RNS Number : 0880S
HSBC Holdings PLC
06 March 2019
 

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

countries/territories

(Audited)

Gross                                             Gross                                             Gross                                               Gross

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

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

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

 

Fully collateralised

477                  1.5                          435                   1.1                              3                 33.3                            19                    -

 

LTV ratio:

178 269 13 17


149

265

7

14


3 - - -


19 - - -


 

- less than 50%

1.7

1.3

33.3

-

 

- 51% to 75%

0.4

0.4

-

-

 

- 76% to 90%

7.7

14.3

-

-

 

- 91% to 100%

11.8

14.3

-

-

 

Partially collateralised (B):

13                    7.7                              8                 12.5                            -                      -                            -                     -

 

Fully collateralised

621               13.5                          433                   9.2                            12                     -                            -                     -

 

LTV ratio:

425 90 38 68


304

58

35

36


2 10 - -


- - - -


 

- less than 50%

11.5

9.2

-

-

 

- 51% to 75%

26.7

6.9

-

-

 

- 76% to 90%

2.6

5.7

-

-

 

- 91% to 100%

16.2

16.7

-

-

 

Partially collateralised (C):

474               56.5                          261                 42.9                            -                      -                            -                     -

 

- collateral value on C

321                                                                      137                                                     -                                                      -

Total

1,433                                38.0                          755                 27.0                            12                   -                              -                    -

At 31 Dec 2018

164,464                              0.5                     30,845                  0.9                  75,271                     -                      5,301                     0.1



 


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

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


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

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


HSBC Holdings plc Annual Report and Accounts 2018    113


Report of the Directors | Risk

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

(Audited)


 

   Gross                                                   Gross                                                   Gross                                                   Gross

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

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

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

 

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

 


Fully collateralised

234,081                       0.1                24,387                    0.2                     36,730                         0.1                93,804                       -

LTV ratio:

60,405 82,590 15,853 75,233


4,461 9,510 2,175 8,241


12,032 14,264 4,567 5,867


24,922 7,267 4,723 56,892


- less than 50%

0.2

0.4

0.1

-

- 51% to 75%

-

0.2

0.1

-

- 76% to 90%

0.1

0.2

0.1

-

- 91% to 100%

-

-

0.1

-

Partially collateralised (A):

48,877                          0.1                  5,551                    0.1                     21,942                         -                         747                      -

- collateral value on A

 

21,097                                                 2,388                                               10,263                                                      696





Total

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



Stage 2


 

Not collateralised

42,053                                        1.4                12,364                    3.1                       6,212                         0.4                  1,578                     1.3

 



 

Fully collateralised

24,977                       1.0                  7,378                    1.0                       3,378                         0.5                  9,713                     1.1

LTV ratio:

11,915 5,344 1,642 6,076


5,410 1,042 140 786


1,421 1,290 391 276


3,711 810 691 4,501


- less than 50%

0.9

0.6

0.4

1.4

- 51% to 75%

1.3

3.5

0.6

1.4

- 76% to 90%

1.5

2.9

0.5

0.3

- 91% to 100%

0.8

0.1

0.4

0.9

Partially collateralised (B):

4,993                          0.7                       381                   3.1                       2,287                         0.3                         -                       -


 

2,074                                 207                                                     971                                                        -

 

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

 

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

 


Fully collateralised

1,660                                        25.2                       513                   6.2                            146                        -                         188                    9.6

LTV ratio:

596 487 382 195


181 172 86 74


11 62 32 41


77 103 - 8


- less than 50%

34.9

7.7

-

22.1

- 51% to 75%

10.5

1.7

-

1.0

- 76% to 90%

25.4

10.5

-

-

- 91% to 100%

31.8

8.1

-

-

Partially collateralised (C):

931                                           44.9                       179                   22.3                         158                      15.2                            5                  60.0

 

Fully collateralised

59                      13.6                         -                       -                              9                           -                           -                       -

LTV ratio:

12 16 22 9


- - - -


- - - 9


- - - -


- less than 50%

33.3

-

-

-

- 51% to 75%

25.0

-

-

-

- 76% to 90%

-

-

-

-

- 91% to 100%

-

-

-

-

Partially collateralised (C):

43                      72.1                         8                        -                              35                      85.7                         -                       -

- collateral value on C

38                                                       3                                                          34                                                       -

Total

316                                           59.2                         8                        -                              69                      50.7                         -                       -

At 31 Dec 2018

912,414                                     0.6             206,595                    0.8                  193,659                         0.3             136,436                     0.1



 

114            HSBC Holdings plc Annual Report and Accounts 2018


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

(Audited)

Rated CRR/ PD8


 


Fully collateralised

1,895                                          3.6                         74                        4.1                         11                        9.1                  1,621                        3.1

LTV ratio:

693 292 45 865


21 49 2 2


- 11 - -


594 169 20 838


- less than 50%

4.2

4.8

-

4.2

- 51% to 75%

2.7

2.0

9.1

2.4

- 76% to 90%

15.6

-

-

-

- 91% to 100%

2.8

-

-

-

Partially collateralised (A):

212                                              2.8                         23                        4.3                       153                        1.3                         -                          -

 

Fully collateralised

1,719                                        24.8                       513                        6.2                       155                        -                         188                       9.6

LTV ratio:

608 503 405 203


181 172 86 74


11 62 32 50


77 103 - 8


- less than 50%

36.0

7.7

-

22.1

- 51% to 75%

8.7

1.7

-

1.0

- 76% to 90%

24.2

10.5

-

-

- 91% to 100%

31.5

8.1

-

-

Partially collateralised (B):

974                                           46.1                       187                      21.9                       193                      28.0                            5                    60.0

- collateral value on B

466


116


73


2


Total

7,892

46.1

2,475

33.2

851

52.6

199

11.1

At 31 Dec 2018

11,242

33.7

3,137

27.4

1,109

41.3

2,011

4.2

 


Other credit risk exposures

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

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

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

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

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

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

Derivatives

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

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

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

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

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

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


HSBC Holdings plc Annual Report and Accounts 2018    115


Report of the Directors | Risk

Notional contract amounts and fair values of derivatives by product type

 

Total OTC derivatives

31,982,343                     255,190             251,001

25,346,612                     328,806             324,442

- total OTC derivatives cleared by central counterparties

17,939,035

52,424

52,845

11,908,326

118,030

119,394

- total OTC derivatives not cleared by central counterparties

14,043,308

202,766

198,156

13,438,286

210,776

205,048

Total exchange traded derivatives

2,030,580                             2,346                  4,545

1,869,210                             1,437                  2,804


 


116          HSBC Holdings plc Annual Report and Accounts 2018


 


Report of the Directors | Risk

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

(Audited)

Non-credit impaired                                                         Credit impaired

Stage 1                                           Stage 2                                           Stage 3                                             Total

Gross carrying/

Gross carrying/

Gross carrying/

Gross carrying/

nominal

Allowance for

nominal

Allowance for

nominal

Allowance for

nominal

Allowance for

amount

ECL

amount

ECL

amount

ECL

amount

ECL

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


 


For footnotes, see page 147.

