiple of five years, after the first reset date
• The interest on each of the securities will be payable semi-annually in arrears on 2 April and 2 October in each year, accounted for as a dividend
• Interest on the securities is due and payable only at the sole and absolute discretion of Standard Chartered PLC, subject to certain additional restrictions set out in the terms and conditions. Accordingly, Standard Chartered PLC may at any time elect to cancel any interest payment (or part thereof) which would otherwise be payable on any interest payment date
• The securities convert into ordinary shares of Standard Chartered PLC, at a pre-determined price, should the fully loaded Common Equity Tier 1 ratio of the Group fall below 7.0 per cent. Approximately 572 million ordinary shares would be required to satisfy the conversion of all the securities mentioned above
The securities rank behind the claims against Standard Chartered PLC of (a) unsubordinated creditors, (b) which are expressed to be subordinated to the claims of unsubordinated creditors of Standard Chartered PLC but not further or otherwise; or (c) which are, or are expressed to be, junior to the claims of other creditors of Standard Chartered PLC, whether subordinated or unsubordinated, other than claims which rank, or are expressed to rank, pari passu with, or junior to, the claims of holders of the AT1 securities in a winding-up occurring prior to the conversion trigger.
Reserves
The constituents of the reserves are summarised as follows:
• The capital reserve represents the exchange difference on redenomination of share capital and share premium from sterling to US dollars in 2001. The capital redemption reserve represents the nominal value of preference shares redeemed
• Merger reserve represents the premium arising on shares issued using a cash box financing structure, which required the Company to create a merger reserve under section 612 of the Companies Act 2006. Shares were issued using this structure in 2005 and 2006 to assist in the funding of certain acquisitions, in 2008, 2010 and 2015 for the shares issued by way of a rights issue, and for the shares issued in 2009 in the placing. The funding raised by the 2008 and 2010 rights issues and 2009 share issue was fully retained within the Company
• Own credit adjustment reserve represents the cumulative gains and losses on financial liabilities designated at fair value through profit or
loss relating to own credit. Following the Group's decision to early apply this IFRS 9 requirement the cumulative OCA component of financial liabilities designated at fair value through profit or loss has been transferred from opening retained earnings to the OCA reserve. Gains and losses on financial liabilities designated at fair value through profit or loss relating to own credit in the year have been taken through other comprehensive income into this reserve. On derecognition of applicable instruments the balance of any OCA will not be recycled to the income statement, but will be transferred within equity to retained earnings
• Fair value through OCI debt reserve represents the unrealised fair value gains and losses in respect of financial assets classified as fair value through OCI, net of expected credit losses and taxation. Gains and losses are deferred in this reserve and are reclassified to the income statement when the underlying asset is sold, matures or becomes impaired. Fair value through OCI equity reserve represents unrealised fair value gains and losses in respect of financial assets classified as fair value through OCI, net of taxation. Gains and losses are recorded in this reserve and never recycled to the income statement
• Cash flow hedge reserve represents the effective portion of the gains and losses on derivatives that meet the criteria for these types of hedges. Gains and losses are deferred in this reserve and are reclassified to the income statement when the underlying hedged item affects profit and loss or when a forecast transaction is no longer expected to occur
• Translation reserve represents the cumulative foreign exchange gains and losses on translation of the net investment of the Group in foreign operations. Since 1 January 2004, gains and losses are deferred to this reserve and are reclassified to the income statement when the underlying foreign operation is disposed. Gains and losses arising from derivatives used as hedges of net investments are netted against the foreign exchange gains and losses on translation of the net investment of the foreign operations
• Retained earnings represents profits and other comprehensive income earned by the Group and Company in the current and prior periods, together with the after tax increase relating to equity-settled share options, less dividend distributions and own shares held (treasury shares)
A substantial part of the Group's reserves are held in overseas subsidiary undertakings and branches, principally to support local operations or to comply with local regulations. The maintenance of local regulatory capital ratios could potentially restrict the amount of reserves which can be remitted. In addition, if these overseas reserves were to be remitted, further unprovided taxation liabilities might arise.
As at 31 December 2018, the distributable reserves of Standard Chartered PLC (the Company) were $15.1 billion (31 December 2017: $15.1 billion). These comprised retained earnings and $12.5 billion of the merger reserve account. Distribution of reserves is subject to maintaining minimum capital requirements.
Own shares
Computershare Trustees (Jersey) Limited is the trustee of the 2004 Employee Benefit Trust ('2004 Trust') and Ocorian Trustees (Jersey) Limited (formerly known as Bedell Trustees Limited) is the trustee of the 1995 Employees' Share Ownership Plan Trust ('1995 Trust'). The 2004 Trust is used in conjunction with the Group's employee share schemes and the 1995 Trust is used for the delivery of other employee share-based payments (such as upfront shares and fixed pay allowances). Group companies fund these trusts from time to time to enable the trustees to acquire shares to satisfy these arrangements.
Except as disclosed, neither the Company nor any of its subsidiaries has bought, sold or redeemed any securities of the Company listed on The Stock Exchange of Hong Kong Limited during the period. Details of the shares purchased and held by the trusts are set out below.
| Number of shares | 1995 Trust | | 2004 Trust | | Total | |||
| 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | |||
| Shares purchased during the period | 1,017,941 | - | | - | - | | 1,017,941 | - |
| Market price of shares purchased ($million) | 8 | - | | - | - | | 8 | - |
| Shares held at the end of the period | 2,354,820 | 3,769,011 | | 16,755 | 18,004 | | 2,371,575 | 3,787,015 |
| Maximum number of shares held during the period | | | | | | | 3,787,015 | 6,182,467 |
29. Non-controlling interests
Accounting policy
Non-controlling interests are measured either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets.
| | $million |
| At 1 January 2017 | 321 |
| Income in equity attributable to non-controlling interests | 1 |
| Other profits attributable to non-controlling interests | 49 |
| Comprehensive income for the year | 50 |
| Distributions | (51) |
| Other increases1 | 21 |
| At 31 December 2017 | 341 |
| Expected credit loss, net | (8) |
| At 1 January 2018 | 333 |
| Income in equity attributable to non-controlling interests | (21) |
| Other profits attributable to non-controlling interests | 55 |
| Comprehensive income for the year | 34 |
| Distributions | (97) |
| Other increases2 | 3 |
| At 31 December 2018 | 273 |
1 Mainly due to additional shares issued including the premium by Nepal of $12 million and $9 million with respect to an acquisition during 2017
2 Mainly due to additional shares issued by Angola
30. Retirement benefit obligations
Accounting policy
The Group operates pension and other post-retirement benefit plans around the world, which can be categorised into defined contribution plans and defined benefit plans.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans on a statutory or contractual basis, and such amounts are charged to operating expenses. The Group has no further payment obligations once the contributions have been paid.
For funded defined benefit plans, the liability recognised in the balance sheet is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. For unfunded defined benefit plans the liability recognised at the balance sheet date is the present value of the defined benefit obligation.
The defined benefit obligation is calculated annually by independent actuaries using the projected unit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using an interest rate equal to the yield on high-quality corporate bonds of the same currency and term as the benefit payments.
Actuarial gains and losses that arise are recognised in shareholders' equity and presented in the statement of other comprehensive income in the period they arise. The Group determines the net interest expense on the net defined benefit liability for the year by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability, taking into account any changes in the net defined benefit liability during the year as a result of contributions and benefit payments. Net interest expense, the cost of the accrual of new benefits, benefit enhancements (or reductions) and administration expenses met directly from plan assets are recognised in the income statement.
Significant accounting estimates and judgements
There are many factors that affect the measurement of the retirement benefit obligations of the UK Fund and Overseas Plans. This measurement requires the use of estimates, such as discount rates, inflation, pension increases, salary increases, and life expectancies which are inherently uncertain; the sensitivity of the liabilities to changes in these assumptions is shown in the Note below.
Retirement benefit obligations comprise:
| | 31.12.18 | 31.12.17 |
| Defined benefit plans obligation | 386 | 443 |
| Defined contribution plans obligation | 13 | 12 |
| Net obligation | 399 | 455 |
Retirement benefit charge comprises:
| | 31.12.18 | 31.12.17 |
| Defined benefit plans | 81 | 98 |
| Defined contribution plans | 284 | 259 |
| Charge against profit/(loss) (Note 7) | 365 | 357 |
The Group operates over 50 defined benefit plans across its geographies, many of which are closed to new entrants who now join defined contribution arrangements. The aim of all these plans is to give employees the opportunity to save appropriately for retirement in a way that is consistent with local regulations, taxation requirements and market conditions. The defined benefit plans expose the Group to currency risk, interest rate risk, investment risk and actuarial risks such as longevity risk.
The material holdings of government and corporate bonds partially hedge movements in the liabilities resulting from interest rate changes. Setting aside movements from other drivers such as currency fluctuation, the increases in discount rates in most geographies over 2018 have led to lower liabilities. These have been somewhat offset by falls in the value of bonds held and poor stock market performance. These movements are shown as actuarial gains versus losses respectively in the tables below. Contributions into a number of plans in excess of the amounts required to fund benefits accruing have also helped to reduce the net deficit over the year.
The disclosures required under IAS 19 have been calculated by independent qualified actuaries based on the most recent full actuarial valuations updated, where necessary, to 31 December 2018.
UK Fund
The Standard Chartered Pension Fund (the 'UK Fund') is the Group's largest pension plan, representing 58 per cent (31 December 2017: 60 per cent) of total pension liabilities, and provides pensions based on 1/60th of final salary per year of service, normally payable from age 60. The UK Fund is set up under a trust that is legally separate from the Bank (its formal sponsor) and, as required by UK legislation, at least one third of the trustee directors are nominated by members; the remainder are appointed by the Bank. The trustee directors have a fiduciary duty to members and are responsible for governing the UK Fund in accordance with its Trust Deed and Rules.
The financial position of the UK Fund is regularly assessed by an independent qualified actuary. The funding valuation as at 31 December 2017 was completed in December 2018 by the Scheme Actuary, A Zegleman of Willis Towers Watson, using assumptions different from those disclosed, and agreed with the UK Fund trustee. It revealed a past service deficit of $203 million (£159 million). To repair the deficit, four annual cash payments of $42.0 million (£32.9 million) were agreed, with the first of these paid in December 2018. The agreement allows that if the funding position improves to being at or near a surplus in future years the three payments from December 2019 will be reduced or eliminated. In addition, an escrow account of $140 million (£110 million) exists to provide security for future contributions.
With effect from 1 July 1998, the UK Fund was closed to new entrants and new employees are offered membership of a defined contribution plan. With effect from 1 April 2018 the UK Fund was closed to further accrual of benefits for the 91 active members remaining at that time. There is no accounting impact as a result of the closure as the liabilities represented by the benefits already accrued are not expected to be significantly altered by the closure.
As at 31 December 2018, the weighted average duration of the UK Fund was 14 years (31 December 2017: 15 years).
A judgement in respect of Lloyds Bank on 26 October 2018 addressed the requirement to equalise the impact of Guaranteed Minimum Pensions (GMP) for males and females. The impact on the UK Fund of this judgement was estimated by the Scheme Actuary to be $2 million. This impact has been recognised as a past service cost in the income statement.
The Group is not required to recognise any additional liability under IFRIC 14 or the 2015 exposure draft of proposed amendments to it, as the Bank has control of any pension surplus under the Trust Deed and Rules.
Overseas plans
The principal overseas defined benefit arrangements operated by the Group are in Germany, Hong Kong, India, Jersey, Korea, Taiwan, United Arab Emirates (UAE) and the United States of America (US).
Key assumptions
The principal financial assumptions used at 31 December 2018 were:
| | Funded plans | ||||
| UK Fund | | Overseas Plans1 | |||
| 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | ||
| Discount rate | 2.8 | 2.5 | | 0.9 - 7.6 | 1.0 - 7.2 |
| Price Inflation | 2.1 | 2.1 | | 1.0 - 5.0 | 1.0 - 5.0 |
| Salary increases | n/a | 2.1 | | 2.1 - 7.0 | 2.1 - 7.0 |
| Pension increases | 2.1 | 2.1 | | 0.0 - 3.2 | 1.6 - 3.2 |
1 The range of assumptions shown is for the main defined benefit overseas plans in Germany, Hong Kong, India, Jersey, Korea, Taiwan, UAE and the US. These comprise over 90 per cent of the total liabilities of overseas defined benefit plans
The principal non-financial assumptions are those made for UK life expectancy. The assumptions for life expectancy for the UK Fund are that a male member currently aged 60 will live for 28 years (31 December 2017: 28 years) and a female member for 29 years (31 December 2017: 29 years) and a male member currently aged 40 will live for 30 years (31 December 2017: 30 years) and a female member for 30 years (31 December 2017: 30 years) after their 60th birthdays.
Both financial and non-financial assumptions can be expected to change in the future, which would affect the value placed on the liabilities. For example, changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below:
• If the discount rate increased by 25 basis points the liability would reduce by approximately $55 million for the UK Fund (31 December 2017: $65 million) and $30 million for the other plans (31 December 2017: $30 million)
• If the rate of inflation increased by 25 basis points the liability, allowing for the consequent impact on pension and salary increases would increase by approximately $40 million for the UK Fund (31 December 2017: $45 million) and $20 million for the other plans (31 December 2017: $20 million)
• If the rate salaries increase compared to inflation increased by 25 basis points the liability would increase by nil for the UK Fund (31 December 2017: $2 million) and approximately $15 million for the other plans (31 December 2017: $15 million)
• If longevity expectations increased by one year the liability would increase by approximately $45 million for the UK Fund (31 December 2017: $55 million) and $15 million for the other plans (31 December 2017: $15 million)
Although this analysis does not take account of the full distribution of cash flows expected under the UK Fund, it does provide an approximation of the sensitivity to the main assumptions. While changes in other assumptions would also have an impact, the effect would not be as significant.
| | Unfunded plans | ||||
| US post-retirement medical1 | | Other2 | |||
| 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | ||
| Discount rate | 4.4 | 3.8 | | 2.7 - 7.6 | 2.3 - 7.2 |
| Price inflation | 2.5 | 2.5 | | 2.0 - 5.0 | 1.9 - 5.0 |
| Salary increases | 4.0 | N/A | | 3.5 - 7.0 | 2.1 - 7.0 |
| Pension increases | N/A | N/A | | 0.0 - 2.1 | 0.0 - 2.1 |
| Post-retirement medical rate | 9% in 2018 reducing by 1% per annum to 5% in 2022 | 8% in 2017 reducing by | | N/A | N/A |
1 The US post-retirement medical plan was closed to new entrants and eligibility for benefits tightened in 2017. This is reflected in the pension cost table below
2 The range of assumptions shown is for the main unfunded plans in India, Korea, Thailand, UAE and the UK. They comprise around 85 per cent of the total liabilities of unfunded plans
Fund values:
The fair value of assets and present value of liabilities of the plans attributable to defined benefit members were:
| At 31 December | 31.12.18 | | 31.12.17 | ||||||||
| Funded plans | | Unfunded plans | Funded plans | | Unfunded plans | ||||||
| UK Fund $million | Overseas plans | Post-retirement medical $million | Other | UK Fund $million | Overseas plans | Post-retirement medical $million | Other | ||||
| Equities | 166 | 310 | | N/A | N/A | | 180 | 354 | | N/A | N/A |
| Government bonds | 762 | 176 | | N/A | N/A | | 752 | 191 | | N/A | N/A |
| Corporate bonds | 147 | 87 | | N/A | N/A | | 140 | 87 | | N/A | N/A |
| Absolute Return Fund | 147 | - | | N/A | N/A | | 177 | - | | N/A | N/A |
| Hedge funds1 | 110 | - | | N/A | N/A | | 190 | 2 | | N/A | N/A |
| Insurance linked funds1 | 36 | - | | N/A | N/A | | 38 | - | | N/A | N/A |
| Opportunistic credit1 | 15 | - | | N/A | N/A | | 60 | - | | N/A | N/A |
| Property | 44 | 14 | | N/A | N/A | | 64 | 13 | | N/A | N/A |
| Derivatives | (7) | 3 | | N/A | N/A | | 5 | 4 | | N/A | N/A |
| Cash and equivalents | 136 | 221 | | N/A | N/A | | 91 | 195 | | N/A | N/A |
| Others1 | 9 | 34 | | N/A | N/A | | 10 | 39 | | N/A | N/A |
| Total fair value of assets2 | 1,565 | 845 | | N/A | N/A | | 1,707 | 885 | | N/A | N/A |
| Present value of liabilities | (1,615) | (974) | | (17) | (190) | | (1,827) | (996) | | (18) | (194) |
| Net pension (liability)/asset | (50) | (129) | | (17) | (190) | | (120) | (111) | | (18) | (194) |
1 Unquoted assets
2 Self-investment is monitored closely and is less than $1 million of Standard Chartered equities and bonds for 2018 (31 December 2017: $2 million). Self-investment is only allowed where it is not practical to exclude it - for example through investment in index-tracking funds where the Group is a constituent of the relevant index
The pension cost for defined benefit plans was:
| 31.12.18 | Funded plans | | Unfunded plans | Total | ||
| UK Fund | Overseas | Post- | Other | |||
| Current service cost | 1 | 54 | | - | 12 | 67 |
| Past service cost and curtailments1 | 2 | - | | - | - | 2 |
| Settlement cost2 | - | - | | - | 1 | 1 |
| Interest income on pension plan assets | (41) | (27) | | - | - | (68) |
| Interest on pension plan liabilities | 44 | 29 | | 1 | 5 | 79 |
| Total charge to profit before deduction of tax | 6 | 56 | | 1 | 18 | 81 |
| Losses/(gains) on plan assets excluding interest income3 | 67 | 46 | | - | - | 113 |
| Losses/(gains) on liabilities | (76) | (17) | | (2) | 1 | (94) |
| Total losses/(gains) recognised directly in statement | (9) | 29 | | (2) | 1 | 19 |
| Deferred taxation | 2 | (8) | | - | - | (6) |
| Total losses/(gains) after tax | (7) | 21 | | (2) | 1 | 13 |
1 The past service cost in the UK Fund is due to the impact of the Lloyds judgement on 26 October 2018 confirming the requirement for UK defined benefit pension schemes to equalise the impact of Guaranteed Minimum Pensions (GMPs) for males and females
2 The costs arise primarily from the settlement of benefits in Thailand
3 The actual return on the UK Fund assets was a loss of $26 million and on overseas plan assets was a loss of $19 million
| 31.12.17 | Funded plans | | Unfunded plans | Total | ||
| UK Fund | Overseas | Post- | Other | |||
| Current service cost | 4 | 53 | | - | 16 | 73 |
| Past service cost and curtailments1 | (6) | 7 | | (4) | - | (3) |
| Settlement cost2 | - | (1) | | - | 8 | 7 |
| Interest income on pension plan assets | (43) | (23) | | - | - | (66) |
| Interest on pension plan liabilities | 46 | 28 | | 1 | 12 | 87 |
| Total charge/(credit) to profit before deduction of tax | 1 | 64 | | (3) | 36 | 98 |
| Return on plan assets excluding interest income3 | (30) | (83) | | - | - | (113) |
| Losses/(gains) on liabilities | 41 | 51 | | - | (11) | 81 |
| Total losses/(gains) recognised directly in statement | 11 | (32) | | - | (11) | (32) |
| Deferred taxation | 28 | 7 | | - | - | 35 |
| Total losses/(gains) after tax | 39 | (25) | | - | (11) | 3 |
1 The gain In the UK Fund is due to the lower 2017 discretionary pension increase awarded. Costs arising in funded overseas schemes arise primarily in India from the expected statutory increase in the gratuity payment celling, an early retirement severance plan and a discretionary increase to minimum pensions. The gain in the post-retirement medical plan arises due to the reduction in eligibility criteria in the US plan
2 The costs arise primarily from the settlement of benefits in Thailand
3 The actual return on the UK Fund assets was a loss of $73 million and on overseas plan assets was a gain of $106 million
Movement in the defined benefit pension plans and post-retirement medical deficit during the year comprise:
| | Funded plans | | Unfunded plans | Total | ||
| UK Fund | Overseas | Post- | Other | |||
| Deficit at 1 January 2018 | (120) | (111) | | (18) | (194) | (443) |
| Contributions | 62 | 64 | | - | 17 | 143 |
| Current service cost | (1) | (54) | | - | (12) | (67) |
| Past service cost and curtailments | (2) | - | | - | - | (2) |
| Settlement costs and transfers impact | - | - | | - | (1) | (1) |
| Net interest on the net defined benefit asset/liability | (3) | (2) | | (1) | (5) | (11) |
| Actuarial (losses)/gains | 9 | (29) | | 2 | (1) | (19) |
| Exchange rate adjustment | 5 | 3 | | - | 6 | 14 |
| Deficit at 31 December 20181 | (50) | (129) | | (17) | (190) | (386) |
1 The deficit total of $386 million is made up of plans in deficit of $421 million (31 December 2017: $483 million) net of plans in surplus with assets totalling $35 million (31 December 2017: $40 million)
| | Funded plans | | Unfunded plans | Total | ||
| UK Fund | Overseas | Post- | Other | |||
| Deficit at 1 January 2017 | (116) | (159) | | (22) | (198) | (495) |
| Contributions | 19 | 92 | | 1 | 31 | 143 |
| Current service cost | (4) | (53) | | - | (16) | (73) |
| Past service cost and curtailments | 6 | (7) | | 4 | - | 3 |
| Settlement costs and transfers impact | - | 1 | | - | (8) | (7) |
| Net interest on the net defined benefit asset/liability | (3) | (5) | | (1) | (12) | (21) |
| Actuarial (losses)/gains | (11) | 32 | | - | 11 | 32 |
| Adjustment for Indonesia scheme1 | - | (4) | | - | 4 | - |
| Exchange rate adjustment | (11) | (8) | | - | (6) | (25) |
| Deficit at 31 December 20172 | (120) | (111) | | (18) | (194) | (443) |
1 During 2017 the Indonesian plan (with liabilities of $8 million) was partially funded with a Company contribution of $4 million. The scheme has moved from the unfunded to funded category in the tables
2 The deficit total of $443 million is made up of plans in deficit of $483 million (2016:$513 million) net of plans in surplus with assets totalling $40 million (2016: $18 million)
The Group's expected contribution to its defined benefit pension plans in 2019 is $112 million.
