RNS Number : 0806S
HSBC Holdings PLC
06 March 2019
 

Capital


Page

Capital overview

148

Capital management

148

Capital

149

Risk-weighted assets

150

Leverage ratio

151


Capital overview


Capital ratios


At


31 Dec

1 Jan

31 Dec1


2018


2018


2017



%

%

%

CRD IV transitional




Common equity tier 1 ratio

14.0


14.6


14.5


Tier 1 ratio

17.0


17.4


17.3


Total capital ratio

20.0


21.0


20.9


CRD IV end point




Common equity tier 1 ratio

14.0


14.6


14.5


Tier 1 ratio

16.6


16.5


16.4


Total capital ratio

19.4


18.3


18.3



Total regulatory capital and risk-weighted assets


At


31 Dec

1 Jan

31 Dec1


2018


2018


2017



$m

$m

$m

CRD IV transitional




Common equity tier 1 capital

121,022


127,310



Additional tier 1 capital

26,120


24,810



Tier 2 capital

26,096


31,014


31,429


Total regulatory capital

173,238


183,134


182,383


Risk-weighted assets

865,318


872,089


871,337


CRD IV end point




Common equity tier 1 capital

121,022


127,310


126,144


Additional tier 1 capital

22,525


16,531


16,531


Tier 2 capital

24,511


15,997


16,413


Total regulatory capital

168,058


159,838


159,088


Risk-weighted assets

865,318


872,089


871,337



RWAs by risk types


RWAs

Capital required2


$bn

$bn

Credit risk

691.1


55.3


Counterparty credit risk

47.3


3.8


Market risk

35.8


2.8


Operational risk

91.1


7.3


At 31 Dec 2018

865.3


69.2


For footnotes, see page 151.


Capital management

(Audited)

Our objective in the management of Group capital is to maintain appropriate levels to support our business strategy, and meet our regulatory and stress testing related requirements.

Approach and policy

Our approach to capital management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim to maintain a strong capital base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory capital requirements at all times. Our policy on capital management is underpinned by a capital management framework and our internal capital adequacy assessment process ('ICAAP'), which helps enable us to manage our capital in a consistent manner. The framework incorporates a number of different capital measures calculated on an economic capital and regulatory capital basis. The ICAAP is an assessment of the Group's capital position, outlining both regulatory and internal capital resources and requirements with HSBC's business model, strategy, performance and planning, risks to capital, and the implications of stress testing to capital.

Our assessment of capital adequacy is aligned to our assessment of risks. These risks include credit, market, operational, pensions, insurance, structural foreign exchange, residual risk and interest rate risk in the banking book.

Planning and performance

Capital and risk-weighted asset ('RWA') plans form part of the annual operating plan that is approved by the Board. Revised RWA forecasts are submitted to the GMB on a monthly basis, and reported RWAs are monitored against the plan.

The responsibility for global capital allocation principles rests with the Group Chief Financial Officer. Through our internal governance processes, we seek to maintain discipline over our investment and capital allocation decisions, and seek to ensure that returns on investment meet the Group's management objectives. Our strategy is to allocate capital to businesses and entities to support growth objectives where returns above internal hurdle levels have been identified and in order to meet their regulatory and economic capital needs.

We manage business returns by using a  return on tangible equity ('RoTE') measure and a return on average risk-weighted assets ('RoRWA') measure.

Risks to capital

Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs and/or capital position. The Downside or Upside scenarios are assessed against our capital management objectives and mitigating actions are assigned as necessary.

HSBC closely monitors and considers future regulatory change. 
In December 2017, the Basel Committee on Banking Supervision ('Basel') published revisions to the Basel III framework, which introduces considerable change across the regulatory framework. Following a recalibration, Basel also published the final changes to the market risk RWA regime, the Fundamental Review of the Trading Book ('FRTB'), in January 2019.

Basel has announced that the package will be implemented on 
1 January 2022, with a five-year transitional provision for the output floor, commencing at a rate of 50%. The final standards will need to be transposed into the relevant local law before coming into effect.

HSBC continues to evaluate the final package. Given that the package contains a significant number of national discretions, the possible impact is uncertain.

Stress testing

In addition to annual internal stress tests, the Group is subject to supervisory stress testing in many jurisdictions. Supervisory stress testing requirements are increasing in frequency and in the granularity with which the results are required. These exercises include the programmes of the Prudential Regulation Authority ('PRA'), the Federal Reserve Board, the European Banking Authority, the European Central Bank and the Hong Kong Monetary Authority, as well as stress tests undertaken in other jurisdictions. We take into account the results of regulatory stress testing and our internal stress tests when assessing our internal capital requirements. The outcome of stress testing exercises carried out by the PRA also feeds into a PRA buffer under Pillar 2 requirements, where required.

