RNS Number : 6664F
HSBC Holdings PLC
11 March 2020
 


10

Segmental analysis

The Group Chief Executive, supported by the rest of the GMB, is considered the Chief Operating Decision Maker ('CODM') for the purposes of identifying the Group's reportable segments. Global business results are assessed by the CODM on the basis of adjusted performance that removes the effects of significant items and currency translation from reported results. We therefore present these results on an adjusted basis as required by IFRSs. The 2018 and 2017 adjusted performance information is presented on a constant currency basis. The 2018 and 2017 income statements are converted at the average rates of exchange for 2019, and the balance sheets at 31 December 2018 and 31 December 2017 at the prevailing rates of exchange on 31 December 2019.

Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully attributed to global businesses. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs that are not allocated to global businesses are included in Corporate Centre.

Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. The intra-Group elimination items for the global businesses are presented in Corporate Centre.

Our global businesses

HSBC provides a comprehensive range of banking and related financial services to its customers in its four global businesses. The products and services offered to customers are organised by these global businesses.

•    RBWM offers a broad range of products and services to meet the personal banking and wealth management needs of individual customers. Typically, customer offerings include personal banking products, such as current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services, as well as wealth management services, including insurance and investment products, global asset management services and financial planning services.

•    CMB offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. CMB also offers its customers access to products and services offered by other global businesses, such as GB&M, which include foreign exchange products, raising capital on debt and equity markets and advisory services.

•    GB&M provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services, a markets business that provides services in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.

•    GPB provides a range of services to high net worth individuals and families with complex and international needs within the Group's major markets.


HSBC adjusted profit before tax and balance sheet data

 

 

2019

 

 

Retail
Banking and
Wealth
Management

Commercial
Banking

Global
Banking and
Markets

Global
Private
Banking

Corporate Centre

Total

 

Footnotes

$m

$m

$m

$m

$m

$m

Net operating income/(expense) before change in expected credit losses and other credit impairment charges

1

23,400

 

15,292

 

14,916

 

1,848

 

(47

)

55,409

 

-  external

 

17,026

 

14,805

 

18,517

 

1,445

 

3,616

 

55,409

 

-  inter-segment

 

6,374

 

487

 

(3,601

)

403

 

(3,663

)

-

 

of which: net interest income/(expense)

 

16,525

 

11,226

 

5,601

 

879

 

(3,612

)

30,619

 

Change in expected credit losses and other credit impairment charges

 

(1,390

)

(1,184

)

(153

)

(22

)

(7

)

(2,756

)

Net operating income/(expense)

 

22,010

 

14,108

 

14,763

 

1,826

 

(54

)

52,653

 

Total operating expenses

 

(14,017

)

(6,801

)

(9,417

)

(1,424

)

(1,136

)

(32,795

)

Operating profit/(loss)

 

7,993

 

7,307

 

5,346

 

402

 

(1,190

)

19,858

 

Share of profit in associates and joint ventures

 

55

 

-

 

-

 

-

 

2,299

 

2,354

 

Adjusted profit before tax

 

8,048

 

7,307

 

5,346

 

402

 

1,109

 

22,212

 

 

 

%

%

%

%

%

%

Share of HSBC's adjusted profit before tax

 

36.2

 

32.9

 

24.1

 

1.8

 

5.0

 

100.0

 

Adjusted cost efficiency ratio

 

59.9

 

44.5

 

63.1

 

77.1

 

(2,417.0

)

59.2

 

Adjusted balance sheet data

 

$m

$m

$m

$m

$m

$m

Loans and advances to customers (net)

 

395,393

 

346,060

 

246,266

 

47,593

 

1,431

 

1,036,743

 

Interests in associates and joint ventures

 

449

 

-

 

-

 

-

 

24,025

 

24,474

 

Total external assets

 

526,621

 

367,509

 

1,066,584

 

52,224

 

702,214

 

2,715,152

 

Customer accounts

 

689,283

 

386,522

 

292,284

 

62,943

 

8,083

 

1,439,115

 

 



 

HSBC adjusted profit before tax and balance sheet data (continued)

 

 

 

2018

 

 

Retail
Banking
and Wealth
Management

Commercial
Banking

Global
Banking and
Markets

Global
Private
Banking

Corporate Centre

Total

 

Footnotes

$m

$m

$m

$m

$m

$m

Net operating income/(expense) before change in expected credit losses and other credit impairment charges

1

21,374

 

14,465

 

15,025

 

1,757

 

(290

)

52,331

 

-  external

 

16,794

 

14,226

 

17,554

 

1,474

 

2,283

 

52,331

 

-  inter-segment

 

4,580

 

239

 

(2,529

)

283

 

(2,573

)

-

 

of which: net interest income/(expense)

 

15,432

 

10,380

 

5,122

 

873

 

(2,189

)

29,618

 

Change in expected credit losses and other credit impairment (charges)/recoveries

 

(1,134

)

(712

)

31

 

7

 

119

 

(1,689

)

Net operating income/(expense)

 

20,240

 

13,753

 

15,056

 

1,764

 

(171

)

50,642

 

Total operating expenses

 

(13,255

)

(6,275

)

(9,170

)

(1,425

)

(1,781

)

(31,906

)

Operating profit/(loss)

 

6,985

 

7,478

 

5,886

 

339

 

(1,952

)

18,736

 

Share of profit in associates and joint ventures

 

33

 

-

 

-

 

-

 

2,413

 

2,446

 

Adjusted profit before tax

 

7,018

 

7,478

 

5,886

 

339

 

461

 

21,182

 

 

 

%

%

%

%

%

%

Share of HSBC's adjusted profit before tax

 

33.1

 

35.3

 

27.8

 

1.6

 

2.2

 

100.0

 

Adjusted cost efficiency ratio

 

62.0

 

43.4

 

61.0

 

81.1

 

(614.1

)

61.0

 

Adjusted balance sheet data

 

$m

$m

$m

$m

$m

$m

Loans and advances to customers (net)

 

367,917

 

337,099

 

247,125

 

39,602

 

2,533

 

994,276

 

Interests in associates and joint ventures

 

398

 

-

 

-

 

-

 

21,903

 

22,301

 

Total external assets

 

482,967

 

364,638

 

1,025,737

 

45,520

 

670,333

 

2,589,195

 

Customer accounts

 

649,172

 

362,274

 

294,584

 

65,053

 

8,655

 

1,379,738

 

 

 

 

2017

 

 

Retail
Banking and
Wealth
Management

Commercial
Banking

Global
Banking and
Markets

Global
Private
Banking

Corporate Centre

Total

 

Footnotes

$m

$m

$m

$m

$m

$m

Net operating income before loan impairment charges and other credit risk provisions

1

19,708

 

12,883

 

14,823

 

1,698

 

1,061

 

50,173

 

-  external

 

16,582

 

13,009

 

16,086

 

1,433

 

3,063

 

50,173

 

-  inter-segment

 

3,126

 

(126

)

(1,263

)

265

 

(2,002

)

-

 

of which: net interest income/(expense)

 

13,573

 

8,822

 

4,746

 

812

 

(499

)

27,454

 

Loan impairment charges and other credit risk provisions/(recoveries)

 

 

(941

)

(468

)

(439

)

(17

)

179

 

(1,686

)

Net operating income

 

18,767

 

12,415

 

14,384

 

1,681

 

1,240

 

48,487

 

Total operating expenses

 

(12,386

)

(5,770

)

(8,709

)

(1,384

)

(2,010

)

(30,259

)

Operating profit/(loss)

 

6,381

 

6,645

 

5,675

 

297

 

(770

)

18,228

 

Share of profit in associates and joint ventures

 

12

 

-

 

-

 

-

 

2,316

 

2,328

 

Adjusted profit before tax

 

6,393

 

6,645

 

5,675

 

297

 

1,546

 

20,556

 

 

 

%

%

%

%

%

%

Share of HSBC's adjusted profit before tax

 

31.1

 

32.3

 

27.6

 

1.4

 

7.6

 

100.0

 

Adjusted cost efficiency ratio

 

62.8

 

44.8

 

58.8

 

81.5

 

189.4

 

60.3

 

Adjusted balance sheet data

 

$m

$m

$m

$m

$m

$m

Loans and advances to customers (net)

 

337,768

 

308,870

 

246,890

 

40,013

 

7,382

 

940,923

 

Interests in associates and joint ventures

 

364

 

-

 

-

 

-

 

21,558

 

21,922

 

Total external assets

 

457,126

 

340,211

 

960,732

 

46,706

 

667,822

 

2,472,597

 

Customer accounts

 

629,442

 

356,488

 

276,634

 

65,491

 

11,017

 

1,339,072

 


1   Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions, also referred to as revenue.

Reported external net operating income is attributed to countries and territories on the basis of the location of the branch responsible for reporting the results or advancing the funds:

 

 

2019

2018

2017

 

Footnotes

$m

$m

$m

Reported external net operating income by country/territory

1

56,098

 

53,780

 

51,445

 

-  UK

 

9,011

 

10,340

 

11,057

 

-  Hong Kong

 

18,449

 

17,162

 

14,992

 

-  US

 

4,471

 

4,379

 

4,573

 

-  France

 

1,942

 

1,898

 

2,203

 

-  other countries

 

22,225

 

20,001

 

18,620

 

1   Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions, also referred to as revenue.

 

Adjusted results reconciliation

 

 

2019

2018

2017

 

 

Adjusted

Significant items

Reported

Adjusted

Currency translation

Significant items

Reported

Adjusted

Currency translation

Significant items

Reported

 

Footnotes

$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

Revenue

1

55,409

 

689

 

56,098

 

52,331

 

1,617

 

(168

)

53,780

 

50,173

 

1,344

 

(72

)

51,445

 

ECL

 

(2,756

)

-

 

(2,756

)

(1,689

)

(78

)

-

 

(1,767

)

N/A

N/A

N/A

N/A

LICs

 

N/A

N/A

N/A

N/A

N/A

N/A

N/A

(1,686

)

(83

)

-

 

(1,769

)

Operating expenses

 

(32,795

)

(9,554

)

(42,349

)

(31,906

)

(1,109

)

(1,644

)

(34,659

)

(30,259

)

(915

)

(3,710

)

(34,884

)

Share of profit in associates and joint ventures

 

2,354

 

-

 

2,354

 

2,446

 

90

 

-

 

2,536

 

2,328

 

47

 

-

 

2,375

 

Profit/(loss) before tax

 

22,212

 

(8,865

)

13,347

 

21,182

 

520

 

(1,812

)

19,890

 

20,556

 

393

 

(3,782

)

17,167

 


1  Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions, also referred to as revenue.

Adjusted balance sheet reconciliation

 

2019

2018

2017

 

Reported and adjusted

Adjusted

Currency translation

Reported

Adjusted

Currency translation

Reported

 

$m

$m

$m

$m

$m

$m

$m

Loans and advances to customers (net)

1,036,743

 

994,276

 

(12,580

)

981,696

 

940,923

 

22,041

 

962,964

 

Interests in associates and joint ventures

24,474

 

22,301

 

106

 

22,407

 

21,922

 

822

 

22,744

 

Total external assets

2,715,152

 

2,589,195

 

(31,071

)

2,558,124

 

2,472,597

 

49,174

 

2,521,771

 

Customer accounts

1,439,115

 

1,379,738

 

(17,095

)

1,362,643

 

1,339,072

 

25,390

 

1,364,462

 

 

Adjusted profit reconciliation

 

 

2019

2018

2017

 

Footnotes

$m

$m

$m

Year ended 31 Dec

 

 

 

 

Adjusted profit before tax

 

22,212

 

21,182

 

20,556

 

Significant items

 

(8,865

)

(1,812

)

(3,782

)

-  customer redress programmes (revenue)

 

(163

)

53

 

(108

)

-  disposals, acquisitions and investment in new businesses (revenue)

 

768

 

(113

)

274

 

-  fair value movements on financial instruments

1

84

 

(100

)

(245

)

-  costs of structural reform

2

(158

)

(361

)

(420

)

-  costs to achieve

 

-

 

-

 

(3,002

)

-  customer redress programmes (operating expenses)

 

(1,281

)

(146

)

(655

)

-  disposals, acquisitions and investment in new businesses (operating expenses)

 

-

 

(52

)

(53

)

-  gain on partial settlement of pension obligation

 

-

 

-

 

188

 

-  goodwill impairment

 

(7,349

)

-

 

-

 

-  past service costs of guaranteed minimum pension benefits equalisation

 

-

 

(228

)

-

 

-  restructuring and other related costs

 

(827

)

(66

)

-

 

-  settlements and provisions in connection with legal and other regulatory matters

 

61

 

(816

)

198

 

-  currency translation on significant items

 

 

17

 

41

 

Currency translation

 

 

520

 

393

 

Reported profit before tax

 

13,347

 

19,890

 

17,167

 

1   Fair value movements on financial instruments include non-qualifying hedges and debt value adjustments on derivatives.

2   Comprises costs associated with preparations for the UK's exit from the European Union, costs to establish the UK ring-fenced bank (including the UK ServCo group) and costs associated with establishing an intermediate holding company in Hong Kong.



11

Trading assets

 

 

 

2019

2018

 

Footnotes

$m

$m

Treasury and other eligible bills

 

21,789

 

22,674

 

Debt securities

 

126,043

 

130,539

 

Equity securities

 

78,827

 

60,896

 

Trading securities

 

226,659

 

214,109

 

Loans and advances to banks

1

8,402

 

10,425

 

Loans and advances to customers

1

19,210

 

13,596

 

Year ended 31 Dec

 

254,271

 

238,130

 

1   Loans and advances to banks and customers include reverse repos, stock borrowing and other accounts.

 

Trading securities1

 

 

 

 

 

2019

2018

 

Footnotes

$m

$m

US Treasury and US Government agencies

2

25,722

 

34,664

 

UK Government

 

10,040

 

9,710

 

Hong Kong Government

 

9,783

 

10,772

 

Other governments

 

72,456

 

66,530

 

Asset-backed securities

3

4,691

 

3,351

 

Corporate debt and other securities

 

25,140

 

28,186

 

Equity securities

 

78,827

 

60,896

 

At 31 Dec

 

226,659

 

214,109

 

1   Included within these figures are debt securities issued by banks and other financial institutions of $17,846m (2018: $18,918m), of which $2,637m (2018: $2,367m) are guaranteed by various governments.

2   Includes securities that are supported by an explicit guarantee issued by the US Government.

3   Excludes asset-backed securities included under US Treasury and US Government agencies.


12

Fair values of financial instruments carried at fair value

Control framework

Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk taker.

Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is used. For inactive markets, HSBC sources alternative market information, with greater weight given to information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrument comparability, consistency of data sources, underlying data accuracy and timing of prices.

For fair values determined using valuation models, the control framework includes development or validation by independent support functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before becoming operational and are calibrated against external market data on an ongoing basis.

Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including portfolio changes, market movements and other fair value adjustments.

The majority of financial instruments measured at fair value are in GB&M. GB&M's fair value governance structure comprises its Finance function, Valuation Committees and a Valuation Committee Review Group. Finance is responsible for establishing procedures governing valuation and ensuring fair values are in compliance with accounting standards. The fair values are reviewed by the Valuation Committees, which consist of independent support functions. These committees are overseen by the Valuation Committee Review Group, which considers all material subjective valuations.

Financial liabilities measured at fair value

In certain circumstances, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread that is appropriate to HSBC's liabilities. The change in fair value of issued debt securities attributable to the Group's own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security is valued using a Libor-based discount curve. The difference in the valuations is attributable to the Group's own credit spread. This methodology is applied consistently across all securities.

Structured notes issued and certain other hybrid instruments are included within trading liabilities and are measured at fair value. The credit spread applied to these instruments is derived from the spreads at which HSBC issues structured notes.

Gains and losses arising from changes in the credit spread of liabilities issued by HSBC, recorded in other comprehensive income, reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.

Fair value hierarchy

Fair values of financial assets and liabilities are determined according to the following hierarchy:

•    Level 1 - valuation technique using quoted market price. These are financial instruments with quoted prices for identical instruments in active markets that HSBC can access at the measurement date.

•    Level 2 - valuation technique using observable inputs. These are financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.

•    Level 3 - valuation technique with significant unobservable inputs. These are financial instruments valued using valuation techniques where one or more significant inputs are unobservable.