| | 31.12.18 | | 31.12.17 | ||||
| Assets | Obligations | Total | Assets | Obligations | Total | ||
| At 1 January | 2,592 | (3,035) | (443) | | 2,260 | (2,755) | (495) |
| Contributions1 | 144 | (1) | 143 | | 144 | (1) | 143 |
| Current service cost2 | - | (67) | (67) | | - | (73) | (73) |
| Past service cost and curtailments | - | (2) | (2) | | - | 3 | 3 |
| Settlement costs | - | (1) | (1) | | (14) | 7 | (7) |
| Interest cost on pension plan liabilities | - | (79) | (79) | | - | (87) | (87) |
| Interest income on pension plan assets | 68 | - | 68 | | 66 | - | 66 |
| Benefits paid out2 | (168) | 168 | - | | (152) | 152 | - |
| Actuarial (losses)/gains3 | (113) | 94 | (19) | | 113 | (81) | 32 |
| Exchange rate adjustment | (113) | 127 | 14 | | 175 | (200) | (25) |
| At 31 December | 2,410 | (2,796) | (386) | | 2,592 | (3,035) | (443) |
1 Includes employee contributions of $1 million (31 December 2017: $1 million)
2 Includes administrative expenses paid out of plan assets of $2 million (31 December 2017: $1 million)
3 Actuarial gain on obligation comprises $114 million gain (31 December 2017: $81 million loss) from financial assumption changes, nil gain (31 December 2017: $30 million gain) from demographic assumption changes and $20 million loss (31 December 2017: $30 million gain) from experience
31. Share-based payments
Accounting policy
The Group operates equity-settled and cash-settled share-based compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. For deferred share awards granted as part of an annual performance award, the expense is recognised over the period from the start of the performance period to the vesting date. For example, the expense
for awards granted in 2018 in respect of 2017 performance, which vest in 2019-2021, is recognised as an expense over the period from 1 January 2017 to the vesting dates in 2019-2021. For all other awards, the expense is recognised over the period from the date of grant to the vesting date.
For equity-settled awards, the total amount to be expensed over the vesting period is determined by reference to the fair value of the options at the date of grant, which excludes the impact of any non-market vesting conditions (for example, profitability and growth targets). The fair value of equity instruments granted is based on market prices, if available, at the date of grant. In the absence of market prices, the fair value of the instruments is estimated using an appropriate valuation technique, such as a binomial option pricing model. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest.
At each balance sheet date, the Group revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period. Forfeitures prior to vesting attributable to factors other than the failure to satisfy a non-market vesting condition are treated as a cancellation and the remaining unamortised charge is debited to the income statement at the time of cancellation. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.
Cash-settled awards are revalued at each balance sheet date and a liability recognised on the balance sheet for all unpaid amounts, with any changes in fair value charged or credited to staff costs in the income statement until the awards are exercised. Where forfeitures occur prior to vesting that are attributable to factors other than a failure to satisfy market-based performance conditions, the cumulative charge incurred up to the date of forfeiture is credited to the income statement. Any revaluation related to cash-settled awards is recorded as an amount due from subsidiary undertakings.
The Group operates a number of share-based arrangements for its executive directors and employees. Details of the share-based payment charge are set out below.
| | 31.12.181 | | 31.12.171 | ||||
| Cash | Equity | Total | Cash | Equity | Total | ||
| Deferred share awards | 3 | 89 | 92 | | 14 | 71 | 85 |
| Other share awards | (3) | 77 | 74 | | 9 | 58 | 67 |
| Total share-based payments | - | 166 | 166 | | 23 | 129 | 152 |
1 No forfeiture assumed
2011 Standard Chartered Share Plan (the '2011 Plan')
The 2011 Plan was approved by shareholders in May 2011 and is the Group's main share plan. Since approval, it has been used to deliver various types of share awards:
• Long Term Incentive Plan (LTIP) awards: granted with vesting subject to performance measures. Performance measures attached to awards granted previously include: total shareholder return (TSR); return on equity (RoE) with a Common Equity Tier 1 (CET1) underpin; strategic measures; earnings per share (EPS) growth; and return on risk-weighted assets (RoRWA). Each measure is assessed independently over a three-year period. Awards granted from 2016 have an individual conduct gateway that results in the award lapsing if not met
• Deferred awards are used to deliver the deferred portion of variable remuneration, in line with both market practice and regulatory requirements. These awards vest in instalments on anniversaries of the award date specified at the time of grant. Deferred awards are not subject to any plan limit. This enables the Group to meet regulatory requirements relating to deferral levels, and is in line with market practice
• Restricted share awards, made outside of the annual performance process as replacement buy-out awards to new joiners who forfeit awards on leaving their previous employers, vest in instalments on the anniversaries of the award date specified at the time of grant. This enables the Group to meet regulatory requirements relating to buy-outs, and is in line with market practice. In line with similar plans operated by our competitors, restricted share awards are not subject to an annual limit and do not have any performance measures
• Underpin shares are subject to a combination of two performance measures: EPS growth and RoRWA. The weighting between the two elements is split equally, one-half of the award depending on each measure, assessed independently. These awards vest after three or five years. Underpin shares formed part of the variable remuneration awarded to executive directors and senior management in respect of 2014 performance
Under the 2011 Plan, no grant price is payable to receive an award. The remaining life of the 2011 Plan during which new awards can be made is three years.
Valuation - LTIP awards
The vesting of awards granted in both 2017 and 2018 is subject to the satisfaction of RoE (subject to a capital underpin) and relative TSR performance measures and achievement of a strategic scorecard. The fair value of the TSR component is calculated using the probability of meeting the measures over a three-year performance period, using a Monte Carlo simulation model. The number of shares expected to vest is evaluated at each reporting date, based on the expected performance against the RoE and strategic measures in the scorecard, to determine the accounting charge.
Dividend equivalents accrue on the 2017 awards during the vesting period, so no discount is applied. However, for the 2018 awards, no dividend equivalents accrue and the fair value takes this into account, calculated by reference to market consensus dividend yield.
| | 31.12.18 | 31.12.17 |
| Grant date | 9 March | 13 March |
| Share price at grant date (£) | 7.78 | 7.43 |
| Vesting period (years) | 3-7 | 3-7 |
| Expected dividend yield (%) | 5.00 | N/A |
| Fair value (RoE) (£) | 2.59, 2.59 | 2.48, 2.48 |
| Fair value (TSR) (£) | 1.14, 1.11 | 1.81, 1.38 |
| Fair value (Strategic) (£) | 2.59, 2.59 | 2.48, 2.48 |
Valuation - deferred shares and restricted shares
The fair value for deferred awards which are not granted to material risk takers is based on 100 per cent of the face value of the shares at the date of grant as the share price will reflect expectations of all future dividends. For awards granted to material risk takers in 2018, the fair value of awards takes into account the lack of dividend equivalents, calculated by reference to market consensus dividend yield.
Deferred shares and underpin shares accrue dividend equivalent payments during the vesting period. Details of deferred, underpin and LTIP awards for executive directors can be found in the Annual report.
Deferred share awards
| Grant date | 31.12.18 | ||
| 18 June | | 9 March | |
| Share price at grant date (£) | 7.12 | 7.78 | |
| Vesting period | Expected | Fair value | | Expected | Fair value |
| 1-3 years | N/A, 5.0, 5.0 | 7.12, 6.45, 6.15 | | N/A, 5.0, 5.0 | 7.78, 7.06, 6.73 |
| 1-5 years | 5.0 | 6.00 | | 5.0, 5.0 | 6.74, 6.58 |
| 3-7 years | - | - | | 5.0, 5.0 | 6.11, 5.82 |
| Grant date | 31.12.17 | ||||
| 15 June | | 15 June | | 13 March | |
| Share price at grant date (£) | 7.56 | 7.69 | 7.43 | ||
| Vesting period | Expected | Fair value | | Expected | Fair value | | Expected | Fair value |
| 1-3 years | N/A | 7.56 | | N/A | 7.69 | | N/A | 7.43 |
| 1-5 years | - | - | | - | - | | N/A | 7.43 |
| 3-7 years | - | - | | - | - | | N/A | 7.43 |
Other restricted share awards
| Grant date | 31.12.18 | ||||||
| 28 November | | 2 October | | 18 June | | 9 March | |
| Share price at grant date (£) | 6.11 | 6.16 | 7.12 | 7.78 | |||
| Vesting period | Expected dividend yield | Fair value | | Expected dividend yield | Fair value | | Expected dividend yield | Fair value | | Expected dividend yield | Fair value |
| 6 months | - | - | | - | - | | - | - | | - | |
| 1 year | 5.0 | 5.82 | | 5.0 | 5.86 | | 5.0 | 6.78, 6.45 | | 5.0 | 7.41 |
| 2 years | 5.0 | 5.54 | | 5.0 | 5.58 | | 5.0 | 6.45, 6.15 | | 5.0 | 7.06 |
| 2-3 years | 5.0 | 5.41 | | - | - | | - | - | | - | - |
| 3 years | 5.0 | 5.28 | | 5.0 | 5.32 | | 5.0 | 6.15, 5.85 | | 5.0 | 6.72 |
| 4 years | - | - | | 5.0 | 5.06 | | 5.0 | 5.57 | | 5.0 | 6.40 |
| 5 years | - | - | | 5.0 | 4.82 | | - | - | | 5.0 | 6.10 |
| 6 years | - | - | | - | - | | - | - | | - | |
| Grant date | 31.12.17 | ||||||
| 29 November | | 3 October | | 15 June | | 13 March | |
| Share price at grant date (£) | 7.43 | 7.56 | 7.69 | 7.43 | |||
| Vesting period | Expected dividend yield | Fair value | | Expected dividend yield | Fair value | | Expected dividend yield | Fair value | | Expected dividend yield | Fair value |
| 6 months | - | - | | - | - | | - | - | | - | 7.43 |
| 1 year | - | 7.43 | | - | 7.56 | | - | 7.69 | | - | 7.43 |
| 2 years | - | 7.43 | | - | 7.56 | | 0.5 | 7.61 | | 0.5 | 7.35 |
| 2-3 years | - | - | | - | - | | - | - | | 1.9 | 7.08 |
| 3 years | 1.6 | 7.08 | | 1.6 | 7.21 | | 2.1 | 7.23 | | 2.1 | 6.99 |
| 4 years | 2.2 | 6.80 | | 2.2 | 6.92 | | 2.5 | 6.96 | | 2.5 | 6.72 |
| 5 years | 2.4 | 6.58 | | 2.4 | 6.70 | | - | - | | - | - |
| 6 years | 2.6 | 6.36 | | 2.6 | 6.47 | | - | - | | - | - |
2001 Performance Share Plan (2001 PSP) - now closed to new grants:
The Group's previous plan for delivering performance shares was the 2001 PSP and there remain outstanding vested awards. Under the 2001 PSP half the award was dependent upon TSR performance and the balance was subject to a target of defined EPS growth. Both measures used the same three-year period and were assessed independently.
2006 Restricted Share Scheme (2006 RSS)/2007 Supplementary Restricted Share Scheme (2007 SRSS):
The Group's previous plans for delivering restricted shares were the 2006 RSS and 2007 SRSS, both now replaced by the 2011 Plan. There remain outstanding vested awards under these plans. Awards were generally in the form of nil cost options and did not have any performance measures. Generally deferred restricted share awards vested equally over three years and for non-deferred awards half vested two years after the date of grant and the balance after three years. No further awards will be granted under the 2006 RSS and 2007 SRSS.
2013 Sharesave Plan:
Under the 2013 Sharesave Plan, employees may open a savings contract. Within a period of six months after the third anniversary, employees may purchase ordinary shares in the Company at a discount of up to 20 per cent on the share price at the date of invitation (this is known as the option exercise price). There are no performance measures attached to options granted under the 2013 Sharesave Plan and no grant price is payable to receive an option. In some countries in which the Group operates, it is not possible to operate Sharesave plans, typically due to securities law and regulatory restrictions. In these countries, where possible, the Group offers an equivalent cash-based plan to its employees.
The 2013 Sharesave Plan was approved by Shareholders in May 2013 and all future Sharesave invitations are made under this plan. The remaining life of the 2013 Sharesave Plan is four years.
Valuation - Sharesave:
Options under the Sharesave plans are valued using a binomial option-pricing model. The same fair value is applied to all employees including executive directors. The fair value per option granted and the assumptions used in the calculation are as follows:
All Employee Sharesave Plan (Sharesave)
| Grant date | 31.12.18 | | 31.12.17 |
| 2 October | 3 October | ||
| Share price at grant date (£) | 6.16 | | 7.71 |
| Exercise price (£) | 5.13 | | 6.20 |
| Vesting period (years) | 3 | | 3 |
| Expected volatility (%) | 33.8 | | 34.9 |
| Expected option life (years) | 3.33 | | 3.33 |
| Risk-free rate (%) | 0.87 | | 0.47 |
| Expected dividend yield (%) | 5.00 | | 1.87 |
| Fair value (£) | 1.39 | | 2.32 |
The expected volatility is based on historical volatility over the last three years, or three years prior to grant. The expected life is the average expected period to exercise. The risk-free rate of return is the yield on zero-coupon UK Government bonds of a term consistent with the assumed option life. The expected dividend yield is based on historical dividend for three years prior to grant.
Reconciliation of option movements for the year to 31 December 2018
| | 2011 Plan1 | PSP1 | RSS1 | SRSS1 | Sharesave | Weighted average exercise price | |
| Performance shares | Deferred/restricted shares | ||||||
| Outstanding as at 1 January | 25,477,368 | 23,311,221 | 17,222 | 185,943 | 1,249 | 12,818,234 | 6.06 |
| Granted2,3 | 2,481,485 | 13,649,191 | | | | 4,769,917 | 5.13 |
| Lapsed | (935,037) | (1,375,715) | (553) | (50,484) | | (2,995,333) | 7.36 |
| Exercised | (20,483) | (8,971,717) | (12,399) | (135,459) | (1,249) | (868,457) | 5.57 |
| Outstanding as at 31 December | 27,003,333 | 26,612,980 | 4,270 | - | - | 13,724,361 | 5.48 |
| Exercisable as at 31 December | 43,241 | 3,657,278 | 4,270 | - | - | 3,483,196 | 5.57 |
| Range of exercise prices (£)2 | | | | | - | 5.13 - 6.20 | |
| Intrinsic value of vested but not exercised options | 0.04 | 2.59 | 0.02 | - | - | - | |
| Weighted average contractual remaining life (years) | 7.43 | 8.18 | 0.48 | 0 | 0 | 2.04 | |
| Weighted average share price for options exercised during the period (£) | 7.18 | 7.17 | 6.76 | 7.84 | 7.85 | 6.20 | |
1 Employees do not contribute towards the cost of these awards
2 12,508,120 (DRSA/RSA) granted on 9 March 2018, 39,945 (notional dividend) granted on 11 March 2018, 63,350 (notional dividend) granted on 13 March 2018, 37,774 (notional dividend) granted on 19 March 2018, 2,076,370 (LTIP) granted on 9 March 2018, 216,127 (notional dividend) granted on 11 March 2018, 22,317 (notional dividend) granted on
13 March 2018, 815 (notional dividend) granted on 19 March 2018, 246,367 (DRSA/RSA) granted on 18 June 2018, 165,856 (LTIP) and 75755 (DRSA/RSA) granted on 22 Aug 2018, and 423,038 (DRSA/RA) and 4,769,917 (Sharesave) granted on 2 October 2018, and 254,842 (DRSA/RSA) granted on 28 November 2018
3 For Sharesave granted in 2018 the exercise price is £5.13 per share, which was the average of the closing prices over the five days to the invitation date of 3 September. The closing share price on 31 August 2018 was £6.271
Reconciliation of option movements for the year to 31 December 2017
| | 2011 Plan1 | PSP1 | RSS1 | SRSS1 | Sharesave | Weighted average exercise | |
| Performance shares | Deferred/restricted shares | ||||||
| Outstanding as at 1 January | 28,740,614 | 24,208,988 | 76,977 | 701,603 | 80,299 | 13,291,261 | 6.72 |
| Granted2,3 | 2,347,184 | 12,066,323 | - | - | - | 3,097,250 | 6.20 |
| Lapsed | (5,550,569) | (1,233,517) | (14,821) | (118,531) | (18,741) | (3,529,783) | 8.67 |
| Exercised | (59,861) | (11,730,573) | (44,934) | (397,129) | (60,309) | (40,494) | 5.55 |
| Outstanding as at 31 December | 25,477,368 | 23,311,221 | 17,222 | 185,943 | 1,249 | 12,818,234 | 6.06 |
| Exercisable as at 31 December | 65,429 | 4,526,848 | 17,222 | 185,943 | 1,249 | 1,364,426 | 9.38 |
| Range of exercise prices (£)2 | - | - | - | - | - | 5.30 -9.38 | - |
| Intrinsic value of vested but not exercised options | 0.1 | 3.6 | 0.0 | 0.2 | 0.0 | 0.0 | - |
| Weighted average contractual remaining life (years) | 8.29 | 8.09 | 1.13 | 0.19 | 0.19 | 2.05 | - |
| Weighted average share price for options exercised during the period (£) | 7.44 | 7.43 | 7.73 | 7.43 | 7.35 | 7.62 | - |
1 Employees do not contribute towards the cost of these awards
2 For Sharesave granted in 2017 the exercise price is £6.20 per share, which was the average of the closing prices over the five days to the invitation date of 4 September. The closing share price on 1 September 2017 was £7.7390
3 Performance shares comprise 2,347,184 (LTIP) granted on 13 March 2017. Deferred/restricted shares comprise 10,055,740 (RSA/DRSA) granted on 13 March 2017, 366,830 (RSA/DRSA) granted on 15 June 2017, 871,760 (RSA) granted on 03 October 2017 and 771,993 (RSA) granted on 29 November 2017
32. Investments in subsidiary undertakings, joint ventures and associates
Accounting policy
Subsidiaries
Subsidiaries are all entities, including structured entities, which the Group controls. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the investee. The assessment of power is based on the Group's practical ability to direct the relevant activities of the entity unilaterally for the Group's own benefit and is subject to reassessment if and when one or more of the elements of control change. Subsidiaries are fully consolidated from the date on which the Group effectively obtains control. They are deconsolidated from the date that control ceases, and where any interest in the subsidiary remains, this is remeasured to its fair value and the change in carrying amount is recognised in the income statement.