Capital generation

HSBC Holdings is the 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' own capital issuance and profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investment in subsidiaries.



Capital

 

Own funds disclosure



(Audited)





At



31 Dec

31 Dec1



2018

2017

Ref*


$m

$m


Common equity tier 1 ('CET1') capital: instruments and reserves



1

Capital instruments and the related share premium accounts

22,384


18,932



-  ordinary shares

22,384


18,932


2

Retained earnings

121,180


124,679


3

Accumulated other comprehensive income (and other reserves)

3,368


9,433


5

Minority interests (amount allowed in consolidated CET1)

4,854


4,905


5a

Independently reviewed interim net profits net of any foreseeable charge or dividend

3,697


608


6

Common equity tier 1 capital before regulatory adjustments

155,483


158,557



Common equity tier 1 capital: regulatory adjustments



7

Additional value adjustments

(1,180

)

(1,146

)

8

Intangible assets (net of related deferred tax liability)

(17,323

)

(16,872

)

10

Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)

(1,042

)

(1,181

)

11

Fair value reserves related to gains or losses on cash flow hedges

135


208


12

Negative amounts resulting from the calculation of expected loss amounts

(1,750

)

(2,820

)

14

Gains or losses on liabilities at fair value resulting from changes in own credit standing

298


3,731


15

Defined-benefit pension fund assets

(6,070

)

(6,740

)

16

Direct and indirect holdings of own CET1 instruments

(40

)

(40

)

19

Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions)

(7,489

)

(7,553

)

28

Total regulatory adjustments to common equity tier 1

(34,461

)

(32,413

)

29

Common equity tier 1 capital

121,022


126,144



Additional tier 1 ('AT1') capital: instruments



30

Capital instruments and the related share premium accounts

22,367


16,399


31

-  classified as equity under IFRSs

22,367


16,399


33

Amount of qualifying items and the related share premium accounts subject to phase out from AT1

2,297


6,622


34

Qualifying tier 1 capital included in consolidated AT1 capital (including minority interests not included in CET1) issued by subsidiaries and held by third parties

1,516


1,901


35

-  of which: instruments issued by subsidiaries subject to phase out

1,298


1,374


36

Additional tier 1 capital before regulatory adjustments

26,180


24,922



Additional tier 1 capital: regulatory adjustments



37

Direct and indirect holdings of own AT1 instruments

(60

)

(60

)

41b

Residual amounts deducted from AT1 capital with regard to deduction from tier 2 ('T2') capital during the transitional period

N/A

(52

)


-  Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities

N/A

(52

)

43

Total regulatory adjustments to additional tier 1 capital

(60

)

(112

)

44

Additional tier 1 capital

26,120


24,810


45

Tier 1 capital

147,142


150,954



Tier 2 capital: instruments and provisions



46

Capital instruments and the related share premium accounts

25,056


16,880


47

Amount of qualifying items and the related share premium accounts subject to phase out from T2

N/A

4,746


48

Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in CET1 or AT1) issued by subsidiaries and held by third parties

1,673


10,306


49

-  of which: instruments issued by subsidiaries subject to phase out

1,585


10,236


51

Tier 2 capital before regulatory adjustments

26,729


31,932



Tier 2 capital: regulatory adjustments



52

Direct and indirect holdings of own T2 instruments

(40

)

(40

)

55

Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions)

(593

)

(463

)

57

Total regulatory adjustments to tier 2 capital

(633

)

(503

)

58

Tier 2 capital

26,096


31,429


59

Total capital

173,238


182,383


*     The references identify the lines prescribed in the European Banking Authority ('EBA') template, which are applicable and where there is a value.

For footnotes, see page 151.


Throughout 2018, we complied with the PRA's regulatory capital adequacy requirements, including those relating to stress testing.

At 31 December 2018, our Common equity tier 1 ('CET1') ratio decreased to 14.0% from 14.5% at 31 December 2017.

CET1 capital decreased during the year by $5.1bn, mainly as a result of:

•    unfavourable foreign currency translation differences of $5.5bn;

•    the $2.0bn share buy-back;

•    a $1.2bn increase in threshold deductions as a result of an increase in the value of our material holdings; and

•    an increase in the deduction for intangible assets of $1.1bn.

These decreases were partly offset by:

•    capital generation through profits, net of dividends and scrip of $3.1bn; and

•    a $1.2bn day one impact from transition to IFRS 9, mainly due to classification and measurement changes.

Our Pillar 2A requirement at 31 December 2018, as per the PRA's Individual Capital Guidance based on a point-in-time assessment, was 2.9% of RWAs, of which 1.6% was met by CET1. On 1 January 2019, our Pillar 2A requirement increased to 3.0% of RWAs, of which 1.7% must be met by CET1.