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

This overall decrease was primarily driven by:

·   $1,380m of assets written off;

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

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

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

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


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

Gross carrying amount                                                                            Allowance for ECL

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

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

First lien residential

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

- Band 1

0.000 to 0.250

235,249 17,350 9,316 3,524 1,414 26

-

339 535 3,975 1,236 1,177 1,037

-

- - - - - -

2,921

235,588
17,885
13,291
4,760
2,591
1,063

2,921

(43)

(3) (7) (6) (1) -

-

(1)

(2) (6) (8) (21) (29)

-

- - - - - -

(533)

(44)

(5)

(13)      

(14)      
(22)
(29)

(533)


- Band 2

0.251 to 0.500


- Band 3

0.501 to 1.500


- Band 4

1.501 to 5.000


- Band 5

5.001 to 20.000


- Band 6

20.001 to 99.999


- Band 7

100.000


 






























For footnotes, see page 147.

Collateral on loans and advances

(Audited)

The following table provides a quantification of the value of fixed charges we hold over specific assets where we have a history of enforcing, and are able to enforce, collateral in satisfying a debt in the event of the borrower failing to meet its contractual obligations, and where the collateral is cash or can be realised by

sale in an established market. The collateral valuation excludes any adjustments for obtaining and selling the collateral and, in particular, loans shown as not collateralised or partially collateralised may also benefit from other forms of credit mitigants.

 

HSBC Holdings plc Annual Report and Accounts 2018      119


Report of the Directors | Risk

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

(Audited)

 

Fully collateralised

299,072                              -                130,646                    -                  79,180                    -                    15,321                   -

LTV ratio:

160,563 51,415 40,273 28,383 14,191 4,247


66,834 20,937 17,480 15,086 8,824 1,485


54,262 11,591 5,979 2,986 2,637 1,725


8,060 3,382 2,473 1,113

158

135


- less than 50%

-

-

-

-

- 51% to 60%

-

-

-

-

- 61% to 70%

-

-

-

-

- 71% to 80%

-

-

-

-

- 81% to 90%

-

-

-

-

- 91% to 100%

0.1

-

-

-

Partially collateralised (A):

1,420                                   0.1                       581                   -                         300                   -                           10                    -

LTV ratio:

808

184

428


334

46

201


256

41

3


5

2

3


- 101% to 110%

0.1

-

-

-

- 111% to 120%

0.2

-

-

-

- greater than 120%

0.2

-

-

-

Collateral value on A

1,266                                                                493                                                284                                                     8

Total                                                                                                                           300,492                    -               131,227                    -                  79,480                    -                  15,331                     -

Stage 2


Fully collateralised

6,170

1.0

1,234                                1.3                          867                   -                    1,435                   0.3

LTV ratio:

3,334 932 853 586 331 134


917 113 105 39 27 33


699 74 43 28 20

3


814 268 231 79 32 11


- less than 50%

0.7

0.9

-

0.1

- 51% to 60%

1.1

3.0

-

0.4

- 61% to 70%

1.0

2.2

-

0.3

- 71% to 80%

1.3

3.4

-

0.9

- 81% to 90%

1.7

3.1

-

1.6

- 91% to 100%

2.4

1.5

-

0.8

Partially collateralised (B):

123                   2.9                          46                   0.2                            1                   -                              5                  0.3

LTV ratio:

76

17

30


44

1

1


1

-

-


3

1

1


- 101% to 110%

1.5

0.1

-

0.5

- 111% to 120%

4.5

4.3

-

-

- greater than 120%

5.3

0.6

-

-

Collateral value on B

118                                                   44                                                     1                                                     4

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

 

Fully collateralised

2,557                12.3                  1,023                  10.9                         25                   0.9                       671                  1.0

LTV ratio:

1,255 359 336 280 190 137


638 151 119 70 33 12


24 1 - - - -


219 107 105 114 81 45


- less than 50%

13.6

7.8

0.9

0.9

- 51% to 60%

8.3

11.3

-

0.9

- 61% to 70%

12.0

18.4

-

1.0

- 71% to 80%

9.9

14.8

-

0.9

- 81% to 90%

9.4

19.4

-

1.2

- 91% to 100%

19.8

45.9

-

2.2

Partially collateralised (C):

391                 33.6                          23                 15.8                         -                    -                           24                  0.4

LTV ratio:

73

68

250


10

5

8


-

-

-


14

6

4


- 101% to 110%

17.4

14.3

-

0.6

- 111% to 120%

24.2

26.4

-

0.3

- greater than 120%

40.8

11.1

-

0.2

Collateral value on C

372                                                   20                                                  -                                                   22

 

120          HSBC Holdings plc Annual Report and Accounts 2018


Supplementary information

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

Gross carrying amount                                                                                            Allowance for ECL

Non-bank

        Corporate and         Of which: real                 financial

            commercial                  estate21             institutions

$m                                                                                   $m                                                                                        $m

Total

$m

Corporate and commercial

$m

Non-bank

    Of which: real                   financial

             estate21              institutions

$m                   $m

Total

$m

 

 

Europe                                                                                        176,577                  25,715                  22,529                199,106                      (2,507)                    (481)                       (82)                 (2,589)

- UK

127,093

18,384

17,703

144,796

(1,701)

(410)

(78)

(1,779)

- France

28,204

5,890

2,488

30,692

(405)

(36)

(1)

(406)

- Germany

10,454

246

1,371

11,825

(35)

-

-

(35)

- Switzerland

1,674

509

348

2,022

(1)

-

-

(1)

- other

9,152

686

619

9,771

(365)

(35)

(3)

(368)

Asia                                                                                              263,608                  79,941                  27,284                290,892                      (1,343)                      (67)                        (31)                 (1,374)

- Hong Kong

168,621

63,287

15,062

183,683

(579)

(40)

(20)

(599)

- Australia

11,335

2,323

2,115

13,450

(68)

(3)

-

(68)

- India

6,396

1,408

2,846

9,242

(77)

(4)

(1)                  

(78)

- Indonesia

4,286

35

354

4,640

(269)

-

(2)                  

(271)

- mainland China

24,225

4,423

5,146

29,371

(172)

(15)

(6)

(178)

- Malaysia

7,924

1,649

274

8,198

(77)

(2)

-

(77)

- Singapore

17,564

4,463

431

17,995

(31)

(2)

-

(31)

- Taiwan

6,008

23

156

6,164

(2)

-

-

(2)

- other

17,249

2,330

900

18,149

(68)

(1)

(2)

(70)

Middle East and North Africa (excluding

Saudi Arabia)                                                                               23,738                    2,025                       322                   24,060                       (1,167)                    (178)                          (1)                 (1,168)

- Egypt

1,746

41

-

1,746

(125)

-

-

(125)

- UAE

14,445

1,849

206

14,651

(721)

(176)

(1)

(722)

- other

7,547

135

116

7,663

(321)

(2)

-

(321)

North America                                                                             56,983                  14,169                    9,647                  66,630                         (236)                       (37)                          (8)                    (244)

- US

35,714

8,422

8,777

44,491

(103)

(8)

(2)

(105)

- Canada

20,493

5,354

770

21,263

(105)

(5)

(2)

(107)

- other

776

393

100

876

(28)

(24)

(4)

(32)

Latin America                                                                               13,671                    1,383                     1,625                  15,296                         (299)                          (8)                          (4)                    (303)

- Mexico

11,302                                        1,354                    1,567                 12,869

(225)

(8)                                                   (4)

(229)

- other

2,369                                               29                           58                     2,427

(74)

-                                                      -

(74)

At 31 Dec 2018                                                                        534,577                123,233                  61,407                595,984                      (5,552)                    (771)                     (126)                 (5,678)

 

For footnotes, see page 147.