Associates and joint arrangements
Joint arrangements are where two or more parties either have rights to the assets, and obligations of the joint arrangement (joint operations), or have rights to the net assets of the joint arrangement (joint venture). The Group evaluates the contractual terms of joint arrangements to determine whether a joint arrangement is a joint operation or a joint venture. As at 31 December 2017, the Group did not have any contractual interest in joint operations.
An associate is an entity over which the Group has significant influence.
Investments in associates and joint ventures are accounted for by the equity method of accounting and are initially recognised at cost. The Group's investment in associates and joint ventures includes goodwill identified on acquisition (net of any accumulated impairment loss).
The Group's share of its associates' and joint ventures' post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in other comprehensive income is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share of losses in an associate or a joint venture equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture.
Unrealised gains and losses on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group's interest in the associates and joint ventures. At each balance sheet date the Group assesses whether there is any objective evidence of impairment in the investment in associates and joint ventures. Such evidence includes a significant or prolonged decline in the fair value of the Group's investment in an associate or joint venture below its cost, among other factors.
Significant accounting estimates and judgements
The Group applies judgement in determining if it has control, joint control or significant influence over subsidiaries, joint ventures and associates respectively. These judgements are based upon identifying the relevant activities of counterparties, being those activities that significantly affect the entities returns, and further making a decision of if the Group has control over those entities, joint control, or has significant influence (being the power to participate in the financial and operating policy decisions but not control them).
These judgements are at times determined by equity holdings, and the voting rights associated with those holdings. However, further considerations including but not limited to board seats, advisory committee members and specialist knowledge of some decision-makers are also taken into account.
Impairment testing of investments in associates and joint arrangements is based on estimates including forecasting the expected cash flows from the investments and the discount rate used in calculation of the present values of those cash flows. The estimation of future cash flows and the level to which they are discounted is inherently uncertain and requires significant judgement.
Business combinations
The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, together with the fair value of any contingent consideration payable. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets and contingent liabilities acquired is recorded as goodwill (see Note 17 for details on goodwill recognised by the Group). If the cost of acquisition is less than the fair value of the net assets and contingent liabilities of the subsidiary acquired, the difference is recognised directly in the income statement.
Where the fair values of the identifiable net assets and contingent liabilities acquired have been determined provisionally, or where contingent or deferred consideration is payable, adjustments arising from their subsequent finalisation are not reflected in the income statement if (i) they arise within 12 months of the acquisition date (or relate to acquisitions completed before 1 January 2014) and (ii) the adjustments arise from better information about conditions existing at the acquisition date (measurement period adjustments). Such adjustments are applied as at the date of acquisition and, if applicable, prior year amounts are restated. All changes that are not measurement period adjustments are reported in income other than changes in contingent consideration not classified as financial instruments, which are accounted for in accordance with the appropriate accounting policy, and changes in contingent consideration classified as equity, which is not remeasured.
Changes in ownership interest in a subsidiary, which do not result in a loss of control, are treated as transactions between equity holders and are reported in equity. Where a business combination is achieved in stages, the previously held equity interest is remeasured at the acquisition date fair value with the resulting gain or loss recognised in the income statement.
In the Company's financial statements, investment in subsidiaries, associates and joint ventures are held at cost less impairment and dividends from pre-acquisition profits received prior to 1 January 2009, if any. Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated in the Group accounts.
| Investments in subsidiary undertakings | 31.12.18 | 31.12.17 |
| As at 1 January | 34,853 | 33,853 |
| Additions | - | 1,000 |
| As at 31 December | 34,853 | 34,853 |
At 31 December 2018, the principal subsidiary undertakings, all indirectly held and principally engaged in the business of banking and provision of other financial services, were as follows:
| Country and place of incorporation or registration | Main areas of operation | Group interest |
| Standard Chartered Bank, England and Wales | United Kingdom, Middle East, South Asia, Asia Pacific, Americas and, through Group companies, Africa | 100 |
| Standard Chartered Bank (China) Limited, China | China | 100 |
| Standard Chartered Bank (Hong Kong) Limited, Hong Kong | Hong Kong | 100 |
| Standard Chartered Bank Korea Limited, Korea | Korea | 100 |
| Standard Chartered Bank Malaysia Berhad, Malaysia | Malaysia | 100 |
| Standard Chartered Private Equity Limited, Hong Kong | Hong Kong | 100 |
| Standard Chartered Bank Nigeria Limited, Nigeria | Nigeria | 100 |
| Standard Chartered Bank (Singapore) Limited, Singapore | Singapore | 100 |
| Standard Chartered Bank (Taiwan) Limited, Taiwan | Taiwan | 100 |
| Standard Chartered Bank (Pakistan) Limited, Pakistan | Pakistan | 98.99 |
| Standard Chartered Bank (Thai) Public Company Limited, Thailand | Thailand | 99.87 |
| Standard Chartered Bank Kenya Limited, Kenya | Kenya | 74.30 |
A complete list of subsidiary undertaking is included in Note 40.
The Group does not have any material non-controlling interests in any of its subsidiaries except the 25.7 per cent non-controlling interests amounting to $108 million (31 December 2017: $105 million) in Standard Chartered Bank Kenya Limited. This contributes 3.2 per cent of the Group's Operating Profit and 0.4 per cent of the Group's assets.
While the Group's subsidiaries are subject to local statutory capital and liquidity requirements in relation to foreign exchange remittance, these restrictions arise in the normal course of business and do not significantly restrict the Group's ability to access or use assets and settle liabilities of the Group.
The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those resulting from
the regulatory framework within which the banking subsidiaries operate. These frameworks require banking operations to keep certain levels
of regulatory capital, liquid assets, exposure limits and comply with other required ratios. These restrictions are summarised below:
Regulatory and liquidity requirements
The Group's subsidiaries are required to maintain minimum capital, leverage ratios, liquidity and exposure ratios which therefore restrict the ability of these subsidiaries to distribute cash or other assets to the parent company.
The subsidiaries are also required to maintain balances with central banks and other regulatory authorities in the countries in which they operate. At 31 December 2018, the total cash and balances with central banks was $58 billion (31 December 2017: $59 billion) of which $8 billion (31 December 2017: $10 billion) is restricted.
Statutory requirements
The Group's subsidiaries are subject to statutory requirements not to make distributions of capital and unrealised profits to the parent company, generally to maintain solvency. These requirements restrict the ability of subsidiaries to remit dividends to the Group. Certain subsidiaries are also subject to local exchange control regulations which provide for restrictions on exporting capital from the country other than through normal dividends.
Contractual requirements
The encumbered assets in the balance sheet of the Group's subsidiaries are not available for transfer around the Group. Encumbered assets are disclosed in Risk review and Capital review.
Share of profit from investment in associates and joint ventures comprises:
| | 31.12.18 | 31.12.17 |
| Profit from investment in joint ventures | 29 | 29 |
| Profit from investment in associates | 212 | 239 |
| Total | 241 | 268 |
Interests in joint ventures
| | 31.12.18 | 31.12.17 |
| As at 1 January | 783 | 713 |
| Exchange translation difference | (49) | (1) |
| Expected credit loss, net1 | (33) | - |
| Additions | - | 44 |
| Share of profit | 29 | 29 |
| Disposals | (11) | - |
| Share of FVOCI and other reserves | (2) | (2) |
| As at 31 December | 717 | 783 |
1 IFRS 9 transition impact from joint venture is reported here
The Group's principal joint venture is PT Bank Permata Tbk (Permata). The Group has a 44.56 per cent (31 December 2017: 44.56 per cent) equity investment in Permata. The Group has determined that it has joint control of Permata through its shareholding, which is held alongside a third-party that holds the same percentage. The Group has made the judgement that through these equity holdings, and in making decisions pertaining to Permata that both parties require each other's unanimous consent when making decisions over the relevant activities of Permata. Permata is based in Indonesia and provides financial services to consumer and commercial banking clients. The Group's share of profit of Permata amounts to $26 million (31 December 2017: $29 million) and the Group's share of net assets was $717 million (31 December 2017: $775 million). On 16 February 2017, Permata announced plans for an IDR3 trillion (approximately $225 million) rights issue to drive growth. The Group invested an additional $44 million during 2017 as part of the rights issue. Permata is listed on the Indonesia Stock Exchange with a share price of IDR625 as at 31 December 2018 resulting in a share capitalisation value of the Group's investment of $540 million.
The following table sets out the summarised financial statements of PT Bank Permata Tbk prior to the Group's share of joint ventures being applied:
| | 31.12.18 | 31.12.17 |
| Current assets | 6,001 | 5,626 |
| Non-current assets | 4,439 | 5,193 |
| Current liabilities | (8,342) | (8,415) |
| Non-current liabilities | (657) | (924) |
| Net assets | 1,441 | 1,480 |
| Operating income | 517 | 641 |
| Of which: | | |
| Interest income | 779 | 837 |
| Interest expense | (399) | (447) |
| Expenses | (312) | (334) |
| Impairment | (117) | (224) |
| Operating profit | 88 | 83 |
| Taxation | (23) | (18) |
| Profit after tax | 65 | 65 |
| The financial statements of PT Bank Permata Tbk includes the following | | |
| Cash and cash equivalents | 1,445 | 1,207 |
| Other comprehensive loss for the year | (8) | (5) |
| Total comprehensive income for the year | 57 | 60 |
In December 2016 Permata established a portfolio of non-performing loans that were beyond its risk appetite which were to be liquidated. This resulted in an incremental impairment of $140 million, representing the difference between the carrying amount of the liquidation portfolio on a hold to collect basis and the amount expected to be realised upon liquidation. This is consistent with the Group's restructuring actions. Accordingly, in 2016 the Group has recorded its $62 million share of this incremental impairment as restructuring and this was normalised from the underlying results of the Group. In 2017 a gain of $59 million has been recognised in restructuring as a result of recoveries on these non-performing loans.
Current assets primarily represent cash and short-term receivable balances. Non-current assets are primarily loans to customers. Current liabilities are primarily customer deposits based on contractual maturities, while non-current liabilities are longer-term payables such as subordinated debt.
Reconciliation of the net assets above to the carrying amount of the investments in PT Bank Permata Tbk recognised in the consolidated financial statements:
| | 31.12.18 | 31.12.17 |
| Net assets of PT Bank Permata Tbk | 1,441 | 1,480 |
| Proportion of the Group's ownership interest in joint ventures | 642 | 659 |
| Notional goodwill | 108 | 116 |
| Other adjustments1 | (33) | - |
| Carrying amount of the Group's interest in PT Bank Permata Tbk | 717 | 775 |
1 Relates to IFRS 9 transition adjustments
The Group's interest in Permata was tested for impairment. The recoverable amount is based on estimates including forecasting the expected cash flows from the investments and the discount rate used in calculation of the present values of those cash flows. At 31 December 2018, the recoverable amount of the interest in Permata exceeded its carrying amount, and no impairment provision was required.
Interests in associates
| | China Bohai Bank | | Other | | Total | |||
| 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | |||
| As at 1 January | 1,489 | 1,182 | | 35 | 34 | | 1,524 | 1,216 |
| Exchange translation differences | (95) | 96 | | - | - | | (95) | 96 |
| Expected credit loss, net1 | (19) | - | | - | - | | (19) | - |
| Share of profits | 205 | 229 | | 7 | 10 | | 212 | 239 |
| Disposals | - | - | | - | 37 | | - | 37 |
| Dividends received | (64) | - | | (3) | (2) | | (67) | (2) |
| Share of fair value through other comprehensive income/available-for-sale and Other reserves | 35 | (18) | | - | (39) | | 35 | (57) |
| Others | - | - | | - | (5)2 | | - | (5) |
| As at 31 December | 1,551 | 1,489 | | 39 | 35 | | 1,590 | 1,524 |
1 IFRS 9 transition impact from associates is reported here
2 Relates to Asia Commercial Bank disposed in 2017
A complete list of the Group's interest in associates is included in Note 40. The Group's principal associate is:
| Associate | Nature of activities | Main areas | Group interest |
| China Bohai Bank | Banking | China | 19.99 |
The Group's investment in China Bohai Bank is less than 20 per cent but it is considered to be an associate because of the significant influence the Group is able to exercise over the management and financial and operating policies. The Group applies the equity method of accounting for investments in associates. The reported financials up to November 2018 of this associate are within three months of the Group's reporting date.
The following table sets out the summarised financial statements of China Bohai Bank prior to the Group's share of the associates being applied:
| | China Bohai Bank | |
| 30 Nov 2018 | 30 Nov 2017 | |
| Current assets | 62,212 | 52,056 |
| Non-current assets | 85,547 | 104,479 |
| Current liabilities | (65,731) | (82,293) |
| Non-current liabilities | (74,269) | (66,794) |
| Net assets | 7,759 | 7,448 |
| Operating income | 3,427 | 3,854 |
| Of which: | | |
| Interest income | 6,699 | 6,014 |
| Interest expense | (4,430) | (3,452) |
| Expenses | (1,273) | (1,388) |
| Impairment | (971) | (1,056) |
| Operating profit | 1,183 | 1,410 |
| Taxation | (160) | (263) |
| Profit after tax | 1,023 | 1,147 |
| The financial statements of China Bohai bank include the following: | | |
| Other comprehensive profit/(loss) for the year | 175 | (91) |
| Total comprehensive income for the year | 1,198 | 1056 |
Non-current assets are primarily loans to customers and current liabilities are primarily customer deposits based on contractual maturities.
During the year, there were no indicators of impairment for the Group's investment in China Bohai Bank. The carrying value of the investment as of 31 December 2018 was $1,551 million (31 December 2017: $1,590 million).
33. Structured entities
Accounting policy
A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. Contractual arrangements determine the rights and therefore relevant activities of the structured entity. Structured entities are generally created to achieve a narrow and well-defined objective with restrictions around their activities. Structured entities are consolidated when the substance of the relationship between the Group and the structured entity indicates the Group has power over the contractual relevant activities of the structured entity, is exposed to variable returns, and can use that power to affect the variable return exposure.
In determining whether to consolidate a structured entity to which assets have been transferred, the Group takes into account its ability to direct the relevant activities of the structured entity. These relevant activities are generally evidenced through a unilateral right to liquidate the structured entity, investment in a substantial proportion of the securities issued by the structured entity or where the Group holds specific subordinate securities that embody certain controlling rights. The Group may further consider relevant activities embedded within contractual arrangements such as call options which give the practical ability to direct the entity, special relationships between the structured entity and investors, and if a single investor has a large exposure to variable returns of the structured entity.
Judgement is required in determining control over structured entities. The purpose and design of the entity is considered, along with a determination of what the relevant activities are of the entity and who directs these. Further judgements are made around which investor is exposed to, and absorbs the variable returns of the structured entity. The Group will have to weigh up all of these facts to consider whether the Group, or another involved party is acting as a principal in its own right or as an agent on behalf of others. Judgement is further required in the ongoing assessment of control over structured entities, specifically if market conditions have an effect on the variable return exposure of different investors.
The Group has involvement with both consolidated and unconsolidated structured entities, which may be established by the Group as a sponsor or by a third-party.
Interests in consolidated structured entities: A structured entity is consolidated into the Group's financial statements where the Group controls the structured entity, as per the determination in the accounting policy above.
The following table presents the Group's interests in consolidated structured entities.
| | 31.12.18 | 31.12.17 |
| Aircraft and ship leasing | 4,854 | 5,494 |
| Principal and other structured finance | 1,452 | 2,534 |
| Total | 6,306 | 8,028 |
Interests in unconsolidated structured entities: Unconsolidated structured entities are all structured entities that are not controlled by the Group. The Group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities. An interest in a structured entity is contractual or non-contractual involvement which creates variability of the returns of the Group arising from the performance of the structured entity.