Financial instruments carried at fair value and bases of valuation

 

2019

2018

 

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

Recurring fair value measurements
at 31 Dec

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Trading assets

186,653

 

62,639

 

4,979

 

254,271

 

178,100

 

53,271

 

6,759

 

238,130

 

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

26,505

 

9,373

 

7,749

 

43,627

 

23,125

 

12,494

 

5,492

 

41,111

 

Derivatives

1,728

 

239,131

 

2,136

 

242,995

 

1,868

 

203,534

 

2,423

 

207,825

 

Financial investments

271,467

 

84,087

 

2,023

 

357,577

 

263,885

 

78,882

 

2,000

 

344,767

 

Liabilities

 

 

 

 

 

 

 

 

Trading liabilities

66,925

 

16,192

 

53

 

83,170

 

66,300

 

18,073

 

58

 

84,431

 

Financial liabilities designated at fair value

9,549

 

149,901

 

5,016

 

164,466

 

6,815

 

136,362

 

5,328

 

148,505

 

Derivatives

1,331

 

235,864

 

2,302

 

239,497

 

2,845

 

201,234

 

1,756

 

205,835

 


Transfers between Level 1 and Level 2 fair values

 

Assets

Liabilities

 

Financial investments

Trading assets

Designated
and otherwise mandatorily measured at fair value

Derivatives

Trading liabilities

Designated at fair value

Derivatives

 

$m

$m

$m

$m

$m

$m

$m

At 31 Dec 2019

 

 

 

 

 

 

 

Transfers from Level 1 to Level 2

5,257

 

3,304

 

1,332

 

24

 

278

 

-

 

-

 

Transfers from Level 2 to Level 1

3,486

 

2,726

 

673

 

111

 

220

 

-

 

117

 

At 31 Dec 2018

 

 

 

 

 

 

 

Transfers from Level 1 to Level 2

367

 

435

 

2

 

1

 

79

 

-

 

-

 

Transfers from Level 2 to Level 1

17,861

 

4,959

 

85

 

128

 

1,821

 

-

 

138

 


Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.

Fair value adjustments

Fair value adjustments are adopted when HSBC determines there are additional factors considered by market participants that are not incorporated within the valuation model. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement, such as when models are enhanced and therefore fair value adjustments may no longer be required.


Global Banking and Markets and Corporate Centre fair value adjustments

 

 

 

 

 

2019

2018

 

GB&M

Corporate Centre

GB&M

Corporate Centre

 

$m

$m

$m

$m

Type of adjustment

 

 

 

 

Risk-related

1,040

 

125

 

1,042

 

138

 

-  bid-offer

428

 

79

 

430

 

76

 

-  uncertainty

115

 

1

 

99

 

6

 

-  credit valuation adjustment

355

 

38

 

442

 

52

 

-  debt valuation adjustment

(126

)

-

 

(198

)

-

 

-  funding fair value adjustment

241

 

7

 

256

 

4

 

-  other

27

 

-

 

13

 

-

 

Model-related

71

 

3

 

79

 

3

 

-  model limitation

68

 

3

 

79

 

3

 

-  other

3

 

-

 

-

 

-

 

Inception profit (Day 1 P&L reserves)

72

 

-

 

85

 

-

 

At 31 Dec

1,183

 

128

 

1,206

 

141

 


Bid-offer

IFRS 13 'Fair value measurement' requires the use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the position.

Uncertainty

Certain model inputs may be less readily determinable from market data and/or the choice of model itself may be more subjective. In these circumstances, an adjustment may be necessary to reflect the likelihood that market participants would adopt more conservative values for uncertain parameters and/or model assumptions than those used in HSBC's valuation model.

Credit and debt valuation adjustments

The credit valuation adjustment ('CVA') is an adjustment to the valuation of over-the-counter ('OTC') derivative contracts to reflect the possibility that the counterparty may default and that HSBC may not receive the full market value of the transactions.

The debt valuation adjustment ('DVA') is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that HSBC may default, and that it may not pay the full market value of the transactions.

HSBC calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments are not netted across Group entities.

HSBC calculates the CVA by applying the probability of default ('PD') of the counterparty, conditional on the non-default of HSBC, to HSBC's expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, HSBC calculates the DVA by applying the PD of HSBC, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to HSBC and multiplying the result by the loss expected in the event of default. Both calculations are performed over the life of the potential exposure.

For most products HSBC uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as counterparty netting agreements and collateral agreements with the counterparty.

The methodologies do not, in general, account for 'wrong-way risk'. Wrong-way risk is an adverse correlation between the counterparty's probability of default and the mark-to-market value of the underlying transaction. The risk can either be general, perhaps related to the currency of the issuer country, or specific to the transaction concerned. When there is significant wrong-way risk, a trade-specific approach is applied to reflect this risk in the valuation.

Funding fair value adjustment

The funding fair value adjustment ('FFVA') is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where available, and is adjusted for events that may terminate the exposure, such as the default of HSBC or the counterparty. The FFVA and DVA are calculated independently.

Model limitation

Models used for portfolio valuation purposes may be based upon a simplified set of assumptions that do not capture all current and future material market characteristics. In these circumstances, model limitation adjustments are adopted.

Inception profit (Day 1 P&L reserves)

Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant unobservable inputs. The accounting for inception profit adjustments is discussed in Note 1.


Fair value valuation bases

Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3

 

Assets

Liabilities

 

Financial investments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Total

Trading liabilities

Designated at fair value

Derivatives

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

$m

Private equity including strategic investments

716

 

4

 

7,289

 

-

 

8,009

 

4

 

-

 

-

 

4

 

Asset-backed securities

874

 

934

 

28

 

-

 

1,836

 

-

 

-

 

-

 

-

 

Loans held for securitisation

-

 

1

 

39

 

-

 

40

 

-

 

-

 

-

 

-

 

Structured notes

-

 

3

 

-

 

-

 

3

 

47

 

5,016

 

-

 

5,063

 

Derivatives with monolines

-

 

-

 

-

 

66

 

66

 

-

 

-

 

-

 

-

 

Other derivatives

-

 

-

 

-

 

2,070

 

2,070

 

-

 

-

 

2,302

 

2,302

 

Other portfolios

433

 

4,037

 

393

 

-

 

4,863

 

2

 

-

 

-

 

2

 

At 31 Dec 2019

2,023

 

4,979

 

7,749

 

2,136

 

16,887

 

53

 

5,016

 

2,302

 

7,371

 

 

 

 

 

 

 

 

 

 

 

Private equity including strategic investments

427

 

20

 

5,106

 

-

 

5,553

 

12

 

-

 

-

 

12

 

Asset-backed securities

1,030

 

1,140

 

32

 

-

 

2,202

 

-

 

-

 

-

 

-

 

Loans held for securitisation

-

 

-

 

49

 

-

 

49

 

-

 

-

 

-

 

-

 

Structured notes

-

 

3

 

-

 

-

 

3

 

46

 

5,328

 

-

 

5,374

 

Derivatives with monolines

-

 

-

 

-

 

65

 

65

 

-

 

-

 

-

 

-

 

Other derivatives

-

 

-

 

-

 

2,358

 

2,358

 

-

 

-

 

1,755

 

1,755

 

Other portfolios

543

 

5,596

 

305

 

-

 

6,444

 

-

 

-

 

1

 

1

 

At 31 Dec 2018

2,000

 

6,759

 

5,492

 

2,423

 

16,674

 

58

 

5,328

 

1,756

 

7,142

 


Level 3 instruments are present in both ongoing and legacy businesses. Loans held for securitisation, derivatives with monolines, certain 'other derivatives' and predominantly all Level 3 ABSs are legacy positions. HSBC has the capability to hold these positions.

Private equity including strategic investments

The fair value of a private equity investment (including strategic investments) is estimated on the basis of an analysis of the investee's financial position and results, risk profile, prospects and other factors; by reference to market valuations for similar entities quoted in an active market; or the price at which similar companies have changed ownership.

Asset-backed securities

While quoted market prices are generally used to determine the fair value of the asset-backed securities ('ABSs'), valuation models are used to substantiate the reliability of the limited market data available and to identify whether any adjustments to quoted market prices are required. For certain ABSs, such as residential mortgage-backed securities, the valuation uses an industry standard model with assumptions relating to prepayment speeds, default rates and loss severity based on collateral type, and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for securities of a similar nature.

Structured notes

The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked notes issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios.

Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and foreign exchange rates.

Derivatives

OTC derivative valuation models calculate the present value of expected future cash flows, based upon 'no arbitrage' principles. For many vanilla derivative products, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some differences in market practice. Inputs to valuation models are determined from observable market data wherever possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from historical data or other sources.


 

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy

Movement in Level 3 financial instruments

 

 

Assets

Liabilities

 

 

Financial invest-ments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Trading liabilities

Designated at fair value

Derivatives

 

Footnotes

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2019

 

2,000

 

6,759

 

5,492

 

2,423

 

58

 

5,328

 

1,756

 

Total gains/(losses) recognised in profit or loss

 

6

 

(112

)

598

 

278

 

(4

)

195

 

930

 

-  net income from financial instruments held for trading or managed on a fair value basis

 

-

 

(112

)

-

 

278

 

(4

)

-

 

930

 

-  changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

 

-

 

-

 

598

 

-

 

-

 

195

 

-

 

-  gains less losses from financial investments at fair value through other comprehensive income

 

10

 

-

 

-

 

-

 

-

 

-

 

-

 

-  expected credit loss charges and other credit risk charges

 

(4

)

-

 

-

 

-

 

-

 

-

 

-

 

Total gains/(losses) recognised in other comprehensive income ('OCI')

1

269

 

76

 

(1

)

49

 

1

 

18

 

52

 

-  financial investments: fair value gains/(losses)

 

261

 

-

 

-

 

-

 

-

 

-

 

-

 

-  exchange differences

 

8

 

76

 

(1

)

49

 

1

 

18

 

52

 

Purchases

 

271

 

2,206

 

2,353

 

-

 

8

 

157

 

-

 

New issuances

 

-

 

154

 

-

 

-

 

6

 

1,601

 

-

 

Sales

 

(10

)

(895

)

(276

)

-

 

(9

)

(193

)

-

 

Settlements

 

(329

)

(2,107

)

(434

)

(100

)

(7

)

(1,048

)

(162

)

Transfers out

 

(471

)

(1,558

)

(23

)

(710

)

(9

)

(1,079

)

(473

)

Transfers in

 

287

 

456

 

40

 

196

 

9

 

37

 

199

 

At 31 Dec 2019

 

2,023

 

4,979

 

7,749

 

2,136

 

53

 

5,016

 

2,302

 

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2019

 

(4

)

(22

)

477

 

279

 

-

 

57

 

(407

)

-  net income from financial instruments held
for trading or managed on a fair value basis

 

-

 

(22

)

-

 

279

 

-

 

-

 

(407

)

-  changes in fair value of other financial
instruments mandatorily measured at fair
value through profit or loss

 

-

 

-

 

477

 

-

 

-

 

57

 

-

 

-  loan impairment recoveries and other credit
risk provisions

 

(4

)

-

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Movement in Level 3 financial instruments (continued)

 

 

Assets

Liabilities

 

 

Financial invest-ments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Trading liabilities

Designated at fair value

Derivatives

 

Footnotes

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2018

 

1,767

 

5,080

 

3,958

 

2,444

 

93

 

4,107

 

1,949

 

Total gains/(losses) recognised in profit or loss

 

251

 

284

 

608

 

597

 

(4

)

(637

)

255

 

-  net income from financial instruments held for trading or managed on a fair value basis

 

-

 

284

 

-

 

597

 

(4

)

-

 

255

 

-  changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

 

-

 

-

 

608

 

-

 

-

 

(637

)

-

 

-  gains less losses from financial investments at fair value through other comprehensive income

 

251

 

-

 

-

 

-

 

-

 

-

 

-

 

Total gains/(losses) recognised in other comprehensive income ('OCI')

1

17

 

(274

)

(107

)

(113

)

(3

)

(144

)

(82

)

-  financial investments: fair value gains/(losses)

 

15

 

-

 

-

 

-

 

-

 

-

 

-

 

-  cash flow hedges: fair value gains/(losses)

 

-

 

-

 

6

 

6

 

-

 

-

 

2

 

-  exchange differences

 

2

 

(274

)

(113

)

(119

)

(3

)

(144

)

(84

)

Purchases

 

275

 

4,377

 

2,172

 

-

 

3

 

76

 

-

 

New issuances

 

-

 

975

 

-

 

-

 

6

 

2,442

 

-

 

Sales

 

(51

)

(1,589

)

(395

)

-

 

(11

)

-

 

-

 

Settlements

 

(141

)

(2,021

)

(541

)

(191

)

(2

)

(32

)

(18

)

Transfers out

 

(685

)

(1,402

)

(285

)

(337

)

(24

)

(1,112

)

(464

)

Transfers in

 

567

 

1,329

 

82

 

23

 

-

 

628

 

116

 

At 31 Dec 2018

 

2,000

 

6,759

 

5,492

 

2,423

 

58

 

5,328

 

1,756

 

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2018

 

 

-

 

(5

)

199

 

342

 

(5

)

274

 

(351

)

-  net income from financial instruments held for trading or managed on a fair value basis

 

-

 

(5

)

-

 

342

 

(5

)

-

 

(351

)

-  changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

 

-

 

-

 

199

 

-

 

-

 

274

 

-

 

-  loan impairment recoveries and other credit risk provisions

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

1   Included in 'financial investments: fair value gains/(losses)' in the current year and 'exchange differences' in the consolidated statement of comprehensive income.

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.


Effect of changes in significant unobservable assumptions to reasonably possible alternatives

Sensitivity of Level 3 fair values to reasonably possible alternative assumptions

 

 

2019

2018

 

 

Reflected in profit or loss

Reflected in OCI

Reflected in profit or loss

Reflected in OCI

 

 

Favourable
changes

Un-
favourable
changes

Favourable
changes

Un-
favourable
changes

Favourable
changes

Un-
favourable
changes

Favourable
changes

Un-
favourable
changes

 

Footnotes

$m

$m

$m

$m

$m

$m

$m

$m

Derivatives, trading assets and trading liabilities

1

255

 

(230

)

-

 

-

 

269

 

(257

)

-

 

-

 

Designated and otherwise mandatorily measured at fair value through profit or loss

 

532

 

(417

)

-

 

-

 

394

 

(310

)

-

 

-

 

Financial investments

 

48

 

(53

)

22

 

(22

)

34

 

(36

)

23

 

(22

)

At 31 Dec

 

835

 

(700

)

22

 

(22

)

697

 

(603

)

23

 

(22

)

1   Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these instruments are risk managed.


The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data.

When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually.


Key unobservable inputs to Level 3 financial instruments

The following table lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs at 31 December 2019. The core range of inputs is the estimated range within which 90% of the inputs fall.

 

Quantitative information about significant unobservable inputs in Level 3 valuations

 

 

Fair value

 

 

2019

2018

 

 

Assets

Liabilities

Valuation
techniques

Key unobservable
inputs

Full range
of inputs

Core range
of inputs1

Full range
of inputs

Core range
of inputs1

 

Footnotes

$m

$m

 

 

Lower

Higher

Lower

Higher

Lower

Higher

Lower

Higher

Private equity including
strategic investments

 

8,009

 

4

 

See below

See below

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

Asset-backed securities

2

1,836

 

-

 

 

 

 

 

 

 

 

 

 

 

-  CLO/CDO

 

373

 

-

 

Market proxy

Prepayment rate

0%

9%

0%

9%

0%

10%

0%

10%

 

 

 

 

Market proxy

Bid quotes

0

100

0

100

0

100

50

100

-  other ABSs

 

1,463

 

-

 

Market proxy

Bid quotes

0

101

61

98

0

271

71

99

Loans held for securitisation

 

40

 

-

 

 

 

 

 

 

 

 

 

 

 

Structured notes

 

3

 

5,063

 

 

 

 

 

 

 

 

 

 

 

-  equity-linked notes

 

-

 

3,768

 

Model -
Option model

Equity volatility

5%

90%

6%

56%

8%

79%

13%

53%

 

 

 

 

Model - Option model

Equity correlation

9%

93%

9%

93%

17%

93%

40%

77%

-  FX-linked notes

 

-

 

1,046

 

Model - Option model

FX volatility

1%

23%

3%

22%

1%

27%

3%

25%

-  other

 

3

 

249

 

 

 

 

 

 

 

 

 

 

 

Derivatives with monolines

 

66

 

-

 

Model - Discounted
cash flow

Credit spread

0.4%

2%

0.4%

2%

0.2%

1%

0.2%

1%

Other derivatives

 

2,070

 

2,302

 

 

 

 

 

 

 

 

 

 

 

-  Interest rate derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

   securitisation swaps

 

314

 

640

 

Model - Discounted
cash flow

Prepayment
 rate

6%

7%

6%

7%

6%

7%

6%

7%

   long-dated swaptions

 

838

 

51

 

Model - Option model

IR volatility

8%

22%

8%

21%

13%

39%

14%

36%

   other

 

255

 

155

 

 

 

 

 

 

 

 

 

 

 

-  FX derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

   FX options

 

93

 

218

 

Model - Option model

FX volatility

1%

25%

5%

11%

1%

27%

7%

12%

   other

 

119

 

104

 

 

 

 

 

 

 

 

 

 

 

-  Equity derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

    long-dated single stock options

 

230

 

293

 

Model - Option model

Equity volatility

0%

89%

7%

74%

5%

83%

5%

81%

   other

 

78

 

712

 

 

 

 

 

 

 

 

 

 

 

-  Credit derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

   other

 

143

 

129

 

 

 

 

 

 

 

 

 

 

 

Other portfolios

 

4,863

 

2

 

 

 

 

 

 

 

 

 

 

 

-  structured certificates

 

1,515

 

-

 

Model - Discounted cash flow

Credit volatility

4%

4%

4%

4%

2%

4%

2%

4%

-  repurchase agreements

 

1,604

 

-

 

 

 

 

 

 

 

 

 

 

 

-  other

3

1,744

 

2

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec 2019

 

16,887

 

7,371

 

 

 

 

 

 

 

 

 

 

 

1   The core range of inputs is the estimated range within which 90% of the inputs fall.

2   Collateralised loan obligation/collateralised debt obligation.

3   'Other' includes a range of smaller asset holdings.