HSBC Holdings plc Annual Report and Accounts 2018       121


Report of the Directors | Risk

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

 

Europe

131,557                           46,007                9,790                177,564                  (258)                     (750)                (313)              (1,008)

- UK

124,357 3,454 - 1,120 2,626

20,503 19,616 288 5,213 387

9,356 376 - - 58

144,860 23,070 288 6,333 3,013

(141)

(43) - (2) (72)

(592)

(114)

-

(19)

(25)

(309)

(4) - - -

(733) (157) - (21) (97)

- France

- Germany

- Switzerland

- other

Asia                                                                                                                    119,718               42,049             11,900              161,767

(44)                                        (696)                (465)                  (740)

- Hong Kong

79,059 13,858 1,030 59 8,706 2,890 5,991 5,123 3,002

28,734

764

608

279 1,139 3,209 5,353

860

1,103

8,124 626 228 206 502 888 434 289 603

107,793 14,622 1,638 338 9,845 6,099 11,344 5,983 4,105

(1)

(5)

(5)

-

(2) (24) - (1)

(6)

(329)

(55)

(20) (34) (57) (71) (70) (20) (40)

(228) (54) (14) (27) (50) (33)

(21)

(5)  (33)

(330) (60) (25) (34) (59) (95) (70) (21) (46)

- Australia

- India

- Indonesia

- mainland China

- Malaysia

- Singapore

- Taiwan

- other

Middle East and North Africa (excluding Saudi Arabia)

2,393                                   3,933                1,181                    6,326                     (88)                     (306)                (148)                  (394)

- Egypt

-

1,974

419

309

1,477

2,147

71

538

572

309

3,451

2,566

-

(82)

(0)                  

(5)

(126)

(175)

(1)

(54)

(93)

(5)

(208)

(181)

- UAE

- other

North America

36,964                                5,057                1,341                  42,021                  (122)                     (139)                   (81)                  (261)

- US

17,464

18,267

1,233

2,280

2,562

215

1,028

265

48

19,744

20,829

1,448

(13)

(16)

(93)

(106)

(23)

(10)

(75)

(5)

(1)

(119)

(39)

(103)

- Canada

- other

Latin America

2,701                                   3,958                1,432                    6,659                     (23)                     (521)                (254)                  (544)

- Mexico

                2,550                  3,192

                   151                     766

1,121

311

5,742

917

(22)                                       (465)

(1)                                            (56)

(227)

(27)

(487)

(57)

- other

At 31 Dec 2018

293,333                         101,004             25,644                394,337                  (535)                (2,412)               (1,261)             (2,947)

 


122          HSBC Holdings plc Annual Report and Accounts 2018


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

Gross carrying/nominal amount                                                                          Allowance for ECL

 

 

Stage 1           Stage 2         Stage 3              POCI                     Total       Stage 1         Stage 2       Stage 3            POCI

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

 

Loans and advances to customers at amortised cost

915,188

61,786

13,023

324

990,321

(1,276)

(2,108)

(5,047)

(194)           (8,625)

- RBWM

340,606 304,103 230,250 37,970

2,259

19,228 27,529 14,112 724

193

4,960 5,732 1,683 618

30

- 298 25 1

-

364,794 337,662 246,070 39,313

2,482

(544) (538) (188) (5)

(1)

(1,250)

(659)

(182)

(3)

(14)

(1,129) (3,110) (718) (89)

(1)

- (194) - -

-


- CMB

- GB&M

- GPB

- Corporate Centre

Loans and advances to banks at amortised cost

71,873

307

-

-

72,180

(11)

(2)

-

-                       (13)

- RBWM

5,801

1,912

25,409

46

38,705

5 15 212 -

75

- - - -

-

- - - -

-

5,806 1,927 25,621 46 38,780

(1)

(1)

(7)

-

(2)

- - (2) -

-

- - - -

-

- - - -

-


- CMB

- GB&M

- GPB

- Corporate Centre

Other financial assets measured at amortised cost

581,118

1,673

126

-

582,917

(27)

(6)

(22)

-                       (55)

- RBWM

49,142 15,082 272,028 924 243,942

184 774 703 1

11

32

60

20

2

12

- - - -

-

49,358 15,916 272,751 927 243,965

(14) (7) (1) -

(5)

(2)                  

(3)     (1) -

-

(1) (21) - -

-

- - - -

-


- CMB

- GB&M

- GPB

- Corporate Centre

Total gross carrying amount on balance sheet at 31 Dec 2018

1,568,179

63,766

13,149

324

1,645,418

(1,314)

(2,116)

(5,069)

(194)           (8,693)

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

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

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

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

34,940                  -               -                -            -

    4,113                (7)               -                -            -

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

60                  -               -                -            -

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

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

    1,066                (1)               -                -            -

56                  -               -              (1)            -

Total nominal amount off balance sheet at 31 Dec 2018


 

 


Debt instruments measured at FVOCI at

31 Dec 2018                                                                                                   342,175               923


For footnotes, see page 147.

HSBC Holdings
(Audited)

Risk in HSBC Holdings is overseen by the HSBC Holdings Asset and Liability Management Committee ('Holdings ALCO'). The major risks faced by HSBC Holdings are credit risk, liquidity risk and market risk (in the form of interest rate risk and foreign exchange risk).

Credit risk in HSBC Holdings primarily arises from transactions with Group subsidiaries and from guarantees issued in support of obligations assumed by certain Group operations in the normal conduct of their business. It principally represents claims on Group subsidiaries in Europe and North America.

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

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

·     financial guarantees and similar contracts, where the maximum exposure is the maximum that we would have to pay if the guarantees were called upon (see Note 33).

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

Securitisation exposures and other structured products


default that are not included in the carrying value. These offsets also include collateral received in cash and other financial assets. The total offset relating to our derivative balances is $1.5bn at 31 December 2018 (2017: $2.1bn).

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


HSBC Holdings plc Annual Report and Accounts 2018            123


Report of the Directors | Risk


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


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


Carrying amount of HSBC's consolidated holdings of ABSs

     

 

Financial assets designated                                                   Of which

Financial                              and otherwise mandatorily                                            held through

  investments at               Held at          measured at fair value                                             consolidated

     Trading                    FVOCI amortised cost           through profit and loss                     Total                               SEs

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

Mortgage-related assets

1,680                                   15,422             15,498                                        127                 32,727                           208

 

- sub-prime residential

17 - 153 - 924 586

587 87 14,627 - 15 106

- 2 14,657 - 780 59

- 94 - - - 33

604 183 29,437 - 1,719 784

50 42 - - 10 106

 

- US Alt-A residential


- US Government agency and sponsored enterprises: MBSs22


- UK buy-to-let residential


- other residential


- commercial property


Leveraged finance-related assets

306                                              40                     -                                            21                      367                             200

 

 

For footnotes, see page 147.

