TIDM63AS
RNS Number : 0226Q
HSBC Bank plc
23 February 2021
HSBC Bank plc 2020 Annual Report and Accounts
In fulfilment of its obligations under section 4.1.3 and
6.3.5(1) of the Disclosure Guidance and Transparency Rules, HSBC
Bank plc (the "Company") hereby releases the unedited full text of
its 2020 Annual Report and Accounts for the year ended 31 December
2020.
The document is now available on the Company's website at:
http://www.hsbc.com/investor-relations/subsidiary-company-reporting
A copy of the above document has been submitted to the National
Storage Mechanism and will shortly be available for inspection
at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Contents
Page
Strategic Report
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Highlights 2
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Responding to the new environment 3
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Key financial metrics 3
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Purpose and strategy 4
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Products and services 6
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How we do business 7
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Key Performance Indicators 13
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Economic background and outlook 14
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Financial summary 15
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Risk overview 23
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Report of the Directors
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Risk 25
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- Our approach to risk 25
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- Top and emerging risks 26
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- Areas of special interest 31
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- Our material banking and insurance
risks 35
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Capital 80
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Corporate Governance Report 96
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- Directors 97
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- Company Secretary 99
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- Board of Directors 99
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- Directors' emoluments 99
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- Board committees 99
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- Dividends 102
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- Internal control 91
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- Employees 103
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- Auditors 105
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* Articles of association, conflicts of interest and
indemnification of directors 106
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- Statement on going concern 107
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* Statement of directors' responsibilities in respect
of the financial statements 108
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Financial Statements
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Independent Auditors' Report 109
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Financial statements 107
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Notes on the financial statements 118
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Presentation of Information
This document comprises the Annual Report and Accounts 2020 for
HSBC Bank plc ('the bank') and its subsidiaries (together 'the
group'). 'We', 'us' and 'our' refer to HSBC Bank plc together with
its subsidiaries. It contains the Strategic Report, the Report of
the Directors, the Statement of Directors' Responsibilities and
Financial Statements, together with the Independent Auditors'
Report, as required by the UK Companies Act 2006. References to
'HSBC', 'HSBC Group' or 'Group' within this document mean HSBC
Holdings plc together with its subsidiaries.
HSBC Bank plc is exempt from publishing information required by
The Capital Requirements Country-by-Country Reporting Regulations
2013, as this information is published by its parent, HSBC Holdings
plc. This information is available on HSBC's website:
www.hsbc.com.
Pillar 3 disclosures for the group are also available on
www.hsbc.com, under Investors.
All narrative disclosures, tables and graphs within the
Strategic Report and Report of the Directors are unaudited unless
otherwise stated.
Our reporting currency is GBP sterling.
Unless otherwise specified, all $ symbols represent US
dollars.
.
Cautionary Statement Regarding Forward-
Looking Statements
This Annual Report and Accounts 2020 contains certain
forward-looking statements with respect to the financial condition,
results of operations and business of the group.
Statements that are not historical facts, including statements
about the group's beliefs and expectations, are forward-looking
statements. Words such as 'expects', 'anticipates', 'intends',
'plans', 'believes', 'seeks', 'estimates', 'potential' and
'reasonably possible', variations of these words and similar
expressions are intended to identify forward-looking statements.
These statements are based on current plans, estimates and
projections, and therefore undue reliance should not be placed on
them. Forward-looking statements speak only as of the date they are
made. HSBC Bank plc makes no commitment to revise or update any
forward-looking statements to reflect events or circumstances
occurring or existing after the date of any forward-looking
statement.
Forward-looking statements involve inherent risks and
uncertainties. Readers are cautioned that a number of factors could
cause actual results to differ, in some instances materially, from
those anticipated or implied in any forward-looking statement.
Highlights
For the year ended 31 December 2020
Reported (loss)/profit before tax
(GBPm)
GBP(1,614)m
(2019: GBP(872)m)
Reported revenue (GBPm)
GBP5,900m
(2019: GBP6,044m)
Reported risk-weighted assets at
period end (GBPbn)
GBP122bn
(2019: GBP125bn)
.
Adjusted (loss)/profit before tax
(GBPm)
GBP(184)m
(2019: GBP603m)
.
.
Total assets at period end (GBPbn)
GBP681bn
(2019: GBP636bn)
.
Common equity tier 1 ratio at period
end (%)
14.7%
(2019: 14.2%)
Responding to the new environment
In February 2020, the Group announced a business update, to
increase returns by re-allocating capital out of low-return
franchises into higher performing ones, reducing our cost base and
simplifying our organisation. For Europe, our strategy was adjusted
in line with the business update to focus on international
wholesale banking clients linked to our global network and a
targeted wealth franchise. We are simplifying HSBC Bank plc's
operating model to become one integrated business with hubs in
London and Paris, supported by shared services.
We are continuing with the strategic review of our retail
banking operations in France and are in negotiations in relation to
a potential sale although no decision has yet been taken. If any
sale is implemented, given the underlying performance of the French
retail business, a loss on sale is expected.
In 2020, the economic outlook deteriorated due to the outbreak
of Covid-19, a continued low interest rate environment and
increased geopolitical risk. Covid-19 changed the external
environment and how we operate - our effective transition to remote
working highlights our resilience through this period. Covid-19
significantly impacted customers and our priority was to support
them through a range of initiatives such as, local government
lending schemes and payment holidays.
We remain committed to the strategy and business model outlined
in February 2020; changes to the external landscape have reinforced
the need for HSBC Bank plc to become simpler and more efficient to
operate successfully in the European market.
Key financial metrics
Footnotes 2020 2019
-------------------------------------------------------- --------- ------- -----------------
For the year (GBPm)
-------------------------------------------------------- --------- ------- -----------------
Loss before tax (reported basis) (1,614) (872)
-------------------------------------------------------- --------- ------- ---------------
(Loss) / profit before tax (adjusted basis) 1 (184) 603
-------------------------------------------------------- --------- ------- ---------------
Net operating income before change in expected credit
losses and other credit impairment charges (reported
basis) 2 5,900 6,044
-------------------------------------------------------- --------- ------- ---------------
Loss attributable to shareholders of the parent company (1,488) (1,013)
-------------------------------------------------------- --------- ------- ---------------
At year-end (GBPm)
-------------------------------------------------------- --------- ------- -----------------
Total equity attributable to shareholders of the parent
company 23,666 23,503
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Total assets 681,150 636,491
-------------------------------------------------------- --------- ------- ---------------
Risk-weighted assets 122,392 125,413
-------------------------------------------------------- --------- ------- ---------------
Loans and advances to customers (net of impairment
allowances) 101,491 108,391
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Customer accounts 195,184 177,236
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Capital ratios (%) 3
-------------------------------------------------------- --------- ------- -----------------
Common equity tier 1 14.7 14.2
-------------------------------------------------------- --------- ------- -----------------
Tier 1 18.1 17.6
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Total capital 27.3 27.9
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Performance, efficiency and other ratios (annualised
%)
-------------------------------------------------------- --------- ------- -----------------
Return on average ordinary shareholders' equity 4 (7.9) (4.6)
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Return on tangible equity (%) 5 (2.7) 0.6
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Cost efficiency ratio (reported basis) 6 113.6 112.2
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Cost efficiency ratio (adjusted basis) 6 89.6 87.9
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Ratio of customer advances to customer accounts 52.0 61.2
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1 Adjusted performance is computed by adjusting reported results
for the effect of significant items as detailed on pages 16
to17.
2 Net operating income before change in expected credit losses
and other credit impairment charges is also referred to as
revenue.
3 Capital ratios are detailed in the Capital section on pages 72 to 74.
4 The return on average ordinary shareholders' equity is defined
as profit attributable to shareholders of the parent company
divided by the average total shareholders' equity. Dividends paid
on AT1 should be net of tax in the calculation.
5 The RoTE is calculated as reported profit attributable to
ordinary shareholders less changes in goodwill and intangible
assets and present value of in-force long-term insurance business
divided by average tangible shareholders' equity.
6 Reported cost efficiency ratio is defined as total operating
expenses (reported) divided by net operating income before change
in expected credit losses and other credit impairment charges
(reported), while adjusted cost efficiency ratio is defined as
total operating expenses (adjusted) divided by net operating income
before change in expected credit losses and other credit impairment
charges (adjusted).
About HSBC Group
With assets of $3.0tn and operations in 64 countries and
territories at 31 December 2020, HSBC is one of the largest banking
and financial services organisations in the world. More than 40
million customers bank with us and we employ around 226,000
full-time equivalent staff. We have around 194,000 shareholders in
130 countries and territories.
Purpose and strategy
Our purpose and ambition
Our new purpose is 'Opening up a world of opportunity' and our
ambition is to be the preferred international finance partner for
our clients.
HSBC values
HSBC values help define who we are as an organisation, and are
key to our long-term success.
We value difference
Seeking out different perspectives.
We succeed together
Collaborating across boundaries.
We take responsibility
Holding ourselves accountable and taking the long view.
We get it done
Moving at pace and making things happen.
HSBC Group strategy
The Group have embedded our purpose and ambition into our
strategy.
The Group's strategy focuses on four key areas: focus on our
areas of strength, digitise at scale to adapt our operating model
for the future; energise our organisation for growth; and lead the
transition to net zero.
Focus on our strengths: in each of our global businesses, we
will focus on areas where we are strongest and have significant
opportunities for growth.
Digitise at scale: we will focus our investments in areas such
as technology, to improve our customers' experience while ensuring
security and resilience. These investments in technology will also
help drive down costs, including through automating our middle and
back offices and building solutions to free up office
footprint.
Energise for growth: we are moving to a leaner and simpler
organisation that is energised and fit for the future. We aim to
inspire a dynamic culture and champion inclusion across our
organisation, as well as help our employees develop future
skills.
Transition to net zero: our ambition is to support the
transition to a net zero global economy. We have set out an
ambitious plan to become a net zero bank, to support our customers
in their transition, and to unlock new climate solutions.
HSBC in Europe
Europe is an important part of the global economy, accounting
for over a third of global trade and a quarter of global Gross
Domestic Product (IHS Markit, 2020). In addition, Europe is the
world's largest exporter of manufactured goods and services
(European Commission, 2020). HSBC Bank plc facilitates trade within
Europe and between Europe and other countries where the HSBC Group
has a presence.
With assets of GBP681bn at 31 December 2020, HSBC Bank plc is
one of Europe's largest banking and financial services
organisations. We employ around 16,300 people across our locations.
HSBC Bank plc is responsible for HSBC's European business, aside
from UK retail and most UK commercial banking activity which, post
ring-fencing, are managed by HSBC UK Bank plc.
HSBC Bank Plc is simplifying its operating model to one
integrated business with two main hubs in London and Paris.
HSBC Bank plc operates in 20 markets(1) . Our operating entities
represent the Group to customers, regulators, employees and other
stakeholders. We are organised around the principal operating units
detailed below.
The London hub consists of the UK non-ring fenced bank, which
provides overall governance and management for the Europe region as
a whole and is a global centre of excellence for wholesale banking
for the Group. In addition, the management team directly oversees
our businesses in Armenia, Channel Islands & Isle of Man, and
Malta.
HSBC Continental Europe, comprises our Paris hub and its
European Union ('EU') branches (Belgium, Czech Republic, Greece,
Ireland, Italy, Luxembourg, Netherlands, Poland, Spain and Sweden).
We are creating an integrated Continental European bank anchored on
Paris to better serve our clients, and simplify our organisation.
HSBC France changed its name on 1 December 2020 to become HSBC
Continental Europe, reflecting the purpose and nature of its
activities, namely an integrated Continental European bank
connecting our customers to HSBC's global network.
HSBC Germany Holdings GmbH serves the European Union's largest
economy and one of the leading export nations globally. HSBC
Germany's business proposition mirrors the importance of trade and
global connectivity.
1 Full list of markets where HSBC Bank plc has a presence:
Armenia, Belgium, Channel Islands and Isle of Man, Czech Republic,
France, Germany, Greece, Ireland, Italy, Israel, Luxembourg, Malta,
Netherlands, Poland, Russia, South Africa, Spain, Sweden,
Switzerland and the UK.
HSBC Bank plc's vision and strategy
We are restructuring our European business to be successful and
sustainable, with higher returns. Our vision is to be the leading
bank for international corporates in Europe, focused primarily on
clients that value our network with a focus on transactional
banking and financing. This is complemented by a targeted wealth
offering, through our Wealth and Personal Banking business (see
Products and Services). HSBC Bank plc will remain a key centre of
excellence for risk management and product expertise within the
Group.
Governments and businesses across Europe are at the forefront of
international efforts to combat climate change and are world
leaders in sustainable finance. We share these values and want to
help governments and businesses lead the transition to a
sustainable future.
The impact of Covid-19 on the execution of our strategy
In February 2020, our business update outlined plans to remodel
our European business, enabling us to become simpler and more
competitive. The transformation of Europe has begun and is now in
full implementation and we strive to closely support customers and
colleagues through organisational change.
Consistent with the Group, HSBC Bank plc paused client and
employee transformation actions from late March to mid-June 2020.
Further information as to how we have and will continue to support
our stakeholders can be found on page 7.
During the early stages of the outbreak of Covid-19, our clients
required support through a variety of funding mechanisms. This led
to an inflationary effect on the Risk-weighted assets ('RWAs') held
by HSBC Bank plc, as there was a greater demand for finance. HSBC
UK Holdings Ltd. injected GBP1bn of Common equity tier 1 ('CET1')
to HSBC Bank plc, demonstrating the ability of the Group to support
its subsidiaries, whilst strengthening HSBC Bank plc's position to
withstand the economic shocks as a result of Covid-19.
Looking ahead, with continued low interest rates, higher levels
of credit losses and uncertainty on the unwinding of government
support schemes, we expect to be operating in a more challenging
environment for an extended period. Whilst Covid-19 has affected
the phasing of our transformation activity, it has not altered our
strategy.
Transformation in Europe
The strategy involves a deep transformation of our business in
Europe. In order to simplify our organisation, we have implemented
a leaner management structure, operating as one integrated business
with hubs in London and Paris, supported by shared services (see
HSBC in Europe). This aligns with UK and European Union legal
entity and regulatory requirements for financial services,
following the UK's withdrawal from the European Union.
The group's risk-weighted assets ('RWAs') reduced by GBP3.0bn, 2
percent, during the year. Gross RWA savings of GBP18.8bn from
management actions, including actions to support the group's
transformation, were offset by changes in asset size and quality,
and updates to models, methodology and policy.
Full year adjusted operating expenses for 2020 were GBP5.4bn, an
increase of 1% versus prior year. This included a number of one off
items such as: the impairment of real estate assets in France,
lower capitalisation of IT spend following the write-off of
intangible assets, increases in the EU Single Resolution Fund and
legal provisions and settlements. Excluding these items, operating
expenses decreased reflecting additional cost savings from
management actions, including a reduction in FTE, tight control of
contractor and consultancy spend as well as lower discretionary
spend.
In HSBC Continental Europe, the transformation has focused on
four pillars. The strategic review of the retail operations which
is ongoing and no decision has been made; the repositioning of GBM
for which a social plan ('Plan de Sauvegarde pour l'Emploi') has
been approved by the French Ministry of Labour; the reshaping of
CMB, Global Functions and HOST through a voluntary redundancy plan;
and, the transformation of the HSBC Continental Europe EU Branches,
which increases focus on client related activities whilst better
leveraging our Paris hub and the Group's Centres of Excellence.
HSBC Germany Holdings GmbH demonstrated its resilience and
performed strongly throughout 2020. We purchased the remaining
minority interests in HSBC Trinkaus & Burkhardt AG, achieving a
100% shareholding on 26 January 2021. This will enable our business
in Germany to be fully integrated with the rest of the HSBC
Group.
Investing to capitalise on our strengths
We continue to invest in Transaction Banking (Global Liquidity
and Cash Management 'GLCM', Global Trade and Receivable Finance
'GTRF' and Foreign Exchange 'FX'), which is central to our
strategy. In September 2020, The Banker named HSBC as 'Best
Transaction Bank in Western Europe' in their annual Transaction
Banking Awards.
We are committed to maintaining our core strength in Global
Liquidity and Cash Management, where we are focussed on enhancing
our digital and self-serve capabilities for our clients. In 2020,
we deployed eight additional currencies for our corporate cards. We
also enabled Single Euro Payments Area (SEPA) instant payments in
Ireland, allowing clients to send and receive payments in real
time. To continue to better serve our customers through new ways of
working, we expect to deploy self-serve capabilities to our
Liquidity Management Portal, Cards and Receivables platforms.
Global Trade and Receivables Finance's ambition is to make trade
safer, faster and easier. In 2020 we enhanced our value proposition
by rolling out a core trade platform in France and further
developed our offering through partnership with Fintech providers.
We expect to increase investment in new product platforms, and
deploy automated Anti-Money Laundering and Sanctions controls.
In Foreign Exchange we further enhanced our electronic trading
infrastructure to provide improved risk management to our clients.
Our focus is to support customers' FX and cross-border payment
needs through improved pricing tools and e-trading.
Process of UK withdrawal from the European Union
The UK left the EU on 31 January 2020 and entered a transition
period until 31 December 2020. During the transition period, the UK
continued to be bound by EU laws and regulations. A Trade and
Cooperation Agreement between the EU and the UK was agreed on 24
December 2020 and ratified on 30 December 2020. However, the
Agreement included limited elements on financial services, and, as
a result, did not change the assumptions on which the group's UK
withdrawal from the EU plans had been developed. We will continue
to work with regulators, governments and our customers and seek to
manage any risks created by the Trade and Cooperation Agreement, or
from future regulatory cooperation proposals on financial services
between the UK and the EU, as they arise, particularly across those
industry sectors most impacted.
For further details on our approach to the UK's withdrawal from
the EU, see 'Areas of special interest' on page 27.
Our Global Businesses
The Group manages its products and services through its three
global businesses: GBM; CMB; WPB(1) ; and Corporate Centre
(Corporate Centre comprises, certain legacy assets, central
stewardship costs, and interests in our associates and joint
ventures).
Our global businesses
Our operating model consists of three global businesses and a
Corporate Centre, supported by HSBC Operations, Services and
Technology, and 11 global functions, including Risk, Finance,
Compliance, Legal, Marketing and Human Resources.
Global Banking and Markets Commercial Banking ('CMB') Wealth and Personal Banking
('GBM') ('WPB')(1)
HSBC Global Banking and We serve customers ranging In Europe, Wealth and
Markets delivers tailored from small enterprises Personal Banking serves
financial solutions to focused on their local around 1.2 million customers
major government, corporate market to corporates operating with their financial needs
and institutional clients across borders. We support through Private Banking,
worldwide. We provide multinationals across Retail Banking, Wealth
a comprehensive suite the region and provide Management, Insurance
of services across lending, the tools and expertise and Asset Management.
advisory and capital markets, that European businesses Our core retail proposition
trade services, research, need to thrive. offers a full suite of
securities services and Our network of relationship products including personal
global liquidity and cash managers and product specialists banking, mortgages, loans,
management. work closely to meet customer credit cards, savings,
Our European teams bring needs, from term loans investments and insurance.
together relationship to region-wide treasury Alongside this, WPB offers
managers and product specialists, and trade solutions. We various propositions in
to deliver financial solutions are fully committed to certain markets, including
customised to suit our helping European businesses Jade, Premier, and Advance;
clients' business specific navigate change and seize as well as wealth solutions,
growth ambitions and financial export opportunities. financial planning and
objectives. We continue Commercial Banking is international services.
to work closely with colleagues at the centre of creating In the Channel Islands
in CMB, to provide a range revenue synergies within and Isle of Man, we serve
of tailored products and the Group. We work closely local Islanders as well
seamless services that with our Global Banking as international customers
meet the needs of clients and Markets colleagues through our HSBC Expat
across the bank. GBM operates to provide expertise in proposition.
as an integral part of capital finance and advisory Our Private Banking proposition
the global business and solutions to support our serves high net worth
also contributes significant Commercial Banking clients. and ultra-high net worth
revenues to other regions Our trade teams within clients with investable
through our European client Commercial Banking also assets greater than GBP4m
base. provide import and export in Channel Islands and
Our business is underpinned finance solutions to Global Isle of Man, France and
by a focus on the highest Banking and Markets clients. Germany. The range of
standards of conduct and With major operations services available to
financial crime risk management. in France and Germany, private banking clients
We remain committed to and full-service centres includes investment management,
deepening client relationships, in hubs such as Ireland, Private Wealth Solutions
improving synergies across the Netherlands and Switzerland, and bespoke lending such
HSBC global businesses. we provide corporates as lending against financial
We continue to invest with the means to consolidate assets and residential
in digital programmes and simplify their European mortgage financing for
focused on clients such operations, enabling our high-end properties.
as HSBCnet, streamlining customers to have greater The depth of our global
the platform and improving visibility over their business service matches
customer experience. Cost liquidity position and that of our diverse client
discipline remains a priority, unlock efficiencies in needs: from branches,
as we strive to simplify their treasury structures. self-service terminals,
the business through streamlining Our customers expect us telephone service centres
business lines, operations to be innovative, whether and digital services.
and technology. it is a receivables finance Private Banking hosts
solution to optimise working a 'Next Generation' programme
capital or support in of events to support our
pursuing the sustainability client's next generation
agenda. One way we are and offers philanthropy
helping customers in their advisory to our clients.
sustainability efforts We continue to focus on
is through their supply meeting the needs of our
chains, by developing customers, the communities
green financing solutions we serve, and our people,
that are beneficial for whilst working to build
buyer and seller alike. the bank of the future.
---------------------------------- --------------------------------- --------------------------------
Adjusted profit/(loss) before tax
GBP23m GBP152m GBP(132)m
(2019: GBP201m) (2019: GBP457m) (2019: GBP277m)
---------------------------------- --------------------------------- --------------------------------
Risk-Weighted Assets
GBP76,582m GBP26,923m GBP12,082m
(31 Dec 2019: GBP81,466m) (31 Dec 2019: GBP28,750m) (31 Dec 2019: GBP9,119m)
---------------------------------- --------------------------------- --------------------------------
1 Global Private Banking and Retail Banking and Wealth
management have been merged to form WPB. Refer to Note 9 Segmental
analysis.
Our global businesses are presented on an adjusted basis, which
is consistent with the way in which we assess the performance of
our global businesses.
How we do business
We conduct our business to support the sustained success of our
customers, employees and other stakeholders.
Our approach
Our purpose is 'Opening up a world of opportunity' and we aim to
be the preferred international banking partner for our clients.
To achieve this in a way that is sustainable, we are guided by
our values: we value difference; we succeed together; we take
responsibility; and we get it done.
We build and maintain strong relationships with all of our
stakeholders, including customers, employees and the communities in
which we operate. This will help us deliver our strategy and
operate our business in a way that is sustainable.
In 2020, our ability to help our stakeholders was more important
than ever, as we continued to promote and encourage good conduct
through our employee's behaviours and the decisions we take during
these unprecedented times. We define conduct as delivering fair
outcomes for our customers and not disrupting the orderly and
transparent operation of financial markets. This is central to our
long-term success and ability to serve customers. We have clear
policies, frameworks and governance in place to protect them. For
further information on conduct, see page 80.
Details on our conduct framework are available at
www.hsbc.com/conduct.
Our stakeholders
Building strong relationships with our stakeholders helps enable
us to deliver our strategy in line with long-term values, and
operate the business in a sustainable way. Our stakeholders are the
people who work for us, bank with us, own us, regulate us, and live
in the societies we serve and the planet we all inhabit. These
human connections are complex and overlap. Many of our employees
are customers and shareholders, while our business customers are
often suppliers. We exist to serve, creating value for our
customers and shareholders. Our size and global reach mean our
actions can have a significant impact. We are committed to doing
business responsibly, and thinking for the long term. This is key
to delivering our strategy.
Our section 172 statement, detailing our Directors'
responsibility to stakeholders, can be found on page 10.
Supporting our stakeholders through
Covid-19
The Covid-19 outbreak has created a great deal of uncertainty
and disruption for the people, businesses and communities we serve
around the world. It is affecting everyone in different ways. We
are tailoring our response to the different circumstances and
situations in which our stakeholders find themselves.
Customers
The 2020 operating environment posed significant challenges for
our customers across the region. Our immediate priority is to do
what we can, to provide them with support and flexibility. This has
included offering payment relief, assisting our customers to
restructure their balance sheets and providing access to government
lending schemes.
In the UK, we participated in available government-backed
schemes, obtaining accreditation in CLBILS (Coronavirus Large
Business Interruption Loan Scheme) and assisting customers in
accessing the Covid Corporate Financing Facility (CCFF). In
addition, where appropriate, we guided customers in accessing
Capital Markets. The Commercial Bank have held educational sessions
for existing customers explaining the construct and potential
benefits of CLBILS.
In France, our Commercial Banking team issued lending which
related to the French government-backed, Covid-19 Business
Interruption Guarantee Scheme ('PGE'). Within Global Banking and
Markets and Commercial Banking, digital enhancements have been
deployed to support clients working remotely (e.g. electronic
signature solutions).
In Germany, Markets have benefitted from retail investors demand
for warrants and certificates, successfully managed customer's
currency risks and facilitated capital market financing. In
addition, our Commercial Banking team led a number of Equity
Capital Markets transactions and processed Covid-19 related credit
requests, with a small proportion via government lending
schemes.
The full breakdown of our participation in finance lending
schemes can be found on page 60 (customer relief programmes).
We have taken steps to protect customers and our colleagues.
With customers conducting more of their banking online, we have
deployed new technology to enable them to engage with us in
different ways, including video calls with relationship managers,
regular webinars and continuous coverage from our sales/traders
whether from home or from the office.
Employees
The Covid-19 outbreak tested our employees in many ways and they
adapted quickly to the fast-changing environment. We provided new
and enhanced support to ensure the well-being of employees and have
encouraged a culture of looking out for each other. Our priorities
for our employees are mental health, flexible working and financial
well-being. In addition to our bi-annual employee Snapshot survey,
in 2020, we ran a Covid-19 well-being survey which showed 90% of
our staff felt that the group was providing them with the
information needed to work as effectively as possible during the
Covid-19 situation. 85% of our staff felt that their line manager
was providing them with the support they need to work through the
impact of Covid-19.
In March, we paused the redundancy programme intended to deliver
the reduction in headcount we announced in February. We decided in
June to lift the pause on redundancies, proceeding thoughtfully but
purposefully, while taking local considerations into account.
We strive to support employees closely through all
organisational change. We use objective and appropriate selection
criteria for redundancies. Our focus is to prioritise retention of
our permanent employees through mechanisms such as redeployment.
Where we are unable to, we provide employees with access to
employee assistance programmes and career transition support.
Communities
To deal with the immediate and long term impact of the Covid-19
outbreak in Europe, each market has supported respective staff and
clients, whilst also supporting leading Non-Governmental
Organisations; providing medical response, food security and access
to support for vulnerable people.
Colleagues in each market have identified relevant programmes
such as: support to people in over-indebtedness, protection of
women and vulnerable children, foodbank support or the funding of
medical research. More than $1.2m of the total $25m Group pledge
has benefited causes in 17 European countries.
Regulators and governments
We have proactively engaged with regulators and governments in
Europe, regarding the policy changes issued in response to the
Covid-19 outbreak, to help our customers and to contribute to an
economic recovery.
Suppliers
We made early payments to thousands of our suppliers during the
year to support them through the Covid-19 outbreak.
Investors
HSBC Bank plc maintains an active dialogue with its investors.
The bank's relationship with its debt investors is maintained by
HSBC Group Investor Relations, as many of these relationships span
investments across multiple entities, within the broader HSBC
Group. Engagement with HSBC Bank plc's investors primarily takes
place as a part of HSBC Group's usual course investor relations
work.
Our ESG metrics and targets
We have established targets that guide how we do business,
including how we operate and how we serve our customers. These
targets are designed to help us to make our business - and those of
our customers - more environmentally sustainable. They also help us
to improve employee advocacy and diversity at senior levels as well
as strengthen our market conduct.
The 2020 annual incentive scorecards of the Group Chief
Executive, Group Chief Financial Officer and members of the Group
Executive Committee have 30% weightings for measures linked to
outcomes that underpin the ESG metrics below. ESG metrics are also
incorporated into the Europe Chief Executive and Executive
Committee member scorecards.
Our Environmental metrics:
HSBC Holdings plc disclosures on streamlined energy and carbon
reporting (SECR) requirements, cover HSBC Bank plc. HSBC Bank plc's
main activities related to measuring our carbon dioxide emissions
are summarised below:
We report our carbon emissions following the Greenhouse Gas
Protocol which incorporates the scope 2 market-based emission
methodology. We report carbon dioxide emissions resulting from
energy use in our buildings and employees' business travel. In 2020
we collected data on energy use and business travel for our
operations in Europe in France, Germany, Malta, Switzerland, which
accounted for approximately 23% of our FTEs in Europe(1) .
At the end of 2020, the group achieved 0.69 tonnes of CO2 per
FTE down by 44% compared to 2019 and thus met HSBC's 2020 goal of 2
tonnes CO2 per FTE. The exceptional circumstances caused by the
Covid-19 outbreak affected working behaviours which helped drive
further environmental footprint reductions in our operations.
For further information regarding our environmental footprint,
please visit
https://www.hsbc.com/our-approach/our-climate-strategy/becoming-a-net-zero-bank.
Our Social metrics:
-- Employee engagement was 46% as at the end of 2020, down by 1% compared to 2019(2) .
-- Employee gender diversity, our target was 22.9% of women in
senior leadership roles by the end of 2020. The outcome for 2020
was 22.4% of women in senior leadership roles(3) .
Our Governance metrics:
-- Sustained delivery of global conduct outcomes, with 92.7% of
staff having completed conduct training in 2020. Our target for
2020 was 98%(4) .
1 To estimate the emissions of our operations in countries and
territories where we have operational control and a small presence,
we scale up the emissions data from to 100%.
2 Performance is based on our employee Snapshot results. We
transitioned to the employee engagement index in 2020.
3 Senior leadership is classified as 0 to 3 in our global career
band structure. We narrowly missed our 2020 target, our focus on
improving gender balance in senior leadership across Europe remains
a priority for HSBC Bank plc's executive committee for 2021.
4 The launch of Conduct Global Mandatory Training in 2020 was
slightly delayed due to the Covid-19 outbreak and the completion
date was rolled over into 2021. Our target at the end of deployment
period is 98%.
Non-financial reporting
We have the responsibility to protect our customers, our
communities and the integrity of the financial system. In this
section, we outline our requirements under the Non-Financial
Reporting Directive.
Environmental matters
We recognise our wider obligations to the communities where we
operate, and understand economic growth must also be sustainable.
In October 2020, we announced an ambitious plan to prioritise
financing and investment that supports the transition to a net zero
global economy, and which helps to build a thriving, resilient
future for society and businesses.
Our climate plan has three elements: to support our portfolio of
customers to make the transition; to unlock climate solutions and
innovation; and to transform HSBC into a net zero bank. To achieve
these goals, we will work with a range of stakeholders including
charities, governments, and policymakers. More information about
our assessment of climate risk can be found in the HSBC Holdings
plc annual report, under the Task Force on Climate-related
Financial Disclosures and climate strategy.
In 2020, in recognition of our work to support the global
transition to a low-carbon economy, we have been named as 'Western
Europe's Best Bank for Sustainable Finance' by Euromoney.
Since our 2017 global pledge to provide and facilitate $100bn of
sustainable financing and investment by 2025, HSBC Bank plc has
contributed $44.6bn or 48 per cent of the Group performance
($93.1bn) against this target. We help drive market innovation and
enable flow of capital to sustainable businesses. In addition, we
are helping to shape the Sustainable Finance market in Europe
through: dialogue with regulatory and industry bodies, producing
industry-leading research, participating and organising dedicated
events and engaging with communities.
Important effort has gone into strengthening our own expertise
through training on Sustainable Finance over the year:
-- Around 8400 participants across Europe have attended online
training sessions on Sustainable Finance. Around 20 senior leaders
attended the 2020 Sustainability Leadership Programme, a 2 day
training session dedicated to Sustainable Finance.
-- In France, CMB launched a partnership to support French
corporate clients with their Corporate Social Responsibility and
ESG strategy and energy transition.
We've also progressed in shaping and deploying the product
proposition where European countries have been pioneering and are
still leading the way. For instance, HSBC is heavily involved in
developing the green, socially responsible and sustainability bond
market.
Some examples of corporate sustainability bonds:
-- We have acted as Green Structuring Advisor and Sole Lead
Manager for Henkel who are the first corporate issuer of a plastic
waste reduction bond. Henkel issued privately placed corporate
bonds ($70 million and EUR25 million tranches) with a five-year
tenor to dedicated Japanese and German ESG-investors.
-- We acted as joint bookrunner for the cement industry's first
ever sustainability-linked bond. Under the terms of the EUR850
million deal, Switzerland-based LafargeHolcim commits to reduce the
carbon intensity of the cement it produces (scope 1) by 17.5 per
cent by the end of 2030 from a 2018 base year.
-- HSBC acted as Joint Lead Manager for Volkswagen's first green
bonds with a volume of EUR2 billion. The proceeds of the bonds will
be used in accordance to Volkswagen's Green Finance Framework,
including the funding of the modular electric drive matrix
(MEB).
Other types of green products were developed to new segments of
markets and customers:
-- In Spain, Vidrala was the first client to invest GBP5 million
in HSBC's Green Deposits scheme. HSBC is using the capital to fund
environmentally-progressive projects such as renewable energy,
energy efficiency, pollution control and biodiversity conservation
which align with our client's climate action commitments.
-- In the Channel Islands and Isle of Man, we launched the first
green loan for personal customers to encourage islanders to realize
their green projects, such as buying an electric car or improving
the environmental credentials for their home.
We want to be a leading international bank in Europe creating a
bank fit for the future. Sustainable finance will continue to be
key to our long-term strategy and we will continue to prioritise
our customers' investments and growth in this area.
Employee matters
Our employees and the societies they represent and serve span
many cultures, communities and continents. We believe this
diversity makes us stronger, and we are dedicated to building a
diverse and connected workforce where everyone feels a sense of
belonging.
In July 2020, the Group set out global ethnicity commitments to
improve opportunities for Black and ethnic minority employees and
boost the diversity of our senior leadership. A common requirement
behind our ethnicity commitments is improving the quality and
reporting of employee ethnicity data, to be more transparent about
our representation and accountable for the effectiveness of our
actions. In October 2020 we published the ethnicity data for the UK
and we are exploring how we can improve the data across European
countries in line with local laws and regulations. For further
details on employee ethnicity, please refer to the HSBC Holdings
plc ESG data pack.
We have carried out actions to drive improvements in
representation and sentiment across multiple dimensions of
diversity and inclusion, strengthen our employee networks, and to
improve our diversity data. Our diversity focus goes beyond gender
to include ethnicity, disability and LGBT+. Our key achievements
are detailed on page 92 under Diversity and Inclusion.
The development of our people is core to the success of our
organisation. We continue to develop and implement practices that
build employee capability and identify, develop and deploy talented
employees; this ensures an appropriate supply of high calibre
individuals with the right values, skills and experience for
current and future senior management positions.
Since the launch of HSBC University in 2017, we have continued
to add to the portfolio of world class leadership and professional
development programmes for leaders and people managers. This is
even more important for HSBC Bank plc as our Transformation
programme is implemented and we fulfil our commitment to our
employees through this process to ensure they have access to the
right tools to support their future career.
HSBC Future Skills
We have developed a flagship Future Skills programme to prepare
our people for the changing skills required in the future
workplace. We are encouraging our employees to take ownership of
their development and supporting them to do so. We are creating an
innovative internal talent marketplace through new technology that
helps improve career development by matching the skills and
aspirations of our people with business needs and
opportunities.
Working with research partners such as the World Economic Forum
we have defined a framework of future skills that we believe will
be important in the world as a result of technology and customer
behaviour changes. Some of these skills such as negotiating,
communicating with impact, or leading change are not new, but they
will become even more fundamental in the future of work. However,
we also expect newer skills such as design mindset, computational
thinking or new media literacy to become more prevalent in our
organisation as our Future Skills movement progresses.
In the final quarter of 2020 HSBC Europe started the creation of
a Future Skills 'movement', launched off the back of a 'MySkills'
Festival week held throughout the region in the month of November.
The purpose of the week was to create a unique space for colleagues
to come together, experience new things, engage with intriguing
content and get inspired as to what the future of work could mean
for them, HSBC and the wider communities that we support.
In 2021, we will continue this campaign with some exciting
enhancements with the aim of providing greater opportunities for
colleagues to develop and thrive in the HSBC of the future.
Social matters
We have a responsibility to invest in the long-term prosperity
of the communities where we operate. We recognise that technology
is developing at a rapid pace and that a range of new and different
skills are now needed to succeed. For this reason, much of our
focus is on programmes that develop employability and financial
capability. We also back climate solutions and innovation, and
contribute to disaster relief efforts based on need. In 2020 in
Europe, we contributed GBP2.5m to charitable programmes and our
employees volunteered 2,300 hours to community activities during
the working day.
Human rights
Our commitment to respecting human rights, principally as they
apply to our employees, our suppliers and through our financial
services lending, is set out in our 2015 Statement on Human Rights.
This statement, along with our ESG Updates and our statements under
the UK's Modern Slavery Act ('MSA'), is available on
www.hsbc.com/our-approach/measuring-our-impact.
Anti-corruption and anti-bribery
We are committed to high standards of ethical behaviour and
operate a zero-tolerance approach to bribery and corruption. Our
anti-bribery and corruption policy sets the framework for the Group
and this is followed throughout HSBC Bank plc, to comply with
anti-bribery and corruption legislation in all jurisdictions in
which we operate, and gives practical effect to global initiatives,
such as the OECD Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions. Where local
legislation is in place in a jurisdiction, local policies are in
place as appropriate, for example in France the AFA (Agence
Francaise Anti-corruption) is adhered to.
The principal risks addressed by our anti-bribery and corruption
policy are the risk that our employees, associated persons or
customers engage in bribery or corruption, or that the Group does
so through its strategic activities.
HSBC conducts business with the commitment to supporting the
sustained success of our customers, people and communities.
Non-Financial Information Statement
Disclosures required pursuant to the Companies, Partnerships and
Groups (Accounts and Non-Financial Reporting) Regulations 2016 can
be found on the following pages:
Environmental matters
(including the impact
of the company's business
on the environment) Page 8
-------------------------- -------------
The company's employees Pages 7 to
11 and 92 to
93
-------------------------- -------------
Social matters Page 9
-------------------------- -------------
Respect for human rights Page 9
-------------------------- -------------
Anti-corruption and Page 25
anti-bribery matters
-------------------------- -------------
Business model Page 6
-------------------------- -------------
Principal risks Page 20
-------------------------- -------------
HSBC creates value by providing products and services to meet
our customers' needs. We aim to do so in a way that fits seamlessly
into their lives. This helps us to build long-lasting relationships
with our customers. HSBC maintains trust by striving to protect our
customers' data and information, and delivering fair outcomes for
them and if things go wrong, we need to address complaints in a
timely manner. Operating with high standards of conduct is central
to our long-term success and underpins our ability to serve our
customers. Our Conduct Framework guides activities to strengthen
our business and increases our understanding of how the decisions
we make affect customers and other stakeholders. Details on our
Conduct Framework are available at www.hsbc.com.
Section 172 statement
Section 172 of the Companies Act requires a director of a
company to act in the way he or she considers, in good faith, would
be most likely to promote the success of the company for the
benefit of its members as a whole. In doing this, section 172
requires a director to have regard, amongst other matters, to: the
likely consequences of any decision in the long term; the interests
of the company's employees; the need to foster the company's
business relationships with suppliers, customers and others; the
impact of the company's operations on the community and the
environment; the desirability of the company maintaining a
reputation for high standards of business conduct; and the need to
act fairly as between members of the company.
The Board considered a range of factors when making decisions
and is supported in the discharge of its duties by:
-- an induction programme and ongoing training to provide an
understanding of our business and financial performance and
prospects;
-- management processes which ensure that proposals presented to
Board and Committee meetings for decision include information
relevant to determine the action that would most likely promote the
success of the bank and engagement with stakeholders where relevant
to support appropriate decision making; and
-- agenda planning for Board and Committee meetings to provide
sufficient time for the consideration and discussion of key
matters.
2020 was an unprecedented year as a result of the Covid-19
outbreak, and as such the Board was required to take decisions in
the context of an uncertain and ever-changing external environment.
The Board made a concerted effort to ensure that each stakeholder
group received an appropriate level of consideration given the
circumstances and Directors were provided with regular updates
addressing how the outbreak was affecting, amongst others, the
bank's clients and employees to ensure their interests and views
were being taken into account. The effect of the outbreak
influenced the Board's discussions in a number of ways, and the
Board met more frequently and engaged with management more often
during the height of the crisis to assess the impact of the
outbreak on the bank and its key stakeholders. The Executive
Committee also met more regularly during this period, with more
frequent reports to the Board to ensure directors were kept
informed about developments across the full range of the bank's
activities, including the impacts of Covid-19 on customers,
clients, supply chains and employees. There was also more intensive
dialogue with the bank's regulators.
Stakeholder Engagement
The Board understands the importance of effective engagement
with its stakeholders and is committed to open and constructive
dialogue. This helps build trust and allows the Board to better
understand and respond to the challenges facing the bank. Depending
on the nature of the issue in question, however, the relevance of
each stakeholder group may differ and not every decision the Board
makes will necessarily result in a positive outcome for all
stakeholders.
For further details regarding the role of the Board and the way
in which it makes decisions, including key activities during 2020,
please see page 88.
The Board regularly receives reports from management on issues
concerning customers, the environment, communities, suppliers,
employees, regulators, governments and investors, which it takes
into account in its discussions and in its decision-making process
under section 172. In addition to this, the Board seeks to
understand the interests and views of the bank's stakeholders by
engaging with them directly as appropriate. The Covid-19 outbreak
materially restricted the Board's ability to engage with
stakeholders face-to-face, but examples of how Directors were able
to maintain effective contact are set out below:
Customers
Customers are at the core of the bank's business model and a
primary stakeholder: without customers there would be no bank. The
Board strives to ensure it has a broad understanding of customers,
their needs and challenges, and to give full consideration to
these.
During the year, the CEO and his senior management team
continued to engage directly with customers, often virtually, while
the Board closely monitored the bank's approach to supporting
customers and endorsed the bank's participation in government
support schemes in response to Covid-19 and the associated
increases in risk-weighted assets this required. The Board also
received regular reports from senior management on interaction with
customers, which included key performance indicators measuring the
impacts and challenges to customers as a result of Covid-19, the
Europe transformation programme and associated conduct
considerations. Dedicated deep dive sessions were also held, with
one such session focused on the Insurance business and the impacts
of the pandemic on customer cover.
Employees
Employees are critical to the successful operation of the
Company and its long-term future.
During the year the Board received regular updates from senior
management on various metrics and feedback tools in relation to
employees, including updates on Diversity and Inclusion and the
Gender Pay Gap. In response to the Covid-19 outbreak, updates were
also provided on the impact on employee wellbeing and how the bank
was supporting its staff. The focus on employees by the Board was
also heightened through the frequent updates provided on the Europe
transformation programme and how staff were being impacted by the
level of change.
Shareholders and Investors
The Company is a wholly owned subsidiary of the HSBC Group and,
as such, the Board took into account the implications of its
decisions with regard to its ultimate shareholder, HSBC Holdings
plc, and its debt security investors.
During the course of the year, the Group Chairman held a number
of principal subsidiary chair conferences which were attended by
the Chairman of the Board. In addition, Chairs of the Audit and
Risk committees participated in regional Audit and Risk committee
forums hosted by their Group counterparts. These were attended both
by the bank's Directors as well as Audit and Risk Committee Chairs
of material subsidiaries. The Board also received updates from
management on the bank's debt issuance programmes.
Regulators and Governments
Directors regularly meet with the bank's regulators, the
Financial Conduct Authority ('FCA') and Prudential Regulatory
Authority ('PRA'), and seek to proactively engage them on specific
issues. It is central to the success of the bank that it has strong
relationships with these stakeholders and that there is a mutual
understanding on expectations and challenges given their impact on
customers, the business model and the bank's strategy.
During the year, members of the Board met regularly with
regulators both in the UK and Europe and engagement continued
during 2020 notwithstanding the logistical challenges posed by the
Covid-19 outbreak.
Suppliers
Suppliers are critical to supporting the infrastructure and
operations of the business and have contractual relationships with
the bank.
During the year, the Board received an update on the bank's
performance against its statutory reporting obligations in respect
of the payment of third party suppliers. This also provided an
insight into the impact of its procurement processes and procedures
on suppliers.
Communities and Environment
The Company has legal, regulatory and social responsibilities to
the community and its environment.
During the year the Board received updates on the group's
evolving climate and sustainable finance strategy and net zero
ambition. There will be more extensive engagement in 2021 as part
of the development of a sustainable finance strategy tailored for
Europe and also to provide updates to the Board on delivery against
climate targets and strategy execution.
Employee Engagement
The Chief Executive Officer and the Executive Team are actively
involved in the engagement of employees through leadership calls
and quarterly all employee webcasts to keep the workforce
up-to-date on business developments and answer questions. In
addition, the Chief Executive Officer issues a Europe-wide
newsletter which updates employees on positive initiatives across
the region. During 2020 he also participated in a number of
podcasts/webcasts that focused on Diversity & Inclusion and the
future workplace. The Board receives regular updates from the Chief
Executive Officer and the Head of HR on employee matters, including
feedback received through Town Halls and Exchanges, which this year
included sessions dedicated to the Europe transformation programme,
as well as through regular employee surveys such as the Banking
Standards Board and Snapshot. As a result of Covid-19, a further
Wellbeing survey was organised for employees as a way to assess
staff health and wellbeing during the crisis. These were discussed
at the Board and focus groups have been set up to obtain further
insights into the results. One of the non-executive Directors also
has a particular focus on employee matters to enhance the Board's
view of people issues and to gain a better understanding of the
employee perspective. Further details of the bank's engagement with
employees can be found on pages 7 to 11 and 92 to 93.
Principal Decisions
Set out below are some of the principal decisions made by the
Board during 2020. Each example includes an explanation of how the
Directors have regard to the matters set out in section
172(1)(a)-(f) of the Act when discharging their duties.
Appointment of Chief Executive Officer
In March 2020, Nuno Matos was appointed as the bank's Chief
Executive Officer, to lead the implementation of the Europe
transformation programme. The appointment followed a thorough and
robust search process led by the Nomination, Remuneration and
Governance Committee ('NRGC'), and further details on the process
can be found in the NRGC Report on page 90.
In taking their decision, the Board considered amongst other
matters the ability of prospective candidates to engage
constructively and develop trusted relationships with the bank's
stakeholders as well as the capacity to maintain strong relations
with the workforce whilst implementing significant strategic
change.
The Board was pleased to appoint someone to this role from
within the organisation, thereby providing consistency of culture,
an understanding of the business strategy and model and an
appreciation of key stakeholder relationships.
During the process, the Board engaged with stakeholders in HSBC
Holdings plc due to their understanding of the specifications
required of the role holder and oversight of the Europe
transformation programme. The regulator was also engaged to
determine the suitability of prospective candidates due to its
knowledge of the bank and the regulatory responsibilities attached
to this position.
Such engagement helped the Board determine that the appointment
was in the best interests of the Company as a whole.
These considerations were also of paramount importance when,
following the announcement of Nuno Matos' appointment as Chief
Executive Officer of Wealth and Personal Banking, the Board was
required to consider potential successors. In reaching its decision
in December 2020 to appoint Colin Bell as the bank's new Chief
Executive Officer, a key factor was identifying the best candidate
to continue driving effective execution of the Europe
transformation programme in order to realise the benefits of that
plan for the bank's stakeholders.
Europe Transformation Programme
In April 2020, the Board approved a revised Annual Operating
Plan to implement the bank's response to the revised Group
Strategy, which is referred to as the Europe transformation
programme.
The Board provided support to the members of the Executive
Committee in their development of the plans. In advance of
approval, the Board also constructively challenged and engaged with
senior management to consider the likely consequences of the
strategic actions proposed on all of its stakeholders, including
shareholders, investors and the wider community.
Customers were identified as particularly important stakeholders
under the programme, with the Board recognising the need to
transform the business to become a profitable, successful and
sustainable bank serving the Group's international clients in
Europe. The Board, however, acknowledged that the focus of the new
strategy, in particular the proposed reduction in Risk Weighted
Assets, would require some client relationships to be restructured.
Employees were also identified as key stakeholders given the
importance of ensuring staff understood and implemented the
strategy. At the same time, it was acknowledged that the Europe
transformation programme anticipated a material reduction in
regional staff numbers and that the process would need to be
managed with particular care and sensitivity. The Board was
especially focused on the wellbeing of employees given the volume
of change to be initiated, as well as the importance of treating
customers fairly. Due to the extraordinary impact of the Covid-19
outbreak, the decision was therefore made to pause the employee
redundancy programme and client restructuring during the second
quarter of the year. When the pause on redundancies was lifted in
June, measures were put in place to manage the process as
sensitively as possible, redeploy staff where possible and provide
support to employees leaving the bank.
Appointment of independent non-executive Director and
establishment of new governance body
In November 2020, the Board approved the appointment of Juliet
Robinson as an independent non-executive Director. The Nomination,
Remuneration and Governance Committee, on behalf of the Board,
agreed a role specification which was driven by recommendations
from the HSBC Holdings plc Subsidiary Governance Review summarised
on page 88 and the Committee's own assessment, which highlighted
the need to enhance the Board's capabilities in the areas of
technology transformation and operational resilience. In parallel,
the Board approved the establishment of a new governance body, the
Transformation, Operational Resilience and Technology Committee as
described on page 90, with a focus on providing enhanced oversight
in these areas under the authority of the Board and Risk
Committee.
In reaching these decisions, the interests of the bank's
regulators were a particular focus given the heightened regulatory
scrutiny over technology governance within the Group and the
banking sector more generally. Customers and suppliers were also
identified as important stakeholders, since they will be the
ultimate beneficiaries of successful execution of the significant
operational and technology changes anticipated under the Europe
transformation programme .
Capitalisation of the bank and HSBC Continental Europe
As a result of the significant and sudden capital impact caused
by the adverse economic conditions and market volatility following
the onset of the Covid-19 outbreak, in March 2020 the Board
approved a GBP1 billion CET1 capitalisation of the bank by HSBC
Holdings plc (via the bank's intermediate holding company). In
April 2020, the Board also approved the injection of up to EUR900
million in CET1 and Tier 2 capital by the bank into HSBC
Continental Europe, EUR500 million of which was utilised in May
2020 in the form of Tier 2 capital, to ensure that HSBC Continental
Europe remained well-capitalised notwithstanding the impact of
Covid-19, and to underpin its capacity to support customers during
the pandemic and support the transfer of assets from the bank to
HSBC Continental Europe in anticipation of the end of the Brexit
transition period.
In taking these decisions, the Board was focused on the bank's
obligations to its regulators and investors to maintain prudential
soundness in the face of the uncertainties presented by Covid-19,
as well as ensuring that the bank and its subsidiaries would remain
well-positioned to support their customers, suppliers, employees
and the wider community notwithstanding the unprecedented
challenges posed by the outbreak.
Tax
Our approach to tax
We are committed to applying both the letter and the spirit of
the law in all territories where we operate, and have adopted the
UK Code of Practice for the Taxation of Banks. As a consequence, we
seek to pay our fair share of tax in the countries in which we
operate. We continue to strengthen our processes to help ensure our
banking services are not associated with any arrangements known or
suspected to facilitate tax evasion.