The table below presents the carrying amount of the assets recognised in the financial statements relating to variable interests held in unconsolidated structured entities, the maximum exposure to loss relating to those interests and the total assets of the structured entities. Maximum exposure to loss is primarily limited to the carrying amount of the Group's on-balance sheet exposure to the structured entity. For derivatives, the maximum exposure to loss represents the on-balance sheet valuation and not the notional amount. For commitments and guarantees, the maximum exposure to loss is the notional amount of potential future losses.
| | 31.12.18 | | 31.12.17 | ||||||||
| Asset-backed securities | Structured finance | Principal | Other activities | Total | Asset-backed securities | Structured finance | Principal | Other activities | Total | ||
| Group's interest - assets | | | | | | | | | | | |
| Financial assets held at fair value through profit or loss | 1,094 | - | 72 | 247 | 1,413 | | 885 | - | 389 | 98 | 1,372 |
| Loans and advances/investment securities at amortised cost | 2,556 | 1,403 | 252 | 190 | 4,401 | | 1,437 | 1,527 | 439 | - | 3,403 |
| Investment securities (fair value through other comprehensive income/available-for-sale) | 3,812 | - | - | - | 3,812 | | 4,105 | - | 56 | - | 4,161 |
| Other assets | - | - | 336 | - | 336 | | - | - | 19 | - | 19 |
| Total assets | 7,462 | 1,403 | 660 | 437 | 9,962 | | 6,427 | 1,527 | 903 | 98 | 8,955 |
| Off-balance sheet | 116 | 553 | 79 | - | 748 | | 86 | 501 | 262 | - | 849 |
| Group's maximum exposure to loss | 7,578 | 1,956 | 739 | 437 | 10,710 | | 6,513 | 2,028 | 1,165 | 98 | 9,804 |
| Total assets of structured entities | 205,837 | 2,785 | 3,395 | 11,872 | 223,889 | | 295,468 | 3,747 | 5,052 | 106 | 304,373 |
The main types of activities for which the Group utilises unconsolidated structured entities cover synthetic credit default swaps for managed investment funds (including specialised Principal Finance funds), portfolio management purposes, structured finance and asset-backed securities. These are detailed as follows:
• Asset-backed securities (ABS): The Group also has investments in asset-backed securities issued by third-party structured entities as set out in the Risk review and Capital review. For the purpose of market making and at the discretion of ABS trading desk, the Group may hold an immaterial amount of debt securities from structured entities originated by credit portfolio management. This is disclosed in the ABS column above
- Portfolio management (Group sponsored entities): For the purposes of portfolio management, the Group purchased credit protection via synthetic credit default swaps from note-issuing structured entities. The referenced assets remain on the Group's balance sheet as they are not assigned to these structured entities. The Group continues to own or hold all of the risks and returns relating to these assets. The credit protection obtained from the regulatory-compliant securitisation only serves to protect the Group against losses upon the occurrence of eligible credit events and the underlying assets are not derecognised from the Group's balance sheet. The Group does not hold any equity interests in the structured entities, but may hold an insignificant amount of the issued notes for market making purposes. This is disclosed in the ABS section above. The proceeds of the notes' issuance are typically held as cash collateral in the issuer's account operated by a trustee or invested in AAA-rated government-backed securities to collateralise the structured entities swap obligations to the Group, and to repay the principal to investors at maturity. The structured entities reimburse the Group on actual losses incurred, through the use of the cash collateral or realisation of the collateral security. Correspondingly, the structured entities write down the notes issued by an equal amount of the losses incurred, in reverse order of seniority. All funding is committed for the life of these vehicles and the Group has no indirect exposure in respect of the vehicles' liquidity position. The Group has reputational risk in respect of certain portfolio management vehicles and investment funds either because the Group is the arranger and lead manager or because the structured entities have Standard Chartered branding
• Structured finance: Structured finance comprises interests in transactions that the Group or, more usually, a customer has structured, using one or more structured entities, which provide beneficial arrangements for customers. The Group's exposure primarily represents the provision of funding to these structures as a financial intermediary, for which it receives a lender's return. The transactions largely relate to the provision of aircraft leasing and ship finance
• Principal Finance funds: The Group's exposure to Principal Finance funds represents committed or invested capital in unleveraged investment funds, primarily investing in pan-Asian infrastructure, real estate and private equity
• Other activities: Other activities include structured entities created to support margin financing transactions, the refinancing of existing credit and debt facilities, as well as setting up of bankruptcy remote structured entities
34. Cash flow statement
Adjustment for non-cash items and other adjustments included within income statement
| | Group | | Company | ||
| 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | ||
| Amortisation of discounts and premiums of investment securities | (375) | (292) | | - | - |
| Interest expense on subordinated liabilities | 767 | 748 | | 673 | 563 |
| Interest expense on senior debt securities in issue | 606 | 465 | | 503 | 381 |
| Other non-cash items | 796 | 541 | | 91 | 63 |
| Pension costs for defined benefit schemes | 81 | 98 | | - | - |
| Share-based payment costs | 166 | 152 | | - | - |
| Impairment losses on loans and advances and other credit risk provisions | 653 | 1,362 | | - | - |
| Dividend income from subsidiaries | - | - | | (1,035) | (392) |
| Other impairment | 182 | 499 | | - | - |
| Net gain on derecognition of investment in associate | - | (64) | | - | - |
| Profit from associates and joint ventures | (241) | (268) | | - | - |
| Total | 2,635 | 3,241 | | 232 | 615 |
Change in operating assets
| | Group | | Company | ||
| 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | ||
| Decrease in derivative financial instruments | 1,051 | 19,246 | | 61 | 459 |
| Decrease/(Increase) in debt securities, treasury bills and equity shares held | 4,171 | (5,373) | | - | - |
| Increase in loans and advances to banks and customers | (16,883) | (26,085) | | - | - |
| Net increase in prepayments and accrued income | (252) | (19) | | - | - |
| Net increase in other assets | (924) | (1,394) | | - | - |
| Total | (12,837) | (13,625) | | 61 | 459 |
Change in operating liabilities
| | Group | | Company | ||
| 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | ||
| (Decrease)/increase in derivative financial instruments | (493) | (18,405) | | 636 | (1,049) |
| Net increase/(decrease) in deposits from banks, customer accounts, debt securities in issue, Hong Kong notes in circulation and short positions | 31,216 | 23,877 | | (22) | 1,599 |
| Increase/(decrease) in accruals and deferred income | 3 | 68 | | 6 | (7) |
| Net increase/(decrease) in other liabilities | 3,133 | 279 | | (1,082) | 32 |
| Total | 33,859 | 5,819 | | (462) | 575 |
Disclosures
| | Group | | Company | ||
| 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | ||
| Subordinated debt (including accrued interest): | | | | | |
| Opening balance | 17,550 | 19,913 | | 14,109 | 14,821 |
| Proceeds from the issue | 500 | - | | 500 | - |
| Interest paid | (602) | (743) | | (507) | (353) |
| Repayment | (2,097) | (2,984) | | (474) | (1,249) |
| Foreign exchange movements | (220) | 701 | | (237) | 536 |
| Fair value changes | (373) | 11 | | (248) | 93 |
| Other | 469 | 652 | | 505 | 261 |
| Closing balance | 15,227 | 17,550 | | 13,648 | 14,109 |
| | | | | | |
| Senior debt (including accrued interest): | | | | | |
| Opening balance | 19,738 | 19,800 | | 16,307 | 17,265 |
| Proceeds from the issue | 9,766 | 2,292 | | 4,552 | 1,501 |
| Interest paid | (507) | (896) | | (355) | (825) |
| Repayment | (7,030) | (4,162) | | (3,141) | (3,237) |
| Foreign exchange movements | (347) | 882 | | (199) | 659 |
| Fair value changes | (904) | 26 | | (182) | 21 |
| Other | 1,282 | 1,796 | | 379 | 923 |
| Closing balance | 21,998 | 19,738 | | 17,361 | 16,307 |
35. Cash and cash equivalents
Accounting policy
For the purposes of the cash flow statement, cash and cash equivalents comprise cash, on demand and overnight balances with central banks (unless restricted) and balances with less than three months' maturity from the date of acquisition, including treasury bills and other eligible bills, loans and advances to banks, and short-term government securities.
The following balances with less than three months' maturity from the date of acquisition have been identified by the Group as being cash and cash equivalents.
| | Group | | Company | ||
| 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | ||
| Cash and balances at central banks | 57,511 | 58,864 | | - | - |
| Less: restricted balances | (8,152) | (9,761) | | - | - |
| Treasury bills and other eligible bills | 15,393 | 9,384 | | - | - |
| Loans and advances to banks | 30,449 | 25,729 | | - | - |
| Trading securities | 2,299 | 3,015 | | - | - |
| Amounts owed by and due to subsidiary undertakings | - | - | | 17,606 | 15,714 |
| Total | 97,500 | 87,231 | | 17,606 | 15,714 |
Restricted balances comprise minimum balances required to be held at central banks.
36. Related party transactions
Directors and officers
Details of directors' remuneration and interests in shares are disclosed in the Directors' remuneration report.
IAS 24 Related party disclosures requires the following additional information for key management compensation. Key management comprises non-executive directors, executive directors of Standard Chartered PLC, the Court directors of Standard Chartered Bank and the persons discharging managerial responsibilities (PDMR) of Standard Chartered PLC.
| | 31.12.18 | 31.12.17 |
| Salaries, allowances and benefits in kind | 33 | 35 |
| Share-based payments | 29 | 29 |
| Bonuses paid or receivable | 10 | 11 |
| Total | 72 | 75 |
Transactions with directors and others
At 31 December 2018, the total amounts to be disclosed under the Companies Act 2006 (the Act) and the Listing Rules of the Hong Kong Stock Exchange Limited (HK Listing Rules) about loans to directors were as follows:
| | 31.12.18 | | 31.12.17 | ||
| Number | $million | Number | $million | ||
| Directors | 1 | - | | 1 | - |
The loan transaction provided to the directors of Standard Chartered PLC was a connected transaction under Chapter 14A of the HK Listing Rules. It was fully exempt as financial assistance under Rule 14A.87(1), as it was provided in our ordinary and usual course of business and on normal commercial terms.
As at 31 December 2018, Standard Chartered Bank had created a charge over $83 million (31 December 2017: $75 million) of cash assets in favour of the independent trustee of its employer financed retirement benefit scheme.
Other than as disclosed in the Annual Report and Accounts, there were no other transactions, arrangements or agreements outstanding for any director, connected person or officer of the Company which have to be disclosed under the Act, the rules of the UK Listing Authority or the HK Listing Rules.
Company
The Company has received $953 million (31 December 2017: $848 million) of interest income from Standard Chartered Bank. The Company issues debt externally and lends proceeds to Group companies. At 31 December 2018, it had amounts due from Standard Chartered Bank of $14,380 million (31 December 2017: $12,580 million), derivative financial assets of $9 million (31 December 2017: $70 million) and $1,094 million derivative financial liabilities (31 December 2017: $492 million) with Standard Chartered Bank, amounts due from Standard Chartered Holdings Limited of $80 million (31 December 2017: $80 million). At 31 December 2018, it had amounts due from Standard Chartered IH Limited of $298 million (31 December 2017: $298 million).
The Company has an agreement with Standard Chartered Bank that in the event of Standard Chartered Bank defaulting on its debt coupon interest payments, where the terms of such debt requires it, the Company shall issue shares as settlement for non-payment of the coupon interest.
Associate and joint ventures
The following transactions with related parties are on an arm's-length basis.
| | 31.12.18 | | 31.12.17 | |||||
| China | Clifford Capital | PT Bank Permata | Seychelles International Mercantile Banking Corporation Limited | China | Clifford | PT Bank Permata | ||
| Assets | | | | | | | | |
| Loans and advances | - | 22 | 58 | - | | - | 50 | 95 |
| Debt securities | - | - | - | - | | - | 27 | - |
| Derivative assets | 2 | - | - | - | | 1 | - | - |
| Total assets | 2 | 22 | 58 | - | | 1 | 77 | 95 |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Deposits | 266 | - | 35 | 11 | | 219 | - | 29 |
| Debt securities issued | - | - | - | - | | 15 | - | - |
| Total liabilities | 266 | - | 35 | 11 | | 234 | - | 29 |
| Total net income | 6 | - | 6 | - | | 5 | - | 6 |
37. Post balance sheet events
A final dividend for 2018 of 15 cents per ordinary share was declared by the directors after 31 December 2018.
On 21 February 2019 the Board of the Company approved an entity reorganisation in which it will acquire the direct ownership of Standard Chartered Bank (Hong Kong) Limited currently held by wholly owned subsidiary undertakings Standard Chartered Bank and Standard Chartered Holdings Limited. This common control transaction will have no financial impact on the consolidated accounts of the Group. In the Company only accounts, Investments in Subsidiaries will increase with a corresponding increase in equity being the dividend in specie utilised to achieve the reorganisation. The transaction is subject to Standard Chartered Bank and Standard Chartered Holdings Limited passing necessary resolutions for the dividends in specie and completing the necessary transfers, which are expected to be completed in March 2019.
38. Auditor's remuneration
Auditor's remuneration is included within other general administration expenses. The amounts paid by the Group to their principal auditor, KPMG LLP and its associates (together KPMG), are set out below. All services are approved by the Group Audit Committee and are subject to controls to ensure the external auditor's independence is unaffected by the provision of other services.
| | 31.12.18 | 31.12.171 $million |
| Audit fees for the Group statutory audit | 9.2 | 9.4 |
| Fees payable to KPMG for other services provided to the Group: | | |
| Audit of Standard Chartered PLC subsidiaries | 8.3 | 7.7 |
| Total audit fees | 17.5 | 17.1 |
| Audit-related services | 7.0 | 5.9 |
| Other assurance services | 0.3 | 0.2 |
| Tax compliance and advisory services | 0.1 | 0.3 |
| Corporate finance services | 0.2 | 0.5 |
| Total fees payable | 25.1 | 24.0 |
1 Prior year balances have been re-presented to align to current year categories
The following is a description of the type of services included within the categories listed above:
• Audit fees for the Group statutory audit are in respect of fees payable to KPMG LLP for the statutory audit of the consolidated financial statements of the Group and the separate financial statements of Standard Chartered PLC
• Audit-related fees consist of fees such as those for services required by law or regulation to be provided by the auditor, reviews of interim financial information, reporting on regulatory returns, reporting to a regulator on client assets and extended work performed over financial information and controls authorised by those charged with governance
• Other assurance services include agreed-upon-procedures in relation to statutory and regulatory filings
• Tax services include services which are not prohibited by the European Directive on Statutory Audits of Annual and Consolidated Accounts and the Regulation on Statutory Audits of Public Interest Entities
• Corporate finance services are fees payable to KPMG for issuing comfort letters
Expenses incurred during the provision of services and which have been reimbursed by the Group are not included within auditor's remuneration. Expenses incurred for 2018 were $0.6 million (2017: $0.9 million).
39. Standard Chartered PLC (Company)
Classification and measurement of financial instruments
| Financial assets | 31.12.18 | | 31.12.17 | ||||
| Derivatives held | Amortised cost | Total | Derivatives held | Amortised cost | Total | ||
| Derivatives | 9 | - | 9 | | 70 | - | 70 |
| Investment securities | - | 11,537 | 11,537 | | - | 12,159 | 12,159 |
| Amounts owed by subsidiary undertakings | - | 17,606 | 17,606 | | - | 15,714 | 15,714 |
| Total | 9 | 29,143 | 29,152 | | 70 | 27,873 | 27,943 |
There was no change to the classification, measurement or credit impairment of financial assets upon the transition to IFRS 9. The instruments classified as amortised cost will be recorded in stage 1.
Derivatives held for hedging are held at fair value and are classified as Level 2 while the counterparty is Standard Chartered Bank.
Debt securities comprise corporate securities issued by Standard Chartered Bank and have a fair value equal to carrying value of $11,537 million (31 December 2017: $12,159 million).
In 2018 and 2017, amounts owed by subsidiary undertakings have a fair value equal to carrying value.
| Financial liabilities | 31.12.18 | | 31.12.17 | ||||
| Derivatives held | Amortised cost | Total | Derivatives held | Amortised cost | Total | ||
| Derivatives | 1,128 | - | 1,128 | | 492 | - | 492 |
| Debt securities in issue | - | 17,202 | 17,202 | | - | 16,169 | 16,169 |
| Subordinated liabilities and other borrowed funds | - | 13,436 | 13,436 | | - | 13,882 | 13,882 |
| Total | 1,128 | 30,638 | 31,766 | | 492 | 30,051 | 30,543 |
Derivatives held for hedging are held at fair value and are classified as Level 2 while the counterparty is Standard Chartered Bank.
The fair value of debt securities in issue is $17,202 million (31 December 2017: $16,169 million) and have fair value equal to carrying value.
The fair value of subordinated liabilities and other borrowed funds is $13,043 million (31 December 2017: $14,314 million).
Derivative financial instruments
| Derivatives | 31.12.18 | | 31.12.17 | ||||
| Notional | Assets | Liabilities | Notional | Assets | Liabilities | ||
| Foreign exchange derivative contracts: | | | | | | | |
| Currency swaps | 6,864 | - | 818 | | 8,038 | 59 | 300 |
| Interest rate derivative contracts: | | | | | | | |
| Swaps | 10,939 | 9 | 310 | | 11,980 | 11 | 192 |
| Total | 17,803 | 9 | 1,128 | | 20,018 | 70 | 492 |
Credit risk
Maximum exposure to credit risk
| | 31.12.18 | 31.12.17 |
| Derivative financial instruments | 9 | 70 |
| Debt securities | 11,537 | 12,159 |
| Amounts owed by subsidiary undertakings | 17,606 | 15,714 |
| Total | 29,152 | 27,943 |
In 2018 and 2017, amounts owed by subsidiary undertakings were neither past due nor impaired; the Company had no individually impaired loans.
In 2018 and 2017, the Company had no impaired debt securities. The debt securities held by the Group are issued by Standard Chartered Bank, a wholly owned subsidiary undertaking with credit ratings of A+/A/A1.