Selected 2017 credit risk disclosures

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

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

Summary of credit risk


At 31 Dec 2017

$bn

Maximum exposure to credit risk                                                                                                                                                                                                                                                                           3,078

- total assets subject to credit risk

2,306

772

- off-balance sheet commitments subject to credit risk7,23

Gross loans and advances                                                                                                                                                                                                                                                                                       1,060

- personal lending

376

684

- wholesale lending

Impaired loans                                                                                                                                                                                                                                                                                                                  15

- personal lending

5

10

- wholesale lending

Impaired loans as a % of gross loans and advances                                                                                                                                                                                                                                                    %

Personal lending                                                                                                                                                                                                                                                                                                              1.3

Wholesale lending                                                                                                                                                                                                                                                                                                           1.5

Total                                                                                                                                                                                                                                                                                                                                    1.5

$bn

Impairment allowances                                                                                                                                                                                                                                                                                                   7.5

- personal lending

1.7

5.8

- wholesale lending

Loans and advances net of impairment allowances                                                                                                                                                                                                                                           1,053



For year ended 31 Dec 2017

$bn

Loan impairment charge                                                                                                                                                                                                                                                                                                 2.0

- personal lending

1.0

1.0

- wholesale lending

Other credit risk provisions                                                                                                                                                                                                                                                                                          (0.2)

1.8

For footnotes, see page 147.

124          HSBC Holdings plc Annual Report and Accounts 2018


Credit exposure (2017)

Maximum exposure to credit risk (Audited)

 


Maximum exposure

$m

                    Offset                       Net

                        $m                        $m

Derivatives                                                                                                                                                                                                                                                   219,818

(204,829)                         14,989

Loans and advances to customers held at amortised cost                                                                                                                                                              962,964

(35,414)                         927,550

- personal

374,762

516,754

71,448

(2,946)

(29,459)

(3,009)

371,816

487,295

68,439

- corporate and commercial

- non-bank financial institutions

Loans and advances to banks at amortised cost                                                                                                                                                                                  90,393

(273)                                  90,120

Reverse repurchase agreements - non-trading                                                                                                                                                                                   201,553

(3,724)                            197,829

Total on-balance sheet exposure to credit risk                                                                                                                                                                               2,305,592

(244,240)                   2,061,352

Total off-balance sheet                                                                                                                                                                                                                            771,908

-                                      771,908

- financial guarantees and similar contracts23

41,422

730,486

-

-

41,422

730,486

- loan and other credit-related commitments7

At 31 Dec 2017                                                                                                                                                                                                                                      3,077,500

(244,240)                   2,833,260

For footnotes, see page 147.


 

 

Distribution of financial instruments by credit quality

(Audited)                                                                                               Neither past due nor impaired









Past due
but not
impaired

$m


Total

             gross          Impairment

         amount           allowances

                 $m                        $m



                Strong                       Good         Satisfactory

                      $m                          $m                        $m

Sub-standard

$m

Impaired

$m

Total $m

 

Cash and balances at central banks

179,155

1,043

407

19

180,624

180,624

Items in the course of collection from other banks

6,322

29

273

4

6,628

6,628

Hong Kong Government certificates of indebtedness

34,186

-

-

-

34,186

34,186

Trading assets

137,983

22,365

26,438

1,949

188,735

188,735

- treasury and other eligible bills

15,412

531

491

1,098



17,532

17,532

 

- debt securities

84,493

9,517

12,978

498



107,486

107,486

 

- loans and advances to banks

15,496

5,778

4,757

26



26,057

26,057

 

- loans and advances to customers

22,582

6,539

8,212

327



37,660

37,660

 

 

HSBC Holdings plc Annual Report and Accounts 2018     125


Report of the Directors | Risk

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

(Audited)                                                                                                                                                   Up to 29 days

Loans and advances to customers and banks held at amortised cost







- personal







- corporate and commercial







- financial







Other financial instruments







At 31 Dec 2017

Impaired loans (2017)

Movement in impaired loans by industry sector
(Audited)

 




Personal

$m

Corporate and commercial

$m

Financial

$m

Total

$m

At 1 Jan 2017



6,490

11,362                                376

18,228

Classified as impaired during the year



2,671

3,691                                     17

6,379

Transferred from impaired to unimpaired during the year



(677)

(1,324)                                  (8)

(2,009)

Amounts written off



(1,330)

(1,257)                                  (53)

(2,640)

Net repayments and other



(2,232)

(2,218)                                  (38)

(4,488)

At 31 Dec 2017



4,922

10,254                                294

15,470








Impaired loans by industry sector and geographical region











North

Latin



Europe

Asia

MENA

America

America

Total


$m

$m

$m

$m

$m

$m

Non-renegotiated impaired loans

4,551

1,645

870

1,180

452

8,698

- personal

1,648

475

227

665

280

3,295

- corporate and commercial

2,895

1,146

639

508

172

5,360

- financial

8

24

4

7

-

43

Renegotiated impaired loans

3,491

604

1,079

1,426

172

6,772

- personal

381

125

120

958

43

1,627

- corporate and commercial

2,926

478

895

466

129

4,894

- financial

184

1

64

2

-

251

At 31 Dec 2017

8,042

2,249

1,949

2,606

624

15,470

Impaired loans % of total gross loans and advances

2.0%

0.5%

5.4%

2.2%

2.6%

1.5%

 

Renegotiated loans and forbearance (2017)

At 31 Dec 2017

Impairment allowances on renegotiated loans

 






Renegotiated loans and advances to customers by industry sector

Renegotiated loans and advances to customers by geographical region

First lien


residential

Other personal

Corporate and

Non-bank financial


mortgages

lending

commercial

institutions

Europe Total

$m

$m

$m

$m

$m $m

Neither past due nor impaired

At 31 Dec 201

476

268

2,082

257

3,0835,667

Past due but not impaired

58

49

120

-

227

Impaired

1,329

298

4,894

251

6,772

 

126          HSBC Holdings plc Annual Report and Accounts 2018


Impairment of loans and advances (2017)

Loan impairment charge to the income statement by industry sector (Audited)


                                                                                                          North                        Latin

                  Europe                      Asia                   MENA               America                  America                    Total

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

Personal                                                                                                                                                                         140                     243                        92                        32                      452                        959

- first lien residential mortgages

6

134

(1)

244

5

87

-

32

(27)

479

(17)

976

- other personal

Corporate and commercial                                                                                                                                        619                     298                        83                     (163)                     90                        927

- manufacturing and international trade and services

314

200

105

236

21

41

95

(4)

(8)

18

9

(190)

59

-

31

722

226

(21)

- commercial real estate and other property-related

- other commercial

Financial                                                                                                                                                                         66                          17                        22                          1                        -                         106

At 31 Dec 2017                                                                                                                                                            825                     558                      197                     (130)                   542                    1,992


Charge for impairment losses as a percentage of average gross loans and advances

to customers by geographical region

                                                                                                            North                      Latin

                  Europe                      Asia                     MENA               America                  America                    Total

                          %                          %                             %                          %                             %                          %

New allowances net of allowance releases                                                                                                           0.33                    0.17                       0.79                    (0.05)                    3.20                      0.29

Recoveries                                                                                                                                                                 (0.09)                    (0.03)                  (0.14)                    (0.07)                  (0.41)                  (0.07)

At 31 Dec 2017                                                                                                                                                          0.24                    0.14                       0.65                    (0.12)                    2.79                      0.22

Amount written off net of recoveries                                                                                                                    0.23                    0.13                       1.35                    0.28                       2.42                      0.28