HSBC continues to apply global initiatives to improve tax
transparency such as:
-- the US Foreign Account Tax Compliance Act ('FATCA');
-- the OECD Standard for Automatic Exchange of Financial Account
Information (also known as the Common Reporting Standard);
-- the Capital Requirements Directive IV ('CRD IV') Country by Country Reporting;
-- the OECD Base Erosion and Profit Shifting ('BEPS') initiative; and
-- the UK legislation on the corporate criminal offence ('CCO')
of failing to prevent the facilitation of tax evasion.
We do not expect the BEPS or similar initiatives adopted by
national governments to adversely impact our results
Key Performance Indicators
The Board of Directors tracks the group's progress in
implementing its strategy with a range of financial and
non-financial measures or key performance indicators ('KPIs').
Progress is assessed by comparison with the group strategic
priorities, operating plan targets and historical performance. The
group reviews its KPIs regularly in light of its strategic
objectives and may adopt new or refined measures to better align
the KPIs to HSBC's strategy and strategic priorities.
Financial KPIs
2020 2019
----------------------------- ------- -------
(Loss) before tax (reported)
(GBPm) (1,614) (872)
----------------------------- ------- -----
(Loss)/profit before
tax (adjusted) (GBPm) (184) 603
Cost efficiency ratio
(reported) (%) 113.6 112.2
----------------------------- ------- -----
Cost efficiency ratio
(adjusted) (%) 89.6 87.9
----------------------------- ------- -----
Return on tangible
equity (%) (2.7) 0.6
----------------------------- ------- -------
Common equity tier
1 capital ratio (%) 14.7 14.2
----------------------------- ------- -------
(Loss)/profit before tax (reported/adjusted): Reported
(loss)/profit before tax is the (loss)/profit as reported under
IFRS. Adjusted (loss)/profit before tax adjusts the reported
(loss)/profit for the effect of significant items as detailed on
pages 16 to 17.
Reported loss before tax in 2020 was GBP(1,614)m compared to a
loss before tax of GBP(872)m in 2019. This was primarily driven by
higher Expected Credit Losses ('ECL') from charges related to
specific wholesale exposures, and charges related to the impact of
Covid-19 on the economic outlook. Revenue also decreased driven by
the impact of lower interest rates on our deposit franchises and
insurance manufacturing business, as well as adverse movements in
valuation adjustments in GBM. This was partly offset by lower
operating expenses. Reported operating expenses in 2020 included a
GBP802m impairment of intangibles, mainly software, while in 2019
reported operating expenses included a GBP1,167m impairment of
goodwill as well as costs of GBP87m associated with the group's
preparation for the UK's exit from the Europe Union. This decrease
was partly offset by higher expenses related to restructuring and
other related costs, including severance costs, arising from the
bank's transformation programme.
Adjusted profit before tax decreased due to higher ECL and lower
revenue. The decrease in revenue included the impact of the low
interest rate environment on our businesses and adverse market
impacts on PVIF in insurance manufacturing in WPB. This was partly
offset by a stronger performance in GBM in Markets. Operating
expenses increased reflecting a number of specific items incurred
in 2020. This offset a significant reduction in operating expenses
as a result of the tight control of discretionary spend to reflect
the economic outlook and the initial impact of our transformation
of the bank.
Cost efficiency ratio (reported/adjusted) is measured as total
operating expenses divided by net operating income before expected
credit losses and other credit impairment charges.
In 2020, reported revenue decreased by 2% while reported
operating expenses decreased by 1%. The cost efficiency ratio
therefore worsened by 1.4 percentage points. Reported revenue
decreased, mainly due to the lower interest rate environment
impacting our businesses, partly offset by lower reported operating
expenses, mainly due to lower impairment of goodwill and other
intangible assets.
The cost efficiency ratio (adjusted) worsened by 1.7 percentage
points from 2019, mainly reflecting lower revenue and higher
adjusted costs driven by the factors mentioned above.
Return on tangible equity ('RoTE') is computed by adjusting
reported results to exclude significant items, the movements in the
present value of in-force long-term insurance business ('PVIF') and
for impairments of goodwill, divided by average reported equity
adjusted for goodwill, intangibles and PVIF for the period. The
adjustment to reported results and reported equity excludes amounts
attributable to non-controlling interests.
CET1 capital ratio represents the ratio of common equity tier 1
capital to total risk-weighted assets. CET1 capital is the highest
quality form of capital comprising shareholders' equity and related
non-controlling interests less regulatory deductions and
adjustments.
The group seeks to maintain a strong capital base to support the
development of its business and meet regulatory capital
requirements at all times.
The CET1 capital ratio increased during the year mainly due to a
reduction in risk-weighted assets ('RWAs') and an increase in CET1
capital as a result of a GBP1bn capital injection by HSBC UK
Holdings Limited .
Non-financial KPIs
We monitor a range of non-financial KPIs focusing on customers,
people, culture and values including customer service satisfaction,
employee engagement and diversity and sustainability.
For details on customer service and satisfaction please refer
below; for the remaining non-financial KPIs, refer to the Non
financial reporting section on page 8 and Corporate Governance
section on page 86 to 94.
Customer service and satisfaction
WPB
In WPB Europe, enhancing customer experience and improving
satisfaction remains integral to our strategy. This is monitored
through a number of customer satisfaction metrics covering branch,
contact centre and digital channels. We recognise the importance of
customer feedback and continue to enhance our insights to gain a
better understanding of our clients to provide a more personalised
and relevant service.
Digital continues to be a principal area of investment enhancing
customer experience. In 2020 we demised our legacy platforms for
five of our markets and plan to continue to migrate the remaining
markets to the latest Public Website, Mobile App and Online Banking
platforms in 2021 driving cost efficiencies and improving customer
experience. We enhanced our online Account Opening journey for
Expat clients (WPB Channel Islands & Isle of Man) reducing the
time to apply and open accounts, achieving a 248% increase in
opened accounts year on year. Our Private Banking arm is also
committed to enhancing digital offerings, including enhanced
capabilities to support our advisory offering, a revised mobile
banking app and improved internal platforms to support our people
in delivering improved client service.
We recognise that enhancing customer satisfaction is an evolving
process and are committed to ensure our investments and focus are
prioritised to achieve this.
CMB
Customer experience, satisfaction and conduct are key priorities
for Commercial Banking in Europe. We continue to remain focused on
enhancing our insights through relevant and measurable metrics that
enable us to improve understanding of our customers. In 2020, our
customers have indicated that the key strengths of our existing
franchise are the skills and knowledge of our people and our global
international network. This is further complemented by our product
and service capabilities which support our customers' business
aspirations. We have received a number of external recognitions
including i) the world's leading bank for trade finance for the
fourth year in a row, in the Euromoney Trade Finance Survey ii)
Best Global Cash Manager for Euromoney Cash Management Survey 2020
iii) World's Best Bank for Transaction Services iv) Best
Transaction Bank in Western Europe by The Banker Transaction
Banking Awards 2020.
Conversely, we acknowledge that we do not always consistently
meet our customers' expectations. To address this, we plan to
continue to streamline our onboarding process and to examine
customer feedback to identify opportunities for improvement.
Building on our efforts in 2020, further work is planned for 2021
that will use customer insights to help improve customer experience
and satisfaction.
GBM
We remain committed to providing excellent customer value and
continue to strive towards improving our proposition to meet client
needs.
In 2020, HSBC won the Global Excellence in Leadership award from
Euromoney in relation to our leadership role during the Covid-19
outbreak. Other major awards include industry accolades from The
Banker for 'Best Transaction Bank in Western Europe' and 'Best Bank
for Securities Services' in 2020. Greenwich rated us #1 Standout FX
Dealer for Global Corporates and we remain a top 3 player for
Emerging Markets in 2020. We continue to be ranked 1st in Emerging
EMEA Equity Sales this year in the Extel survey.
We work with clients in achieving their green ambitions, and as
part of that we are proud to be #1 for Green, Social and
Sustainable Bonds.
In the UK, we continue to make strong progress in our event
business where we have executed over 20 ECM deals in 2020, our
highest one year total in over a decade, raising over GBP10bn for
UK corporates. We acted as Global Coordinator on many of these
transactions including leading the first major UK IPO of 2020 and
also the first Covid-19 related primary placing. HSBC is also the
fastest growing FTSE 350 Corporate Broking franchise in the market
and continues to invest in order to deliver excellent service to
our clients and grow the business going forwards.
Key performance indicators calculated by Greenwich are used to
assess a variety of conduct areas. The measure is calculated by the
percentage of promoters who are giving a rating of 9 & 10 less
the detractors (0 to 6) and is benchmarked against the competition.
In 2020, for the metric 'HSBC treats me fairly', our European
business received a score of 75, 6 points ahead of our competitors
and for 'Staff conduct themselves with professional integrity', we
scored 80, 1 point ahead of competitors.
Economic background and outlook
UK
Challenging times
The UK economy has faced a challenging few months. Surging
Covid-19 infections saw a 4-week national lockdown implemented in
November 2020, then another stricter lockdown in January 2021,
which could continue through Q1. Restrictions have included the
closure of non-essential retail, restaurants and, more recently,
schools. While GDP held up well in the fourth quarter of 2020,
rising by 1.0% quarter on quarter, HSBC research expects output to
decline in the first quarter of 2021. The labour market remains
depressed, with the unemployment rate rising to 5.0% in the three
months to November, up from 3.8% before the crisis.
In addition, on 31 December 2020, the UK's post-Brexit
transition period came to an end. The UK has signed a trade deal
with the EU including tariff-free goods trade. But a range of
non-tariff barriers to goods trade - including customs formalities
- are now in place. And limited arrangements are in place to
facilitate services trade. Early signs suggest that the move to new
trading arrangements has entailed a degree of economic
disruption.
Looking ahead, the prospect of a vaccine rollout should allow
Covid-19-related restrictions to ease, while further adjustment on
the part of businesses to new trading arrangements with the EU
should see the economy stage a gradual recovery over the course of
this year and next. However, ongoing headwinds, including elevated
debt levels, corporate insolvencies and unemployment mean that,
after an initial bounce, the recovery may prove very
protracted.
Policy debates ahead
In response to the Covid-19 outbreak, the Bank of England (BoE)
cut Bank Rate from 0.75% to 0.1% last year, and announced a total
of GBP460bn worth of asset purchases under its Quantitative Easing
(QE) programme. The BoE has also been consulting financial
institutions on the feasibility of cutting Bank Rate below zero.
While that remains a possibility, HSBC Research forecasts no policy
rate changes this year or next.
Fiscal policy support has also been substantial - over the past
year it has included a temporary VAT cut, grants to businesses
affected by Covid-19 and the Job Retention Scheme which has offered
large wage subsidies to enable companies to keep staff on their
payroll. UK government net debt has reached almost 100% of GDP and,
at some point over the coming year, it is possible that the
government will consider measures geared towards unwinding support
in order to stabilise the public finances.
Eurozone
The long road to recovery
After a summer which saw a partial recovery from lockdowns in
spring, eurozone GDP fell by 0.7% in the fourth quarter of 2020.
That was the result of renewed restrictions implemented to contain
the spread of Covid-19. Indeed, at the turn of the year, some
sectors of the economy, most notably hospitality, were effectively
shut down. Overall, the level of output in the fourth quarter was
estimated to be 5.1% below its pre-pandemic peak. Unemployment,
meanwhile, is fairly elevated at 8.3% in December, versus a March
2020 trough of 7.2%. Inflation remains low - the eurozone annual
consumer price inflation rate stood at 0.9% in January.
Prospects for the rollout of a Covid-19 vaccine may eventually
bring an end to the need for significant social distancing
measures. However, the lingering effects of Covid-19 (joblessness,
corporate failures and debt) will likely see activity struggling to
return to pre-crisis levels. With the economy set to continue to
run below capacity, HSBC Research's view is that underlying
inflation should remain muted through this year and next.
Fiscal and monetary support continue
Substantial fiscal support measures continue. For example, many
eurozone governments have extended 'short-time' work schemes, which
offer generous wage subsidies aimed at keeping people in work.
These measures will, however, keep public debt burdens elevated.
This year should also see funds start to flow from the EUR750bn EU
Recovery Fund.
Meanwhile, the prospect of subdued inflation is likely to keep
monetary policy very loose. The European Central Bank ('ECB') has
so far announced EUR1.85tn of asset purchases under its Pandemic
Emergency Purchase Programme. These purchases may have helped
support financial markets, helping them absorb the large volume of
public debt issuance stemming from the crisis. HSBC Research is not
forecasting any ECB policy changes from here, but further loosening
measures cannot be ruled out.
.
Financial summary
Use of non-GAAP financial measures
Our reported results are prepared in accordance with
International Financial Reporting Standards ('IFRSs'), as detailed
in the Financial Statements starting on page 107. In measuring our
performance, the financial measures that we use include those
derived from our reported results in order to eliminate factors
that distort year-on-year comparisons. These are considered
non-GAAP financial measures.
Non-GAAP financial measures are described and reconciled to the
closest reported financial measure when used.
Change in reportable segments since year end 2019
Effective from the second quarter in 2020, we simplified our
organisation structure by merging Global Private Banking ('GPB')
and Retail Banking and Wealth Management ('RBWM') to form Wealth
and Personal Banking ('WPB'). We also renamed our Balance Sheet
Management function as Markets Treasury to reflect the activities
it undertakes more accurately and its relationship to our Treasury
function more broadly. This followed realignments within our
internal reporting and includes the reallocation of Markets
Treasury from Corporate Centre to the
global businesses. Comparative data has been re-presented
accordingly and reflected in all the business performance
commentary.The global business segmental results are presented on
an adjusted basis in accordance with IFRS 8 'Operating Segments',
as detailed in 'Basis of preparation' in Note 9: Segmental Analysis
on page 139. Reconciliation of reported and adjusted performance
are presented on pages 15 to 17.
Adjusted performance
Adjusted performance is computed by adjusting reported results
for the year-on-year effects of significant items that distort
year-on-year comparisons.
We use 'significant items' to describe collectively the group of
individual adjustments excluded from reported results when arriving
at adjusted performance. These items are ones that management and
investors would ordinarily identify and consider separately when
assessing performance to understand better the underlying trends in
the business. We consider adjusted performance provides useful
information for investors by aligning internal and external
reporting, identifying and quantifying items management believes to
be significant and providing insight into how management assesses
year-on-year performance.
Changes from 1 January 2020
Interest rate benchmark reform - Phase 2
Interest Rate Benchmark Reform Phase 2: Amendments to IFRS 9,
IAS 39, IFRS 7, IFRS 4 and IFRS 16 issued in August 2020 represents
the second phase of the IASB's project on the effects of interest
rate benchmark reform, addressing issues affecting financial
statements when changes are made to contractual cash flows and
hedging relationships as a result of the reform.
Under these amendments, changes made to a financial instrument
measured at other than fair value through profit or loss that are
economically equivalent and required by interest rate benchmark
reform, do not result in the derecognition or a change in the
carrying amount of the financial instrument. Instead they require
the effective interest rate to be updated to reflect the change in
the interest rate benchmark. In addition, hedge accounting will not
be discontinued solely because of the replacement of the interest
rate benchmark if the hedge meets other hedge accounting
criteria.
These amendments apply from 1 January 2021 with early adoption
permitted. HSBC Bank plc has adopted the amendments from
1 January 2020 and has made the additional disclosures as
required by the amendments.
Summary consolidated income statement for the year ended
2020 2019
Footnotes GBPm GBPm
--------------------------------------------------- --------- ------- ---------
Net interest income 1,898 1,483
--------------------------------------------------- --------- ------- -------
Net fee income 1,400 1,344
--------------------------------------------------- --------- ------- -------
Net income from financial instruments measured
at fair value 2,314 3,882
--------------------------------------------------- --------- ------- -------
Gains less losses from financial investments 95 38
--------------------------------------------------- --------- ------- -------
Net insurance premium income 1,559 2,147
--------------------------------------------------- --------- ------- -------
Other operating income 417 516
--------------------------------------------------- --------- ------- -------
Total operating income 1 7,683 9,410
Net insurance claims, benefits paid and movement
in liabilities to policyholders (1,783) (3,366)
--------------------------------------------------- --------- ------- -------
Net operating income before expected credit losses
and other credit impairment charges 5,900 6,044
--------------------------------------------------- --------- ------- -------
Change in expected credit losses and other credit
impairment charges (808) (124)
--------------------------------------------------- --------- ------- -------
Net operating income 5,092 5,920
Total operating expenses excluding impairment of
goodwill and other intangible assets 1 (5,903) (5,615)
Impairment of goodwill and other intangible assets (802) (1,167)
--------------------------------------------------- --------- ------- -------
Operating Loss (1,613) (862)
--------------------------------------------------- --------- ------- -------
Share of Loss in associates and joint ventures (1) (10)
--------------------------------------------------- --------- ------- -------
Loss before tax (1,614) (872)
Tax expense 136 (119)
--------------------------------------------------- --------- ------- -------
Loss for the year (1,478) (991)
--------------------------------------------------- --------- ------- -------
Loss attributable to shareholders of the parent
company (1,488) (1,013)
--------------------------------------------------- --------- ------- -------
Profit attributable to non-controlling interests 10 22
--------------------------------------------------- --------- ------- -------
1 Total operating income and expense include significant items as detailed on pages 15 to 17.
1
Reported performance
The following commentary reflects the newly formed Wealth and
Personal Banking ('WPB') business segment following the
simplification of our organisational structure. We also renamed our
Balance Sheet Management function as Markets Treasury to reflect
the activities it undertakes more accurately and its relationship
to our Treasury function more broadly.
Performance in 2020 was heavily impacted by lower interest rates
resulting in lower revenue. There was also a deterioration in the
future economic outlook resulting in high Expected Credit Losses
('ECL').
Reported loss before tax was GBP(1,614)m, compared with a loss
before tax in 2019 of GBP(872)m, an increase of GBP742m. This was
mainly due to higher ECL driven by charges related to specific
wholesale exposures, and charges related to the impact of Covid-19.
Reported revenue was lower, impacted by the effect of interest rate
reductions on our deposit franchises, market impacts on the present
value of in-force ('PVIF') long-term insurance contracts in
insurance manufacturing in WPB, an adverse movement in valuation
adjustments in GBM and a decrease in the fair value of preference
share holdings in Visa. Revenue also included restructuring and
other related costs comprising disposal losses associated with RWA
reductions as well as a property-related gain, both of which
related to the commitments at our February 2020 business update.
This was partly offset by higher revenue in GBM driven by a strong
trading performance in our Markets businesses. Operating expenses
were lower, mainly driven by lower impairment of goodwill and other
intangible assets, partly offset by higher transformation
costs.
Net interest income ('NII') increased by GBP415m or 28% compared
to the prior year. NII was lower in WPB, CMB, and GBM compared with
2019, mainly driven by the impact of the lower interest rate
environment. This was more than offset by a reduction in the
funding cost of trading assets, and through initiatives to reduce
the overall funding costs of the bank through retiring more
expensive wholesale funding.
Net fee income increased by GBP56m or 4% compared to the prior
year, primarily in Global Banking due to higher transaction volumes
in the Capital Markets businesses primarily from market activity,
including debt and equity issuances, driven by the impact of
Covid-19. This was partly offset by a decrease in WPB, notably
Retail Banking and Asset Management, driven by adverse market
conditions and lower levels of customer activity reflecting the
impact of Covid-19.
Net income from financial instruments measured at fair value
decreased by GBP1,568m or 40% compared with the prior year. In WPB,
revenue decreased primarily reflecting less favourable equity
market performance in France compared with 2019 due to the impact
of the Covid-19 outbreak on the value of equity and unit trust
assets supporting insurance contracts. After large losses in the
first quarter of 2020, there was a partial recovery in the
remainder of the year.
This adverse movement resulted in a corresponding movement in
liabilities to policyholders, reflecting the extent to which
policyholders participate in the investment performance of the
associated assets. The offsetting movements are recorded in net
insurance claims and benefits paid and movement in liabilities to
policyholders.
Net income also reduced due to lower trading interest income,
booked in Corporate Centre, related to the funding of our trading
activities, which was offset by lower cost of funding in net
interest income above. In addition, there was a decrease in the
fair value of preference shareholdings in Visa in WPB and CMB.
Gains less losses from financial investments increased by
GBP57m, mainly driven by higher gains on the disposal of bonds held
at fair value through other comprehensive income ('FVOCI') in
Markets Treasury.
Net insurance premium income decreased by GBP588m or 27%, mainly
in WPB, driven by lower business volumes in France, partly offset
by an increase in the UK, mainly due to higher sales of single
premium investment business.
Net insurance claims, benefits paid and movement in liabilities
to policyholders decreased by GBP1,583m or 47%, primarily in the
insurance business in WPB. The decrease was driven by lower
valuations on financial assets supporting contracts where the
policyholder is subject to part or all of the investment risk. The
losses recognised on the financial assets measured at fair value
through profit and loss that are held to support these insurance
contract liabilities are reported in 'Net income from financial
instruments designated at fair value'. This was partly offset by a
decrease in premium income.
Other operating income decreased by GBP99m or 19%, mainly due to
adverse market impacts on insurance manufacturing in WPB. This was
driven by the impact of lower interest rates on the valuations of
the liabilities under insurance contracts.
Changes in expected credit losses and other impairment charges
('ECL') increased by GBP684m, mainly driven by higher charges
related to a small number of wholesale exposures, notably in GBM
and CMB, and higher charges related to the ongoing impact of of the
Covid-19 outbreak on the forward economic outlook.
Total operating expenses excluding impairment of goodwill and
other intangible assets increased by GBP288m or 5%. This increase
reflects a number of significant items during the period:
-- an increase of GBP324m in expenses related to restructuring
and other related costs arising from the group's transformation
programme; partly offset by
-- the non-recurrence of costs of GBP87m associated with the
group's preparation for the UK's exit from the Europe Union booked
in 2019.
Impairment of goodwill and other intangible assets in 2020 of
GBP802m principally comprises the write-off of capitalised
software. This mainly relates to our businesses in the UK and
France and reflected the underperformance and deterioration in the
future forecasts of these businesses, substantially relating to
prior periods.
In 2019, operating expenses included a GBP1,167m goodwill
impairment as a result of reductions in forecast future cash flows,
which reflected the challenging market conditions and negative
interest rates in the Eurozone as well as refinements and revisions
of the methodologies employed to allocate carrying value in
use.
Share of (loss)/profit in associates and joint ventures was a
loss of GBP(1)m compared to a loss of GBP(10)m in 2019. This was
driven by a partial reversal of the loss booked in the first half
of the year on the share of profit recognised from our
associates.
Tax credit was GBP136m compared to a tax expense of GBP119m in
2019.
.
Adjusted performance
Significant revenue items by business segment - (gains)/losses for the
year ended
Corporate
WPB CMB GBM Centre Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------- ----- ----- ----- --------- -------
31 Dec 2020
---------------------------------------------------------- ----- ----- ----- --------- -------
Reported revenue 1,035 1,132 3,784 (51) 5,900
---------------------------------------------------------- ----- ----- ----- --------- -----
Significant revenue items - 1 189 (93) 97
-----
* debit valuation adjustment on derivative contracts - - 2 - 2
----------------------------------------------------------
* fair value movement on non-qualifying hedges - 1 2 (2) 1
----------------------------------------------------------
* restructuring and other related costs - - 185 (91) 94
---------------------------------------------------------- ----- ----- ----- --------- -----
Adjusted revenue 1,035 1,133 3,973 (144) 5,997
31 Dec 2019(1)
---------------------------------------------------------- ----- ----- ----- --------- -------
Reported revenue 1,356 1,211 3,743 (266) 6,044
---------------------------------------------------------- ----- ----- ----- --------- -----
Significant revenue items 1 1 30 (7) 25
---------------------------------------------------------- ----- ----- ----- --------- -----
* UK customer redress programmes 1 - - - 1
----------------------------------------------------------
* debit valuation adjustment on derivative contracts - - 27 - 27
----------------------------------------------------------
* fair value movement on non-qualifying hedges - 1 3 (7) (3)
----------------------------------------------------------
Adjusted revenue 1,357 1,212 3,773 (273) 6,069
---------------------------------------------------------- ----- ----- ----- --------- -----
1 A change in reportable segments was made in 2020. Comparative
data have been re-presented accordingly. For further guidance,
refer to Note 9 on page 139.
1
Significant cost items by business segment - (recoveries)/charges for
the year ended
Corporate
WPB CMB GBM Centre Total
GBPm GBPm GBPm GBPm GBPm
----------------------------------------------------------- ------- ------- ------- --------- ---------
31 Dec 2020
----------------------------------------------------------- ------- ------- ------- --------- ---------
Reported operating expenses (1,169) (773) (4,179) (584) (6,705)
----------------------------------------------------------- ------- ------- ------- --------- -------
Significant cost items 41 114 680 498 1,333
-----------------------------------------------------------
* restructuring and other related costs(2) 5 79 218 377 679
-----------------------------------------------------------
* settlements and provisions in connection with legal
and regulatory matters - - 1 8 9
-----------------------------------------------------------
* impairment of other intangible assets 36 35 461 113 645
-----------------------------------------------------------
Adjusted operating expenses (1,128) (659) (3,499) (86) (5,372)
31 Dec 2019(3)
Reported operating expenses (1,729) (1,175) (3,678) (200) (6,782)
----------------------------------------------------------- ------- ------- ------- --------- -------
Significant cost items 652 529 147 122 1,450
* costs of structural reform(1) - 3 29 55 87
* restructuring and other related costs 20 6 117 61 204
-----------------------------------------------------------
* settlements and provisions in connection with legal
and regulatory matters - - 1 6 7
-----------------------------------------------------------
* impairment of goodwill 632 520 - - 1,152
-----------------------------------------------------------
Adjusted operating expenses (1,077) (646) (3,531) (78) (5,332)
----------------------------------------------------------- ------- ------- ------- --------- -------
1 Costs of structural reform includes costs associated with the UK's exit from the EU.
2 Includes the write down of software GBP148m.
3 A change in reportable segments was made in 2020. Comparative
data have been re-presented accordingly. For further guidance,
refer to Note 9 on page 139.
Net impact on profit before tax by business segment
Corporate
WPB CMB GBM Centre Total
GBPm GBPm GBPm GBPm GBPm
--------------------------------------- ----- ---- ----- --------- ---------
31 Dec 2020
--------------------------------------- ----- ---- ----- --------- ---------
Reported loss before tax (173) 37 (846) (632) (1,614)
--------------------------------------- ----- ---- ----- --------- -------
Net impact on reported profit and loss 41 115 869 405 1,430
--------------------------------------- ----- ---- ----- --------- -------
* Significant revenue items - 1 189 (93) 97
---------------------------------------
* Significant cost items 41 114 680 498 1,333
--------------------------------------- ----- ---- ----- --------- -------
Adjusted profit/(loss) before tax (132) 152 23 (227) (184)
31 Dec 2019(1)
---------------------------------------------------------------------------------
Reported profit/(loss) before tax (376) (73) 24 (447) (872)
--------------------------------------- ----- ---- ----- --------- -------
Net impact on reported profit and loss 653 530 177 115 1,475
--------------------------------------- ----- ---- ----- --------- -------
* Significant revenue items 1 1 30 (7) 25
---------------------------------------
* Significant cost items 652 529 147 122 1,450
--------------------------------------- ----- ---- ----- --------- -------
Adjusted profit/(loss) before tax 277 457 201 (332) 603
--------------------------------------- ----- ---- ----- --------- -------
1 A change in reportable segments was made in 2020. Comparative
data have been re-presented accordingly. For further guidance,
refer to Note 9 on page 139.
Adjusted performance
The following commentary reflects the newly formed WPB business
segment following the simplification our our organisational
structure. We also renamed our Balance Sheet Management function as
Markets Treasury to reflect the activities it undertakes more
accurately and its relationship to our Treasury function more
broadly.
Adjusted loss before tax of GBP(184)m compared to a profit
before tax of GBP603m, down by GBP787m when compared with 2019.
This was mainly driven by higher ECL and lower adjusted revenue.
ECL was higher due to charges related to the ongoing global impact
of Covid-19 outbreak on the forward economic outlook and on our
customers. Adjusted revenue decreased primarily from the impact of
the lower interest rate environment and the impact of volatile
items including market impacts on insurance manufacturing in WPB
and an adverse movement in valuation adjustments in GBM. Adjusted
operating expenses were higher reflecting a number of specific
items incurred in 2020. This was partly offset by a significant
reduction in operating expenses as a result of the tight control of
discretionary spend to reflect the economic outlook and the initial
impact of our transformation of the bank.
Adjusted revenue decreased by GBP72m or 1%, primarily in WPB and
CMB, partly offset by an increase in GBM and Corporate Centre.
The decrease in adjusted revenue reflected the impact of the
lower interest rate environment on our businesses, particularly in
Global Liquidity and Cash Management ('GLCM') within GBM and CMB,
although deposit balances grew compared to 2019. In WPB, the lower
interest rate environment resulted in adverse market impacts on
insurance manufacturing. In addition, Insurance Manufacturing
revenue was lower due to adverse market impacts following a sharp
fall in equity markets in the first quarter, although this
substantially reversed over the remainder of the year as equity
markets recovered. In GBM, adjusted revenue included the impact of
adverse credit and funding valuations, notably in the first
quarter, which were partly reversed in the subsequent quarters, and
a reduction in revenue in Principal Investments ('PI') including
the non-recurrence of a 2019 valuation gain.
These reductions were partly offset by higher revenue in Global
Markets, notably in the Foreign Exchange and Credit businesses,
from market volatility. Revenue also increased in Corporate Centre,
primarily due to the reallocation of certain internal liquidity
charges to the global businesses in the 2020.
Adjusted ECL were GBP684m higher compared with 2019, mainly
reflecting charges relating to a small number of wholesale
exposures (in both CMB and GBM. There was also an increase in stage
1 and stage 2 charges, notably in the first half of the year,
reflecting the deterioration in the forward economic outlook
impacted by the Covid-19 outbreak. The economic outlook stabilised
in the second half of the year in 2020, and as a result, stage 1
and stage 2 provisions were broadly unchanged compared with the
first half of the year.
Adjusted operating expenses increased by GBP40m or 1% reflecting
a number of specific items incurred in 2020 including the
impairment of real estate assets in France, legal provisions and
settlements and the impact of reduced capitalisation of IT spend
following the write-off of intangible assets in June 2020. The
Single Resolution Fund ('SRF') contribution in France was also
higher compared with 2019.
In line with our transformation plans and to reflect the
economic outlook, we reviewed and re-prioritised spend. This
resulted in a reduction in FTE, tight control of contractor and
consultancy spend as well as lower discretionary spend.
Share of (loss)/profit in associates and joint ventures was a
loss of GBP1m compared to a loss of GBP10m in 2019, reflecting a
partial reversal of the loss booked in the first half of year on
the share of profit recognised from our associates.
Global Banking and Markets
Adjusted profit before tax was GBP23m, a decrease of GBP178m
compared with 2019. This was largely driven by higher ECL, partly
offset by higher revenue and lower operating expenses.
Revenue increased by GBP200m or 5%, mainly in Global Markets
driven by a strong Foreign Exchange and Fixed Income ('FICC')
performance, notably in Credit and Foreign Exchange, driven by
increased market volatility.
This was partly offset by lower revenue in Equities, mainly
driven by the non-repeat of a legal provision release in 2019.
Excluding this, revenue was higher driven by a stronger performance
in the second half of the year from equity derivatives as equity
markets recovered and volatility increased. Markets also received a
higher allocation of the bank's funding costs compared with 2019 to
better reflect internal funding used to finance activities in the
business.
GLCM revenue also decreased driven by margin compression
following reductions in interest rates, although this was partly
offset by growth in average balances. Revenue was also lower in
Principal Investments ('PI') including the non-repeat of a 2019
gain.
ECL increased by GBP410m due to higher charges against a small
number of clients in Global Banking within the oil and gas as well
as real estate sectors. In addition, there were higher charges
related to the impact of Covid-19 on the forward economic
outlook.
Operating expenses decreased by GBP32m or 1% compared with 2019,
mainly due to lower performance-related pay and lower market
transaction costs. This was partly offset by an increase in SRF
levy in France and the transfer of the levy from Corporate Centre
in Germany.
Commercial Banking
Adjusted profit before tax was GBP152m, down by GBP305m compared
with 2019. This was mainly driven by higher ECL and lower revenue
largely due to the impact of lower interest rates.
Revenue decreased by GBP79m or 7% compared with 2019. This was
primarily due to lower revenue in GLCM driven by the lower interest
rate environment, partly offset by growth in average deposit
balances. Revenue also decreased due to adverse fair value
movements in preference share holdings in Visa in the UK.
ECL increased by GBP213m compared with 2019, mainly driven by
higher charges against specific customers, notably in the travel,
retail and automobile sectors. In addition, there were higher
charges related to the global impact of Covid-19 on the forward
economic outlook and on our customers.
Operating expenses increased by GBP13m, mainly reflecting an
impairment of real estate assets in France and higher compliance
costs and SRF levy in France and Germany.
Wealth and Personal Banking ('WPB')
Adjusted loss before tax of GBP132m compared with a profit
before tax of GBP277m in 2019, down by GBP409m. This was primarily
due to lower revenue, higher operating expenses and higher ECL.
Revenue decreased by GBP322m or 24%, mainly in insurance
manufacturing in France largely driven by adverse market impacts
due to the lower interest rate environment, and lower new business
volumes. Revenue also decreased in our Asset Management Group
('AMG') and Retail Banking businesses due to adverse market
conditions, lower levels of customer activity and lower Assets
Under Management ('AUM') reflecting the impact of Covid-19. In the
UK, revenue was also lower, mainly due to a decrease in the fair
value of our preference share holdings in Visa. In the Channel
Islands and Isle of Man, there was a decrease in revenue from
deposits due to the low interest rate environment despite growth in
average balances.
ECL were GBP36m higher compared with 2019, mainly driven by
higher charges relating to the global impact of Covid-19 on the
forward economic outlook.
Operating expenses increased by GBP51m or 5%. This was primarily
driven by an impairment of real estate assets in France, partly
offset by lower discretionary spend, notably marketing costs as
well as lower staff and consultancy costs.
Corporate Centre
Adjusted loss before tax of GBP227m was GBP104m lower than the
loss before tax of GBP332m in 2019. This was mainly driven by
higher revenue, partly offset by lower releases of ECL and higher
operating expenses.
Revenue was higher by GBP129m, primarily driven by the
reallocation of certain internal liquidity charges to the global
businesses in 2020. Revenue also increased in Legacy Credit driven
by lower losses on portfolio disposals compared with 2019.
ECL net releases of GBP4m in 2020 compared with net releases of
GBP29m in 2019. This reflected provision releases following Legacy
Credit portfolio disposals in both years, with a higher level of
portfolio disposals in 2019.
Operating expenses increased by GBP8m or 10%, mainly driven by
an impairment of real estate assets in France, partly offset by the
transfer of the SRF levy in Germany to the global businesses in
2020.
Shares of (loss)/profit in associates and joint ventures was a
loss of GBP1m compared to a loss of GBP10m in 2019. This reflected
a partial reversal of provision booked in the first have of the
year on the share of profit recognised from our associates.
Dividends
The consolidated reported loss for the year attributable to the
shareholders of the bank was GBP(1,488)m.
No dividend in respect of 2020 was declared on the ordinary
share capital during the year.
Further information about the results is given in the
consolidated income statement on page 108.
Review of business position
Summary consolidated balance sheet at 31 Dec
2020 2019
GBPm GBPm
------------------------------------------------------------- ------- ---------
Total assets 681,150 636,491
------------------------------------------------------------- ------- -------
* cash and balances at central banks 85,092 51,816
-------------------------------------------------------------
* trading assets 86,976 98,249
-------------------------------------------------------------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 16,220 17,012
-------------------------------------------------------------
* derivatives 201,210 164,538
-------------------------------------------------------------
* loans and advances to banks 12,646 11,467
-------------------------------------------------------------
* loans and advances to customers 101,491 108,391
-------------------------------------------------------------
* reverse repurchase agreements - non-trading 67,577 85,756
-------------------------------------------------------------
* financial investments 51,826 46,464
-------------------------------------------------------------
* other assets 58,112 52,798
-------------------------------------------------------------
Total liabilities 657,301 612,479
------------------------------------------------------------- ------- -------
* deposits by banks 34,305 23,991
-------------------------------------------------------------
* customer accounts 195,184 177,236
-------------------------------------------------------------
* repurchase agreements - non-trading 34,903 49,385
-------------------------------------------------------------
* trading liabilities 44,229 48,026
-------------------------------------------------------------
* financial liabilities designated at fair value 40,792 41,642
-------------------------------------------------------------
* derivatives 199,232 161,083
-------------------------------------------------------------
* debt securities in issue 17,371 25,039
-------------------------------------------------------------
* liabilities under insurance contracts 22,816 21,509
-------------------------------------------------------------
* other liabilities 68,469 64,568
-------------------------------------------------------------
Total equity 23,849 24,012
------------------------------------------------------------- ------- -------
Total shareholders' equity 23,666 23,503
------------------------------------------------------------- ------- -------
Non-controlling interests 183 509
------------------------------------------------------------- ------- -------
.
There are no reconciling items between the adjusted and reported
view of the balance sheet for 2020 and 2019.
The group maintained a strong and liquid balance sheet with the
ratio of customer advances to customer accounts of 52.0% compared
with 61.2% as at 31 December 2019. The increase in customer
accounts had impact on higher level of cash and balances at central
bank as compared to 2019. Derivative assets increased by 22.3%,
primarily from mark-to-market gains. The increase in derivative
assets was broadly consistent with the increase in derivative
liabilities as the underlying risk is broadly matched.
The equity balance decreased by 0.7% as a result of losses
during the period, largely offset by capital injection received
during the year. Debt securities in issue decreased by 30.6% in
line with the funding strategy. Additionally repurchase and reverse
repurchase agreements (non-trading) decreased by 29.3% and 21.2%,
respectively, as a result of market activities.
Net interest margin
Net interest margin is calculated by dividing net interest
income as reported in the income statement by the average balance
of interest-earning assets. Average balances are based on daily
averages of the group's activities.
Net interest income
------- ---------
2020 2019
GBPm GBPm
-------------------------------- ------- ---------
Interest income 4,086 5,504
-------------------------------- ------- -------
Interest expense (2,188) (4,021)
-------------------------------- ------- -------
Net interest income 1,898 1,483
-------------------------------- ------- -------
Average interest-earning assets 369,617 343,944
-------------------------------- ------- -------
% %
-------------------------------- ------- ---------
Gross interest yield(1) 0.74 1.25
-------------------------------- ------- ---------
Less: gross interest payable(1) (0.27) (0.93)
-------------------------------- ------- -------
Net interest spread(2) 0.47 0.32
-------------------------------- ------- ---------
Net interest margin(3) 0.51 0.43
-------------------------------- ------- ---------
1 Gross interest yield is the average annualised interest rate
earned on average interest-earning assets ('AIEA'). Gross interest
payable is the average annualised interest cost as a percentage of
average interest-bearing liabilities.
2 Net interest spread is the difference between the average
annualised interest rate earned on AIEA, net of amortised premiums
and loan fees, and the average annualised interest rate payable on
average interest-bearing liabilities.
3 Net interest margin is net interest income expressed as an annualised percentage of AIEA.
Summary of interest income by asset type
2020 2019
Average Interest Average Interest
balance income Yield(1) balance income Yield(1)
GBPm GBPm % GBPm GBPm %
Short term funds and loans and
advances to banks 90,841 (113) (0.12) 66,056 108 0.16
------------------------------------ -------- -------- -------- -------- -------- --------
Loans and advances to customers 116,518 2,058 1.77 117,665 2,492 2.12
------------------------------------ -------- -------- -------- -------- -------- --------
Reverse repurchase agreements -
non-trading 68,573 22 0.03 77,140 478 0.62
------------------------------------ -------- -------- -------- -------- -------- --------
Financial investments 51,335 652 1.27 50,194 935 1.86
------------------------------------ -------- -------- -------- -------- -------- --------
Other interest-earning assets 42,350 118 0.28 32,889 287 0.87
------------------------------------ -------- -------- -------- -------- -------- --------
Total interest-earning assets 369,617 2,737 0.74 343,944 4,300 1.25
------------------------------------ -------- -------- -------- -------- -------- --------
Trading assets and financial assets
designated or mandatorily measured
at fair value(2) 66,061 1,000 1.51 73,862 1,974 2.67
------------------------------------ -------- -------- -------- -------- -------- --------
Expected credit losses provision (1,347) - - (1,192) - -
------------------------------------ -------- -------- -------- -------- -------- --------
Non-interest-earning assets 306,223 - - 266,527 - -
------------------------------------ -------- -------- -------- -------- -------- --------
Total assets 740,554 3,737 0.50 683,141 6,274 0.92
------------------------------------ -------- -------- -------- -------- -------- --------
1 Interest yield calculations include negative interest on
assets recognised as interest expense in the income statement.
2 Interest income arising from trading assets is included within
'Net trading income' in the income statement.
1
Summary of interest expense by type of liability and equity
2020 2019
Average Interest Average Interest
balance expense Cost(1) balance expense Cost(1)
GBPm GBPm % GBPm GBPm %
Deposits by banks 28,812 (60) (0.21) 23,298 146 0.63
------------------------------------------ -------- -------- ------- -------- -------- -------
Financial liabilities designated
at fair value - own debt issued 16,279 107 0.66 16,409 201 1.22
------------------------------------------ -------- -------- ------- -------- -------- -------
Customer accounts 143,807 321 0.22 136,544 1,028 0.75
------------------------------------------ -------- -------- ------- -------- -------- -------
Repurchase agreements - non-trading 38,829 (129) (0.33) 49,801 337 0.68
------------------------------------------ -------- -------- ------- -------- -------- -------
Debt securities in issue and subordinated
debts 36,502 439 1.20 37,944 683 1.80
------------------------------------------ -------- -------- ------- -------- -------- -------
Other interest-bearing liabilities 47,384 160 0.34 38,559 422 1.09
------------------------------------------ -------- -------- ------- -------- -------- -------
Total interest-bearing liabilities 311,613 838 0.27 302,555 2,817 0.93
------------------------------------------ -------- -------- ------- -------- -------- -------
Trading liabilities and financial
liabilities designated at fair
value (excluding own debt issued)(2) 65,356 1,252 1.92 71,549 1,705 2.38
------------------------------------------ -------- -------- ------- -------- -------- -------
Non-interest-bearing current accounts 55,990 - - 50,208 - -
------------------------------------------ -------- -------- ------- -------- -------- -------
Total equity and other non-interest
bearing liabilities 307,595 - - 258,829 - -
------------------------------------------ -------- -------- ------- -------- -------- -------
Total equity and liabilities 740,554 2,090 0.28 683,141 4,522 0.66
------------------------------------------ -------- -------- ------- -------- -------- -------
1 Interest payable calculations include negative interest on
liabilities recognised as interest income in the income
statement.
2 Interest expense arising from trading liabilities is included
within 'Net trading income' in the income statement.
Risk overview
The group continuously identifies and monitors risks. This
process, which is informed by its risk factors and the results of
its stress testing programme, gives rise to the classification of
certain financial and non financial risks. Changes in the
assessment of these risks may result in adjustments to the group's
business strategy and, potentially, its risk appetite.
Our banking risks include credit risk, treasury risk, market
risk, resilience risk, regulatory compliance risk, financial crime
and fraud risk and model risk. We also incur insurance risk. In
addition to these banking risks, we have identified top and
emerging risks with the potential to have a material impact on
our financial results, or reputation and the sustainability of our
long-term business model.
The exposure to our risks and risk management of these are
explained in more detail in the Risk section of the Report of the
Directors on pages 22 to 86.
During 2020, a number of changes to our top and emerging risks
have been made, to reflect the revised assessment of their effect
on the group.
A new risk in respect of the Covid-19 outbreak was added in
2020.
Risk Mitigants
===================================================================
Externally driven
Covid-19 -- Since the Covid-19 outbreak, we have worked with regulators,
governments and our customers to implement measures to mitigate
the financial, operational and other impacts of the outbreak
on our clients, our businesses and the economies in which
we operate. We have successfully invoked business continuity
plans to effectively manage our operations under the constraints
imposed by governments in response to the outbreak.
------------------ -------------------------------------------------------------------
UK exit p The UK left the EU on 31 January 2020 and entered a transition
from EU period until 31 December 2020. During the transition period,
the UK continued to be bound by EU laws and regulations.
A Trade and Cooperation Agreement between the EU and the
UK was agreed on 24 December 2020 and ratified on 30 December
2020. However, the Agreement included limited elements on
financial services, and, as a result, did not change the
group's UK withdrawal from EU planning. We will continue
to work with regulators, governments and our customers to
manage any risks created by the Trade and Cooperation Agreement,or
from future regulatory cooperation proposals on financial
services between the UK and the EU, as they arise, particularly
across those industry sectors most impacted.
------------------ -------------------------------------------------------------------
Geopolitical p We monitor developments in geopolitical risk and assess
risk what impacts this may have on our portfolios. Further negotiations
between the UK and the EU are expected in a number of areas
not covered by the Trade and Cooperation Agreement and we
continue to follow developments closely. Covid-19 has resulted
in an unprecedented global economic slowdown with a significant
increase in credit stress across our portfolios. We have
increased the frequency and depth of our monitoring activities
with Covid-19 vulnerability assessments performed as part
of the customer reviews. Stress tests and other sectorial
reviews were performed in 2020 to identify portfolios or
customers who were experiencing or were likely to experience
financial difficulty as a result of Covid-19. We have also
increased resources to help address the increased level
of credit defaults in the current environment.
------------------ -------------------------------------------------------------------
Cyber threat u We help protect the group and our customers by continuing
and unauthorised to strengthen our cyber defences, helping enable the safe
access to execution of our business priorities and the security of
systems our customers' information. Our data-driven approach, grounded
in strong controls that mitigate advanced cyber threats,
enhances our capability in threat detection, access controls
and resiliency.
------------------ -------------------------------------------------------------------
Regulatory p We monitor regulatory developments closely and engage with
focus on regulators, as appropriate, to help ensure that new regulatory
conduct requirements are implemented effectively and in a timely
of business way. In addition to developments driven by the Covid-19
outbreak, we are keeping abreast of the emerging regulatory
agenda, which is increasingly focused on diversity, sustainable
development, climate change, operational resilience and
digital services and innovation.
------------------ -------------------------------------------------------------------
Financial u We continued to support our customers and business throughout
Crime and the Covid-19 outbreak, while ensuring that our controls
Fraud risk remained effective to manage financial crime risk. We progressed
with our plans to improve our fraud controls and we continue
to invest in both advanced analytics and artificial intelligence,
which remain key components of our next generation of tools
to fight financial crime.
------------------ -------------------------------------------------------------------
Market illiquidity p The Covid-19 outbreak has created significant volatility
and volatility in global markets. Against this background we continue to
monitor risks closely and report regularly on illiquidity
and concentration risks to the PRA.
------------------ -------------------------------------------------------------------
Ibor transition p We are part of the Group's Interbank Offered Rates ('Ibor')
transition programme and remain focused on providing alternative
near risk-free rate products, and making them available
to our customers, along with updating the supporting processes
and systems. We engage with industry participants and regulatory
working groups to aid an orderly transition within the required
timelines. In light of delays in market and client readiness
caused by the Covid-19 outbreak, we are engaging and prioritising
clients for transition of their outstanding contracts linked
to Ibors that already have a confirmed demise.
------------------ -------------------------------------------------------------------
Climate u We continue to improve how we identify, oversee and manage
Related climate-related risk, both physical and transition. Our
Risks risk management priorities are focusing on: assessing the
physical and transition risk in our wholesale credit portfolio;
reviewing retail mortgage exposures in respect of natural
hazard risk; and developing scenarios internally for risk
management, planning and stress testing. We continue to
engage with our stakeholders, in particular with regard
to how we compile related data and disclosures.
------------------ -------------------------------------------------------------------
Internally driven
People risk p We continue to monitor workforce capacity and capability
requirements in line with our strategy and any emerging
issues in the markets in which we operate. We have also
put in place measures to ensure that our people are properly
supported and able to work safely during the Covid-19 outbreak.
We are monitoring people risks that may arise due to business
transformation to help ensure that we sensitively manage
any redundancies and support impacted employees.
------------------ -------------------------------------------------------------------
IT systems u We actively monitor and improve service resilience across
infrastructure our technology infrastructure to minimise service disruption
and resilience to our customers, and enhance our service management disciplines
and change execution capabilities. We continued to adapt
our IT systems during 2020 to support our customers and
operations during the Covid-19 outbreak. We are also seeking
to reduce the complexity of our technology estate and this
includes consolidation of our core banking systems onto
a single strategic platform.
------------------ -------------------------------------------------------------------
Internally driven
-----------------------------------------------------------------------------------------
Execution p We continue to strengthen our prioritisation and governance
risk processes for significant strategic, regulatory and compliance
projects. With business continuity plans in place across
the markets in which we operate and significant remote working
in place, the impact of Covid-19 on the bank's major change
programmes continues to be closely monitored.
---------------- --------------------------------------------------------------------
Model risk p We continue to strengthen oversight of models and the second
line of defence Model Risk Management function. We are embedding
a new model risk policy, which includes updated controls
around use and monitoring of models. We have developed new
model risk appetite measures, which will be implemented
in the first quarter of 2021. Potential revisions to capital
models are underway to reflect the extreme economic shocks
and various government support measures resulting from the
Covid-19 outbreak.
---------------- --------------------------------------------------------------------
Data management u We continue to enhance and advance our insights, data aggregation,
reporting and decisions through ongoing improvement and
investments (including machine learning and artificial intelligence
capabilities). Our work to modernise our data infrastructure
also continues, building on the Cloud to increase flexibility
and scalability and improve our fit for purpose data while
also respecting the evolving regulatory landscape regarding
the localisation of data. This is a crucial component of
effectively managing our risk.
---------------- --------------------------------------------------------------------
Third Party u We continue to enhance our third-party risk management
Risk Management programme to help ensure compliance with our third party
risk policy and required standards. We work closely with
our third parties to monitor performance and, as a result
of the Covid-19 outbreak, their financial stability. In
2021, we will continue to strengthen our third-party risk
framework and improve our technology, process and people
capabilities.
---------------- --------------------------------------------------------------------
p Risk has heightened during 2020
u Risk remains at the same level
as 2019
-- New risk introduced in 2020
On behalf of the Board
J Fleurant, Director
22 February 2021
Registered number
14259
Risk
Page
Our approach to risk 25
----------------------------------- ----
Our risk appetite 25
----------------------------------- ----
Risk management 26
----------------------------------- ----
Key developments and risk profile 26
----------------------------------- ----
Top and emerging risks 26
----------------------------------- ----
Externally driven 26
----------------------------------- ----
Internally driven 30
----------------------------------- ----
Areas of special interest 31
----------------------------------- ----
Process of UK withdrawal from
the European Union 31
----------------------------------- ----
IBOR transition 32
----------------------------------- ----
Our material banking and insurance
risks 35
----------------------------------- ----
Credit risk 36
----------------------------------- ----
Treasury risk 79
----------------------------------- ----
Market risk 85
----------------------------------- ----
Resilience risk 89
----------------------------------- ----
Regulatory compliance risk 90
----------------------------------- ----
Financial crime risk 90
----------------------------------- ----
Model risk 92
----------------------------------- ----
Insurance manufacturing operations
risk 92
----------------------------------- ----
.
Our approach to risk
Our risk appetite
We recognise the importance of a strong culture, which refers to
our shared attitudes, values and standards that shape behaviours
related to risk awareness, risk taking and risk management. All our
people are responsible for the management of risk, with the
ultimate accountability residing with the Board.
We seek to build our business for the long term by balancing
social, environmental and economic considerations in the decisions
we make. Our strategic priorities are underpinned by our endeavour
to operate in a sustainable way. This helps us to carry out our
social responsibility and manage the risk profile of the business.