Liquidity risk
The following table analyses the residual contractual maturity of the assets and liabilities of the Company on a discounted basis:
| | 31.12.18 | ||||||||
| One month | Between | Between three months and six months | Between | Between | Between | Between | More than | Total | |
| Assets | | | | | | | | | |
| Derivative financial instruments | - | - | - | - | - | 3 | - | 6 | 9 |
| Investment securities | - | - | - | - | - | 1,698 | 3,960 | 5,879 | 11,537 |
| Amount owed by subsidiary undertakings | 1,318 | - | - | 2,759 | - | 2,093 | 7,070 | 4,366 | 17,606 |
| Investments in subsidiary undertakings | - | - | - | - | - | - | - | 34,853 | 34,853 |
| Other assets | - | - | - | - | - | - | - | - | - |
| Total assets | 1,318 | - | - | 2,759 | - | 3,794 | 11,030 | 45,104 | 64,005 |
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Derivative financial instruments | 83 | - | - | 9 | - | 260 | 324 | 452 | 1,128 |
| Senior debt | 1,031 | - | - | 2,731 | - | 2,079 | 5,402 | 5,959 | 17,202 |
| Other liabilities | 201 | 91 | 59 | - | 21 | - | - | 19 | 391 |
| Subordinated liabilities and | - | - | - | - | - | 1,472 | 4,368 | 7,596 | 13,436 |
| Total liabilities | 1,315 | 91 | 59 | 2,740 | 21 | 3,811 | 10,094 | 14,026 | 32,157 |
| Net liquidity gap | 3 | (91) | (59) | 19 | (21) | (17) | 936 | 31,078 | 31,848 |
| | 31.12.17 | ||||||||
| One month | Between | Between | Between | Between | Between | Between | More than | Total | |
| Assets | | | | | | | | | |
| Derivative financial instruments | - | - | - | - | - | 2 | 5 | 63 | 70 |
| Investment securities | - | - | - | - | - | - | 3,658 | 8,501 | 12,159 |
| Amount owed by subsidiary undertakings | 271 | 23 | 1,577 | - | 1,613 | 3,901 | 5,275 | 3,054 | 15,714 |
| Investments in subsidiary undertakings | - | - | - | - | - | - | - | 34,853 | 34,853 |
| Other assets | - | - | - | - | - | - | - | 3 | 3 |
| Total assets | 271 | 23 | 1,577 | - | 1,613 | 3,903 | 8,938 | 46,474 | 62,799 |
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Derivative financial instruments | - | - | 2 | - | - | 19 | 283 | 188 | 492 |
| Senior debt | - | - | 1,326 | - | 1,499 | 3,826 | 4,671 | 4,847 | 16,169 |
| Other liabilities | 194 | 72 | 76 | - | 24 | - | 36 | 3 | 405 |
| Subordinated liabilities and | - | - | - | - | - | - | 3,094 | 10,788 | 13,882 |
| Total liabilities | 194 | 72 | 1,404 | - | 1,523 | 3,845 | 8,084 | 15,826 | 30,948 |
| Net liquidity gap | 77 | (49) | 173 | - | 90 | 58 | 854 | 30,648 | 31,851 |
Financial liabilities on an undiscounted basis
| | 31.12.18 | ||||||||
| One month | Between | Between three months and six months | Between | Between | Between | Between | More than | Total | |
| Derivative financial instruments | 83 | - | - | 9 | - | 260 | 324 | 452 | 1,128 |
| Debt securities in issue | 1,031 | 7 | 172 | 2,765 | 241 | 2,408 | 6,175 | 6,633 | 19,432 |
| Subordinated liabilities and | - | - | 221 | - | 362 | 2,055 | 5,975 | 12,789 | 21,402 |
| Other liabilities | 201 | 91 | 59 | - | 21 | - | - | 20 | 392 |
| Total liabilities | 1,315 | 98 | 452 | 2,774 | 624 | 4,723 | 12,474 | 19,894 | 42,354 |
| | 31.12.17 | ||||||||
| One month | Between | Between | Between | Between | Between | Between | More than | Total | |
| Derivative financial instruments | - | - | 2 | - | - | 18 | 284 | 188 | 492 |
| Debt securities in issue | 6 | 10 | 51 | 66 | 1,592 | 4,151 | 5,192 | 5,854 | 16,922 |
| Subordinated liabilities and | 12 | 30 | 33 | 210 | 106 | 617 | 4,774 | 15,982 | 21,764 |
| Other liabilities | 192 | 72 | 76 | - | 24 | - | 36 | - | 400 |
| Total liabilities | 210 | 112 | 162 | 276 | 1,722 | 4,786 | 10,286 | 22,024 | 39,578 |
40. Related undertakings of the Group
As at 31 December 2018, the Group's interests in related undertakings is disclosed below. Unless otherwise stated, the share capital disclosed comprises ordinary or common shares which are held by subsidiaries of the Group. Note 32 details undertakings that have a significant contribution to the Group's net profit or net assets.
Subsidiary Undertakings
| Name and registered address | Country of | Description of shares | Proportion of shares held (%) |
| The following companies have the address of 1 Basinghall Avenue, | | | |
| BWA Dependents Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| FinVentures UK Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing (UK) Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| SC (Secretaries) Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| SC Leaseco Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| SC Transport Leasing 1 Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| SC Transport Leasing 2 Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| SCMB Overseas Limited | United Kingdom | £0.10 Ordinary shares | 100 |
| Stanchart Nominees Limited1 | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered Africa Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered APR Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| Standard Chartered Bank | United Kingdom | $0.01 Non-Cumulative Irredeemable Preference shares | 100 |
| $5.00 Non-Cumulative Redeemable Preference shares | 100 | ||
| $1.00 Ordinary shares | 100 | ||
| Standard Chartered Health Trustee (UK) Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered Holdings Limited1 | United Kingdom | $2.00 Ordinary shares | 100 |
| Standard Chartered I H Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| Standard Chartered Leasing (UK) 2 Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| Standard Chartered Leasing (UK) 3 Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| Standard Chartered Leasing (UK) Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| Standard Chartered Masterbrand Licensing Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| Standard Chartered NEA Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| Standard Chartered Nominees Limited1 | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered Nominees (Private Clients UK) Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| Standard Chartered Overseas Holdings Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered Securities (Africa) Holdings Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| Standard Chartered Trustees (UK) Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered UK Holdings Limited | United Kingdom | £10.00 Ordinary shares | 100 |
| The SC Transport Leasing Partnership 1 | United Kingdom | Limited Partnership interest | 100 |
| The SC Transport Leasing Partnership 2 | United Kingdom | Limited Partnership interest | 100 |
| The SC Transport Leasing Partnership 3 | United Kingdom | Limited Partnership interest | 100 |
| The SC Transport Leasing Partnership 4 | United Kingdom | Limited Partnership interest | 100 |
| The BW Leasing Partnership 1 LP2 | United Kingdom | Limited Partnership interest | 100 |
| The BW Leasing Partnership 2 LP2 | United Kingdom | Limited Partnership interest | 100 |
| The BW Leasing Partnership 3 LP2 | United Kingdom | Limited Partnership interest | 100 |
| The BW Leasing Partnership 4 LP2 | United Kingdom | Limited Partnership interest | 100 |
| The BW Leasing Partnership 5 LP2 | United Kingdom | Limited Partnership interest | 100 |
| The following companies have the address of 2 More London Riverside, London SE1 2JT, United Kingdom | | | |
| Bricks (C&K) LP2 | United Kingdom | Limited Partnership interest | 100 |
| Bricks (C) LP2 | United Kingdom | Limited Partnership interest | 100 |
| Bricks (M) LP | United Kingdom | Limited Partnership interest | 100 |
| Bricks (P) LP2 | United Kingdom | Limited Partnership interest | 100 |
| Bricks (T) LP2 | United Kingdom | Limited Partnership interest | 100 |
| The following company has the address of Rua Gamal Abdel Nasser, | | | |
| Standard Chartered Bank Angola S.A. | Angola | AOK6,475.62 Ordinary shares | 60 |
| The following company has the address of Level 5, 345 George St, | | | |
| Standard Chartered Grindlays Pty Limited | Australia | AUD Ordinary shares | 100 |
| The following companies have the address of 5th Floor Standard House Bldg, The Mall, Queens Road, PO Box 496, Gaborone, Botswana | | | |
| Standard Chartered Bank Insurance Agency (Proprietary) Limited | Botswana | BWP1.00 Ordinary shares | 100 |
| Standard Chartered Investment Services (Proprietary) Limited | Botswana | BWP1.00 Ordinary shares | 100 |
| Standard Chartered Bank Botswana Limited | Botswana | BWP1.00 Ordinary shares | 75.8 |
| Standard Chartered Botswana Education Trust3 | Botswana | Interest in trust | 100 |
| Standard Chartered Botswana Nominees (Proprietary) Limited | Botswana | BWP Ordinary shares | 100 |
| The following company has the address of Avenida Brigadeiro Faria Lima, 3600 - 7th floor, Sao Paulo, Sao Paulo, 04538-132, Brazil | | | |
| Standard Chartered Bank (Brasil) S.A. - Banco de Investimento | Brazil | BRL Ordinary shares | 100 |
| The following company has the address of 51-55 Jalan Sultan, Complex | | | |
| Standard Chartered Finance (Brunei) Bhd | Brunei Darussalam | BND1.00 Ordinary shares | 100 |
| The following company has the address of G01-02, Wisma Haji Mohd | | | |
| Standard Chartered Securities (B) Sdn Bhd | Brunei Darussalam | BND1.00 Ordinary shares | 100 |
| The following company has the address of 1155, Boulevard de la Liberté, Douala, B.P. 1784, Cameroon | | | |
| Standard Chartered Bank Cameroon S.A | Cameroon | XAF10,000.00 shares | 100 |
| The following company has the address of 20 Adelaide Street, Suite 1105, Toronto ON M5C 2T6 Canada | | | |
| Standard Chartered (Canada) Limited | Canada | CAD1.00 Ordinary shares | 100 |
| The following company has the address of Maples Finance Limited, | | | |
| SCB Investment Holding Company Limited | Cayman Islands | $1,000.00 A Ordinary shares | 100 |
| $1.00 Class X shares | 100 | ||
| The following company has the address of Cayman Corporate Centre, | | | |
| Ocean Horizon Holdings South Ltd | Cayman Islands | $1.00 Ordinary shares | 100 |
| The following companies have the address of Walkers Corporate Limited, Cayman Corporate Centre, 27 Hospital Road George Town, Grand Cayman KY1-9008, Cayman Islands | | | |
| Sirat Holdings Limited | Cayman Islands | $0.01 Ordinary shares | 91 |
| $0.01 Preference shares | 66.7 | ||
| Standard Chartered Corporate Private Equity (Cayman) Limited | Cayman Islands | $0.001 Ordinary shares | 100 |
| Standard Chartered International Partners | Cayman Islands | $0.001 Ordinary shares | 100 |
| Standard Chartered Principal Finance (Cayman) Limited | Cayman Islands | $0.0001 Ordinary shares | 100 |
| Standard Chartered Private Equity (Cayman) Limited | Cayman Islands | $0.001 Ordinary shares | 100 |
| The following company has the address of Mourant Ozannes Corporate Services (Cayman) Limited, Harbour Centre, 42 North Church Street, | | | |
| Sunflower Cayman SPC | Cayman Islands | $1.00 Management shares | 100 |
| The following companies have the address of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman KY1-1104, | | | |
| Cerulean Investments LP | Cayman Islands | Limited Partnership interest | 100 |
| Standard Chartered Saadiq Mudarib Company Limited | Cayman Islands | $1.00 Ordinary shares | 100 |
| The following companies have the address of Unit 2 - 101, Building 3, | | | |
| Pembroke Aircraft Leasing (Tianjin) Limited | China | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing Tianjin 1 Limited | China | CNY1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing Tianjin 2 Limited | China | CNY1.00 Ordinary shares | 100 |
| The following company has the address of Standard Chartered Tower, | | | |
| Standard Chartered Bank (China) Limited | China | CNY Ordinary shares | 100 |
| The following company has the address of Unit 5, 12th Floor, Standard Chartered Tower, World Finance, No 1 East Third Ring Middle Road, Chaoyang District, Beijing 100020, China | | | |
| Standard Chartered Corporate Advisory Co. Ltd | China | $1.00 Ordinary shares | 100 |
| The following company has the address of No. 188 Yeshen Rd, 11F, | | | |
| Standard Chartered Trading (Shanghai) Limited | China | $15,000,000.00 Ordinary shares | 100 |
| The following company has the address of No. 35, Xinhuanbei Road, TEDA, Tianjin, 300457, China | | | |
| Standard Chartered Global Business Services Co. Limited | China | $ Ordinary shares | 100 |
| The following company has the address of Standard Chartered Bank Cote d'Ivoire, 23 Boulevard de la République, Abidjan 17, 17 B.P. 1141, Cote d'Ivoire | | | |
| Standard Chartered Bank Cote d' Ivoire SA | Cote d'Ivoire | XOF100,000.00 Ordinary shares | 100 |
| The following company has the address of Standard Chartered Bank France, 32 Rue de Monceau,75008, Paris, France | | | |
| Pembroke Lease France SAS | France | €1.00 Ordinary shares | 100 |
| The following company has the address of 8 Ecowas Avenue, PMB 259 Banjul, The Gambia | | | |
| Standard Chartered Bank Gambia Limited | Gambia | GMD1.00 Ordinary shares | 74.9 |
| The following company has the address of Taunusanlage 16, 60325, | | | |
| Standard Chartered Bank AG | Germany | € Ordinary shares | 100 |
| The following companies have the address of Standard Chartered Bank Building, 87 Independence Avenue, P.O. Box 768, Accra,Ghana | | | |
| Standard Chartered Bank Ghana Limited | Ghana | GHS Ordinary shares | 69.4 |
| GHS0.52 Preference shares | 87.0 | ||
| Standard Chartered Ghana Nominees Limited | Ghana | GHS Ordinary shares | 100 |
| The following companies have the address of Bordeaux Court, Les Echelons, South Esplanade, St.Peter Port, Guernsey | | | |
| Birdsong Limited | Guernsey | £1.00 Ordinary shares | 100 |
| Nominees One Limited | Guernsey | £1.00 Ordinary shares | 100 |
| Nominees Two Limited | Guernsey | £1.00 Ordinary shares | 100 |
| Songbird Limited | Guernsey | £1.00 Ordinary shares | 100 |
| Standard Chartered Secretaries (Guernsey) Limited | Guernsey | £1.00 Ordinary shares | 100 |
| Standard Chartered Trust (Guernsey) Limited | Guernsey | £1.00 Ordinary shares | 100 |
| The following company has the address of 15/F, Standard Chartered Tower, 388 Kwun Tong Road, Kwun Tong, Kowloon, Hong Kong | | | |
| Horsford Nominees Limited | Hong Kong | HKD Ordinary shares | 100 |
| The following companies have the address of 1401 Hutchison House, | | | |
| Kozagi Limited | Hong Kong | HKD10.00 Ordinary shares | 100 |
| Majestic Legend Limited | Hong Kong | HKD1.00 Ordinary shares | 100 |
| Ori Private Limited | Hong Kong | $1.00 Ordinary shares | 100 |
| $1.00 A Ordinary shares | 90.8 | ||
| Standard Chartered PF Real Estate (Hong Kong) Limited | Hong Kong | HKD10.00 Ordinary shares | 100 |
| The following companies have the address of 25/F, Standard Chartered Bank Building, 4-4A Des Voeux Road, Central, Hong Kong | | | |
| Marina Acacia Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Amaryllis Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Amethyst Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Ametrine Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Angelite Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Apollo Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Beryl Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Carnelian Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Emerald Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Flax Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Gloxinia Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Hazel Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Honor Shipping Limited | Hong Kong | HKD Ordinary shares | 100 |
| $ Ordinary shares | 100 | ||
| Marina Ilex Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Iridot Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Kunzite Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Leasing Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Mimosa Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Moonstone Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Peridot Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Sapphire Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| Marina Splendor Shipping Limited | Hong Kong | HKD Ordinary shares | 100 |
| $ Ordinary shares | 100 | ||
| Marina Tourmaline Shipping Limited | Hong Kong | $ Ordinary shares | 100 |
| SC Digital Solutions Limited | Hong Kong | HKD0.05 Ordinary shares | 100 |
| Standard Chartered Leasing Group Limited | Hong Kong | $ Ordinary shares | 100 |
| Standard Chartered Trade Support (HK) Limited | Hong Kong | HKD Ordinary shares | 100 |
| The following company has the address of 13/F, Standard Chartered Tower, 388 Kwun Tong Road, Kwun Tong, Kowloon, Hong Kong | | | |
| SC Learning Limited | Hong Kong | HKD Ordinary shares | 100 |
| The following company has the address of 2/F, Standard Chartered Bank Building, 4-4A Des Voeux Road, Central, Hong Kong | | | |
| Standard Chartered Private Equity Limited | Hong Kong | HKD1.00 Ordinary shares | 100 |
| $1.00 Ordinary shares | 100 | ||
| The following company has the address of 13/F, Standard Chartered Bank Building, 4-4A Des Voeux Road, Central, Hong Kong | | | |
| Standard Chartered Trust (Hong Kong) Limited | Hong Kong | HKD10.00 Ordinary shares | 100 |
| The following company has the address of 14/F, Standard Chartered Bank Building, 4-4A Des Voeux Road, Central, Hong Kong | | | |
| Standard Chartered Private Equity Managers (Hong Kong) Limited | Hong Kong | HKD Ordinary shares | 100 |
| The following company has the address of 15/F, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong | | | |
| Standard Chartered Securities (Hong Kong) Limited | Hong Kong | HKD Ordinary shares | 100 |
| The following company has the address of 21/F, Standard Chartered Tower, 388 Kwun Tong Road, Kwun Tong, Kowloon, Hong Kong | | | |
| Standard Chartered Asia Limited | Hong Kong | HKD Deferred shares | 100 |
| HKD Ordinary shares | 100 | ||
| $ Ordinary shares | 100 |
| The following companies have the address of 32/F, Standard Chartered Bank Building, 4-4A Des Voeux Road, Central, Hong Kong | | | |
| Standard Chartered Sherwood (HK) Limited | Hong Kong | HKD Ordinary shares | 100 |
| Standard Chartered Bank (Hong Kong) Limited | Hong Kong | HKD A Ordinary shares | 100 |
| HKD B Ordinary shares | 100 | ||
| $ Preference shares | 100 | ||
| The following company has the address of L5 The Forum, Exchange Square, 8 Connaught Place,Central, Hong Kong | | | |
| Standard Chartered Global Trading Investments Limited | Hong Kong | HKD Ordinary shares | 100 |
| The following company has the address of 1st Floor, Europe Building, | | | |
| Standard Chartered Global Business Services Private Limited | India | INR10.00 Equity shares | 100 |
| The following company has the address of 90 M.G.Road, II Floor, FORT, Mumbai, MAHARASHTRA, 400 001, India | | | |
| Standard Chartered Finance Private Limited | India | INR10.00 Ordinary shares | 98.7 |
| The following companies have the address of Crescenzo, 6th Floor, | | | |
| Standard Chartered (India) Modeling and Analytics Centre Private Limited | India | INR10.00 Ordinary shares | 100 |
| Standard Chartered Investments and Loans (India) Limited | India | INR10.00 Ordinary shares | 100 |
| St Helen's Nominees India Private Limited | India | INR10.00 Equity shares | 100 |
| The following company has the address of Crescenzo, 7th Floor, Plot No 38-39, G Block, Bandra Kurla Complex, Bandra East, Mumbai, Maharashtra, 400051, India | | | |
| Standard Chartered Private Equity Advisory (India) Private Limited | India | INR1,000.00 Ordinary shares | 100 |
| The following company has the address of 2nd Floor, 23-25 M.G. Road, | | | |
| Standard Chartered Securities (India) Limited | India | INR10.00 Ordinary shares | 100 |
| The following companies have the address of Menara Standard Chartered, 7th floor, Jl. Prof. DR. Satrio No. 164, Jakarta, 12930, Indonesia | | | |
| PT. Price Solutions Indonesia | Indonesia | $100.00 Ordinary shares | 100 |
| PT Solusi Cakra Indonesia | Indonesia | IDR23,809,600.00 Ordinary shares | 99 |
| The following companies have the address of 32 Molesworth Street, | | | |
| Inishbrophy Leasing Limited | Ireland | €1.00 Ordinary shares | 100 |
| Inishcannon Leasing Limited | Ireland | $1.00 Ordinary shares | 100 |
| Inishcorky Leasing Limited | Ireland | $1.00 Ordinary shares | 100 |
| Inishcrean Leasing Limited | Ireland | $1.00 Ordinary shares | 100 |
| Inishdawson Leasing Limited | Ireland | €1.00 Ordinary shares | 100 |
| Inisherkin Leasing Limited | Ireland | $1.00 Ordinary shares | 100 |
| Inishgort Leasing Limited | Ireland | $1.00 Ordinary shares | 100 |
| Inishlynch Leasing Limited | Ireland | €1.00 Ordinary shares | 100 |
| Inishoo Leasing Limited | Ireland | $1.00 Ordinary shares | 100 |
| Inishquirk Leasing Limited | Ireland | $1.00 Ordinary shares | 100 |
| Inishtubrid Leasing Limited | Ireland | $1.00 Ordinary shares | 100 |