Private equity including strategic investments

Given the bespoke nature of the analysis in respect of each private equity holding, it is not practical to quote a range of key unobservable inputs.

Prepayment rates

Prepayment rates are a measure of the anticipated future speed at which a loan portfolio will be repaid in advance of the due date. They vary according to the nature of the loan portfolio and expectations of future market conditions, and may be estimated using a variety of evidence, such as prepayment rates implied from proxy observable security prices, current or historical prepayment rates and macroeconomic modelling.

Market proxy

Market proxy pricing may be used for an instrument when specific market pricing is not available but there is evidence from instruments with common characteristics. In some cases it might be possible to identify a specific proxy, but more generally evidence across a wider range of instruments will be used to understand the factors that influence current market pricing and the manner of that influence.

Volatility

Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike and maturity of the option.

Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price. The core range is significantly narrower than the full range because these examples with extreme volatilities occur relatively rarely within the HSBC portfolio.

Correlation

Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one. It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.

Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, HSBC trade prices, proxy correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects the wide variation in correlation inputs by market price pair.

Credit spread

Credit spread is the premium over a benchmark interest rate required by the market to accept lower credit quality. In a discounted cash flow model, the credit spread increases the discount factors applied to future cash flows, thereby reducing the value of an asset. Credit spreads may be implied from market prices and may not be observable in more illiquid markets.

Inter-relationships between key unobservable inputs

Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables may be correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other events. Furthermore, the effect of changing market variables on the HSBC portfolio will depend on HSBC's net risk position in respect of each variable.


HSBC Holdings

Basis of valuing HSBC Holdings' financial assets and liabilities measured at fair value

 

 

2019

2018

 

Footnotes

 

$m

$m

Valuation technique using observable inputs: Level 2

 

 

 

Assets at 31 Dec

 

 

 

-  derivatives

 

2,002

 

707

 

-  financial investments

 

-

 

-

 

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

1

61,964

 

23,513

 

Liabilities at 31 Dec

 

 

 

-  designated at fair value

 

30,303

 

25,049

 

-  derivatives

 

2,021

 

2,159

 

1   In 2019, due to the restructuring of the Group's Asia and UK operations to meet resolution and recovery requirements, changes in the terms of financial assets have resulted in the derecognition of principal amounts of $33.3bn, relating to financial assets measured at amortised cost. Under the revised terms, financial assets with principal amounts of $33.3bn (2018: nil) measured on fair value basis have been recognised.

 


13

Fair values of financial instruments not carried at fair value


Fair values of financial instruments not carried at fair value and bases of valuation

 

 

Fair value

 

Carrying
amount

Quoted market
price Level 1

Observable
inputs Level 2

Significant
unobservable
inputs Level 3

Total

 

$m

$m

$m

$m

$m

At 31 Dec 2019

 

 

 

 

 

Assets

 

 

 

 

 

Loans and advances to banks

69,203

 

-

 

68,508

 

739

 

69,247

 

Loans and advances to customers

1,036,743

 

-

 

10,365

 

1,027,178

 

1,037,543

 

Reverse repurchase agreements - non-trading

240,862

 

16

 

240,199

 

691

 

240,906

 

Financial investments - at amortised cost

85,735

 

26,202

 

62,572

 

287

 

89,061

 

Liabilities

 

 

 

 

 

Deposits by banks

59,022

 

-

 

58,951

 

-

 

58,951

 

Customer accounts

1,439,115

 

-

 

1,439,362

 

150

 

1,439,512

 

Repurchase agreements - non-trading

140,344

 

-

 

140,344

 

-

 

140,344

 

Debt securities in issue

104,555

 

-

 

104,936

 

-

 

104,936

 

Subordinated liabilities

24,600

 

-

 

28,861

 

385

 

29,246

 

 

 

 

 

 

 

At 31 Dec 2018

 

 

 

 

 

Assets

 

 

 

 

 

Loans and advances to banks

72,167

 

-

 

68,378

 

3,791

 

72,169

 

Loans and advances to customers

981,696

 

-

 

10,518

 

974,559

 

985,077

 

Reverse repurchase agreements - non-trading

242,804

 

81

 

241,407

 

1,369

 

242,857

 

Financial investments - at amortised cost

62,666

 

1,790

 

60,073

 

216

 

62,079

 

Liabilities

 

 

 

 

 

Deposits by banks

56,331

 

-

 

56,308

 

-

 

56,308

 

Customer accounts

1,362,643

 

-

 

1,362,794

 

151

 

1,362,945

 

Repurchase agreements - non-trading

165,884

 

-

 

165,884

 

-

 

165,884

 

Debt securities in issue

85,342

 

-

 

85,430

 

-

 

85,430

 

Subordinated liabilities

22,437

 

-

 

24,968

 

373

 

25,341

 

Other financial instruments not carried at fair value are typically short term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness and Hong Kong currency notes in circulation, all of which are measured at amortised cost.


Valuation

Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It does not reflect the economic benefits and costs that HSBC expects to flow from an instrument's cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market prices are available may differ from those of other companies.

Loans and advances to banks and customers

To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment rates, using assumptions that HSBC believes are consistent with those that would be used by market participants in valuing such loans; new business rates estimates for similar loans; and trading inputs from other market participants including observed primary and secondary trades. From time to time, we may engage a third-party valuation specialist to measure the fair value of a pool of loans.

The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants' expectations of credit losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit-impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.

Financial investments

The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities.

Deposits by banks and customer accounts

The fair values of on-demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.

Debt securities in issue and subordinated liabilities

Fair values in debt securities in issue and subordinated liabilities are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.

Repurchase and reverse repurchase agreements - non-trading

Fair values of repurchase and reverse repurchase agreements that are held on a non-trading basis provide approximate carrying amounts.

This is due to the fact that balances are generally short dated.


HSBC Holdings

The methods used by HSBC Holdings to determine fair values of financial instruments for the purposes of measurement and disclosure are described above.

Fair values of HSBC Holdings' financial instruments not carried at fair value on the balance sheet

 

 

2019

2018

 

 

Carrying amount

Fair value1

Carrying amount

Fair value1

 

Footnotes

$m

$m

$m

$m

Assets at 31 Dec

 

 

 

 

 

Loans and advances to HSBC undertakings

 

10,218

 

10,504

 

56,144

 

56,801

 

Financial investments - at amortised cost

2

16,106

 

16,121

 

 

 

Liabilities at 31 Dec

 

 

 

 

 

Amounts owed to HSBC undertakings

 

464

 

464

 

949

 

949

 

Debt securities in issue

 

56,844

 

59,140

 

50,800

 

51,552

 

Subordinated liabilities

 

18,361

 

22,536

 

17,715

 

20,224

 

1   Fair values (other than Level 1 financial investments) were determined using valuation techniques with observable inputs (Level 2).

2   The 2019 period includes $16.1bn (2018: nil) of investments in highly liquid securities.


14

Financial assets designated and otherwise mandatorily measured at fair value through profit

or loss

 

 

 

2019

 

2018

 

 

 

Designated at fair value

Mandatorily measured at fair value

Total

Designated at fair value

Mandatorily measured at fair value

Total

 

 

$m

$m

$m

$m

$m

$m

Securities

 

2,344

 

35,808

 

38,152

 

2,349

 

30,217

 

32,566

 

-  treasury and other eligible bills

 

630

 

31

 

661

 

641

 

29

 

670

 

-  debt securities

 

1,714

 

4,838

 

6,552

 

1,708

 

4,839

 

6,547

 

-  equity securities

 

-

 

30,939

 

30,939

 

-

 

25,349

 

25,349

 

Loans and advances to banks and customers

 

1

 

4,555

 

4,556

 

-

 

7,717

 

7,717

 

Other

 

-

 

919

 

919

 

-

 

828

 

828

 

At 31 Dec

 

2,345

 

41,282

 

43,627

 

2,349

 

38,762

 

41,111

 

 

Securities1

 

 

 

2019

 

2018

 

 

 

Designated at fair value

Mandatorily measured at fair value

Total

Designated at fair value

Mandatorily measured at fair value

Total

 

Footnotes

$m

$m

$m

$m

$m

$m

Hong Kong Government

 

4

 

-

 

4

 

4

 

-

 

4

 

Other governments

 

666

 

754

 

1,420

 

673

 

713

 

1,386

 

Asset-backed securities

2

-

 

363

 

363

 

-

 

399

 

399

 

Corporate debt and other securities

 

1,674

 

3,752

 

5,426

 

1,672

 

3,756

 

5,428

 

Equities

 

-

 

30,939

 

30,939

 

-

 

25,349

 

25,349

 

At 31 Dec

 

2,344

 

35,808

 

38,152

 

2,349

 

30,217

 

32,566

 

1   Included within these figures are debt securities issued by banks and other financial institutions of $366m (2018 re-presented: $676m), of which nil (2018: nil) are guaranteed by various governments.

2   Excludes asset-backed securities included under US Treasury and US Government agencies.


15

Derivatives


Notional contract amounts and fair values of derivatives by product contract type held by HSBC

 

Notional contract amount

Fair value - Assets

Fair value - Liabilities

 

Trading

Hedging

Trading

Hedging

Total

Trading

Hedging

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

Foreign exchange

8,207,629

 

31,899

 

84,083

 

455

 

84,538

 

84,498

 

740

 

85,238

 

Interest rate

17,895,349

 

177,006

 

183,668

 

1,208

 

184,876

 

175,095

 

2,031

 

177,126

 

Equities

1,077,347

 

-

 

9,053

 

-

 

9,053

 

11,237

 

-

 

11,237

 

Credit

345,644

 

-

 

4,744

 

-

 

4,744

 

5,597

 

-

 

5,597

 

Commodity and other

93,245

 

-

 

1,523

 

-

 

1,523

 

2,038

 

-

 

2,038

 

Gross total fair values

27,619,214

 

208,905

 

283,071

 

1,663

 

284,734

 

278,465

 

2,771

 

281,236

 

Offset (Note 30)

 

 

 

 

(41,739

)

 

 

(41,739

)

At 31 Dec 2019

27,619,214

 

208,905

 

283,071

 

1,663

 

242,995

 

278,465

 

2,771

 

239,497

 

 

 

 

 

 

 

 

 

 

Foreign exchange

7,552,462

 

29,969

 

85,959

 

458

 

86,417

 

82,494

 

653

 

83,147

 

Interest rate

24,589,916

 

163,271

 

155,293

 

1,080

 

156,373

 

154,257

 

2,261

 

156,518

 

Equities

1,256,550

 

-

 

10,198

 

-

 

10,198

 

10,750

 

-

 

10,750

 

Credit

346,596

 

-

 

3,414

 

-

 

3,414

 

3,776

 

-

 

3,776

 

Commodity and other

74,159

 

-

 

1,134

 

-

 

1,134

 

1,355

 

-

 

1,355

 

Gross total fair values

33,819,683

 

193,240

 

255,998

 

1,538

 

257,536

 

252,632

 

2,914

 

255,546

 

Offset (Note 30)

 

 

 

 

(49,711

)

 

 

(49,711

)

At 31 Dec 2018

33,819,683

 

193,240

 

255,998

 

1,538

 

207,825

 

252,632

 

2,914

 

205,835

 

The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

Derivative assets and liabilities increased during 2019, driven by yield curve movements and changes in foreign exchange rates.


Notional contract amounts and fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries

 

Notional contract amount

Assets

Liabilities

 

Trading

Hedging

Trading

Hedging

Total

Trading

Hedging

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

Foreign exchange

24,980

 

-

 

161

 

-

 

161

 

766

 

-

 

766

 

Interest rate

48,937

 

36,769

 

435

 

1,406

 

1,841

 

1,072

 

183

 

1,255

 

At 31 Dec 2019

73,917

 

36,769

 

596

 

1,406

 

2,002

 

1,838

 

183

 

2,021

 

 

 

 

 

 

 

 

 

 

Foreign exchange

16,623

 

1,120

 

207

 

-

 

207

 

628

 

155

 

783

 

Interest rate

44,059

 

38,418

 

283

 

217

 

500

 

538

 

838

 

1,376

 

At 31 Dec 2018

60,682

 

39,538

 

490

 

217

 

707

 

1,166

 

993

 

2,159

 


Use of derivatives

For details regarding the use of derivatives, see page 139 under 'Market Risk'.

Trading derivatives

Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenue based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.

Substantially all of HSBC Holdings' derivatives entered into with subsidiaries are managed in conjunction with financial liabilities designated at fair value.

Derivatives valued using models with unobservable inputs

The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as shown in the following table:


Unamortised balance of derivatives valued using models with significant unobservable inputs

 

 

2019

2018

 

Footnotes

$m

$m

Unamortised balance at 1 Jan

 

86

 

106

 

Deferral on new transactions

 

145

 

161

 

Recognised in the income statement during the year:

 

(154

)

(158

)

-  amortisation

 

(80

)

(96

)

-  subsequent to unobservable inputs becoming observable

 

(3

)

(2

)

-  maturity, termination or offsetting derivative

 

(71

)

(60

)

Exchange differences

 

1

 

(4

)

Other

 

(5

)

(19

)

Unamortised balance at 31 Dec

1

73

 

86

 

1   This amount is yet to be recognised in the consolidated income statement.


Hedge accounting derivatives

HSBC applies hedge accounting to manage the following risks: interest rate, foreign exchange and net investment in foreign operations.  Further details on how these risks arise and how they are managed by the Group can be found in the 'Report of the Directors'.

Fair value hedges

HSBC enters into fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value caused by movements in market interest rates on certain fixed-rate financial instruments that are not measured at fair value through profit or loss, including debt securities held and issued.

HSBC hedging instrument by hedged risk

 

Hedging instrument

 

 

Carrying amount

 

 

 

Notional amount1

Assets

Liabilities

Balance sheet presentation

Change in fair value2

Hedged risk

$m

$m

$m

$m

Interest rate3

122,753

 

1,056

 

2,208

 

Derivatives

(1,531

)

At 31 Dec 2019

122,753

 

1,056

 

2,208

 

 

(1,531

)

 

Interest rate3

123,551

 

915

 

2,123

 

Derivatives

283

 

At 31 Dec 2018

123,551

 

915

 

2,123

 

 

283

 

1   The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

2   Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

3   The hedged risk 'interest rate' includes inflation risk.

HSBC hedged item by hedged risk

 

Hedged item

Ineffectiveness

 

Carrying amount

Accumulated fair value hedge adjustments included in carrying amount2

Change in fair value1

Recognised in profit and loss

 

 

Assets

Liabilities

Assets

Liabilities

Balance sheet presentation

Profit and loss presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Interest rate3

90,617

 

 

1,859

 

 

Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income

2,304

 

(7

)

Net income from financial instruments held for trading or managed on a fair value basis

153

 

 

4

 

 

Loans and advances to banks

5

 

1,897

 

 

12

 

 

Loans and advances to customers

24

 

 

15,206

 

 

797

 

Debt securities in issue

(1,011

)

 

3,009

 

 

39

 

Deposits by banks

202

 

At 31 Dec 2019

92,667

 

18,215

 

1,875

 

836

 

 

1,524

 

(7

)

 

 

 

HSBC hedged item by hedged risk (continued)

 

Hedged item

Ineffectiveness

 

Carrying amount

Accumulated fair value hedge adjustments included in carrying amount2

Change in fair value1

Recognised in profit and loss

 

 

Assets

Liabilities

Assets

Liabilities

Balance sheet presentation

Profit and loss presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Interest rate3

93,469

 

 

231

 

 

Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income

(425

)

(37

)

Net income from financial instruments held for trading or managed on a fair value basis

1,455

 

 

(6

)

 

Loans and advances to customers

(4

)

 

14,171

 

 

(155

)

Debt securities in issue

124

 

 

4,780

 

 

45

 

Deposits by banks

(15

)

 

At 31 Dec 2018

94,924

 

18,951

 

225

 

(110

)

 

(320

)

(37

)

 

1   Used in effectiveness testing; comprising amount attributable to the designated hedged risk that can be a risk component.