We are committed to managing and mitigating climate-related risks,
both physical and transition, and continue to incorporate
consideration of these into how we manage and oversee risks
internally and with our customers.
The following principles guide the group's overarching appetite
for risk and determine how our businesses and risks are
managed.
Financial position
-- Strong capital position, defined by regulatory and internal ratios.
-- Liquidity and funding management for each entity on a stand-alone basis.
Operating model
-- Ambition to generate returns in line with our risk appetite
and strong risk management capability.
-- Ambition to deliver sustainable earnings and appropriate returns for shareholders.
Business practice
-- Zero tolerance for knowingly engaging in any business,
activity or association where foreseeable reputational risk or
damage has not been considered and/or mitigated.
-- No appetite for deliberately or knowingly causing detriment
to consumers arising from our products and services or incurring a
breach of the letter or spirit of regulatory requirements.
-- No appetite for inappropriate market conduct by a member of staff or by any group business.
Enterprise-wide application
Our risk appetite encapsulates consideration of financial and
non-financial risks and is expressed in both quantitative and
qualitative terms. It is applied at the global business level, at
the country level and to material European entities.
Our risk management framework
An established risk governance framework and ownership structure
ensures oversight of, and accountability for, the effective
management of risk within the group. HSBC's Risk Management
Framework ('RMF') fosters the continuous monitoring of the risk
environment and an integrated evaluation of risks and their
interactions. Integral to the RMF are risk appetite, stress testing
and the identification of emerging risks.
The bank's Risk Committee focuses on risk governance and
provides a forward-looking view of risks and their mitigation. The
Risk Committee is a committee of the Board and has responsibility
for oversight and advice to the Board on, amongst other things, the
bank's risk appetite, tolerance and strategy, systems of risk
management, internal control and compliance. Additionally, members
of the Risk Committee attend meetings of the Chairman's Nominations
and Remuneration Committee at which the alignment of the reward
structures to risk appetite is considered.
In carrying out its responsibilities, the Risk Committee is
closely supported by the Chief Risk Officer, the Chief Financial
Officer, the Head of Internal Audit and the Head of Compliance,
together with other business functions on risks within their
respective areas of responsibility.
Responsibility for managing both financial and non-financial
risk lies with our people. They are required to manage the risks of
the business and operational activities for which they are
responsible. We maintain oversight of our risks through our various
specialist Risk Stewards, as well as the accountability held by the
Chief Risk Officer.
Non-financial risk includes some of the most material risks HSBC
faces, such as cyber attacks, poor customer outcomes and loss of
data. Actively managing non-financial risk is crucial to serving
our customers effectively and having a positive impact on society.
During 2020 we continued to strengthen the control environment and
our approach to the management of non-financial risk, as is broadly
set out in our risk management framework. The management of
non-financial risk focuses on governance and risk appetite,
providing a single view of the non-financial risks that matter
most, and associated controls. It incorporates a risk management
system designed to enable the active management of non-financial
risk. Our ongoing focus is on simplifying our approach to
non-financial risk management, while driving more effective
oversight and better end-to-end identification and management of
risks. This is overseen by the Operational and Resilience Risk
function, headed by the Group Head of Operational and Resilience
Risk.
Three lines of defence
To create a robust control environment to manage risks, we use
an activity-based three lines of defence model, whereby the
activity a member of staff undertakes drives which line they reside
within. This model delineates management accountabilities and
responsibilities for risk management and the control
environment.
The model underpins our approach to risk management by
clarifying responsibility, encouraging collaboration and enabling
efficient coordination of risk and control activities. The three
lines are summarised below:
-- The first line of defence owns the risks and is responsible
for identifying, recording, reporting and managing them, and
ensuring that the right controls and assessments are in place to
mitigate them.
-- The second line of defence challenges the first line of
defence on effective risk management, and provides advice and
guidance in relation to the risk.
-- The third line of defence is our Internal Audit function,
which provides independent assurance that the group's risk
management approach and processes are designed and operating
effectively.
Risk appetite
We formally articulate our risk appetite through our risk
appetite statement ('RAS'), which is approved by the Board on the
recommendation of the Risk Committee. Setting out our risk appetite
ensures that planned business activities provide an appropriate
balance of return for the risk we are taking, and that we agree a
suitable level of risk for our strategy. In this way, risk appetite
informs our financial planning process and helps senior management
to allocate capital to business activities, services and
products.
The RAS consists of qualitative statements and quantitative
metrics, covering financial and non-financial risks. It is
fundamental to the development of business line strategies,
strategic and business planning and senior management balanced
scorecards. Performance against the RAS is reported to the Risk
Management Meeting ('RMM') so that any actual performance that
falls outside the approved risk appetite is discussed and
appropriate mitigating actions are determined. This reporting
allows risks to be promptly identified and mitigated, and informs
risk-adjusted remuneration to drive a strong risk culture.
.
Risk management
As a provider of banking and financial services, the group
actively manages risk as a core part of its day-to-day activities.
It continues to maintain a strong liquidity position and is well
positioned for the evolving regulatory landscape.
Stress testing
Stress testing is an important tool that is used by banks, as
part of their internal risk management, and regulators to assess
vulnerabilities in individual banks and/or the financial banking
sector under hypothetical adverse scenarios. The results of stress
testing are used to assess banks' resilience to a range of adverse
shocks and to assess their capital adequacy.
HSBC Bank plc is subject to regulatory stress testing in several
jurisdictions. These requirements are increasing in frequency and
granularity. They include the programmes of the Bank of England
('BoE'), Prudential Regulation Authority ('PRA') and the European
Banking Authority ('EBA'). Assessment by regulators is on both a
quantitative and qualitative basis, the latter focusing on our
portfolio quality, data provision, stress testing capability and
capital planning processes.
A number of internal macroeconomic and event-driven scenarios
specific to the European region were considered and reported to
senior management during the course of the year. The selection of
stress scenarios is based upon the output of our top and emerging
risks identified and our risk appetite. The results help the Board
and senior management to set our risk appetite and confirm the
strength of our strategic and financial plans. Our risk appetite is
set at a level that enables the group to withstand future stress
impacts.
The macroeconomic internal stress test, conducted throughout
2020, considered combinations of various potential impacts as
identified in our top and emerging risks, in particular the
ramifications of various potential scenarios relating to the UK's
exit from the EU, Covid-19, geopolitical tensions and trade wars,
and operational risk.
The group also conducts Reverse Stress Testing. This exercise
requires a firm to assess scenarios and circumstances that would
render its business model unviable, thereby identifying potential
business vulnerabilities. Examples include extreme macroeconomic
downturn scenarios, or specific idiosyncratic events, covering
operational risk.
In 2020, the BoE cancelled the annual BoE concurrent stress
testing exercise due to the Covid-19 outbreak.
Key developments and risk profile
Key developments in 2020
We have actively managed the risks resulting from the Covid-19
outbreak and its impacts on our customers and operations during
2020, as well as other key risks described in this section.
In addition, we enhanced our risk management in the following
areas:
-- In January 2020, we simplified our approach and articulation
of risk management through the combination of our enterprise risk
management framework and our operational risk management
framework.
-- A new model risk policy is being progressively implemented to
improve how we manage model risk and meet enhanced external
expectations.
-- We continued to focus on simplifying our approach to
non-financial risk management. We are driving more effective
oversight and better end-to-end identification and management of
non-financial risks.
-- We established the Treasury Risk Management function. This
function is a dedicated second line of defence, providing
independent oversight of treasury activities across capital risk,
liquidity and funding risk, structural foreign exchange risk,
interest rate in the banking book together with pension risk.
-- We continue to support the business and our customers
throughout the global pandemic, while continuing to manage
financial crime risk. We continued to invest in both advanced
analytics and artificial intelligence, which remain key components
of our next generation of tools to fight financial crime.
-- We formed a new Operational and Resilience Risk combined
sub-function. The sub-function provides robust first line of
defence oversight and risk steward oversight, supported by clear
plans and evidenced by effective and timely independent challenge.
The sub-function helps to ensure that the first line of defence are
focused firmly on priority tasks. By bringing the two teams
together, we expect to benefit from improved stewardship, better
risk management capabilities and better outcomes for our
customers.
--
Top and emerging risks
Top and emerging risks are those that may impact on the
financial results, reputation or business model of the bank. If
these risks were to occur, they could have a material effect on the
group. The exposure to these risks and our risk management approach
are explained in more detail below.
Externally driven
Covid-19
The Covid-19 outbreak continues to dominate the political and
economic landscape, as it did throughout much of 2020. The twin
shocks of a public health emergency and the resultant economic
fallout have been felt around the world, and hit both advanced and
emerging markets. The closure of borders threatened medical and
food supplies for many markets, and there is the potential for
countries and territories to focus efforts on building resilient
supply chains closer to home to be less vulnerable to global
shocks.
Further waves of infections emerged in the fourth quarter of
2020 with a new variant also identified in the UK and national
level lockdown measures are now in place to varying degrees in
countries across Europe including the UK, France, Germany and
Ireland. The development of Covid-19 vaccines has raised hopes of
widespread immunisations being achieved by the end of 2021 and
government measures being eased. However tensions could increase as
countries compete for the array of vaccines either under
development, approved or pending approval, while the potential
differences in protection offered by vaccines and the speed and
scale with which they can be manufactured may impact the speed of
economic recovery.
Mitigating actions
-- We have successfully invoked business continuity plans to
effectively manage our operations under the constraints posed by
governments of the countries in which we operate in response to the
outbreak.
-- We have increased the frequency and depth of monitoring
activities, and performed stress tests and other sectoral reviews
to identify portfolios or customers who were experiencing, or were
likely to experience, financial difficulty as a result of the
Covid-19 outbreak.
Process of UK withdrawal from the European Union
The UK left the EU on 31 January 2020 and entered a transition
period until 31 December 2020. A Trade and Cooperation Agreement
between the EU and the UK was agreed on 24 December 2020 and
ratified on 30 December 2020. With respect to Financial Services,
it includes a joint declaration of cooperation and both parties are
expected in the coming months to enter discussions with the aim of
agreeing a Memorandum of Understanding establishing the framework
for this cooperation. As expected, the passport arrangement expired
at the end of the transition period, and therefore all Financial
Institutions in the UK, including HSBC Bank plc, have lost their
existing EU regulatory permissions to continue servicing clients in
the European Economic Area ('EEA') from 1 January 2021:
-- Clients: the UK's departure from the EU is likely to impact
our clients operating models, including their supply chains,
working capital requirements, investment decisions and financial
markets infrastructure access. Some EEA incorporated clients will
be required to be migrated from the UK to HSBC Continental Europe
(or another EEA entity) and most customers who we expect can no
longer be serviced out of the UK have now been migrated.
-- People: we have identified and established the required roles
to support our new business model across the group following the
UK's exit from the EU. Our priority is to ensure that we continue
to support our clients and people under the new Trade and
Cooperation Agreement, and help minimise any disruption.
Mitigating actions
-- We continue to track and close the remaining actions
including client migrations, resolution of any potential product
restrictions for our customers.
-- We are undertaking a comprehensive impact assessment of the
Trade and Cooperation Agreement to understand the range of
potential implications for our customers, our products and our
business.
-- We actively monitor our portfolio to identify areas of
stress, supported by stress testing analyses. Vulnerable sectors or
asset classes, third party dependencies are subject to additional
management review to determine if any adjustments to risk policy or
appetite are required.
-- We will actively participate in external discussions in
relation to the development of an appropriate Equivalence
framework.
-- We continue to stay very close to our clients, via proactive
communications and dedicated channels to respond to customer
queries, and will monitor for any operational and/or other impacts
as a consequence of the Trade and Cooperation Agreement, in
particular Trade clients due to the increased documentation
requirement to comply with import/export licence procedures as well
as rules of origin.
-- We are supporting our UK employees resident in EEA countries
and EEA employees resident in the UK, with their settlement
applications.
-- We will continue to work with regulators, governments and our
clients in an effort to manage risks as they arise, particularly
across the most impacted sectors.
Geopolitical risk
Our operations and portfolios are exposed to risks associated
with political instability, civil unrest and military conflict,
which could lead to disruption of our operations, physical risk to
our staff and/or physical damage to our assets.
The Trade and Co-operation Agreement agreed between the UK and
the EU avoids the imposition of tariffs and quotas in UK-EU goods
trade, and therefore a more material setback to the expected
gradual recovery of the UK and EU economies from recessions caused
by the Covid-19 outbreak. However, the new trading relationship
features non tariff barriers, and leaves several aspects of the
broader relationship, including financial services trade, for
further negotiation. A five-year review clause could also introduce
periodic instability in bilateral relations.
Mitigating actions
-- We continually monitor the geopolitical outlook, in
particular in countries where we have material exposures and/or a
physical presence.
-- We use internal stress tests and scenario analysis as well as
regulatory stress test programmes, to adjust limits and exposures
to reflect our risk appetite and mitigate risks as appropriate.
-- We have taken steps to enhance physical security in those
geographical areas deemed to be at high risk from terrorism.
-- We have reviewed our business continuity plans following the
Covid-19 outbreak, to ensure the safety and well-being of our staff
and customers and to ensure our ability to maintain our business
operations is upheld.
Cyber threat and unauthorised access to systems
Together with other organisations, we continue to operate in a
challenging cyber threat environment, which requires ongoing
investment in business and technical controls to defend against
these threats.
Key threats include unauthorised access to online customer
accounts, advanced malware attacks, attacks on third-party
suppliers and security vulnerabilities being exploited.
Mitigating actions
-- We continually evaluate threat levels for the most prevalent
attack types and their potential outcomes. To further protect our
business and our customers we strengthened our controls to reduce
the likelihood and impact of advanced malware, data leakage,
infiltration of payment systems and denial of service attacks.
-- We continue to enhance our cybersecurity capabilities,
including cloud security, identity and access management, metrics
and data analytics, and third-party security reviews. An important
part of our defence strategy is ensuring our people remain aware of
cybersecurity issues and know how to report incidents.
-- We report and review cyber risk and control effectiveness
quarterly at executive and non-executive Board level. We also
report it across our businesses and functions, to help ensure
appropriate visibility and governance of the risk and mitigating
actions.
-- We participate globally in several industry bodies and
working groups to share information about tactics employed by
cyber-crime groups and to collaborate in fighting, detecting and
preventing cyber attacks on financial organisations.
Regulatory focus on conduct of business
Financial service providers continue to operate to stringent
regulatory and supervisory requirements, particularly in the areas
of capital and liquidity management, conduct of business, financial
crime, internal control frameworks, the use of models and the
integrity of financial services delivery. Regulatory changes may
affect the activities of the group.
Mitigating actions
-- We are fully engaged, wherever possible, with the government
and regulators in the UK and Europe to help ensure that new
requirements are properly considered by regulators and the
financial sector and can be implemented effectively.
-- In particular, we have engaged proactively with regulators
and governments across the economies in which we operate regarding
the policy changes issued in response to Covid-19 to help our
customers and to contribute to an economic recovery.
Financial crime and fraud risk
Financial institutions remain under considerable regulatory
scrutiny regarding their ability to prevent and detect financial
crime. Financial crime threats continue to evolve, often in tandem
with increased geopolitical developments, posing challenges for
financial institutions to keep abreast of developments and manage
conflicting laws. The global economic slowdown as a result of the
Covid-19 outbreak and the resulting rapid deployment of government
relief measures to support individuals and businesses, have
increased the risk of fraud. Developments around virtual
currencies, stablecoins and central bank digital currencies have
continued, with the industry's financial crime risk assessment and
management frameworks in their early stages. The evolving
regulatory environment presents an execution challenge. We continue
to face increasing challenges presented by national data privacy
requirements in a global organisation, which may affect our ability
to manage financial crime risks effectively. There has also been an
increase in media and public scrutiny on how financial crime is
managed within financial institutions.
In December 2012, among other agreements, HSBC Holdings plc
('HSBC Holdings') agreed to an undertaking with the UK Financial
Services Authority, which was replaced by a Direction issued by the
FCA in 2013, and consented to a cease-and-desist consent order with
the US Federal Reserve Board ('FRB'), both of which contained
certain forward-looking anti-money laundering ('AML') and
sanctions-related obligations. We also agreed to retain an
independent compliance monitor (who is, for FCA purposes, a
'Skilled Person' under section 166 of the Financial Services and
Markets Act and, for FRB purposes, an 'Independent Consultant') to
produce periodic assessments of the Group's AML and sanctions
compliance programme. Reflective of our significant progress in
strengthening financial crime risk management capabilities, our
engagement with the Skilled Person was terminated in 1Q 2020 and in
2Q 2020, a new Skilled Person with a narrower mandate was appointed
to assess the remaining areas that require further work in order
for us to transition fully to business-as-usual financial crime
risk management. Thereafter, in 2020, the FCA issued a new, more
tailored Direction that replaces the previous Direction issued in
2013. The Independent Consultant will continue to carry out an
annual Office of Foreign Assets Control ('OFAC') compliance review
at the FRB's discretion. The role of the Skilled Person/Independent
Consultant is discussed on page 81.
Mitigating actions
-- We continue to enhance our financial crime risk management
capabilities. We are investing in next generation capabilities to
fight financial crime through the application of advanced analytics
and artificial intelligence. We continue to monitor geopolitical
developments closely and the impacts on our financial crime
controls.
-- We are strengthening and investing in our fraud controls, to
introduce next generation anti-fraud capabilities to protect both
customers and the bank. We have developed procedures and controls
to manage the risks associated with direct and indirect exposure to
virtual currencies, and we continue to monitor external
developments. We continue to educate our staff on emerging digital
products and associated risks.
-- We continue to monitor external developments on stable coins
and central bank digital currencies, engaging with central banks
and regulators on financial crime risk management.
-- We continue to work with jurisdictions and relevant
international bodies to address data privacy challenges through
international standards, guidance, and legislation to help enable
effective management of financial crime risk.
-- We continue to take steps designed to ensure that the reforms
we have put in place are both effective and sustainable over the
long term.
Market illiquidity and volatility
The Covid-19 outbreak has created significant volatility in
global markets across 2020. Market liquidity, as defined by the
ability to trade the desired volume of a financial security in a
timely manner, continues to vary. Liquidity remains challenging due
to multiple factors: regulatory demands such as increased capital
requirements constraining the overall balance sheet size of
financial institutions, the implementation of the Volcker rule,
which prohibits certain trading activities, and the impact of
revised collateral and internal liquidity requirements.
This is a market-wide issue, where HSBC may incur losses or
result in lower revenue.
Mitigating actions
-- We continually monitor our positions more vulnerable to
illiquidity and concentration risks, adjusting our market risk
limits and risk appetite where appropriate.
Climate-related risks
Climate change can impact a number of our risk types:
-- Transition risk, arising from the move to a low-carbon
economy, such as through policy, regulatory and technological
changes.
-- Physical risk, through increasing severity and/or frequency
of severe weather events or other climatic events (e.g. sea level
rise, flooding).
These have potential to cause both idiosyncratic and systemic
risks, resulting, over time, in potential financial impacts for
HSBC. Impacts could materialise through higher risk-weighted assets
('RWAs'), greater transactional losses and/or increased capital
requirements.
Mitigating actions
-- A dedicated Climate Risk Oversight Forum ('CROF') is
responsible for shaping and overseeing HSBC's approach to climate
risk to support the Group in managing climate-related risks that
are outside of risk appetite. We are establishing our governance
and delivery plan which will see our own forum which will be
chaired by the CRO with the mandate of mirroring the
responsibilities of the Global CROF.
-- We will start to introduce Risk Appetite metrics during 2021
together with the development of reporting capabilities and key
indicators.
-- We implement HSBC Group sustainability risk policies as part
of its broader reputational risk framework. We focus our policies
on sensitive sectors that may have a high adverse impact on people
or on the environment and in which we have a significant number of
customers. These include sectors with potentially high-carbon
impacts.
-- HSBC continues to expand its thinking with regards to stress
testing of climate risks. It has commenced sector specific scenario
analysis and continues current work to source data and develop
scenarios.
-- The Group is working with the PRA, FCA and the wider industry
through their Climate Financial Risk Forum to ensure it remains
aware of and drives emerging best practice.
Ibor transition
Throughout 2020, our interbank offered rate ('Ibor') transition
programme, which is tasked with the development of new replacement
near risk-free rate ('RFR') products and transition from legacy
Ibor contracts, has continued to implement the required IT and
operational changes necessary to facilitate an orderly transition
from Ibors to RFRs, or alternative benchmarks, such as policy
interest rates. These changes have enabled the group to meet
regulatory endorsed milestones related to product readiness and the
clearing house led transition to RFR discounting. Additionally, to
further support our business and our customers, our programme's
scope has widened to include additional interest rate benchmarks,
which now have a plan for demise in the near future.
We have identified financial and non-financial risks related to
the transition and developed key actions to mitigate the identified
risks. These risks include those associated with the continued sale
of products referencing Ibor through 2020. The group has, however,
actively removed certain Ibor referencing products from sale, and
implemented processes and controls to manage the continued sale of
Ibor products to meet our clients' needs. As products referencing
Ibor continue to be sold, and RFR products are developed,
considerations relating to the enforceability of fallback
provisions and the evolution of RFR market conventions have
potentially increased legal and compliance risks. Furthermore, the
impact of the Covid-19 outbreak has compressed timelines for client
engagement and potentially increased the resilience risks
associated with the rollout of new products, transition of legacy
contracts, and new RFR sales.
Mitigating Actions
-- We are part of the HSBC Group programme to facilitate an
orderly transition to alternative benchmarks and replacement RFR
products for our business and our clients. The execution of this
programme is overseen by the Group Chief Risk Officer, with the
group's transition overseen by our CRO as monitored through our
Risk Management Meeting.
-- We have and continue to carry out extensive training,
communication and client engagement to facilitate appropriate
selection of products.
-- We have dedicated teams in place to support the development
of and transition to alternative rate and replacement RFR
products.
-- We are implementing IT and operational changes to enable a longer transition window.
-- We met the third quarter 2020 regulatory endorsed milestones
for implementing changes to contractual documentation.
-- We assess, monitor and dynamically manage risks, and
implement specific mitigating controls when required.
-- We continue to engage with regulatory and industry bodies
actively to mitigate risks relating to hedge accounting changes,
multiple RFR market conventions, and so-called 'tough legacy'
contracts that have no appropriate replacements or no likelihood of
renegotiation to transition. This includes providing feedback and
responses on recent ICE Benchmark Administration ('IBA') and FCA
consultations.
--
Internally driven
People risk
Our success in delivering our strategic priorities and managing
the regulatory environment proactively depends on the development
and retention of our leadership and high-performing employees. The
ability to continue to attract, develop and retain competent
individuals in an employment market impacted by the Covid-19
outbreak is challenging particularly due to organisational
restructuring. Changed working arrangements, local Covid-19
restrictions and health concerns during the pandemic also impact on
employee mental health and well-being.
Mitigating actions
-- We have put in place measures to help support our people so
they are able to work safely during the Covid-19 outbreak.
-- We promote a diverse and inclusive workforce and provide
active support across a wide range of health and wellbeing
activities. We continue to build our speak up culture through
active campaigns.
-- Monitoring of people risks that have arisen due to
organisational restructuring, helping to ensure we manage
redundancies sensitively and support impacted employees.
-- Launch of the Future Skills Curriculum through HSBC
University to help provide the critical skills that will enable
employees and HSBC to be successful in the future.
-- We continue to develop succession plans for key management
roles, with actions agreed and reviewed on a regular basis by the
group's Executive Committee.
-- We have robust plans in place, driven by senior management,
to mitigate the effect of external factors that may impact our
employment practices. Political, legislative and regulatory
challenges are closely monitored to minimise the impact on the
attraction and retention of talent and key performers.
IT systems infrastructure and resilience
HSBC is committed to investing in the reliability and resilience
of its IT systems and critical services. HSBC does so in order to
protect its customers and ensure they do not receive disruption to
services, which could result in reputational and regulatory
damage.
The group's strategy includes simplification of our technology
estate to reduce complexity and costs; this includes consolidation
of our core banking systems onto a single strategic platform. The
target state will leverage existing and known technology, and will
be simpler and easier to maintain. However, as with any strategic
transformation programme risks associated with implementation must
be managed continuously.
Mitigating actions
-- We continue to invest in transforming how software solutions
are developed, delivered and maintained, with a particular focus on
providing high-quality, stable and secure services. As part of
this, we are concentrating on improving system resilience and
service continuity testing. We have enhanced the security features
of our software development life cycle and improved our testing
processes and tools.
-- During 2020, we have upgraded many of our IT systems,
simplified our service provision and replaced older IT
infrastructure and applications. These enhancements led to
continued global improvements in service availability during 2020
for both our customers and employees.
-- We manage implementation risks arising from the
simplification of our technology estate continuously via thorough
oversight of these risks at all levels of the programme and
reporting up to our Risk Committee.
Execution risk
In order to deliver our strategic objectives and meet mandatory
regulatory requirements, it is important for HSBC to maintain a
strong focus on execution risk. This requires robust management of
significant resource-intensive and time-sensitive programmes. Risks
arising from the magnitude and complexity of change may include
regulatory censure, reputational damage or financial losses.
Current major initiatives include managing the operational
implications of the UK's departure from the EU; Ibor transition;
and the implementation of business transformation and the impacts
of this on our people.
Mitigating actions
-- Our prioritisation and governance processes for significant
projects are monitored by the group's Executive Committee.
-- In 2020, with business continuity plans in place across the
markets in which we operate and significant remote working in
place, the impact of Covid-19 on the bank's major change programmes
continues to be closely monitored
Model risk
Model risk arises whenever business decision-making includes
reliance on models. We use models in both financial and
non-financial contexts and in a range of business applications such
as customer selection, product pricing, financial crime transaction
monitoring, creditworthiness evaluation and financial reporting.
Assessing model performance is a continuous undertaking. Models can
need redevelopment as market conditions change. This was required
following the outbreak of Covid-19 as some models used for
estimating credit losses needed to be redeveloped due to the
dramatic change to inputs including GDP, unemployment rates and
housing prices.
Prior to the Covid-19 outbreak a key area of focus was improving
and enhancing our model risk governance, and this activity
continued throughout 2020. We prioritised the redevelopment of
internal ratings-based ('IRB') and internal models methods ('IMM')
models, in relation to counterparty credit, as part of the IRB
repair and Basel III programmes with a key focus on enhancing the
quality of data used as model inputs.
Mitigating actions
-- We enhanced the monitoring and review of loss model
performance through our Model Risk Management function as part of a
broader quarterly process to determine loss levels. The Model Risk
Management team aims to provide strong and effective review and
challenge of any future redevelopment of these models.
-- We are appointing model risk stewards for our key entities to
support, oversee and guide the global businesses and functions on
model risk management. The risk stewards will provide close
monitoring of changes in model behaviour, working closely with
business and function model owners and sponsors.
-- We worked with the model owners of IRB models and traded risk
models to increase our engagement on management of model risk with
key regulators including the PRA and the ECB.
-- We updated the model risk policy and introduced model risk
standards to enable a more risk-based approach to model risk
management.
-- We refreshed the model risk controls through the risk control
assessment process. Employees who work in the first line of defence
are expected to complete testing using the new enhanced controls in
order to assess and understand model risk across the global
businesses and key geographies.
-- The model inventory system was upgraded to provide more
granular measurement and management of model risk for multiple
applications of a single model.
-- We are redeveloping our IRB and IMM models for counterparty
credit and our internal models approach ('IMA') for traded risk
models. These will be submitted for PRA approval over the next two
years.
Data management
The group currently uses a large number of systems and
applications to support key business processes and operations. As a
result, we often need to reconcile multiple data sources, including
customer data sources, to reduce the risk of error. Along with
other organisations, we also need to meet external regulatory
obligations such as the General Data Protection Regulation
('GDPR'), Basel Committee for Banking Supervision ('BCBS') 239, and
Basel III.
Mitigating actions
-- We are improving data quality across a large number of
systems globally. Our data management, aggregation and oversight
continues to strengthen and enhance the effectiveness of internal
systems and processes. We are implementing data controls for end to
end critical processes to improve our data capture at the point of
entry and throughout the data lifecycle.
-- Through our global data management framework we are expanding
and enhancing our data governance processes to help monitor the
quality of critical customer, product, reference and transaction
data proactively and resolve associated data issues in a timely
manner.
-- We continue to modernise our data and analytics
infrastructure through investments in advanced capabilities in
cloud visualisation, machine learning and artificial intelligence
platforms.
-- We help protect customer data via our global data privacy
framework that establishes data privacy practices, design
principles and guidelines that enable us to demonstrate compliance
with data privacy laws and regulations in the jurisdictions in
which the group operates.
-- To help our employees keep abreast of data privacy laws and
regulations we continue to hold data privacy awareness training
highlighting our commitment to protect personal data for customers,
employees and stakeholders.
Third Party Risk Management
We utilise third parties for the provision of a range of
services, in common with other financial service providers. Risks
arising from the use of third party service providers may be less
transparent and therefore more challenging to manage or influence.
It is critical that we ensure we have appropriate risk management
policies, processes and practices. These should include adequate
control over the selection, governance and oversight of third
parties, particularly for key processes and controls that could
affect operational resilience. Any deficiency in our management of
risks arising from the use of third parties could affect our
ability to meet strategic, regulatory or client expectations and
damage our reputation.
Mitigating actions
-- We continued to embed our third party management framework in
the first line of defence through a dedicated team. We have
deployed processes, controls and technology to assess third party
service providers against key criteria and associated control
monitoring testing and assurance.
-- A dedicated oversight forum in the second line of defence
monitors the embedding of policy requirements and performance
against risk appetite.
--
Areas of special interest
Process of UK withdrawal from the European Union
The UK left the EU on 31 January 2020 and entered a transition
period until 31 December 2020. A Trade and Cooperation Agreement
between the EU and the UK was agreed on
24 December 2020 and ratified by the UK on 30 December 2020. It
includes a joint declaration of cooperation, and, in the coming
months, both parties are expected to enter discussions with the aim
of agreeing a Memorandum of Understanding establishing the
framework for this cooperation. As expected, the current passport
arrangement expired at the end of the transition period, and
therefore financial Institutions in the UK including HSBC Bank plc
lost their existing EU regulatory permissions or 'passporting
rights' to continue servicing clients in the European Economic Area
(EEA) from 1 January 2021. The Trade and Cooperation Agreement
mainly focused on goods and services but also covered a wide range
of other areas, including competition, state aid, tax, fishery,
transport, data and security. However, it included limited elements
on financial services, and, as a result, did not change HSBC's
planning in relation to the UK's withdrawal from the EU.
Our programme to manage the impact of the UK leaving the EU has
now been largely completed. It was based on the assumption of a
scenario whereby the UK exits the transition period without the
financial passporting or regulatory equivalence framework that
supports cross-border business.
Legal entity restructuring
Our branches in seven European Economic Area ('EEA') countries
(Belgium, the Netherlands, Luxembourg, Spain, Italy, Ireland and
Czech Republic) relied on passporting out of the UK. We had worked
on the assumption that passporting will no longer be possible
following the UK's departure from the EU and therefore transferred
our branch business to newly established branches of HSBC
Continental Europe our primary banking entity authorised in the EU.
This was completed in the first quarter of 2019.
Product offering
To accommodate for customer migrations and new business after
the UK's departure from the EU, we expanded and enhanced our
existing product offering in France, the Netherlands and Ireland.
We also opened a new branch in Stockholm to service our customers
in the Nordics.
Customer migrations
The UK's departure from the EU is likely to have an impact on
our clients' operating models, including their working capital
requirements, investment decisions and financial markets
infrastructure access. Our priority is to provide continuity of
service, and while our intention was to minimise the level of
change for our customers, we were required to migrate some
EEA-incorporated clients from the UK to HSBC Continental Europe, or
another EEA entity. We have now migrated almost all clients who we
expect can no longer be serviced out of the UK and their respective
jurisdictions and we are working in close collaboration with them
to swiftly manage their transition in 2021.
Employees
The migration of EEA-incorporated clients requires us to
strengthen our local teams in the EU, and France in particular.
Given the scale and capabilities of our existing business in
France, we are well prepared to take on additional roles and
activities. We have now completed the transfer of roles from London
to Paris to support our post-UK withdrawal from the EU operating
model.
Looking beyond the transfer of roles to the EU, we are also
providing support to our UK employees who are UK citizens resident
in EEA countries and EEA employees resident in the UK, for example
with settlement applications.
We have completed our programme work in terms of ensuring we
were prepared for the UK leaving the EU under the terms described
above. However, there remain risks, many of them linked to absence
of some equivalence decisions between the EU and the UK.
Equivalence decisions are an established feature of EU law which
allow the authorities in the UK and EU to rely on the other's
regime for specific regulatory purposes only. Whilst the UK and the
EU have made a number of equivalence decisions, these decisions do
not give UK firms full access to EU clients and counterparties.
We have carried out detailed reviews of our credit portfolios to
determine those sectors and customers most vulnerable to the UK's
exit from the EU and will continue to monitor any implications for
our clients in adhering to the new requirements under the Trade and
Cooperation agreement. For further details, see 'Measurement
uncertainty and sensitivity analysis of ECL estimates' on page
42.
Ibor transition
Interbank offered rates ('Ibors') are used to set interest rates
on hundreds of trillions of US dollars of different types of
financial transactions and are used extensively for valuation
purposes, risk measurement and performance benchmarking.
The FCA announced in July 2017 that it would no longer continue
to persuade or require panel banks to submit rates for the London
interbank offered rate ('Libor') after 2021. In addition, the 2016
EU Benchmark Regulation, which aims to ensure the accuracy,
robustness and integrity of interest rate benchmarks, has resulted
in other regulatory bodies' reassessment of their national
benchmarks. This includes the Euro Overnight Index Average
('Eonia'). As a result, industry-led National Working Groups
('NWGs') are actively discussing the mechanisms for an orderly
transition of five Libors to their chosen replacement rates.
The transition process away from Ibors, including the transition
of legacy contracts that reference Ibors, exposes the group to
material execution risks, and increases some financial and
non-financial risks.
As our Ibor transition programme progresses into the execution
phase, resilience and operational risks, are heightened. This is
due to an expected increase in the number of new near risk-free
rate ('RFR') products being rolled out, compressed timelines for
the transition of legacy Ibor contracts and the extensive systems
and process changes required to facilitate both new products and
the transition. This is being exacerbated by the current interest
rate environment where low Libor rates, in comparison with
replacement RFR, could affect decisions to transition contracts
early, further compressing transition timelines. Regulatory
compliance, legal and conduct risks may also increase as a result
of both the continued sale of products referencing Ibors, and the
sale of new products referencing RFRs, principally due to the lack
of established market conventions, and the timelines for
transition.
Financial risks resulting from the discontinuation of Ibors and
the development of market liquidity in RFRs will also affect the
group throughout transition. The differences in Ibor and RFR
interest rates will create a basis risk that we need to actively
manage through appropriate financial hedging. Basis risk in the
trading book and in the banking book may arise out of the
asymmetric adoption of RFRs across assets and liabilities and
across currencies and products. In addition, this may limit the
ability to hedge effectively.
The orderly transition from Ibors continues to be the
programme's key objective through 2021 and can be broadly grouped
into two workstreams: the development of alternative rate and RFR
product capabilities and the transition of legacy Ibor
contracts.
Development of alternative rate and RFR product capabilities
All global businesses have actively developed and implemented
system and operational capabilities for alternative rates, such as
policy interest rates, and replacement RFR products during 2020.
Several key transactions for near RFR products undertaken within
Wholesale. The offering of RFR products is expected to be expanded,
with further releases for products referencing the Sterling
Overnight Index Average ('Sonia') and the Secured Overnight
Financing Rate ('SOFR') set for the first half of 2021, in addition
to products linked to other RFRs set to be released throughout
2021.
These developments and the reduced suitability of Ibor products
have enabled us to cease selling certain Ibor linked products.
While Ibor sales do continue for a number of product lines, Ibor
exposures that have post-2021 maturities are reducing, aided by
market compression of Ibor trades, and undertaking new transactions
in alternative rate and replacement RFR products, as market
liquidity builds.
Transition legacy contracts
In addition to offering alternative rate and replacement RFR
products, the development of new product capabilities will also
help facilitate the transition of legacy Ibor and Eonia products.
The group has begun to engage clients to determine their ability to
transition in line with the readiness of alternative rate and
replacement RFR products. The Covid-19 outbreak and the interest
rate environment may have affected clients' abilities to transition
early, and has resulted in compressed timelines for the transition
of legacy Ibor contracts. However, for some US dollar Libor legacy
contracts, this timing risk may be mitigated in part by the recent
announcement by the Libor benchmark administrator, ICE Benchmark
Administration Limited ('IBA'), to consult on extending the
publication of overnight and one, three, six and 12 month US dollar
Libor settings to 30 June 2023. Despite the proposed extension,
regulatory and industry guidance has been clear that market
participants should cease writing new US dollar Libor contracts as
soon as is practicable, and in any event by the end of 2021. While
the extended deadline will result in additional US dollar Libor
transactions maturing before cessation, not all of them will, so it
is possible that other proposed solutions, including legislative
relief, will still be needed.
The group continues to have Ibor and Eonia derivatives, loan,
and bond exposures maturing beyond 2021. For the derivatives
exposures, the adoption of the ISDA protocol, as a fallback
provision, which came into effect in January 2021, and the
successful changes made by clearing houses to discount derivatives
using euro short-term rate ('EURstr') and secured overnight funding
rate ('SOFR') reduce the risk of a disorderly transition of the
derivatives market.
For the group's loan book, the global businesses have developed
commercial strategies that include active client engagement and
communication, providing detailed information on RFR products to
determine our clients' abilities to transition to a suitable
alternative rate or replacement RFR product, before Ibor
cessation.
The administrator of Libor, IBA, has announced a proposal to
extend the publication date of most US dollar Libor tenors
until
30 June 2023. Publication of one-week and two-month tenors will
cease after 31 December 2021. This proposal, if endorsed, would
reduce the amounts presented in the above table as some financial
instruments included will reach their contractual maturity date
prior to 30 June 2023.
Financial instruments impacted by IBOR reforms
(audited)
Amendments to IFRSs issued in August 2020 (Interest Rate
Benchmark Reform Phase 2) represents the second phase of the IASB's
project on the effects of interest rate benchmark reform,
addressing issues affecting financial statements when changes are
made to contractual cash flows and hedging relationships as a
result of reform.
Under these amendments, changes made to a financial instrument
measured at other than fair value through profit or loss that are
economically equivalent and required by interest rate benchmark
reform, do not result in the derecognition or a change in the
carrying amount of the financial instrument. Instead they require
the effective interest rate to be updated to reflect the change in
the interest rate benchmark. In addition, hedge accounting will not
be discontinued solely because of the replacement of the interest
rate benchmark if the hedge meets other hedge accounting
criteria.
These amendments apply from 1 January 2021 with early adoption
permitted. HSBC has adopted the amendments from 1 January 2020.
Financial instruments yet
to transition to alternative
benchmarks, by main benchmark
USD Libor GBP Libor EONIA Others(1)
At 31 Dec 2020 GBPm GBPm GBPm GBPm
---------------------------------------- --------- --------- ------- -----------
Non-derivative financial assets(2) 10,012 5,762 1 184
---------------------------------------- --------- --------- ------- ---------
Non-derivative financial liabilities(2) 1,933 1,410 3 1
---------------------------------------- --------- --------- ------- ---------
Derivative notional contract amount 1,700,582 868,313 196,515 134,693
---------------------------------------- --------- --------- ------- ---------
1 Comprises financial instruments referencing other significant
benchmark rates yet to transition to alternative benchmarks (EUR
Libor, JPY Libor, CHF Libor, SOR and THBFIX).
2 Gross carrying amount excluding allowances for expected credit
losses.
The amounts in the above table relate to HSBC's main operating
entities(1) and provide an indication of the extent of the group's
exposure to the Ibor benchmarks which are due to be replaced.
Amounts are in respect of financial instruments that:
-- contractually reference an interest rate benchmark that is
planned to transition to an alternative benchmark;
-- have a contractual maturity date after 31 December 2021, the
date by which Libor is expected to cease;
-- are recognised on HSBC's consolidated balance sheet.
-- The amounts in the above table predominantly represent the bank's exposure.
(1) Entities where we have material exposures impacted by Ibor
reform in countries including the United Kingdom, France, and
Germany.
Risks related to Covid-19
The Covid-19 outbreak and its effect on the global economy have
impacted our customers and our performance, and the future effects
of the outbreak are uncertain. The outbreak necessitated
governments to respond at unprecedented levels to protect public
health, local economies and livelihoods. It has affected countries
and territories at different times and varying degrees as it has
developed. The varying government measures in response have added
challenges, given the rapid pace of change and significant
operational demands. The speed at which countries and territories
will be able to unwind their government measures and return to
pre-Covid-19 economic levels will vary based on the levels of
infection and local political decisions and access and ability to
rollout vaccines. There remains a risk of subsequent waves of
infection, as evidenced by the recently emerged new more
transmissible variants of the virus. Renewed outbreaks emphasise
the ongoing threat of Covid-19 even in countries that have recorded
lower than average cases so far.
Government restrictions imposed around the world to limit the
spread of Covid-19 has resulted in a sharp contraction in global
economic activity, including countries in Europe. The extent of any
recovery in economic activity and reduction in unemployment rates
across our major markets in 2021 will be dependent upon successful
rollout of vaccination programmes, coupled with effective
non-pharmacological measures to contain the virus, such as 'track
and trace' systems and restrictions to mobility that will lead to a
decline in infections across over the course of the year.
Governments and Central Banks are expected to continue to work
together, to ensure that households and firms receive an
appropriate level of financial support until restrictions on
economic activity and mobility can be materially eased. Such
support is intended to ensure that labour and housing markets do
not experience abrupt, negative corrections and is also intended to
limit the extent of long term structural damage to economies. There
is a high degree of uncertainty associated with economic forecasts
in the current environment and there are significant risks
therefore to even a gradual recovery in economic activity in 2021.
The degree of uncertainty varies by market, driven by country
specific trends in the evolution of the pandemic and associated
policy responses and any impacts felt from the new Trade and
Cooperation Agreement in place between the UK and the EU from 1
January 2021.
There is a material risk of a renewed drop in economic activity.
The economic fallout from the Covid-19 outbreak risks increasing
inequality across markets that have already suffered from social
unrest. This will leave the burden on governments and central banks
to maintain or increase fiscal and monetary stimulus. After
financial markets suffered a sharp fall in the early phases of the
spread of Covid-19, they rebounded but still remain volatile.
Depending on the degree to which global economic growth suffers
permanent losses, financial asset prices may suffer a further sharp
fall.
Governments and central banks in major economies have deployed
extensive measures to support their local populations. Measures
implemented by governments have included income support to
households and funding support to businesses. Central bank measures
have included cuts to policy rates, support to funding markets and
asset purchases. These measures are being extended in countries
where further waves of the Covid-19 outbreak are prompting renewed
government restrictions. Central banks are expected to maintain
record-low interest rates for a considerable period of time and the
debt burden of governments is expected to rise significantly.
In many of our markets we have initiated market-specific
measures to support our personal and business customers through
these challenging times. These included mortgage assistance,
payment holidays, the waiving of certain fees and charges, and
liquidity relief for businesses facing market uncertainty and
supply chain disruption. We have also worked closely with
governments and supporting national schemes that focus on the parts
of the economy most impacted by Covid-19. On 1 July 2020 HSBC Bank
plc became an accredited lender under the UK's Coronavirus Large
Business Interruption Loan Scheme ('CLBILS'). For details of our
customer relief programmes see page 60.
The rapid introduction and varying nature of the government
support schemes, as well as customer expectations, has led to risks
as the Group implements large-scale changes in a short period of
time. This has led to increased operational risks, including
complex conduct considerations, increased reputational risk and
increased risk of fraud. These risks are likely to be heightened
further as and when those government support schemes are
unwound.
Our capital, funding and liquidity position is expected to help
us to continue supporting our customers throughout the Covid-19
outbreak.
In many of our markets, the Covid-19 outbreak has led to a
weakening in GDP, a key input used for calculating expected credit
loss ('ECL'), and there remains the risk of more adverse economic
scenarios given its ongoing impact. Furthermore, ECL will also
increase from other parts of our business impacted by the
disruption to supply chains. The impact will vary by sectors of the
economy, with retail, hospitality and commercial real estate among
those facing distress. The impact of the outbreak on the long-term
prospects of businesses in these sectors is uncertain and may lead
to significant ECL charges on specific exposures, which may not be
fully captured in ECL estimates. In addition, in times of crisis,
fraudulent activity is often more prevalent, leading to potentially
significant ECL charges or operational losses. The significant
changes in economic and market drivers, customer behaviours and
government actions caused by Covid-19 have materially impacted the
performance of financial models. IFRS9 model performance has been
dramatically impacted over the course of 2020 which has increased
reliance on management judgment in determining the appropriate
level of ECL estimates. These models are driven by forecasts of
economic factors such as GDP and unemployment. Many of these models
were not able to deliver reliable outputs given the dramatic
volatility in these forecasts, many of which significantly exceeded
observed historic extremes, as a consequence of the global economic
crisis. There has also been an unprecedented response from
governments to provide a variety of economic stimulus packages to
support livelihoods and the highest hit business sectors which
could not be predicted by models.
In order to address some model limitations and performance
issues, we have redeveloped some of the key models used to
calculate ECL estimates. These models have been independently
validated by the Model Risk Management team and have been assessed
as having the ability to deliver reliable credit loss estimates.
While this has reduced the reliance on management judgement for
determining ECL estimates in some portfolios, the current uncertain
economic outlook coupled with the expected end to government
support schemes has led to post model management adjustments still
being required.
The Model Risk Management team is reviewing IFRS9 model
performance at the country and group level on a quarterly basis to
assess whether or not the models in place can deliver reliable
outputs. These assessments provide the credit teams with a view
of model reliability. IFRS 9 model redevelopment will continue
as the economic consequences of the the Covid-19 outbreak become
clearer over time as economic conditions normalise and actual
credit losses occur.
As a result of the Covid-19 outbreak, business continuity
responses have been implemented and the majority of service level
agreements have been maintained. We have not experienced any major
impacts to the supply chain from our third-party service providers
due to Covid-19.
There remain significant uncertainties in assessing the duration
of the Covid-19 outbreak and its impact. The actions taken by the
various governments and central banks, in particular in the UK,
provide an indication of the potential severity of the downturn and
post-recovery environment, which from a commercial, regulatory and
risk perspective could be significantly different to past crises
and persist for a prolonged period. A continued prolonged period of
significantly reduced economic activity as a result of the impact
of the outbreak would have a materially adverse effect on our
financial condition, results of operations, prospects, liquidity,
capital position and credit ratings. We continue to monitor the
situation closely, and given the novel or prolonged nature of the
outbreak, additional mitigating actions may be required.
Interest rate environment
We have implemented capabilities and commercialised pricing to
accommodate negative interest rates for a significant portion of
our Euro and Swiss franc denominated business. Central banks have
reduced interest rates in most financial markets due to the adverse
impact on the timelines and path for economic recovery from the
Covid-19 outbreak, which has in turn increased the likelihood of
negative interest rates across more countries, including the UK.
This raises a number of risks and concerns.
We have a programme of work that is confirming our negative rate
operational capabilities for sterling denominated business and
improving our readiness where required. This programme is focused
upon ensuring that our systems and processes can accommodate zero,
near zero or negative rates and determining the resulting impacts
on our customers, while being fully mindful of all regulatory
constraints. Pricing decisions will continue to be informed based
on the needs of our customers, together with balance sheet and
market environment considerations, to ensure a fair exchange in
value. For most deposit products, decisions may be made to pass
through the negative rates to customers.
However, the move to negative rates will result in our
commercial margins being compressed, impacting our profitability.
The pricing of this risk will need to be carefully considered,
given the significant impact that prolonged low interest rates are
likely to have on our net interest income. If there is a
rebalancing of portfolios toward fee-generating business and
trading activities to offset reduced profits, we may become exposed
once rates start rising again. These factors may challenge the
long-term profitability of the banking sector, including that of
the group, and will be considered as part of our transformation
programme.
Our material banking and insurance risks
The material risk types associated with our banking and
insurance manufacturing operations are described in the following
tables.
Description of risks - banking operations
Credit risk (see page 32)
The risk of financial Credit risk arises Credit risk is:
loss if a customer principally from direct * measured as the amount that could be lost if a
or counterparty lending, trade finance customer or counterparty fails to make repayments;
fails to meet an and leasing business,
obligation under but also from certain
a contract. other products such * monitored using various internal risk management
as guarantees and derivatives. measures and within limits approved by individuals
within a framework of delegated authorities; and
* managed through a robust risk control framework that
outlines clear and consistent policies, principles
and guidance for risk managers.
------------------------- ------------------------------ -----------------------------------------------------------
Treasury risk (see page 71)
The risk of having Treasury risk arises Treasury risk is:
insufficient capital, from changes to the * measured through appetites set as target and minimum
liquidity or funding respective resources ratios;
resources to meet and risk profiles driven
financial obligations by customer behaviour,
and satisfy regulatory management decisions * monitored and projected against appetites and using
requirements, including or the external environment. stress and scenario testing; and
the risk of adverse
impact on earnings
or capital due to * managed through control of resources in conjunction
structural foreign with risk profiles and cashflows.
exchange exposures
and changes in market
interest rates,
and including the
financial risks
arising from historic
and current provision
of pensions and
other post employment
benefits to staff
and their dependants.
------------------------- ------------------------------ -----------------------------------------------------------
Market risk (see page 76)
The risk that movements Exposure to market Market risk is:
in market factors risk is separated into * measured using sensitivities, value at risk ('VaR')
such as foreign two portfolios: and stress testing, giving a detailed picture of
exchange rates, * trading portfolios; and potential gains and losses for a range of market
interest rates, movements and scenarios, as well as tail risks over
credit spreads, specified time horizons;
equity prices and * non-trading portfolios.
commodity prices
will reduce our * monitored using VaR, stress testing and other
income or the value Market risk exposures measures, including the sensitivity of net interest
of our portfolios. arising from our insurance income and the sensitivity of structural foreign
operations are discussed exchange; and
on page 82.
* managed using risk limits approved by the risk
management meeting ('RMM') and the RMM in various
global businesses.
------------------------- ------------------------------ -----------------------------------------------------------
Resilience risk (see page 79)
Resilience risk Resilience risk arises Resilience risk is:
is the risk that from failures or inadequacies * measured through a range of metrics with defined
we are unable to in processes, people, maximum acceptable impact tolerances, and against our
provide critical systems or external agreed risk appetite.
services to our events. These may be
customers, affiliates, driven by rapid technological
and counterparties innovation, changing * monitored through oversight of enterprise processes,
as a result of sustained behaviours of our consumers, risks, controls and strategic change programmes; and
and significant cyber-threats and attacks,
operational disruption. crossborder dependencies,
and third party relationships. * managed by continuous monitoring and thematic
reviews.
------------------------- ------------------------------ -----------------------------------------------------------
Regulatory compliance risk (see page
80)
The risk that we Regulatory compliance Regulatory compliance risk is:
fail to observe risk arises from the * measured by reference to identified metrics, incident
the letter and spirit risks associated with assessments, regulatory feedback and the judgement
of all relevant breaching our duty and assessment of our regulatory compliance teams;
laws, codes, rules, to our customers and
regulations and other counterparties,
standards of good inappropriate market * monitored against the first line of defence risk and
market practice, conduct and breaching control assessments, the results of the monitoring
and incur fines other regulatory requirements. and control activities of the second line of defence
and penalties and functions, and the results of internal and external
suffer damage to audits and regulatory inspections; and
our business.
* managed by establishing and communicating appropriate
policies and procedures, training employees in them,
and monitoring activity to assure their observance.
Proactive risk control and/or remediation work is
undertaken where required.