| Nightjar Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 1 Limited | Ireland | €1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 2 Limited | Ireland | €1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 3 Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 4 Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 5 Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 6 Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 7 Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 8 Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 9 Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 10 Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 11 Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing 12 Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Aircraft Leasing Holdings Limited | Ireland | $1.00 Ordinary shares | 100 |
| Pembroke Capital Limited | Ireland | €1.25 Ordinary shares | 100 |
| $1.00 Ordinary shares | 100 | ||
| Pembroke Capital Shannon Limited | Ireland | €1.25 Ordinary shares | 100 |
| Skua Limited | Ireland | $1.00 Ordinary shares | 100 |
| The following company has the address of First Names House, Victoria Road, Douglas, IM2 4DF, Isle of Man | | | |
| Pembroke Group Limited | Isle of Man | $0.01 Ordinary shares | 100 |
| The following companies have the address of 1st Floor, Goldie House, | | | |
| Standard Chartered Assurance Limited | Isle of Man | $1.00 Ordinary shares | 100 |
| $1.00 Redeemable Preference shares | 100 | ||
| Standard Chartered Insurance Limited | Isle of Man | $1.00 Ordinary shares | 100 |
| The following company has the address of 21/F, Sanno Park Tower, | | | |
| Standard Chartered Securities (Japan) Limited | Japan | JPY50,000 Ordinary shares | 100 |
| The following company has the address of Lime Grove House, Green Street, St Helier, JE1 2ST, Jersey | | | |
| Ocean Horizon Holdings East Limited | Jersey | $1.00 Ordinary shares | 100 |
| The following company has the address of 4/F St Pauls Gate, | | | |
| Ocean Horizon Holdings West Limited | Jersey | $1.00 Ordinary shares | 100 |
| The following company has the address of 15 Castle Street, St Helier, | | | |
| SCB Nominees (CI) Limited | Jersey | $1.00 Ordinary shares | 100 |
| The following company has the address of IFC 5, St Helier, JE1 1ST, Jersey | | | |
| Standard Chartered Funding (Jersey) Limited1 | Jersey | £1.00 Ordinary shares | 100 |
| The following companies have the address of Standard Chartered@ Chiromo, Number 48, Westlands Road, P. O. Box 30003 - 00100, Nairobi, Kenya | | | |
| Standard Chartered Investment Services Limited | Kenya | KES20.00 Ordinary shares | 100 |
| Standard Chartered Bank Kenya Limited | Kenya | KES5.00 Ordinary shares | 74.3 |
| KES5.00 Preference shares | 100 | ||
| Standard Chartered Securities (Kenya) Limited | Kenya | KES10.00 Ordinary shares | 100 |
| Standard Chartered Financial Services Limited | Kenya | KES20.00 Ordinary shares | 100 |
| Standard Chartered Insurance Agency Limited | Kenya | KES100.00 Ordinary shares | 100 |
| Standard Chartered Kenya Nominees Limited | Kenya | KES20.00 Ordinary shares | 100 |
| The following companies have the address of M6-2701, West 27Fl, | | | |
| Resolution Alliance Korea Ltd | Korea, Republic of | KRW5,000.00 Ordinary shares | 100 |
| The following company has the address of 2/F, 47 Jongno, Jongno-gu, | | | |
| Standard Chartered Bank Korea Limited | Korea, Republic of | KRW5,000.00 Ordinary shares | 100 |
| Standard Chartered Securities Korea Limited | Korea, Republic of | KRW5,000.00 Ordinary shares | 100 |
| The following companies have the address of 17/F, 100, Gongpyeong-dong, Jongno-gu, Seoul, Korea, Republic of | | | |
| SCPEK IV | Korea, Republic of | Limited Partnership interest | 41.4 |
| Standard Chartered Private Equity Korea II | Korea, Republic of | KRW1,000,000.00 Partnership interest | 100 |
| Standard Chartered Private Equity Managers (Korea) Limited | Korea, Republic of | KRW5,000.00 Ordinary shares | 100 |
| SW Holdings Limited | Korea, Republic of | KRW1,000.00 Ordinary shares | 100 |
| TBO Korea Holdings Limited | Korea, Republic of | KRW1,000.00 Ordinary shares | 100 |
| The following company has the address of Atrium Building, Maarad Street, 3rd Floor, P.O.Box: 11-4081 Riad El Solh, Beirut, Beirut Central District, Lebanon | | | |
| Standard Chartered Metropolitan Holdings SAL | Lebanon | $10.00 Ordinary A shares | 100 |
| The following companies have the address of Level 16, Menara Standard Chartered, 30, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia | | | |
| Cartaban (Malaya) Nominees Sdn Berhad | Malaysia | RM10.00 Ordinary shares | 100 |
| Cartaban Nominees (Asing) Sdn Bhd | Malaysia | RM1.00 Ordinary shares | 100 |
| Cartaban Nominees (Tempatan) Sdn Bhd | Malaysia | RM1.00 Ordinary shares | 100 |
| Golden Maestro Sdn Bhd | Malaysia | RM1.00 Ordinary shares | 100 |
| Popular Ambience Sdn Bhd | Malaysia | RM1.00 Ordinary shares | 100 |
| Price Solutions Sdn Bhd | Malaysia | RM1.00 Ordinary shares | 100 |
| SCBMB Trustee Berhad | Malaysia | RM10.00 Ordinary shares | 100 |
| Standard Chartered Bank Malaysia Berhad | Malaysia | RM0.10 Irredeemable Cumulative Preference shares | 100 |
| RM1.00 Ordinary shares | 100 | ||
| Standard Chartered Saadiq Berhad | Malaysia | RM1.00 Ordinary shares | 100 |
| The following companies have the address of Brumby Centre, Lot 42, | | | |
| Marina Morganite Shipping Limited | Malaysia | $ Ordinary shares | 100 |
| Marina Moss Shipping Limited | Malaysia | $1.00 Ordinary shares | 100 |
| Marina Tanzanite Shipping Limited | Malaysia | $ Ordinary shares | 100 |
| Pembroke Leasing (Labuan) 2 Berhad | Malaysia | $1.00 Ordinary shares | 100 |
| Pembroke Leasing (Labuan) 3 Berhad | Malaysia | $1.00 Ordinary shares | 100 |
| Pembroke Leasing (Labuan) Pte Limited | Malaysia | $1.00 Ordinary shares | 100 |
| The following company has the address of N8, Jalan Kerinchi, 59200 Kuala Lumpur, Wilayah Persekutuan, Malaysia | | | |
| Resolution Alliance Sdn Bhd2 | Malaysia | RM1.00 Ordinary shares | 91 |
| The following company has the address of Level 7, Wisma Standard Chartered, Jalan Teknologi 8, Taman Teknologi Malaysia, 57000 Bukit Jalil, Kuala Lumpur, Wilayah Persekutuan, Malaysia | | | |
| Standard Chartered Global Business Services Sdn Bhd | Malaysia | RM1.00 Ordinary shares | 100 |
| The following companies have the address of Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, MH96960, Marshall Islands | | | |
| Marina Alysse Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Amandier Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Ambroisee Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Angelica Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Aquamarine Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Aventurine Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Buxus Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Celsie Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Citrine Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Dahlia Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Dittany Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Dorado Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Lilac Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Lolite Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Obsidian Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Pissenlet Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Poseidon Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Protea Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Quartz Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Remora Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Turquoise Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Zeus Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| Marina Zircon Shipping Limited | Marshall Islands | $1.00 Ordinary shares | 100 |
| The following companies have the address of SGG Corporate Services (Mauritius) Ltd, 33, Edith Cavell St, Port Louis, 11324, Mauritius | | | |
| Actis Asia Real Estate (Mauritius) Limited | Mauritius | Class A $1.00 Ordinary shares | 100 |
| Class B $1.00 Ordinary shares | 100 | ||
| Actis Place Holdings (Mauritius) Limited2 | Mauritius | Class A $1.00 Ordinary shares | 62 |
| Class B $1.00 Ordinary shares | 62 | ||
| Actis Treit Holdings (Mauritius) Limited2 | Mauritius | Class A $1.00 Ordinary shares | 62 |
| Class B $1.00 Ordinary shares | 62 | ||
| The following company has the address of 6/F, Standard Chartered Tower, 19, Bank Street, Cybercity, Ebene, 72201, Mauritius | | | |
| Standard Chartered Bank (Mauritius) Limited | Mauritius | $10.00 Ordinary shares | 100 |
| The following companies have the address of c/o Abax Corporate Services Ltd, 6/F, Tower A, 1 CYBERCITY, Ebene, Mauritius | | | |
| Standard Chartered Financial Holdings | Mauritius | $1.00 Ordinary shares | 100 |
| Standard Chartered Private Equity (Mauritius) II Limited | Mauritius | $1.00 Ordinary shares | 100 |
| Standard Chartered Private Equity (Mauritius) Limited | Mauritius | $1.00 Ordinary shares | 100 |
| $ Redeemable Preference shares | 100 | ||
| Standard Chartered Private Equity (Mauritius) lll Limited | Mauritius | $1.00 Ordinary shares | 100 |
| The following company has the address of 5/F, Ebene Esplanade, 24 Bank Street, Cybercity, Ebene, Mauritius | | | |
| Subcontinental Equities Limited | Mauritius | $1.00 Ordinary shares | 100 |
| The following company has the address of Standard Chartered Bank Nepal Limited, Madan Bhandari Marg, Ward No.34, Kathmandu Metropolitan City, Kathmandu District, Bagmati Zone, Kathmandu, Nepal | | | |
| Standard Chartered Bank Nepal Limited | Nepal | NPR100.00 Ordinary shares | 70.2 |
| The following companies have the address of Hoogoorddreef 15, 1101 BA, Amsterdam, Netherlands | | | |
| Pembroke B717 Holdings B.V. | Netherlands | €1.00 Ordinary shares | 100 |
| Pembroke Holland B.V. | Netherlands | €450.00 Ordinary shares | 100 |
| The following companies have the address of 1 Basinghall Avenue, | | | |
| Smart Application Investment B.V. | Netherlands | €45.00 Ordinary shares | 100 |
| Standard Chartered Holdings (Africa) B.V. | Netherlands | €4.50 Ordinary shares | 100 |
| Standard Chartered Holdings (Asia Pacific) B.V. | Netherlands | €4.50 Ordinary shares | 100 |
| Standard Chartered Holdings (International) B.V. | Netherlands | €4.50 Ordinary shares | 100 |
| Standard Chartered MB Holdings B.V. | Netherlands | €4.50 Ordinary shares | 100 |
| The following companies have the address of 142 Ahmadu Bello Way, | | | |
| Cherroots Nigeria Limited | Nigeria | NGN1.00 Ordinary shares | 100 |
| Standard Chartered Bank Nigeria Limited | Nigeria | NGN1.00 Irredeemable Non Cumulative Preference shares | 100 |
| NGN1.00 Ordinary shares | 100 | ||
| NGN1.00 Redeemable Preference shares | 100 | ||
| Standard Chartered Capital & Advisory Nigeria Limited | Nigeria | NGN1.00 Ordinary shares | 100 |
| Standard Chartered Nominees (Nigeria) Limited | Nigeria | NGN1.00 Ordinary shares | 100 |
| The following company has the address of 3/F Main SCB Building, | | | |
| Price Solution Pakistan (Private) Limited1 | Pakistan | PKR10.00 Ordinary shares | 100 |
| The following company has the address of P.O. Box No. 5556I.I. Chundrigar Road, Karachi, 74000, Pakistan | | | |
| Standard Chartered Bank (Pakistan) Limited | Pakistan | PKR10.00 Ordinary shares | 100 |
| The following company has the address of ul. Towarowa 25A, 00-869 Warszawa, Poland | | | |
| Standard Chartered Global Business Services spólka z ograniczona odpowiedzialnoscia | Poland | PLN50.00 Ordinary shares | 100 |
| The following company has the address of Offshore Chambers, PO Box 217, Apia, Western Samoa | | | |
| Standard Chartered Nominees (Western Samoa) Limited | Samoa | $1.00 Ordinary shares | 100 |
| The following company has the address of Al Faisaliah Office Tower, 7/F, | | | |
| Standard Chartered Capital (Saudi Arabia) | Saudi Arabia | SAR10.00 Ordinary shares | 100 |
| The following company has the address of 9 & 11, Lightfoot Boston Street, Freetown, Sierra Leone | | | |
| Standard Chartered Bank Sierra Leone Limited | Sierra Leone | SLL1.00 Ordinary shares | 80.7 |
| The following companies have the address of 8 Marina Boulevard, Level 23, Marina Bay Financial Centre, Tower 1, 018981, Singapore | | | |
| Actis Mahi Holdings (Singapore) Private Limited | Singapore | SGD 1.00 Ordinary shares | 100 |
| Actis Place Holdings No.1 (Singapore) Private Limited2 | Singapore | SGD 1.00 Ordinary shares | 100 |
| Actis Place Holdings No.2 (Singapore) Private Limited2 | Singapore | SGD 1.00 Ordinary shares | 100 |
| Actis RE Investment 1 Private Limited2 | Singapore | SGD 1.00 Ordinary shares | 100 |
| Actis RE Investment 2 Private Limited2 | Singapore | SGD 1.00 Ordinary shares | 100 |
| Actis RE Investment 3 Private Limited2 | Singapore | SGD 1.00 Ordinary shares | 100 |
| Actis RE Investment 4 Private Limited2 | Singapore | SGD 1.00 Ordinary shares | 100 |
| Actis Treit Holdings No.1 (Singapore) Private Limited2 | Singapore | SGD 1.00 Ordinary shares | 100 |
| Actis Treit Holdings No.2 (Singapore) Private Limited2 | Singapore | SGD 1.00 Ordinary shares | 100 |
| Augusta Viet Pte. Ltd. | Singapore | $1.00 Ordinary shares | 100 |
| Greenman Pte. Ltd. | Singapore | SGD1.00 Class A Preferred shares | 100 |
| SGD1.00 Class B Preferred shares | 100 | ||
| SGD1.00 Ordinary shares | 100 | ||
| Standard Chartered PF Managers Pte. Limited | Singapore | $1.00 Ordinary shares | 100 |
| Standard Chartered Private Equity (Singapore) Pte. Ltd | Singapore | $ Ordinary shares | 100 |
| Standard Chartered Private Equity Managers (Singapore) Pte. Ltd | Singapore | $ Ordinary shares | 100 |
| Standard Chartered Real Estate Investment Holdings (Singapore) | Singapore | SGD1.00 Ordinary shares | 100 |
| The following companies have the address of 8 Marina Boulevard, Level 26, Marina Bay Financial Centre, Tower 1, 018981, Singapore | | | |
| Marina Aquata Shipping Pte. Ltd. | Singapore | $ Ordinary shares | 100 |
| Marina Aruana Shipping Pte. Ltd. | Singapore | SGD Ordinary shares | 100 |
| $ Ordinary shares | 100 | ||
| Marina Aster Shipping Pte. Ltd. | Singapore | SGD Ordinary shares | 100 |
| Marina Cobia Shipping Pte. Ltd. | Singapore | SGD Ordinary shares | 100 |
| $ Ordinary shares | 100 | ||
| Marina Daffodil Shipping Pte. Ltd. | Singapore | SGD Ordinary shares | 100 |
| Marina Fatmarini Shipping Pte. Ltd. | Singapore | $ Ordinary shares | 100 |
| Marina Frabandari Shipping Pte. Ltd. | Singapore | $ Ordinary shares | 100 |
| Marina Freesia Shipping Pte. Ltd. | Singapore | SGD Ordinary shares | 100 |
| Marina Gerbera Shipping Pte. Ltd. | Singapore | $ Ordinary shares | 100 |
| Marina Mars Shipping Pte. Ltd. | Singapore | SGD Ordinary shares | 100 |
| Marina Mercury Shipping Pte. Ltd. | Singapore | SGD Ordinary shares | 100 |
| Marina Opah Shipping Pte. Ltd. | Singapore | SGD Ordinary shares | 100 |
| $ Ordinary shares | 100 | ||
| Marina Partawati Shipping Pte. Ltd. | Singapore | $ Ordinary shares | 100 |
| Marina Poise Shipping Pte. Ltd. | Singapore | $ Ordinary shares | 100 |
| The following companies have the address of 231A Pandan Loop,128419, Singapore | | | |
| Phoon Huat Pte. Ltd. | Singapore | SGD1.00 Ordinary shares | 70 |
| Redman Pte. Ltd. | Singapore | SGD1.00 Ordinary shares | 70 |
| The following company has the address of 7 Changi Business Park Crescent, #03-00 Standard Chartered @ Changi, 486028, Singapore | | | |
| Raffles Nominees (Pte.) Limited | Singapore | SGD Ordinary shares | 100 |
| The following companies have the address of 8 Marina Boulevard, Level 27, Marina Bay Financial Centre, Tower 1, 018981, Singapore | | | |
| SCTS Capital Pte. Ltd | Singapore | SGD Ordinary shares | 100 |
| SCTS Management Pte. Ltd. | Singapore | SGD Ordinary shares | 100 |
| Standard Chartered (2000) Limited | Singapore | SGD1.00 Ordinary shares | 100 |
| Standard Chartered Bank (Singapore) Limited | Singapore | SGD Ordinary shares | 100 |
| SGD Preference shares | 100 | ||
| $ Ordinary shares | 100 | ||
| Standard Chartered Trust (Singapore) Limited | Singapore | SGD Ordinary shares | 100 |
| Standard Chartered Holdings (Singapore) Private Limited | Singapore | SGD Ordinary shares | 100 |
| $ Ordinary shares | 100 | ||
| The following company has the address of Abogado Pte Ltd, No. 8 Marina Boulevard, #05-02 MBFC Tower 1, 018981, Singapore | | | |
| Standard Chartered IL&FS Management (Singapore) Pte. Limited | Singapore | $1.00 Ordinary shares | 50 |
| The following company has the address of 9 Battery Road, #15-01 Straits Trading Building, 049910, Singapore | | | |
| Standard Chartered Nominees (Singapore) Pte Ltd | Singapore | SGD1.00 Ordinary shares | 100 |
| The following companies have the address of 5/F, 4 Sandown Valley Crescent, Sandton, Gauteng, 2196, South Africa | | | |
| CMB Nominees Proprietary Limited | South Africa | ZAR1.00 Ordinary shares | 100 |
| Standard Chartered Nominees South Africa Proprietary Limited (RF) | South Africa | ZAR Ordinary shares | 100 |
| The following company has the address of 1, 2, 4, 7, 9, 10F, No. 168/170 &, 8F, 12F, No.168, Tun Hwa N. Rd., Songshan Dist., Taipei, 105, Taiwan | | | |
| Standard Chartered Bank (Taiwan) Limited | Taiwan | TWD10.00 Ordinary shares | 100 |
| The following companies have the address of 1 Floor, International House, Shaaban Robert Street / Garden Avenue, PO Box 9011, Dar Es Salaam, Tanzania, United Republic of | | | |
| Standard Chartered Bank Tanzania Limited | Tanzania, United Republic of | TZS1,000.00 Ordinary shares | 100 |
| TZS1,000.00 Preference shares | 100 | ||
| Standard Chartered Tanzania Nominees Limited | Tanzania, United Republic of | TZS1,000.00 Ordinary shares | 100 |
| The following company has the address of 100 North Sathorn Road, Silom, Bangrak Bangkok, 10500, Thailand | | | |
| Standard Chartered Bank (Thai) Public Company Limited | Thailand | THB10.00 Ordinary shares | 100 |
| The following company has the address of Buyukdere Cad. Yapi Kredi Plaza C Blok, Kat 15, Levent, Istanbul, 34330, Turkey | | | |
| Standard Chartered Yatirim Bankasi Turk Anonim Sirketi | Turkey | TRL0.10 Ordinary shares | 100 |
| The following company has the address of Standard Chartered Bank Bldg, | | | |
| Standard Chartered Bank Uganda Limited | Uganda | UGS1,000.00 Ordinary shares | 100 |
| The following company has the address of 505 Howard St. #201, | | | |
| SC Studios, LLC | United States | Membership interest | 100 |
| The following company has the address of Standard Chartered Bank, 37F, 1095 Avenue of the Americas, New York 10036, United States | | | |
| Standard Chartered Bank International (Americas) Limited | United States | $1.00 Ordinary shares | 100 |
| The following companies have the address of Corporation Trust Centre, | | | |
| Standard Chartered Holdings Inc. | United States | $100.00 Common shares | 100 |
| StanChart Securities International LLC | United States | Membership interest | 100 |
| Standard Chartered Capital Management (Jersey), LLC | United States | Membership interest | 100 |
| Standard Chartered Securities (North America) LLC | United States | Membership interest | 100 |
| Standard Chartered International (USA) LLC | United States | Membership interest | 100 |
| The following company has the address of 50 Fremont Street, San Francisco CA 94105, United States | | | |
| Standard Chartered Overseas Investment, Inc. | United States | $10.00 Ordinary shares | 100 |
| The following company has the address of 251 Little Falls Drive, Wilmington, Delaware 19808, USA | | | |
| Standard Chartered Trade Services Corporation | United States | $0.01 Common shares | 100 |
| The following company has the address of Room 1810-1815, Level 18, Building 72, Keangnam Hanoi Landmark Tower, Pham Hung Road, Cau Giay New Urban Area, Me Tri Ward, Nam Tu Liem District, Hanoi10000, Vietnam | | | |
| Standard Chartered Bank (Vietnam) Limited | Vietnam | VND Charter Capital shares | 100 |
| The following companies have the address of Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, Virgin Islands, British | | | |
| Sky Favour Investments Limited | Virgin Islands, British | $1.00 Ordinary shares | 100 |
| Sky Harmony Holdings Limited | Virgin Islands, British | $1.00 Ordinary shares | 100 |
| The following companies have the address of Standard Chartered House, Cairo Road, Lusaka, PO BOX 32238, Zambia | | | |
| Standard Chartered Bank Zambia Plc | Zambia | ZMW0.25 Ordinary shares | 90 |
| Standard Chartered Zambia Securities Services Nominees Limited | Zambia | ZMK1.00 Ordinary shares | 100 |
| The following companies have the address of Africa Unity Square Building, | | | |
| Africa Enterprise Network Trust3 | Zimbabwe | Interest in Trust | 100 |
| Standard Chartered Asset Management Limited | Zimbabwe | $0.001 Ordinary shares | 100 |
| Standard Chartered Bank Zimbabwe Limited | Zimbabwe | $1.00 Ordinary shares | 100 |
| Standard Chartered Nominees Zimbabwe (Private) Limited | Zimbabwe | $2.00 Ordinary shares | 100 |
1 Directly held by parent company of the Group
2 The Group has determined that these undertakings are excluded from being consolidated into the Group's accounts, and do not meet the definition of a Subsidiary under IFRS. See Notes 32 and 33 for the consolidation policy and disclosure of the undertaking.