2   The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were assets of $482m for FVOCI and assets of $2m for debt issued.

3   The hedged risk 'interest rate' includes inflation risk.


HSBC Holdings hedging instrument by hedged risk

 

Hedging instrument

 

 

Carrying amount

 

 

 

Notional amount1,4

 

Assets

Liabilities

Balance sheet presentation

Change in fair value2

Hedged risk

$m

$m

$m

$m

Interest rate3

36,769

 

1,406

 

183

 

Derivatives

1,704

 

At 31 Dec 2019

36,769

 

1,406

 

183

 

 

1,704

 


1   The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

2   Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

3   The hedged risk 'interest rate' includes foreign exchange risk.

4   The notional amount of non-dynamic fair value hedges is equal to $36,769m, of which the weighted-average maturity date is March 2027 and the weighted-average swap rate is 1.53%. The majority of these hedges are internal to HSBC Group.

HSBC Holdings hedged item by hedged risk

 

Hedged item

Ineffectiveness

 

Carrying amount

Accumulated fair value hedge adjustments included in carrying amount2

 

Change in fair value1

Recognised in profit and loss

 

 

Assets

Liabilities

Assets

Liabilities

Balance sheet presentation

Profit and loss presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Interest rate3

 

38,126

 

 

1,088

 

Debt securities in issue

(1,697

)

7

 

Net income from financial instruments held for trading or managed on a fair value basis

 

At 31 Dec 2019

-

 

38,126

 

-

 

1,088

 

 

(1,697

)

7

 

 

1   Used in effectiveness testing; comprising amount attributable to the designated hedged risk that can be a risk component.

2   The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were liabilities of $71m for debt issued.

3   The hedged risk 'interest rate' includes foreign exchange risk.

Sources of hedge ineffectiveness may arise from basis risk, including but not limited to the discount rates used for calculating the fair value of derivatives, hedges using instruments with a non-zero fair value, and notional and timing differences between the hedged items and hedging instruments.

For some debt securities held, HSBC manages interest rate risk in a dynamic risk management strategy. The assets in scope of this strategy are high-quality fixed-rate debt securities, which may be sold to meet liquidity and funding requirements.

The interest rate risk of the HSBC fixed-rate debt securities issued is managed in a non-dynamic risk management strategy.


Cash flow hedges

HSBC's cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates and foreign-currency basis.

HSBC applies macro cash flow hedging for interest rate risk exposures on portfolios of replenishing current and forecasted issuances of non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness and ineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.

HSBC also hedges the variability in future cash flows on foreign-denominated financial assets and liabilities arising due to changes in foreign exchange market rates with cross-currency swaps, which are considered dynamic hedges.

 

Hedging instrument by hedged risk

 

 

 

 

Hedging instrument

Hedged item

Ineffectiveness

 

 

Carrying amount

 

Change in fair value2

Change in fair value3

Recognised in profit and loss

Profit and loss presentation

 

Notional amount1

Assets

Liabilities

Balance sheet presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Foreign currency

21,385

 

455

 

254

 

Derivatives

341

 

341

 

-

 

Net income from financial instruments held for trading or managed on a fair value basis

Interest rate

54,253

 

152

 

46

 

Derivatives

195

 

193

 

2

 

At 31 Dec 2019

75,638

 

607

 

300

 

 

536

 

534

 

2

 

 

 

Foreign currency

24,954

 

295

 

653

 

Derivatives

(198

)

(200

)

2

 

Net income from financial instruments held for trading or managed on a fair value basis

Interest rate

39,720

 

165

 

138

 

Derivatives

(77

)

(67

)

(10

)

At 31 Dec 2018

64,674

 

460

 

791

 

 

(275

)

(267

)

(8

)

 

1   The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

2   Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

3   Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component.

Sources of hedge ineffectiveness may arise from basis risk, including but not limited to timing differences between the hedged items and hedging instruments and hedges using instruments with a non-zero fair value.

Reconciliation of equity and analysis of other comprehensive income by risk type

 

Interest rate

Foreign currency

 

$m

$m

Cash flow hedging reserve at 1 Jan 2019

(26

)

(182

)

Fair value gains/(losses)

193

 

341

 

Fair value (gains)/losses reclassified from the cash flow hedge reserve to the income statement in respect of:

 

 

Hedged items that have affected profit or loss

99

 

(371

)

Income taxes

(53

)

4

 

Others

(9

)

3

 

Cash flow hedging reserve at 31 Dec 2019

204

 

(205

)

 

Cash flow hedging reserve at 1 Jan 2018

(40

)

(187

)

Fair value gains/(losses)

(67

)

(200

)

Fair value (gains)/losses reclassified from the cash flow hedge reserve to the income statement in respect of:

 

 

Hedged items that has affected profit or loss

90

 

227

 

Income taxes

(11

)

(13

)

Others

2

 

(9

)

Cash flow hedging reserve at 31 Dec 2018

(26

)

(182

)

Hedges of net investments in foreign operations

The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using forward foreign exchange contracts or by financing with foreign currency borrowings. At 31 December 2019, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were assets of nil (2018: $163m), liabilities of $485m (2018: nil) and notional contract values of $10,500m (2018: $5,000m). Ineffectiveness recognised in 'Net income from financial instruments held for trading or managed on a fair value basis' in the year ended 31 December 2019 was nil (2018: nil).

Interest rate benchmark reform: Amendments to IFRS 9 and IAS 39 'Financial Instruments'

Following the request received by the Financial Stability Board from the G20, a fundamental review and reform of the major interest rate benchmarks is underway across the world's largest financial markets. This reform was not contemplated when IAS 39 was published, and consequently the IASB has published a set of temporary exceptions from applying specific hedge accounting requirements to provide clarification on how the standard should be applied in these circumstances.

Amendments to IFRS 9 and IAS 39 were endorsed in January 2020 and modify specific hedge accounting requirements. Under these temporary exceptions, interbank offered rates ('Ibors') are assumed to continue unaltered for the purposes of hedge accounting until such time as the uncertainty is resolved.

The application of this set of temporary exceptions is mandatory for accounting periods starting on or after 1 January 2020, but early adoption is permitted. HSBC elected to apply these exceptions for the year ended 31 December 2019. Significant judgement will be required in determining when uncertainty is expected to be resolved and therefore when the temporary exceptions will cease to apply. However, at 31 December 2019, the uncertainty continued to exist and so the temporary exceptions apply to all of the Group's hedge accounting relationships that reference benchmarks subject to reform or replacement.

The Group has cash flow and fair value hedge accounting relationships that are exposed to different Ibors, predominantly US dollar Libor, sterling Libor, and Euribor as well as overnight rates subject to the market-wide benchmarks reform, such as the European overnight Index Average rate ('Eonia'). Many of the existing derivatives, loans, bonds and other financial instruments designated in relationships referencing these benchmarks will transition to new risk-free rates ('RFRs') in different ways and at different times. External progress on the transition to RFRs is being monitored, with the objective of ensuring a smooth transition for the Group's hedge accounting relationships. The specific issues arising will vary with the details of each hedging relationship, but may arise due to the transition of existing products included in the designation, a change in expected volumes of products to be issued, a change in contractual terms of new products issued, or a combination of these factors. Some hedges may need to be de-designated and new relationships entered into, while others may survive the market-wide benchmarks reform.

The hedge accounting relationships that are affected by the adoption of the temporary exceptions hedge items presented in the balance sheet as 'Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income', 'Loans and advances to customers', 'Debt securities in issue' and 'Deposits by banks'.

The notional amounts of interest rate derivatives designated in hedge accounting relationships represent the extent of the risk exposure managed by the Group that is directly affected by market-wide benchmarks reform and impacted by the temporary exceptions. The cross-currency swaps designated in hedge accounting relationships and affected by Ibor reform are not significant and have not been presented below:

Hedging instrument impacted by Ibor reform

 

Hedging instrument

 

Impacted by Ibor reform

Not impacted by Ibor reform

Notional

amount1

 

£

$

Other

Total

 

$m

$m

$m

$m

$m

$m

$m

Fair value hedges

20,378

 

4,533

 

41,274

 

13,435

 

79,620

 

43,133

 

122,753

 

Cash flow hedges

5,724

 

6,594

 

15,750

 

15,979

 

44,047

 

10,206

 

54,253

 

At 31 Dec 2019

26,102

 

11,127

 

57,024

 

29,414

 

123,667

 

53,339

 

177,006

 


1   The notional contract amounts of interest rate derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.


The calculation of Eonia changed on 2 October 2019 so that going forward it is calculated as the euro short-term rate ('€STR') plus a fixed spread of 8.5 basis points. This change has triggered a structural change in the sale and repurchase agreement ('repo') market in France, whereby the overnight floating rate repo market referencing Eonia has significantly shifted into an overnight fixed rate repo market referencing repo rates. In this context, regarding the accounting standard setters' activities, management consider that continuing to apply hedge accounting to the existing hedge relationships using forecast issuances of overnight repos, provides the most relevant accounting.

For further information on Ibor transition, see our Areas of Special interest on page 81.



Hedging instrument impacted by Ibor reform held by HSBC Holdings

 

Hedging instrument

 

Impacted by Ibor reform

Not impacted by Ibor reform

Notional amount

 

£

$

Other

Total

 

$m

$m

$m

$m

$m

$m

$m

Fair value hedges

3,928

 

5,222

 

24,500

 

3,119

 

36,769

 

-

 

36,769

 

Cash flow hedges

-

 

-

 

-

 

-

 

-

 

-

 

-

 

At 31 Dec 2019

3,928

 

5,222

 

24,500

 

3,119

 

36,769

 

-

 

36,769

 



16

Financial investments

 

Carrying amount of financial investments

 

 

2019

2018

 

Footnotes

$m

$m

Financial investments measured at fair value through other comprehensive income

 

357,577

 

344,767

 

-  treasury and other eligible bills

 

95,043

 

96,642

 

-  debt securities

 

260,536

 

246,371

 

-  equity securities

 

1,913

 

1,657

 

-  other instruments

1

85

 

97

 

Debt instruments measured at amortised cost

2

85,735

 

62,666

 

-  treasury and other eligible bills

 

10,476

 

679

 

-  debt securities

 

75,259

 

61,987

 

At 31 Dec

 

443,312

 

407,433

 

1   'Other instruments' comprises of loans and advances.

2   Fair value $89.1bn (2018: $62.1bn).

 

Equity instruments measured at fair value through other comprehensive income

 

Fair value

Dividends recognised

Type of equity instruments

$m

$m

Investments required by central institutions

738

 

22

 

Business facilitation

1,124

 

19

 

Others

51

 

9

 

At 31 Dec 2019

1,913

 

50

 

 

 

 

Investments required by central institutions

848

 

34

 

Business facilitation

758

 

21

 

Others

51

 

9

 

At 31 Dec 2018

1,657

 

64

 

 

Financial investments at amortised cost and fair value

 

 

2019

2018

 

 

Amortised cost

Fair value1

Amortised cost

Fair value1

 

Footnotes

$m

$m

$m

$m

US Treasury

 

79,633

 

80,589

 

54,941

 

54,763

 

US Government agencies

2

26,356

 

26,387

 

21,058

 

20,580

 

US Government-sponsored entities

2

8,070

 

8,259

 

12,867

 

12,701

 

UK Government

 

28,621

 

28,973

 

20,576

 

21,083

 

Hong Kong Government

 

47,824

 

47,820

 

49,956

 

49,955

 

Other governments

 

140,510

 

142,511

 

142,495

 

144,099

 

Asset-backed securities

3

2,954

 

2,889

 

3,579

 

3,390

 

Corporate debt and other securities

 

101,750

 

107,364

 

97,286

 

98,419

 

Equities

 

1,241

 

1,913

 

1,353

 

1,657

 

At 31 Dec

 

436,959

 

446,705

 

404,111

 

406,647

 

1   Included within 'fair value' figures are debt securities issued by banks and other financial institutions of $61bn (2018: $56bn), of which $11bn (2018: $8bn) are guaranteed by various governments.

2   Includes securities that are supported by an explicit guarantee issued by the US Government.

3   Excludes asset-backed securities included under US Government agencies and sponsored entities.

Maturities of investments in debt securities at their carrying amount

 

Up to 1 year

1 to 5 years

5 to 10 years

Over 10 years

Total

 

$m

$m

$m

$m

$m

Debt securities measured at fair value through other comprehensive income

61,833

 

123,740

 

42,831

 

32,132

 

260,536

 

Debt securities measured at amortised cost

5,472

 

14,395

 

21,431

 

33,961

 

75,259

 

At 31 Dec 2019

67,305

 

138,135

 

64,262

 

66,093

 

335,795

 

 

 

 

 

 

 

Debt securities measured at fair value through other comprehensive income

61,598

 

124,075

 

36,194

 

24,504

 

246,371

 

Debt securities measured at amortised cost

2,519

 

10,086

 

16,065

 

33,317

 

61,987

 

At 31 Dec 2018

64,117

 

134,161

 

52,259

 

57,821

 

308,358

 

 

 

Contractual maturities and weighted average yields of investment debt securities

 

Up to 1 year

1 to 5 years

5 to 10 years

Over 10 years

 

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

 

$m

%

$m

%

$m

%

$m

%

Debt securities measured at fair value through other comprehensive income

 

 

 

 

 

 

 

 

US Treasury

6,322

 

2.1

 

26,834

 

2.0

 

18,208

 

2.0

 

3,268

 

2.9

 

US Government agencies

-

 

-

 

79

 

2.2

 

1

 

4.7

 

15,581

 

2.6

 

US Government-sponsored agencies

725

 

2.8

 

167

 

3.1

 

1,940

 

2.8

 

2,191

 

3.0

 

UK Government

4,681

 

1.3

 

4,393

 

1.1

 

4,443

 

0.2

 

2,811

 

2.8

 

Hong Kong Government

559

 

1.3

 

145

 

1.8

 

152

 

3.2

 

-

 

-

 

Other governments

39,144

 

2.3

 

54,689

 

2.8

 

11,478

 

1.7

 

1,862

 

3.6

 

Asset-backed securities

18

 

2.7

 

1

 

0.5

 

325

 

3.1

 

2,610

 

2.2

 

Corporate debt and other securities

9,735

 

2.0

 

34,921

 

1.8

 

4,879

 

2.2

 

2,795

 

3.4

 

Total amortised cost at 31 Dec 2019

61,184

 

 

121,229

 

 

41,426

 

 

31,118

 

 

Total carrying value

61,833

 

 

123,740

 

 

42,831

 

 

32,132

 

 

Debt securities measured at amortised cost

 

 

 

 

 

 

 

 

US Treasury

3,010

 

1.9

 

4,879

 

1.8

 

2,931

 

1.9

 

141

 

4.2

 

US Government agencies

-

 

-

 

13

 

3.8

 

19

 

3.5

 

10,286

 

2.6

 

US Government-sponsored agencies

-

 

-

 

482

 

2.7

 

551

 

2.3

 

2,015

 

3.2

 

Hong Kong Government

10

 

1.6

 

20

 

1.6

 

9

 

1.4

 

-

 

-

 

Other governments

128

 

4.4

 

552

 

3.4

 

487

 

3.1

 

832

 

4.2

 

Asset-backed securities

-

 

-

 

-

 

-

 

-

 

-

 

2

 

7.5

 

Corporate debt and other securities

2,324

 

3.5

 

8,449

 

3.4

 

17,434

 

3.3

 

20,685

 

3.8

 

Total amortised cost at 31 Dec 2019

5,472

 

 

14,395

 

 

21,431

 

 

33,961

 

 

Total carrying value

5,472

 

 

14,395

 

 

21,431

 

 

33,961

 

 

The maturity distributions of ABSs are presented in the above table on the basis of contractual maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2019 by the book amount of debt securities at that date. The yields do not include the effect of related derivatives.