Movement in impairment allowances by industry sector and by geographical

region

                                                                                                           North                    Latin

              Europe                        Asia                    MENA              America               America                      Total

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

At 1 Jan 2017                                                                                                                                                           2,789                  1,635                    1,681                  1,272                       473                    7,850

Amounts written off

Personal                                                                                                                                                                       (438)                  (366)                     (329)                  (100)                     (487)              (1,720)

- first lien residential mortgages

(8)

(430)

(6)

(360)

(42)

(287)

(26)

(74)

(9)

(478)

(91)

(1,629)

- other personal

Corporate and commercial                                                                                                                                      (648)                  (273)                     (119)                  (273)                        (63)              (1,376)

- manufacturing and international trade and services

(318)

(121)

(209)

(250)

(10)

(13)

(74)

(37)

(8)

(44)

(20)

(209)

(18)

(4)

(41)

(704)

(192)

(480)

- commercial real estate and other property-related

- other commercial

Financial                                                                                                                                                                         (74)                       (1)                        -                           (2)                        -                        (77)

Total amounts written off                                                                                                                                   (1,160)                    (640)                     (448)                  (375)                     (550)              (3,173)

Recoveries of amounts written off in previous years

Personal                                                                                                                                                                       296                        104                        39                          38                        68                        545

- first lien residential mortgages

9

287

4

100

-

39

17

21

25

43

55

490

- other personal

Corporate and commercial                                                                                                                                        35                          10                          2                           37                        13                          97

- manufacturing and international trade and services

10

8

17

9

-

1

1

1

-

11

1

25

3

-

10

34

10

53

- commercial real estate and other property-related

- other commercial

Financial                                                                                                                                                                           2                           -                         -                           -                         -                              2

Total recoveries of amounts written off in previous years                                                                               333                        114                        41                          75                        81                        644

Charge to income statement                                                                                                                                   825                        558                      197                     (130)                     542                    1,992

Exchange and other movements                                                                                                                            274                             5                        (10)                     (51)                        (47)                     171

At 31 Dec 2017                                                                                                                                                       3,061                  1,672                    1,461                       791                      499                    7,484

Impairment allowances against banks:

- individually assessed                                                                                                                                                -                           -                         -                           -                         -                            -

Impairment allowances against customers:

- individually assessed                                                                                                                                           2,296                  1,056                    1,104                       383                      121                    4,960

- collectively assessed                                                                                                                                              765                        616                      357                        408                      378                    2,524

Impairment allowances at 31 Dec 2017                                                                                                             3,061                  1,672                    1,461                       791                      499                    7,484

 

HSBC Holdings plc Annual Report and Accounts 2018    127


Report of the Directors | Risk

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





Banks

Customers


Total

$m

individually assessed

$m

Individually

assessed

$m

Collectively
assessed

$m

At 1 Jan 2017                                                                                                                                                                                                                                                                                                                                                                                                          -

4,932

2,918

7,850

Amounts written off                                                                                                                                                                                                                        -

(1,468)

(1,705)

(3,173)

Recoveries of loans and advances previously written off                                                                                                                                                                                                                        -

119

525

644

Charge to income statement                                                                                                                                                                                                                        -

1,114

878

1,992

Exchange and other movements                                                                                                                                                                                                                        -

263

(92)

171

At 31 Dec 2017                                                                                                                                                                                                                        -

4,960

2,524

7,484

Impairment allowances % of loans and advances                                                                                                                                                                                                                        -

0.5%

0.3%

0.8%

Wholesale lending (2017)




Total wholesale lending for loans and advances to banks and customers24




Gross loans

$m

Impairment allowance

$m

Corporate and commercial                                                                                                                                                                                                                                                    522,248                  (5,494)

                     

- agriculture, forestry and fishing

6,302 10,911 115,531 17,397 2,806 15,443 98,079 24,258 16,971 18,405 114,349 18,094 19,960

221 1,490 5,688 3,003 20,354

-

-

11,728

1,258

(122) (450) (1,390) (88) (3) (540) (1,361) (131) (138) (83)

(638)

(95)

(138)

-

(7)      (34) (14) (235) - -

(8)      (19)

 

- mining and quarrying


- manufacturing


- electricity, gas, steam and air-conditioning supply


- water supply, sewerage, waste management and remediation


- construction


- wholesale and retail trade, repair of motor vehicles and motorcycles


- transportation and storage


- accommodation and food


- publishing, audiovisual and broadcasting


- real estate


- professional, scientific and technical activities


- administrative and support services


- public administration and defence, compulsory social security


- education


- health and care


- arts, entertainment and recreation


- other services


- activities of households


- extra-territorial organisations and bodies activities


- government


- asset-backed securities


Non-bank financial institutions

71,719

(271)

Loans and advances to banks

90,393

-

At 31 Dec 2017

684,360

(5,765)

By geography



Europe

228,775

(2,469)

- of which: UK

163,393

(1,589)

Asia

332,680

(1,402)

- of which: Hong Kong

197,232

(639)

MENA

29,142

(1,131)

North America

76,661

(579)

Latin America

17,102

(184)

At 31 Dec 2017

684,360

(5,765)

For footnotes, see page 147.



 

Wholesale lending: loan and other credit-related commitments7 

North                Latin

Europe                 Asia                MENA                                   America           America                  Total                 UK          Hong Kong

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

For footnotes, see page 147.

128          HSBC Holdings plc Annual Report and Accounts 2018


Commercial real estate (2017) Commercial real estate lending


North

Europe                        Asia                   MENA                  America       Latin America                       Total                      UK                Hong Kong

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


Gross loans and advances

On demand, overdrafts or revolving


< 1 year                                                                                                       5,734                18,038                      268

1-2 years                                                                                           4,780                11,549                               119

2-5 years                                                                                         14,770                25,395                               117

> 5 years                                                                                             2,309                  5,986                               183

At 31 Dec 2017                                                                                      27,593                60,968                      687


4,678                       260

1,178                         58

2,199                       734

862                          454

8,917                   1,506


 

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

(Audited)




Of which:





Report of the Directors | Risk

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

(Audited)                                                                                                                                                                                                                                                                            Of which:

    Total                           UK               Hong Kong                        US

     $m                           $m                          $m                        $m

      

Rated CRR/ EL8





Not collateralised

3,722

319

15

1,708

Fully collateralised

554

104

5

48

- LTV ratio: less than 50%

188 157 39 170

25 66 11 2

3 2 - -

7

34

2

5

 

- 51% to 75%


- 76% to 90%


- 91% to 100%


Partially collateralised (A):

493

92

135

42

- Collateral value on A

206

59

10

21

Total

4,769

515

155

1,798

Rated CRR/ EL9 to 10





Not collateralised

3,734

1,508

511

3

Fully collateralised

2,572

1,223

98

317

- less than 50%

804 606 398 764

516 403 235 69

60 10 21 7

-

6

-

311

 

- 51% to 75%


- 76% to 90%


- 91% to 100%


 

Partially collateralised (B):

1,750 877 8,056 12,825


398

209

3,129

3,644

167

425

300

745

2,543

- Collateral value on B


123

Total


776

At 31 Dec 2017


931

Personal lending (2017)


Total personal lending gross loans

 