3 No share capital by virtue of being a trust
Joint ventures
| Name | Country of | Description of shares | Proportion of shares held (%) |
| The following company has the address of WTC II Building, Jalan Jenderal Sudirman Kav29-31, Jakarta, 12920' Indonesia | | | |
| PT Bank Permata Tbk | Indonesia | IDR125.00 B shares | 44.6 |
| The following company has the address of 100/36 Sathorn Nakorn Tower, | | | |
| Resolution Alliance Limited | Thailand | THB10.00 Ordinary shares | 49 |
Associates
| Name | Country of | Description of shares | Proportion of shares held (%) |
| The following company has the address of Bohai Bank Building, No.218 | | | |
| China Bohai Bank Co. Ltd | China | CNY Ordinary shares | 19.99 |
| The following company has the address of C/o CIM Corporate Services Ltd, Les Cascades, Edith Cavell Street, Port Louis, Mauritius | | | |
| FAI Limited | Mauritius | $1.00 Ordinary shares | 25 |
| The following company has the address of Victoria House, State House Avenue, Victoria, MAHE, Seychelles | | | |
| Seychelles International Mercantile Banking Corporation Limited | Seychelles | SCR1,000.00 Ordinary shares | 22 |
| The following company has the address of 1 Raffles Quay, #23-01, | | | |
| Clifford Capital Pte. Ltd | Singapore | $1.00 Ordinary shares | 9.9 |
Significant investment holdings and other related undertakings
| Name | Country of | Description of shares | Proportion of shares held (%) |
| The following company has the address of 65A Basinghall Street, London, EC2V 5DZ, United Kingdom | | | |
| Cyber Defence Alliance Limited | United Kingdom | Membership interest | 25 |
| The following company has the address of Walker House, 87 Mary Street, George Town, KY1-9005, Cayman Islands | | | |
| Asia Trading Holdings Limited | Cayman Islands | $0.01 Ordinary shares | 50 |
| The following company has the address of Intertrust Corporate Services (Cayman) Limited, 190 Elgin Avenue, George Town, Grand Cayman, KY1-9005, Cayman Islands | | | |
| ATSC Cayman Holdco Limited | Cayman Islands | $0.01 A Ordinary shares | 5.3 |
| $0.01 B Ordinary shares | 100 | ||
| The following companies have the address of Harbour Centre #42 North Church Street, PO Box 1348, Grand Cayman, KY1-1108 Cayman Islands, Cayman Islands | | | |
| Standard Chartered IL&FS Asia Infrastructure (Cayman) Limited | Cayman Islands | $0.01 Ordinary shares | 50 |
| Standard Chartered IL&FS Asia Infrastructure Growth Fund Company Limited | Cayman Islands | $1.00 Ordinary shares | 50 |
| Standard Chartered IL&FS Asia Infrastructure Growth Fund, L.P. | Cayman Islands | Partnership interest | 38.6 |
| The following companies have the address of 190 Elgin Avenue, George Town, Grand Cayman, KY1-9005, Cayman Islands | | | |
| Greathorse Chemical Limited | Cayman Islands | $1.00 Ordinary shares | 32.95 |
| Hygienic Group | Cayman Islands | $0.01 Redeemable Exchangeable Preferred shares | 29.32 |
| The following company has the address of 3, Floor 1, No.1, Shiner Wuxingcaiyuan, West Er Huan Rd, Xi Shan District, Kunming, Yunnan Province, PRC, China | | | |
| Yunnan Golden Shiner Property Development Co., Ltd. | China | CNY1.00 Ordinary shares | 42.5 |
| The following company has the address of Nerine House, St George's Place, St Peter Port, GY1 3ZG, Guernsey | | | |
| Stonehage Fleming Family and Partners Ltd | Guernsey | £0.01 Class B shares | 9.2 |
| £0.01 Class DC shares | 20.2 | ||
| The following companies have the address of Unit 605-08, 6/F Wing On Centre, 111 Connaught Rd, Central Sheung Wan, Hong Kong | | | |
| Actis Carrock Holdings (HK) Limited | Hong Kong | $ Class A shares | 39.69 |
| $ Class B shares | 39.69 | ||
| Actis Jack Holdings (HK) Limited | Hong Kong | $ Class A shares | 39.69 |
| $ Class B shares | 39.69 | ||
| Actis Rivendell Holdings (HK) Limited | Hong Kong | $ Class A shares | 39.69 |
| $ Class B shares | 39.69 | ||
| Actis Temple Stay Holdings (HK) Limited | Hong Kong | $ Class A shares | 39.69 |
| $ Class B shares | 39.69 | ||
| Actis Young City Holdings (HK) Limited | Hong Kong | $ Class A shares | 39.69 |
| $ Class B shares | 39.69 | ||
| The following company has the address of Off CTS No. 216, Village Bandivali, Patel Estate, S. V. road, Jogeshwari (W) Mumbai City, 400102, India | | | |
| Hitodi Infrastructure Limited | India | Cumulative Redeemable Preference shares | 100 |
| The following company has the address of 70, Nagindas Master Road, | | | |
| Joyville Shapoorji Housing Private Limited | India | INR10.00 Common Equity shares | 25.8 |
| The following company has the address of 5/F, Mahindra Towers, Worli, Mumbai, 400018, India | | | |
| Mahindra Homes Private Limited | India | INR10.00 Compulsorily Convertible Preference shares | 100 |
| INR10.00 A Ordinary shares | 25 | ||
| INR10.00 B Ordinary shares | 100 | ||
| The following company has the address of 1221 A, Devika Tower, 12th Floor, | | | |
| Mikado Realtors Private Limited | India | INR10.00 Ordinary shares | 26 |
| The following company has the address of Elphinstone Building, 2nd Floor, | | | |
| TRIL IT4 Private Limited | India | INR10.00 Ordinary shares | 26 |
| The following company has the address of 4/F, 274, Chitalia House, | | | |
| Industrial Minerals and Chemical Co. Pvt. Ltd | India | INR100.00 Ordinary shares | 26 |
| The following company has the address of No. 1, Kanagam Village, | | | |
| Northern Arc Capital Limited | India | INR20.00 Compulsorily Convertible Preference shares | 33.5 |
| INR10.00 Equity shares | 4.6 | ||
| The following company has the address of E-78, South Extension Part-I, | | | |
| Tek Travels Private Limited | India | INR10.00 Ordinary shares | 49.99 |
| The following company has the address of Graha Paramita, 3/F, Jalan Denpasar, Raya Block D-2, Kav. 8, Kuningan, Jakarta, 12940, Indonesia | | | |
| PT Travira Air | Indonesia | IDR1,000,000.00 Ordinary shares | 30 |
| The following company has the address of TRIO Building, 8/F, Jl, Kebon | | | |
| PT Trikomsel Oke Tbk | Indonesia | IDR50.00 Series B shares | 29.2 |
| The following companies have the address of 4/F St Pauls Gate, | | | |
| Standard Jazeera Limited | Jersey | $100.00 Ordinary shares | 20 |
| Standard Topaz Limited | Jersey | $1,000.00 Ordinary shares | 20 |
| The following company has the address of 146-8 Chusa-ro Sinam-myeon, Yesan-gun Chungnam, Korea, Republic of | | | |
| Daiyang Metal Company Ltd | Korea, Republic of | KRW 500 Ordinary shares | 23.1 |
| KRW 500 Preferred shares | 100 | ||
| KRW 500 Convertible Preference shares | 100 | ||
| The following companies have the address of 185 Seongnaecheon-ro Songpa-gu Seoul Korea, Republic of | | | |
| Haram Trade Co.Ltd. | Korea, Republic of | KRW 1,000,000,000 Ordinary shares | 45 |
| KRW 1,000,000,000 redeemable convertible preferred shares | 100 | ||
| Maesong Trading Co.Ltd. | Korea, Republic of | KRW 1,000,000,000 Ordinary shares | 45 |
| KRW 1,000,000,000 redeemable convertible preferred shares | 100 | ||
| Sameun Trade Co. Ltd. | Korea, Republic of | KRW 500,000,000 Ordinary shares | 34.62 |
| KRW 500,000,000 redeemable convertible preferred shares | 100 | ||
| Sunwoo MT Co., Ltd. | Korea, Republic of | KRW 10,000,000,000 Ordinary shares | 45 |
| KRW 10,000,000,000 redeemable convertible preferred shares | 100 | ||
| The following company has the address of 2615 Nambusoonhwan-ro, Gangnam-gu, Seoul, Korea, Republic of | | | |
| Taebong Prime Co. Ltd | Korea, Republic of | KRW 10,000,000,000 Ordinary shares | 45 |
| KRW 10,000,000,000 redeemable convertible preferred shares | 100 | ||
| The following company has the address of 17/F (Gongpyung-dong), 110, Jongno-gu, Seoul, Korea, Republic of | | | |
| Standard Chartered Private Equity Korea III | Korea, Republic of | KRW1,000,000.00 Ordinary shares | 31 |
| The following company has the address of Lot 6.05, Level 6, KPMG Tower, | | | |
| House Network SDN BHD | Malaysia | RM1.00 Ordinary shares | 25 |
| The following company has the address of 180B Bencoolen Street, | | | |
| Crystal Jade Group Holdings Pte Ltd | Singapore | $ Ordinary shares | 42.6 |
| The following company has the address of Blk 10, Kaki Bukit Avenue 1, #07-05 Kaki Bukitr Industrial Estate, 417492, Singapore | | | |
| MMI Technoventures Pte Ltd | Singapore | SGD Ordinary shares | 50 |
| SGD 0.01 Redeemable Preference shares | 50 | ||
| The following company has the address of 1 Venture Avenue, #07-07 Big Box, 608521, Singapore | | | |
| Omni Centre Pte. Ltd. | Singapore | SGD Redeemable Convertible Preference shares | 100 |
| The following company has the address of 81 Ubi Avenue 4, #03-11 UB One, 408830, Singapore | | | |
| Polaris Limited | Singapore | SGD Ordinary shares | 25.8 |
| The following company has the address of 80 Raffles Place, #32-01, | | | |
| THSC Investments Pte. Ltd. | Singapore | SGD0.50 Ordinary Shares | 29.2 |
| The following company has the address of EADB Building, Plot 4 Nile Avenue, PO Box 7128, Kampala, Uganda | | | |
| East African Development Bank | Uganda | $13,500.00 Class B shares | 24.5 |
| The following company has the address of 251 Little Falls Drive, Wilmington, New Castle DE 19808, United States | | | |
| Paxata, Inc. | United States | $0.0001 Series C2 Preferred Stock | 40.7 |
| The following company has the address of Floor 7, Samco Building, | | | |
| New Lifestyle Service Corporation | Vietnam | VND Dividend Preference shares | 100 |
| VND Redeemable Preference shares | 100 |
| The following company has the address of Floor M, Petroland Building, | | | |
| Online Mobile Services Joint Stock Company | Vietnam | VND10,000 Class A1 Redeemable Preference shares | 100 |
| VND10,000 Class A1 Dividend Preference shares | 100 | ||
| VND10,000 Class C Dividend Preference shares | 28.5 | ||
| The following company has the address of PO Box 957, Offshore Incorporations Centre,, Road Town, Tortola, BVI, Virgin Islands, British | | | |
| Ecoplast Technologies Inc | Virgin Islands, British | $0.0001 Class C Preferred shares | 100 |
In liquidation
Subsidiary undertakings
| Name | Country of | Description of shares | Proportion of shares held (%) |
| The following companies have the address of Deloitte LLP, Hill House, | | | |
| SC Overseas Investments Limited | United Kingdom | AUD1.00 Ordinary shares | 100 |
| $1.00 Ordinary shares | 100 | ||
| Standard Chartered Capital Markets Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| $1.00 Ordinary shares | 100 | ||
| Standard Chartered Debt Trading Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered (GCT) Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Compass Estates Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Chartered Financial Holdings Limited | United Kingdom | £5.00 Ordinary shares | 100 |
| £1.00 Preference shares | 100 | ||
| The following company has the address of Cra 7 Nro 71-52 TA if 702, | | | |
| Sociedad Fiduciaria Extebandes S.A. | Colombia | COP1.00 Ordinary shares | 100 |
| The following companies have the address of Schottegatweg Oost, | | | |
| American Express International Finance Corp.N.V. | Curaçao | $1,000.00 Ordinary shares | 100 |
| Ricanex Participations N.V. | Curaçao | $1,000.00 Ordinary shares | 100 |
| The following company has the address of 8/Floor, Gloucester Tower, | | | |
| Leopard Hong Kong Limited | Hong Kong | $ Ordinary shares | 100 |
| The following companies have the address of 32 Molesworth Street, | | | |
| Pembroke 7006 Leasing Limited | Ireland | €1.25 Ordinary shares | 100 |
| Pembroke Alpha Limited | Ireland | €1.00 Ordinary shares | 100 |
| The following company has the address of Standard Chartered@Chiromo, Number 48, Westlands Road, P. O. Box 30003 - 00100, Nairobi, Kenya | | | |
| Standard Chartered Management Services Limited | Kenya | KES20.00 Ordinary shares | 100 |
| The following company has the address of 30 Rue Schrobilgen, 2526, Luxembourg | | | |
| Standard Chartered Financial Services (Luxembourg) S.A. | Luxembourg | €25.00 Ordinary shares | 100 |
| The following companies have the address of Level 16, Menara Standard Chartered, 30, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia | | | |
| Amphissa Corporation Sdn Bhd | Malaysia | RM1.00 Ordinary shares | 100 |
| The following company has the address of Jiron Huascar 2055, Jesus Maria, Lima 15072, Peru | | | |
| Banco Standard Chartered en Liquidacion | Peru | $75.133 Ordinary shares | 100 |
| The following company has the address of Quai du General Guisan 38, 8022, Zurich, Switzerland, Switzerland | | | |
| Standard Chartered Bank (Switzerland) S.A. | Switzerland | CHF1,000.00 Ordinary shares | 100 |
| CHF100.00 Participation Capital shares | 100 | ||
| The following company has the address of 6/F, Hewlett Packard Building, | | | |
| Kwang Hua Mocatta Company Ltd. (Taiwan) | Taiwan | TWD1,000.00 Ordinary shares | 97.9 |
| The following company has the address of 100/3, Sathorn Nakorn Tower, | | | |
| Standard Chartered (Thailand) Company Limited | Thailand | THB10.00 Ordinary shares | 100 |
| The following company has the address of Luis Alberto de Herrera 1248, Torre II, Piso 11, Esc. 1111, Uruguay | | | |
| Standard Chartered Uruguay Representacion S.A. | Uruguay | UYU1.00 Ordinary shares | 100 |
Joint ventures
| Name | Country of | Description of shares | Proportion of shares held (%) |
| The following companies have the address of 32 Molesworth St, Dublin 2, D02 Y512, Ireland | | | |
| Canas Leasing Limited | Ireland | $1 Ordinary shares | 50 |
| Elviria Leasing Limited | Ireland | $1 Ordinary shares | 50 |
Associates
| Name | Country of | Description of shares | Proportion of shares held (%) |
| The following company has the address of Quadrant House, 4 Thomas | | | |
| MCashback Limited | United Kingdom | £0.01 Ordinary shares | 31.7 |
Liquidated/dissolved/sold
Subsidiary undertakings
| Name | Country of | Description of shares | Proportion of shares held (%) |
| St. Helens Nominees Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered Corporate Finance (Canada) Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered Corporate Finance (Eurasia) Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered (CT) Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered Equitor Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered Financial Investments Limited | United Kingdom | £1.00 Ordinary A Shares | 100 |
| Standard Chartered Portfolio Trading (UK) Limited | United Kingdom | £1.00 Ordinary shares | 100 |
| Standard Chartered Receivables (UK) Limited | United Kingdom | $1.00 Ordinary shares | 100 |
| Standard Chartered Participacoes E Assessoria Economica Ltda | Brazil | BRL0.51 Common shares | 100 |
| SCL Consulting (Shanghai) Co. Ltd | China | $ Ordinary shares | 100 |
| Double Wings Limited | Hong Kong | HKD1.00 Ordinary shares | 100 |
| GE Capital (Hong Kong) Limited | Hong Kong | HKD10.00 Ordinary shares | 100 |
| Rivendell Private Limited | Hong Kong | $1.00 A Ordinary shares | 84.8 |
| Union Town Limited | Hong Kong | HKD1.00 Ordinary shares | 100 |
| Standard Chartered Bank Mozambique, S.A. | Mozambique | $1.00 Ordinary shares | 100 |
| Standard Chartered Investments (Singapore) Private Limited | Singapore | $ Ordinary shares | 100 |
| Prime Financial Holdings Limited | Singapore | SGD Ordinary shares | 100 |
| $ Ordinary shares | 100 | ||
| Standard Chartered Securities (Singapore) Pte. Limited | Singapore | SGD Ordinary shares | 100 |
| Thai Exclusive Leasing Company Limited | Thailand | THB10.00 Ordinary shares | 100 |
| California Rose Limited | Virgin Islands, British | $1.00 Ordinary shares | 90.5 |
| Earnest Range Limited | Virgin Islands, British | $1.00 Ordinary shares | 90.5 |
Significant investment holdings and other related undertakings
| Name | Country of | Description of shares | Proportion of shares held (%) |
| Chayora Holdings Limited | Cayman Islands | $0.01 Series B Preferred Shares | 100 |
| Ningbo Xingxin Real Estate Development Co.,Ltd* | China | CNY1.00 Registered Capital | 60 |