------------------------- ------------------------------ -----------------------------------------------------------
Financial crime risk (see page 81)
The risk that we Financial crime and Financial crime and fraud risk
knowingly or unknowingly fraud risk arises from is:
help parties to day-to-day banking * measured by reference to identified metrics, incident
commit or to further operations. assessments, regulatory feedback and the judgement
potentially illegal and assessment of our financial crime risk teams;
activity, including
both internal and
external fraud. * monitored against our financial crime risk appetite
statement and metrics, the results of the monitoring
and control activities of the second line of defence
functions, and the results of internal and external
audits and regulatory inspections; and
* managed by establishing and communicating appropriate
policies and procedures, training employees in them,
and monitoring activity to ensure their observance.
Proactive risk control and/or remediation work is
undertaken where required.
------------------------- ------------------------------ -----------------------------------------------------------
Description of risks - banking operations (continued)
Model risk (see page 82)
Model risk is Model risk arises in Model risk is:
the potential both financial and non-financial * measured by reference to model performance tracking
for adverse contexts whenever business and the output of detailed technical reviews, with
consequences decision making includes key metrics including model review statuses and
from business reliance on models. findings;
decisions informed
by models, which
can be exacerbated * monitored against model risk appetite statements,
by errors in insight from the independent review function,
methodology, feedback from internal and external audits, and
design or the regulatory reviews; and
way they are
used.
* managed by creating and communicating appropriate
policies, procedures and guidance, training
colleagues in their application, and supervising
their adoption to ensure operational effectiveness.
------------------- --------------------------------- ----------------------------------------------------------
Our insurance manufacturing subsidiaries are regulated
separately from our banking operations. Risks in our insurance
entities are managed using methodologies and processes that are
subject to Group oversight. Our insurance operations are also
subject to some of the same risks as our banking operations, and
these, are covered by the Group's risk management processes. There
are though specific risks inherent to the insurance operations as
noted below.
Description of risks - insurance manufacturing operations
Financial risk (see page 82)
For insurance Exposure to financial Financial risk is:
entities, risks arises from: * measured (i) for credit risk, in terms of economic
Financial * market risk affecting the fair values of financial capital and the amount that could be lost if a
risk includes assets or their future cash flows; counterparty fails to make repayments; (ii) for
the risk of market risk, in terms of economic capital, internal
not being metrics and fluctuations in key financial variables;
able * credit risk; and and (iii) for liquidity risk, in terms of internal
to metrics, including stressed operational cash flow
effectively projections;
match * liquidity risk of entities not being able to make
liabilities payments to policyholders as they fall due.
arising under * monitored through a framework of approved limits and
insurance delegated authorities; and
contracts
with
appropriate * managed through a robust risk control framework that
investments outlines clear and consistent policies, principles
and that the and guidance. This includes using product design and
expected asset liability matching and bonus rates.
sharing
of financial
performance
with
policyholders
under certain
contracts is
not possible.
Insurance risk (see page 82)
The risk The cost of claims and Insurance risk is:
that, benefits can be influenced * measured in terms of life insurance liabilities and
over time, by many factors, including economic capital allocated to insurance underwriting
the mortality and morbidity risk;
cost of the experience, as well as
contract, lapse and surrender rates.
including * monitored though a framework of approved limits and
claims and delegated authorities; and
benefits
may exceed
the * managed through a robust risk control framework that
total amount outlines clear and consistent policies, principles
of premiums and guidance. This includes using product design,
and underwriting, reinsurance and claims-handling
investment procedures.
income
received.
------------- -------------------------------------------------------- ----------------------------------------------------------
Credit risk
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet an obligation under a contract. Credit
risk arises principally from direct lending, trade finance and
leasing business, but also from certain other products, such as
guarantees and derivatives.
Credit risk management
Key developments in 2020
Due to unique market conditions in the Covid-19 outbreak, we
expanded operational practices to provide short-term support to
customers under the current policy framework. For further details
of market-specific measures to support our personal and business
customers, see page 29. Outside these Covid-19 initiatives, there
have been no material changes to credit risk policy and we continue
to apply the requirements of IFRS 9 'Financial Instruments' within
Credit risk.
Governance and structure
We have established group-wide credit risk management and
related IFRS 9 processes. We continue to actively assess the impact
of economic developments in key markets on specific customers,
customer segments or portfolios. As credit conditions change, we
take mitigating action, including the revision of risk appetites or
limits and tenors, as appropriate. In addition, we continue to
evaluate the terms under which we provide credit facilities within
the context of individual customer requirements, the quality of the
relationship, local regulatory requirements, market practices and
our local market position.
Credit risk sub-function
(Audited)
Credit approval authorities are delegated by the Board to the
Chief Executive together with the authority to sub-delegate them.
The Credit risk sub-function in Risk is responsible for the key
policies and processes for managing credit risk, which include
formulating credit policies and risk rating frameworks, guiding the
appetite for credit risk exposures, undertaking independent reviews
and objective assessment of credit risk, and monitoring performance
and management of portfolios.
The principal objectives of our credit risk management are:
-- to maintain across the group a strong culture of responsible
lending and a robust risk policy and control framework;
-- to both partner and challenge global businesses in defining,
implementing and continually re-evaluating our risk appetite under
actual and scenario conditions; and
-- to ensure there is independent, expert scrutiny of credit risks, their costs and mitigation.
Key risk management process
IFRS 9 'Financial Instruments' process
The IFRS 9 process comprises three main areas: modelling and
data; implementation; and governance.
Modelling and data
The Group has established IFRS 9 modelling and data processes in
various geographies, which are subject to internal model risk
governance including independent review of significant model
developments.
Implementation
A centralised impairment engine performs the ECL calculation
using data, which is subject to a number of validation checks and
enhancements, from a variety of client, finance and risk systems.
Where possible, these checks and processes are performed in a
globally consistent and centralised manner.
Governance
Management review forums are established in order to review and
approve the impairment results. Management review forums have
representatives from Credit Risk and Finance. Required members of
the committee are the heads of Wholesale Credit, Market Risk, and
Wealth and Personal Banking Risk, as well as the global business
Chief Financial Officers and the Chief Accounting Officer.
Concentration of exposure
(Audited)
Concentrations of credit risk arise when a number of
counterparties or exposures have comparable economic
characteristics, or are engaged in similar activities, or operate
in the same geographical areas/industry sectors, so that their
collective ability to meet contractual obligations is uniformly
affected by changes in economic, political or other conditions. The
group uses a number of controls and measures to minimise undue
concentration of exposure in the group's portfolios across
industry, country and customer groups. These include portfolio and
counterparty limits, approval and review controls, and stress
testing.
.
Credit quality of financial instruments
(Audited)
Our risk rating system facilitates the internal ratings-based
approach under the Basel framework adopted by the Group to support
the calculation of our minimum credit regulatory capital
requirement. The five credit quality classifications each encompass
a range of granular internal credit rating grades assigned to
wholesale and retail lending businesses, and the external ratings
attributed by external agencies to debt securities.
For debt securities and certain other financial instruments,
external ratings have been aligned to the five quality
classifications based upon the mapping of related Customer Risk
Rating ('CRR') to external credit rating.
Wholesale lending
The CRR 10-grade scale summarises a more granular underlying
23-grade scale of obligor probability of default ('PD'). All
corporate customers are rated using the 10- or 23-grade scale,
depending on the degree of sophistication of the Basel approach
adopted for the exposure.
Each CRR band is associated with an external rating grade by
reference to long-run default rates for that grade, represented by
the average of issuer-weighted historical default rates. This
mapping between internal and external ratings is indicative and may
vary over time.
Retail lending
Retail lending credit quality is based on a 12-month
point-in-time probability-weighted PD.
Credit quality classification
Sovereign Other debt
debt securities securities Wholesale lending
and bills and bills and derivatives Retail lending
---------------- ------------
12-month
probability
External External Internal of Internal 12 month
credit credit credit default credit probability-weighted
Footnotes rating rating rating % rating PD %
----------------- --------- ---------------- ------------ -------- ------------ ---------- --------------------
Quality
classification 1,2
----------------- --------- ---------------- ------------ -------- ------------ ---------- --------------------
Strong BBB and A- and above CRR1 to 0 - 0.169 Band 1 and 0.000 -
above CRR2(1) 2 0.500
----------------- --------- ---------------- ------------ -------- ------------ ---------- --------------------
Good BBB- to BBB+ to CRR3 0.170 - Band 3 0.501 -
BB BBB- 0.740 1.500
----------------- --------- ---------------- ------------ -------- ------------ ---------- --------------------
BB- to B BB+ to B CRR4 to 0.741 - Band 4 and 1.501 -
Satisfactory and unrated and unrated CRR5 4.914 5 20.000
----------------- --------- ---------------- ------------ -------- ------------ ---------- --------------------
Sub-standard B- to C B- to C CRR6 to 4.915 - Band 6 20.001 -
CRR8 99.999 99.999
----------------- --------- ---------------- ------------ -------- ------------ ---------- --------------------
CRR9 to
Credit impaired Default Default CRR10 100 Band 7 100
----------------- --------- ---------------- ------------ -------- ------------ ---------- --------------------
1 Customer risk rating ('CRR').
2 12-month point-in-time probability-weighted PD.
Quality classification definitions
* 'Strong' exposures demonstrate a strong capacity to
meet financial commitments, with negligible or low
probability of default and/or low levels of expected
loss.
* 'Good' exposures require closer monitoring and
demonstrate a good capacity to meet financial
commitments, with low default risk.
* 'Satisfactory' exposures require closer monitoring
and demonstrate an average to fair capacity to meet
financial commitments, with moderate default risk.
* 'Sub-standard' exposures require varying degrees of
special attention and default risk is of greater
concern.
* 'Credit-impaired' exposures have been assessed as
described in Note 1.2(i) on the Financial Statements.
============================================================
Renegotiated loans and forbearance
'Forbearance' describes concessions made on the contractual
terms of a loan in response to an obligor's financial
difficulties.
A loan is classed as 'renegotiated' when we modify the
contractual payment terms on concessionary terms because we have
significant concerns about the borrowers' ability to meet
contractual payments when due. Non-payment-related concessions
(e.g. covenant waivers), while potential indicators of impairment,
do not trigger identification as renegotiated loans.
Loans that have been identified as renegotiated retain this
designation until maturity or derecognition.
For details of our policy on derecognised renegotiated loans,
see Note 1.2(i) on the financial statements.
Credit quality of renegotiated loans
On execution of a renegotiation, the loan will also be
classified as credit impaired if it is not already so classified.
In wholesale lending, all facilities with a customer, including
loans that have not been modified, are considered credit impaired
following the identification of a renegotiated loan.
Wholesale renegotiated loans are classified as credit impaired
until there is sufficient evidence to demonstrate a significant
reduction in the risk of non-payment of future cash flows, observed
over a minimum one-year period, and there are no other indicators
of impairment. Personal renegotiated loans generally remain credit
impaired until repayment, write-off or derecognition.
Renegotiated loans and recognition of expected credit losses
(Audited)
For retail lending, unsecured renegotiated loans are generally
segmented from other parts of the loan portfolio. Renegotiated
expected credit loss assessments reflect the higher rates of losses
typically encountered with renegotiated loans. For wholesale
lending, renegotiated loans are typically assessed individually.
Credit risk ratings are intrinsic to the impairment assessments.
The individual impairment assessment takes into account the higher
risk of the future non-payment inherent in renegotiated loans.
Impairment assessment
(Audited)
For details of our impairment policies on loans and advances and
financial investments see Note 1.2(i) on the financial
statements.
Write-off of loans and advances
(Audited)
For details of our accounting policy on the write-off of loans
and advances, see Note 1.2(i) on the financial statements.
Unsecured personal facilities, including credit cards, are
generally written off at between 150 and 210 days past due. The
standard period runs until the end of the month in which the
account becomes 180 days contractually delinquent. Write-off
periods may be extended, generally to no more than 360 days past
due. However, in exceptional circumstances, they may be extended
further.
For secured facilities, write-off should occur upon repossession
of collateral, receipt of proceeds via settlement, or determination
that recovery of the collateral will not be pursued.
Any secured assets maintained on the balance sheet beyond 60
months of consecutive delinquency-driven default require additional
monitoring and review to assess the prospect of recovery.
There are exceptions in a few countries where local regulation
or legislation constrain earlier write-off, or where the
realisation of collateral for secured real estate lending takes
more time. In the event of bankruptcy or analogous proceedings,
write-off may occur earlier than the maximum periods stated above.
Collection procedures may continue after write-off.
Credit risk in 2020
At 31 December 2020, gross loans and advances to customers and
banks of GBP115.6bn decreased by GBP5.3bn, compared with
31 December 2019. This included favourable foreign exchange
movements of GBP3.7bn. Excluding foreign exchange movements, the
decline was driven by a GBP10.4bn decrease in wholesale loans and
advances to customers. This was partly offset by a GBP0.4bn
increase in personal loans and advances and a GBP1.0bn increase in
loans and advances to banks.
During the first half of 2020, the group experienced a
significant increase in allowances for ECL, which subsequently
stabilised during the second half of 2020. Excluding foreign
exchange movements, the allowance for ECL in relation to loans and
advances to customers increased by GBP403m from 31 December 2019.
This was attributable to:
-- a GBP379m increase in wholesale loans and advances to
customers, of which GBP175m was driven by stages 1 and 2; and
-- a GBP24m increase in personal loans and advances to
customers, of which GBP23m was driven by stages 1 and 2.
During the first six months of the year, the group experienced
significant migrations from stage 1 to stage 2, reflecting a
worsening of the economic outlook. This trend slowed during the
second half of 2020 as forward economic guidance ('FEG') remained
broadly stable in comparison with 30 June 2020, with some countries
experiencing transfers from stage 2 to stage 1. At 31 December
2020, stage 3 gross loans and advances to customers of GBP3.0bn
increased by GBP0.9bn, compared with
31 December 2019. As the Covid-19 outbreak continues, there may
be volatility in future stage 3 balances, in particular due to the
expiration of the measures implemented by governments, regulators
and banks to support customers.
Summary of credit risk
The following disclosure presents the gross carrying/nominal
amount of financial instruments to which the impairment
requirements in IFRS9 are applied and the associated allowance for
ECL. The allowance for ECL increased from GBP1,113m at
31 December 2019 to GBP1,632m at 31 December 2020.
The allowance for ECL at 31 December 2020 comprised of GBP1,497m
(2019: GBP1,050m) in respect of assets held at amortised cost,
GBP135m (2019: GBP63m) in respect of loan commitments and financial
guarantees, and GBP22m (2019: GBP16m) in respect of debt
instruments measured at FVOCI.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied
(Audited)
---------------------- ----------- ---------------------- -------------
31 Dec 2020 31 Dec 2019
Gross carrying/nominal Allowance Gross carrying/nominal Allowance
amount for ECL(1) amount for ECL(1)
The group GBPm GBPm GBPm GBPm
------------------------------------ ---------------------- ----------- ---------------------- -------------
Loans and advances to customers at
amortised cost 102,960 (1,469) 109,428 (1,037)
------------------------------------ ---------------------- ----------- ---------------------- -----------
- personal 26,499 (208) 24,833 (173)
------------------------------------
- corporate and commercial 62,987 (1,168) 66,990 (809)
------------------------------------
- non-bank financial institutions 13,474 (93) 17,605 (55)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Loans and advances to banks at
amortised
cost 12,662 (16) 11,471 (4)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Other financial assets measured at
amortised cost 202,763 (12) 181,755 (9)
------------------------------------ ---------------------- ----------- ---------------------- -----------
- cash and balances at central banks 85,093 (1) 51,816 -
------------------------------------
- items in the course of collection
from other banks 243 - 707 -
------------------------------------
- reverse repurchase agreements -
non trading 67,577 - 85,756 -
------------------------------------
- financial investments 15 - 13 -
------------------------------------
- prepayments, accrued income and
other assets(2) 49,835 (11) 43,463 (9)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Total gross carrying amount on
balance
sheet 318,385 (1,497) 302,654 (1,050)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Loans and other credit related
commitments 143,036 (112) 121,447 (54)
------------------------------------ ---------------------- ----------- ---------------------- -----------
- personal 2,211 (1) 1,950 (2)
------------------------------------
- corporate and commercial 75,863 (89) 68,893 (50)
------------------------------------
- financial 64,962 (22) 50,604 (2)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Financial guarantees(3) 3,969 (23) 4,318 (9)
------------------------------------ ---------------------- ----------- ---------------------- -----------
- personal 32 - 34 -
------------------------------------
- corporate and commercial 2,735 (19) 2,849 (8)
------------------------------------
- financial 1,202 (4) 1,435 (1)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Total nominal amount off balance
sheet(4) 147,005 (135) 125,765 (63)
------------------------------------ ---------------------- ----------- ---------------------- -----------
465,390 (1,632) 428,419 (1,113)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Memorandum Memorandum
allowance allowance
Fair value for ECL(5) Fair value for ECL(5)
GBPm GBPm GBPm GBPm
------------------------------------ ---------------------- ----------- ---------------------- -------------
Debt instruments measured at fair
value through other comprehensive
income ('FVOCI') 51,713 (22) 46,360 (16)
------------------------------------ ---------------------- ----------- ---------------------- -----------
1 The total ECL is recognised in the loss allowance for the
financial asset unless the total ECL exceeds the gross carrying
amount of the financial asset, in which case the ECL is recognised
as a provision.
2 Includes only those financial instruments which are subject to
the impairment requirements of IFRS 9. 'Prepayments, accrued income
and other assets' as presented within the consolidated balance
sheet on page 110 includes both financial and non-financial
assets.
3 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
4 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
5 Debt instruments measured at FVOCI continue to be measured at
fair value with the allowance for ECL as a memorandum item. Change
in ECL is recognised in 'Change in expected credit losses and other
credit impairment charges' in the income statement.
Summary of financial instruments to which the impairment
requirements in IFRS 9 are applied
(Audited)
---------------------- ----------- ---------------------- -------------
31 Dec 2020 31 Dec 2019
Gross carrying/nominal Allowance Gross carrying/nominal Allowance
amount for ECL(1) amount for ECL(1)
The bank GBPm GBPm GBPm GBPm
------------------------------------ ---------------------- ----------- ---------------------- -------------
Loans and advances to customers at
amortised cost 43,831 (590) 50.314 (388)
------------------------------------ ---------------------- ----------- ---------------------- -----------
- personal 3,582 (13) 3.637 (8)
------------------------------------
- corporate and commercial 26,014 (494) 29,839 (345)
------------------------------------
- non-bank financial institutions 14,235 (83) 16,838 (35)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Loans and advances to banks at
amortised
cost 8,078 (15) 9,525 (3)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Other financial assets measured at
amortised cost 135,900 (1) 114,330 -
------------------------------------ ---------------------- ----------- ---------------------- -----------
- cash and balances at central banks 48,777 - 30,149 -
------------------------------------
- items in the course of collection
from other banks 37 - 44 -
------------------------------------
- reverse repurchase agreements-non
trading 50,137 - 50,736 -
------------------------------------
- financial investments 2,214 - - -
------------------------------------
- prepayments, accrued income and
other assets(2) 34,735 (1) 33,401 -
------------------------------------ ---------------------- ----------- ---------------------- -----------
Total gross carrying amount on
balance
sheet 187,809 (606) 174,169 (391)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Loans and other credit related
commitments 45,308 (81) 39,682 (25)
------------------------------------ ---------------------- ----------- ---------------------- -----------
- personal 352 - 308 (1)
------------------------------------
- corporate and commercial 25,444 (66) 25,495 (23)
------------------------------------
- financial 19,512 (15) 13,879 (1)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Financial guarantees(3) 1,510 (13) 3,695 (4)
------------------------------------ ---------------------- ----------- ---------------------- -----------
- personal 3 - 3 -
------------------------------------
- corporate and commercial 457 (9) 674 (3)
------------------------------------
- financial 1,050 (4) 3,018 (1)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Total nominal amount off balance
sheet(4) 46,818 (94) 43,377 (29)
------------------------------------ ---------------------- ----------- ---------------------- -----------
234,627 (700) 217,546 (420)
------------------------------------ ---------------------- ----------- ---------------------- -----------
Memorandum Memorandum
allowance allowance
Fair value for ECL(5) Fair value for ECL(5)
GBPm GBPm GBPm GBPm
------------------------------------ ---------------------- ----------- ---------------------- -------------
Debt instruments measured at
FVOCI(5) 28,699 (9) 26,506 (4)
------------------------------------ ---------------------- ----------- ---------------------- -----------
1 The total ECL is recognised in the loss allowance for the
financial asset unless the total ECL exceeds the gross carrying
amount of the financial asset, in which case the ECL is recognised
as a provision.
2 Includes only those financial instruments which are subject to
the impairment requirements of IFRS 9. 'Prepayments, accrued income
and other assets' as presented within the consolidated balance
sheet on page 110 includes both financial and non-financial
assets.
3 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
4 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
5 Debt instruments measured at FVOCI continue to be measured at
fair value with the allowance for ECL as a memorandum item. Change
in ECL is recognised in 'Change in expected credit losses and other
credit impairment charges' in the income statement.
The following table provides an overview of the group's and
bank's credit risk by stage and industry, and the associated ECL
coverage. The financial assets recorded in each stage have the
following characteristics:
-- Stage 1: These financial assets are unimpaired and without
significant increase in credit risk on which a 12-month allowance
for ECL is recognised.
-- Stage 2: A significant increase in credit risk has been
experienced since initial recognition on which a lifetime ECL is
recognised.
--
Stage 3: There is objective evidence of impairment, and are
therefore considered to be in default or otherwise credit-impaired
on which a lifetime ECL is recognised.
-- Purchased or originated credit-impaired ('POCI'): Financial
assets that are purchased or originated at a deep discount that
reflects the incurred credit losses on which a lifetime ECL is
recognised.
--
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2020
(Audited)
Gross carrying/nominal
amount(2) Allowance for ECL ECL coverage %
------- ------- -----
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI(3) Total 1 2 3 POCI(3) Total 1 2 3 POCI(3) Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
Loans and
advances
to customers
at amortised
cost 83,179 16,774 2,966 41 102,960 (129) (297) (1,031) (12) (1,469) 0.2 1.8 34.8 29.3 1.4
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
- personal 24,991 974 534 - 26,499 (18) (37) (153) - (208) 0.1 3.8 28.7 - 0.8
--------------------------------------
* corporate and commercial 46,773 14,052 2,121 41 62,987 (100) (225) (831) (12) (1,168) 0.2 1.6 39.2 29.3 1.9
--------------------------------------
* non-bank financial institutions 11,415 1,748 311 - 13,474 (11) (35) (47) - (93) 0.1 2.0 15.1 - 0.7
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- -------
Loans and
advances
to banks
at amortised
cost 12,533 129 - - 12,662 (13) (3) - - (16) 0.1 2.3 - - 0.1
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
Other financial
assets measured
at amortised
cost 202,659 65 39 - 202,763 (2) - (10) - (12) - - 25.6 - -
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 128,956 13,814 266 - 143,036 (34) (68) (10) - (112) - 0.5 3.8 - 0.1
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
- personal 1,991 217 3 - 2,211 - (1) - - (1) - 0.5 - - -
--------------------------------------
* corporate and commercial 65,199 10,404 260 - 75,863 (29) (51) (9) - (89) - 0.5 3.5 - 0.1
--------------------------------------
- financial 61,766 3,193 3 - 64,962 (5) (16) (1) - (22) - 0.5 33.3 - -
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- -------
Financial
guarantees(1) 2,839 1,008 121 1 3,969 (4) (10) (9) - (23) 0.1 1.0 7.4 - 0.6
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
- personal 26 5 1 - 32 - - - - - - - - - -
--------------------------------------
* corporate and commercial 1,878 737 119 1 2,735 (3) (7) (9) - (19) 0.2 0.9 7.6 - 0.7
--------------------------------------
- financial 935 266 1 - 1,202 (1) (3) - - (4) 0.1 1.1 - - 0.3
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- -------
At 31 Dec
2020 430,166 31,790 3,392 42 465,390 (182) (378) (1,060) (12) (1,632) - 1.2 31.3 28.6 0.4
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
3 Purchased or originated credit-impaired ('POCI').
Unless identified at an earlier stage, all financial assets are
deemed to have suffered a significant increase in credit risk when
they are 30 days past due ('DPD') and are transferred from stage 1
to stage 2. The following disclosure presents the ageing of stage 2
financial assets by those less than 30 days and greater than 30 DPD
and therefore presents those financial assets classified as stage 2
due to ageing (30 DPD) and those identified at an earlier stage
(less than 30 DPD).
Stage 2 days past due analysis at 31 December 2020
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
Of which: Of which: Of which: Of which: Of which: Of which:
1 to 30 and 1 to 1 to 30 and
Stage 29 > Stage 29 30 and Stage 29 >
2 DPD(1,2) DPD(1,2) 2 DPD(1,2) > DPD(12) 2 DPD(1,2) DPD(1,2)
The group GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
Loans and
advances
to customers
at amortised
cost: 16,774 64 50 (297) (3) (2) 1.8 4.7 4.0
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
- personal 974 54 39 (37) (2) (2) 3.8 3.7 5.1
-------------
- corporate
and
commercial 14,052 9 11 (225) (1) - 1.6 11.1 -
-------------
- non-bank
financial
institutions 1,748 1 - (35) - - 2.0 - -
------------- -------- --------- --------- -------- --------- --------- ----- ---------
Loans and
advances
to banks at
amortised
cost 129 - - (3) - - 2.3 - -
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
Other
financial
assets
measured at
amortised
cost 65 - - - - - - - -
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
1 Days past due ('DPD'). Up-to-date accounts in stage 2 are not shown in amounts presented above.
2 The days past due amounts presented above are on a contractual
basis and include the benefit of any customer relief payment
holidays granted.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2019 (continued)
(Audited)
Gross carrying/nominal
amount(2) Allowance for ECL ECL coverage %
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI(3) Total 1 2 3 POCI(3) Total 1 2 3 POCI(3) Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -------
Loans and
advances
to customers
at amortised
cost 100,077 7,238 2,043 70 109,428 (104) (126) (774) (33) (1,037) 0.1 1.7 37.9 47.1 0.9
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
- personal 23,273 1,073 487 - 24,833 (6) (23) (144) - (173) - 2.1 29.6 - 0.7
--------------------------------------
* corporate and commercial 59,654 5,806 1,460 70 66,990 (85) (100) (591) (33) (809) 0.1 1.7 40.5 47.1 1.2
--------------------------------------
* non-bank financial institutions 17,150 359 96 - 17,605 (13) (3) (39) - (55) 0.1 0.8 40.6 - 0.3
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
Loans and
advances
to banks
at amortised
cost 11,408 63 - - 11,471 (4) - - - (4) - - - - -
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
Other financial
assets measured
at amortised
cost 181,697 26 32 - 181,755 - - (9) - (9) - - 28.1 - -
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 118,078 3,235 129 5 121,447 (22) (11) (21) - (54) - 0.3 16.3 - -
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
- personal 1,859 88 3 - 1,950 - (2) - - (2) - 2.3 - - 0.1
--------------------------------------
* corporate and commercial 65,796 2,967 125 5 68,893 (20) (9) (21) - (50) - 0.3 16.8 - 0.1
--------------------------------------
- financial 50,423 180 1 - 50,604 (2) - - - (2) - - - - -
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
Financial
guarantees(1) 3,685 567 63 3 4,318 (2) (6) (1) - (9) 0.1 1.1 1.6 - 0.2
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
- personal 33 - 1 - 34 - - - - - - - - - -
--------------------------------------
* corporate and commercial 2,352 433 61 3 2,849 (2) (6) - - (8) 0.1 1.4 - - 0.3
--------------------------------------
- financial 1,300 134 1 - 1,435 - - (1) - (1) - - 100.0 - 0.1
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
At 31 Dec
2019 414,945 11,129 2,267 78 428,419 (132) (143) (805) (33) (1,113) - 1.3 35.5 42.3 0.3
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
3 Purchased or originated credit-impaired ('POCI').
Stage 2 days past due analysis at 31 December 2019 (continued)
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
Of which: Of which: Of which: Of which: Of which: Of which:
Stage 1 to 30 and Stage 1 to 30 and Stage 1 to 30 and
2 29 DPD(1) > DPD(1) 2 29 DPD(1) > DPD(1) 2 29 DPD(1) > DPD(1)
The group GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
Loans and
advances
to customers
at amortised
cost 7,238 73 100 (126) (1) (3) 1.7 1.4 3.0
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
- personal 1,073 58 44 (23) (1) (1) 2.1 1.7 2.3
-------------
- corporate
and
commercial 5,806 15 56 (100) - (2) 1.7 - 3.6
-------------
- non-bank
financial
institutions 359 - - (3) - - 0.8 - -
------------- -------- --------- --------- -------- --------- --------- ----- ---------
Loans and
advances
to banks at
amortised
cost 63 - - - - - - - -
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
Other
financial
assets
measured at
amortised
cost 26 5 - - - - - - -
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
1 Days past due ('DPD'). Up-to-date accounts in stage 2 are not shown in amounts presented above.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2020
(Audited)
Gross carrying/nominal
amount(2) Allowance for ECL ECL coverage %
------- ----- -----
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI(3) Total 1 2 3 POCI(3) Total 1 2 3 POCI(3) Total
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
Loans and
advances
to customers
at amortised
cost 34,629 7,921 1,279 2 43,831 (79) (158) (351) (2) (590) 0.2 2.0 27.4 100.0 1.3
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
- personal 3,455 70 57 - 3,582 (1) (8) (4) - (13) - 11.4 7.0 - 0.4
--------------------------------------
* corporate and commercial 18,670 6,424 918 2 26,014 (70) (121) (301) (2) (494) 0.4 1.9 32.8 100.0 1.9
--------------------------------------
* non-bank financial institutions 12,504 1,427 304 - 14,235 (8) (29) (46) - (83) 0.1 2.0 15.1 - 0.6
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- -------
Loans and
advances
to banks
at amortised
cost 7,995 83 - - 8,078 (12) (3) - - (15) 0.2 3.6 - - 0.2
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
Other financial
assets
measured
at amortised
cost 135,843 35 22 - 135,900 - - (1) - (1) - - 4.5 - -
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 39,343 5,905 60 - 45,308 (28) (48) (5) - (81) 0.1 0.8 8.3 - 0.2
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
- personal 338 14 - - 352 - - - - - - - - - -
--------------------------------------
* corporate and commercial 21,895 3,492 57 - 25,444 (23) (39) (4) - (66) 0.1 1.1 7.0 - 0.3
--------------------------------------
- financial 17,110 2,399 3 - 19,512 (5) (9) (1) - (15) - 0.4 33.3 - 0.1
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- -------
Financial
guarantees(1) 1,203 253 54 - 1,510 (2) (4) (7) - (13) 0.2 1.6 13.0 - 0.9
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
- personal 2 1 - - 3 - - - - - - - - - -
--------------------------------------
* corporate and commercial 331 73 53 - 457 (1) (1) (7) - (9) 0.3 1.4 13.2 - 2.0
--------------------------------------
- financial 870 179 1 - 1,050 (1) (3) - - (4) 0.1 1.7 - - 0.4
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- -------
At 31 Dec
2020 219,013 14,197 1,415 2 234,627 (121) (213) (364) (2) (700) 0.1 1.5 25.7 100.0 0.3
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
3 Purchased or originated credit-impaired ('POCI').
Stage 2 days past due analysis at 31 December 2020
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
Of which: Of which: Of which: Of which: Of which: Of which:
Stage 1 to 30 and Stage 1 to 30 and Stage 1 to 30 and
2 29 DPD(1) > DPD(1) 2 29 DPD(1) > DPD(1) 2 29 DPD(1) > DPD(1)
The bank GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
Loans and
advances
to customers
at amortised
cost: 7,921 16 8 (158) (1) (1) 2.0 6.3 12.5
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
- personal 70 15 8 (8) (1) (1) 11.4 6.7 12.5
-------------
- corporate
and
commercial 6,424 1 - (121) - - 1.9 - -
-------------
- non-bank
financial
institutions 1,427 - - (29) - - 2.0 - -
------------- -------- --------- --------- -------- --------- --------- ----- ---------
Loans and
advances
to banks at
amortised
cost 83 - - (3) - - 3.6 - -
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
Other
financial
assets
measured at
amortised
cost 35 - - - - - - - -
------------- -------- --------- --------- -------- --------- --------- ----- --------- ---------
1 Days past due ('DPD'). Up-to-date accounts in stage 2 are not shown in amounts presented above.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2019 (continued)
(Audited)
Gross carrying/nominal Allowance for
amount(2) ECL ECL coverage %
------- ----- -------
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI(3) Total 1 2 3 POCI(3) Total 1 2 3 POCI(3) Total
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- ------- ----- ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -------
Loans and
advances
to customers
at amortised
cost 46,173 3,430 678 33 50,314 (58) (67) (239) (24) (388) 0.1 2.0 35.3 72.7 0.8
-------------------------------------- ------- ----- ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
- personal 3,562 57 18 - 3,637 (1) (3) (4) - (8) - 5.3 22.2 - 0.2
--------------------------------------
* corporate and commercial 26,082 3,109 615 33 29,839 (48) (62) (211) (24) (345) 0.2 2.0 34.3 72.7 1.2
--------------------------------------
* non-bank financial institutions 16,529 264 45 - 16,838 (9) (2) (24) - (35) 0.1 0.8 53.3 - 0.2
-------------------------------------- ------- ----- ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
Loans and
advances
to banks
at amortised
cost 9,487 38 - - 9,525 (3) - - - (3) - - - - -
-------------------------------------- ------- ----- ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
Other financial
assets
measured
at amortised
cost 114,306 16 8 - 114,330 - - - - - - - - - -
-------------------------------------- ------- ----- ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 38,820 839 18 5 39,682 (15) (8) (2) - (25) - 1.0 11.1 - 0.1
-------------------------------------- ------- ----- ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
- personal 305 3 - - 308 - (1) - - (1) - 33.3 - - 0.3
--------------------------------------
* corporate and commercial 24,657 815 18 5 25,495 (14) (7) (2) - (23) 0.1 0.9 11.1 - 0.1
--------------------------------------
- financial 13,858 21 - - 13,879 (1) - - - (1) - - - - -
-------------------------------------- ------- ----- ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
Financial
guarantees(1) 3,363 275 57 - 3,695 (1) (2) (1) - (4) - 0.7 1.8 - 0.1
-------------------------------------- ------- ----- ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
- personal 3 - - - 3 - - - - - - - - - -
--------------------------------------
* corporate and commercial 468 150 56 - 674 (1) (2) - - (3) 0.2 1.3 - - 0.4
--------------------------------------
- financial 2,892 125 1 - 3,018 - - (1) - (1) - - 100.0 - -
-------------------------------------- ------- ----- ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
At 31 Dec
2019 212,149 4,598 761 38 217,546 (77) (77) (242) (24) (420) - 1.7 31.8 63.2 0.2
-------------------------------------- ------- ----- ----- ------- ------- ----- ----- ----- ------- ----- ----- ----- ----- ------- -----
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
3 Purchased or originated credit-impaired ('POCI').
Stage 2 days past due analysis at 31 December 2019 (continued)
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
Of Of Of Of Of Of which:
which: which: which: which: which:
Stage 1 to 30 and Stage 1 to 30 and Stage 1 to 30 and
2 29 DPD1 > DPD1 2 29 DPD1 > DPD1 2 29 DPD1 > DPD1
The bank GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- ------- -------- -------- ------- -------- -------- ------- -------- ----------
Loans and
advances
to customers
at amortised
cost: 3,430 13 6 (67) - - 2.0 - -
------------- ------- -------- -------- ------- -------- -------- ------- -------- --------
- Personal 57 13 6 (3) - - 5.3 - -
-------------
- Corporate
and
commercial 3,109 - - (62) - - 2.0 - -
-------------
- Non-bank
financial
institutions 264 - - (2) - - 0.8 - -
------------- ------- -------- -------- ------- -------- -------- ------- -------- --------
Loans and
advances
to banks at
amortised
cost 38 - - - - - - - -
------------- ------- -------- -------- ------- -------- -------- ------- -------- --------
Other
financial
assets
measured at
amortised
cost 16 - - - - - - - -
------------- ------- -------- -------- ------- -------- -------- ------- -------- --------
1 Days past due ('DPD'). Up-to-date accounts in stage 2 are not shown in amounts presented above.
1
Credit exposure
Maximum exposure to credit risk
(Audited)
This section provides information on balance sheet items and
their offsets as well as loan and other credit-related
commitments.
The offset on derivatives remains in line with the movements in
maximum exposure amounts.
'Maximum exposure to credit risk'
table
The following table presents our
maximum exposure before taking account
of any collateral held or other
credit enhancements (unless such
enhancements meet accounting offsetting
requirements). The table excludes
financial instruments whose carrying
amount best represents the net exposure
to credit risk and it excludes equity
securities as they are not subject
to credit risk. For the financial
assets recognised on the balance
sheet, the maximum exposure to credit
risk equals their carrying amount;
for financial guarantees and other
guarantees granted, it is the maximum
amount that we would have to pay
if the guarantees were called upon.
For loan commitments and other credit-related
commitments, it is generally the
full amount of the committed facilities.
The offset in the table relates
to amounts where there is a legally
enforceable right of offset in the
event of counterparty default and
where, as a result, there is a net
exposure for credit risk purposes.
However, as there is no intention
to settle these balances on a net
basis under normal circumstances,
they do not qualify for net presentation
for accounting purposes. No offset
has been applied to off-balance
sheet collateral. In the case of
derivatives the offset column also
includes collateral received in
cash and other financial assets.
==============================================
Other credit risk mitigants
While not disclosed as an offset in the following 'Maximum
exposure to credit risk' table, other arrangements are in place
which reduce our maximum exposure to credit risk. These include a
charge over collateral on borrowers' specific assets such as
residential properties, collateral held in the form of financial
instruments that are not held on balance sheet and short positions
in securities. In addition, for financial assets held as part of
linked insurance/investment contracts the risk is predominantly
borne by the policyholder. See Note 28 on the financial statements
for further details of collateral in respect of certain loans and
advances and derivatives.
Collateral available to mitigate credit risk is disclosed in the
Collateral section on page 64.
Maximum exposure to credit risk
--------- --------- ---------
(Audited) 2020 2019
Maximum Maximum
exposure Offset Net exposure Offset Net
The group GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------------- --------- --------- ------- --------- --------- ---------
Loans and advances to customers
held at amortised cost 101,491 (8,717) 92,774 108,391 (10,419) 97,972
----------------------------------------- --------- --------- ------- --------- --------- -------
- personal 26,291 (3) 26,288 24,660 - 24,660
-----------------------------------------
- corporate and commercial 61,819 (7,662) 54,157 66,181 (8,833) 57,348
-----------------------------------------
- non-bank financial institutions 13,381 (1,052) 12,329 17,550 (1,586) 15,964
----------------------------------------- --------- --------- ------- --------- --------- -------
Loans and advances to banks at amortised
cost 12,646 (137) 12,509 11,467 (75) 11,392
----------------------------------------- --------- --------- ------- --------- --------- -------
Other financial assets held at amortised
cost 203,084 (10,604) 192,480 181,983 (21,848) 160,135
----------------------------------------- --------- --------- ------- --------- --------- -------
- cash and balances at central banks 85,092 - 85,092 51,816 - 51,816
-----------------------------------------
- items in the course of collection
from other banks 243 - 243 707 - 707
- reverse repurchase agreements
- non trading 67,577 (10,604) 56,973 85,756 (21,848) 63,908
-----------------------------------------
- financial investments 15 - 15 13 - 13
-----------------------------------------
- prepayments, accrued income and
other assets 50,157 - 50,157 43,691 - 43,691
----------------------------------------- --------- --------- ------- --------- --------- -------
Derivatives 201,210 (200,137) 1,073 164,538 (163,779) 759
----------------------------------------- --------- --------- ------- --------- --------- -------
Total on balance sheet exposure
to credit risk 518,431 (219,595) 298,836 466,379 (196,121) 270,258
----------------------------------------- --------- --------- ------- --------- --------- -------
Total off-balance sheet 165,368 - 165,368 148,306 - 148,306
----------------------------------------- --------- --------- ------- --------- --------- -------
- financial and other guarantees(1) 18,177 - 18,177 19,456 - 19,456
-----------------------------------------
- loan and other credit-related
commitments 147,191 - 147,191 128,850 - 128,850
----------------------------------------- --------- --------- ------- --------- --------- -------
At 31 Dec 683,799 (219,595) 464,204 614,685 (196,121) 418,564
----------------------------------------- --------- --------- ------- --------- --------- -------
2020 2019
The bank GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------------- ------- --------- ------- ------- --------- ---------
Loans and advances to customers
held at amortised cost 43,241 (8,711) 34,530 49,926 (17,409) 32,517
----------------------------------------- ------- --------- ------- ------- --------- -------
- personal 3,569 - 3,569 3,629 - 3,629
-----------------------------------------
- corporate and commercial 25,520 (7,661) 17,859 29,494 (8,833) 20,661
-----------------------------------------
- non-bank financial institutions 14,152 (1,050) 13,102 16,803 (8,576) 8,227
----------------------------------------- ------- --------- ------- ------- --------- -------
Loans and advances to banks at amortised
cost 8,063 - 8,063 9,522 - 9,522
----------------------------------------- ------- --------- ------- ------- --------- -------
Other financial assets held at amortised
cost 135,948 (10,003) 125,945 114,440 (14,936) 99,504
----------------------------------------- ------- --------- ------- ------- --------- -------
- cash and balances at central banks 48,777 - 48,777 30,149 - 30,149
-----------------------------------------
- items in the course of collection
from other banks 37 - 37 44 - 44
-----------------------------------------
- reverse repurchase agreements
- non trading 50,137 (10,003) 40,134 50,736 (14,936) 35,800
-----------------------------------------
- financial investments 2,214 - 2,214 - - -
-----------------------------------------
- prepayments, accrued income and
other assets 34,783 - 34,783 33,511 - 33,511
----------------------------------------- ------- --------- ------- ------- --------- -------
Derivatives 182,066 (181,925) 141 152,496 (152,450) 46
----------------------------------------- ------- --------- ------- ------- --------- -------
Total on balance sheet exposure
to credit risk 369,318 (200,639) 168,679 326,384 (184,795) 141,589
----------------------------------------- ------- --------- ------- ------- --------- -------
Total off-balance sheet 54,899 - 54,899 55,298 - 55,298
----------------------------------------- ------- --------- ------- ------- --------- -------
- financial and other guarantees(1) 8,640 - 8,640 11,236 - 11,236
-----------------------------------------
- loan and other credit-related
commitments 46,259 - 46,259 44,062 - 44,062
----------------------------------------- ------- --------- ------- ------- --------- -------
At 31 Dec 424,217 (200,639) 223,578 381,682 (184,795) 196,887
----------------------------------------- ------- --------- ------- ------- --------- -------
1 'Financial and other guarantees' represents 'Financial
guarantees' and 'Performance and other guarantees' as disclosed in
Note 30, net of ECL.
Concentration of exposure
We have a number of businesses with a broad range of products.
We operate in a number of markets with the majority of our
exposures in UK and France.
For an analysis of:
-- financial investments, see Note 15 on the financial statements;
-- trading assets, see Note 10 on the financial statements;
-- derivatives, see page 66 and Note 14 on the financial statements; and
-- loans and advances by industry sector and by the location of
the principal operations of the lending subsidiary or by the
location of the lending branch, see page 61 for wholesale lending
and page 67 for personal lending.
Credit deterioration of financial instruments
(Audited)
A summary of our current policies and practices regarding the
identification, treatment and measurement of stage 1, stage 2 and
stage 3 (credit impaired) and POCI financial instruments can be
found in Note 1.2 on the financial statements.
Measurement uncertainty and sensitivity
analysis of ECL estimates
(Audited)
The recognition and measurement of ECL involves the use of
significant judgement and estimation. We form multiple economic
scenarios based on economic forecasts, apply these assumptions to
credit risk models to estimate future credit losses, and
probability-weight the results to determine an unbiased ECL
estimate. Management judgemental adjustments are used to address
late breaking events, data and model limitations, model
deficiencies and expert credit judgements.
Methodology
Four economic scenarios have been used to capture the
exceptional nature of the current economic environment and to
articulate management's view of the range of potential outcomes.
Scenarios produced to calculate ECL are aligned to HSBC's top and
emerging risks. Three of these scenarios are drawn from consensus
forecasts and distributional estimates. The Central scenario is
deemed the 'most likely' scenario, and usually attracts the largest
probability weighting, while the outer scenarios represent the
tails of the distribution which are less likely to occur. The
Central scenario is created using the average of a panel of
external forecasters, while consensus Upside and Downside scenarios
are created with reference to distributions for select markets that
capture forecasters' views of the entire range of outcomes.
Management has chosen to use an additional scenario to represent
its view of severe downside risks. The use of an additional
scenario is in line with HSBC's forward economic guidance
methodology and has been regularly used over the course of 2020.
Management may include additional scenarios if it feels that the
consensus scenarios do not adequately capture the top and emerging
risks. Unlike the consensus scenarios, these additional scenarios
are driven by narrative assumptions, could be country-specific and
may result in shocks that drive economic activity permanently away
from trend.
Description of economic scenarios
The economic assumptions presented in this section have been
formed by HSBC with reference to external forecasts specifically
for the purpose of calculating ECL.
The world economy experienced a deep economic shock in 2020. As
Covid-19 spread globally, governments in many of our markets sought
to limit the human impact by imposing significant restrictions on
mobility, in turn driving the deep falls in activity that were
observed in the first half of the year. Restrictions were eased as
cases declined in response to the initial measures, which supported
an initial rebound in economic activity by the third quarter of
2020. This increase in mobility unfortunately led to renewed
transmission of the virus in several countries, placing healthcare
systems under significant burden, leading governments to re-impose
restrictions on mobility and causing economic activity to decline
once more.
Economic forecasts are subject to a high degree of uncertainty
in the current environment. Limitations of forecasts and economic
models require a greater reliance on management judgement in
addressing both the error inherent in economic forecasts and in
assessing associated ECL outcomes. The scenarios used to calculate
ECL are described below.
The consensus Central scenario
The group's Central scenario features an improvement in economic
growth in 2021 as activity and employment gradually return to the
levels experienced prior to the outbreak of Covid-19.
Despite the sharp contraction in activity, government support in
advanced economies played a crucial role in averting significant
financial distress. At the same time, central banks in our key
markets implemented a variety of measures, which included lowering
their main policy interest rates, implementing emergency support
measures for funding markets, and either restarting or increasing
quantitative easing programmes in order to support economies and
the financial system. Across our key markets, governments and
central banks are expected to continue to work together to ensure
that households and firms receive an appropriate level of financial
support until restrictions on economic activity and mobility can be
materially eased. Such support intends to ensure that labour and
housing markets do not experience abrupt, negative corrections and
also intends to limit the extent of long term structural damage to
economies.
Our Central scenario incorporates expectations that governments
and public health authorities in our key markets will implement
large vaccination programmes, first by inoculating critical groups
and then increasing coverage to include the wider population. The
deployment of mass vaccination programmes marks a significant step
forward in combating the virus and will ease the burden on
healthcare systems. We expect vaccination programmes across our key
markets to contribute positively to recovery prospects and our
Central scenario assumes a steady increase in the proportion of the
population inoculated against Covid-19 over the course of 2021.
Differences across markets in the speed and scale of economic
recovery in the Central scenario reflect timing differences in the
progression of the Covid-19 outbreak, national level differences in
restrictions imposed, the coverage achieved by vaccination
programmes and the scale of support measures.
The key features of our Central scenario are:
-- Economic activity across our key markets will recover in
2021, supported by a successful rollout of vaccination programmes.
We expect vaccination programmes, coupled with effective
non-pharmacological measures to contain the virus including 'track
and trace' systems and restrictions to mobility, to lead to a
significant decline in infections across our key markets by the end
of 2021.
-- Where government support programmes are available, they will
continue to provide support to labour markets and households in
2021. We expect a gradual reversion of the unemployment rate to
pre-crisis levels over the course of the projection period as a
result of economic recovery and due to the orderly withdrawal of
government support.
-- Inflation will converge towards central bank targets in our key markets.
-- In advanced economies, government support in 2020 led to
large deficits and a significant increase in public debt. This
support is expected to continue as needed and deficits are expected
to reduce gradually over the projection period. Sovereign debt
levels will remain high and our Central scenario does not assume
fiscal austerity.
-- Policy interest rates in key markets will remain at current
levels for an extended period and will increase very modestly
towards the end of our projection period. Central banks will
continue to provide assistance through their asset purchase
programmes as needed.
-- The West Texas Intermediate oil price is forecast to average
$43 per barrel over the projection period.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Central scenario.
Central scenario 2021-2025
UK France
% %
---------------------------- ------ --------
GDP growth rate
---------------------------- ------ --------
2020: Annual average growth
rate (11.0) (9.7)
---------------------------- ------ ------
2021: Annual average growth
rate 4.9 5.9
---------------------------- ------ ------
2022: Annual average growth
rate 3.1 2.9
---------------------------- ------ ------
2023: Annual average growth
rate 2.4 2.2
---------------------------- ------ ------
5-year average 2.8 2.9
---------------------------- ------ ------
Unemployment rate
---------------------------- ------ --------
2020: Annual average rate 4.6 7.9
---------------------------- ------ ------
2021: Annual average rate 6.9 10.0
---------------------------- ------ ------
2022: Annual average rate 5.8 9.1
---------------------------- ------ ------
2023: Annual average rate 5.4 8.8
---------------------------- ------ ------
5-year average 5.6 9.0
---------------------------- ------ ------
House Price growth
---------------------------- ------ --------
2020: Annual average growth
rate 2.3 4.4
---------------------------- ------ ------
2021: Annual average growth
rate (2.1) (0.5)
---------------------------- ------ ------
2022: Annual average growth
rate 0.9 4.1
---------------------------- ------ ------
2023: Annual average growth
rate 3.0 4.1
---------------------------- ------ ------
5-year average 1.9 2.8
---------------------------- ------ ------
Short term interest rate
---------------------------- ------ --------
2020: Annual average rate 0.3 (0.4)
---------------------------- ------ ------
2021: Annual average rate 0.1 (0.5)
---------------------------- ------ ------
2022: Annual average rate 0.1 (0.5)
---------------------------- ------ ------
2023: Annual average rate 0.1 (0.5)
---------------------------- ------ ------
5-year average 0.2 (0.5)
---------------------------- ------ ------
Probability 40 40
---------------------------- ------ ------
The graphs comparing the respective Central scenarios in the
fourth quarters of 2019 and 2020 reveal the extent of economic
dislocation that occurred in 2020 and the impact this has had on
central projections made at the end of 2019.
The emergent nature of the Covid-19 outbreak at the end of 2019
meant that, consistent with other banks, the group's Central
scenario did not, on a forward-looking basis, consider the impact
of the virus. Our Central scenario at the 2019 year-end projected
moderate growth over a five-year horizon, with strong prospects for
employment and a gradual increase in policy interest rates by
central banks in the major economies of Europe. The onset of the
virus led to a fundamental reassessment of our central forecast and
the distribution of risks over the course of 2020. Our Central
scenario at the end of 2020, as described above, is based on
assumptions that are considerably different.
GDP growth: Comparison
UK
Note: Real GDP shown as year-on-year percentage change.
France
Note: Real GDP shown as year-on-year percentage change.
The consensus Upside scenario
Compared with the consensus Central scenario, the consensus
Upside scenario features a faster recovery in economic activity
during the first two years, before converging to long-run
trends.
The scenario is consistent with a number of key upside risk
themes. These include the orderly and rapid global abatement of
Covid-19 via successful containment and prompt deployment of a
vaccine; continued support from fiscal and monetary policy and
smooth relations between the UK and the EU, which enables the two
parties to swiftly reach a comprehensive agreement on trade and
services.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Upside scenario.