Europe

$m

Asia
$m

MENA North America Latin America

$m                                  $m                      $m

Total
$m

Total as a % of total gross

UK                     Hong Kong                 loans

$m                                 $m

First lien residential mortgages

126,685

109,502

2,375

37,330

2,281

278,173

119,770

70,279

26.2

- of which:










interest only (including offset)

35,242

873

65

92

-

36,272

33,468

-

3.4

affordability (including US adjustable rate mortgages)

409

3,111

-

13,742

-

17,262

-

3

1.6

Other personal lending

43,329

40,880

4,496

5,227

4,376

98,308

19,790

27,868

9.3

- other

32,995

29,400

2,663

2,919

2,205

70,182

10,039

19,977

6.7

 

- credit cards

10,235

11,435

1,531

1,037

1,642

25,880

9,751

7,891

2.4

 

- second lien residential mortgages

99

21

2

1,233

-

1,355

-

-

0.1

 

- motor vehicle finance

-

24

300

38

529

891

-

-

0.1

 

At 31 Dec 2017

170,014

50,384


150,382

120,312

6,871                              42,557               6,657

376,481

194,310

139,560             98,147                35.5

Loan and other credit-related commitments


3,975                              14,443               5,196

48,413                89,994

Total personal lending impairment allowances

First lien residential mortgages

Other personal lending

- other

230

109

132

17

151

639                                      147                    36

- credit cards

111

128

122

30

140

531                                      110                    50

- second lien residential mortgages

-

-

-

13

-

13                                           -                      -

- motor vehicle finance

-

-

5

-

7

12                                           -                      -

 

At 31 Dec 2017

603

267

327

208

314

1,719

402

86

Impairment allowances % of impaired loans

29.7%

44.5%

94.2%

12.8%

97.2%

34.9%

28.3%

62.3%

 


130      HSBC Holdings plc Annual Report and Accounts 2018


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

Total                           UK                   Hong Kong                              US

  $m                           $m                               $m                             $m

Non-impaired loans and advances

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

 

          

- LTV ratio: less than 50%

164,110 48,287 37,054 25,893 9,445 2,299

69,679 20,706 15,422 11,992 5,824 1,113

55,237 8,340 3,282 3,402 1,376 436

7,868 4,180 2,832 1,312

42

6

 

- 51% to 60%


- 61% to 70%


- 71% to 80%


- 81% to 90%


- 91% to 100%


Partially collateralised:



Greater than 100% (A)

660

174                                                     -                               -

- 101% to 110%

270

89

-

-

- 111% to 120%

121

16

-

-

- greater than 120%

269

69

-

-

Collateral on A

550

125                                                     -                               -

Non-impaired loans and advances

287,748

124,910                                   72,073                     16,240

Impaired loans and advances



Fully collateralised

3,004

1,00846                                                                        1,138

- LTV ratio: less than 50%

1,238 518 416 354 323 155

538 196 130 85 40 19

42 3 - 1 - -

414 207 178 160 115 64

 

- 51% to 60%


- 61% to 70%


- 71% to 80%


- 81% to 90%


- 91% to 100%


Partially collateralised:




Greater than 100% (B)

342

38                                                        -

36

- 101% to 110%

101

15

-

19

- 111% to 120%

61

5

-

11

- greater than 120%

180

18

-

6

Collateral on B

269

31                                                        -

33

Impaired loans and advances

3,346

1,046                                                 46

1,174

At 31 Dec 2017

291,094

125,956                                    72,119

17,414

 

HSBC Holdings plc Annual Report and Accounts 2018     131


Report of the Directors | Risk

Supplementary information (2017)

Wholesale gross loans and advances to customers by country/territory

Gross loans                                                                                                   Impairment allowances

Non-bank

Corporate and

commercial       Of which: real                  financial

estate21             institutions

$m                          $m

$m

(2,286)                      (371)                     (183)

- UK

130,121

14,609

27,829


(1,390)

(299)

(180)


- France

32,647

5,597

2,048


(542)

(34)

-


- Germany

9,690

250

1,156


(51)

-

(2)


- Switzerland

1,244

1

531


-

-

-


- other

8,799

3,787

529


(303)

(38)

(1)


(1,375)                         (43)                       (27)

- Hong Kong

156,198

51,787

15,346

171,544

(613)

(30)

(26)

(639)

- Australia

11,311

1,987

2,355

13,666

(75)

(4)

-

(75)

- India

5,382

1,030

2,165

7,547

(95)

(3)

(1)

(96)

- Indonesia

4,157

18

114

4,271

(254)

-

-

(254)

- mainland China

26,052

8,953

4,824

30,876

(224)

(2)

-

(224)

- Malaysia

7,489

1,555

331

7,820

(34)

-

-

(34)

- Singapore

17,541

2,890

259

17,800

(41)

(2)

-

(41)

- Taiwan

5,176

11

185

5,361

(4)

-

-

(4)

- other

17,644

2,323

732

18,376

(35)

(2)

-

(35)

For footnotes, see page 147.

132          HSBC Holdings plc Annual Report and Accounts 2018


Personal gross loans and advances to customers by country/territory

Gross loans                                                                              Impairment allowances

First lien

residential                                     Of which:

mortgages Other personal       credit cards

$m                                                  $m     $m

Europe                                                                                                                                   126,685             43,329             10,235

- UK

119,770

19,790

9,751


(145)


(110)


- France

2,910

16,650

420


(33)


-


- Germany

1

234

-


-


-


- Switzerland

839

5,776

-


-


-


- other

3,165

879

64


(84)


(1)


(30)

- Hong Kong

70,279 12,444 1,185 64 8,877 3,003 5,760 4,877 3,013

27,868 838 441 322 1,170 3,385 4,952 822 1,082

7,891 749 193 225 289 837 419 283 549


- (2) (4) - (2) (14) - (1)

(7)


(50)

(18)

(4)

(11)

(5)

(20)

(6)

(2)

(12)


- Australia

- India

- Indonesia

- mainland China

- Malaysia

- Singapore

- Taiwan

- other

Middle East and North Africa (excluding Saudi Arabia)

- Egypt

-   UAE

-   other
North America

-   US

-   Canada

-   other
Latin America

-   Mexico

-   other
At 31 Dec 2017


Carrying amount of HSBC's consolidated holdings of ABSs

Designated at fair value

  through profit or             Loans and

  Trading Available for sale Held to maturity                         loss           receivables

$m                        $m                          $m                          $m                        $m

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

- sub-prime residential

22 - 331 814 600

918 1,102 11,750 181 270

- 3 13,962 - -

- - - - -

32

-

-

1,595

135


484 1,041 - 75 226

- US Alt-A residential

- US Government agency and sponsored enterprises: MBSs

- other residential

- commercial property

 

Leveraged finance-related assets

128

373

-

Student loan-related assets

155

2,198

-

Other assets

1,266

731

-

At 31 Dec 2017

3,316

17,523

13,965

 


HSBC Holdings plc Annual Report and Accounts 2018     133


 


Liquid assets of HSBC's principal entities


 


For footnotes, see page 147.

Sources of funding

(Audited)

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

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


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

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

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


HSBC Holdings plc Annual Report and Accounts 2018    135


Report of the Directors | Risk

Funding sources


 


For footnotes, see page 147.