HSBC Holdings

HSBC Holdings carrying amount of financial investments

 

 

2019

2018

 

Footnotes

$m

$m

Debt instruments measured at amortised cost

1

 

 

-  treasury and other eligible bills

 

10,081

 

-

 

-  debt securities

 

6,025

 

-

 

At 31 Dec

 

16,106

 

-

 

1   The 2019 period includes $16.1bn (2018: nil) of investments in highly liquid securities.

Financial investments at amortised cost and fair value

 

 

2019

2018

 

 

Amortised cost

Fair value

Amortised cost

Fair value

 

 

$m

$m

$m

$m

US Treasury

 

16,106

 

16,121

 

-

 

-

 

US Government agencies

 

-

 

-

 

-

 

-

 

US Government-sponsored entities

 

-

 

-

 

-

 

-

 

At 31 Dec

 

16,106

 

16,121

 

-

 

-

 

 

Maturities of investments in debt securities at their carrying amount

 

Up to 1 year

1 to 5 years

5 to 10 years

Over 10 years

Total

 

$m

$m

$m

$m

$m

Debt securities measured at amortised cost

3,010

 

3,015

 

-

 

-

 

6,025

 

At 31 Dec 2019

3,010

 

3,015

 

-

 

-

 

6,025

 

 

 

 

 

 

 

Debt securities measured at amortised cost

-

 

-

 

-

 

-

 

-

 

At 31 Dec 2018

-

 

-

 

-

 

-

 

-

 

 

 

Contractual maturities and weighted average yields of investment debt securities

 

Up to 1 year

1 to 5 years

5 to 10 years

Over 10 years

 

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

 

$m

%

$m

%

$m

%

$m

%

Debt securities measured at amortised cost

 

 

 

 

 

 

 

 

US Treasury

3,010

 

1.9

 

3,015

 

1.7

 

-

 

-

 

-

 

-

 

US Government agencies

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

US Government-sponsored agencies

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

Total amortised cost at 31 Dec 2019

3,010

 

 

3,015

 

 

-

 

 

-

 

 

Total carrying value

3,010

 

 

3,015

 

 

-

 

 

-

 

 

The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2019 by the book amount of debt securities at that date. The yields do not include the effect of related derivatives.


17

Assets pledged, collateral received and assets transferred


Assets pledged

Financial assets pledged as collateral

 

 

2019

2018

 

 

$m

$m

Treasury bills and other eligible securities

 

14,034

 

11,470

 

Loans and advances to banks

 

1,975

 

151

 

Loans and advances to customers

 

26,017

 

51,659

 

Debt securities

 

60,995

 

95,210

 

Equity securities

 

24,626

 

22,510

 

Other

 

50,231

 

34,028

 

Assets pledged at 31 Dec

 

177,878

 

215,028

 


Assets pledged as collateral include all assets categorised as encumbered in the disclosure on page 73 of the Pillar 3 Disclosures at 31 December 2019.

The amount of assets pledged to secure liabilities may be greater than the book value of assets utilised as collateral. For example, in the case of securitisations and covered bonds, the amount of liabilities issued plus mandatory over-collateralisation is less than the book value of the pool of assets available for use as collateral. This is also the case where assets are placed with a custodian or a settlement agent that has a floating charge over all the assets placed to secure any liabilities under settlement accounts.

These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard securities lending and borrowing, repurchase agreements and derivative margining. HSBC places both cash and non-cash collateral in relation to derivative transactions.

Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the Hong Kong Government certificates of indebtedness are held.


Financial assets pledged as collateral which the counterparty has the right to sell or repledge

 

2019

2018

 

$m

$m

Trading assets

63,163

 

76,121

 

Financial investments

10,782

 

15,741

 

At 31 Dec

73,945

 

91,862

 


Collateral received

The fair value of assets accepted as collateral relating primarily to standard securities lending, reverse repurchase agreements, swaps of securities and derivative margining that HSBC is permitted to sell or repledge in the absence of default was $468,798m (2018: $482,818m). The fair value of any such collateral sold or repledged was $304,261m (2018: $350,848m).

HSBC is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard securities lending, reverse repurchase agreements and derivative margining.

Assets transferred

The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending agreements, as well as swaps of equity and debt securities. For secured borrowings, the transferred asset collateral continues to be recognised in full while a related liability, reflecting the Group's obligation to repurchase the assets for a fixed price at a future date, is also recognised on the balance sheet. Where securities are swapped, the transferred asset continues to be recognised in full. There is no associated liability as the non-cash collateral received is not recognised on the balance sheet. The Group is unable to use, sell or pledge the transferred assets for the duration of the transaction, and remains exposed to interest rate risk and credit risk on these pledged assets. With the exception of 'Other sales' in the following table, the counterparty's recourse is not limited to the transferred assets.


Transferred financial assets not qualifying for full derecognition and associated financial liabilities

 

Carrying amount of:

Fair value of:

 

 

Transferred assets

Associated liabilities

Transferred assets

Associated liabilities

Net

position

 

$m

$m

$m

$m

$m

At 31 Dec 2019

 

 

 

 

 

Repurchase agreements

45,831

 

45,671

 

 

 

 

Securities lending agreements

35,122

 

3,225

 

 

 

 

Other sales (recourse to transferred assets only)

2,971

 

2,885

 

2,974

 

2,897

 

77

 

 

 

 

 

 

 

At 31 Dec 2018

 

 

 

 

 

Repurchase agreements

62,216

 

60,361

 

 

 

 

Securities lending agreements

32,486

 

2,426

 

 

 

 

Other sales (recourse to transferred assets only)

2,647

 

2,647

 

2,625

 

2,630

 

(5

)


18

Interests in associates and joint ventures


Carrying amount of HSBC's interests in associates and joint ventures

 

 

 

2019

2018

 

$m

$m

Interests in associates

24,384

 

22,244

 

Interests in joint ventures1

90

 

163

 

Interests in associates and joint ventures

24,474

 

22,407

 

1   During 2019, HSBC increased its shareholding in HSBC Saudi Arabia, which is now recognised as a subsidiary.


Principal associates of HSBC

 

 

2019

2018

 

 

Carrying amount

Fair value1

Carrying amount

Fair value1

 

 

$m

$m

$m

$m

Bank of Communications Co., Limited

 

18,982

 

10,054

 

17,754

 

10,991

 

The Saudi British Bank

 

4,370

 

5,550

 

3,557

 

5,222

 

1   Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy).

 

 

At 31 Dec 2019

 

Footnotes

Country of incorporation and principal place of business

Principal

activity

HSBC's

interest

%

Bank of Communications Co., Limited

 

People's Republic of China

Banking services

19.03

 

The Saudi British Bank

1

Saudi Arabia

Banking services

29.20

 

1   In June 2019, the merger between The Saudi British Bank ('SABB') and Alawwal bank ('Alawwal') became effective. The merger involved SABB issuing a fixed number of new shares to Alawwal's shareholders in exchange for the transfer of Alawwal's net assets and cancellation of its shares. HSBC's 40.0% interest in SABB reduced to 29.2% of the combined entity, resulting in a dilution gain of $828m recognised in HSBC's consolidated income statement. The dilution gain represents the difference between the carrying amount of HSBC's interest in SABB that was derecognised proportionate to the percentage reduction, and HSBC's share of the increase in the combined entity's net assets. The combined entity continues to be an associate of HSBC.


A list of all associates and joint ventures is set out in Note 37.

Bank of Communications Co., Limited

The Group's investment in Bank of Communications Co., Limited ('BoCom') is classified as an associate. Significant influence in BoCom was established via representation on BoCom's Board of Directors and participation in a technical cooperation and exchange programme ('TCEP'). Under the TCEP, a number of HSBC staff have been seconded to assist in the maintenance of BoCom's financial and operating policies. Investments in associates are recognised using the equity method of accounting in accordance with IAS 28, whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the Group's share of BoCom's net assets. An impairment test is required if there is any indication of impairment.

Impairment testing

At 31 December 2019, the fair value of the Group's investment in BoCom had been below the carrying amount for approximately eight years. As a result, the Group performed an impairment test on the carrying amount, which confirmed that there was no impairment at 31 December 2019 as the recoverable amount as determined by a value-in-use ('VIU') calculation was higher than the carrying value.


 

At 31 Dec 2019

At 31 Dec 2018

 

VIU

Carrying value

Fair value

VIU

Carrying value

Fair value

 

$bn

$bn

$bn

$bn

$bn

$bn

BoCom

21.5

 

19.0

 

10.1

 

18.0

 

17.8

 

11.0

 


In future periods, the VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs are described below and are based on factors observed at period-end. The factors that could result in a change in the VIU and an impairment include a short-term underperformance by BoCom, a change in regulatory capital requirements or an increase in uncertainty regarding the future performance of BoCom resulting in a downgrade of the future asset growth or profitability. An increase in the discount rate as a result of an increase in the risk premium or risk-free rates could also result in a reduction of VIU and an impairment. At the point where the carrying value exceeds the VIU, impairment would be recognised.

If the Group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying value.

Basis of recoverable amount

The impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management's best estimates of future earnings available to ordinary shareholders prepared in accordance with IAS 36. Significant management judgement is required in arriving at the best estimate. There are two main components to the VIU calculation. The first component is management's best estimate of BoCom's earnings, which is based on explicit forecasts over the short to medium term. This results in forecast earnings growth that is lower than recent historical actual growth and also reflects the uncertainty arising from the current economic outlook. Earnings beyond the short to medium term are then extrapolated in perpetuity using a long-term growth rate to derive a terminal value, which comprises the majority of the VIU. The second component is the capital maintenance charge ('CMC'), which is management's forecast of the earnings that need to be withheld in order for BoCom to meet regulatory capital requirements over the forecast period, meaning that CMC is deducted when arriving at management's estimate of future earnings available to ordinary shareholders. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets and the expected minimum regulatory capital requirements. An increase in the CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management considers other factors, including qualitative factors, to ensure that the inputs to the VIU calculation remain appropriate.

Key assumptions in value-in-use calculation

We used a number of assumptions in our VIU calculation, in accordance with the requirements of IAS 36:

•    Long-term profit growth rate: 3% (2018: 3%) for periods after 2023, which does not exceed forecast GDP growth in mainland China and is consistent with forecasts by external analysts.

•    Long-term asset growth rate: 3% (2018: 3%) for periods after 2023, which is the rate that assets are expected to grow to achieve long-term profit growth of 3%.

•    Discount rate: 11.24% (2018: 11.82%). This is based on a capital asset pricing model ('CAPM') calculation for BoCom, using market data. Management also compares the rate derived from the CAPM with discount rates from external sources. The discount rate used is within the range of 10.0% to 15.0% (2018: 10.4% to 15.0%) indicated by external sources.

•    Expected credit losses as a percentage of customer advances: 0.95% (2018: ranges from 0.73% to 0.79%) in the short to medium term and reflect increases due to the US-China trade tensions and BoCom's actual results. For periods after 2023, the ratio is 0.76% (2018: 0.70%). This ratio was increased to provide greater weighting to the most recent data points and analyst forecasts.

•    Risk-weighted assets as a percentage of total assets: 61% (2018: 62%) for all forecast periods. This is consistent with BoCom's actual results and slightly higher than the forecasts disclosed by external analysts.

•    Cost-income ratio: ranges from 37.1% to 38.8% (2018: 38.7% to 39.0%) in the short to medium term. This is slightly above BoCom's actual results in recent years and within the range of forecasts disclosed by external analysts.

•    Effective tax rate: ranges from 12.0% to 17.0% (2018: 13.8% to 22.3%) in the short to medium term reflecting BoCom's actual results and an expected increase towards the long-term assumption. For periods after 2023, the rate is 22.5% (2018: 22.5%), which is slightly higher than the historical average.

•    Capital requirements: Capital adequacy ratio of 11.5% (2018:11.5%) and tier 1 capital adequacy ratio of 9.5% (2018: 9.5%), based on the minimum regulatory requirements.

The following table shows the change to each key assumption in the VIU calculation that on its own would reduce the headroom to nil:

Key assumption

Changes to key assumption to reduce headroom to nil

•     Long-term profit growth rate

•     Decrease by 99 basis points

•     Long-term asset growth rate

•     Increase by 80 basis points

 

•     Discount rate

•     Increase by 122 basis points

 

•     Expected credit losses as a percentage of customer advances

•     Increase by 16 basis points

 

•     Risk-weighted assets as a percentage of total assets

•     Increase by 624 basis points

 

•     Cost-income ratio

•     Increase by 373 basis points
 

•     Long-term effective tax rate

•     Increase by 900 basis points

•     Capital requirements - capital adequacy ratio

 

•     Increase by 118 basis points

•     Capital requirements - tier 1 capital adequacy ratio

 

•     Increase by 190 basis points

 

The following table further illustrates the impact on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity of the VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change may occur at the same time. The selected rates of reasonably possible changes to key assumptions are largely based on external analysts' forecasts, which can change period to period.


Sensitivity of VIU to reasonably possible changes in key assumptions

 

Favourable change

Unfavourable change

 

 

Increase
 in VIU

VIU

 

Decrease
in VIU

VIU

 

bps

$bn

$bn

bps

$bn

$bn

At 31 Dec 2019

 

 

 

 

 

 

Long-term profit growth rate

-

 

-

 

21.5

 

(50

)

(1.3

)

20.2

 

Long-term asset growth rate

(50

)

1.4

 

22.9

 

-

 

-

 

21.5

 

Discount rate

(54

)

1.4

 

22.9

 

56

 

(1.2

)

20.3

 

Expected credit losses as a percentage of customer advances

2019 to 2023: 90
2024 onwards: 70

1.0

 

22.5

 

2019 to 2023: 108
2024 onwards: 81

(1.2

)

20.3

 

Risk-weighted assets as a percentage of total assets

(96

)

0.4

 

21.9

 

12

 

-

 

21.5

 

Cost-income ratio

(175

)

1.0

 

22.5

 

95

 

(1.2

)

20.3

 

Long-term effective tax rate

(352

)

1.0

 

22.5

 

250

 

(0.7

)

20.8

 

Earnings in short to medium term - compound annual growth rate1

107

 

0.5

 

22.0

 

(346

)

(2.4

)

19.1

 

Capital requirements - capital adequacy ratio

-

 

-

 

21.5

 

337

 

(8.2

)

13.3

 

Capital requirements - tier 1 capital adequacy ratio

-

 

-

 

21.5

 

322

 

(6.0

)

15.5

 

At 31 Dec 2018

 

 

 

 

 

 

Long-term profit growth rate

100

 

2.6

 

20.6

 

(10

)

(0.2

)

17.8

 

Long-term asset growth rate

(10

)

0.3

 

18.3

 

100

 

(2.8

)

15.3

 

Discount rate

(142

)

3.2

 

21.3

 

28

 

(0.5

)

17.5

 

Expected credit losses as a percentage of customer advances

2018 to 2022: 70
2023 onwards: 65

0.9

 

18.9

 

2018 to 2022: 83
2023 onwards: 77

(1.0

)

17.0

 

Risk-weighted assets as a percentage of total assets

(140

)

0.5

 

18.6

 

80

 

(0.3

)

17.8

 

Cost-income ratio

(160

)

1.1

 

19.2

 

200

 

(1.4

)

16.7

 

Long-term effective tax rate

(280

)

0.7

 

18.7

 

250

 

(0.6

)

17.5

 

Earnings in short to medium term - compound annual growth rate1,2

204

 

1.1

 

19.1

 

(366

)

(1.8

)

16.2

 

Capital requirements - capital adequacy ratio

-

 

-

 

18.0

 

258

 

(5.0

)

13.0

 

Capital requirements - tier 1 capital adequacy ratio

-

 

-

 

18.0

 

243

 

(3.2

)

14.8

 

1   Based on management's explicit forecasts over the short to medium term.

2   Amounts at 31 December 2018 have been updated to align with the 2019 approach to describe the impact of the change in isolation.


Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of VIU is $18.5bn to $22.8bn (2018: $15.5bn to $19.6bn). The range is based on the favourable/unfavourable change in the earnings in the short- to medium-term and long-term expected credit losses as a percentage of customer advances as set out in the table above. All other long-term assumptions, the discount rate and the basis of the CMC have been kept unchanged when determining the reasonably possible range of the VIU.