Consensus Upside scenario best outcome
UK France
% %
------------------------------------ ----------- --------------
GDP growth rate 19.9 (2Q21) 19.5 (2Q21)
------------------------------------ ----------- --------------
Unemployment rate 3.7 (4Q22) 7.9 (4Q22)
------------------------------------ ----------- --------------
House price growth 6.9 (4Q22) 5.7 (2Q22)
------------------------------------ ----------- --------------
Short term interest
rate 0.1 (2Q22) (0.4) (1Q21)
------------------------------------ ----------- --------------
Probability consensus
Upside 5 5
------------------------------------ ----------- ------------
Note: Extreme point in the consensus Upside is 'best outcome' in
the scenario, for example the highest GDP growth and the lowest
unemployment rate, in the first two years of the scenario.
Downside scenarios
The year 2021 is expected to be a period of economic recovery,
but the progression and management of the pandemic presents a key
risk to global growth. A new and more contagious strain of the
virus increased the transmission rate in the UK and resulted in
stringent restrictions to mobility towards the end of 2020. This
viral strain observed in the UK, together with aggressive strains
observed in other countries including South Africa and Brazil,
introduce the risk that transmission may increase significantly
within the national borders of a number of countries in 2021 and
also raise concerns around the efficacy of vaccines as the virus
mutates. Some countries may keep significant restrictions to
mobility in place for an extended period of time and at least until
critical segments of the population can be inoculated. Further
risks to international travel also arise.
A number of vaccines have been developed and approved for use at
a rapid pace and plans to inoculate significant proportions of
national populations in 2021 across many of our key markets are a
clear positive for economic recovery. While we expect vaccination
programmes to be successful, governments and healthcare authorities
face country-specific challenges that could affect the speed and
spread of vaccinations. These challenges include the logistics of
inoculating a significant proportion of national populations within
a limited timeframe and the public acceptance of vaccines. On a
global level, supply challenges could affect the pace of roll-out
and the efficacy of vaccines is yet to be determined.
Government support programmes in advanced economies in 2020 were
supported by accommodative actions taken by central banks. These
measures by governments and central banks have provided households
and firms with significant support. An inability or unwillingness
to continue with such support or the untimely withdrawal of support
present a downside risk to growth.
While Covid-19 and related risks dominate the economic outlook,
geopolitical risks also present a threat. These risks include the
Trade and Co-operation Agreement between the UK and EU which
averted a disorderly UK departure from the EU, but the risk of
future disagreements remain, which may hinder the ability to reach
a more comprehensive agreement on trade and services.
The consensus Downside scenario
In the consensus Downside scenario, economic recovery is
considerably weaker compared with the Central scenario. GDP growth
remains weak, unemployment rates stay elevated and asset and
commodity prices fall before gradually recovering towards their
long-run trends.
The scenario is consistent with the key downside risks
articulated above. Further outbreaks of Covid-19, coupled with
delays in vaccination programmes, lead to longer-lasting
restrictions on economic activity in this scenario. Other global
risks also increase and drive increased risk-aversion in asset
markets.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Downside scenario.
Consensus Downside scenario worst
outcome
UK France
% %
----------------------------- ------------ --------------
GDP growth rate (7.6) (1Q21) (3.0) (1Q21)
----------------------------- ------------ --------------
Unemployment rate 9.4 (4Q21) 11.2 (1Q21)
----------------------------- ------------ --------------
(10.8)
House price growth (4Q21) (3.3) (2Q21)
----------------------------- ------------ --------------
Short-term interest
rate 0.1 (1Q21) (0.5) (1Q21)
----------------------------- ------------ --------------
Probability consensus
Downside 40 40
----------------------------- ------------ ------------
Note: Extreme point in the consensus Downside is 'worst outcome'
in the scenario, for example lowest GDP growth and the highest
unemployment rate, in the first two years of the scenario.
Additional Downside scenario
An additional Downside scenario that features a global recession
has been created to reflect management's view of severe risks. In
this scenario, infections rise in 2021 and setbacks to vaccine
programmes imply that successful roll-out of vaccines only occurs
towards the end of 2021 and it takes until the end of 2022 for the
pandemic to come to an end. The scenario also assumes governments
and central banks are unable to significantly increase fiscal and
monetary programmes, which results in abrupt corrections in labour
and asset markets.
The following table describes key macroeconomic variables and
the probabilities assigned in the additional Downside scenario.
Additional Downside scenario worst
outcome
UK France
% %
----------------------- ---------- ------------
(10.1)
GDP growth rate (1Q21) (6.7) (1Q21)
----------------------- ---------- ------------
Unemployment rate 9.8 (3Q21) 12.3 (1Q21)
----------------------- ---------- ------------
(14.5)
House price growth (4Q21) (7.1) (3Q21)
----------------------- ---------- ------------
Short-term interest
rate 0.8 (2Q21) 0.2 (2Q21)
----------------------- ---------- ------------
Probability additional
Downside 15 15
----------------------- ---------- ------------
Note: Extreme point in the additional Downside is 'worst
outcome' in the scenario, for example lowest GDP growth and the
highest unemployment rate, in the first two years of the
scenario.
In considering economic uncertainty and assigning probabilities
to scenarios, management has considered both global and
country-specific factors. This has led management to assigning
scenario probabilities that are tailored to its view of uncertainty
in individual markets.
To inform its view, management has considered trends in the
progression of the virus in individual countries, the expected
reach and efficacy of vaccine roll-outs over the course of 2021,
the size and effectiveness of future government support schemes and
the connectivity with other countries. Management has also been
guided by the actual response to the Covid-19 outbreak and by the
economic experience across countries in 2020.
The UK and France face the greatest economic uncertainty in our
key markets. In the UK, the discovery of a more infectious strain
of the virus and subsequent national restrictions on activity
imposed before the end of 2020 have resulted in considerable
uncertainty in the economic outlook. In France, the increases in
cases and hospitalisations towards the end of 2020, the
difficulties experienced with the launch of a national vaccination
programme and the wide range of measures taken to restrict activity
similarly affect the economic outlook. Given these considerations,
the Central and the consensus Downside scenario for the UK and
France have each been assigned 40% probability. This reflects
management's view that as a result of elevated uncertainty in these
two markets, the Central scenario cannot be viewed as the single
most likely outcome. The additional Downside scenario has been
assigned 15% probability to reflect the view that the balance of
risks is weighted to the downside.
Uncertainty related to the continued impact of the pandemic and
the ability of governments to control its spread via restrictions
and vaccinations over the course of 2021 also play a prominent role
in assigning scenario weights to our other markets.
The following graphs show the historical and forecasted GDP
growth rate for the various economic scenarios in UK and
France.
.
UK
France
Critical accounting estimates and judgements
The calculation of ECL under IFRS 9 involves significant
judgements, assumptions and estimates. The level of estimation
uncertainty and judgement has increased during 2020 as a result of
the economic effects of the Covid-19 outbreak, including
significant judgements relating to:
-- the selection and weighting of economic scenarios, given
rapidly changing economic conditions in an unprecedented manner,
uncertainty as to the effect of government and central bank support
measures designed to alleviate adverse economic impacts, and a
wider distribution of economic forecasts than before the pandemic.
The key judgements are the length of time over which the economic
effects of the pandemic will occur, the speed and shape of
recovery. The main factors include the effectiveness of pandemic
containment measures, the pace of roll-out and effectiveness of
vaccines, and the emergence of new variants of the virus, plus a
range of geopolitical uncertainties, which together represent a
very high degree of estimation uncertainty, particularly in
assessing Downside scenarios;
-- estimating the economic effects of those scenarios on ECL,
where there is no observable historical trend that can be reflected
in the models that will accurately represent the effects of the
economic changes of the severity and speed brought about by the
Covid-19 outbreak. Modelled assumptions and linkages between
economic factors and credit losses may underestimate or
overestimate ECL in these conditions, and there is significant
uncertainty in the estimation of parameters such as collateral
values and loss severity; and
-- the identification of customers experiencing significant
increases in credit risk and credit impairment, particularly where
those customers have accepted payment deferrals and other reliefs
designed to address short-term liquidity issues given muted default
experience to date. The use of segmentation techniques for
indicators of significant increases in credit risk involves
significant estimation uncertainty.
How economic scenarios are reflected in ECL calculations
Models are used to reflect economic scenarios on ECL estimates.
As described above, modelled assumptions and linkages based on
historical information could not alone produce relevant information
under the unprecedented conditions experienced in 2020, and it was
necessary to place greater emphasis on judgemental adjustments to
modelled outcomes than in previous years.
We have developed globally consistent methodologies for the
application of forward economic guidance into the calculation of
ECL for wholesale and retail credit risk. These standard approaches
are described below, followed by the management judgemental
adjustments made, including those to reflect the circumstances
experienced in 2020.
For wholesale, a global methodology is used for the estimation
of the term structure of probability of default ('PD') and loss
given default ('LGD'). For PDs, we consider the correlation of
forward economic guidance to default rates for a particular
industry in a country. For LGD calculations, we consider the
correlation of forward economic guidance to collateral values and
realisation rates for a particular country and industry. PDs and
LGDs are estimated for the entire term structure of each
instrument.
For impaired loans, LGD estimates take into account independent
recovery valuations provided by external consultants where
available or internal forecasts corresponding to anticipated
economic conditions and individual company conditions. In
estimating the ECL on impaired loans that are individually
considered not to be significant, we incorporate forward economic
guidance proportionate to the probability-weighted outcome and the
Central scenario outcome for non-stage 3 populations.
For retail, the impact of economic scenarios on PD is modelled
at a portfolio level. Historical relationships between observed
default rates and macroeconomic variables are integrated into IFRS
9 ECL estimates by using economic response models. The impact of
these scenarios on PD is modelled over a period equal to the
remaining maturity of the underlying asset or assets. The impact on
LGD is modelled for mortgage portfolios by forecasting future
loan-to-value ('LTV') profiles for the remaining maturity of the
asset by using national level forecasts of the house price index
and applying the corresponding LGD expectation.
These models are based largely on historical observations and
correlations with default rates. Management judgemental adjustments
are described below.
Management judgemental adjustments
In the context of IFRS 9, management judgemental adjustments are
short-term increases or decreases to the ECL at either a customer
or portfolio level to account for late breaking events, model and
data limitations and deficiencies, and expert credit judgement
applied following management review and challenge.
The most severe projections at 31 December 2020 of macroeconomic
variables are outside the historical observations on which IFRS 9
models have been built and calibrated to operate. Moreover, the
complexities of country-specific governmental support programmes,
the impacts on customer behaviours and the unpredictable pathways
of the pandemic have never been modelled. Consequently, the group's
IFRS 9 models, in some cases, generate outputs that appear overly
sensitive when compared with other economic and credit metrics.
Governmental support programmes and customer payment reliefs have
dislocated the correlation between economic conditions and defaults
on which models are based. Management judgemental adjustments are
required to help ensure that an appropriate amount of ECL
impairment is recognised.
We have internal governance in place to regularly monitor
management judgemental adjustments and, where possible, to reduce
the reliance on these through model recalibration or redevelopment,
as appropriate. During 2020 the composition of modelled ECL and
management judgemental adjustments changed significantly,
reflecting the path of the pandemic, containment efforts and
government support measures, and this is expected to continue to be
the case until economic conditions improve. Wider-ranging model
changes will take time to develop and need observable loss data on
which models can be developed. Models will be revisited over time
once the longer-term impacts of Covid-19 are observed. Therefore,
we anticipate significant management judgemental adjustments for
the foreseeable future.
Management judgemental adjustments made in estimating the
reported ECL at 31 December 2020 are set out in the following
table. The table includes adjustments in relation to data and model
limitations resulting from the pandemic, and as a result of the
regular process of model development and implementation. It shows
the adjustments applicable to the scenario-weighted ECL numbers.
Adjustments in relation to Downside scenarios are more significant,
as results are subject to greater uncertainty.
Management judgemental adjustments
to ECL(1)
Retail Wholesale Total
GBPm GBPm GBPm
Low-risk counterparties
(banks, sovereigns
and government entities) - 8 8
-------------------------- ------ --------- -----
Corporate lending
adjustments - 56 56
-------------------------- ------ --------- -----
Retail lending PD
adjustments (10) - (10)
-------------------------- ------ --------- -----
Retail model default
suppression adjustment 3 - 3
-------------------------- ------ --------- -----
Other retail lending
adjustments 16 - 16
-------------------------- ------ --------- -----
Total 9 64 73
-------------------------- ------ --------- -----
1 Management judgemental adjustments presented in the table
reflect increases or (decreases) to ECL, respectively.
During 2020, management judgemental adjustments reflected the
volatile economic conditions associated with the Covid-19 pandemic.
The composition of modelled ECL and management judgemental
adjustments changed significantly over 2020 as certain economic
measures, such as GDP growth rate, passed the expected low point in
a number of key markets and returned towards those reflected in
modelled relationships, subject to continued uncertainty in the
recovery paths of different economies.
The adjustments relating to low-credit-risk exposures are mainly
to highly rated banks, sovereigns and US government-sponsored
entities, where modelled credit factors did not fully reflect the
underlying fundamentals of these entities or the effect of
government support and economic programmes in the Covid-19
environment.
Adjustments to corporate exposures principally reflect the
outcome of management judgements for high-risk and vulnerable
sectors in some of our key markets, supported by credit experts'
input, quantitative analysis and benchmarks. Considerations include
potential default suppression in some sectors due to government
intervention and late-breaking (idiosyncratic) developments.
The retail model default suppression adjustment was applied as
defaults remain temporarily suppressed due to government support
and customer relief programmes, which have supported stabilised
portfolio performance. Retail models are reliant on the assumption
that as macroeconomic conditions deteriorate, defaults will
crystallise. This adjustment aligns the increase in default due to
changes in economic conditions to the period of time when defaults
are expected to be observed. The retail model default suppression
adjustment will be monitored and updated prospectively to ensure
appropriate alignment with expected performance taking into
consideration the levels and timing of government support and
customer relief programmes.
Retail lending PD adjustments are primarily related to an
adjustment made in relation to the UK. The downside unemployment
forecasts were outside the historical bounds on which the model was
developed resulting in unintuitive levels of PD. This adjustment
reduced the sensitivity of PD to better align with the historical
correlation between changes in levels of unemployment and
defaults.
Economic scenarios sensitivity analysis of ECL estimates
Management considered the sensitivity of the ECL outcome against
the economic forecasts as part of the ECL governance process by
recalculating the ECL under each scenario described above for
selected portfolios, applying a 100% weighting to each scenario in
turn. The weighting is reflected in both the determination of a
significant increase in credit risk and the measurement of the
resulting ECL.
The ECL calculated for the Upside and Downside scenarios should
not be taken to represent the upper and lower limits of possible
ECL outcomes. The impact of defaults that might occur in the future
under different economic scenarios is captured by recalculating ECL
for loans in stages 1 and 2 at the balance sheet date. The
population of stage 3 loans (in default) at the balance sheet date
is unchanged in these sensitivity calculations. Stage 3 ECL would
only be sensitive to changes in forecasts of future economic
conditions if the loss-given default ('LGD') of a particular
portfolio was sensitive to these changes.
There is a particularly high degree of estimation uncertainty in
numbers representing tail risk scenarios when assigned a 100%
weighting.
For wholesale credit risk exposures, the sensitivity analysis
excludes ECL and financial instruments related to defaulted
obligors because the measurement of ECL is relatively more
sensitive to credit factors specific to the obligor than future
economic scenarios. Therefore, it is impracticable to separate the
effect of macroeconomic factors in individual assessments. For
retail credit risk exposures, the sensitivity analysis includes ECL
for loans and advances to customers related to defaulted obligors.
This is because the retail ECL for secured mortgage portfolios
including loans in all stages is sensitive to macroeconomic
variables.
Wholesale and retail sensitivity
The wholesale and retail sensitivity analysis is stated
inclusive of management judgemental adjustments, as appropriate to
each scenario. The results tables exclude portfolios held by the
insurance business and small portfolios, and as such cannot be
directly compared to personal and wholesale lending presented in
other credit risk tables. Additionally in both the wholesale and
retail analysis, the comparative period results for
additional/alternative Downside scenarios are also not directly
comparable with the current period, because they reflect different
risk profiles relative to the consensus scenarios for the period
end.
Wholesale analysis
IFRS 9 ECL sensitivity to future
economic conditions
UK France
GBPm GBPm
----------------------------- ------- -------
ECL of loans and advances
to customers at 31 December
2020(1)
----------------------------- ------- -------
Reported ECL 317 88
----------------------------- ------- -------
Consensus scenarios
----------------------------- ------- -------
Central scenario 219 82
----------------------------- ------- -------
Upside scenario 156 73
----------------------------- ------- -------
Downside scenario 339 98
----------------------------- ------- -------
Additional Downside scenario 657 178
Gross carrying amount(2) 137,825 123,444
----------------------------- ------- -------
ECL of loans and advances
to customers at 31 December
2019(1, 3)
----------------------------- ------- ---------
Reported ECL 119 42
----------------------------- ------- ---------
Consensus scenarios
----------------------------- ------- ---------
Central scenario 92 40
----------------------------- ------- ---------
Upside scenario 83 38
----------------------------- ------- ---------
Downside scenario 108 60
----------------------------- ------- -------
Alternative scenarios
----------------------------- ------- ---------
UK alternative Downside
scenario 1 ('AD1') 160
----------------------------- ------- ---------
Gross carrying amount
(2) 125,085 119,967
----------------------------- ------- -------
1 ECL sensitivity includes off-balance sheet financial
instruments that are subject to significant measurement
uncertainty.
2 Includes low credit-risk financial instruments such as debt
instruments at FVOCI, which have high carrying amounts but low ECL
under all the above scenarios.
3 ECL sensitivities for 2019 exclude portfolios utilising less
complex modelling approaches and management judgemental adjustments
only included in reported ECL.
At 31 December 2020, the higher sensitivity in UK is largely
driven by significant exposure in the country and more severe
impacts of the downside scenarios relative to the central and
probability weighted scenarios.
Retail analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
GBPm GBPm
----------------------------- ----- --------
ECL of loans and advances
to customers at 31 December
2020(2)
----------------------------- ----- --------
Reported ECL 12 114
----------------------------- ----- ------
Consensus scenarios
----------------------------- ----- --------
Central scenario 11 113
----------------------------- ----- ------
Upside scenario 8 111
----------------------------- ----- ------
Downside scenario 14 115
----------------------------- ----- ------
Additional Downside
scenario 17 118
----------------------------- ----- --------
Gross carrying amount 1,980 19,254
----------------------------- ----- ------
ECL of loans and advances
to customers at
31 December 2019(2)
Reported ECL 8 102
-------------------------- ----- ------
Consensus scenarios
-------------------------- ----- ------
Central scenario 7 102
-------------------------- ----- ------
Upside scenario 7 102
-------------------------- ----- ------
Downside scenario 9 103
-------------------------- ----- ------
Gross carrying amount 2,012 17,749
-------------------------- ----- ------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 ECL sensitivity includes only on-balance sheet financial
instruments to which IFRS 9 impairment requirements are
applied.
Reconciliation of changes in gross carrying/nominal amount and
allowances for loans and advances to banks and customers including
loan commitments and financial guarantees
The following disclosure provides a reconciliation by stage of
the group's gross carrying/nominal amount and allowances for loans
and advances to banks and customers, including loan commitments and
financial guarantees. Movements are calculated on a quarterly basis
and therefore fully capture stage movements between quarters. If
movements were calculated on a year-to-date basis they would only
reflect the opening and closing position of the financial
instrument. The transfers of financial instruments represents the
impact of stage transfers upon the gross carrying/nominal amount
and associated allowance for ECL.
The net remeasurement of ECL arising from stage transfers
represents the increase or decrease due to these transfers, for
example, moving from a 12-month (stage 1) to a lifetime (stage 2)
ECL measurement basis. Net remeasurement excludes the underlying
customer risk rating ('CRR')/probability of default ('PD')
movements of the financial instruments transferring stage. This is
captured, along with other credit quality movements in the 'changes
in risk parameters - credit quality' line item.
Changes in 'New financial assets originated or purchased',
'Assets derecognised (including final repayments)' and 'Changes to
risk parameters - further lending/repayments' represent the impact
from volume movements within the group's lending portfolio.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees(1)
(Audited)
Non credit - impaired Credit - impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross
Gross Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance Gross Allowance
carrying/nominal for nominal for nominal for nominal for carrying/nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- -----------
At 1 Jan 2020 195,249 (132) 11,103 (143) 2,235 (796) 78 (33) 208,665 (1,104)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Transfers of
financial
instruments (19,123) (62) 16,792 93 2,331 (31) - - - -
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
- Transfers from
Stage 1 to Stage
2 (31,600) 54 31,600 (54) - - - - - -
-------------------
- Transfers from
Stage 2 to Stage
1 12,821 (121) (12,821) 121 - - - - - -
-------------------
- Transfers to
Stage
3 (351) 7 (2,147) 32 2,498 (39) - - - -
-------------------
- Transfers from
Stage 3 7 (2) 160 (6) (167) 8 - - - -
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Net remeasurement
of ECL arising
from
transfer of stage - 60 - (67) - (2) - - - (9)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
New financial
assets
originated or
purchased 95,477 (62) - - - - 10 (1) 95,487 (63)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Asset derecognised
(including final
repayments) (72,860) 6 (2,553) 21 (998) 139 (16) 1 (76,427) 167
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to risk
parameters -
further
lending/repayments (21,912) 48 5,666 6 (41) 101 (11) (2) (16,298) 153
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to risk
parameters -
credit
quality - (53) - (248) - (687) - - - (988)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to model
used for ECL
calculation - 10 - (36) - - - - - (26)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Assets written off - - - - (252) 252 (23) 23 (275) 275
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Credit related
modifications
that resulted in
derecognition - - - - (18) 5 - - (18) 5
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Foreign exchange 6,058 5 498 (3) 95 (33) 2 - 6,653 (31)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Others(2) 1,826 - 220 (1) - 2 - - 2,046 1
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
At 31 Dec 2020 184,715 (180) 31,726 (378) 3,352 (1,050) 40 (12) 219,833 (1,620)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
ECL income
statement
charge for the
period 9 (324) (449) (2) (766)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Recoveries 2
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Others (17)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Total ECL income
charge for the
period (781)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
.
12 months ended
At 31 Dec 2020 31 Dec 2020
Gross carrying/nominal Allowance
amount for ECL ECL charge
GBPm GBPm GBPm
---------
As above 219,833 (1,620) (781)
---------
Other financial assets measured at
amortised cost 202,763 (12) (2)
---------
Non-trading reverse purchase agreement
commitments 42,794 - -
---------
Performance and other guarantees not
considered for IFRS 9 (17)
Summary of financial instruments to
which the impairment requirements
in IFRS 9 are applied/Summary consolidated
income statement 465,390 (1,632) (800)
---------
Debt instruments measured at FVOCI 51,713 (22) (8)
---------
Total allowance for ECL/total income
statement ECL charge for the period n/a (1,654) (808)
---------
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Includes the period on period movement in exposures relating
to other HSBC Group companies. As at 31 December 2020, these
amounted to GBP2bn and were classified as Stage 1 with no ECL.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees(1) (continued)
(Audited)
Non credit - impaired Credit - impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross
Gross Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance Gross Allowance
carrying/nominal for nominal for nominal for nominal for carrying/nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 Jan 2019 205,009 (154) 17,010 (207) 2,557 (989) 124 (78) 224,700 (1,428)
---------------- --------- --------- ---------
Transfers of
financial
instruments: 1,566 (61) (2,198) 83 632 (22) - - - -
---------------- --------- --------- ---------
- Transfers from
Stage 1 to Stage
2 (8,660) 19 8,660 (19) - - - - - -
- Transfers from
Stage 2 to Stage
1 10,426 (80) (10,426) 80 - - - - - -
- Transfers to
Stage
3 (205) 1 (487) 24 692 (25) - - - -
- Transfers from
Stage 3 5 (1) 55 (2) (60) 3 - - - -
---------------- --------- --------- ---------
Net remeasurement
of ECL arising
from
transfer of stage - 52 - (28) - (1) - - - 23
New financial
assets
originated or
purchased 113,078 (79) - - - - 21 (16) 113,099 (95)
Asset derecognised
(including final
repayments) (88,021) 5 (1,479) 17 (411) 96 (7) 3 (89,918) 121
---------------- ---------
Changes to risk
parameters -
further
lending/repayments (26,328) 60 (2,380) 21 (99) 62 23 8 (28,784) 151
---------------- ---------
Changes to risk
parameters -
credit
quality - 46 - (38) - (333) - (28) - (353)
---------------- ---------
Changes to model
used for ECL
calculation - - - - - - - - - -
---------------- ---------
Assets written off - - - - (304) 304 (78) 78 (382) 382
---------------- --------- --------- ---------
Credit related
modifications
that resulted in
derecognition - - - - (65) 46 - - (65) 46
---------
Foreign exchange (6,029) 4 (341) 4 (84) 32 (6) 3 (6,460) 43
---------------- --------- --------- ---------
Others(2) (4,026) (5) 491 5 9 9 1 (3) (3,525) 6
---------------- --------- --------- ---------
At 31 Dec 2019 195,249 (132) 11,103 (143) 2,235 (796) 78 (33) 208,665 (1,104)
---------------- --------- --------- ---------
ECL Income
statement
charge for the
period 84 (28) (176) (33) (153)
---------
Recoveries 6
---------
Others (3)
---------
Total ECL income
statement charge/
for the period (150)
---------
12 months ended
At 31 Dec 2019 31 Dec 2019
Gross carrying/nominal Allowance
amount for ECL ECL charge
GBPm GBPm GBPm
---------
As above 208,665 (1,104) (150)
Other financial assets measured at
amortised cost 181,755 (9) 3
Non-trading reverse purchase agreement
commitments 37,999 - -
Performance and other guarantees not
considered for IFRS 9 (4)
---------
Summary of financial instruments to
which the impairment requirements
in IFRS 9 are applied/Summary consolidated
income statement 428,419 (1,113) (151)
Debt instruments measured at FVOCI 46,360 (16) 27
---------
Total allowance for ECL/total income
statement ECL charge for the period n/a (1,129) (124)
---------
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Includes the period on period movement in exposures relating
to other HSBC Group companies. As at 31 December 2019, these
amounted to GBP(5)bn and were classified as Stage 1 with no
ECL.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees(1)
(Audited)
Non credit - impaired Credit - impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross
Gross Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance Gross Allowance
carrying/nominal for nominal for nominal for nominal for carrying/nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- --------- --------- --------- --------- --------- --------- ---------------- -----------
At 1 Jan 2020 94,937 (77) 4,582 (77) 753 (242) 38 (24) 100,310 (420)
------------------- ---------------- --------- --------- --------- --------- --------- --------- ---------
Transfers of
financial
instruments (12,397) (27) 11,422 47 975 (20) - - - -
------------------- ---------------- --------- --------- --------- --------- --------- --------- ---------
- Transfers from
Stage 1 to Stage
2 (17,892) 36 17,892 (36) - - - - - -
-------------------
- Transfers from
Stage 2 to Stage
1 5,676 (68) (5,676) 68 - - - - - -
-------------------
- Transfers to
Stage
3 (183) 5 (845) 17 1,028 (22) - - - -
-------------------
- Transfers from
Stage 3 2 - 51 (2) (53) 2 - - - -
------------------- ---------------- --------- --------- --------- --------- --------- ----------------
Net remeasurement
of ECL arising
from
transfer of stage - 26 - (34) - - - - - (8)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
New financial
assets
originated or
purchased 14,911 (43) - - - - - - 14,911 (43)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Asset derecognised
(including final
repayments) (7,687) 2 (666) 2 (167) 9 (15) 1 (8,535) 14
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to risk
parameters -
further
lending/repayments (5,898) 35 (1,201) 13 (25) (9) 2 (3) (7,122) 36
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to risk
parameters -
credit
quality - (54) - (129) - (232) - 1 - (414)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to model
used for ECL
calculation - 10 - (36) - - - - - (26)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Assets written off - - - - (118) 118 (23) 23 (141) 141
------------------- ---------------- --------- --------- --------- --------- --------- --------- ---------
Credit related
modifications
that resulted in
derecognition - - - - (16) 4 - - (16) 4
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Foreign exchange (60) 7 24 1 (2) 4 - - (38) 12
------------------- ---------------- --------- --------- --------- --------- --------- --------- ---------
Others(2) (5,384) - - - (5) 5 - - (5,389) 5
------------------- ---------------- --------- --------- --------- --------- --------- --------- ---------
At 31 Dec 2020 78,422 (121) 14,161 (213) 1,395 (363) 2 (2) 93,980 (699)
------------------- ---------------- --------- --------- --------- --------- --------- --------- ---------
ECL income
statement
charge for the
period (24) (184) (232) (1) (441)
------------------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Recoveries -
------------------- --------- --------- --------- --------- ---------------- ---------
Others (12)
------------------- --------- --------- --------- --------- ---------------- ---------
Total ECL income
charge for the
period (453)
------------------- --------- --------- --------- --------- ---------------- ---------
12 months ended
At 31 Dec 2020 31 Dec 2020
Gross carrying/nominal Allowance
amount for ECL ECL charge
GBPm GBPm GBPm
---------
As above 93,980 (699) (453)
---------
Other financial assets measured at
amortised cost 135,900 (1) 4
---------
Non-trading reverse purchase agreement
commitments 4,747 - -
---------
Performance and other guarantees not
considered for IFRS 9 (3)
Summary of financial instruments to
which the impairment requirements
in IFRS 9 are applied/Summary consolidated
income statement 234,627 (700) (452)
Debt instruments measured at FVOCI 28,699 (9) (5)
---------
Total allowance for ECL/total income
statement ECL charge for the period n/a (709) (457)
---------
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Includes the period on period movement in exposures relating
to other HSBC Group companies. As at 31 December 2020, these
amounted to GBP(5)bn and were classified as Stage 1 with no
ECL.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees(1) (continued)
(Audited)
Non-credit - impaired Credit - impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross
Gross Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance/ Gross Allowance/
carrying/nominal for nominal for nominal for nominal for carrying/nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 Jan 2019 124,740 (115) 11,439 (154) 1,179 (467) 108 (75) 137,466 (811)
---------------- --------- ----------
Transfers of
financial
instruments: 2,678 (32) (2,983) 50 305 (18) - - - -
---------------- --------- ----------
- Transfers from
Stage 1 to Stage
2 (3,736) 15 3,736 (15) - - - - - -
- Transfers from
Stage 2 to Stage
1 6,602 (47) (6,602) 47 - - - - - -
- Transfers to
Stage
3 (192) 1 (145) 18 337 (19) - - - -
- Transfers from
Stage 3 4 (1) 28 - (32) 1 - - - -
---------------- --------- ----------
Net remeasurement
of ECL arising
from
transfer of stage - 31 - (15) - - - - - 16
New financial
assets
originated or
purchased 18,132 (57) - - - - 18 (15) 18,150 (72)
Asset derecognised
(including final
repayments) (12,180) 1 (602) 16 (99) 14 - - (12,881) 31
----------------
Changes to risk
parameters -
further
lending/repayments (19,884) 45 (2,538) 24 (249) 35 14 (2) (22,657) 102
----------------
Changes to risk
parameters -
credit
quality - 34 - (10) - (89) - (7) - (72)
----------------
Changes to model
used for ECL
calculation - - - - - - - - - -
----------------
Assets written off - - - - (194) 194 - - (194) 194
---------------- --------- ----------
Credit related
modifications
that resulted in
derecognition - - - - (62) 45 - - (62) 45
----------------
Foreign exchange (218) 2 (21) - (7) 3 (3) 2 (249) 7
---------------- --------- ----------
Others(2) (18,331) 14 (713) 12 (120) 41 (99) 73 (19,263) 140
---------------- --------- ----------
At 31 Dec 2019 94,937 (77) 4,582 (77) 753 (242) 38 (24) 100,310 (420)
---------------- --------- ----------
ECL income
statement
charge for the
period 54 15 (40) (24) 5
Recoveries 2
Others (10)
Total ECL income
statement charge/
for the period (3)
.
12 months ended
At 31 Dec 2019 31 Dec 2019
Gross carrying/nominal Allowance
amount for ECL ECL charge
GBPm GBPm GBPm
As above 100,310 (420) (3)
Other financial assets measured at
amortised cost 114,330 - -
Non-trading reverse purchase agreement
commitments 2,906 - -
Performance and other guarantees not
considered for IFRS 9 2
---------
Summary of financial instruments to
which the impairment requirements
in IFRS 9 are applied/Summary consolidated
income statement 217,546 (420) (1)
Debt instruments measured at FVOCI 26,506 (4) 2
Total allowance for ECL/total income
statement ECL charge for the period n/a (424) 1
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Includes the period on period movement in exposures relating
to other HSBC Group companies. As at 31 December 2019, these
amounted to GBP(12)bn and were classified as Stage 1 with no
ECL.
Credit quality
Credit quality of financial instruments
(Audited)
We assess the credit quality of all financial instruments that
are subject to credit risk. The credit quality of financial
instruments is a point-in-time assessment of the probability of
default ('PD'), whereas stages 1 and 2 are determined based on
relative deterioration of credit quality since initial recognition.
Accordingly, for non-credit-impaired financial instruments, there
is no direct relationship between the credit quality assessment and
stages 1 and 2, though typically the lower credit quality bands
exhibit a higher proportion in stage 2.
The five credit quality classifications each encompass a range
of granular internal credit rating grades assigned to wholesale and
personal lending businesses and the external ratings attributed by
external agencies to debt securities, as shown in the table on page
33.
Distribution of financial instruments by credit quality at 31 December
2020
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- ------ ------------ --------- --------- ------- --------- ---------
In-scope for IFRS 9
------- ------ ------------ --------- --------- ------- --------- ---------
Loans and advances
to customers held
at
amortised cost 43,077 24,780 26,477 5,619 3,007 102,960 (1,469) 101,491
------- ------ ------------ --------- --------- ------- --------- -------
- personal 19,232 4,341 2,251 141 534 26,499 (208) 26,291
- corporate and
commercial 16,340 17,132 22,330 5,023 2,162 62,987 (1,168) 61,819
- non-bank financial
institutions 7,505 3,307 1,896 455 311 13,474 (93) 13,381
Loans and advances
to banks held at
amortised
cost 10,518 721 1,412 11 - 12,662 (16) 12,646
------- ------ ------------ --------- --------- ------- --------- -------
Cash and balances at
central banks 84,964 - 129 - - 85,093 (1) 85,092
------- ------ ------------ --------- --------- ------- --------- -------
Items in the course
of collection from
other banks 240 - 3 - - 243 - 243
------- ------ ------------ --------- --------- ------- --------- -------
Reverse repurchase
agreements -
non-trading 57,282 8,370 1,920 5 - 67,577 - 67,577
------- ------ ------------ --------- --------- ------- --------- -------
Financial
investments 2 - 13 - - 15 - 15
------- ------ ------------ --------- --------- ------- --------- -------
Prepayments, accrued
income and other
assets 47,928 566 1,285 17 39 49,835 (11) 49,824
------- ------ ------------ --------- --------- ------- --------- -------
- endorsements and
acceptances 62 2 31 2 2 99 (1) 98
- accrued income and
other 47,866 564 1,254 15 37 49,736 (10) 49,726
Debt instruments
measured
at fair value
through
other comprehensive
income(1) 46,029 2,487 405 153 - 49,074 (22) 49,052
------- ------ ------------ --------- --------- ------- --------- -------
Out-of-scope for
IFRS
9
Trading assets 34,302 5,996 9,493 410 - 50,201 - 50,201
------- ------ ------------ --------- --------- ------- --------- -------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 2,460 1,152 587 4 - 4,203 - 4,203
Derivatives 165,868 30,113 4,299 890 40 201,210 - 201,210
------- ------ ------------ --------- --------- ------- --------- -------
Total gross carrying
amount on balance
sheet 492,670 74,185 46,023 7,109 3,086 623,073 (1,519) 621,554
------- ------ ------------ --------- --------- ------- --------- -------
Percentage of total
credit quality 79% 12% 8% 1% - 100%
------- ------ ------------ --------- --------- -------
Loans and other
credit-related
commitments 97,281 26,361 17,081 2,047 266 143,036 (112) 142,924
------- ------ ------------ --------- --------- ------- --------- -------
Financial guarantees 1,340 1,153 1,020 334 122 3,969 (23) 3,946
------- ------ ------------ --------- --------- ------- --------- -------
In-scope:
Irrevocable
loan commitments
and
financial
guarantees 98,621 27,514 18,101 2,381 388 147,005 (135) 146,870
Loans and other
credit-related
commitments 2,525 986 578 177 1 4,267 - 4,267
------- ------ ------------ --------- --------- ------- --------- -------
Performance and
other
guarantees 6,728 3,808 3,145 422 179 14,282 (51) 14,231
------- ------ ------------ --------- --------- ------- --------- -------
Out-of-scope:
Revocable
loan commitments
and
non-financial
guarantees 9,253 4,794 3,723 599 180 18,549 (51) 18,498
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments by credit quality at 31 December
2019 (continued)
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------
In-scope for IFRS 9
Loans and advances
to customers held
at
amortised cost 43,805 32,224 27,863 3,423 2,113 109,428 (1,037) 108,391
------- ------ ------------ --------- ------- --------- -------
- personal 16,704 4,902 2,597 143 487 24,833 (173) 24,660
- corporate and
commercial 17,252 22,767 22,573 2,868 1,530 66,990 (809) 66,181
- non-bank financial
institutions 9,849 4,555 2,693 412 96 17,605 (55) 17,550
---------
Loans and advances
to banks held at
amortised
cost 9,709 1,163 581 18 - 11,471 (4) 11,467
------- ------ ------------ --------- ------- --------- -------
Cash and balances at
central banks 51,658 42 116 - - 51,816 - 51,816
------- ------ ------------ --------- --------- ------- --------- -------
Items in the course
of collection from
other banks 705 1 1 - - 707 - 707
------- ------ ------------ --------- ------- --------- -------
Reverse repurchase
agreements -
non-trading 72,587 10,819 2,258 92 - 85,756 - 85,756
------- ------ ------------ --------- --------- ------- --------- -------
Financial
investments 2 - 11 - - 13 - 13
------- ------ ------------ --------- --------- ------- --------- -------
Prepayments, accrued
income and other
assets 41,895 546 983 7 32 43,463 (9) 43,454
------- ------ ------------ --------- --------- ------- --------- -------
- endorsements and
acceptances 33 35 13 - 1 82 - 82
- accrued income and
other 41,862 511 970 7 31 43,381 (9) 43,372
---------
Debt instruments
measured
at fair value
through
other comprehensive
income(1) 41,431 2,105 811 191 1 44,539 (16) 44,523
------- ------ ------------ --------- ------- --------- -------
Out-of-scope for
IFRS
9
Trading assets 42,335 6,934 9,731 956 - 59,956 - 59,956
------- ------ ------------ --------- --------- ------- --------- -------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 1,265 684 3,367 7 - 5,323 - 5,323
Derivatives 130,929 24,973 8,048 588 - 164,538 - 164,538
------- ------ ------------ --------- --------- ------- --------- -------
Total gross carrying
amount on balance
sheet 436,321 79,491 53,770 5,282 2,146 577,010 (1,066) 575,944
------- ------ ------------ --------- --------- ------- --------- -------
Percentage of total
credit quality 76% 14% 9% 1% - 100%
------- ------ ------------ --------- -------
Loans and other
credit-related
commitments 74,056 27,374 18,721 1,162 134 121,447 (54) 121,393
------- ------ ------------ --------- --------- ------- --------- -------
Financial guarantees 1,822 1,103 1,001 326 66 4,318 (9) 4,309
------- ------ ------------ --------- --------- ------- --------- -------
In-scope:
Irrevocable
loan commitments
and
financial
guarantees 75,878 28,477 19,722 1,488 200 125,765 (63) 125,702
------- ------ ------------ --------- ------- --------- -------
Loans and other
credit-related
commitments 4,485 1,931 899 139 3 7,457 - 7,457
------- ------ ------------ --------- --------- ------- --------- -------
Performance and
other
guarantees 7,525 3,052 3,870 639 100 15,186 (39) 15,147
------- ------ ------------ --------- --------- ------- --------- -------
Out-of-scope:
Revocable
loan commitments
and
non-financial
guarantees 12,010 4,983 4,769 778 103 22,643 (39) 22,604
------- ------ ------------ --------- ------- --------- -------
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments by credit quality at 31 December
2020
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- ------ ------------ --------- --------- ------- --------- ---------
In-scope for IFRS 9
------- ------ ------------ --------- --------- ------- --------- ---------
Loans and advances
to customers held
at
amortised cost 20,109 12,752 8,496 1,193 1,281 43,831 (590) 43,241
------- ------ ------------ --------- --------- ------- --------- -------
- personal 1,804 816 880 25 57 3,582 (13) 3,569
- corporate and
commercial 7,870 9,401 6,785 1,038 920 26,014 (494) 25,520
- non-bank financial
institutions 10,435 2,535 831 130 304 14,235 (83) 14,152
Loans and advances
to banks held at
amortised
cost 7,256 412 410 - - 8,078 (15) 8,063
------- ------ ------------ --------- --------- ------- --------- -------
Cash and balances at
central banks 48,777 - - - - 48,777 - 48,777
------- ------ ------------ --------- --------- ------- --------- -------
Items in the course
of collection from
other banks 37 - - - - 37 - 37
------- ------ ------------ --------- --------- ------- --------- -------
Reverse repurchase
agreements -
non-trading 41,057 7,213 1,862 5 - 50,137 - 50,137
------- ------ ------------ --------- --------- ------- --------- -------
Financial
investments 2,214 - - - - 2,214 - 2,214
Prepayments, accrued
income and other
assets 34,495 94 120 4 22 34,735 (1) 34,734
- endorsements and
acceptances 44 2 22 - 2 70 (1) 69
- accrued income and
other 34,451 92 98 4 20 34,665 - 34,665
Debt instruments
measured
at fair value
through
other comprehensive
income(1) 27,762 62 3 - - 27,827 (9) 27,818
------- ------ ------------ --------- --------- ------- --------- -------
Out-of-scope for
IFRS
9
Trading assets 21,486 5,922 9,406 410 - 37,224 - 37,224
------- ------ ------------ --------- --------- ------- --------- -------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 94 788 382 4 - 1,268 - 1,268
Derivatives 150,837 26,966 3,625 638 - 182,066 - 182,066
Total gross carrying
amount on balance
sheet 354,124 54,209 24,304 2,254 1,303 436,194 (615) 435,579
------- ------ ------------ --------- --------- ------- --------- -------
Percentage of total
credit quality 81% 13% 6% - - 100%
------- ------ ------------ -------
Loans and other
credit-related
commitments 29,939 10,375 4,422 512 60 45,308 (81) 45,227
Financial guarantees 913 134 376 33 54 1,510 (13) 1,497
In-scope:
Irrevocable
loan commitments
and
financial
guarantees 30,852 10,509 4,798 545 114 46,818 (94) 46,724
Loans and other
credit-related
commitments 475 235 148 173 1 1,032 - 1,032
------- ------ ------------ --------- --------- ------- --------- -------
Performance and
other
guarantees 4,670 1,701 623 127 35 7,156 (13) 7,143
Out-of-scope:
Revocable
loan commitments
and
non-financial
guarantees 5,145 1,936 771 300 36 8,188 (13) 8,175
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments by credit quality at 31 December
2019 (continued)
(Audited)
Gross carrying/notional amount
Credit Allowance
Strong Good Satisfactory Sub-standard impaired Total for ECL Net
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
In-scope for IFRS
9
Loans and
advances to
customers held
at amortised
cost 20,751 17,246 10,353 1,253 711 50,314 (388) 49,926
------- ------ ------------ --------- ------- --------- -------
- personal 1,846 897 857 19 18 3,637 (8) 3,629
- corporate and
commercial 6,976 13,043 8,165 1,007 648 29,839 (345) 29,494
- non-bank
financial
institutions 11,929 3,306 1,331 227 45 16,838 (35) 16,803
Loans and
advances to
banks held at
amortised
cost 8,166 915 431 13 - 9,525 (3) 9,522
------- ------ ------------ --------- ------- --------- -------
Cash and balances
at
central banks 30,149 - - - - 30,149 - 30,149
Items in the
course
of collection
from other
banks 44 - - - - 44 - 44
------- ------ ------------ --------- ------- --------- -------
Reverse
repurchase
agreements
- non-trading 40,284 8,209 2,155 88 - 50,736 - 50,736
------- ------ ------------ --------- ------- --------- -------
Financial - - - - - - - -
investments
------- ------ ------------ --------- ------- --------- -------
Prepayments,
accrued
income and other
assets 33,100 182 111 - 8 33,401 - 33,401
------- ------ ------------ --------- ------- --------- -------
- endorsements
and acceptances 3 35 3 - 1 42 - 42
- accrued income
and
other 33,097 147 108 - 7 33,359 - 33,359
Debt instruments
measured
at fair value
through
other
comprehensive
income(1) 26,009 73 3 - - 26,085 (4) 26,081
------- ------ ------------ --------- ------- --------- -------
Out-of-scope for
IFRS
9
Trading assets 29,183 6,849 9,599 956 - 46,587 - 46,587
------- ------ ------------ --------- ------- --------- -------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 84 377 1,789 7 - 2,257 - 2,257
Derivatives 128,381 20,396 3,140 579 - 152,496 - 152,496
------- ------ ------------ --------- ------- --------- -------
Total gross
carrying
amount on
balance sheet 316,151 54,247 27,581 2,896 719 401,594 (395) 401,199
------- ------ ------------ --------- ------- --------- -------
Percentage of
total
credit quality 79% 14% 7% - - 100%
------- ------ ------------ --------- -------
Loans and other
credit-related
commitments 22,854 9,955 6,708 142 23 39,682 (25) 39,657
Financial
guarantees 2,964 210 410 54 57 3,695 (4) 3,691
------- ------ ------------ --------- ------- --------- -------
In-scope:
Irrevocable
loan commitments
and
financial
guarantees 25,818 10,165 7,118 196 80 43,377 (29) 43,348
Loans and other
credit-related
commitments 2,606 1,244 434 119 2 4,405 - 4,405
------- ------ ------------ --------- ------- --------- -------
Performance and
other
guarantees 5,102 1,340 774 308 30 7,554 (9) 7,545
------- ------ ------------ --------- ------- --------- -------
Out-of-scope:
Revocable
loan commitments
and
non-financial
guarantees 7,708 2,584 1,208 427 32 11,959 (9) 11,950
------- ------ ------------ --------- ------- --------- -------
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage distribution
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- -------
Loans and advances
to
customers at
amortised
cost 43,077 24,780 26,477 5,619 3,007 102,960 (1,469) 101,491
------- -------
- stage 1 42,579 21,351 17,556 1,693 - 83,179 (129) 83,050
- stage 2 498 3,429 8,921 3,926 - 16,774 (297) 16,477
- stage 3 - - - - 2,966 2,966 (1,031) 1,935
- POCI - - - - 41 41 (12) 29
------- -------
Loans and advances
to
banks at amortised
cost 10,518 721 1,412 11 - 12,662 (16) 12,646
- stage 1 10,479 674 1,372 8 - 12,533 (13) 12,520
- stage 2 39 47 40 3 - 129 (3) 126
- stage 3 - - - - - - - -
- POCI - - - - - - - -
------- -------
Other financial
assets
measured at
amortised
cost 190,416 8,936 3,350 22 39 202,763 (12) 202,751
- stage 1 190,407 8,924 3,321 7 - 202,659 (2) 202,657
- stage 2 9 12 29 15 - 65 - 65
- stage 3 - - - - 39 39 (10) 29
- POCI - - - - - - - -
------- -------
Loans and other
credit-related
commitments 97,281 26,361 17,081 2,047 266 143,036 (112) 142,924
- stage 1 95,270 21,398 11,758 530 - 128,956 (34) 128,922
- stage 2 2,011 4,963 5,323 1,517 - 13,814 (68) 13,746
- stage 3 - - - - 266 266 (10) 256
- POCI - - - - - - - -
------- -------
Financial guarantees 1,340 1,153 1,020 334 122 3,969 (23) 3,946
- stage 1 1,337 883 496 123 - 2,839 (4) 2,835
- stage 2 3 270 524 211 - 1,008 (10) 998
- stage 3 - - - - 121 121 (9) 112
- POCI - - - - 1 1 - 1
------- -------
At 31 Dec 2020 342,632 61,951 49,340 8,033 3,434 465,390 (1,632) 463,758
Debt instruments at
FVOCI(1)
- stage 1 45,958 2,424 233 - - 48,615 (12) 48,603
- stage 2 71 63 172 153 - 459 (10) 449
- stage 3 - - - - - - - -
- POCI - - - - - - - -
------- -------
At 31 Dec 2020 46,029 2,487 405 153 - 49,074 (22) 49,052
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage distribution
(continued)
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- -------
Loans and advances
to
customers at
amortised
cost 43,805 32,224 27,863 3,423 2,113 109,428 (1,037) 108,391
------ --------- --------- --------- -------
- stage 1 43,804 31,864 23,006 1,403 - 100,077 (104) 99,973
- stage 2 1 360 4,857 2,020 - 7,238 (126) 7,112
- stage 3 - - - - 2,043 2,043 (774) 1,269
- POCI - - - - 70 70 (33) 37
------- ------ --------- --------- ------- --------- -------
Loans and advances
to
banks at amortised
cost 9,709 1,163 581 18 - 11,471 (4) 11,467
------ --------- --------- --------- -------
- stage 1 9,671 1,161 561 15 - 11,408 (4) 11,404
- stage 2 38 2 20 3 - 63 - 63
- stage 3 - - - - - - - -
- POCI - - - - - - - -
------- ------ --------- --------- ------- --------- -------
Other financial
assets
measured at
amortised
cost 166,847 11,408 3,369 99 32 181,755 (9) 181,746
------ --------- --------- --------- -------
- stage 1 166,847 11,402 3,352 96 - 181,697 - 181,697
- stage 2 - 6 17 3 - 26 - 26
- stage 3 - - - - 32 32 (9) 23
- POCI - - - - - - - -
------- ------ --------- --------- ------- --------- -------
Loans and other
credit-related
commitments 74,056 27,374 18,721 1,162 134 121,447 (54) 121,393
------ --------- --------- --------- -------
- stage 1 73,949 26,824 16,868 437 - 118,078 (22) 118,056
- stage 2 107 550 1,853 725 - 3,235 (11) 3,224
- stage 3 - - - - 129 129 (21) 108
- POCI - - - - 5 5 - 5
------- ------ --------- --------- ------- --------- -------
Financial guarantees 1,822 1,103 1,001 326 66 4,318 (9) 4,309
------ --------- --------- --------- -------
- stage 1 1,821 1,087 663 114 - 3,685 (2) 3,683
- stage 2 1 16 338 212 - 567 (6) 561
- stage 3 - - - - 63 63 (1) 62
- POCI - - - - 3 3 - 3
------- ------ --------- --------- ------- --------- -------
At 31 Dec 2019 296,239 73,272 51,535 5,028 2,345 428,419 (1,113) 427,306
------ --------- --------- --------- -------
Debt instruments at
FVOCI(1)
- stage 1 41,368 2,089 568 - - 44,025 (7) 44,018
- stage 2 63 16 243 191 - 513 (9) 504
- stage 3 - - - - - - - -
- POCI - - - - 1 1 - 1
------- ------ --------- --------- ------- --------- -------
At 31 Dec 2019 41,431 2,105 811 191 1 44,539 (16) 44,523
------ --------- --------- --------- -------
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage distribution
(continued)
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- -------
Loans and advances
to
customers at
amortised
cost 20,109 12,752 8,496 1,193 1,281 43,831 (590) 43,241
------- -------
- stage 1 19,650 10,014 4,918 47 - 34,629 (79) 34,550
- stage 2 459 2,738 3,578 1,146 - 7,921 (158) 7,763
- stage 3 - - - - 1,279 1,279 (351) 928
- POCI - - - - 2 2 (2) -
------- -------
Loans and advances
to
banks at amortised
cost 7,256 412 410 - - 8,078 (15) 8,063
------- -------
- stage 1 7,254 366 375 - - 7,995 (12) 7,983
- stage 2 2 46 35 - - 83 (3) 80
- stage 3 - - - - - - - -
- POCI - - - - - - - -
------- -------
Other financial
assets
measured at
amortised
cost 126,580 7,307 1,982 9 22 135,900 (1) 135,899
------- -------
- stage 1 126,579 7,306 1,953 5 - 135,843 - 135,843
- stage 2 1 1 29 4 - 35 - 35
- stage 3 - - - - 22 22 (1) 21
- POCI - - - - - - - -
------- -------
Loans and other
credit-related
commitments 29,939 10,375 4,422 512 60 45,308 (81) 45,227
- stage 1 28,569 8,176 2,453 145 - 39,343 (28) 39,315
- stage 2 1,370 2,199 1,969 367 - 5,905 (48) 5,857
- stage 3 - - - - 60 60 (5) 55
- POCI - - - - - - - -
------- -------
Financial guarantees 913 134 376 33 54 1,510 (13) 1,497
- stage 1 910 121 170 2 - 1,203 (2) 1,201
- stage 2 3 13 206 31 - 253 (4) 249
- stage 3 - - - - 54 54 (7) 47
- POCI - - - - - - - -
------- -------
At 31 Dec 2020 184,797 30,980 15,686 1,747 1,417 234,627 (700) 233,927
Debt instruments at
FVOCI(1)
- stage 1 25,570 62 - - - 25,632 (7) 25,625
- stage 2 - - 3 - - 3 (2) 1
- stage 3 - - - - - - - -
- POCI - - - - - - - -
------- -------
At 31 Dec 2020 25,570 62 3 - - 25,635 (9) 25,626
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage distribution
(continued)
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- ------ --------- --------- ------- --------- ---------
Loans and advances
to
customers at
amortised
cost 20,751 17,246 10,353 1,253 711 50,314 (388) 49,926
------ --------- --------- --------- -------
- stage 1 20,751 17,027 8,310 85 - 46,173 (58) 46,115
- stage 2 - 219 2,043 1,168 - 3,430 (67) 3,363
- stage 3 - - - - 678 678 (239) 439
- POCI - - - - 33 33 (24) 9
------- ------ --------- --------- ------- --------- -------
Loans and advances
to
banks at amortised
cost 8,166 915 431 13 - 9,525 (3) 9,522
------ --------- --------- --------- -------
- stage 1 8,149 914 411 13 - 9,487 (3) 9,484
- stage 2 17 1 20 - - 38 - 38
- stage 3 - - - - - - - -
- POCI - - - - - - - -
------- ------ --------- --------- ------- --------- -------
Other financial
assets
measured at
amortised
cost 103,577 8,391 2,266 88 8 114,330 - 114,330
------ --------- --------- --------- -------
- stage 1 103,577 8,387 2,254 88 - 114,306 - 114,306
- stage 2 - 4 12 - - 16 - 16
- stage 3 - - - - 8 8 - 8
- POCI - - - - - - - -
------- ------ --------- --------- ------- --------- -------
Loans and other
credit-related
commitments 22,854 9,955 6,708 142 23 39,682 (25) 39,657
------ --------- --------- --------- -------
- stage 1 22,754 9,867 6,186 13 - 38,820 (15) 38,805
- stage 2 100 88 522 129 - 839 (8) 831
- stage 3 - - - - 18 18 (2) 16
- POCI - - - - 5 5 - 5
------- ------ --------- --------- ------- --------- -------
Financial guarantees 2,964 210 410 54 57 3,695 (4) 3,691
------ --------- --------- --------- -------
- stage 1 2,963 200 200 - - 3,363 (1) 3,362
- stage 2 1 10 210 54 - 275 (2) 273
- stage 3 - - - - 57 57 (1) 56
- POCI - - - - - - - -
------- ------ --------- --------- ------- --------- -------
At 31 Dec 2019 158,312 36,717 20,168 1,550 799 217,546 (420) 217,126
------ --------- --------- --------- -------
Debt instruments at
FVOCI(1)
---------
- stage 1 26,009 73 - - - 26,082 (2) 26,080
- stage 2 - - 3 - - 3 (2) 1
- stage 3 - - - - - - - -
- POCI - - - - - - - -
------- ------ --------- --------- ------- --------- -------
At 31 Dec 2019 26,009 73 3 - - 26,085 (4) 26,081
------ --------- --------- --------- -------
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
1
Credit--impaired loans
(Audited)
The group determines that a financial instrument is credit
impaired and in stage 3 by considering relevant objective evidence,
primarily whether:
-- contractual payments of either principal or interest are past due for more than 90 days;
-- there are other indications that the borrower is unlikely to
pay such as that a concession has been granted to the borrower for
economic or legal reasons relating to the borrower's financial
condition; and
-- the loan is otherwise considered to be in default. If such
unlikeliness to pay is not identified at an earlier stage, it is
deemed to occur when an exposure is 90 days past due, even where
regulatory rules permit default to be defined based on 180 days
past due. Therefore the definitions of credit-impaired and default
are aligned as far as possible so that stage 3 represents all loans
which are considered defaulted or otherwise credit-impaired.