Wholesale term debt maturity profile

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

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

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

 

Debt securities issued

8,091                                13,362                15,808                10,241                    5,447                21,811               70,462                63,914         209,136

- unsecured CDs and CP

4,378

7,640

10,696

6,546

818

529

764

1,031

32,402

- unsecured senior MTNs

467

1,233

3,107

2,263

2,172

11,252

55,307

54,256

130,057

- unsecured senior structured notes

817

821

1,452

1,029

2,394

3,005

7,021

4,473

21,012

- secured covered bonds

-

-

205

-

-

1,190

3,469

1,137

6,001

- secured asset-backed
commercial paper

2,094

-

-

-

-

-

-

-

2,094

- secured ABS

-

-

-

-

-

-

-

327

327

- others

335

3,668

348

403

63

5,835

3,901

2,690

17,243

Subordinated liabilities

-                                               95                   2,007                       -                           -                    2,021                  1,383                31,131           36,637

- subordinated debt securities

-                                               95                   2,007                       -                           -                    2,021                1,383

28,934

34,440

- preferred securities

-                                               -                         -                         -                           -                         -                         -

2,197

2,197

At 31 Dec 2018

8,091                                13,457                17,815                10,241                    5,447                23,832               71,845                95,045         245,773

 

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

- unsecured CDs and CP

1,085

3,636

4,334

3,064

6,132

137

386

277

19,051

- unsecured senior MTNs

1,614

2,973

3,047

2,924

5,109

6,564

41,090

39,544

102,865

- unsecured senior structured notes

1,298

1,796

2,054

1,935

2,870

4,586

10,156

5,328

30,023

- secured covered bonds

-

-

-

209

-

212

2,494

1,655

4,570

- secured asset-backed










commercial paper

3,479

-

-

-

-

-

-

-

3,479

- secured ABS

-

-

-

-

-

-

914

436

1,350

- others

26

4

-

-

1,000

1,501

307

994

3,832

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

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

- preferred securities                                                                  -                         -                         -                         -                           -                         -                     459

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

136          HSBC Holdings plc Annual Report and Accounts 2018


Contractual maturity of financial liabilities

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


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

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


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

HSBC Holdings plc Annual Report and Accounts 2018     137


Report of the Directors | Risk

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

 


Footnotes

Amounts owed to HSBC undertakings

Financial liabilities designated at fair value

Derivatives

Debt securities in issue

Subordinated liabilities

Other financial liabilities

Loan commitments

Financial guarantees                                                                                                       8

At 31 Dec 2018


 

 


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

·     trading portfolios; and

·     non-trading portfolios.

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

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

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

Trading portfolios

Value at risk of the trading portfolios

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


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

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

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

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

The effects of portfolio diversification reduced the overall trading VaR.


138          HSBC Holdings plc Annual Report and Accounts 2018


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

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

 

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


Trading VaR, 99% 1 day35
(Audited)


 


Back-testing

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

Non-trading portfolios

Value at risk of the non-trading portfolios

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


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

There was no evidence of model errors or control failures.

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

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

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

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


HSBC Holdings plc Annual Report and Accounts 2018     139


Report of the Directors | Risk

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

 

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

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


 


Balance at 31 Dec 2018 Average

Maximum

Minimum


 

 


140          HSBC Holdings plc Annual Report and Accounts 2018


Net structural foreign exchange exposures

Net interest income sensitivity

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

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

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

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

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


For footnotes, see page 147.

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

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

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

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

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

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


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


 


 

227

179

147

50

203

806

(287)

(305)

(181)

8

(160)

(925)

845

711

600

412

731

3,299

(1,444)

(1,425)

(631)

31

(732)

(4,201)

 


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

HSBC Holdings plc Annual Report and Accounts 2018     141


Report of the Directors | Risk

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

  Year 1                   Year 2                     Year 3                   Year 4                     Year 5                     Total

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


 


Sensitivity of capital and reserves

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


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

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


 


Sensitivity of cash flow hedging reported reserves to interest rate movements

Maximum

Minimum

impact

impact

$m                                   $m


 


Defined benefit pension schemes

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

Additional market risk measures applicable only to the parent company


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

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


142          HSBC Holdings plc Annual Report and Accounts 2018


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

Foreign exchange risk

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

HSBC Holdings - foreign exchange VaR

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


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

Sensitivity of net interest income

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

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


 


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

US dollar               HK dollar                  Sterling                         Euro                        Other                         Total

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

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

Year 1                       Year 2                    Year 3                       Year 4                       Year 5                         Total

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


 


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

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


Interest rate repricing gap table

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


Repricing gap analysis of HSBC Holdings


Footnotes

Cash at bank and in hand:


- balances with HSBC undertakings

3,509                                            3,509                              -                              -                              -                               -

Derivatives

707                                                       -                              -                              -                              -                           707

HSBC Holdings plc Annual Report and Accounts 2018    143


Report of the Directors | Risk


Loans and advances to HSBC undertakings

Financial investments in HSBC undertakings

Investments in subsidiaries

Other assets

Total assets

Amounts owed to HSBC undertakings

Financial liabilities designated at fair values

Derivatives

Debt securities in issue

Other liabilities

Subordinated liabilities

Total equity

Total liabilities and equity

Off-balance sheet items attracting interest rate sensitivity

Net interest rate risk gap at 31 Dec 2018

Cumulative interest rate gap


Cash at bank and in hand:


 


Operational risk profile

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

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

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

Operational risk exposures in 2018

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

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

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

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

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

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

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

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

Operational risk losses in 2018


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


144          HSBC Holdings plc Annual Report and Accounts 2018






Insurance manufacturing operations risk profile

Insurance manufacturing operations risk in 2018

Page

145

Key risk types

148

- Market risk

148

- Credit risk

149

- Liquidity risk

149

HSBC's bancassurance model

145

- Insurance risk

149

Measurement

145




Insurance manufacturing operations risk in 2018

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

HSBC's bancassurance model

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

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

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

Measurement
(Audited)

The risk profile of our insurance manufacturing businesses is measured using an economic capital approach. Assets and liabilities are measured on a market value basis, and a capital requirement is defined to ensure that there is a less than one-in-200 chance of insolvency over a one-year time horizon, given the risks to which the businesses are exposed. The methodology for the economic capital calculation is largely aligned to the pan-European Solvency II insurance capital regulations. The economic capital coverage


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

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

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

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

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

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

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

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


 


HSBC Holdings plc Annual Report and Accounts 2018     145


Report of the Directors | Risk

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


 


- trading assets

- 15,533 286 29,302 15,280 4,711

-

8,814 - - - 267

-

2,951

13 6,396 4,836 653

-

1,259

41 3,331 1,877 154

- 28,557 340 39,029 21,993 5,785

- financial assets designated at fair value

- derivatives

- financial investments - HTM                                                                                                          44

- financial investments - AFS                                                                                                            44

- other financial assets                                                                                                                       41

 

Reinsurance assets


1,108

274

1,154

-

2,536

PVIF

42

-

-

-

6,610

6,610

Other assets and investment properties


1,975

2

164

1,126

3,267

Total assets


68,195

9,357

16,167

14,398

108,117

Liabilities under investment contracts designated at fair value


-

1,750

3,885

-

5,635

Liabilities under insurance contracts


67,137

7,548

10,982

-

85,667

Deferred tax

43

14

6

9

1,230

1,259

Other liabilities


-

-

-

3,325

3,325

Total liabilities


67,151

9,304

14,876

4,555

95,886

Total equity


-

-

-

12,231

12,231

Total liabilities and equity at 31 Dec 2017


67,151

9,304

14,876

16,786

108,117

For footnotes, see page 147.