| Fast Great Investment Limited | Hong Kong | HKD1.00 Ordinary shares | 28 |
| Standard Latitude Consultancy (HK) Limited | Hong Kong | $5,000 Ordinary shares | 20 |
| Fountain Valley PFV Limited | Korea, Republic of | KRW5,000.00 Ordinary shares | 47.3 |
| Lotus PFV Co. Ltd | Korea, Republic of | KRW5,000.00 Ordinary shares | 50 |
| Smoothie King Holdings, Inc. | Korea, Republic of | KRW5,000.00 Ordinary shares | 20.3 |
| Maxpower Group Pte Ltd | Singapore | Redeemable Preference shares | 100 |
| SGD Warrants | 100 |
41. Transition to IFRS 9 Financial Instruments
Balance Sheet
| | IAS 39 31 December | Classification & measurement2 | Expected | Other | IFRS 9 |
| Cash and balances at central banks | 58,864 | - | - | - | 58,864 |
| Financial assets held at fair value through profit or loss | 27,564 | 47,076 | - | - | 74,640 |
| Derivative financial instruments | 47,031 | - | - | - | 47,031 |
| Loans and advances to banks1 | 78,188 | (15,886) | (7) | - | 62,295 |
| Of which: Reverse repurchase agreements and other similar secured lending | 20,694 | (15,593) | - | - | 5,101 |
| Loans and advances to customers1 | 282,288 | (29,966) | (815) | - | 251,507 |
| Of which: Reverse repurchase agreements and other similar secured lending | 33,581 | (29,015) | - | - | 4,566 |
| Investment securities | 117,025 | (1,193) | (19) | - | 115,813 |
| Other assets | 33,490 | - | - | - | 33,490 |
| Current tax assets | 491 | - | - | 1 | 492 |
| Prepayments and accrued income | 2,307 | - | - | - | 2,307 |
| Interests in associates and joint ventures | 2,307 | - | - | (52) | 2,255 |
| Goodwill and intangible assets | 5,013 | - | - | - | 5,013 |
| Property, plant and equipment | 7,211 | - | - | - | 7,211 |
| Deferred tax assets | 1,177 | - | - | 125 | 1,302 |
| Assets classified as held for sale | 545 | - | - | - | 545 |
| Total assets | 663,501 | 31 | (841) | 74 | 662,765 |
| Deposits by banks | 30,945 | - | - | - | 30,945 |
| Customer accounts | 370,509 | - | - | - | 370,509 |
| Repurchase agreements and other similar secured borrowing | 39,783 | (38,144) | - | - | 1,639 |
| Financial liabilities held through profit or loss | 16,633 | 38,140 | - | - | 54,773 |
| Derivative financial instruments | 48,101 | - | - | - | 48,101 |
| Debt securities in issue | 46,379 | - | - | - | 46,379 |
| Other liabilities | 35,257 | - | - | - | 35,257 |
| Current tax liabilities | 376 | - | - | (10) | 366 |
| Accruals and deferred income | 5,493 | - | - | - | 5,493 |
| Subordinated liabilities and other borrowed funds | 17,176 | - | - | - | 17,176 |
| Deferred tax liabilities | 404 | - | - | (37) | 367 |
| Provisions for liabilities and charge1 | 183 | - | 176 | - | 359 |
| Retirement benefit obligations | 455 | - | - | - | 455 |
| Total liabilities | 611,694 | (4) | 176 | (47) | 611,819 |
| Share capital and share premium account | 7,097 | - | - | - | 7,097 |
| Other reserves | 12,767 | (165) | 65 | (7) | 12,660 |
| Retained earnings1 | 26,641 | 200 | (1,074) | 128 | 25,895 |
| Total parent company shareholders' equity | 46,505 | 35 | (1,009) | 121 | 45,652 |
| Other equity instruments | 4,961 | - | - | - | 4,961 |
| Total equity excluding non-controlling interests | 51,466 | 35 | (1,009) | 121 | 50,613 |
| Non-controlling interests | 341 | - | (8) | - | 333 |
| Total equity | 51,807 | 35 | (1,017) | 121 | 50,946 |
| Total equity and liabilities | 663,501 | 31 | (841) | 74 | 662,765 |
1 The Group's initial estimate of credit impairment provisions 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 provisions has been revised down by $222 million to $6,498 million, and the net expected credit loss of $(1,296) million adjusted against retained earnings has similarly decreased by $222 million to $(1,074) million
2 FVTPL financial assets have increased due to reclassifications of $44,608 million of reverse repurchase agreements (IAS 39: loans and receivables), $1,244 million of loans and advances to banks and customers (IAS 39: loans and receivables), $511 million of investment debt securities (IAS 39: available-for sale) and $684 million of equity shares (IAS 39: available-for-sale), with the remaining $29m being IFRS 9 re-measurement adjustments. Repurchase agreements of $38,144 million have been reclassified from amortised cost under IAS 39 to FVTPL
Statement of changes in equity
| | Share capital | Capital and merger reserves | Own credit adjustment reserve | Available-for-sale reserve | Fair value through OCI reserve | Cash flow hedge reserve | Translation reserve | Retained earnings | Parent company shareholders' equity | Other equity instruments | Non-controlling interests | Total |
| As at | 7,097 | 17,129 | 54 | 83 | - | (45) | (4,454) | 26,641 | 46,505 | 4,961 | 341 | 51,807 |
| Net impact of: | - | - | - | (83) | (82) | - | - | 200 | 35 | - | - | 35 |
| IFRS 9 reclassifications1 | - | - | - | (83) | (86) | - | - | 169 | - | - | - | - |
| IFRS 9 re-measurements2 | - | - | - | - | 4 | - | - | 31 | 35 | - | - | 35 |
| Expected credit loss, net3 | - | - | - | - | 65 | - | - | (1,074) | (1,009) | - | (8) | (1,017) |
| Tax impact4 | - | - | - | - | (6) | - | - | 179 | 173 | - | - | 173 |
| Impact of IFRS 9 on share of joint ventures and associates, net of tax | - | - | - | - | (1) | - | - | (51) | (52) | - | - | (52) |
| Estimated IFRS 9 transition adjustments | - | - | - | (83) | (24) | - | - | (746) | (853) | - | (8) | (861) |
| As at 1 January 2018 | 7,097 | 17,129 | 54 | - | (24) | (45) | (4,454) | 25,895 | 45,652 | 4,961 | 333 | 50,946 |
1 Available-for-sale category has been removed under IFRS 9. Unrealised gains and losses have been transferred to fair value through other comprehensive income (FVOCI) reserves, or retained earnings where the instruments are held as FVTPL. The FVOCI reserve includes a $187 million loss in respect of equity securities designated as FVOCI, partly offset by $18 million gain on debt securities designated as FVOCI
2 The remeasurement impact of financial assets that are now measured at fair value under IFRS 9
3 Impact from adopting expected credit losses. Gross impact is estimated at $1,082 million (comprising $1,074 million in retained earnings and $8 million in non-controlling interests). As FVOCI debt instruments are held at fair value on the balance sheet, the expected credit loss charged to retained earnings is recognised as a credit to the FVOCI reserve. The net FVOCI reserve relating to FVOCI debt instruments will be recycled to the income statement on disposal of the instruments
4 Tax of $173 million has been credited to reserves as a result of transition to IFRS 9. Of this, deferred tax of $142 million has been credited to retained earnings, and is provided on additional deductible temporary differences that have arisen from loss provisions due to initial adoption of the expected credit loss approach
Impact of moving from an incurred loss approach to an expected credit loss approach
| | 1 January 2018 | ||||||||
| Loss allowances per IAS 39 | | Expected credit loss per IFRS 9 | Increase/( | ||||||
| Portfolio impairment provisions | Individual impairment provisions | Total | Stage 1 | Stage 2 | Stage 3 | Total | |||
| Corporate & Institutional Banking | 156 | 3,466 | 3,622 | | 105 | 394 | 3,433 | 3,932 | 310 |
| Retail Banking | 208 | 275 | 483 | | 382 | 178 | 389 | 949 | 466 |
| Commercial Banking | 99 | 1,431 | 1,530 | | 39 | 93 | 1,369 | 1,501 | (29) |
| Private Banking | 2 | 67 | 69 | | 8 | 1 | 91 | 100 | 31 |
| Central & other items | - | - | - | | 4 | - | - | 4 | 4 |
| Total loans and advances to customers1 | 465 | 5,239 | 5,704 | | 538 | 666 | 5,282 | 6,486 | 782 |
| Loans and advances to banks | 1 | 4 | 5 | | 6 | 2 | 4 | 12 | 7 |
| Financial guarantees | - | 77 | 77 | | 6 | 16 | 77 | 99 | 22 |
| Debt securities and other eligible bills - amortised cost | - | 114 | 114 | | 3 | 16 | 213 | 232 | 118 |
| Debt securities and other eligible bills - FVOCI | - | - | - | | 23 | 42 | - | 65 | 65 |
| Total | 466 | 5,434 | 5,900 | | 576 | 742 | 5,576 | 6,894 | 994 |
1 Includes both drawn and undrawn commitments
Movement in loss provisions
| | Debt securities | FVOCI debt securities | Loans to banks | Loans to customers | Provisions for liabilities | Total | |
| Undrawn commitments | Guarantees | ||||||
| Total IAS 39 loss provisions | 114 | - | 5 | 5,7021 | 21 | 77 | 5,900 |
| Reclassifications: | | | | | | | |
| Loss provisions reclassified to FVTPL | (109) | - | - | (122) | - | - | (231) |
| Modification losses netted against gross exposure | - | - | - | (65) | - | - | (65) |
| Adjusted IAS 39 loss provisions | 5 | - | 5 | 5,515 | 2 | 77 | 5,604 |
| Additional expected credit loss provisions | 227 | 65 | 7 | 815 | 154 | 22 | 1,290 |
| Total IFRS 9 impairment provisions | 232 | 65 | 12 | 6,3302 | 1562 | 99 | 6,894 |
| Estimated net expected credit loss movement | 118 | 65 | 7 | 628 | 154 | 22 | 994 |
1 Total IAS 39 loss allowances ($5,704 million) applied to loans and advances to customers as previously reported
2 Total IFRS 9 expected credit losses ($6,486 million) applied to loans and advances to customers
Impact on non-performing loans to customers and banks1
| | Corporate & Institutional | Retail | Commercial Banking | Private | Total |
| Gross | | | | | |
| At 31 December 2017 | 5,957 | 489 | 2,026 | 207 | 8,679 |
| Modified loans | (39) | - | (26) | - | (65) |
| Performing forborne (impaired) | - | 329 | - | - | 329 |
| Reclassified | (62) | - | (40) | - | (102) |
| At 1 January 2018 (stage 3) | 5,856 | 818 | 1,960 | 207 | 8,841 |
| | | | | | |
| Credit impairment provisions | | | | | |
| At 31 December 2017 (IAS 39 IIP) | 3,468 | 2152 | 1,431 | 67 | 5,181 |
| Modified loans | (39) | - | (26) | - | (65) |
| Performing forborne (impaired) | - | 60 | - | - | 60 |
| Reclassified to FVTPL | (81) | - | (40) | - | (121) |
| Additional expected credit loss | 1 | 114 | 6 | - | 121 |
| GSAM multiple scenario provisions | 88 | - | (2) | 24 | 110 |
| At 1 January 2018 (stage 3) | 3,437 | 3892 | 1,369 | 91 | 5,286 |
| IAS 39 PIP at 31 December 2017 | 157 | 208 | 99 | 2 | 466 |
| Collateral at 31 December 2017 | 1,111 | 218 | 277 | 203 | 1,809 |
| Non-performing cover ratios: | | | | | |
| At 31 December 2017 (IAS 39) | 61% | 87% | 75% | 33% | 65% |
| At 31 December 2017 (IAS 39, excluding PIP) | 58% | 44% | 71% | 32% | 60% |
| At 1 January 2018 (IFRS 9) | 59% | 48% | 70% | 44% | 60% |
| At 31 December 2017 (IAS 39, including collateral) | 77% | 89% | 84% | 100% | 81% |
| At 1 January 2018 (IFRS 9, including collateral) | 78% | 74% | 84% | 100% | 80% |
| Of the above, included in the liquidation portfolio: | | | | | |
| Gross | 1,945 | - | 125 | 156 | 2,226 |
| Credit impairment provisions (IAS 39) | 1,388 | - | 123 | 62 | 1,573 |
| Additional provisions (IFRS 9) | 29 | - | | 24 | 53 |
| At 1 January 2018 (stage 3) | 1,417 | | 123 | 86 | 1,626 |
| Non-performing cover ratios: | | | | | |
| At 31 December 2017 (IAS 39) | 71% | - | 98% | 40% | 71% |
| At 1 January 2018 (IFRS 9) | 73% | - | 98% | 55% | 73% |
| At 31 December 2017 (IAS 39, including collateral) | 84% | - | 98% | 100% | 86% |
| At 1 January 2018 (IFRS 9, including collateral) | 85% | - | 98% | 100% | 88% |
1 Includes FVTPL impaired loans
2 Under IAS 39, Retail Banking non-performing loans excluded those impaired loans classified as performing
42. Dealings in Standard Chartered PLC listed securities
This is also disclosed as part of Note 28 Share capital, other equity and reserves
Except as disclosed, neither the Company nor any of its subsidiaries has bought, sold or redeemed any securities of the company listed on The Stock Exchange of Hong Kong Limited during the period. Details of the shares purchased and held by the trusts are set out below.
| Number of shares | 1995 Trust |
| 2004 Trust |
| Total | |||
| 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | 31.12.18 | 31.12.17 | |||
| Shares purchased during the year | 1,017,941 | - |
| - | - |
| 1,017,941 | - |
| Market price of shares purchased ($million) | 8- | - |
| - | - |
| 8 | - |
| Shares held at the end of the year | 2,354,820 | 3,769,011 |
| 16,755 | 18,004 |
| 2,371,575 | 3,787,015 |
| Maximum number of shares held during the year |
|
|
|
|
|
| 3,787,015 | 6,182,467 |
43. Corporate governance
The directors confirm that Standard Chartered PLC (the Company) has complied with all of the provisions set out in the UK Corporate Governance Code 2014 during the year ended 31 December 2018. The directors also confirm that, throughout the year, the Company has complied with the code provisions set out in the Hong Kong Corporate Governance Code contained in Appendix 14 of the Hong Kong Listing Rules. The Group confirms that it has adopted a code of conduct regarding directors' securities transactions on terms no less exacting than required by Appendix 10 of the Hong Kong Listing Rules and that the directors of the Company have complied with the required standards of the adopted code of conduct. The directors also confirm that the announcement of these results has been reviewed by the Company's Audit Committee.
Shareholder information
Forward-looking statements
This document may contain 'forward-looking statements' that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as 'may', 'could', 'will', 'expect', 'intend', 'estimate', 'anticipate', 'believe', 'plan', 'seek', 'continue' or other words of similar meaning. By their very nature, such statements are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and the Group's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements.
Recipients should not place reliance on, and are cautioned about relying on, any forward-looking statements. There are several factors which could cause actual results to differ materially from those expressed or implied in forward-looking statements. The factors that could cause actual results to differ materially from those described in the forward-looking statements include (but are not limited to) changes in global, political, economic, business, competitive, market and regulatory forces or conditions, future exchange and interest rates, changes in tax rates, future business combinations or dispositions and other factors specific to the Group. Any forward- looking statement contained in this document is based on past or current trends and/or activities of the Group and should not be taken as a representation that such trends or activities will continue in the future.
No statement in this document is intended to be a profit forecast or to imply that the earnings of the Group for the current year or future years will necessarily match or exceed the historical or published earnings of the Group. Each forward-looking statement speaks only as of the date of the particular statement. Except as required by any applicable laws or regulations, the Group expressly disclaims any obligation to revise or update any forward looking statement contained within this document, regardless of whether those statements are affected as a result of new information, future events or otherwise.
Nothing in this document shall constitute, in any jurisdiction, an offer or solicitation to sell or purchase any securities or other financial instruments, nor shall it constitute a recommendation or advice in respect of any securities or other financial instruments or any other matter.
This information will be available on the Group's website at sc.com
Details of voting at the Company's AGM and of proxy votes cast can be found on the Company's website at sc.com/investors
If you would like to receive more information, please visit our website at sc.com/shareholders or contact the shareholder helpline on 0370 702 0138
Further information can be obtained from the Company's registrars or from ShareGift on 020 7930 3737 or from sharegift.org
Please register online at investorcentre.co.uk or contact our registrar for a mandate form
You can check your shareholding at computershare.com/hk/investors