Selected financial information of BoCom

The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2019, HSBC included the associate's results on the basis of the financial statements for the 12 months ended 30 September 2019, taking into account changes in the subsequent period from 1 October 2019 to 31 December 2019 that would have materially affected the results.


Selected balance sheet information of BoCom

 

 

At 30 Sep

 

 

2019

2018

 

 

$m

$m

Cash and balances at central banks

 

112,239

 

125,414

 

Loans and advances to banks and other financial institutions

 

108,026

 

102,980

 

Loans and advances to customers

 

730,510

 

686,951

 

Other financial assets

 

435,740

 

408,136

 

Other assets

 

40,101

 

42,106

 

Total assets

 

1,426,616

 

1,365,587

 

Deposits by banks and other financial institutions

 

290,492

 

304,395

 

Customer accounts

 

868,627

 

829,539

 

Other financial liabilities

 

131,772

 

94,900

 

Other liabilities

 

23,074

 

36,332

 

Total liabilities

 

1,313,965

 

1,265,166

 

Total equity

 

112,651

 

100,421

 


Reconciliation of BoCom's total shareholders' equity to the carrying amount in HSBC's consolidated financial statements

 

At 30 Sep

 

2019

2018

 

$m

$m

HSBC's share of total shareholders' equity

18,509

 

17,275

 

Goodwill and other intangible assets

473

 

479

 

Carrying amount

18,982

 

17,754

 


Selected income statement information of BoCom

 

For the 12 months ended 30 Sep

 

2019

2018

 

$m

$m

Net interest income

20,558

 

19,295

 

Net fee and commission income

6,411

 

6,245

 

Change in expected credit losses and other credit impairment charges

(7,479

)

(5,602

)

Depreciation and amortisation

(1,934

)

(767

)

Tax expense

(1,636

)

(1,554

)

Profit for the year

11,175

 

11,116

 

Other comprehensive income

315

 

190

 

Total comprehensive income

11,490

 

11,306

 

Dividends received from BoCom

613

 

611

 


Associates and joint ventures

For the year ended 31 December 2019, HSBC's share of associates' and joint ventures' tax on profit was $314m (2018: $306m). This is included within 'Share of profit in associates and joint ventures' in the consolidated income statement.


19

Investments in subsidiaries


Main subsidiaries of HSBC Holdings

 

At 31 Dec 2019

 

Place of incorporation or registration

HSBC's interest %

 

 

Share class

Europe

 

 

 

HSBC Bank plc

England and Wales

100

£1 Ordinary, $0.01 Non-cumulative third Dollar Preference

HSBC UK Bank plc

England and Wales

100

£1 Ordinary

HSBC France

France

99.99

€5 Actions

HSBC Trinkaus & Burkhardt AG

Germany

80.67

Stückaktien no par value

Asia

 

 

 

Hang Seng Bank Limited

Hong Kong

62.14

HK$5 Ordinary

HSBC Bank (China) Company Limited

People's Republic of China

100

CNY1 Ordinary

HSBC Bank Malaysia Berhad

Malaysia

100

RM0.50 Ordinary

HSBC Life (International) Limited

Bermuda

100

HK$1 Ordinary

The Hongkong and Shanghai Banking Corporation Limited

Hong Kong

100

Ordinary no par value

Middle East and North Africa

 

 

 

HSBC Bank Middle East Limited

United Arab Emirates

100

$1 Ordinary and $1 Cumulative Redeemable Preference shares (CRP)

North America

 

 

 

HSBC Bank Canada

Canada

100

Common no par value and Preference no par value

HSBC Bank USA, N.A.

US

100

$100 Common and $0.01 Preference

Latin America

 

 

 

HSBC Mexico, S.A., Institución de Banca Múltiple,
Grupo Financiero HSBC

Mexico

99.99

MXN2 Ordinary


Details of the debt, subordinated debt and preference shares issued by the main subsidiaries to parties external to the Group are included in Note 25 'Debt securities in issue' and Note 28 'Subordinated liabilities', respectively.

A list of all related undertakings is set out in Note 37. The principal countries of operation are the same as the countries and territories of incorporation except for HSBC Life (International) Limited, which operates mainly in Hong Kong.

HSBC is structured as a network of regional banks and locally incorporated regulated banking entities. Each bank is separately capitalised in accordance with applicable prudential requirements and maintains a capital buffer consistent with the Group's risk appetite for the relevant country or region. HSBC's capital management process is incorporated in the annual operating plan, which is approved by the Board.

HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings' issuance of equity and non-equity capital, and by profit retention. The increase in HSBC Holdings' investments in subsidiaries during the year is primarily driven by new capital injections of $3,721m (2018: net increase of $65,222m), partially offset by $2,562m impairment charges (2018: net reversal of $2,064m), which includes $2,475m impairment of HSBC Overseas Holdings (UK) Limited.

As part of its capital management process, HSBC Holdings seeks to maintain a balance between the composition of its capital and its investment in subsidiaries. Subject to this, there is no current or foreseen impediment to HSBC Holdings' ability to provide funding for such investments. During 2019, consistent with the Group's capital plan, the Group's subsidiaries did not experience any significant restrictions on paying dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged with regard to planned dividends or payments. However, the ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial and operating performance.

The amount of guarantees by HSBC Holdings in favour of other Group entities is set out in Note 32.

Information on structured entities consolidated by HSBC where HSBC owns less than 50% of the voting rights is included in Note 20 'Structured entities'. In each of these cases, HSBC controls and consolidates an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.


Subsidiaries with significant non-controlling interests

 

2019

2018

Hang Seng Bank Limited

 

 

Proportion of ownership interests and voting rights held by non-controlling interests

37.86

%

37.86%

Place of business

Hong Kong

Hong Kong

 

$m

$m

Profit attributable to non-controlling interests

1,229

1,194

 

Accumulated non-controlling interests of the subsidiary

7,262

6,637

 

Dividends paid to non-controlling interests

720

647

 

Summarised financial information:

 

 

-  total assets

212,485

197,867

 

-  total liabilities

191,819

179,450

 

-  net operating income before changes in expected credit losses and other credit impairment charges

5,558

5,294

 

-  profit for the year

3,251

3,159

 

-  total comprehensive income for the year

3,461

2,950

 


20

Structured entities

HSBC is mainly involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets, conduits and investment funds, established either by HSBC or a third party.


Consolidated structured entities

Total assets of HSBC's consolidated structured entities, split by entity type

 

Conduits

Securitisations

HSBC
managed funds

Other

Total

 

$bn

$bn

$bn

$bn

$bn

At 31 Dec 2019

8.6

 

9.6

 

6.8

 

6.7

 

31.7

 

At 31 Dec 2018

9.2

 

5.7

 

6.5

 

4.4

 

25.8

 


Conduits

HSBC has established and manages two types of conduits: securities investment conduits ('SICs') and multi-seller conduits.

Securities investment conduits

The SICs purchase highly rated ABSs to facilitate tailored investment opportunities.

•    At 31 December 2019, Solitaire, HSBC's principal SIC, held $2.1bn of ABSs (2018: $2.3bn). It is currently funded entirely by commercial paper ('CP') issued to HSBC. Although HSBC continues to provide a liquidity facility, Solitaire has no need to draw on it as long as HSBC purchases its issued CP, which HSBC intends to do for the foreseeable future. At 31 December 2019, HSBC held $3.2bn of CP (2018: $3.4bn).

•    As at 31 December 2019, Barion, Malachite and Mazarin are fully redeemed vehicles with no current trading activity.

Multi-seller conduit

HSBC's multi-seller conduit was established to provide access to flexible market-based sources of finance for its clients. Currently, HSBC bears risk equal to the transaction-specific facility offered to the multi-seller conduit, amounting to $12.4bn at 31 December 2019 (2018: $16.1bn). First loss protection is provided by the originator of the assets, and not by HSBC, through transaction-specific credit enhancements. A layer of secondary loss protection is provided by HSBC in the form of programme-wide enhancement facilities.

Securitisations

HSBC uses structured entities to securitise customer loans and advances it originates in order to diversify its sources of funding for asset origination and capital efficiency purposes. The loans and advances are transferred by HSBC to the structured entities for cash or synthetically through credit default swaps, and the structured entities issue debt securities to investors.

HSBC managed funds

HSBC has established a number of money market and non-money market funds. Where it is deemed to be acting as principal rather than agent in its role as investment manager, HSBC controls these funds.

Other

HSBC has entered into a number of transactions in the normal course of business, which include asset and structured finance transactions where it has control of the structured entity. In addition, HSBC is deemed to control a number of third-party managed funds through its involvement as a principal in the funds.

Unconsolidated structured entities

The term 'unconsolidated structured entities' refers to all structured entities not controlled by HSBC. The Group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities.


Nature and risks associated with HSBC interests in unconsolidated structured entities

 

Securitisations

HSBC managed funds

Non-HSBC managed funds

Other

Total

Total asset values of the entities ($m)

0-500

91

 

236

 

670

 

70

 

1,067

 

500-2,000

12

 

70

 

642

 

7

 

731

 

2,000-5,000

-

 

28

 

345

 

-

 

373

 

5,000-25,000

-

 

14

 

260

 

-

 

274

 

25,000+

-

 

3

 

39

 

2

 

44

 

Number of entities at 31 Dec 2019

103

 

351

 

1,956

 

79

 

2,489

 

 

$bn

$bn

$bn

$bn

$bn

Total assets in relation to HSBC's interests in the unconsolidated structured entities

5.3

 

9.1

 

15.1

 

4.2

 

33.7

 

-  trading assets

-

 

0.2

 

3.5

 

1.3

 

5

 

-  financial assets designated and otherwise mandatorily measured at fair value

-

 

8.4

 

10.7

 

-

 

19.1

 

-  loans and advances to customers

5.3

 

-

 

0.4

 

2.3

 

8

 

-  financial investments

-

 

0.5

 

0.5

 

-

 

1

 

-  other assets

-

 

-

 

-

 

0.6

 

0.6

 

Total liabilities in relation to HSBC's interests in the unconsolidated structured entities

-

 

-

 

-

 

0.3

 

0.3

 

-  other liabilities

-

 

-

 

-

 

0.3

 

0.3

 

Other off-balance sheet commitments

0.3

 

0.3

 

3.9

 

0.7

 

5.2

 

HSBC's maximum exposure at 31 Dec 2019

5.6

 

9.4

 

19.0

 

4.6

 

38.6

 

 

 

 

 

 

 

Total asset values of the entities ($m)

 

 

 

 

 

0-500

76

 

243

 

906

 

79

 

1,304

 

500-2,000

10

 

56

 

570

 

5

 

641

 

2,000-5,000

1

 

17

 

230

 

-

 

248

 

5,000-25,000

-

 

5

 

90

 

1

 

96

 

25,000+

-

 

2

 

10

 

-

 

12

 

Number of entities at 31 Dec 2018

87

 

323

 

1,806

 

85

 

2,301

 

 

$bn

$bn

$bn

$bn

$bn

Total assets in relation to HSBC's interests in the unconsolidated structured entities

3.8

 

8.3

 

8.9

 

4.7

 

25.7

 

-  trading assets

-

 

0.1

 

0.3

 

1.3

 

1.7

 

-  financial assets designated and otherwise mandatorily measured at fair value

-

 

7.3

 

7.9

 

-

 

15.2

 

-  loans and advances to customers

3.8

 

-

 

0.3

 

2.7

 

6.8

 

-  financial investments

-

 

0.9

 

0.4

 

0.3

 

1.6

 

-  other assets

-

 

-

 

-

 

0.4

 

0.4

 

Total liabilities in relation to HSBC's interests in the unconsolidated structured entities

-

 

-

 

-

 

0.2

 

0.2

 

-  other liabilities

-

 

-

 

-

 

0.2

 

0.2

 

Other off-balance sheet commitments

0.8

 

0.1

 

3.3

 

1.0

 

5.2

 

HSBC's maximum exposure at 31 Dec 2018

4.6

 

8.4

 

12.2

 

5.5

 

30.7

 


The maximum exposure to loss from HSBC's interests in unconsolidated structured entities represents the maximum loss it could incur as a result of its involvement with these entities regardless of the probability of the loss being incurred.

•    For commitments, guarantees and written credit default swaps, the maximum exposure to loss is the notional amount of potential future losses.

•    For retained and purchased investments in and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying value of these interests at the balance sheet reporting date.

The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements that HSBC has entered into in order to mitigate the Group's exposure to loss.

Securitisations

HSBC has interests in unconsolidated securitisation vehicles through holding notes issued by these entities. In addition, HSBC has investments in ABSs issued by third-party structured entities.

HSBC managed funds

HSBC establishes and manages money market funds and non-money market investment funds to provide customers with investment opportunities. Further information on funds under management is provided on page 60.

HSBC, as fund manager, may be entitled to receive management and performance fees based on the assets under management. HSBC may also retain units in these funds.

Non-HSBC managed funds

HSBC purchases and holds units of third-party managed funds in order to facilitate business and meet customer needs.

Other

HSBC has established structured entities in the normal course of business, such as structured credit transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions.

In addition to the interests disclosed above, HSBC enters into derivative contracts, reverse repos and stock borrowing transactions with structured entities. These interests arise in the normal course of business for the facilitation of third-party transactions and risk management solutions.

HSBC sponsored structured entities

The amount of assets transferred to and income received from such sponsored structured entities during 2019 and 2018 were not significant.


21

Goodwill and intangible assets

 

 

 

2019

2018

 

Footnotes

$m

$m

Goodwill

 

5,590

 

12,986

 

Present value of in-force long-term insurance business

 

8,945

 

7,149

 

Other intangible assets

1

5,628

 

4,222

 

At 31 Dec

 

20,163

 

24,357

 

1   Included within other intangible assets is internally generated software with a net carrying value of $4,829m (2018: $3,632m). During the year, capitalisation of internally generated software was $2,086m (2018: $1,781m) and amortisation was $947m (2018: $687m).


Movement analysis of goodwill

 

2019

2018

 

$m

$m

Gross amount

 

 

At 1 Jan

22,180

 

22,902

 

Exchange differences

(154

)

(617

)

Other

58

 

(105

)

At 31 Dec

22,084

 

22,180

 

Accumulated impairment losses

 

 

At 1 Jan

(9,194

)

(9,314

)

Impairment losses

(7,349

)

-

 

Exchange differences

49

 

120

 

At 31 Dec

(16,494

)

(9,194

)

Net carrying amount at 31 Dec

5,590

 

12,986

 


Impairment testing

The Group's impairment test in respect of goodwill allocated to each cash-generating unit ('CGU') is performed at 1 July each year. A review for indicators of impairment is undertaken at each subsequent quarter-end and at 31 December 2019.

31 December 2019 impairment test

Having considered the extent of our 2020 business update, current market conditions and their combined potential impact on HSBC's operations, an interim impairment test was performed at 31 December 2019 for all CGUs. As a result, we recognised $7.3bn of goodwill impairment related to five CGUs: GB&M; Europe - CMB; North America - GPB; Latin America - CMB; and Middle East and North Africa - CMB.

Impairment resulted from a combination of factors, including our macroeconomic outlook, a corresponding judgement to reduce the basis of the long-term growth rate assumption used to estimate value in use ('VIU'), IFRS requirements which limit elements of management-approved forecasts that should be considered when testing goodwill for impairment (see 'Management's judgement in estimating cash flows of a CGU' on page 290) and lower forecast profitability in some businesses. Significant inputs to the VIU calculation are discussed in more detail within 'Basis of the recoverable amount' on page 290. Management considered the sensitivity of certain assumptions and the outcome of reasonably possible alternative scenarios. This resulted in full impairment of goodwill for the five CGUs.

Impairment results and key assumptions in VIU calculation - impaired CGUs

 

Carrying amount

of which goodwill

Value in use

Impairment

Discount rate

Growth rate beyond initial cash flow projections

 

$bn

$bn

$bn

$bn

%

%

Cash-generating unit

 

 

 

 

 

 

GB&M

60.7

 

4.0

 

55.8

 

4.0

 

9.5

 

2.0

 

Europe - CMB

20.0

 

2.5

 

17.5

 

2.5

 

9.5

 

1.8

 

North America - GPB

0.9

 

0.4

 

0.5

 

0.4

 

9.5

 

2.1

 

Latin America - CMB

1.3

 

0.3

 

1.0

 

0.3

 

17.0

 

3.6

 

Middle East and North Africa - CMB

2.6

 

0.1

 

1.5

 

0.1

 

13.3

 

2.4

 

2019 impairment recognised

 

 

 

7.3

 

 

 

 

Basis of the recoverable amount

The recoverable amount of all CGUs to which goodwill has been allocated was equal to its VIU at each respective testing date. The VIU is calculated by discounting management's cash flow projections for the CGU. The key assumptions used in the VIU calculation for each individually significant CGU that is not impaired are discussed below.