 


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

Footnotes


Financial assets

28,631                                            66,793                            1,320                        96,744

- trading assets

-

13,142

121 296 12,453 2,619

-

15,774

116 48,595 440 1,868

-

326

-

522

441

31

-

29,242

237 49,413 13,334 4,518

- financial assets designated and otherwise mandatorily measured at fair value through profit or loss

- derivatives

- financial investments - at amortised cost

- financial investments - at fair value through other comprehensive income

- other financial assets                                                                                                                                          41

Reinsurance assets

249                                                     2,438                                   5                         2,692

 

PVIF                                                                                                                                                                                                                                                                                                                                                                 42

Other assets and investment properties

Total assets

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

Deferred tax                                                                                                                                                                 43

Other liabilities

Total liabilities

Total equity

Total liabilities and equity at 31 Dec 2018

 

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

- trading assets

- 12,430 169 - 15,144 2,488

- 15,633 171 38,506 6,393 3,270

-

494

-

523

456

27

- 28,557 340 39,029 21,993 5,785

- financial assets designated at fair value

- derivatives

- financial investments - HTM                                                                                                                             44

- financial investments - AFS                                                                                                                                44

- other financial assets                                                                                                                                          41

 

Reinsurance assets


469

2,063

4

2,536

PVIF

42

773

5,709

128

6,610

Other assets and investment properties


1,666

1,577

24

3,267

Total assets


33,139

73,322

1,656

108,117

Liabilities under investment contracts designated at fair value


739

4,896

-

5,635

Liabilities under insurance contracts


28,416

56,047

1,204

85,667

Deferred tax

43

217

1,033

9

1,259

Other liabilities


2,043

1,209

73

3,325

Total liabilities


31,415

63,185

1,286

95,886

Total equity


1,724

10,137

370

12,231

Total liabilities and equity at 31 Dec 2017


33,139

73,322

1,656

108,117

 


146     HSBC Holdings plc Annual Report and Accounts 2018



HSBC Holdings plc Annual Report and Accounts 2018     147


Report of the Directors | Risk


Key risk types

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

Market risk

(Audited)

Description and exposure

Market risk is the risk of changes in market factors affecting HSBC's capital or profit. Market factors include interest rates, equity and growth assets and foreign exchange rates.

Our exposure varies depending on the type of contract issued. Our most significant life insurance products are contracts with discretionary participating features ('DPF') issued in France and Hong Kong. These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in bonds, with a proportion allocated to other asset classes to provide customers with the potential for enhanced returns.

DPF products expose HSBC to the risk of variation in asset returns, which will impact our participation in the investment performance.


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

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

Where local rules require, these reserves are held as part of liabilities under insurance contracts. Any remainder is accounted for as a deduction from the present value of in-force ('PVIF') long-term insurance business on the relevant product. The following table shows the total reserve held for the cost of guarantees, the range of investment returns on assets supporting these products and the implied investment return that would enable the business to meet the guarantees.

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

For unit-linked contracts, market risk is substantially borne by the policyholder, but some market risk exposure typically remains, as fees earned are related to the market value of the linked assets.


 


148          HSBC Holdings plc Annual Report and Accounts 2018


Credit risk

(Audited)

Description and exposure

Credit risk is the risk of financial loss if a customer or counterparty fails to meet their obligation under a contract. It arises in two main areas for our insurance manufacturers:

·     risk associated with credit spread volatility and default by debt security counterparties after investing premiums to generate a return for policyholders and shareholders; and

·     risk of default by reinsurance counterparties and non-reimbursement for claims made after ceding insurance risk.

Liquidity risk

(Audited)

Description and exposure

Liquidity risk is the risk that an insurance operation, though solvent, either does not have sufficient financial resources available to meet its obligations when they fall due, or can secure them only at excessive cost.

The following table shows the expected undiscounted cash flows for insurance liabilities at 31 December 2018. The liquidity risk exposure is


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

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

Credit risk on assets supporting unit-linked liabilities is predominantly borne by the policyholder. Therefore, our exposure is primarily related to liabilities under non-linked insurance and investment contracts and shareholders' funds. The credit quality of insurance financial assets is included in the table on page 100. The risk associated with credit spread volatility is to a large extent mitigated by holding debt securities to maturity, and sharing a degree of credit spread experience with policyholders.

wholly borne by the policyholder in the case of unit-linked business and is shared with the policyholder for non-linked insurance.

The profile of the expected maturity of insurance contracts at 31 December 2018 remained comparable with 2017.

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


Expected maturity of insurance contract liabilities
(Audited)

Expected cash flows (undiscounted)

Within 1 year                       1-5 years                   5-15 years             Over 15 years                              Total

$m                                $m                               $m                               $m                                 $m


 

1,119

2,932

2,684

1,962

8,697

7,459

27,497

46,217

55,989

137,162

 


 


 

969

3,041

4,695

6,814

15,519

6,916

26,453

43,784

45,334

122,487

7,885

29,494

48,479

52,148

138,006

 


Insurance risk

Description and exposure

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

Sensitivities
(Audited)

The following table shows the sensitivity of profit and total equity to reasonably possible changes in non-economic assumptions across all our insurance manufacturing subsidiaries.

Mortality and morbidity risk is typically associated with life insurance contracts. The effect on profit of an increase in mortality or morbidity depends on the type of business being written. Our largest exposures to mortality and morbidity risk exist in Hong Kong and Singapore.

Sensitivity analysis
(Audited)


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

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

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

Sensitivity to lapse rates depends on the type of contracts being written. For a portfolio of term assurance, an increase in lapse rates typically has a negative effect on profit due to the loss of future income on the lapsed policies. However, some contract lapses have a positive effect on profit due to the existence of policy surrender charges. We are most sensitive to a change in lapse rates on unit-linked and universal life contracts in Hong Kong and Singapore, and DPF contracts in France.

Expense rate risk is the exposure to a change in the cost of administering insurance contracts. To the extent that increased expenses cannot be passed on to policyholders, an increase in expense rates will have a negative effect on our profits.


 


Effect on profit after tax and total equity at 31 Dec

10% increase in mortality and/or morbidity rates

10% decrease in mortality and/or morbidity rates

10% increase in lapse rates

10% decrease in lapse rates

10% increase in expense rates

10% decrease in expense rates


HSBC Holdings plc Annual Report and Accounts 2018       149


Report of the Directors | Risk


Footnotes to Risk

1          Customer risk rating ('CRR').

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

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

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

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

5          The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.

6          Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the consolidated balance sheet on page 216 includes both financial and non-financial assets.

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

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

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

10       Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is recognised in 'Change in expected credit losses and other credit impairment charges' in the income statement.

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

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

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

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

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

16       ECL sensitivities exclude portfolios utilising less complex modelling approaches.

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

18       For the purposes of this disclosure gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.

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

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

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

22       US mortgage-backed securities.

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


150             HSBC Holdings plc Annual Report and Accounts 2018


HSBC Holdings plc Annual Report and Accounts 2018                151


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