--
Renegotiated loans and forbearance
The following table shows the gross carrying amounts of the
group's holdings of renegotiated loans and advances to customers by
industry sector and by stages. Mandatory and general offer loan
modifications that are not borrower-specific, for example
market-wide customer relief programmes, have not been classified as
renegotiated loans. For details on customer relief schemes see page
60.
A summary of our current policies and practices for renegotiated
loans and forbearance is set out in 'Credit risk management' on
page 32.
Renegotiated loans and advances to customers at amortised costs by stage
allocation
Stage Stage Stage POCI Total
1 2 3
The group GBPm GBPm GBPm GBPm GBPm
Gross carrying amount
Personal - - 122 - 122
- first lien residential mortgages - - 97 - 97
- other personal lending - - 25 - 25
Wholesale 43 348 773 40 1,204
- corporate and commercial 43 348 773 40 1,204
- non-bank financial institutions - - - - -
At 31 Dec 2020 43 348 895 40 1,326
Allowance for ECL
Personal - - (18) - (18)
- first lien residential mortgages - - (14) - (14)
- other personal lending - - (4) - (4)
Wholesale (1) (9) (211) (12) (233)
- corporate and commercial (1) (9) (211) (12) (233)
- non-bank financial institutions - - - - -
At 31 Dec 2020 (1) (9) (229) (12) (251)
The group
Gross carrying amount
Personal - - 75 - 75
- first lien residential mortgages - - 57 - 57
- other personal lending - - 18 - 18
Wholesale 285 327 346 69 1,027
- corporate and commercial 285 327 345 69 1,026
- non-bank financial institutions - - 1 - 1
At 31 Dec 2019 285 327 421 69 1,102
Allowance for ECL
Personal - - (14) - (14)
- first lien residential mortgages - - (10) - (10)
- other personal lending - - (4) - (4)
Wholesale (2) (6) (84) (32) (124)
- corporate and commercial (2) (6) (84) (32) (124)
- non-bank financial institutions - - - - -
At 31 Dec 2019 (2) (6) (98) (32) (138)
Stage Stage Stage POCI Total
1 2 3
The bank GBPm GBPm GBPm GBPm GBPm
Gross carrying amount
Personal - - 7 - 7
- first lien residential mortgages - - 6 - 6
- other personal lending - - 1 - 1
Wholesale 39 181 520 2 742
- corporate and commercial 39 181 520 2 742
At 31 Dec 2020 39 181 527 2 749
Allowance for ECL
Personal - - - - -
- first lien residential mortgages - - - - -
- other personal lending - - - - -
Wholesale (1) (4) (124) (2) (131)
- corporate and commercial (1) (4) (124) (2) (131)
At 31 Dec 2020 (1) (4) (124) (2) (131)
Renegotiated loans and advances to customers at amortised costs by stage
allocation (continued)
Stage Stage Stage POCI Total
1 2 3
The bank GBPm GBPm GBPm GBPm GBPm
Gross carrying amount
Personal - - 4 - 4
- first lien residential mortgages - - 3 - 3
- other personal lending - - 1 - 1
Wholesale 171 201 135 33 540
- corporate and commercial 171 201 135 33 540
At 31 Dec 2019 171 201 139 33 544
Allowance for ECL
Personal - - - - -
- first lien residential mortgages - - - - -
- other personal lending - - - - -
Wholesale (1) (5) (21) (24) (51)
- corporate and commercial (1) (5) (21) (24) (51)
At 31 Dec 2019 (1) (5) (21) (24) (51)
Customer relief programmes
In response to the Covid-19 outbreak, governments and regulators
around the world have introduced a number of support measures for
both personal and wholesale customers in market-wide schemes. The
following table presents the number of personal accounts/wholesale
customers and the associated drawn loan values of customers under
these schemes and HSBC-specific measures at 31 December 2020. In
relation to personal lending, the majority of relief measures,
including payment holidays, relate to existing lending, while in
wholesale lending the relief measures comprise of payment holidays,
refinancing of existing facilities and new lending under government
backed schemes.
.
At 31 December 2020, the gross carrying value of loans to
personal customers under relief was GBP197m. This comprised GBP69m
in relation to mortgages and GBP128m in relation to other personal
lending. The gross carrying value of loans to wholesale customers
under relief was GBP5,468m. We continue to monitor the
recoverability of loans granted under customer relief programmes,
including loans to a small number of customers that were
subsequently found to be ineligible for such relief. The ongoing
performance of such loans remains an area of uncertainty at
31 December 2020.
Personal lending
HSBC
Continental Other
Extant at 31 December 2020 UK Europe(1) Germany markets(2) Total
Market-wide schemes
Number of accounts granted mortgage
customer relief 00s 1 - - - 1
Drawn loan value of accounts granted
mortgage customer relief GBPm 9 - - - 9
Number of accounts granted other personal
lending customer relief 00s <1 5 - - 5
Drawn loan value of accounts granted
other personal lending customer relief GBPm - 38 - - 38
HSBC-specific measures
Number of accounts granted mortgage
customer relief 00s - <1 - 3 3
Drawn loan value of accounts granted
mortgage customer relief GBPm - 2 - 58 60
Number of accounts granted other personal
lending customer relief 00s - 3 - 2 5
Drawn loan value of accounts granted
other personal lending customer relief GBPm - 85 - 5 90
Total personal lending to major markets
under market-wide schemes and HSBC-specific
measures
Number of accounts granted mortgage
customer relief 00s 1 <1 - 3 4
Drawn loan value of accounts granted
mortgage customer relief GBPm 9 2 - 58 69
Number of accounts granted other personal
lending customer relief 00s <1 8 - 2 10
Drawn loan value of accounts granted
other personal lending customer relief GBPm - 123 - 5 128
Market-wide schemes and HSBC-specific
measures - mortgage relief as a proportion
of total mortgages % 0.5 0.1 - 2.2 0.9
Market-wide schemes and HSBC-specific
measures - other personal lending
relief as a proportion of total other
personal lending loans and advances % - 0.7 - 2.3 0.7
Wholesale lending
HSBC
Continental Other
Extant at 31 December 2020 UK Europe(1) Germany markets(2) Total
Market-wide schemes
Number of customers under market-wide
schemes 00s <1 49 <1 1 50
Drawn loan value of customers under
market-wide schemes GBPm 1 3,997 47 24 4,069
HSBC-specific measures
Number of customers under HSBC-specific
measures 00s <1 3 - <1 4
Drawn loan value of customers under
HSBC-specific measures GBPm 1 1,103 - 295 1,399
Total wholesale lending to major markets
under market-wide schemes and HSBC-specific
measures
Number of customers 00s <1 52 <1 1 54
Drawn loan value GBPm 2 5,100 47 319 5,468
Market-wide schemes and HSBC-specific
measures as a proportion of total
wholesale lending loans and advances % - 20.7 0.7 22.7 8.5
1 HSBC Continental Europe includes France and branches in Spain,
Poland and Greece.
2 Other markets include Malta, Jersey, Armenia and Middle east
leasing partnership.
The initial granting of customer relief does not automatically
trigger a migration to stage 2 or 3. However, information provided
by payment deferrals is considered in the context of other
reasonable and supportable information. This forms part of the
overall assessment for whether there has been a significant
increase in credit risk and credit impairment to identify loans for
which lifetime ECL is appropriate. An extension in payment deferral
does not automatically result in a migration to stage 2 or stage 3.
The key accounting and credit risk judgement to ascertain whether a
significant increase in credit risk has occurred is whether the
economic effects of the Covid-19 outbreak on the customer are
likely to be temporary over the lifetime of the loan, and whether
they indicate that a concession is being made in respect of
financial difficulty that would be consistent with stage 3.
Market-wide schemes
The following narrative provides further details on the major
government and regulatory schemes offered in the UK, HSBC
Continental Europe, Germany and Malta.
UK personal lending
Mortgages
Customer relief granted on UK mortgages primarily consists of
payment holidays or partial payment deferrals.
Relief is offered for up to a total of six months. No payment is
required from the borrower during this period and interest
continues to be charged as usual. There is no impact upon the
customers' arrears or default status from the utilisation of these
schemes.
Other personal lending payment holidays
Customer relief is granted for up to six months. The maximum
relief value is up to the due payment amount (i.e. monthly expected
payment) during the period.
UK wholesale lending
The primary relief granted under government schemes consists of
Coronavirus Large Business Interruption Loan Schemes ('CLBILS'). It
provides finance to medium and large-sized enterprises that have a
turnover in excess of GBP45m with loans of up to GBP200m. The
interest rate and tenor of the loan are negotiated on commercial
terms. A government guarantee of 80% is provided under the
scheme.
HSBC Continental Europe personal lending
France - Other personal lending
The Prêt garanti par l'Etat ('PGE') government scheme provides
term lending to professionals, firms, business owners, craftsmen
and micro-entrepreneurs for a maximum duration of six years
including a first year deferral. The maximum relief value is at 25%
of baseline turnover with the maximum amount of EUR2.25m granted.
Borrowers need to confirm that Covid-19 has placed them under
temporary financial hardship and that they didn't experience
financial difficulties before the crisis.
HSBC Continental Europe wholesale lending
France
The Prêt garanti par l'Etat ('PGE') government scheme provides
term lending to all registered French companies, excluding real
estate special purpose vehicles ('SPVs'), banks, and companies
subject to insolvency proceedings, for a maximum duration of one
year (with the option to amortise up to five years). The maximum
loan value is linked to turnover.
Spain
The Official Credit Institute (Instituto de Crédito Oficial)
('ICO') scheme provides funding to Spanish companies, that are not
listed as delinquent or insolvent and are not in a critical
situation as defined by Regulation, for a maximum tenor of five
years. The maximum loan size is linked to company wage bills and
turnover. HSBC Spain assesses the eligibility of facilities for
funding up to EUR50m. Facilities over EUR50m are referred to the
ICO.
Germany - wholesale lending
Kreditanstalt für Wiederaufbau (KfW) Coronavirus Aid provides
lending to corporates for a maximum tenor of five years.
Malta - wholesale lending
The Covid-19 guarantee scheme provides funding to all business
undertakings established and operating in Malta, for a maximum loan
tenor of five years. The maximum loan value is EUR10m for small and
medium enterprises and EUR25m for large enterprises. Higher amounts
must be referred to Malta Development Bank.
HSBC-specific measures
UK wholesale lending
HSBC is offering repayment holidays on small business term
loans, flexible business loans, fixed rate loans and LIBOR loans to
CMB customers. The duration is three to six months and there is no
specific cap or maximum loan value.
France business banking lending
Payment holidays offered to professionals, firms, business
owners, craftsmen and micro-entrepreneurs for a duration between
one and six months (with possible extension up to twelve months for
tourism industry).
France wholesale lending
Payment holidays offered to commercial banking customers focused
largely on business banking or lower end micro and medium
enterprises. The duration is between 3 and 18 months and there is
no specific maximum loan value.
Malta personal lending
Mortgages and term loans
Repayment holidays were offered to customers for an initial
duration between three and six months. In addition, customers have
subsequently been granted the ability to apply for a second
extension of up to a further six months.
Malta wholesale lending
Repayment holidays offered to customers for a duration between
three and six months. There is no specific cap or maximum loan
value.
Wholesale lending
This section provides further details on the countries and
industries comprising wholesale loans and advances to customers and
banks. Industry granularity is also provided by stage with
geographical data presented for loans and advances to customers and
banks, loans and other credit-related commitments and financial
guarantees.
Total wholesale lending for loans and advances to banks and customers
by stage distribution
Gross carrying amount Allowance for ECL
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------ ----- ---- ------ ----- ----- ----- ---- ---------
Corporate and commercial 46,773 14,052 2,121 41 62,987 (100) (225) (831) (12) (1,168)
- agriculture, forestry
and fishing 108 8 9 - 125 - - (5) - (5)
- mining and quarrying 1,110 215 108 - 1,433 (1) (3) (2) - (6)
- manufacture 8,598 2,900 286 13 11,797 (11) (34) (93) (3) (141)
* electricity, gas, steam and air-co
nditioning supply 2,532 299 29 - 2,860 (3) (3) (5) - (11)
* water supply, sewerage, waste mana
gement and
remediation 260 44 4 - 308 - (2) (3) - (5)
- construction 589 265 131 2 987 (7) (17) (46) (2) (72)
* wholesale and retail trade, repair
of motor vehicles
and motorcycles 7,074 1,779 283 1 9,137 (10) (22) (171) (1) (204)
- transportation
and storage 3,506 2,175 253 - 5,934 (31) (30) (81) - (142)
- accommodation and
food 964 408 23 - 1,395 (2) (8) (12) - (22)
* publishing, audiovisual and broadc
asting 2,381 424 50 - 2,855 (2) (16) (11) - (29)
- real estate 5,256 1,266 393 - 6,915 (17) (28) (194) - (239)
* professional, scientific and techn
ical activities 3,219 1,409 179 25 4,832 (3) (14) (53) (6) (76)
- administrative
and support services 6,470 2,336 259 - 9,065 (8) (19) (125) - (152)
* public administration and defence,
compulsory social
security 449 147 - - 596 (1) (1) - - (2)
- education 26 76 1 - 103 - (3) (1) - (4)
- health and care 490 127 9 - 626 (1) (10) (6) - (17)
- arts, entertainment
and recreation 127 85 4 - 216 - (3) (3) - (6)
- other services 2,443 25 100 - 2,568 (2) (2) (20) - (24)
- activities of households 2 - - - 2 - - - - -
- government 1,153 53 - - 1,206 (1) - - - (1)
- asset-backed securities 16 11 - - 27 - (10) - - (10)
------ ------ ----- ---- ------ ----- ----- ----- ---- -------
Non-bank financial
institutions 11,415 1,748 311 - 13,474 (11) (35) (47) - (93)
Loans and advances
to banks 12,533 129 - - 12,662 (13) (3) - - (16)
At 31 Dec 2020 70,721 15,929 2,432 41 89,123 (124) (263) (878) (12) (1,277)
By country
UK 32,869 7,695 1,097 2 41,663 (87) (147) (310) (2) (546)
France 25,378 4,514 739 2 30,633 (16) (55) (417) (2) (490)
Germany 5,460 1,692 334 - 7,486 (4) (20) (68) - (92)
Other countries 7,014 2,028 262 37 9,341 (17) (41) (83) (8) (149)
At 31 Dec 2020 70,721 15,929 2,432 41 89,123 (124) (263) (878) (12) (1,277)
Total wholesale lending for loans and other credit-related commitments
and financial guarantees(1) by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------- ----- ------- ----- ---- -------
Corporate and
commercial 67,077 11,141 379 1 78,598 (32) (58) (18) - (108)
------- ---- ----- -----
Financial 62,701 3,459 4 - 66,164 (6) (19) (1) - (26)
------- ---- ----- -----
At 31 Dec 2020 129,778 14,600 383 1 144,762 (38) (77) (19) - (134)
------- ---- ----- -----
By geography
Europe 129,778 14,600 383 1 144,762 (38) (77) (19) - (134)
------- ---- ----- -----
- of which: UK 34,908 6,066 109 - 41,083 (29) (51) (12) - (92)
------- ---- ----- -----
- of which: France 80,356 1,992 49 - 82,397 (3) (9) (3) - (15)
------- ---- ----- -----
- of which: Germany 11,208 5,711 193 - 17,112 (2) (9) (1) - (12)
------- ---- ----- -----
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
Total wholesale lending for loans and advances to banks and customers
by stage distribution (continued)
Gross carrying amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------
Corporate and commercial 59,654 5,806 1,460 70 66,990 (85) (100) (591) (33) (809)
------------------------------------------
* agriculture, forestry and fishing 86 7 10 - 103 - - (7) - (7)
------------------------------------------
* mining and quarrying 1,335 400 1 - 1,736 (3) (6) - - (9)
------------------------------------------
* manufacture 11,764 1,411 148 46 13,369 (18) (33) (66) (9) (126)
* electricity, gas, steam and air-con
ditioning supply 2,543 313 37 - 2,893 (4) (14) (5) - (23)
* water supply, sewerage, waste manag
ement and
remediation 422 31 - - 453 - - - - -
------------------------------------------
- construction 891 113 145 23 1,172 (1) (2) (62) (23) (88)
------------------------------------------
* wholesale and retail trade, repair
of motor vehicles
and motorcycles 8,534 903 316 1 9,754 (10) (5) (159) (1) (175)
------------------------------------------
* transportation and storage 5,112 216 264 - 5,592 (11) (8) (43) - (62)
------------------------------------------
* accommodation and food 985 286 16 - 1,287 (2) - (8) - (10)
------------------------------------------
* publishing, audiovisual and broadca
sting 2,656 164 23 - 2,843 (5) (2) (4) - (11)
- real estate 6,414 979 218 - 7,611 (13) (9) (104) - (126)
------------------------------------------
* professional, scientific and techni
cal activities 5,869 178 33 - 6,080 (4) (1) (20) - (25)
* administrative and support services 7,566 534 224 - 8,324 (7) (6) (100) - (113)
------------------------------------------
* public administration and defence,
compulsory social
security 555 138 - - 693 - (2) - - (2)
------------------------------------------
- education 111 3 2 - 116 (1) - (1) - (2)
------------------------------------------
- health and care 305 38 8 - 351 (1) (3) (5) - (9)
------------------------------------------
- arts, entertainment
and recreation 337 9 5 - 351 - - (4) - (4)
------------------------------------------
- other services 3,319 13 10 - 3,342 (4) - (3) - (7)
------------------------------------------
- activities of
households 3 - - - 3 - - - - -
------------------------------------------
- government 831 60 - - 891 - - - - -
------------------------------------------
- asset-backed securities 16 10 - - 26 (1) (9) - - (10)
------------------------------------------
Non-bank financial
institutions 17,150 359 96 - 17,605 (13) (3) (39) - (55)
------------------------------------------
Loans and advances
to banks 11,408 63 - - 11,471 (4) - - - (4)
------------------------------------------
At 31 Dec 2019(1) 88,212 6,228 1,556 70 96,066 (102) (103) (630) (33) (868)
------------------------------------------
By country
------------------------------------------
UK 43,946 3,184 550 33 47,713 (52) (49) (187) (24) (312)
------------------------------------------
France 27,082 1,223 528 3 28,836 (17) (21) (316) (1) (355)
------------------------------------------
Germany 8,406 541 220 - 9,167 (1) (4) (40) - (45)
------------------------------------------
Other countries 8,778 1,280 258 34 10,350 (32) (29) (87) (8) (156)
------------------------------------------
At 31 Dec 2019 88,212 6,228 1,556 70 96,066 (102) (103) (630) (33) (868)
------------------------------------------
.
Total wholesale lending for loans and other credit-related commitments
and financial guarantees(2) by stage distribution (continued)
Nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Corporate and commercial 68,148 3,400 186 8 71,742 (22) (15) (21) - (58)
Financial 51,723 314 2 - 52,039 (2) - (1) - (3)
At 31 Dec 2019(1) 119,871 3,714 188 8 123,781 (24) (15) (22) - (61)
By geography
Europe 119,871 3,714 188 8 123,781 (24) (15) (22) - (61)
- of which: UK 32,779 943 75 5 33,802 (14) (7) (3) - (24)
- of which: France 69,226 913 48 - 70,187 (3) (1) (12) - (16)
- of which: Germany 13,634 1,389 63 - 15,086 (1) (1) (8) - (10)
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied .
1
Collateral and other credit enhancement
(Audited)
Although collateral can be an important mitigant of credit risk,
it is the group's practice to lend on the basis of the customer's
ability to meet their obligations out of cash flow resources rather
than placing primary reliance on collateral and other credit risk
enhancements. Depending on the customer's standing and the type of
product, facilities may be provided without any collateral or other
credit enhancements. For other lending, a charge over collateral is
obtained and considered in determining the credit decision and
pricing. In the event of default, the group may utilise the
collateral as a source of repayment.
Depending on its form, collateral can have a significant
financial effect in mitigating our exposure to credit risk. Where
there is sufficient collateral, an expected credit loss is not
recognised. This is the case for reverse repurchase agreements and
for certain loans and advances to customers where the loan to value
('LTV') is very low.
Mitigants may include a charge on borrowers' specific assets,
such as real estate or financial instruments. Other credit risk
mitigants include short positions in securities and financial
assets held as part of linked insurance/investment contracts where
the risk is predominantly borne by the policyholder. Additionally,
risk may be managed by employing other types of collateral and
credit risk enhancements, such as second charges, other liens and
unsupported guarantees. Guarantees are normally taken from
corporates and export credit agencies. Corporates would normally
provide guarantees as part of a parent/subsidiary relationship and
span a number of credit grades. The export credit agencies will
normally be investment grade.
Certain credit mitigants are used strategically in portfolio
management activities. While single name concentrations arise in
portfolios managed by Global Banking and Corporate Banking, it is
only in Global Banking that their size requires the use of
portfolio level credit mitigants. Across Global Banking, risk
limits and utilisations, maturity profiles and risk quality are
monitored and managed proactively. This process is key to the
setting of risk appetite for these larger, more complex,
geographically distributed customer groups. While the principal
form of risk management continues to be at the point of exposure
origination, through the lending decision-making process, Global
Banking also utilises loan sales and credit default swap ('CDS')
hedges to manage concentrations and reduce risk. These transactions
are the responsibility of a dedicated Global Banking portfolio
management team. Hedging activity is carried out within agreed
credit parameters, and is subject to market risk limits and a
robust governance structure. Where applicable, CDSs are entered
into directly with a central clearing house counterparty. Otherwise
our exposure to CDS protection providers is diversified among
mainly banking counterparties with strong credit ratings.
CDS mitigants are held at portfolio level and are not included
in the expected loss calculations. CDS mitigants are not reported
in the following tables.
Collateral on loans and advances
The following tables include off-balance sheet loan commitments,
primarily undrawn credit lines.
The collateral measured in the following tables consists of
charges over cash and marketable financial instruments. The values
in the tables represent the expected market value on an open market
basis. No adjustment has been made to the collateral for any
expected costs of recovery. Marketable securities are measured at
their fair value.
Other types of collateral such as unsupported guarantees and
floating charges over the assets of a customer's business are not
measured in the following tables. While such mitigants have value,
often providing rights in insolvency, their assignable value is not
sufficiently certain and they are therefore assigned no value for
disclosure purposes.
The LTV ratios presented are calculated by directly associating
loans and advances with the collateral that individually and
uniquely supports each facility. When collateral assets are shared
by multiple loans and advances, whether specifically or, more
generally, by way of an all monies charge, the collateral value is
pro-rated across the loans and advances protected by the
collateral.
For credit-impaired loans, the collateral values cannot be
directly compared with impairment allowances recognised. The LTV
figures use open market values with no adjustments. Impairment
allowances are calculated on a different basis, by considering
other cash flows and adjusting collateral values for costs of
realising collateral as explained further on page 123.
Other corporate, commercial and financial (non-bank) loans and
advances
Other corporate, commercial and financial (non-bank) loans are
analysed separately in the following table, which focuses on the
countries containing the majority of our loans and advances
balances. For financing activities in other corporate and
commercial lending, collateral value is not strongly correlated to
principal repayment performance.
Collateral values are generally refreshed when an obligor's
general credit performance deteriorates and we have to assess the
likely performance of secondary sources of repayment should it
prove necessary to rely on them.
Wholesale lending - corporate, commercial and financial (non-bank) loans
and advances including loan commitments by level of
collateral for key countries by stage (excluding commercial real estate)
(Audited)
Of which:
Total UK France Germany
Gross Gross Gross Gross
carrying/nominal ECL carrying/nominal ECL carrying/nominal ECL carrying/nominal
amount coverage amount coverage amount coverage amount ECL coverage
The group GBPm % GBPm % GBPm % GBPm %
---------- ---------- ---------- ------------
Stage 1
Not
collateralised 117,820 0.1 49,970 0.1 47,647 - 13,685 -
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
Fully
collateralised 12,232 0.1 8,241 0.2 2,163 - 638 -
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
LTV ratio:
- less than
50% 1,886 0.3 1,019 0.3 543 - - -
- 51% to 75% 4,403 0.2 3,489 0.2 901 - - -
- 76% to 90% 751 0.1 267 0.4 360 - - -
- 91% to 100% 5,192 - 3,466 - 359 - 638 -
Partially
collateralised
(A): 3,476 0.1 59 - 3,167 0.1 - -
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
- collateral
value
on A 2,855 32 2,621 -
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
Total Stage 1 133,528 0.1 58,270 0.1 52,977 - 14,323 -
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
Stage 2
Not
collateralised 23,132 1.0 12,398 1.2 2,447 1.1 6,220 0.4
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
Fully
collateralised 1,838 1.2 630 1.0 649 1.1 290 0.3
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
LTV ratio:
- less than
50% 824 1.5 326 1.2 348 0.6 - -
- 51% to 75% 334 1.2 269 0.4 45 2.2 - -
- 76% to 90% 47 2.1 26 3.8 17 - - -
- 91% to 100% 633 0.8 9 - 239 1.3 290 0.3
Partially
collateralised
(B): 2,629 0.7 87 2.3 2,528 0.6 - -
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
- collateral
value
on B 2,223 14 2,200 -
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
Total Stage 2 27,599 1.0 13,115 1.2 5,624 0.9 6,510 0.4
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
Stage 3
Not
collateralised 1,803 36.3 740 29.7 529 63.9 441 15.2
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
Fully
collateralised 210 9.5 152 1.3 12 66.7 21 14.3
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
LTV ratio:
- less than
50% 25 28.0 2 - 7 57.1 - -
- 51% to 75% 27 29.6 17 5.9 3 66.7 - -
- 76% to 90% 120 0.8 118 0.8 1 100.0 - -
- 91% to 100% 38 10.5 15 - 1 100.0 21 14.3
Partially
collateralised
(C): 275 24.0 71 11.3 191 26.2 - -
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
- collateral
value
on C 182 40 136 -
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
Total Stage 3 2,288 32.4 963 23.9 732 54.1 462 15.2
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
POCI
Not
collateralised 37 27.0 2 100.0 - - - -
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
Fully - - - - - - - -
collateralised
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
LTV ratio:
- less than - - - - - - - -
50%
- 51% to 75% - - - - - - - -
- 76% to 90% - - - - - - - -
- 91% to 100% - - - - - - - -
Partially
collateralised
(D): 3 100.0 - - 3 100.0 - -
---------------- ---------- ---------------- ---------- ---------------- ------------
- collateral
value
on D 3 - 3 -
---------------- ---------- ---------------- ---------- ---------------- ---------------- ------------
Total POCI 40 32.5 2 100.0 3 100.0 - -
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
At 31 Dec 2020 163,455 0.7 72,350 0.7 59,336 0.8 21,295 0.5
---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ------------
Wholesale lending - corporate, commercial and financial (non-bank) loans
and advances including loan commitments by level of
collateral for key countries by stage (excluding commercial real estate)
(continued)
(Audited)
Of which:
Total UK France Germany
Gross ECL Gross ECL Gross ECL coverage Gross ECL coverage
carrying/nominal coverage carrying/nominal coverage carrying/nominal carrying/nominal
amount amount amount amount
The group GBPm % GBPm % GBPm % GBPm %
------------------ ------------------ ------------------ ------------ ------------------
Stage 1
Not
collateralised 131,034 0.1 59,634 0.1 43,672 - 18,298 -
Fully
collateralised 16,650 0.1 11,610 0.1 3,069 0.1 898 -
LTV ratio:
- less than
50% 3,360 0.1 2,462 0.1 794 - - -
- 51% to 75% 3,326 0.2 2,085 0.2 1,018 0.1 - -
- 76% to 90% 1,013 0.1 259 - 548 - - -
- 91% to 100% 8,951 - 6,804 - 709 0.1 898 -
Partially
collateralised
(A): 2,316 0.1 335 - 1,759 0.1 - -
------------
- collateral
value
on A 1,753 203 1,448 -
Total Stage 1 150,000 0.1 71,579 0.1 48,500 - 19,196 -
Stage 2
------------------ ------------------ ------------------ ------------ ------------------
Not
collateralised 7,050 1.2 2,910 1.7 1,456 0.6 1,534 0.3
------------
Fully
collateralised 865 1.2 623 0.8 142 2.1 76 -
LTV ratio:
- less than
50% 271 1.1 253 0.8 17 - - -
- 51% to 75% 169 0.6 124 0.8 46 - - -
- 76% to 90% 29 - 18 - 11 - - -
- 91% to 100% 396 1.5 228 0.9 68 2.9 76 -
Partially
collateralised
(B): 86 - 29 - 55 - - -
- collateral
value
on B 34 1 32 -
Total Stage 2 8,001 1.2 3,562 1.5 1,653 0.7 1,610 0.3
------------
Stage 3
------------------ ------------------ ------------------ ------------ ------------------
Not
collateralised 1,161 45.7 442 41.2 414 68.1 228 18.9
------------
Fully
collateralised 147 12.2 78 2.6 31 25.8 11 18.2
------------
LTV ratio:
- less than
50% 48 16.7 19 - 10 30.0 - -
- 51% to 75% 14 21.4 2 - 12 25.0 - -
- 76% to 90% 32 3.1 25 - 7 14.3 - -
- 91% to 100% 53 11.3 32 3.1 2 50.0 11 18.2
Partially
collateralised
(C): 141 20.6 47 8.5 76 22.4 - -
------------
- collateral
value
on C 50 30 10 -
------------
Total Stage 3 1,449 39.8 567 33.2 521 58.9 239 18.8
------------
POCI
------------------ ------------------ ------------------ ------------ ------------------
Not
collateralised 57 52.6 23 100.0 - - - -
Fully - - - - - - - -
collateralised
LTV ratio:
- less than - - - - - - - -
50%
- 51% to 75% - - - - - - - -
- 76% to 90% - - - - - - - -
- 91% to 100% - - - - - - - -
Partially
collateralised
(D): 18 16.7 15 6.7 4 50.0 - -
------------
- collateral
value
on D 16 12 4 -
Total POCI 75 44.0 38 63.2 4 50.0 - -
------------
At 31 Dec 2019 159,525 0.5 75,746 0.4 50,678 0.7 21,045 0.3
------------
.
Other credit risk exposures
In addition to collateralised lending, other credit enhancements
are employed and methods used to mitigate credit risk arising from
financial assets. These are described in more detail below:
-- Some securities issued by governments, banks and other
financial institutions benefit from additional credit enhancement
provided by government guarantees that cover the assets;
-- Debt securities issued by banks and financial institutions
include asset-backed securities ('ABSs') and similar instruments
which are supported by underlying pools of financial assets. Credit
risk associated with ABSs is reduced through the purchase of credit
default swap ('CDS') protection;
-- Trading loan and advances mainly pledged against cash
collaterals are posted to satisfy margin requirements. There is
limited credit risk on trading loans and advances since in the
event of default of the counterparty these would be set off against
the related liability. Reverse repos and stock borrowings are by
their nature collateralised.
Collateral accepted as security that the group is permitted to
sell or repledge under these arrangements is described on page 157
of the financial statements.
-- The group's maximum exposure to credit risk includes
financial guarantees and similar contracts granted; as well as loan
and other credit-related commitments. Depending on the terms of the
arrangement, we may use additional credit mitigation if a guarantee
is called upon or a loan commitment is drawn and subsequently
defaults.
For further information on these arrangements, see Note 30 on
the financial statements.
Derivatives
We participate in transactions exposing us to counterparty
credit risk. Counterparty credit risk is the risk of financial loss
if the counterparty to a transaction defaults before satisfactorily
settling it. It arises principally from over-the-counter ('OTC')
derivatives and securities financing transactions and is calculated
in both the trading and non-trading books. Transactions vary in
value by reference to market factors such as interest rates,
exchange rates or asset prices.
The counterparty risk from derivative transactions is taken into
account when reporting the fair value of derivative positions. The
adjustment to the fair value is known as the credit value
adjustment ('CVA').
The International Swaps and Derivatives Association ('ISDA')
master agreement is our preferred agreement for documenting
derivatives activity. It is common, and our preferred practice, for
the parties involved in a derivative transaction to execute a
credit support annex ('CSA') in conjunction with the ISDA master
agreement. Under a CSA, collateral is passed between the parties to
mitigate the counterparty risk inherent in outstanding positions.
The majority of our CSAs are with financial institutional
clients.
We manage the counterparty exposure on our OTC derivative
contracts by using collateral agreements with counterparties and
netting agreements. Currently, we do not actively manage our
general OTC derivative counterparty exposure in the credit markets,
although we may manage individual exposures in certain
circumstances.
We place strict policy restrictions on collateral types and as a
consequence the types of collateral received and pledged are, by
value, highly liquid and of a strong quality, being predominantly
USD, EUR and GBP cash and G7 Government Bonds.
Where a collateral type is required to be approved outside the
collateral policy, approval is required from a committee of senior
representatives from Markets, Legal and Risk.
See Note 28 on the financial statements for details regarding
legally enforceable right of offset in the event of counterparty
default and collateral received in respect of derivatives.
.
Personal lending
This section provides further details on the countries and
products comprising personal loans and advances to customers.
Further product granularity is also provided by stage, with
geographical data presented for loans and advances to customers,
loan and other credit-related commitments, and financial
guarantees.
Total personal lending for loans and advances to customers at amortised
costs by stage distribution
Gross carrying amount Allowance for ECL
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------ ----- ----- ------ ----- ----- ----- -------
By portfolio
------ ----- ----- ------ ----- ----- ----- -------
First lien residential mortgages 7,087 211 265 7,563 (9) (10) (77) (96)
------ ----- ----- ------ ----- ----- ----- -----
* of which: interest only (including offset) 3,454 151 115 3,720 (1) (3) (30) (34)
------ ----- ----- ------ ----- ----- ----- -----
* affordability including ARMs 394 2 4 400 (2) - (1) (3)
------ ----- ----- ------ ----- ----- ----- -----
Other personal lending 17,904 763 269 18,936 (9) (27) (76) (112)
------ ----- ----- ------ ----- ----- ----- -----
- other(1) 17,616 726 255 18,597 (7) (21) (75) (103)
- credit cards 288 37 14 339 (2) (6) (1) (9)
At 31 Dec 2020 24,991 974 534 26,499 (18) (37) (153) (208)
By geography
------ ----- ----- ------ ----- ----- ----- -------
UK(2) 3,455 70 57 3,582 (2) (9) (5) (16)
------ ----- ----- ------ ----- ----- ----- -----
France 19,230 689 296 20,215 (7) (20) (92) (119)
------ ----- ----- ------ ----- ----- ----- -----
Germany 124 145 - 269 - - - -
------ ----- ----- ------ ----- ----- ----- -----
Other countries 2,182 70 181 2,433 (9) (8) (56) (73)
------ ----- ----- ------ ----- ----- ----- -----
At 31 Dec 2020 24,991 974 534 26,499 (18) (37) (153) (208)
------ ----- ----- ------ ----- ----- ----- -----
Total personal lending for loans and other credit-related commitments
and financial guarantees(3) by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------- ------ ----- ---------- ------ ----- ----- -------
UK 340 15 - 355 - - - -
France 1,170 29 3 1,202 - - - -
Germany 65 170 - 235 - - - -
---------- ------ ----- ---------- ------ ----- ----- -----
Other countries 442 8 1 451 - (1) - (1)
At 31 Dec 2020 2,017 222 4 2,243 - (1) - (1)
1 Of which GBP15,105m guaranteed by Credit Logement in France as at 31 December 2020.
2 Includes primarily first lien residential mortgages in Channel Islands and Isle of Man.
3 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
Total personal lending for loans and advances to customers at amortised
costs by stage distribution (continued)
Gross carrying amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
By portfolio
First lien residential mortgages 7,080 287 237 7,604 (2) (7) (71) (80)
* of which: interest only (including offset) 3,414 228 112 3,754 - (3) (28) (31)
- affordability including
ARMs 378 3 1 382 - - - -
Other personal lending 16,193 786 250 17,229 (4) (16) (73) (93)
- other(1) 15,867 750 234 16,851 (3) (12) (72) (87)
- credit cards 326 36 16 378 (1) (4) (1) (6)
At 31 Dec 2019 23,273 1,073 487 24,833 (6) (23) (144) (173)
By geography
UK(2) 3,562 58 17 3,637 (1) (4) (3) (8)
France 17,403 911 322 18,636 (3) (15) (87) (105)
Germany 200 46 - 246 - - - -
Other countries 2,108 58 148 2,314 (2) (4) (54) (60)
At 31 Dec 2019 23,273 1,073 487 24,833 (6) (23) (144) (173)
Total personal lending for loans and other credit-related commitments
and financial guarantees(3) by stage distribution (continued)
Nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------- ----- ----- ---------- ----- ------ ----- -------
UK 308 3 - 311 - (1) - (1)
France 961 35 4 1,000 - - - -
Germany 129 46 - 175 - - - -
Other countries 494 4 - 498 - (1) - (1)
At 31 Dec 2019 1,892 88 4 1,984 - (2) - (2)
1 Of which GBP11,110m guaranteed by Credit Logement in France as at 31 December 2019.
2 Includes primarily first lien residential mortgages in Channel Islands and Isle of Man.
3 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
Collateral on loans and advances
The following table provides a quantification of the value of
fixed charges we hold over specific assets where we have a history
of enforcing, and are able to enforce, collateral in satisfying a
debt in the event of the borrower failing to meet its contractual
obligations, and where the collateral is cash or can be realised by
sale in an established market.
The collateral valuation excludes any adjustment for obtaining
and selling the collateral and in particular loans shown as
collateralised or partially collateralised may also benefit from
other forms of credit mitigants.
Personal lending: residential mortgage loans including loan commitments
by level of collateral for key countries
(Audited)
Of which:
Total UK France
Gross ECL Gross ECL Gross ECL
exposure coverage exposure coverage exposure coverage
The group GBPm % GBPm % GBPm %
----------- ----------- ----------- -----------
Stage 1
----------- ----------- -----------
Fully collateralised 7,308 0.1 2,751 - 2,364 -
--------- --------- ----------- ---------
LTV ratio:
----------- ----------- ----------- -----------
- less than 50% 3,110 0.1 1,018 - 1,147 -
- 51% to 60% 1,074 0.1 293 - 513 -
- 61% to 70% 991 0.1 316 - 378 -
- 71% to 80% 789 0.3 214 - 225 -
- 81% to 90% 505 0.4 109 - 70 -
- 91% to 100% 839 0.1 801 - 31 -
--------- --------- ---------
Partially collateralised (A): 90 - 9 - 63 -
--------- --------- ----------- ---------
LTV ratio:
-----------
- 101% to 110% 21 - - - 13 -
- 111% to 120% 14 - 2 - 10 -
- greater than 120% 55 - 7 - 40 -
--------- --------- ---------
- collateral value on A 81 5 63
--------- --------- ----------- ---------
Total 7,398 0.1 2,760 - 2,427 -
--------- --------- ----------- ---------
Stage 2
----------- ----------- -----------
Fully collateralised 202 4.0 34 2.9 116 0.9
--------- --------- ----------- ---------
LTV ratio:
----------- -----------
- less than 50% 114 1.8 17 - 64 1.6
- 51% to 60% 31 3.2 4 - 21 -
- 61% to 70% 22 4.5 - - 17 -
- 71% to 80% 15 13.3 - - 10 -
- 81% to 90% 6 16.7 - - 3 -
- 91% to 100% 14 7.1 13 7.7 1 -
--------- --------- ---------
Partially collateralised (B): 10 20.0 - - 5 -
--------- --------- --------- ---------
LTV ratio:
-----------
- 101% to 110% 4 25.0 - - 2 -
- 111% to 120% 2 50.0 - - - -
- greater than 120% 4 - - - 3 -
--------- --------- ---------
- collateral value on B 10 - 5
--------- --------- ----------- ---------
Total 212 4.7 34 2.9 121 0.8
--------- --------- --------- ---------
Stage 3
-----------
Fully collateralised 200 22.0 12 8.3 69 23.2
--------- --------- ---------
LTV ratio:
----------- ----------- -----------
- less than 50% 95 13.7 8 12.5 30 23.3
- 51% to 60% 34 23.5 3 - 10 30.0
- 61% to 70% 34 26.5 - - 16 12.5
- 71% to 80% 23 34.8 1 - 7 28.6
- 81% to 90% 9 44.4 - - 2 50.0
- 91% to 100% 5 40.0 - - 4 25.0
--------- --------- ---------
Partially collateralised (C): 65 50.8 - - 36 38.9
--------- --------- ----------- ---------
LTV ratio:
-----------
- 101% to 110% 10 60.0 - - 3 33.3
- 111% to 120% 8 62.5 - - 1 -
- greater than 120% 47 46.8 - - 32 40.6
- collateral value on C 35 - 17
--------- --------- ---------
Total 265 29.1 12 8.3 105 28.6
--------- --------- ----------- ---------
At 31 Dec 2020 7,875 1.2 2,806 0.1 2,653 1.2
--------- --------- ----------- ---------
Personal lending: residential mortgage loans including loan commitments
by level of collateral for key countries (continued)
(Audited)
Of which:
Total UK France
Gross ECL Gross ECL Gross ECL
exposure coverage exposure coverage exposure coverage
The group GBPm % GBPm % GBPm %
Stage 1
Fully collateralised 7,056 - 2,887 - 2,290 -
LTV ratio:
- less than 50% 2,868 - 971 - 984 -
- 51% to 60% 961 - 271 - 502 -
- 61% to 70% 845 - 258 - 402 -
- 71% to 80% 676 - 218 - 273 -
- 81% to 90% 400 - 127 - 89 -
- 91% to 100% 1,306 0.1 1,042 - 40 -
Partially collateralised (A): 345 - 4 - 74 -
LTV ratio:
- 101% to 110% 221 - - - 15 -
- 111% to 120% 65 - 1 - 11 -
- greater than 120% 59 - 3 - 48 -
- collateral value on A 323 2 73
Total 7,401 - 2,891 - 2,364 -
Stage 2
Fully collateralised 272 2.2 43 - 190 0.5
LTV ratio:
- less than 50% 128 1.6 15 - 91 1.1
- 51% to 60% 44 2.3 8 - 31 -
- 61% to 70% 34 2.9 1 - 28 -
- 71% to 80% 33 3.0 - - 29 -
- 81% to 90% 9 0.0 - - 8 -
- 91% to 100% 24 4.2 19 - 3 -
Partially collateralised (B): 15 6.7 - - 8 -
LTV ratio:
- 101% to 110% 7 14.3 - - 2 -
- 111% to 120% 2 - - - 1 -
- greater than 120% 6 - - - 5 -
- collateral value on B 15 - 7
Total 287 - 43 - 198 -
Stage 3
Fully collateralised 173 20.8 14 7.1 89 27.0
LTV ratio:
- less than 50% 99 22.2 11 9.1 52 30.8
- 51% to 60% 25 16.0 1 - 13 15.4
- 61% to 70% 16 18.8 1 - 8 12.5
- 71% to 80% 17 17.6 1 - 8 25.0
- 81% to 90% 7 28.6 - - 3 33.3
- 91% to 100% 9 22.2 - - 5 40.0
Partially collateralised (C): 64 57.8 - - 13 30.8
LTV ratio:
- 101% to 110% 29 51.7 - - 5 20.0
- 111% to 120% 14 71.4 - - 2 50.0
- greater than 120% 21 57.1 - - 6 33.3
- collateral value on C 51 - 10
Total 237 30.8 14 7.1 102 27.5
At 31 Dec 2019 7,925 1.0 2,948 - 2,664 1.1
Treasury risk
Overview
Treasury risk is the risk of having insufficient capital,
liquidity or funding resources to meet financial obligations and
satisfy regulatory requirements, together with the financial risks
arising from the provision of pensions and other post-employment
benefits to staff and their dependents. Treasury risk also includes
the risk to our earnings or capital due to structural foreign
exchange exposures and changes in market interest rates.
Treasury risk arises from changes to the respective resources
and risk profiles driven by customer behaviour, management
decisions or the external environment.
Approach and policy
Our objective in the management of treasury risk is to maintain
appropriate levels of capital, liquidity, funding, foreign exchange
and market risk to support our business strategy, and meet our
regulatory and stress testing-related requirements.
Our approach to treasury 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 and liquidity base to support the risks inherent
in our business and invest in accordance with our strategy, meeting
both consolidated and local regulatory requirements at all
times.
Our policy is underpinned by our risk management framework, our
internal capital adequacy assessment process ('ICAAP') and our
internal liquidity adequacy assessment process ('ILAAP'). The risk
framework incorporates a number of measures aligned to our
assessment of risks for both internal and regulatory purposes.
These risks include credit, market, operational, pensions,
structural foreign exchange and interest rate risk in the banking
book.
The PRA is the supervisor of the bank and lead supervisor of the
group. The PRA sets capital requirements and receives information
on the capital and liquidity adequacy of the bank and the group.
Individual banking subsidiaries are directly regulated by their
local banking supervisors, who set and monitor their capital
adequacy requirements.
Treasury risk management
Governance and structure
Capital and liquidity are the responsibility of HSBC Bank Plc
Executive Committee and directly addressed by HSBC Bank Plc Board.
Treasury risks are managed through the Asset and Liability
Management Committee ('ALCO') and overseen by the Risk Management
Meeting ('RMM').
Regarding Interest rate risk in the banking book ('IRRBB'), the
Asset, Liability and Capital Management ('ALCM') function is
responsible for managing non-traded interest rate risk, maintaining
the transfer pricing framework and informing ALCO of the overall
banking book interest rate risk exposure. Banking book interest
rate positions may be transferred to be managed by the Markets
Treasury business, previously known as Balance Sheet Management,
within the market risk limits approved by the RMM. Effective
governance of Markets Treasury is supported by the dual reporting
lines it has to the Chief Executive Officer of GBM and to the Group
Treasurer, with Risk acting as a second line of defence.
Pension risk is managed by a network of regional pension risk
forums. The governance and oversight of the pension plans sponsored
by HSBC within its European operations are the responsibility of
the Europe Pension Oversight Forum ('POF'), which is chaired by the
Bank's Head of Risk Strategy.
Capital, liquidity and structural foreign exchange exposure risk
management processes
We manage group capital and to ensure that we exceed current and
expected future requirements, and that we respect the payment
priority of our capital providers. Throughout 2020, we complied
with the PRA regulatory capital adequacy requirements, including
those relating to stress testing.