On 4 May 2018, HSBC changed the way in which some of its capital securities are recognised in regulatory capital. The securities were previously recognised as grandfathered tier 2 capital and are now treated as fully eligible tier 2 instruments.


Risk-weighted assets

RWAs

RWAs fell by $6.0bn in the year, which included a drop of $23.4bn due to foreign currency translation differences. Excluding foreign currency translation differences, the $17.4bn increase comprised growth of $27.6bn from asset size and of $2.9bn from changes in asset quality, less a $9.2bn fall due to changes in methodology and policy and a $3.9bn decrease due to model updates.

The following comments describe RWA movements in 2018, excluding foreign currency translation differences.

Asset size

Asset size movements of $41.5bn were principally driven by lending growth in CMB, RBWM and GB&M. In CMB and GB&M, corporate lending made the largest contribution, primarily in Hong Kong, reflecting our strategic focus on loan business in the region and customer demand. RBWM's $6.5bn increase in book size mainly stemmed from mortgage business in Asia and Europe, which was boosted by expanding broker relationships in the UK.

In Corporate Centre, there was a fall of $11.3bn. This included reductions in legacy portfolios of $9.1bn and a decline in money market placements and balances with correspondent banks, which was primarily in Hong Kong. Market risk exposures reduced by $2.8bn, mostly due to lower exposures and rate volatility in France.

Asset quality

Mainly as a result of changes in portfolio mix, RWAs increased by $4.0bn across CMB, GB&M, GPB and RBWM, significantly in Europe and North America. These rises were mitigated by the impact of improved risk parameters in Corporate Centre, predominantly in Asia.

Model updates

Extending our counterparty credit risk exposure models to exposures in Asia and North America reduced RWAs by $4.3bn and $2.4bn respectively.

This was partly offset by increases of $1.6bn, due to updates to UK retail and corporate models, $1.1bn due to a new receivables finance model in Germany, and $0.4bn due to a redeveloped residential mortgage model in Hong Kong.

Methodology and policy

The $10.0bn decrease reported in internal updates derived from management initiatives, including refinements to risk parameters and improved collateral recognition. This was partly offset by a $0.8bn increase in external updates from IFRS 9 implementation effects on credit risk and deferred tax in Corporate Centre.


RWAs by global business



RBWM

CMB

GB&M

GPB

Corporate Centre

Total


$bn

$bn

$bn

$bn

$bn

$bn

Credit risk

99.6


296.9


172.0


13.8


108.8


691.1


Counterparty credit risk

-


-


45.1


0.2


2.0


47.3


Market risk

-


-


32.4


-


3.4


35.8


Operational risk

27.3


24.3


31.5


2.8


5.2


91.1


At 31 Dec 2018

126.9


321.2


281.0


16.8


119.4


865.3


Credit risk

94.2


277.3


180.2


13.0


120.5


685.2


Counterparty credit risk

-


-


52.4


0.2


1.9


54.5


Market risk

-


-


35.9


-


3.0


38.9


Operational risk

27.3


23.7


30.8


2.8


8.1


92.7


At 31 Dec 2017

121.5


301.0


299.3


16.0


133.5


871.3


 

RWAs by geographical region



Europe

Asia

MENA

North

America

Latin

America

Total


Footnotes

$bn

$bn

$bn

$bn

$bn

$bn

Credit risk


219.5


291.9


47.0


103.1


29.6


691.1


Counterparty credit risk


27.3


9.2


1.0


8.3


1.5


47.3


Market risk

3

24.0


23.3


1.9


8.5


1.4


35.8


Operational risk


27.3


39.5


6.8


11.7


5.8


91.1


At 31 Dec 2018


298.1


363.9


56.7


131.6


38.3


865.3


Credit risk


225.9


284.2


47.7


101.2


26.2


685.2


Counterparty credit risk


27.8


13.0


1.1


10.9


1.7


54.5


Market risk

3

29.0


23.5


3.3


7.1


1.0


38.9


Operational risk


28.9


37.1


7.1


12.1


7.5


92.7


At 31 Dec 2017


311.6


357.8


59.2


131.3


36.4


871.3


For footnotes, see page 151.