Key assumptions in VIU calculation - significant CGUs at 31 December 2019

 

 

 

 

Goodwill at 31 Dec 2019

Discount rate

Growth rate beyond initial cash flow

Goodwill at
1 Jul 2019

Discount
rate

Nominal growth rate beyond initial cash flow projections

Goodwill at
1 Jul 2018

Discount

rate

Nominal

growth rate beyond initial cash flow projections

 

$m

%

%

$m

%

%

$m

%

%

Cash-generating unit Europe - RBWM

3,464

 

8.3

 

1.7

 

3,496

 

8.3

 

3.2

 

3,565

 

8.1

 

3.8

 


At 31 December 2019, aggregate goodwill of $2,126m (1 July 2019: $2,938m; 1 July 2018: $3,061m) had been allocated to CGUs that were not considered individually significant. The Group's CGUs do not carry on their balance sheets any significant intangible assets with indefinite useful lives, other than goodwill.

Management's judgement in estimating the cash flows of a CGU

The cash flow projections for each CGU are based on plans approved by the Board. The Board challenges and endorses planning assumptions in light of internal capital allocation decisions necessary to support our strategy, current market conditions and macroeconomic outlook. For the 31 December 2019 interim impairment test, cash flow projections until the end of Q1 2024 were considered. As required by IFRSs, estimates of future cash flows exclude estimated cash inflows or outflows that are expected to arise from restructuring initiatives before an entity has a constructive obligation to carry out the plan, and would therefore have recognised a provision for restructuring costs. Our business update includes plans to reduce operating costs by approximately $4.5bn by 2022, incurring costs to achieve these reductions of $6.0bn. Accordingly, we have excluded these components of the plan approved by the Board as they relate to individual CGUs when calculating VIU.

Discount rate

The rate used to discount the cash flows is based on the cost of capital assigned to each CGU, which is derived using a capital asset pricing model ('CAPM'). CAPM depends on a number of inputs reflecting financial and economic variables, including the risk-free rate and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market's assessment of the economic variables and management's judgement. The discount rates for each CGU are refined to reflect the rates of inflation for the countries within which the CGU operates. In addition, for the purposes of testing goodwill for impairment, management supplements this process by comparing the discount rates derived using the internally generated CAPM, with the cost of capital rates produced by external sources for businesses operating in similar markets.

Long-term growth rate

The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term perspective within the Group of business units making up the CGUs. Prior to the 31 December 2019 impairment test, these growth rates reflected GDP and inflation (nominal GDP) for the countries within which the CGU operates or from which it derives revenue. At 31 December 2019 we considered the extent to which growth rates based on nominal GDP data remained appropriate given the uncertainty in the macroeconomic environment from the impact of social unrest in Hong Kong, trade disagreements between the US and China and the UK's withdrawal from the EU. We anticipate that when global growth does stabilise it will be at a slightly lower level than recent years. As a result, we considered it appropriate to base the long-term growth rate assumption on inflation data, moving away from a higher nominal GDP basis. This judgement had a material impact on the goodwill impairment outcome.

Sensitivities of key assumptions in calculating VIU

At 31 December 2019, Europe - RBWM was sensitive to reasonably possible adverse changes in key assumptions supporting the recoverable amount. In making an estimate of reasonably possible changes to assumptions, management considers the available evidence in respect of each input to the model, such as the external range of discount rates observable, historical performance against forecast and risks attaching to the key assumptions underlying cash flow projections. A reasonable change in a single key assumption may not result in impairment. Though taken together a combination of reasonable changes in key assumptions could result in a recoverable amount that is lower than the CGU's carrying amount.

 

Cash-generating unit

 

 

 

 

Europe - RBWM

Cash flow projections

•      Level of interest rates and yield curves.

•      Competitors' position within the market.

•      Level and change in unemployment rates.

•      Uncertain regulatory environment.

•      Customer remediation and regulatory actions.

•      Cash flow projections decrease by 30%. This does not result in an impairment.

 

Discount rate

•      Discount rate used is a reasonable estimate of a suitable market rate for the profile of the business.

•      External evidence suggests that the rate used is not appropriate to the business.

•      Discount rate increases by 100 bps. This does not result in an impairment.

 

 

Sensitivity of VIU to reasonably possible changes in key assumptions and changes to current assumptions to achieve nil headroom

 

Europe - RBWM

In $ billions (unless otherwise stated)

$bn

At 31 December 2019

 

Carrying amount

10.1

VIU

16.7

Impact on VIU

 

100 bps increase in the discount rate - single variable

(2.3

)

30% decrease in cash flow projections - single variable

(5.6

)

Cumulative impact of all changes

(7.1

)

Changes to key assumption to reduce headroom to NIL - single variable

 

Discount rate - bps

397

 

Cash flows - %

(39.4

)


Present value of in-force long-term insurance business

When calculating the present value of in-force long-term ('PVIF') insurance business, expected cash flows are projected after adjusting for a variety of assumptions made by each insurance operation to reflect local market conditions and management's judgement of future trends and uncertainty in the underlying assumptions is reflected by applying margins (as opposed to a cost of capital methodology) including valuing the cost of policyholder options and guarantees using stochastic techniques.

Actuarial Control Committees of each key insurance entity meet on a quarterly basis to review and approve PVIF assumptions. All changes to non-economic assumptions, economic assumptions that are not observable and model methodologies must be approved by the Actuarial Control Committee.


Movements in PVIF

 

 

2019

2018

 

Footnotes

$m

$m

As at 31 Dec 2017

 

7,149

 

6,610

 

Impact on transition to IFRS 9

 

NA

(78

)

At 1 Jan

 

7,149

 

6,532

 

Change in PVIF of long-term insurance business

 

1,749

 

673

 

-  value of new business written during the year

 

1,225

 

1,117

 

-  expected return

1

(836

)

(719

)

-  assumption changes and experience variances (see below)

 

1,378

 

292

 

-  other adjustments

 

(18

)

(17

)

Exchange differences and other movements

 

47

 

(56

)

At 31 Dec

 

8,945

 

7,149

 

1   'Expected return' represents the unwinding of the discount rate and reversal of expected cash flows for the period.


Assumption changes and experience variances

Included within this line item are:

•    $1,126m (2018: $(56)m), directly offsetting interest rate-driven changes to the valuation of liabilities under insurance contracts.

•    $36m (2018: $455m), reflecting the future expected sharing of returns with policyholders on contracts with discretionary participation features ('DPF'), to the extent this sharing is not already included in liabilities under insurance contracts.

•    $216m (2018: $(107)m), driven by other assumptions changes and experience variances.

Key assumptions used in the computation of PVIF for main life insurance operations

Economic assumptions are set in a way that is consistent with observable market values. The valuation of PVIF is sensitive to observed market movements and the impact of such changes is included in the sensitivities presented below.


 

2019

2018

 

Hong Kong

France1

Hong Kong

France1

 

%

%

%

%

Weighted average risk-free rate

1.84

 

0.44

 

2.29

 

1.52

 

Weighted average risk discount rate

5.44

 

1.27

 

5.90

 

2.35

 

Expense inflation

3.00

 

1.70

 

3.00

 

1.70

 

1   For 2019, the calculation of France's PVIF assumes a risk discount rate of 1.27% (2018: 2.35%) plus a risk margin of $130m (2018: $109m).


Sensitivity to changes in economic assumptions

The Group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding explicit allowances for risks not reflected in the best-estimate cash flow modelling. Where the insurance operations provide options and guarantees to policyholders the cost of these options and guarantees is an explicit reduction to PVIF, unless it is already allowed for as an explicit addition to the technical provisions required by regulators. For further details of these guarantees and the impact of changes in economic assumptions on our insurance manufacturing subsidiaries, see page 150.


Sensitivity to changes in non-economic assumptions

Policyholder liabilities and PVIF are determined by reference to non-economic assumptions, including mortality and/or morbidity, lapse rates and expense rates. For further details on the impact of changes in non-economic assumptions on our insurance manufacturing operations, see page 151.


22

Prepayments, accrued income and other assets

 

 



2019

2018

 

Footnotes

$m

$m

Prepayments and accrued income

 

9,057

 

8,715

 

Settlement accounts

 

14,744

 

13,957

 

Cash collateral and margin receivables

 

49,148

 

33,202

 

Assets held for sale

 

123

 

735

 

Bullion

 

14,830

 

13,753

 

Endorsements and acceptances

 

10,198

 

9,623

 

Reinsurers' share of liabilities under insurance contracts (Note 4)

 

3,592

 

2,506

 

Employee benefit assets (Note 5)

 

8,280

 

7,934

 

Right-of-use assets

1

4,222

 

N/A

Owned property, plant and equipment

 

10,480

 

10,060

 

Other accounts

 

12,006

 

10,086

 

At 31 Dec

 

136,680

 

110,571

 

1   Right-of-use assets have been recognised from 1 January 2019 following the adoption of IFRS 16. Comparatives have not been restated.


Prepayments, accrued income and other assets include $92,979m (2018: $74,151m) of financial assets, the majority of which are measured at amortised cost.


23

Trading liabilities

 

 

 

2019

2018

 

Footnotes

$m

$m

Deposits by banks

1

4,187

 

4,871

 

Customer accounts

1

6,999

 

8,614

 

Other debt securities in issue (Note 25)

 

1,404

 

1,400

 

Other liabilities - net short positions in securities

 

70,580

 

69,546

 

At 31 Dec

 

83,170

 

84,431

 

1   'Deposits by banks' and 'Customer accounts' include repos, stock lending and other amounts.

 


24

Financial liabilities designated at fair value


HSBC

 

 

2019

2018

 

Footnotes

$m

$m

Deposits by banks and customer accounts

1

17,660

 

19,003

 

Liabilities to customers under investment contracts

 

5,893

 

5,458

 

Debt securities in issue (Note 25)

 

130,364

 

109,351

 

Subordinated liabilities (Note 28)

 

10,130

 

14,282

 

Preferred securities (Note 28)

 

419

 

411

 

At 31 Dec

 

164,466

 

148,505

 

1   Structured deposits placed at HSBC Bank USA and HSBC Trust Company (Delaware) National Association are insured by the Federal Deposit Insurance Corporation, a US government agency, up to $250,000 per depositor.


The carrying amount of financial liabilities designated at fair value was $6,120m more than the contractual amount at maturity (2018: $11,496m less). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of $2,877m (2018: loss of $209m).


HSBC Holdings

 

2019

2018

 

$m

$m

Debt securities in issue (Note 25)

24,687

 

17,767

 

Subordinated liabilities (Note 28)

5,616

 

7,282

 

At 31 Dec

30,303

 

25,049

 


The carrying amount of financial liabilities designated at fair value was $2,227m more than the contractual amount at maturity
(2018: $920m more). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of $1,386m (2018: loss of $812m).


25

Debt securities in issue


HSBC

 

 

 

2019

2018

 

 

$m

$m

Bonds and medium-term notes

 

180,969

 

162,277

 

Other debt securities in issue

 

55,354

 

33,816

 

Total debt securities in issue

 

236,323

 

196,093

 

Included within:

 

 

 

-  trading liabilities (Note 23)

 

(1,404

)

(1,400

)

-  financial liabilities designated at fair value (Note 24)

 

(130,364

)

(109,351

)

At 31 Dec

 

104,555

 

85,342

 


HSBC Holdings

 

2019

2018

 

$m

$m

Debt securities

81,531

 

68,567

 

Included within:

 

 

-  financial liabilities designated at fair value (Note 24)

(24,687

)

(17,767

)

At 31 Dec

56,844

 

50,800

 


26

Accruals, deferred income and other liabilities

 

 

2019

2018

 

$m

$m

Accruals and deferred income

11,808

 

11,296

 

Settlement accounts

14,356

 

13,022

 

Cash collateral and margin payables

56,646

 

41,044

 

Endorsements and acceptances

10,127

 

9,633

 

Employee benefit liabilities (Note 5)

1,771

 

2,167

 

Lease liabilities1

4,604

 

N/A

Other liabilities

18,844

 

20,218

 

At 31 Dec

118,156

 

97,380

 

1   Lease liabilities have been recognised from 1 January 2019 following the adoption of IFRS 16. Comparatives have not been restated.


Accruals, deferred income and other liabilities include $111,395m (2018: $87,390m) of financial liabilities, the majority of which are measured at amortised cost.


27

Provisions

 

 

Restructuring
costs

Legal proceedings
and regulatory
matters

Customer
remediation

Other
provisions

Total

 

$m

$m

$m

$m

$m

Provisions (excluding contractual commitments)

 

 

 

 

 

At 1 Jan 2019

130

 

1,128

 

788

 

357

 

2,403

 

Additions

402

 

282

 

1,674

 

223

 

2,581

 

Amounts utilised

(203

)

(660

)

(837

)

(81

)

(1,781

)

Unused amounts reversed

(34

)

(158

)

(49

)

(108

)

(349

)

Exchange and other movements

61

 

13

 

70

 

(111

)

33

 

At 31 Dec 2019

356

 

605

 

1,646

 

280

 

2,887

 

Contractual commitments1

 

 

 

 

 

At 1 Jan 2019

 

 

 

 

517

 

Net change in expected credit loss provision and other movements

 

 

 

 

(6

)

At 31 Dec 2019

 

 

 

 

511

 

Total provisions

 

 

 

 

 

At 31 Dec 2018

 

 

 

 

2,920

 

At 31 Dec 2019

 

 

 

 

3,398

 

 

 

 

Restructuring

costs

Legal proceedings

and regulatory

matters

Customer

remediation

Other

provisions

Total

 

$m

$m

$m

$m

$m

Provisions (excluding contractual commitments)

 

 

 

 

 

At 31 Dec 2017

334

 

1,501

 

1,454

 

469

 

3,758

 

Additions

73

 

1,132

 

288

 

232

 

1,725

 

Amounts utilised

(158

)

(1,255

)

(838

)

(143

)

(2,394

)

Unused amounts reversed

(107

)

(279

)

(90

)

(131

)

(607

)

Exchange and other movements

(12

)

29

 

(26

)

(70

)

(79

)

At 31 Dec 2018

130

 

1,128

 

788

 

357

 

2,403

 

Contractual commitments1

 

 

 

 

 

At 1 Jan 2018

 

 

 

 

537

 

Net change in expected credit loss provision and other movements

 

 

 

 

(20

)

At 31 Dec 2018

 

 

 

 

517

 

Total provisions

 

 

 

 

 

At 31 Dec 2017

 

 

 

 

4,011

 

At 31 Dec 2018

 

 

 

 

2,920

 


1   Contractual commitments include the provision for contingent liabilities measured under IFRS 9 'Financial Instruments' in respect of financial guarantees and the expected credit loss provision on off-balance sheet guarantees and commitments.



Further details of 'Legal proceedings and regulatory matters' are set out in Note 34. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim) or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC.

Customer remediation refers to HSBC's activities to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is often initiated by HSBC in response to customer complaints and/or industry developments in sales practices and is not necessarily initiated by regulatory action. Further details of customer remediation are set out in this note.

Refer to Note 32 for further information on the impact of IFRS 9 on undrawn loan commitments and financial guarantees, presented in 'Contractual commitments'. This provision results from the adoption of IFRS 9 and has no comparatives. Further analysis of the movement in the expected credit loss provision is disclosed within the 'Reconciliation of allowances for loans and advances to banks and customers including loan commitments and financial guarantees' table on page 99.

Payment protection insurance

At 31 December 2019, $1.1bn (2018: $555m) of the customer remediation provision relates to the estimated liability for redress in respect of the possible mis-selling of payment protection insurance ('PPI') policies in previous years.

Payments totalling $750m were made during 2019. An increase in provisions of $1.2bn was recognised during the year, primarily reflecting the deadline of 29 August 2019 for bringing complaints announced by the FCA, and leading to:

•    a higher than expected increase in the number of inbound complaints received prior to 29 August 2019;

•    the effect on the total number of inbound complaints as a result of treating customer information requests relating to PPI policies received between 29 June 2019 and 29 August 2019 as complaints;

•    the additional operational expenses related to the increases in populations of potential claims;

•    an industry-wide exercise by the Official Receiver to pursue redress amounts in respect of bankrupt and insolvent customers; and

•    an increased volume of actual or forecast legal claims for PPI mis-selling, which is not affected by the deadline of 29 August 2019.