There is a continued focus on the quality of regulatory
reporting by the PRA and other regulators globally. We continue to
strengthen our processes and controls over regulatory reporting,
including commissioning independent external reviews of various
aspects of regulatory reporting. As we strengthen our processes and
controls, there may be impacts on some of our regulatory ratios
such as the CET1 and liquidity coverage ratio ('LCR'). We continue
to keep the PRA and other relevant regulators informed of adverse
findings from external reviews and our progress in strengthening
the control environment.
All the capital instruments included in our capital base have
either been issued as fully compliant CRD IV securities (on an end
point basis) or in accordance with the rules and guidance in the
PRA's previous General Prudential Sourcebook, which are included in
the capital base by virtue of the application of CRR II.
HSBC requires all operating entities to comply with HSBC Group's
Liquidity and Funding Risk Management Framework ('LFRF') on a
stand-alone basis and to meet regulatory and internal minimum
requirements at all times. The LCR and net stable funding ratio
('NSFR') are key components of the LFRF.
The Group's operating entities are predominantly defined on a
country basis to reflect the local management of liquidity and
funding. However, where appropriate, this definition may be
expanded to cover a consolidated group of legal entities or
narrowed to a principal office (branch) of a wider legal entity to
reflect the management under internal or regulatory
definitions.
The RMM reviews and agrees annually the list of entities it
directly oversees and the composition of these entities.
Details of HSBC's ('LFRF') can be found in the group's Pillar 3
document.
Structural foreign exchange exposures represent the group's net
investments in subsidiaries, branches and associates, the
functional currencies of which are currencies other than sterling.
An entity's functional currency is that of the primary economic
environment in which the entity operates.
Unrealised gains or losses due to revaluations of structured
foreign exchange exposures are recognised in other comprehensive
income, whereas other unrealised gains or losses arising from
revaluations of foreign exchange positions are reflected in the
income statement.
The group's structural foreign exchange exposures are managed
with the primary objective of ensuring, where practical, that the
group's consolidated capital ratios and the capital ratios of
individual banking subsidiaries are largely protected from the
effect of changes in exchange rates. We hedge structural foreign
exchange exposures only in limited circumstances.
Measurement of interest rate risk in the banking book
The following measures are used by ALCM to monitor and control
interest rate risk in the banking book including:
-- non-traded VaR;
-- Net Interest Income ('NII') sensitivity; and
-- Economic Value of Equity ('EVE').
Non-traded VaR
Non-traded VaR uses the same models as those used in the trading
book as discussed under the Market risk section, but for banking
book balances.
Net interest income sensitivity
A principal part of our management of non-traded interest rate
risk is to monitor the sensitivity of expected NII under varying
interest rate scenarios (simulation modelling), where all other
economic variables are held constant. This monitoring is undertaken
by ALCO.
The group applies a combination of scenarios and assumptions
relevant to the businesses as well as applying standard scenarios
that are required throughout HSBC group.
NII sensitivity reflects the group's sensitivity of earnings to
changes in market interest rates. Entities forecast both one year
and five year NII sensitivities across a range of interest rate
scenarios based on a static balance sheet assumption. Sites include
business line rate pass-on assumptions, re-investment of maturing
assets and liabilities at market rates per shock scenario and
prepayment risk. NII is modelled based on no management actions
i.e. the risk profile at the month end is assumed to remain
constant throughout the forecast horizon.
Economic value of equity
EVE represents the present value of the future banking book cash
flows that could be distributed to equity providers under a managed
run-off scenario, i.e. the current book value of equity plus the
present value of future net interest income in this scenario. EVE
sensitivity is the extent to which the EVE value will change due to
a pre-specified movement in interest rates, where all other
economic variables are held constant.
Pension risk management processes
HSBC provides future pension benefits on a defined contribution
basis from many of its European operations. However there remain
future defined benefit pensions provided in the region.
Pension plans are run by local fiduciaries in line with local
legislative requirements. The largest pension plan is the HSBC
Trinkaus & Burkhardt Pension Scheme which is regulated by the
German Company Benefits Act (Gesetz zur Verbesserung der
betrieblichen Altersversorgung - Betriebsrentengesetz
-BetrAVG).
In defined contribution pension plans, the contributions that
HSBC is required to make are known, while the ultimate pension
benefit will vary, typically with investment returns achieved by
investment choices made by the employee. While the market risk to
HSBC of defined contribution plans is low, it is still exposed to
operational and reputational risk.
In defined benefit pension plans, the level of pension benefit
is known. Therefore, the level of contributions required by HSBC
will vary due to a number of risks, including:
-- investments delivering a return below that required to provide the projected plan benefits;
-- the prevailing economic environment leading to corporate
failures, thus triggering write-downs in asset values (both equity
and debt);
-- a change in either interest rates or inflation, causing an
increase in the value of the plan liabilities; and
-- plan members living longer than expected (known as
longevity risk).
Pension risk is assessed using an economic capital model that
takes into account potential variations in these factors. The
impact of these variations on both pension assets and pension
liabilities is assessed using a one-in-200-year stress test.
Scenario analysis and other stress tests are also used to support
pension risk management.
To fund the benefits associated with defined benefit plans,
sponsoring group companies, and in some instances employees, make
regular contributions in accordance with advice from actuaries and
in consultation with the plan's trustees where relevant. These
contributions are normally set to ensure that there are sufficient
funds to meet the cost of the accruing benefits for the future
service of active members. However, higher contributions are
required when plan assets are considered insufficient to cover the
existing pension liabilities. Contribution rates are typically
revised annually or once every three years, depending on the
plan.
The defined benefit plans invest contributions in a range of
investments designed to limit the risk of assets failing to meet a
plan's liabilities. Any changes in expected returns from the
investments may also change future contribution requirements. In
pursuit of these long-term objectives, an overall target allocation
of the defined benefit plan assets between asset classes is
established. In addition, each permitted asset class has its own
benchmarks, such as stock market or property valuation indices or
liability characteristics. The benchmarks are reviewed at least
once every three to five years and more frequently if required by
local legislation or circumstances. The process generally involves
an extensive asset and liability review.
.
Capital risk in 2020
Capital overview
Key capital numbers
At
31 Dec 31 Dec
2020 2019
Available capital (GBPm)
-------
Common equity tier
1 capital 18,042 17,791
------- -------
Tier 1 capital 22,165 22,130
------- -------
Total regulatory capital 33,438 34,929
------- -------
Risk-weighted assets
(GBPm)
-------
Credit risk 77,214 79,208
------- -------
Counterparty credit
risk 19,344 21,286
------- -------
Market risk 14,589 13,107
------- -------
Operational risk 11,245 11,812
------- -------
Total risk-weighted
assets 122,392 125,413
------- -------
Capital ratios (%)
-------
Common equity tier
1 14.7 14.2
-------
Total tier 1 18.1 17.6
-------
Total capital 27.3 27.9
-------
Leverage ratio (transitional)
-------
Tier 1 capital (GBPm) 22,165 22,130
------- -------
Total leverage ratio
exposure measure (GBPm) 565,049 571,302
------- -------
Leverage ratio (%) 3.9 3.9
-------
Leverage ratio (fully
phased-in)
-------
Tier 1 capital (GBPm) 21,732 21,480
------- -------
Total leverage ratio
exposure measure (GBPm) 565,049 571,302
------- -------
Leverage ratio (%) 3.8 3.8
-------
Capital figures and ratios in the table above are calculated in
accordance with the Capital Requirements Regulation and Directive,
as implemented ('CRR'). These include the regulatory transitional
arrangements for IFRS 9 'Financial Instruments', including
paragraph four of article 473a. Leverage ratios are calculated
using the end point definition of capital and the IFRS 9 regulatory
transitional arrangements.
Following the end of the transition period after the UK's
withdrawal from the EU, any reference to EU regulations and
directives (including technical standards) should be read as a
reference to the UK's version of such regulation and/or directive,
as onshored into UK law under the European Union (Withdrawal) Act
2018.
Own funds
Own funds disclosure
(Audited)
At
31 Dec 31 Dec
2020 2019
Ref(*) GBPm GBPm
Common equity tier 1 ('CET1') capital: instruments
and reserves
Capital instruments and the related share premium
1 accounts 797 797
------- -------
* ordinary shares 797 797
2 Retained earnings 17,407 19,272
------- -------
3 Accumulated other comprehensive income (and other 2,888 2,048
reserves)
------- -------
5 Minority interests (amount allowed in consolidated 66 350
CET1)
------- -------
5a Independently reviewed interim net profits net of (1,755) (3,019)
any foreseeable charge or dividend
------- -------
6 Common equity tier 1 capital before regulatory adjustments 19,403 19,448
28 Total regulatory adjustments to common equity tier (1,361) (1,657)
1
------- -------
29 Common equity tier 1 capital 18,042 17,791
36 Additional tier 1 capital before regulatory adjustments 4,167 4,384
43 Total regulatory adjustments to additional tier 1 (44) (45)
capital
------- -------
44 Additional tier 1 capital 4,123 4,339
------- -------
45 Tier 1 capital 22,165 22,130
51 Tier 2 capital before regulatory adjustments 11,724 13,229
57 Total regulatory adjustments to tier 2 capital (451) (430)
------- -------
58 Tier 2 capital 11,273 12,799
------- -------
59 Total capital 33,438 34,929
------- -------
* The references identify the lines prescribed in the European
Banking Authority template, which are applicable and where there is
a value.
At 31 December 2020, our CET1 capital ratio increased to 14.7%
from 14.2% at 31 December 2019. This was due to a decrease in RWAs
and an increase in capital during the year. CET1 capital increased
by GBP0.2bn during the year, mainly as a result of a capital
injection of GBP1bn by HSBC UK Holdings Limited, foreign exchange
differences of GBP0.4bn, offset by loss for the period on a
regulatory basis (adjusted for intangible impairments) of GBP1.0bn
net of dividends.
We have applied the revised regulatory treatment of software
assets, which became a UK requirement in December 2020. The impact
of the change on our CET1 ratio was immaterial.
Risk-weighted assets
Risk-weighted assets ('RWAs') decreased by GBP3.0bn during the
year, including an increase of GBP0.4bn due to foreign currency
translation differences. The GBP3.4bn decrease (excluding foreign
currency translation differences) comprised the movements described
by the following comments.
Asset size
The GBP0.9bn decrease in RWAs was driven mainly by a GBP2.8bn
fall in CMB and a GBP0.8bn fall in GBM. This is primarily due to
management initiatives under our transformation programme, partly
offset by mark-to-market movements in counterparty credit risk
RWAs. The GBP0.3bn fall in WPB was mainly driven by operational
risk reductions. Market risk RWAs increased by GBP3.2bn due to
market volatility.
Asset quality
The GBP2.2bn increase in asset quality was mainly driven by a
GBP1.3bn rise in CMB and GBP1.0bn rise in GBM. This was mainly due
to changes in portfolio mix and credit migration.
Model updates
Model updates led to a GBP0.1bn decrease in RWAs. This was
mainly due to a GBP1.2bn fall in market risk RWAs as a result of
changes to the calculation of risks not in VaR and the
implementation of a new options portfolio model and a GBP0.1bn fall
in GBM due to global corporate model updates. This was offset by a
GBP1.3bn increase in WPB mainly related to our retail model in
France.
Methodology and policy
The GBP4.5bn fall in RWAs included reductions from initiatives
under our transformation programme and risk parameter refinements,
offset by changes in approach to credit risk exposures.
GBM and CMB reduced RWAs by GBP7.4bn of which GBP4.8bn were
under the transformation programme. These reductions stem from a
variety of actions, including risk parameter refinements and
improved collateral linkage. Changes under the CRR 'Quick Fix'
relief package in relation to the implementation of the revised
small and medium-sized enterprise supporting factor led to a
GBP0.3bn fall in RWAs within CMB.
At the start of 2020, we implemented two changes that led to a
GBP3.8bn increase in our wholesale credit risk exposures.
Application of the new securitisation framework to the pre-existing
book caused RWAs to rise by GBP2.8bn, mainly in Corporate Centre
and GBM. We also transferred several UK corporate portfolios from
the Advanced to the Foundation IRB approach which resulted in a
GBP1.0bn rise in RWAs in GBM.
WPB RWAs increased by GBP1.5bn mainly as a result of changes to
calculations on French retail exposures.
RWA movement by global business by key driver
Credit risk, counterparty
credit risk and operational
risk
Corporate Market Total
WPB CMB GBM Centre risk RWAs
GBPm GBPm GBPm GBPm GBPm GBPm
------- -------- -------- --------- ------- ---------
RWAs at 1 Jan 2020 9,119 28,768 68,569 5,850 13,107 125,413
-------------------------- ------- -------- -------- --------- ------- -------
Asset size (260) (2,780) (831) (241) 3,166 (946)
-------------------------- ------- -------- -------- --------- ------- -------
Asset quality 5 1,321 989 (160) - 2,155
-------------------------- ------- -------- -------- --------- ------- -------
Model updates 1,346 (57) (259) 24 (1,179) (125)
-------------------------- ------- -------- -------- --------- ------- -------
Methodology and policy 1,522 (1,485) (6,002) 1,296 204 (4,465)
Foreign exchange movement 313 1,072 (26) (290) (709) 360
-------------------------- ------- -------- -------- --------- ------- -------
Total RWA movement 2,926 (1,929) (6,129) 629 1,482 (3,021)
-------------------------- ------- -------- -------- --------- ------- -------
RWAs at 31 Dec 2020 12,045 26,839 62,440 6,479 14,589 122,392
-------------------------- ------- -------- -------- --------- ------- -------
.
Leverage ratio
Our leverage ratio calculated in accordance with the Capital
Requirements Regulation was 3.8% at 31 December 2020, unchanged
from 31 December 2019. The impact to our leverage ratio arising
from the change in treatment of software assets was immaterial.
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 of wide-ranging information on
their risks, capital and management. Our Pillar 3 Disclosures at 31
December 2020 is published on our website,
www.hsbc.com/investors
Structural foreign exchange exposures
The group's structural foreign currency exposure is represented
by the net asset value of its foreign currency equity and
subordinated debt investments in subsidiary undertakings, branches,
joint ventures and associates.
For our policies and procedures for managing structural foreign
exchange exposures, see page 71 of the 'Risk management'
section.
Net structural foreign exchange exposures
2020 2019
GBPm GBPm
Currency of structural
exposure
Euro 8,511 8,446
US Dollars 1,081 1,005
South African rand 277 324
Israeli new shekel 159 139
Russian rouble 119 155
Others, each less than
GBP150m 327 301
At 31 Dec 10,474 10,370
Liquidity and funding risk in 2020
Liquidity coverage ratio
The LCR aims to ensure that a bank has sufficient unencumbered
high-quality liquid assets ('HQLA') to meet its liquidity needs in
a 30-calendar-day liquidity stress scenario. HQLA consist of cash
or assets that can be converted into cash at little or no loss of
value in markets.
At 31 December 2020, all the group's principal operating
entities were within the LCR risk tolerance level established by
the Board and applicable under the LFRF.
The following table displays the individual LCR levels for HSBC
Bank plc's principal operating entities on the European Commission
Delegated Regulation basis.
Operating entities' LCRs
At
31 Dec 31 Dec
2020 2019
% %
HSBC Bank plc 136 142
------
HSBC Continental
Europe 143 152
------
HSBC Trinkaus &
Burkhardt AG 144 125
------
While HQLA increased due to deposit growth, the LCR for HSBC
Bank plc and HSBC Continental Europe declined, reflecting a
reassessment of potential LCR outflows, particularly with respect
to committed facilities.
Net stable funding ratio
The Net Stable Funding Ratio ('NSFR') requires institutions to
maintain sufficient stable funding relative to required stable
funding, and reflects a bank's long-term funding profile (funding
with a term of more than a year).
At 31 December 2020, all the group's principal operating
entities were within the NSFR risk tolerance level established by
the Board and applicable under the LFRF.
Operating entities' NSFRs
At
31 Dec 31 Dec
2020 2019
% %
HSBC Bank plc(1) 133 122
HSBC Continental
Europe(2) 130 117
HSBC Trinkaus
& Burkhardt AG 138 121
1 HSBC Bank plc uses an adjusted NSFR as a basis for
establishing stable funding. The adjusted NSFR requires HSBC Bank
plc to maintain sufficient stable funding and reflects its long
term funding profile. The adjusted NSFR takes into account the
anticipated regulatory changes approved under the Capital
Requirements Regulation and Directive, as implemented ('CRR II'),
and other internal adjustments commensurate with the risk profile
of the balance sheet.
2 Post Brexit, the CRR II implementation is under review by PRA
in terms of applicability for UK banks.
Depositor concentration and term funding maturity
concentration
The LCR and NSFR metrics assume a stressed outflow based on a
portfolio of depositors within each depositor segment. To ensure
the validity of these assumptions in the sense that the deposit
base is sufficient diversified, the depositor concentration is
monitored on an ongoing basis.
In addition to this, operating entities are exposed to term
re-financing concentration risk if the current maturity profile
results in future maturities being overly concentrated in any
defined period.
Liquid assets of the group's principal operating entities
The table below shows the unweighted liquidity value of assets
categorised as liquid, which is used for the purposes of
calculating the LCR metric. This reflects the stock of unencumbered
liquid assets at the reporting date, using the regulatory
definition of liquid assets.
Operating entities' liquid
assets
At Estimated At Estimated
liquidity liquidity
value value
31 Dec 31 Dec
2020 2019
GBPm GBPm
HSBC Bank plc
Level 1 88,942 68,467
Level 2a 8,260 5,883
Level 2b 3,888 3,289
HSBC Continental
Europe
Level 1 34,981 32,410
Level 2a 267 747
Level 2b - -
HSBC Trinkaus & Burkhardt
AG
Level 1 11,044 7,573
Level 2a 8 27
Level 2b 315 294
Sources of funding
Our primary sources of funding are customer current accounts,
repo and wholesale securities.
The following 'Funding sources and uses' table provides a
consolidated view of how our balance sheet is funded, and should be
read in light of the LFRF, which requires operating entities to
manage liquidity and funding risk on a stand-alone basis.
The table analyses our consolidated balance sheet according to
the assets that primarily arise from operating activities and the
sources of funding primarily supporting these activities. Assets
and liabilities that do not arise from operating activities are
presented at other balance sheet lines. In 2020, the level of
customer accounts continued to exceed the level of loans and
advances to customers. The positive funding gap was predominantly
deployed in liquid assets, cash and balances with central banks and
financial investments, as required by the LFRF.
Funding sources and uses for the group
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
------- ------- ---------
Sources Uses
-------
Loans and advances to
Customer accounts 195,184 177,236 customers 101,491 108,391
------- ------- ------- -------
Loans and advances to
Deposits by banks 34,305 23,991 banks 12,646 11,467
------- ------- ------- -------
Repurchase agreements Reverse repurchase agreements
- non-trading 34,903 49,385 - non-trading 67,577 85,756
------- ------- ------- -------
Cash collateral, margin
Debt securities in issue 17,371 25,039 and settlement accounts 46,840 40,254
------- ------- ------- -------
Cash collateral, margin
and settlement accounts 47,173 43,556 Assets held for sale 90 13
------- -------
Subordinated liabilities 13,764 13,182 Trading assets 86,976 98,249
------- ------- ------- -------
Financial liabilities
designated at fair value 40,792 41,642 - reverse repos 8,182 8,358
------- -------
Liabilities under insurance
contracts 22,816 24,509 - stock borrowing 4,137 5,094
------- -------
Trading liabilities 44,229 48,026 - other trading assets 74,657 84,797
------- -------
- repos 8,441 349 Financial investments 51,826 46,464
------- -------
Cash and balances with
- stock lending 3,356 7,498 central banks 85,092 51,816
------- -------
Other balance sheet
- other trading liabilities 32,432 40,179 assets 228,612 194,081
------- -------
Total equity 23,849 24,012
------- -------
Other balance sheet liabilities 206,764 168,913
------- -------
At 31 Dec 681,150 636,491 At 31 Dec 681,150 636,491
------- ------- ------- -------
Contingent liquidity risk arising from committed lending
facilities
The group provides customers with committed facilities such as
standby facilities to corporate customers and committed backstop
lines to conduits sponsored by the group. All of the undrawn
commitments provided to conduits or external customers are
accounted for in the LCR and NSFR in line with the applicable
regulations. This ensures that under a stress scenario any
additional outflow generated by increased utilisation of these
committed facilities by either customers or the group's
sponsored conduits will not give rise to liquidity risk for the
group.
Since the group controls the size of the portfolio of securities
held by these conduits, no contingent liquidity risk exposure
arises as a result of these undrawn committed lending facilities.
In relation to commitments to customers, the table below shows the
level of undrawn commitments outstanding in terms of the five
largest single facilities and the largest market sector.
The group's contractual exposures at 31 December monitored under the
contingent liquidity risk limit structure
2020 2019
Footnotes GBPbn GBPbn
------------------------------------------------------
Commitments to conduits
------------------------------------------------------
Consolidated multi-seller conduits 1
------------------------------------------------------
- total lines 5.8 4.4
------------------------------------------------------
- largest individual lines 0.4 0.2
------------------------------------------------------
Consolidated securities investment conduits - total
lines 1.6 2.4
------------------------------------------------------
Commitments to customers
------------------------------------------------------
- five largest 2 6.6 4.4
------------------------------------------------------
- largest market sector 3 8.0 8.7
------------------------------------------------------
1 Exposures relate to the Regency multi-seller conduit. This
vehicle provides funding to group customers by issuing debt secured
by a diversified pool of customer-originated assets. In 2019,
Regency ceased to be consolidated in HSBC Bank plc's LCR and
adjusted NSFR reports.
2 Represents the undrawn balance for the five largest committed
liquidity facilities provided to customers, other than those
facilities to conduits.
3 Represents the undrawn balance for the total of all committed
liquidity facilities provided to the largest market sector, other
than those facilities to conduits.
Asset encumbrance and collateral management
An asset is defined as encumbered if it has been pledged as
collateral against an existing liability and, as a result, is no
longer available to the group to secure funding, satisfy collateral
needs or be sold to reduce the funding requirement. Collateral is
managed on an operating entity basis consistent with the approach
to managing liquidity and funding. Available collateral held in an
operating entity is managed as a single consistent collateral pool
from which each operating entity will seek to optimise the use of
the available collateral. The objective of this disclosure is to
facilitate an understanding of available and unrestricted assets
that could be used to support potential future funding and
collateral needs. The disclosure is not designed to identify assets
which would be available to meet the claims of creditors or to
predict assets that would be available to creditors in the event of
a resolution or bankruptcy.
Summary of assets available to support potential future funding and collateral
needs (on- and off-balance sheet)
2020 2019
GBPm GBPm
---------
Total on-balance sheet assets at 31 Dec 681,150 636,491
--------- ---------
Less:
---------
- reverse repo/stock borrowing receivables and derivative
assets (281,125) (263,762)
--------- ---------
- other assets that cannot be pledged as collateral (51,068) (52,292)
--------- ---------
Total on-balance sheet assets that can support funding
and collateral needs at 31 Dec 348,957 320,437
--------- ---------
Add: off-balance sheet assets
---------
- fair value of collateral received in relation to
reverse repo/stock borrowing/derivatives that is available
to sell or repledge 213,690 239,032
--------- ---------
Total assets that can support future funding and collateral
needs 562,647 559,469
--------- ---------
Less:
---------
- on-balance sheet assets pledged (107,671) (94,860)
--------- ---------
- re-pledging of off-balance sheet collateral received
in relation to reverse repo/stock borrowing/derivatives (154,486) (179,442)
--------- ---------
Assets available to support funding and collateral
needs at 31 Dec 300,490 285,167
--------- ---------
Market risk
Overview
Market risk is the risk that movements in market factors,
including foreign exchange rates and commodity prices, interest
rates, credit spreads and equity prices will reduce the group's
income or the value of its portfolios.
Exposure to market risk is separated into two portfolios.
Trading portfolios comprise positions arising from market-making
and warehousing of customer-derived positions.
Non-trading portfolios including Markets Treasury comprise
positions that primarily arise from the interest rate management of
the group's retail and commercial banking assets and liabilities,
financial investments designated as held-to-collect-and-sale
('HTCS'), and exposures arising from the group's insurance
operations.
Key developments in 2020
There were no material changes to our policies and practices for
the management of market risk in 2020.
Market risk governance
(Audited)
The following diagram summarises the main business areas where
trading and non-trading market risks reside, and the market risk
measures used to monitor and limit exposures.
Non-trading
Trading risk risk
* Foreign exchange and commodities * Interest rates
* Interest rates * Credit spreads
* Credit spreads * Foreign exchange
* Equities
GBM GBM, ALCO, CMB
and WPB
Value at risk Value at risk
| Sensitivity | Sensitivity
| Stress testing | Stress testing
Where appropriate, we apply similar risk management policies and
measurement techniques to both trading and non-trading portfolios.
Our objective is to manage and control market risk exposures to
optimise return on risk while maintaining a market profile
consistent with our established risk appetite.
Market risk is managed and controlled through limits approved by
the group Chief Risk Officer. These limits are allocated across
business lines and to the group and its subsidiaries. The majority
of HSBC's total VaR and almost all trading VaR reside in GBM. Each
major operating entity has an independent market risk management
and control sub-function, which is responsible for measuring,
monitoring and reporting market risk exposures against limits on a
daily basis. Each operating entity is required to assess the market
risks arising in its business and to transfer them either to its
local Markets & Securities Services or Markets Treasury unit
for management, or to separate books managed under the supervision
of the local ALCO. The Traded Risk function enforces the controls
around trading in permissible instruments approved for each site as
well as following completion of the new product approval process.
Traded Risk also restricts trading in the more complex derivative
products to offices with appropriate levels of product expertise
and robust control systems.
Market risk measures
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with the group's risk
appetite.
We use a range of tools to monitor and limit market risk
exposures including sensitivity analysis, VaR, and stress
testing
Sensitivity analysis
Sensitivity analysis measures the impact of individual market
factor movements on specific instruments or portfolios, including
interest rates, foreign exchange rates, credit spreads and equity
prices, such as the effect of a one basis point change in yield. We
use sensitivity measures to monitor the market risk positions
within each risk type. Sensitivity limits are set for portfolios,
products and risk types, with the depth of the market being one of
the principal factors in determining the level of limits set.
Value at risk
VaR is a technique that estimates the potential losses on risk
positions as a result of movements in market rates and prices over
a specified time horizon and to a given level of confidence. The
use of VaR is integrated into market risk management and is
calculated for all trading positions regardless of how the group
capitalises those exposures. Where there is not an approved
internal model, the group uses the appropriate local rules to
capitalise exposures.
In addition, the group calculates VaR for non-trading portfolios
in order to have a complete picture of risk. The models are
predominantly based on historical simulation. VaR is calculated at
a 99% confidence level for a one-day holding period. Where we do
not calculate VaR explicitly, we use alternative tools like Stress
Testing.
The VaR models used by us are based predominantly on historical
simulation. These models derive plausible future scenarios from
past series of recorded market rates and prices, taking into
account inter-relationships between different markets and rates
such as interest rates and foreign exchange rates. The models also
incorporate the effect of option features on the underlying
exposures.
The historical simulation models used incorporates the following
features:
-- historical market rates and prices are calculated with
reference to foreign exchange rates and commodity prices, interest
rates, equity prices and the associated volatilities;
-- potential market movements utilised for VaR are calculated
with reference to data from the past two years; and
-- VaR measures are calculated to a 99% confidence level and use a one-day holding period.
The nature of the VaR models means that an increase in observed
market volatility will most likely lead to an increase in VaR
without any changes in the underlying positions.
VaR model limitations
Although a valuable guide to risk, VaR should always be viewed
in the context of its limitations. For example:
-- the use of historical data as a proxy for estimating future
events may not encompass all potential events, particularly those
which are extreme in nature;
-- the use of a holding period assumes that all positions can be
liquidated or the risks offset during that period. This may not
fully reflect the market risk arising at times of severe
illiquidity, when the holding period may be insufficient to
liquidate or hedge all positions fully;
-- the use of a 99% confidence level by definition does not take
into account losses that might occur beyond this level of
confidence; and
-- VaR is calculated on the basis of exposures outstanding at
the close of business and therefore does not necessarily reflect
intra-day exposures.
Risk not in VaR framework
Other basis risks which are not completely covered in VaR, such
as the Libor tenor basis, are complemented by our risk not in VaR
('RNIV') calculations, and are integrated into our capital
framework.
Risk factors are reviewed on a regular basis and either
incorporated directly in the VaR models, where possible, or
quantified through the VaR-based RNIV approach or a stress test
approach within the RNIV framework. The outcome of the VaR-based
RNIV is included in the VaR calculation; a stressed VaR RNIV is
also computed for the risk factors considered in the VaR-based RNIV
approach.
Stress-type RNIVs include a deal contingent derivatives capital
charge to capture risk for these transactions and a de-peg risk
measure to capture risk to pegged and heavily managed
currencies
Stress testing
Stress testing is an important procedure that is integrated into
our market risk management tool to evaluate the potential impact on
portfolio values of more extreme, although plausible, events or
movements in a set of financial variables. In such scenarios,
losses can be much greater than those predicted by VaR
modelling.
Stress testing is implemented at legal entity, regional and
overall Group levels. A standard set of scenarios is utilised
consistently across all regions within the HSBC group. Scenarios
are tailored to capture the relevant events or market movements at
each level. The risk appetite around potential stress losses for
the group is set and monitored against referral limits.
Market risk reverse stress tests are undertaken on the premise
that there is a fixed loss. The stress testing process identifies
which scenarios lead to this loss. The rationale behind the reverse
stress test is to understand scenarios which are beyond normal
business settings that could have contagion and systemic
implications.
Stressed VaR and stress testing, together with reverse stress
testing and the management of gap risk, provide management with
insights regarding the 'tail risk' beyond VaR for which the group's
appetite is limited.
Trading portfolios
Back-testing
We routinely validate the accuracy of our VaR models by
back-testing them against both actual and hypothetical profit and
loss against the corresponding VaR numbers. Hypothetical profit and
loss excludes non-modelled items such as fees, commissions and
revenues of intra-day transactions.
We would expect on average to see two or three profits in excess
of the VaR at 1% confidence level and two or three losses in excess
of VaR at the 99% confidence level over a one-year period. The
actual number of profits or losses in excess of VaR over this
period can therefore be used to gauge how well the models are
performing.
We back-test our VaR at various entity hierarchy levels.
Back-testing using the regulatory hierarchy includes entities which
have approval to use VaR in the calculation of market risk
regulatory capital requirement.
Non-trading portfolios
Non-trading VaR of HSBC Bank plc includes the interest rate risk
of non-trading financial instruments held by the global businesses
and transferred into portfolios managed by Markets Treasury or
Asset, Liability and Capital Management ('ALCM') functions. In
measuring, monitoring and managing risk in our non-trading
portfolios, VaR is just one of the tools used. The management of
interest rate risk in the banking book is described further in
'Non-trading interest rate risk' below, including the role of
Markets Treasury. The Group's and HSBC Bank plc's control of market
risk in the non-trading portfolios is based on transferring the
assessed market risk of non-trading assets and liabilities created
outside Markets Treasury or Markets, to the books managed by
Markets Treasury, provided the market risk can be neutralised. The
net exposure is typically managed by Markets Treasury through the
use of fixed rate government bonds (liquid asset held in
held-to-collect-and-sale ('HTCS' books)) and interest rate swaps.
The interest rate risk arising from fixed rate government bonds
held within HTCS portfolios is reflected within the group's
non-trading VaR. Interest rate swaps used by Markets Treasury are
typically classified as either a fair value hedge or a cash flow
hedge and included within the group's non-trading VaR. Any
market
risk that cannot be neutralised in the market is managed by HSBC
Bank plc ALCM in segregated ALCO books. .
Defined benefit pension scheme
Market risk also arises within the Bank's defined benefit
pension schemes to the extent that the obligations of the schemes
are not fully matched by assets with determinable cash flows. Refer
to the Pension risk management processes section on page 72 for
additional information.
Market risk in 2020
Global financial conditions worsened rapidly with the onset of
the Covid-19 outbreak from mid-February. Market volatility reached
extreme levels across most asset classes and equity prices fell
sharply. In credit markets, spreads and yields reached multi-year
highs. The gold market experienced Covid-19 related disruption in
refining and transportation, affecting the relative pricing of gold
futures contracts. Oil prices collapsed due to rising oversupply as
demand reduced materially from the economic slowdown. Financial
markets stabilised from April onwards, as governments in several
developed countries announced economic recovery programmes and key
central banks intervened to provide liquidity and support asset
prices. Global equity markets substantially recovered from their
losses in March and credit spreads reverted towards pre-Covid-19
levels. During 2H20 markets remained susceptible to further bouts
of volatility triggered by increases in Covid-19 cases and various
geopolitical risks. Market sentiment improved after positive
vaccine news and the US presidential elections in November 2020,
adding momentum to the performance of risky assets.
We managed market risk prudently during 2020. Sensitivity
exposures remained within appetite as the business pursued its core
market-making activity in support of our customers during the
outbreak. We also undertook hedging activities to protect the
business from potential future deterioration in credit conditions.
Market risk continued to be managed using a complementary set of
exposure measures and limits, including stress and scenario
analysis.
Trading portfolios
Value at risk of the trading portfolios
(Audited)
Trading VaR predominantly resides within Market & Securities
Services where it was GBP27.5m at 31 December 2020 compared with
GBP24.9m at 31 December 2019. The Total Trading VaR was fairly
volatile during H1 and increased to a peak at GBP47.7m. This was
driven by both the widening of the Credit spread levels during the
peak of the crisis and the rise of the Equity dividend RNIV. During
H2 the Total Trading VaR was much less volatile; it slightly
decreased during the third quarter of 2020, owing to a decrease of
the Equity VaR, before slightly increasing at the end of the year.
The third quarter reduction was driven by risk position changes in
the Equity portfolio whereas the increase observed at the end of
the year is explained by position changes in both the Credit and FX
trading portfolio.
.
Daily VaR (trading portfolios), 99% 1 day (GBPm)
.
The group's trading VaR for the year is shown in the table
below.
Trading VaR, 99% 1 day
(Audited)
Foreign
exchange Credit
(FX) and Interest Equity Spread Portfolio
commodity rate (IR) (EQ) (CS) Diversification(1) Total(2)
GBPm GBPm GBPm GBPm GBPm GBPm
---------- ---------- ------ ------- ------------------- ----------
Balance at 31 Dec
2020 7.6 11.0 13.9 14.1 (19.2) 27.5
---------- ---------- ------ ------- ------------------- --------
Average 6.5 13.5 18.7 14.1 (20.8) 32.1
---------- ---------- ------ ------- ------------------- --------
Maximum 14.2 21.2 33.2 29.2 - 47.7
---------- ---------- ------ ------- ------------------- --------
Minimum 2.0 9.2 8.1 9.6 - 20.9
---------- ---------- ------ ------- ------------------- --------
Balance at 31 Dec
2019 3.1 16.1 11.4 10.8 (16.5) 24.9
Average 4.1 17.1 10.3 17.1 (16.6) 32.0
Maximum 10.3 23.3 19.7 26.3 - 39.8
Minimum 2.0 12.9 6.3 8.3 - 23.2
1 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types, for example,
interest rate, equity and foreign exchange, together in one
portfolio. It is measured as the difference between the sum of the
VaR by individual risk type and the combined total VaR. A negative
number represents the benefit of portfolio diversification. As the
maximum occurs on different days for different risk types, it is
not meaningful to calculate a portfolio diversification benefit for
this measure.
2 The total VaR is non-additive across risk types due to
diversification effect and it includes VaR RNIV.
Back-testing
In 2020, HSBC Bank plc experienced 21 back testing exceptions in
total, 15 of which against the Hypothetical P&L and 6 of which
against the Actual P&L. The majority of these exceptions
occurred during H1, as reported in the H1 2020 interim report.
The high number of Hypothetical back-testing exceptions that
occurred in March 2020 was primarily due to the extreme market
volatility resulting from the economic impact of the Covid-19
outbreak, which was significantly greater than the volatility used
in the model calibration. In recognition of the exceptional market
environment, the PRA has granted temporary relief, valid for six
months, that permits UK firms, including HSBC, to offset the impact
of the higher VaR multiplier resulting from exceptions that
occurred after the onset of the Covid-19 outbreak. This offset was
against incremental RNIV market risk capital requirements. This
grace period expired at end of September, after which HSBC Bank plc
were allowed to discount the majority of these exceptions since it
was acknowledged they were not due to a model deficiency. During
the second half of the year, HSBC Bank plc only experienced one
exception against Hypothetical P&L and one against Actual
P&L.
As a result, the number of exceptions in 2020 amounts to six
against the Hypothetical P&L and four against the Actual
P&L.
.
Non-trading portfolios
Value at risk of the non-trading portfolios
(Audited)
The non-trading VaR in 2020 was driven by interest rate risk in
the banking book arising from Markets Treasury and ALCM book
positions. It is to be noted that, as opposed to the previous
years, the group Insurance entity has been included in the non
trading VaR; this has a modest impact of around GBP0.5m. The
non-trading VaR as at 31 December 2020 was GBP33.3m, driven by
interest rate risk in the banking book arising from Markets
Treasury and ALCM book positions. During first quarter of 2020, the
VaR for non-trading activity increased from 31 December 2019 with
spikes seen particularly during March and April due to
unprecedented levels of volatility in the markets caused by the
Covid-19 outbreak. Extreme volatility in the yields of sovereign
debt and interest swaps, coupled with volatility in the spread of
agencies and supranational led to an overall increase in the
non-trading VaR during the first half of the year. During the
second half of 2020, the total non trading book VaR was much more
stable and fluctuated between GBP28m and GBP35m. The interest rate
non trading book VaR trended higher during this period as the
Markets Treasury business deployed the cash within the Liquid Asset
Buffer ('LAB') into local government securities as opportunities
arise.
The daily levels of total non-trading VaR over the last year are
set out in the graph below.
Daily VaR (non-trading portfolios), 99% 1 day (GBPm)
The group's non-trading VaR for the year is shown in the table
below.
Non-trading VaR, 99% 1 day
(Audited)
Interest Credit
rate spread Portfolio
(IR) (CS) diversification(1) Total(2)
GBPm GBPm GBPm GBPm
Balance at 31 Dec 2020 25.1 11.6 (3.4) 33.3
Average 21.9 12.3 (6.3) 27.9
Maximum 28.8 16.6 - 35.0
Minimum 14.3 5.5 - 15.0
Balance at 31/12/2019 15.7 5.7 (4.5) 16.8
Average 17.5 5.3 (4.3) 18.5
Maximum 20.7 7.3 - 22.5
Minimum 14.9 4.2 - 15.4
1 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types, for example,
interest rate, equity and foreign exchange, together in one
portfolio. It is measured as the difference between the sum of the
VaR by individual risk type and the combined total VaR. A negative
number represents the benefit of portfolio diversification. As the
maximum occurs on different days for different risk types, it is
not meaningful to calculate a portfolio diversification benefit for
this measure.
2 The total VaR is non-additive across risk types due to diversification effect.
Resilience Risk
Overview
Resilience risk is the risk that we are unable to provide
critical services to our customers, affiliates and counterparties,
during sustained and significant operational disruption. Resilience
risk arises from failures or inadequacies in processes, people,
systems or external events.
Resilience Risk management
Key developments in 2020
In line with the increasing expectations from customers,
regulators and our Board, and in response to a continually evolving
threat landscape that the wider industry faces, we combined
Operational and Resilience Risk to form a new Operational and
Resilience Risk sub-function. This sub function provides robust
non-financial risk steward oversight of the bank's business,
functions, legal entities and critical business service management
of risk, supported by effective and timely independent challenge.
We carried out several initiatives during the year:
-- We developed a regional hub accountable for core Operational and Resilience Risk activities.
-- We implemented business and function aligned teams focused on
emerging risks as well as material products and services.
-- We deployed risk management oversight of the most material
transformation programmes across HSBC Bank plc.
-- We implemented central services including governance, reporting and transformation.
-- We created a standalone assurance capability that provides
independent review and evaluation of end to end processes, risks
and key controls.
We prioritise these efforts on material risk and areas
undergoing strategic growth, aligning our location strategy to this
need.
Governance and structure
The Operational and Resilience Risk target operating model
provides a consistent view across resilience risks, strengthening
our risk management oversight while operating effectively as part
of a simplified non-financial risk structure. We view resilience
risk across seven risk types related to: third parties and supply
chain; information, technology and cyber security; payments and
manual processing; physical security; business interruption and
contingency risk, buildings unavailability; and workplace
safety.
Operational and Resilience Risk is governed in the group through
the RMM and our Risk Committee with clear global escalation routes
through to the Non-Financial Risk Management Board ('NFRMB'),
chaired by the Group Chief Risk Officer and the Group Risk
Management Meeting ('GRMM').
Key risk management process
Operational Resilience is our ability to anticipate, prevent,
adapt, respond to, recover and learn from internal or external
disruption, protecting customers, the markets we operate in and
economic stability. Resilience is determined by assessing whether
we are able to continue providing our most important services,
within an agreed level. We accept that we will not be able to
prevent all disruption, but we prioritise investment to continually
improve the response and recovery strategies for our important
business services.
Business operations continuity
As a result of Covid-19, we successfully implemented business
continuity responses and continued to maintain the majority of
service level agreements. We did not experience any major impacts
to the supply chain from our third party service providers due to
Covid-19. The risk of damage or theft to our physical assets or
criminal injury to our colleagues remains unchanged and no
significant incidents impacted our buildings or people.
Regulatory compliance risk
Overview
The Regulatory Compliance ('RC') is covered through the
sub-function Regulatory Conduct. This provides independent,
objective oversight and challenge, and promotes a
compliance-orientated culture that supports the business in
delivering fair outcomes for customers, maintaining the integrity
of financial markets and achieving HSBC's strategic objectives.
Key developments in 2020
Whilst there were no material changes to the policies for the
management of RC risk in 2020, there were enhancements to the RC
Risk Taxonomy and Control Library.
-- Our taxonomy is a key foundation of how we categorise risk,
assign regulation, set policy and set the parameters of our Risk
Stewardship. Work to review and refresh the risks and controls
under L2 risks were completed in December 2020 and approved by the
NFRO design authority meetings. We set out to and achieved our
objective to simplify, clarify and rationalise the risks and
controls.
-- In October 2020, HSBC completed the implementation of the
Conflicts Management Office Strategic Re-engineering programme.
This included the deployment of enhanced Global Conflict Management
Solution ('GCMS'), and to develop/release the new GCMS list
modules.
-- FX Deferred Prosecution Agreement: On 19 January 2021, it was
confirmed that the FX DPA has expired. The bank will continue to
implement reforms pursuant to our order.
Governance and structure
European Regulatory Conduct sits under the EMEA (Europe and
MENAT), and Global Banking & Markets ('GBM') and Commercial
Banking ('CMB') Chief Compliance Officer ('CCO'). The Head of
Regulatory Conduct, Europe will liaise closely with the Group
Regulatory Conduct Capability team to help drive a consistent group
approach to conduct and culture related work. Regulatory Conduct
continues to be structured as a global sub function with regional
and country RC teams, which support and advise each global business
and global function.
Key risk management processes
We regularly review our policies and procedures. Global policies
and procedures require the prompt identification and escalation of
any actual or potential regulatory breach to RC. Reportable events
are escalated to the bank's RMM and Risk Committee, as appropriate.
Matters relating to the Group's regulatory conduct of business are
reported to the Group Risk Committee.
Conduct of business
In 2020, we continued to promote and encourage good conduct
through our people's behaviour and decision making to deliver
fair
outcomes for our customers, and to maintain financial market
integrity. During 2020:
-- We continued to champion a strong conduct and customer
focused culture. We implemented a number of measures throughout the
Covid-19 outbreak to support our customers in financial
difficulties. We also maintained service and supported colleagues
in unprecedented conditions.
-- We continued our focus on culture and behaviours, adapting
our controls and risk management processes to reflect significant
levels of remote working throughout the year.
-- We continued to invest significant resources to improve our
compliance systems and controls relating to our activities in
Global Markets and to ensure market integrity. These included
enhancements to: pricing and disclosure, order management and trade
execution; trade; voice and audio surveillance; front office
supervision; and the enforcement and discipline framework for
employee misconduct.
-- We continued to emphasise - and worked to create - an
environment in which employees are encouraged and feel safe to
speak up. We placed a particular focus on the importance of
well-being during the pandemic through regular top-down
communications, virtual town halls, videos and podcasts.
-- We continued to embed conduct within our business line
processes. We also considered and sought to mitigate the conduct
impacts of the Group's strategic transformation programme and other
key business change programmes, including those relating to the
UK's departure from the EU and the Ibor transition.
-- We delivered our sixth annual global mandatory training
course on conduct to reinforce the importance of conduct for all
colleagues.
-- We are refreshing our approach to conduct arrangements across
the Group with a view to ensuring that the arrangements remain
appropriate for the nature of our business.
The Board continues to maintain oversight of conduct matters
through the RMM and the Executive Committee.
Further information on our conduct is provided in the Strategic
Report on page 7 and www.hsbc.com/conduct, and for conduct-related
costs relating to significant items, see page 16.
Financial crime risk
Overview
To ensure that we do not knowingly or unknowingly help parties
commit illegal (or potentially illegal) activity that arises from
our day-to-day banking operations, we manage financial crime risk
by providing policy, framework, and specialist capabilities through
the Financial Crime function. In 2020, Financial Crime, as part of
the wider Compliance structure, went through a significant
transformation, with a new model designed to:
-- Simplify the structure to make it easier for the function and
the businesses to engage with each other;
-- Clarify accountability between the First and Second line of
defence and Group versus regions and countries;
-- Embrace technology to drive greater automation, improve risk
management and increase efficiency;
-- Ensure we continue to build and improve capabilities in
existing teams and attract the best talent in future; and
-- Streamline, by setting out financial crime compliance and
mitigation roles clearly between HSBC Bank plc's and HSBC UK
ring-fenced bank.
Governance
The new Compliance model and structure, once fully implemented,
will help us to achieve our long-term vision of setting
industry-leading standards for compliance in financial services and
meet the Bank's needs for the future. As part of the
transformation, we appointed a new leadership team, which included
the appointment of Chief Compliance Officers (CCOs). The CCO for
Europe Middle East & Africa (EMEA) has responsibility and
accountability for the Compliance function in the region.
Within the EMEA Compliance executive, the Europe Head of
Financial Crime is responsible for promoting consistent
implementation and best practice, and providing effective oversight
of the operational effectiveness of the financial crime framework,
to ensure the Bank's exposure to financial crime and related
reputational risk is well managed. The Europe Head of Financial
Crime also acts as the FCA's Senior Management Function ('SMF17'),
Regional Money Laundering Reporting Officer (MLRO) and Risk Steward
in relation to financial crime risks.
Structure
The Financial Crime function provides best practice monitoring,
investigations, advisory, surveillance, risk assessment
capabilities, able to identify financial crime and emergent risk
issues proactively, quickly and effectively. The function supports
the business to deliver world class customer experience whilst
safeguarding against financial crime risk, engaging with external
stakeholders (regulators and other banks) to enable the bank to
understand current and future threats, and maintain a leading role
in the industry.
The FC team's activities span both the first and second lines of
defence.
-- The first line specialist activities are: Investigations;
Surveillance; Intelligence; and Transaction Monitoring
Controls.
-- The second line risk steward activities are: Affiliate Due
Diligence; AML; Transaction Monitoring; Anti-Bribery &
Corruption ('AB&C'); Advisory; Policy; Training; Tax
Transparency; Sanctions; Fraud Risk; Insider Risk and Risk
Assessment.
To oversee enterprise-wide management of financial crime risks,
HSBC established Financial Crime Risk Management Committees
('FCRMCs') in June 2017, to maintain global standards, key policies
and frameworks and support individuals in discharging their
responsibilities under the Senior Managers Regime. In 2020, the key
financial crime governance meeting was the HBEU FCRMC. This was
held monthly and chaired by the bank's CEO, with business line
leaders and the Regional Head of Financial Crime as key members.
This forum ran in a consistent manner, monthly, and according to
the Group Compliance Framework and Ways of Working standards rolled
out by the Company Secretary.
Other Key developments in 2020
The professionals leading each of the areas of Financial Crime
have extensive knowledge and experience. Country coverage has
continued to mature, building strong and supportive relationships
to manage the diversity of risk across Europe.
We continued to invest in our Intelligence-led Financial Crime
Risk Management strategy; a high-level vision for enhancing the
Bank's financial crime risk management, through the use of advanced
analytics and emerging technology. The result will be an ability to
dynamically provide more accurate, timely and actionable insights
on financial crime risk to the business, starting with our
Transaction Monitoring systems, which we are working towards in
2021.
The financial crime risk capabilities delivered through our
Global Standards programme continued to be integrated into our
day-to-day operations in 2020. Our AML, Sanctions and AB&C
policy and control frameworks are embedded, and the transition of
Tax Transparency risk stewardship responsibilities to Financial
Crime teams (from Group Finance) has now been completed, augmented
by awareness sessions and updated policies and procedures. In 2020,
to mitigate bribery and corruption risk, we deployed automated
tools to support the management of gifts and entertainment to and
from our staff and to reconcile those records with employee expense
claims.
We focused our anti-fraud capabilities on threats posed by new
and existing typologies. As an example, Covid-19 presented an
immediate financial crime risk to HSBC clients and operations, and
to keep on top of the risks, Financial Crime proactively worked
closely with business operations and consumers, through trend
analysis, investigations and publications, to stay vigilant to the
evolving landscape. Furthermore, in 2020, a new anti-Fraud policy
and control framework was published, comprising new policies, a new
control framework and a new fraud classification and reporting
standard which the risk stewards will support the businesses in
complying with throughout 2021.
Our surveillance capability deployed new controls and systems to
better mitigate market abuse and misconduct. Specifically,
introducing a more effective detection of control of information
risks; introducing a new strategic communications system that
enables new detective and analytical capabilities; deploying a
trader surveillance control for our higher risk internal HSBC
employees, customers and clients.
Skilled Person & Independent Consultant
Following expiration in December 2017 of the anti-money
laundering Deferred Prosecution Agreement ('DPA') entered into with
the US Department of Justice, the then Monitor continued to work in
2020 to serve in the capacity of the bank's Skilled Person under
Section 166 of the Financial Services and Markets Act under the
Direction issued by the FCA in 2013 (On 7 July 2020, the 2013 FCA
Direction was replaced by a new FCA Direction (2020 FCA
Direction)). Considering HSBC's significant progress towards its
financial crime risk target end-state, in terms of key systems,
processes and people, the Skilled Person narrowed their mandate to
assess the remaining areas that required further work in order for
HSBC to transition fully to business-as-usual financial crime risk
management. More work was required to strengthen HSBC's automated
transaction monitoring ('TM') and Sanctions risk management
capabilities.
Transaction Monitoring: The FCA issued a Final Requirement
Notice on 14 April 2020 (Requirement Notice), which required HSBC
to provide the FCA with a report of an assessment of HSBC's
progress and trajectory towards achieving an effective automated TM
capability. HSBC engaged Ernst & Young LLP (EY) to conduct the
required assessment (TM Review) in two phases: (i) between May and
September 2020; and (ii) December 2020 to the end of June 2021,
with three European countries in scope, the bank included. Phase 2
is currently underway and we expect a report by the end of the
third quarter of 2021.
Sanctions: The Skilled Person also continued to work in capacity
as an Independent Consultant (IC) under a cease-and-desist order
issued by the US Federal Reserve Board (FRB). A further two FRB
recommendations were closed in 2020 in the FRB7 report. This takes
the total recommendations closed by both the Bank and the IC to 67
of the 69 recommendations issued across FRB Reviews 1-7. Of the two
remaining recommendations, one was closed by the Bank but remains
open with the IC; and another remains in progress. In 18 June 2020,
IC issued the final FRB7 report, with no new recommendations. This
concluded the FRB7 review which focused on HSBC's Mastergroup and
Multi-National Corporation (MNC) programme, with a high level
review on the OFAC Compliance programme, and marked the first FRB
review in which the IC found HSBC to be "substantially compliant"
with all OFAC Compliance elements of the 2012 FRB Cease and Desist
Consent Order. HSBC is preparing for an FRB8 review, which is
currently scheduled to commence in the first quarter of 2021.