 

RWA movement by global business by key driver


Credit risk, counterparty credit risk and operational risk





RBWM

CMB

GB&M

GPB

Corporate Centre

Market
risk

Total
RWAs


$bn

$bn

$bn

$bn

$bn

$bn

$bn

RWAs at 31 Dec 2017

121.5


301.0


263.4


16.0


130.5


38.9


871.3


Asset size

6.5


30.8


4.2


0.2


(11.3

)

(2.8

)

27.6


Asset quality

0.4


2.0


0.9


0.7


(1.1

)

-


2.9


Model updates

1.3


1.7


(6.9

)

-


-


-


(3.9

)

-  portfolios moving onto internal ratings based ('IRB') approach

0.6


0.8


(0.3

)

-


-


-


1.1


-  new/updated models

0.7


0.9


(6.6

)

-


-


-


(5.0

)

Methodology and policy

0.7


(2.4

)

(7.3

)

0.1


-


(0.3

)

(9.2

)

-  internal updates

0.9


(2.6

)

(7.3

)

0.1


(0.8

)

(0.3

)

(10.0

)

-  external updates - regulatory

(0.2

)

0.2


-


-


0.8


-


0.8


Foreign exchange movements

(3.5

)

(11.9

)

(5.7

)

(0.2

)

(2.1

)

-


(23.4

)

Total RWA movement

5.4


20.2


(14.8

)

0.8


(14.5

)

(3.1

)

(6.0

)

RWAs at 31 Dec 2018

126.9


321.2


248.6


16.8


116.0


35.8


865.3


 

RWA movement by geographical region by key driver


Credit risk, counterparty credit risk and operational risk




Europe

Asia

MENA

North

America

Latin

America

Market

 risk

Total

 RWAs


$bn

$bn

$bn

$bn

$bn

$bn

$bn

RWAs at 31 Dec 2017

282.6


334.3


55.9


124.2


35.4


38.9


871.3


Asset size

(0.4

)

23.2


0.4


2.6


4.6


(2.8

)

27.6


Asset quality

2.3


(0.9

)

0.1


1.3


0.1


-


2.9


Model updates

2.9


(4.5

)

-


(2.3

)

-


-


(3.9

)

-  portfolios moving onto IRB approach

1.4


(0.2

)

-


(0.1

)

-


-


1.1


-  new/updated models

1.5


(4.3

)

-


(2.2

)

-


-


(5.0

)

Methodology and policy

(2.4

)

(5.4

)

(0.2

)

(0.7

)

(0.2

)

(0.3

)

(9.2

)

-  internal updates

(2.4

)

(5.8

)

(0.6

)

(0.9

)

-


(0.3

)

(10.0

)

-  external updates - regulatory

-


0.4


0.4


0.2


(0.2

)

-


0.8


Foreign exchange movements

(10.9

)

(6.1

)

(1.4

)

(2.0

)

(3.0

)

-


(23.4

)

Total RWA movement

(8.5

)

6.3


(1.1

)

(1.1

)

1.5


(3.1

)

(6.0

)

RWAs at 31 Dec 2018

274.1


340.6


54.8


123.1


36.9


35.8


865.3





Leverage ratio

 



At



31 Dec

1 Jan

31 Dec1



2018

2018

2017

Ref*


$bn

$bn

$bn

20

Tier 1 capital

143.5


143.8


142.7


21

Total leverage ratio exposure

2,614.9


2,556.4


2,557.1




%

%

%

22

Leverage ratio

5.5


5.6


5.6


EU-23

Choice of transitional arrangements for the definition of the capital measure

Fully phased-in

Fully phased-in

Fully phased-in


UK leverage ratio exposure - quarterly average

2,464.4


2,351.2


2,351.4




%

%

%


UK leverage ratio - quarterly average

5.8


6.2


6.1



UK leverage ratio - quarter end

6.0


6.1


6.1


*     The references identify the lines prescribed in the EBA template.

 


Our leverage ratio calculated in accordance with the Capital Requirements Directive IV ('CRD IV') was 5.5% at 31 December 2018, down from 5.6% at 31 December 2017. The increase in exposure was primarily due to growth in customer lending and financial investments.

The Group's UK leverage ratio at 31 December 2018 was 6.0%. This measure excludes qualifying central bank balances from the calculation of exposure.

At 31 December 2018, our UK minimum leverage ratio requirement of 3.25% was supplemented by an additional leverage ratio buffer of 0.5% and a countercyclical leverage ratio buffer of 0.2%. These additional buffers translated into capital values of $12.7bn and $4.7bn respectively. We exceeded these leverage requirements.


 

Pillar 3 disclosure requirements

Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication, at least annually, of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 31 December 2018 is published on our website, www.hsbc.com, under 'Investor Relations'.


Footnotes to capital, leverage and risk-

weighted assets

1

All figures presented as reported under IAS 39 at 31 December 2017.

2

'Capital requirement' represents the minimum total capital charge set at 8% of RWAs by article 92 of the Capital Requirements Regulation.

3

RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
END
 
 
ACSEAKDKEELNEFF