The estimated liability for redress for both single and regular premium policies is calculated on the basis of a refund of the total premiums paid by the customer plus simple interest of 8% per annum (or the rate inherent in the related loan product where higher).

Future estimated redress levels are based on historical redress paid to customers per policy.

At 31 December 2019, contact was made with customers who collectively held 3.0 million policies, representing 56% of total policies sold. A total of 5.4 million PPI policies have been sold since 2000, generating estimated revenue of $3.4bn at 2019. The gross written premiums on these policies were approximately $4.5bn. Although the deadline for bringing complaints has passed, customers can still commence litigation for PPI mis-selling. Provision has been made for the best estimate of any obligation to meet those claims. Given the limited period following the complaints time bar, the volume and quality of future claims through legal channels remains uncertain. During the second half of 2019, we received an increasing number of legal claims and Letters Before Action. Our provision estimates that approximately 45,000 claims will be settled in the future.

The following table summarises the cumulative number of information requests received between 29 June and 29 August 2019, and the number of claims expected to be assessed in the future, excluding legal claims:


Cumulative PPI complaints received to 31 December 2019

 

Footnotes

Cumulative actual to
31 Dec 2019

Information requests received during autoconversion period (000s)

1

1,889

Information requests awaiting evaluation (000s)

 

234

Remaining autoconverted claims anticipated to be worked (000s)

1

167

Remaining reactive claims anticipated to be worked (000s)

1

44

Total remaining claims anticipated to be worked (000s)

1

211

Average uphold rate per claim

2

86

%

Average redress per claim ($)

3

3,226

1   Excludes invalid claims for which no PPI policy exists.

2   Including inbound and autoconverted claims, but excludes FOS complaints.

3   Including inbound and autoconverted claims, but excludes claims from the Official Receiver.


The PPI provision is based upon assumptions and estimates taken from historical experience. The profile of cases yet to be assessed could therefore vary leading to different uphold rates or average redress levels being used to arrive at the provision.

We continued to monitor available information up until the date of the approval of the financial statements to ensure the provision estimate was appropriate.

Sensitivity to key assumptions

•    A 10% increase/decrease in the uphold rate for complaints yet to be worked would increase/decrease the redress provision by approximately $40m.

•    A 10% increase/decrease in the average redress for complaints yet to be worked would increase/decrease the redress provision by approximately $56m.

•    An increase/decrease in settled legal claim volumes of 10,000 would increase/decrease the redress provision by approximately $29m.


28

Subordinated liabilities


HSBC's subordinated liabilities

 

2019

2018

 

$m

$m

At amortised cost

24,600

 

22,437

 

-  subordinated liabilities

22,775

 

20,651

 

-  preferred securities

1,825

 

1,786

 

Designated at fair value (Note 24)

10,549

 

14,693

 

-  subordinated liabilities

10,130

 

14,282

 

-  preferred securities

419

 

411

 

At 31 Dec

35,149

 

37,130

 

Issued by HSBC subsidiaries

12,363

 

13,168

 

Issued by HSBC Holdings

22,786

 

23,962

 


Subordinated liabilities rank behind senior obligations and generally count towards the capital base of HSBC. Capital securities may be called and redeemed by HSBC subject to prior notification to the PRA and, where relevant, the consent of the local banking regulator. If not redeemed at the first call date, coupons payable may step up or become floating rate based on interbank rates. On subordinated liabilities other than floating rate notes, interest is payable at fixed rates of up to 10.176%.

The balance sheet amounts disclosed in the following table are presented on an IFRS basis and do not reflect the amount that the instruments contribute to regulatory capital, principally due to regulatory amortisation and regulatory eligibility limits.


HSBC's subsidiaries subordinated liabilities in issue

 

 

 

 

2019

2018

 

Footnotes

First call date

Maturity date

$m

$m

Additional tier 1 capital securities guaranteed by HSBC Holdings

1

 

 

 

 

$900m

10.176% non-cumulative step-up perpetual preferred securities, series 2

 

Jun 2030

 

900

 

892

 

 

 

 

 

 

900

 

892

 

Additional tier 1 capital securities guaranteed by HSBC Bank plc

1

 

 

 

 

£300m

5.862% non-cumulative step-up perpetual preferred securities

 

Apr 2020

 

420

 

411

 

£700m

5.844% non-cumulative step-up perpetual preferred securities

 

Nov 2031

 

925

 

894

 

 

 

 

 

 

1,345

 

1,305

 

Tier 2 securities issued by HSBC Bank plc

 

 

 

 

 

$750m

Undated floating rate primary capital notes

 

Jun 1990

 

750

 

750

 

$500m

Undated floating rate primary capital notes

 

Sep 1990

 

500

 

500

 

$300m

Undated floating rate primary capital notes, series 3

 

Jun 1992

 

300

 

300

 

$300m

7.65% subordinated notes

 

-

 

May 2025

300

 

300

 

 

 

 

 

 

1,850

 

1,850

 

 

 

 

 

 

 

 

£300m

6.50% subordinated notes

 

-

 

Jul 2023

396

 

382

 

£350m

5.375% callable subordinated step-up notes

2

Nov 2025

Nov 2030

549

 

513

 

£500m

5.375% subordinated notes

 

-

 

Aug 2033

875

 

757

 

£225m

6.25% subordinated notes

 

-

 

Jan 2041

296

 

286

 

£600m

4.75% subordinated notes

 

-

 

Mar 2046

785

 

758

 

 

 

 

 

 

4,751

 

4,546

 

Tier 2 securities issued by The Hongkong and Shanghai Banking Corporation Ltd

 

 

 

 

 

$400m

Primary capital undated floating rate notes (third series)

 

Jul 1991

 

400

 

400

 

 

 

 

 

 

400

 

400

 

Tier 2 securities issued by HSBC Bank Malaysia Berhad

 

 

 

 

 

MYR500m

5.05% subordinated bonds

 

Nov 2022

Nov 2027

122

 

121

 

 

 

 

 

 

122

 

121

 

Tier 2 securities issued by HSBC USA Inc.

 

 

 

 

 

$750m

5.00% subordinated notes

6

-

 

Sep 2020

748

 

747

 

$250m

7.20% subordinated debentures

6

-

 

Jul 2097

221

 

221

 

 

Other subordinated liabilities each less than $150m

3

 

 

202

 

269

 

 

 

 

 

 

1,171

 

1,237

 

Tier 2 securities issued by HSBC Bank USA, N.A.

 

 

 

 

 

$1,250m

4.875% subordinated notes

 

-

 

Aug 2020

1,246

 

1,226

 

$1,000m

5.875% subordinated notes

4

-

 

Nov 2034

463

 

1,106

 

$750m

5.625% subordinated notes

4

-

 

Aug 2035

496

 

829

 

$700m

7.00% subordinated notes

 

-

 

Jan 2039

700

 

697

 

 

 

 

 

 

2,905

 

3,858

 

Tier 2 securities issued by HSBC Finance Corporation

 

 

 

 

 

$2,939m

6.676% senior subordinated notes

5, 6

-

 

Jan 2021

507

 

507

 

 

 

 

 

 

 

 

Tier 2 securities issued by HSBC Bank Canada

 

 

 

 

 

 

Other subordinated liabilities each less than $150m

 

Oct 1996

Nov 2083

26

 

29

 

 

 

 

 

 

26

 

29

 

Securities issued by other HSBC subsidiaries

 

 

 

 

 

Other subordinated liabilities each less than $200m

3

 

 

236

 

273

 

Subordinated liabilities issued by HSBC subsidiaries at 31 Dec

7

 

 

12,363

 

13,168

 

1   See paragraph below, 'Guaranteed by HSBC Holdings or HSBC Bank plc'.

2   The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.5 percentage points.

3   Some securities included here are ineligible for inclusion in the capital base of HSBC.

4   HSBC tendered for these securities in November 2019. The principal balance is $358m and $383m respectively. The original notional of these securities are $1,000m and $750m respectively.

5   HSBC tendered for these securities in 2017. In January 2018, a further tender was conducted. The principal balance is $507m. The original notional of these securities is $2,939m.

6   These securities are ineligible for inclusion in the capital base of HSBC.

7   Approximately $60m of these securities were held by HSBC Holdings.


HSBC Holdings' subordinated liabilities

 

2019

2018

 

$m

$m

At amortised cost

18,361

 

17,715

 

Designated at fair value (Note 24)

5,616

 

7,282

 

At 31 Dec

23,977

 

24,997

 


HSBC Holdings' subordinated liabilities in issue

 

 

First call

Maturity

2019

2018

 

Footnotes

date

date

$m

$m

Tier 2 securities issued by HSBC Holdings

 

 

 

 

 

Amounts owed to third parties

 

 

 

 

 

$2,000m

4.25% subordinated notes

2,3

-

 

 Mar 2024

2,076

 

2,001

 

$1,500m

4.25% subordinated notes

2

-

 

Aug 2025

1,611

 

1,494

 

$1,500m

4.375% subordinated notes

2

-

 

 Nov 2026

1,626

 

1,470

 

$488m

7.625% subordinated notes

1

-

 

May 2032

545

 

549

 

$222m

7.35% subordinated notes

1

-

 

Nov 2032

245

 

246

 

$2,000m

6.5% subordinated notes

1

-

 

May 2036

2,036

 

2,040

 

$2,500m

6.5% subordinated notes

1

-

 

Sep 2037

2,738

 

2,419

 

$1,500m

6.8% subordinated notes

1

-

 

Jun 2038

1,490

 

1,489

 

$1,500m

5.25% subordinated notes

2,3

-

 

Mar 2044

1,886

 

1,661

 

 

 

 

 

 

 

 

£650m

5.75% subordinated notes

2

-

 

Dec 2027

1,059

 

960

 

£650m

6.75% subordinated notes

2

-

 

Sep 2028

855

 

826

 

£750m

7.0% subordinated notes

2

-

 

Apr 2038

1,064

 

992

 

£900m

6.0% subordinated notes

2

-

 

Mar 2040

1,294

 

1,156

 

 

 

 

 

 

 

 

€1,750m

6.0% subordinated notes

2

-

 

Jun 2019

-

 

2,125

 

€1,500m

3.375% subordinated notes

2,3

Jan 2019

Jan 2024

-

 

1,719

 

€1,500m

3.0% subordinated notes

2

-

 

Jun 2025

1,736

 

1,725

 

€1,000m

3.125% subordinated notes

2

-

 

Jun 2028

1,321

 

1,233

 

 

 

 

 

 

21,582

 

24,105

 

Amounts owed to HSBC undertakings

 

 

 

 

 

$900m

10.176% subordinated step-up cumulative notes

 

Jun 2030

Jun 2040

892

 

892

 

 

 

 

 

 

892

 

892

 

Other securities issued by HSBC Holdings

 

 

 

 

 

Amounts owed to third parties

 

 

 

 

 

$1,500m

5.625% contingent convertible securities

4

Nov 2019

Jan 2020

1,503

 

-

 

 

 

 

 

 

1,503

 

-

 

At 31 Dec

 

 

 

23,977

 

24,997

 

1   Amounts owed to third parties represent securities included in the capital base of HSBC as tier 2 securities in accordance with the grandfathering provisions under CRR II. Prior period figures are included on a CRD IV basis.

2   These securities are included in the capital base of HSBC as fully CRR II-compliant tier 2 securities on an end point basis.

3   These subordinated notes are measured at amortised cost in HSBC Holdings, where the interest rate risk is hedged using a fair value hedge, while they are measured at fair value in the Group.

4   This security was called by HSBC Holdings on 22 November 2019 and was redeemed and cancelled on 17 January 2020. Between the date of exercise of the call option and the redemption, this security was considered to be a subordinated liability. Refer to Note 31 for further details on additional Tier 1 securities.


Guaranteed by HSBC Holdings or HSBC Bank plc

Capital securities guaranteed by HSBC Holdings or HSBC Bank plc were issued by the Jersey limited partnerships. The proceeds of these were lent to the respective guarantors by the limited partnerships in the form of subordinated notes. They qualify as additional tier 1 capital for HSBC under CRR II by virtue of the application of grandfathering provisions. The two capital securities guaranteed by HSBC Bank plc also qualify as additional tier 1 capital for HSBC Bank plc (on a solo and a consolidated basis) under CRR II by virtue of the same grandfathering process.

These preferred securities, together with the guarantee, are intended to provide investors with rights to income and capital distributions and distributions upon liquidation of the relevant issuer that are equivalent to the rights that they would have had if they had purchased non-cumulative perpetual preference shares of the relevant issuer. There are limitations on the payment of distributions if such payments are prohibited under UK banking regulations or other requirements, if a payment would cause a breach of HSBC's capital adequacy requirements, or if HSBC Holdings or HSBC Bank plc has insufficient distributable reserves (as defined).

HSBC Holdings and HSBC Bank plc have individually covenanted that, if prevented under certain circumstances from paying distributions on the preferred securities in full, they will not pay dividends or other distributions in respect of their ordinary shares, or repurchase or redeem their ordinary shares, until the distribution on the preferred securities has been paid in full.

If the consolidated total capital ratio of HSBC Holdings falls below the regulatory minimum required or if the Directors expect it to do so in the near term, provided that proceedings have not been commenced for the liquidation, dissolution or winding up of HSBC Holdings, the holders' interests in the preferred securities guaranteed by HSBC Holdings will be exchanged for interests in preference shares issued by HSBC Holdings that have economic terms which are in all material respects equivalent to the preferred securities and their guarantee.

If any of the two issues guaranteed by HSBC Bank plc are outstanding in April 2049 or November 2048 respectively, or if the total capital ratio of HSBC Bank plc (on a solo or consolidated basis) falls below the regulatory minimum required, or if the Directors expect it to do so

in the near term, provided that proceedings have not been commenced for the liquidation, dissolution or winding up of HSBC Bank plc, the holders' interests in the preferred securities guaranteed by HSBC Bank plc will be exchanged for interests in preference shares issued by HSBC Bank plc that have economic terms which are in all material respects equivalent to the preferred securities and their guarantee.

Tier 2 securities

Tier 2 capital securities are either perpetual or dated subordinated securities on which there is an obligation to pay coupons. These capital securities are included within HSBC's regulatory capital base as tier 2 capital under CRR II, either as fully eligible capital or by virtue of the application of grandfathering provisions. In accordance with CRR II, the capital contribution of all tier 2 securities is amortised for regulatory purposes in their final five years before maturity.


29

Maturity analysis of assets, liabilities and off-balance sheet commitments

The table on page 299 provides an analysis of consolidated total assets, liabilities and off-balance sheet commitments by residual contractual maturity at the balance sheet date. These balances are included in the maturity analysis as follows:

•    Trading assets and liabilities (including trading derivatives but excluding reverse repos, repos and debt securities in issue) are included in the 'Due not more than 1 month' time bucket, because trading balances are typically held for short periods of time.

•    Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the 'Due over 5 years' time bucket. Undated or perpetual instruments are classified based on the contractual notice period, which the counterparty of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the 'Due over 5 years' time bucket.

•    Non-financial assets and liabilities with no contractual maturity are included in the 'Due over 5 years' time bucket.

•    Financial instruments included within assets and liabilities of disposal groups held for sale are classified on the basis of the contractual maturity of the underlying instruments and not on the basis of the disposal transaction.

•    Liabilities under insurance contracts are included in the 'Due over 5 years' time bucket. Liabilities under investment contracts are classified in accordance with their contractual maturity. Undated investment contracts are included in the 'Due over 5 years' time bucket, although such contracts are subject to surrender and transfer options by the policyholders.

•    Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down.


HSBC

Maturity analysis of assets, liabilities and off-balance sheet commitments

 

Due not
more than
1 month

Due over
1 month
but not
more than
3 months

Due over
3 months
but not
more than
6 months

Due over
6 months
but not
more than
9 months

Due over
9 months
but not
more than
1 year

Due over
1 year
but not
more than
2 years

Due over
2 years
but not
more than
5 years

Due over
5 years

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

$m

Financial assets

 

 

 

 

 

 

 

 

 

Cash and balances at central banks

154,099

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

154,099

 

Items in the course of collection from other banks

4,956

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

4,956

 

Hong Kong Government certificates of indebtedness

38,380

 

-

 

-

 

-

 

-