Model risk
Overview
Model risk is the potential for adverse consequences from
business decisions informed by models, which can be exacerbated by
errors in methodology, design or the way they are used. Model risk
arises in both financial and non-financial contexts whenever
business decision making includes reliance on models.
Key developments in 2020
In 2020, we carried out a number of initiatives to further
develop and embed the Model Risk Management sub-function,
including:
-- With the appointment of the Group Chief Model Risk Officer,
our Head of model risk management now reports to both the Chief
Risk Officer and the Group Chief Model Risk Officer.
-- We updated the model risk policy and introduced model risk
standards to enable a more risk-based approach to model risk
management whilst retaining a consistent approach.
-- Working with the businesses and functions, new model risk
controls were developed in the Risk Control Library. These controls
formed the basis for Model Risk Control Assessments that have been
implemented for businesses and functions.
-- We are introducing new risk appetite measures and metrics
that provide forward looking measures of model risk.
-- The Independent Model Validation team has begun a
transformation program that will utilise advanced analytics and new
workflow tools, with the objective of providing a more risk based,
efficient and effective management of model validation
processes.
-- The consequences of Covid-19 on IFRS 9 model performance and
reliability has resulted in enhanced monitoring of those models and
related model adjustments. Dramatic changes to model inputs such as
GDP and unemployment rates and the yet unknown impact of the
government support programmes have made the model results
unreliable. As a result, greater reliance has been placed on
management underlays/overlays based on business judgement to derive
expected credit losses.
-- New IFRS 9 models for portfolios that required the largest
model overlays during 2020 have been redeveloped, validated and
implemented in the fourth quarter of 2020 including the updating of
a key model for the UK portfolio. Limited new data was available
for use in the recalibrations, therefore judgmental post-model
adjustments were required to allow for the economic effects of the
pandemic not captured by the models.
Governance and structure
We placed greater focus on our model risk activities during
2020. The HSBC Group elevated Model Risk Management to a function
in its own right within the Global Risk Structure, where it had
previously been structured as a sub-function within Global Risk
Strategy, the global team now reports directly to the Global Chief
Risk Officer. Our Model Risk Management team is headed by the Head
of Model Risk Management with support from teams based in London,
Dusseldorf and Paris.
Key risk management processes
We use a variety of modelling approaches, including regression,
simulation, sampling, machine learning and judgemental scorecards
for a range of business applications, in activities such as
customer selection, product pricing, financial crime transaction
monitoring, creditworthiness evaluation and financial reporting.
Responsibility for managing model risk is delegated from the RMM to
the Model Risk Committee, which is chaired by the Chief Risk
Officer. This committee regularly reviews our model risk management
policies and procedures, and requires the first line of defence to
demonstrate comprehensive and effective controls based on a library
of model risk controls provided by Model Risk Management. The Model
Risk Committee is supported by dedicated model governance forums
within each of the model areas and countries. Model Risk Management
also reports on model risk to senior management on a regular basis
through the use of the risk map, and top and emerging risks.
We regularly review the effectiveness of these processes,
including the model oversight committee structure, to help ensure
appropriate understanding and ownership of model risk is embedded
in the businesses and functions.
Insurance manufacturing operations risk Overview
The majority of the risk in our insurance business derives from
manufacturing activities and can be categorised as financial risk
or insurance risk. Financial risks include market risk, credit risk
and liquidity risk. Insurance risk is the risk, other than
financial risk, of loss transferred from the holder of the
insurance contract to HSBC, the issuer.
HSBC's bancassurance model
We operate an integrated bancassurance model which provides
insurance products principally for customers with whom we have a
banking relationship. The insurance contracts we sell relate to the
underlying needs of our banking customers, which we can identify
from our point-of-sale contacts and customer knowledge. For the
products we manufacture, the majority of sales are of savings and
investment products.
By focusing largely on personal and small and medium-sized
enterprise businesses, we are able to optimise volumes and
diversify individual insurance risks. We choose to manufacture
these insurance products in HSBC subsidiaries based on an
assessment of operational scale and risk appetite. Manufacturing
insurance allows us to retain the risks and rewards associated with
writing insurance contracts by keeping part of the underwriting
profit and investment income within the group.
Where we do not have the risk appetite or operational scale to
be an effective insurance manufacturer, we engage with a handful of
leading external insurance companies in order to provide insurance
products to our customers through our banking network and direct
channels. These arrangements are generally structured with our
exclusive strategic partners and earn the group a combination of
commissions, fees and a share of profits. We distribute insurance
products in all of our geographical regions.
Insurance products are sold through all global businesses, but
predominantly by WPB and CMB through our branches and direct
channels.
Insurance manufacturing operations risk management
Key developments in 2020
There were no material changes to the insurance risk management
framework in 2020. Policies and practices for the management of
risks associated with the selling of insurance contracts outside of
bancassurance channels were enhanced in response to this being an
increasing area of importance for the insurance business. Also,
enhancements were made to the Capital Risk Framework for insurance
operations to better align to the Group's Capital Risk
Framework.
Governance
Insurance risks are managed to a defined risk appetite, which is
aligned to the bank's risk appetite and risk management framework,
including the three lines of defence model. For details on the
governance framework, see page 22. The Group Insurance Risk
Management Meeting oversees the control framework globally and is
accountable to the WPB Risk Management Meeting on risk matters
relating to the insurance business. The monitoring of the risks
within the insurance operations is carried out by insurance risk
teams. Specific risk functions, including Wholesale Credit &
Market Risk, Operational Risk, Information Security Risk and
Compliance, support Insurance Risk teams in their respective areas
of expertise.
Stress and scenario testing
Stress testing forms a key part of the risk management framework
for the insurance business. We participate in local and Group-wide
regulatory stress tests, including the Bank of England stress test
of the banking system, the European Insurance and Occupational
Pensions Authority stress test, and individual country insurance
regulatory stress tests.
These have highlighted that a key risk scenario for the
insurance business is a prolonged low interest rate environment. In
order to mitigate the impact of this scenario, the insurance
operations are taking a number of actions including repricing some
products to reflect lower interest rates, launching less capital
intensive products, investing in more capital efficient assets and
developing investment strategies to optimise the expected returns
against the cost of economic capital.
Management and mitigation of key risk types
Our insurance manufacturing operations are subject to financial
risk, including market risk, credit risk and liquidity risk, and
insurance risk.
Market risk
All our insurance manufacturing subsidiaries have market risk
mandates which specify the investment instruments in which they are
permitted to invest and the maximum quantum of market risk which
they may retain. They manage market risk by using, among others,
some or all of the techniques listed below, depending on the nature
of the contracts written:
-- For products with discretionary participating features
('DPF'), adjusting bonus rates to manage the liabilities to
policyholders. The effect is that a significant portion of the
market risk is borne by the policyholder.
-- Asset and liability matching where asset portfolios are
structured to meet projected liability cash flows. The Group
manages its assets using an approach that considers asset quality,
diversification, cash flows matching, liquidity, volatility and
target investment return. It is not always possible to match asset
and liability durations due to uncertainty over the receipt of all
future premiums and the timing of claims, and also because the
forecast payment dates of liabilities may exceed the duration of
the longest-dated investments available. We use models to assess
the effect of a range of future scenarios on the values of assets
and associated liabilities, and local ALCOs employ the outcomes in
determining how to best structure asset holdings to support
liabilities.
-- Using derivatives to protect against adverse market movements
or better match liability cash flows.
-- For new products with investment guarantees, considering the
cost when determining the level of premiums or the price
structure.
-- Periodically reviewing products identified as higher risk,
which contain investment guarantees and embedded optionality
features linked to savings and investment products, for active
management.
-- Designing new products to mitigate market risk, such as
changing the investment return sharing between policyholders and
the shareholder.
-- Exiting, to the extent possible, investment portfolios whose risk is considered unacceptable.
-- Repricing premiums charged on new contracts to policyholders.
Credit risk
Our insurance manufacturing subsidiaries are responsible for the
credit risk, quality and performance of their investment
portfolios. Our assessment of the creditworthiness of issuers and
counterparties is based primarily upon internationally recognised
credit ratings and other publicly available information.
Investment credit exposures are monitored against limits by our
insurance manufacturing subsidiaries, and are aggregated and
reported to HSBC Group Insurance Credit Risk and Group Credit Risk
functions. Stress testing is performed on the investment credit
exposures using credit spread sensitivities and default
probabilities.
We use a number of tools to manage and monitor credit risk.
These include a credit report which contains a watch-list of
investments with current credit concerns, primarily investments
that may be at risk of future impairment or where high
concentrations to counterparties are present in the investment
portfolio. The report is circulated monthly to senior management in
Group Insurance and the individual country chief risk officers to
identify investments which may be at risk of future impairment.
Liquidity risk
Risk is managed by cash flow matching and maintaining sufficient
cash resources, investing in high credit-quality investments with
deep and liquid markets, monitoring investment concentrations and
restricting them where appropriate, and establishing committed
contingency borrowing facilities.
Insurance manufacturing subsidiaries are required to complete
quarterly liquidity risk reports for HSBC Group Insurance Risk
function and an annual review of the liquidity risks to which it is
exposed.
Insurance risk
The bank primarily uses the following techniques to manage and
mitigate insurance risk:
-- product design, pricing and overall proposition management
(for example, management of lapses by introducing surrender
charges);
-- underwriting policy;
-- claims management processes; and
-- reinsurance which cedes risks above our acceptable thresholds
to an external reinsurer thereby limiting our exposure.
--
.
Insurance manufacturing operations risk in 2020
Measurement
(Audited)
The risk profile of our insurance manufacturing businesses is
measured using an economic capital approach. Assets and liabilities
are measured on a market value basis, and a capital requirement is
defined to ensure that there is a less than one-in-200 chance of
insolvency over a one-year time horizon, given the risks to which
the businesses are exposed. The methodology for the economic
capital calculation is largely aligned to the pan-European Solvency
II insurance capital regulations. The economic capital coverage
ratio (economic net asset value divided by the economic capital
requirement) is a key risk appetite measure. The Covid-19 outbreak
caused sales of insurance products to be lower than forecast in
2020 although we responded by expanding digital and remote
servicing capabilities. To date there has been limited impact on
claims or lapse behaviours although this remains under close
monitoring. The largest effect on insurance entities came from
volatility in the financial markets and the material fall in
interest rates which impact levels of capital and profitability.
Businesses responded by executing de-risking strategies followed by
subsequent re-risking of positions as markets
recovered.Enhanced monitoring of risks and pricing conditions
continues.The following table shows the composition of assets and
liabilities by contract type.
.
Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
Shareholder
assets
With Unit- Other and
DPF linked contracts(1) liabilities Total
Footnotes GBPm GBPm GBPm GBPm GBPm
--------- ------ ------ ------------ ----------- --------
Financial assets 20,261 2,412 249 2,490 25,412
--------- ------ ------ ------------ ----------- ------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 9,148 2,352 92 991 12,583
- derivatives 76 - - 2 78
---------
- financial investments - at amortised
cost 372 1 - 17 390
---------
- financial investments - at fair
value through other comprehensive
income 8,724 - 112 1,341 10,177
---------
- other financial assets 2 1,941 59 45 139 2,184
---------
Reinsurance assets - 47 134 - 181
--------- ------ ------ ------------ ----------- ------
PVIF 3 - - - 647 647
--------- ------ ------ ------------ ----------- ------
Other assets and investment properties 809 1 - 60 870
--------- ------ ------ ------------ ----------- ------
Total assets at 31 Dec 2020 21,070 2,460 383 3,197 27,110
--------- ------ ------ ------------ ----------- ------
Liabilities under investment contracts
designated at fair value - 944 - - 944
--------- ------ ------ ------------ ----------- ------
Liabilities under insurance contracts 20,962 1,512 342 - 22,816
--------- ------ ------ ------------ ----------- ------
Deferred tax 4 107 3 - 39 149
--------- ------ ------ ------------ ----------- ------
Other liabilities - - - 1,776 1,776
--------- ------ ------ ------------ ----------- ------
Total liabilities at 31 Dec 2020 21,069 2,459 342 1,815 25,685
--------- ------ ------ ------------ ----------- ------
Total equity at 31 Dec 2020 - - - 1,425 1,425
--------- ------ ------ ------------ ----------- ------
Total liabilities and equity at 31
Dec 2020 21,069 2,459 342 3,240 27,110
--------- ------ ------ ------------ ----------- ------
Financial assets 19,258 2,116 233 2,231 23,838
------ ----- --- ----- ------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 8,222 2,057 78 1,359 11,716
- derivatives 61 - - 2 63
- financial investments - at amortised
cost 69 - 1 7 77
- financial investments - at fair
value through other comprehensive
income 9,033 - 105 749 9,887
- other financial assets 2 1,873 59 49 114 2,095
Reinsurance assets - 50 129 - 179
PVIF 3 - - - 715 715
Other assets and investment properties 763 1 1 54 819
Total assets at 31 Dec 2019 20,021 2,167 363 3,000 25,551
Liabilities under investment contracts
designated at fair value - 862 - - 862
Liabilities under insurance contracts 19,889 1,295 325 - 21,509
Deferred tax 4 137 6 - 31 174
Other liabilities - - - 1,645 1,645
Total liabilities at 31 Dec 2019 20,026 2,163 325 1,676 24,190
Total equity at 31 Dec 2019 - - - 1,361 1,361
Total liabilities and equity at 31
Dec 2019 20,026 2,163 325 3,037 25,551
1 'Other contracts' includes term assurance and credit life insurance.
2 Comprise mainly loans and advances to banks, cash and
intercompany balances with other non-insurance legal entities.
3 Present value of in-force long-term insurance business.
4 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
Key risk types
The key risks for the insurance operations are market risks (in
particular interest rate and equity) and credit risks, followed by
insurance underwriting risks and operational risks. Liquidity risk,
whilst significant for the bank, is minor for our insurance
operations.
Market risk
(Audited)
Description and exposure
Market risk is the risk of changes in market factors affecting
the bank's capital or profit. Market factors include interest
rates, equity and growth assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued.
Our most significant life insurance products are investment
contracts with discretionary participating features ('DPF') issued
in France. These products typically include some form of capital
guarantee or guaranteed return on the sums invested by the
policyholders, to which discretionary bonuses are added if allowed
by the overall performance of the funds. These funds are primarily
invested in bonds with a proportion allocated to other asset
classes, to provide customers with the potential for enhanced
returns.
DPF products expose the bank to the risk of variation in asset
returns, which will impact our participation in the investment
performance. In addition, in some scenarios the asset returns can
become insufficient to cover the policyholders' financial
guarantees, in which case the shortfall has to be met by the bank.
Amounts are held against the cost of such guarantees, calculated by
stochastic modelling.
The cost of such guarantees is accounted for as a deduction from
the present value of in-force 'PVIF' asset, unless the cost of such
guarantees is already explicitly allowed for within the insurance
contracts liabilities, under the local rules. The table below shows
the total reserve held for the cost of guarantees, the range of
investment returns on assets supporting these products and the
implied investment return that would enable the business to meet
the guarantees. The cost of guarantees increased to GBP347m (2019:
GBP203m) primarily due to the reduction in swap rates in France.
For unit-linked contracts, market risk is substantially borne by
the policyholder, but some market risk exposure typically remains
as fees earned are related to the market value of the linked
assets.
Financial return guarantees
(Audited)
2020 2019
Long-term Long-term
Investment investment Investment investment
returns returns returns returns
implied on relevant Cost implied on relevant Cost
by guarantee portfolios of guarantees by guarantee portfolios of guarantees
% % GBPm % % GBPm
0.7 - 1.2 -
Capital - 2.0 162 - 2.4 71
Nominal annual
return 2.6 2.0 96 2.6 2.4 58
Nominal annual
return 4.5 2.0 89 4.5 2.4 74
At 31 Dec 347 203
Sensitivities
The following table illustrates the effects of selected interest
rate and equity price scenarios on our profit for the year and the
total equity of our insurance manufacturing subsidiaries.
Where appropriate, the effects of the sensitivity tests on
profit after tax and equity incorporate the impact of the stress on
the PVIF. Due in part to the impact of the cost of guarantees and
hedging strategies which may be in place, the relationship between
the profit and total equity and the risk factors is non-linear.
Therefore, the results disclosed should not be extrapolated to
measure sensitivities to different levels of stress. For the same
reason, the impact of the stress is not necessarily symmetrical on
the upside and downside. The sensitivities are stated before
allowance for management actions which may mitigate the effect of
changes in the market environment. The sensitivities presented
allow for adverse changes in policyholder behaviour that may arise
in response to changes in market rates. The differences between the
impacts on profit after tax and equity are driven by the changes in
value of the bonds measured at fair value through other
comprehensive income, which are only accounted for in equity.
Sensitivity of the group's insurance manufacturing subsidiaries to market
risk factors
(Audited)
2020 2019
Effect Effect Effect Effect
on on on profit on
profit total after total
after tax equity tax equity
GBPm GBPm GBPm GBPm
---------- -------
+100 basis point parallel shift
in yield curves 110 89 84 67
----------------------------------------------- ---------- ------- -------
-100 basis point parallel shift
in yield curves (203) (179) (175) (157)
----------------------------------------------- ---------- ------- -------
10% increase in equity prices 39 39 28 28
----------------------------------------------- ---------- ------- -------
10% decrease in equity prices (42) (42) (30) (30)
----------------------------------------------- ---------- ------- -------
.
Credit risk
(Audited)
Description and exposure
Credit risk arises in two main areas for our insurance
manufacturers:
-- risk associated with credit spread volatility and default by
debt security counterparties after investing premiums to generate a
return for policyholders and shareholders; and
-- risk of default by reinsurance counterparties and
non-reimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect of
these items are shown in the table on page 84.
The credit quality of the reinsurers' share of liabilities under
insurance contracts is assessed as 'satisfactory' or higher as
defined on page 33, with 100% of the exposure being neither past
due nor impaired. Credit risk on assets supporting unit-linked
liabilities is predominantly borne by the policyholder; therefore
our exposure is primarily related to liabilities under non-linked
insurance and investment contracts and shareholders' funds. The
credit quality of these financial assets is included in the table
on page 50.
Liquidity risk
(Audited)
Description and exposure
Liquidity risk is the risk that an insurance operation, though
solvent, either does not have sufficient financial resources
available to meet its obligations when they fall due, or can secure
them only at excessive cost.
The following table shows the expected undiscounted cash flows
for insurance contract liabilities at 31 December 2020. The
liquidity risk exposure is wholly borne by the policyholder in the
case of unit-linked business and is shared with the policyholder
for non-linked insurance.
The profile of the expected maturity of insurance contracts
at
31 December 2020 remained comparable with 2019.
The remaining contractual maturity of investment contract
liabilities is included in Note 27.
Expected maturity of insurance contract liabilities
(Audited)
Expected cash flows (undiscounted)
Within Over 15
1 year 1-5 years 5-15 years years Total
GBPm GBPm GBPm GBPm GBPm
Unit-linked 222 539 790 672 2,223
With DPF and Other contracts 1,565 5,765 7,735 6,077 21,142
At 31 Dec 2020 1,787 6,304 8,525 6,749 23,365
Unit-linked 193 451 633 611 1,888
With DPF and Other contracts 1,373 5,163 6,815 6,714 20,065
At 31 Dec 2019 1,566 5,614 7,448 7,325 21,953
.
Insurance risk
Description and exposure
Insurance risk is the risk of loss through adverse experience,
in either timing or amount, of insurance underwriting parameters
(non-economic assumptions). These parameters include mortality,
morbidity, longevity, lapses and unit costs.
The principal risk we face is that, over time, the cost of the
contract, including claims and benefits, may exceed the total
amount of premiums and investment income received.
The table on page 84 analyses our insurance manufacturing
exposures by type of contract.
The insurance risk profile and related exposures remain largely
consistent with those observed at 31 December 2019.
Sensitivities
The table below shows the sensitivity of profit and total equity
to reasonably possible changes in non-economic assumptions across
all our insurance manufacturing subsidiaries.
Mortality and morbidity risk is typically associated with life
insurance contracts. The effect on profit of an increase in
mortality or morbidity depends on the type of business being
written. Our largest exposure to mortality and morbidity risk
exists in the UK. Sensitivity to lapse rates depends on the type of
contracts being written. For a portfolio of term assurance, an
increase in lapse rates typically has a negative effect on profit
due to the loss of future income on the lapsed policies. However,
some contract lapses have a positive effect on profit due to the
existence of policy surrender charges. We are most sensitive to a
change in lapse rates in France.
Expense rate risk is the exposure to a change in the cost of
administering insurance contracts. To the extent that increased
expenses cannot be passed on to policyholders, an increase in
expense rates will have a negative effect on our profits.
Sensitivity analysis
(Audited)
2020 2019
GBPm GBPm
---- ------
Effect on profit after
tax and total equity
at 31 Dec
10% increase in mortality
and/or morbidity rates (15) (20)
10% decrease in mortality
and/or morbidity rates 15 18
10% increase in lapse
rates (19) (20)
10% decrease in lapse
rates 21 23
10% increase in expense
rates (46) (42)
10% decrease in expense
rates 43 42
Corporate Governance Report
The statement of corporate governance practices set out on pages
86 to 94, together with the information incorporated by reference,
constitutes the Corporate Governance Report of HSBC Bank plc (the
'bank'). The following disclosures, read together with those in the
Strategic Report, including the section 172 Statement on pages 10
and 11 and reporting on employee engagement on pages 7 to 11
describe how the Board has discharged its duty under section 172 of
the Companies Act 2006 (the 'Act'), as well as the requirements
under the Companies (Miscellaneous Reporting) Regulations 2018 (the
'Reporting Regulations').
Engagement with employees, suppliers, customers and others
Customers Page 7 How we do business
section 172
Page 10 statement
Employees Page 7 How we do business
Pages 10 section 172
and 11 statement
Pages 92 Corporate Governance
to 93 statement
Communities Pages 7 and
/ the environment 8 How we do business
Regulators Page 7 How we do business
section 172
Page 10 statement
Suppliers Page 7 How we do business
section 172
Page 10 statement
The bank, together with the wider Group, is committed to high
standards of corporate governance. The Group has a comprehensive
range of principles, policies and procedures influenced by the UK
Corporate Governance Code with requirements in respect of Board
independence, composition and effectiveness to ensure that the
Group is well managed, with appropriate oversight and control.
During the year, the bank adhered to these corporate governance
principles, policies and procedures.
The Directors serving at 31 December 2020 are set out below.
Directors
Stephen O'Connor
Chairman
Chairman of the Nomination, Remuneration & Governance
Committee
Appointed to the Board: May 2018. Chairman since August 2018
Stephen is a non-executive director of HSBC Continental Europe,
Chairman and Founder of Quantile Technologies Limited, and a
non-executive Director, Chairman of the Risk Committee and member
of both the Audit and Nomination Committees of The London Stock
Exchange Group plc and a Director of the London Stock Exchange plc.
He is also a non-executive Director of the FICC Markets Standards
Board. He has more than 25 years' investment banking experience in
London and New York.
Former appointments include: Chairman of the International Swaps
and Derivatives Association, prior to which he was Managing
Director and a member of the Fixed Income Management Committee at
Morgan Stanley.
Nuno Matos
Executive Director and Chief Executive Officer
Chairman of the Executive Committee
Appointed to the Board and as Chief Executive Officer: March
2020. Stepped down as Chief Executive Officer on 22 February 2021
and will be resigning from the Board on 23 February 2021.
Nuno is the Chief Executive of HSBC Bank plc and a Group General
Manager. Nuno is also a member of the Supervisory Board of HSBC
Trinkaus & Burkhardt AG and was previously CEO of HSBC Mexico.
He joined HSBC in 2015 as regional head of RBWM in Latin America
and Global Head of Retail Business Banking. Prior to joining HSBC,
he held senior positions at Santander Group.
Jacques Fleurant
Executive Director and Chief Finance Office r
Member of the Executive Committee
Appointed to the Board and as Chief Finance Officer: August
2018
Jacques leads the Finance function in the support and control of
HSBC's businesses and operations in Europe. Previously, he served
as Chief Financial Officer for HSBC Bank Canada from July 2012 to
August 2018.
Jacques joined HSBC in 2000 in Toronto, and has held a variety
of senior roles in finance and operations. Prior to joining HSBC,
he performed senior roles at Merrill Lynch and for the Canadian
Revenue Agency.
Dame Mary Marsh
Independent non-executive Director
Member of the Risk Committee
Appointed to the Board: January 2009
Mary is the non-executive Chair of Trustees of the Royal College
of Paediatrics and Child Health, a director of the London Symphony
Orchestra, a member of the Governing Body of the London Business
School and a Trustee of Teach First.
Former appointments include: founding Director of the Clore
Social Leadership Programme and Chief Executive of the National
Society for the Prevention of Cruelty to Children.
Stephen Moss
Non-executive Director
Appointed to the Board: April 2020. To resign from the Board on
23 February 2021.
Stephen was named Regional Chief Executive in March 2020, with
responsibility for overseeing the Group's businesses in Europe
(apart from HSBC UK); the Middle East, North Africa and Turkey;
Latin America; and Canada. He joined HSBC in 1992 and has held
roles in Hong Kong and London. Previously Stephen held the role of
Chief of Staff to the Group Chief Executive leading Group Strategy
and Planning, Group Mergers and Acquisitions, Global
Communications, Global Events, Group Public Affairs and Group
Corporate Sustainability. Stephen continues to oversee the Group's
mergers and acquisitions activities, and is a non-executive
director of The Saudi British Bank, HSBC Bank Middle East Limited,
HSBC Middle East Holdings B.V., HSBC Latin America Holdings (UK)
Limited and HSBC Bank Canada.
Yukiko Omura
Independent non-executive Director
Member of the Risk Committee
Appointed to the Board: May 2018
Yukiko is a non-executive Director of The Private Infrastructure
Development Group Limited ('PIDG'), as well as Chair of GuarantCo
Limited, a subsidiary of PIDG. She also serves as a non-executive
Director of Assured Guaranty Ltd, and a member of the Supervisory
Board of Nishimoto HD Co. Ltd. She has more than 35 years'
international professional experience in both the public and
private financial sector, performing senior roles for JP Morgan,
Lehman Brothers, UBS and Dresdner Bank.
Former appointments include: Under-Secretary General and
COO/Vice President of the International Fund for Agricultural
Development and Executive Vice President and CEO of the
Multilateral Investment Guarantee Agency of the World Bank
Group.
Dr Eric Strutz
Independent non-executive Director
Chairman of the Risk Committee, member of both the Audit
Committee and the Nomination, Remuneration & Governance
Committee
Appointed to the Board: October 2016
Eric is a member of the Supervisory Board and Chairs the Audit
Committee of HSBC Trinkaus & Burkhardt AG, the Vice Chairman
and Lead Independent Director of Partners Group Holding AG, where
he also Chairs the Risk and Audit Committee, a member of the Board
of Directors of Global Blue Group Holding AG, and a member of the
Advisory Board and Chairman of the Audit & Risk Committee of
Luxembourg Investment Company 261 Sarl.
Former appointments include: Chief Financial Officer of
Commerzbank Group, Partner and Director of the Boston Consulting
Group, as well as non-executive Director of Mediobanca Banca di
Credito Finanziario SpA.
John Trueman
Deputy Chairman and independent non-executive Director
Member of the Risk Committee, the Audit Committee and the
Nomination, Remuneration & Governance Committee
Appointed to the Board: September 2004. Deputy Chairman since
December 2013
John is Chairman of HSBC Global Asset Management Limited. Former
appointments include: Deputy Chairman of S.G. Warburg & Co
Ltd.
Andrew Wright
Independent non-executive Director
Chairman of the Audit Committee, member of both the Risk
Committee and the Nomination, Remuneration & Governance
Committee
Appointed to the Board: May 2018
Andrew is a member of the Supervisory Board and Chairs the Risk
Committee of HSBC Trinkaus & Burkhardt AG.
Former appointments include: Treasurer to the Prince of Wales
and the Duchess of Cornwall, a role he held from May 2012 until
June 2019, Global Chief Financial Officer for the Investment Bank
at UBS AG, Chief Financial Officer, Europe and the Middle East at
Lehman Brothers and Chief Financial Officer for the Private Client
and Asset Management Division at Deutsche Bank.
Board Changes during 2020 and following
the year-end
James Emmett stepped down from the Board on 29 February 2020 and
Nuno Matos succeeded him as a Director and Chief Executive Officer
of the bank and Europe with effect from 1 March 2020. On 30
November 2020, it was announced that Nuno Matos would step down
from the Board to take up the position of Chief Executive Officer
of Wealth and Personal Banking. Colin Bell has been appointed to
succeed him as Chief Executive Officer of the bank and Europe with
effect from 22 February 2021. His appointment as a Director will
also take effect on 22 February 2021, immediately following the
approval and signature of all documents comprising the bank's
Annual Report and Accounts 2020. A brief biography is set out
below:
Colin Bell joined HSBC in July 2016. He previously held the role
of Group Chief Compliance Officer, and also led the Group
transformation oversight programme.
Colin previously worked at UBS, which he joined in 2007, where
he was the Global Head of Compliance and Operational Risk Control.
Colin joined the British Army in 1990 and he served for 16 years in
a variety of command and staff roles and completed the Joint
Services Command and Staff College in 2001.
Stephen Moss was appointed as a non-independent non-executive
director on 24 April 2020. He will step down from the Board on 23
February 2021 in anticipation of taking up the position of Chief
Executive Officer, Middle East, North Africa and Turkey (MENAT) in
April 2021, subject to regulatory approval.
Juliet Robinson joined the Board as an independent non-executive
director and member of the Risk Committee with effect from 1
February 2021. A brief biography for Juliet is set out below:
Prior to her appointment to the Board, Juliet held a number of
senior management positions at Morgan Stanley, most recently a dual
role as European Head of Operations and Global Head of Shared
Services and Banking Operations. Prior to 2007 she performed senior
roles within Goldman Sachs International.
Company Secretary
The responsibilities of the Company Secretary include ensuring
good governance practices at Board level and effective information
flows within the Board and its committees and between senior
management and the non-executive Directors.
Loren Wulfsohn acted as Company Secretary of the bank until
30 April 2020 and Philip Jockelson acted as Company Secretary
for the remainder of the year.
Board of Directors
Role
The Board, led by the Chairman, is responsible amongst other
matters for:
(i) promoting the long-term success of the bank and delivering
sustainable value to shareholders and other stakeholders;
(ii) entrepreneurial leadership of the bank within a framework
of prudent and effective controls which enables risks to be
assessed and managed;
(iii) setting the bank's strategy and risk appetite statement
including monitoring the bank's risk profile; and
(iv) approving the capital and operating plans and material
transactions on the recommendation of management.
The role of the independent non-executive Directors is to
support the development of proposals on strategy, hold management
to account and ensure the executive Directors are discharging their
responsibilities properly by promoting a culture that encourages
constructive challenge. Non-executive Directors also review the
performance of management in meeting agreed goals and objectives.
The Chairman meets with the non-executive Directors without the
executive Directors in attendance after each Board meeting and
otherwise, as necessary.
The majority of the Board members are independent non-executive
Directors. Both the Chief Executive Officer and the Chief Finance
Officer are members of the Board. All Directors are subject to
election or re-election at the bank's Annual General Meeting.
Operation of the Board
The Board is ordinarily scheduled to meet at least seven times a
year but in 2020, given the unique challenges faced during the year
as a result of the Covid-19 outbreak, the Board held nine scheduled
meetings (with additional ad hoc meetings and weekly calls held
during the height of the crisis) to ensure that the Board was
properly informed on a regular basis regarding all key issues
affecting the bank.
Board activities during 2020
In addition to responding to the impacts of the Covid-19
outbreak, the Board has focused during 2020 on resetting the
region's strategic direction, supporting the Chief Executive and
overseeing performance, risk and capital.
Due to the evolving external landscape during 2020, in addition
to ongoing dialogue with management to progress the formulation and
execution of the revised strategy, three dedicated strategy
sessions were held by the Board during the course of the year. Deep
dives on key aspects of the bank's business were also conducted to
consider the performance and strategy of key businesses and
countries.
During the year the Board also approved the financial, capital,
liquidity and funding plans put forward by management and monitored
the implementation of plans in anticipation of the end of the
Brexit transition period. Further information on the principal
decisions made by the Board during 2020, including in respect of
the strategic reset and capital plans is located in the section 172
statement on pages 10 to 12.
Directors' emoluments
Details of the emoluments of the Directors of the bank for 2020,
disclosed in accordance with the Companies Act, are shown in Note 5
'Employee compensation and benefits'.
Non-executive Directors do not have service contracts, but are
engaged through letters of appointment. There are no obligations in
the non-executive Directors' letters of appointment that could give
rise to payments other than fees due or payments for loss of
office.
Board committees
The Board delegates oversight of certain audit, risk,
remuneration, nomination and governance matters to its committees.
Each standing Board committee is chaired by a non-executive Board
member and has a remit to cover specific topics in accordance with
their respective terms of reference. Only independent non-executive
Directors are members of Board committees. The Chairman of each
non-executive Board Committee reports to the Board on the
activities of the Committee since the previous Board meeting.
Board and Committee effectiveness and performance
The Board understands the importance of, and benefits that
derive from regular reviews of the effectiveness of the Board and
its Committees. In 2020, the bank was subject to an internally
facilitated subsidiary governance review of the Group's main
subsidiary Boards and Committees. The review focused on (i) the
composition, skill-set, time commitment and fees for Boards and
Committees; (ii) service quality and scope of governance and
secretarial support; and (iii) the effectiveness of the bank's
relationship with the Group. The results of the subsidiary
governance review of the bank have been considered by the Board and
work is ongoing to address recommendations. Executive Directors are
also subject to performance evaluation which helps to determine the
level of variable pay they receive each year.
At the date of this report, the following are the principal
Committees of the Board:
Audit Committee
Role
The Audit Committee is accountable to the Board and has
non-executive responsibility for oversight of and advice to the
Board on financial reporting related matters, internal controls
over financial reporting and implementation of the Group's policies
and procedures for capturing and responding to whistleblower
concerns. The Committee's key responsibilities are:
(i) to monitor and assess the integrity of the financial
statements, formal announcements and regulatory information in
relation to the bank's financial performance;
(ii) to ensure the effectiveness of, and ensure that management
has appropriate controls over, financial reporting;
(iii) to review and monitor the relationship with the external
auditor; and
(iv) to oversee the work of Internal Audit.
The Committee meets regularly with the bank's senior financial
and Internal Audit management and the external auditors to
consider, among other matters, the bank's financial reporting, the
nature and scope of audit reviews, the effectiveness of the systems
of internal control relating to financial reporting and the
monitoring of the Finance function transformation programme. The
Committee also has responsibility for the oversight of the
bank's whistleblowing arrangements, and receives regular updates
on the numbers and types of matters raised by employees through the
whistleblowing arrangements that are in place.
Committee activities during 2020
In addition to significant accounting judgements, key matters
considered by the Committee during the year included the impact of
the Covid-19 outbreak, the bank's capital and risk management and
Pillar 3 disclosures, the proposed adoption of Cloud by the Finance
function, the independence, fees and performance of the external
auditor, PricewaterhouseCoopers LLP, and updates on key issues
identified by Internal Audit related to the bank and its
subsidiaries.
The Committee also received updates from the Chairs of the Audit
Committees of material subsidiaries of the Bank, updates from the
external auditor on the progress and findings of their audit, and
bi-annual updates on the tax position of the bank and its
subsidiaries. It also received regular reports on whistle
blowing.
Operation of the Committee
The Committee held eight scheduled meetings during the year and
held separate meetings with each of the Chief Finance Officer, the
Chief Risk Officer, the Head of Internal Audit and representatives
of the external auditor without management present.
The current members are Andrew Wright (Chairman), Eric Strutz
and John Trueman.
Significant accounting judgements and related matters considered by the
Audit Committee ('AC') for the year ended 2020 included:
Interim and annual reporting The AC considered key judgements in relation
to interim and annual reporting.
Expected credit loss ('ECL') The AC considered the key judgements related
allowances and charges to IFRS 9 and the related disclosures, including
considerations in respect of ECL allowances
and charges for wholesale lending. Attention
was paid to credit risk assessment in the
UK and Continental Europe and the adjustment
to ECL for Covid-19 related economic uncertainty,
including post-model adjustments.
Valuation of financial instruments The AC considered the key valuation metrics
and judgements involved in the determination
of the fair value of financial instruments.
Going concern The AC considered a wide range of information
relating to present and potential conditions,
including projections for profitability, cash
flows, liquidity and capital.
Impairment of investment The AC reviewed management's periodic assessment
in subsidiary of impairment of investments in subsidiaries
and paid particular attention to the reliability
of the cash flow projections and long-term
growth rate and discount rate assumptions.
Management assessed that there had been no
further impairment of the bank's investment
in HSBC Continental Europe for the year ended
2020.
Non-financial assets impairment The AC considered the results of the periodic
testing non-financial assets impairment test. Management
assessed that in total GBP1.0bn of non-financial
assets are impaired or derecognised during
the year mainly due to the cash generating
units no longer having a value in use in excess
of their net assets.
Appropriateness of provisioning The AC received reports from management on
for legal proceedings and the recognition and measurement of provisions
regulatory matters and contingent liabilities for legal proceedings
and regulatory matters. Matters included accounting
judgements in relation to provisions and contingent
liabilities arising from investigations by
regulators and competition and law enforcement
authorities around the world on the trading
in the foreign exchange market.
IBOR transition The AC considered the accounting implications
of benchmark interest rate replacement for
hedge accounting relationships at 31 December
2020, the longer term broader implications
for financial instruments and other areas
of accounting, and the related disclosures.
The AC concluded that management's judgement
regarding the continuation of hedge accounting
was appropriate as at 31 December 2020 and
that this position will be kept under review
in the context of future market developments
in the transition of interest rate benchmarks
to new risk free rates.
Controls The AC considered the financial control environment
on an ongoing basis through the year, reviewing
and challenging remediation actions undertaken
and enhancements made. This included confirmation
of mitigating controls where programmes of
work had not fully completed by the year end.
Areas of particular focus in 2020 have been
Impairment of Non-Financial Assets, third
party risk management, Business User Access,
Model Risk Governance, general ledger substantiation
and Financial Statement Disclosures.
Tax The AC considered key judgements in relation
to tax, notably the contingent liability for
retrospective VAT assessments issued by HMRC
and deferred tax asset recognition.
Insurance business revenue The AC considered management's actions to
and cost sharing assumptions address the impact of the prolonged low interest
rate environment in the Eurozone on the insurance
business and its implications for the present
value of in-force contracts.
Sustainable Finance The AC noted the regulatory developments on
Environmental, Social, Governance ('ESG')
reporting requirements.
Significant accounting judgements and related matters considered by the
Audit Committee ('AC') for the year ended 2020 included: (continued)
Regulatory reliefs and policy The AC considered management's actions to
changes to alleviate impacts implement the regulatory reliefs and policy
of Covid-19 changes made to alleviate impacts of Covid-19,
including i) Deferrals to existing projects
and regulatory reviews ii) Capital and liquidity
reliefs to mitigate procyclical impacts and
iii) Policy Clarifications, mainly application
of IFRS 9 in light of the Covid-19 uncertainty
and changes to the Capital Requirements Regulation.
Restructuring provisions The AC considered key judgements in relation
to restructuring provisions, mainly relating
to transformation in HSBC Continental Europe.
Risk Committee
Role
The Risk Committee has overall non-executive responsibility for
oversight of risk-related matters and the risks impacting the bank.
The Committee's key responsibilities are:
(i) to advise the Board on risk appetite-related matters, and
key regulatory submissions, including the ICAAP and ILAAP, as well
as recovery and resolution planning;
(ii) to oversee and advise the Board on all risk-related
matters, including financial risks, non-financial risks and the
effectiveness of the bank's conduct framework;
(iii) to review and challenge the bank's stress testing
exercises; and
(iv) to review the effectiveness of the bank's Risk Management
Framework.
The Committee meets regularly with the bank's senior financial,
risk, internal audit and compliance management and the external
auditors to consider, among other matters, risk reports and
internal audit reports and the effectiveness of compliance
activities. The Risk Committee also has responsibility for the
oversight of systems, operational resilience and the bank's IT
infrastructure, including operational resilience of critical IT and
other business services, cyber security, digital and major IT
change programmes.
During 2021, the Risk Committee will be assisted in the
discharge of its duties in respect of oversight of operational and
IT resilience matters by a new advisory body, the Transformation,
Operational Resilience and Technology Committee. This Committee
will also assist the Board with oversight of the Europe
transformation programme and IT Strategy. The new Committee will
facilitate more in-depth discussion of these important topics and
report to the Risk Committee and Board on its activities.
The current members are Juliet Robinson (Chair), Eric Strutz and
Mary Marsh.
Committee activities during 2020
Key matters considered by the Committee during the year included
the bank's approach to the financial and non-financial risks
arising out of the Covid-19 outbreak, the Transformation programme,
IBOR transition, implementation of the Payment Services Directive
II, third party risk management, non-financial risks and
preparations for the end of the Brexit transition period.
The Committee also reviewed and challenged key regulatory
processes, including the bank's internal capital adequacy
assessment process and the internal capital liquidity assessment
process; recovery and resolution plans (including the bank's
response to the Bank of England's Resolvability Assessment
Framework requirements); the outcome of stress tests undertaken
during the year; and the bank's capital and funding plans.
Operation of the Committee
The Committee held 11 scheduled meetings during the year and
held separate meetings with the Head of Internal Audit, the Chief
Risk Officer, the Chief Finance Officer and representatives of the
external auditor without management present.
The current members are: Eric Strutz (Chairman), Mary Marsh,
Yukiko Omura, John Trueman and Andrew Wright.
Nomination, Remuneration & Governance Committee
Role
The Nomination, Remuneration & Governance Committee has
responsibility for:
(i) leading the process for Board appointments and for
identifying and nominating, for the approval of the Board,
candidates for appointment to the Board;
(ii) the endorsement of the appointment of individuals to
certain Board and management positions at the bank's subsidiaries;
including proposed fees payable to non-executive Directors on
subsidiary boards;
(iii) reviewing the implementation and appropriateness of HSBC
Group's remuneration policy and the remuneration of the bank's
senior executives, including the identification of the Material
Risk Taker population for the purposes of the Capital Requirements
Directive; and
(iv) reviewing and developing the corporate governance framework
on behalf of the Board and ensuring it is consistent with best
corporate governance standards and practices while remaining
appropriate to the size, complexity and strategy of the bank.
Committee activities during the year
Key matters considered by the Committee during the year included
the appointment to the Board of new Directors, including a leading
role in the identification of new Chief Executive Officers and an
additional independent non-executive Director, as well as several
senior positions within the bank's Executive Committee.
Other activities during the year included approval of a revised
Board Diversity Policy. The Committee applies the principles in the
policy when considering the composition of the Board, including in
relation to gender, ethnicity and age. Other factors taken into
account when assessing Board composition include the educational
and professional background of directors, with specific focus
during the year on securing new appointments with suitable
experience to oversee execution of the Europe transformation
programme.
The Group has implemented a Subsidiary Accountability Framework
('SAF') which seeks to ensure a consistent approach to governance
across all subsidiaries in the Group, and to strengthen interaction
and information flows between the bank and the Group. The SAF is
now embedded and the Committee's remit now encompasses Governance
oversight, which includes the implementation of the SAF across the
region. The Committee reports on progress both to the Board and,
through the Group Chairman's Forum, to the Group.
Operation of the Committee
The Committee held eight scheduled meetings during 2020, with
additional meetings arranged to consider specific matters.
The current members are: Stephen O'Connor (Chairman), Eric
Strutz, John Trueman and Andrew Wright.
Executive Committee
The Executive Committee is a committee of the Board and is
accountable to the Board for the management and day-to-day running
of the bank. The purpose of the Committee is to support the Chief
Executive Officer of the bank in the performance of his duties and
exercise of his powers, authorities and discretions in relation to
the management of the bank and its subsidiaries and to support him
in the discharge of his responsibilities to the Board. The
Committee meets regularly and is chaired by the Chief Executive
Officer.
Regular Risk Management Meetings of the Executive Committee,
chaired by the Chief Risk Officer, are held to establish, maintain
and periodically review the policy and guidelines for the
management of risk within the bank.
Regular meetings of the Financial Crime Risk Management
Committee are held to ensure effective enterprise-wide management
of financial crime risk within the bank.
During 2020, in addition to its day-to-day oversight of the
bank's operations, the Executive Committee's principal areas of
focus included managing the bank's response to the Covid-19
outbreak (with daily meetings convened during the height of the
crisis) and oversight of the bank's transformation programme
through the establishment of a dedicated weekly Transformation
Execution Committee. The Executive Committee also established a
People Committee during 2020 to ensure due consideration of issues
relevant to the bank's employees.
The bank continues to operate a Disclosure Committee, under the
authority of the Chief Executive Officer, to support the bank in
the discharge of its obligations under relevant Market Abuse
Regulations. The Disclosure Committee is comprised of the Chief
Finance Officer (Chairman), Chief Risk Officer, General Counsel,
Company Secretary and the Global Head of Debt Investor
Relations.
Dividends
Information about dividends paid during the year is provided on
page 18 of the Strategic Report and in Note 8 to the financial
statements.
Internal control
The Board is responsible for maintaining and reviewing the
effectiveness of risk management and internal control systems and
for determining the aggregate level and types of risks the bank is
willing to take in achieving its strategic objectives.
To meet this requirement and to discharge its obligations under
the FCA Handbook and the PRA Handbook, procedures have been
designed for safeguarding assets against unauthorised use or
disposal; for maintaining proper accounting records; and for
ensuring the reliability and usefulness of financial information
used within the business or for publication.
These procedures provide reasonable assurance against material
misstatement, errors, losses or fraud. They are designed to provide
effective internal control within the group and accord with the
Financial Reporting Council's guidance for Directors issued in
2014, internal control and related financial and business
reporting. The procedures have been in place throughout the year
and up to 22 February 2021, the date of approval of this Annual
Report and Accounts 2020.
The key risk management and internal control procedures include
the following:
-- Global principles: The HSBC Group's Global Principles set an
overarching standard for all other policies and procedures and are
fundamental to the Group's risk management structure. They inform
and connect our purpose, values, strategy and risk management
principles, guiding us to do the right thing and treat our
customers and our colleagues fairly at all times.
-- Risk management framework (RMF): The RMF provides an
effective and efficient approach to how we govern and oversee the
organisation as well as how we monitor and mitigate risks to the
delivery of our strategy. It applies to all categories of risk,
covering core governance, standards and principles that bring
together all of the group's risk management practices into an
integrated structure.
-- Delegation of authority within limits set by the Board:
Subject to certain matters reserved for the Board, the Chief
Executive Officer has been delegated authority limits and powers
within which to manage the day-to-day affairs of the group,
including the right to sub-delegate those limits and powers. Each
relevant executive has authority within which to manage the
day-to-day affairs of the business or function for which he or she
is accountable. Those individuals are required to maintain a clear
and appropriate apportionment of significant responsibilities and
to oversee the establishment and maintenance of systems of control
that are appropriate to their business or function. Authorities to
enter into credit and market risk exposures are delegated with
limits to line management of group companies. However, credit
proposals with specified higher-risk characteristics require the
concurrence of the appropriate global function. Credit and market
risks are measured and reported at subsidiary company level and
aggregated for risk concentration analysis on a group-wide
basis.
-- Risk identification and monitoring: Systems and procedures
are in place to identify, assess, control and monitor the material
risk types facing the group as set out in the RMF. The group's risk
measurement and reporting systems are designed to help ensure that
material risks are captured with all the attributes necessary to
support well-founded decisions, that those attributes are
accurately assessed and that information is delivered in a timely
manner for those risks to be successfully managed and
mitigated.
-- Changes in market conditions/practices: Processes are in
place to identify new risks arising from changes in market
conditions/practices or customer behaviours, which could expose the
group to heightened risk of loss or reputational damage. The group
employs a top and emerging risks framework, which contains an
aggregate of all current and forward-looking risks and enables it
to take action that either prevents them materialising or limits
their impact.
-- Responsibility for risk management: All employees are
responsible for identifying and managing risk within the scope of
their role as part of the three lines of defence model. This is an
activity-based model to delineate management accountabilities and
responsibilities for risk management and the control environment.
The second line of defence sets the policy and guidelines for
managing specific areas, provides advice and guidance in relation
to the risk, and challenges the first line of defence (the risk
owners) on effective risk management.
-- The Board has delegated to the Audit Committee oversight for
the implementation of the group's policies and procedures for
capturing and responding to whistleblower concerns, ensuring
confidentiality, protection and fair treatment of whistleblowers,
and receiving reports arising from the operation of those policies
as well as ensuring arrangements are in place for independent
investigation.
-- Strategic plans: Strategic plans are prepared for global
businesses, global functions and geographical regions within the
framework of the HSBC Group's overall strategy. The bank also
prepares and adopts an Annual Operating Plan, which is informed by
detailed analysis of risk appetite, describing the types and
quantum of risk that the bank is prepared to take in executing its
strategy and sets out the key business initiatives and the likely
financial effects of those initiatives.
-- The effectiveness of the group's system of risk management
and internal control is reviewed regularly by the Board, the Risk
Committee and the Audit Committee.
-- During 2020, the group continued to focus on operational
resilience and invest in the non-financial risk infrastructure.
There was a particular focus on material and emerging risks with
significant progress made enhancing the end-to-end risk and control
assessment process. The Risk Committee and the Audit Committee
received confirmation that executive management has taken or is
taking the necessary actions to remedy any failings or weaknesses
identified through the operation of the group's framework of
controls.
Internal control over financial reporting
The key risk management and internal control procedures over
financial reporting include the following:
-- Entity level controls : The primary mechanism through which
comfort over risk management and internal control systems is
achieved, is through assessments of the effectiveness of entity
level controls ('ELCs'), and the reporting of risk and control
issues on a regular basis through the various risk management and
risk governance forums. ELCs are internal controls that have a
pervasive influence over the entity as a whole. They include
controls related to the control environment, for example the bank's
values and ethics, the promotion of effective risk management and
the overarching governance exercised by the Board and its
non-executive committees. The design and operational effectiveness
of ELCs are assessed annually as part of the assessment of the
effectiveness of internal controls over financial reporting.
-- Process level transactional controls: Key process level
controls that mitigate risk of financial mis-statement are
identified, recorded and monitored in accordance with the risk
framework. This includes the identification and assessment of
relevant control issues against which action plans are tracked
through to remediation. Further details on the group's approach to
risk management can be found on page 22. The Audit Committee has
continued to receive regular updates on HSBC's ongoing activities
for improving the effective oversight of end-to-end business
processes and management continues to identify opportunities for
enhancing key controls, such as through the use of automation
technologies.
-- External Reporting Forum: The External Reporting Forum
reviews financial reporting disclosures made by the bank for any
material errors, mis-statements or omissions. The integrity of
disclosures is underpinned by structures and processes within the
group's Finance and Risk functions that support rigorous analytical
review of financial reporting and the maintenance of proper
accounting records.
-- Disclosure Committee: As indicated on page 91, the Disclosure
Committee considers the external reporting obligations of the bank
to ensure compliance with reporting obligations under the EU Market
Abuse Regulations.
-- Financial reporting: The group's financial reporting process
is controlled using documented accounting policies and reporting
formats, supported by detailed instructions and guidance on
reporting requirements, issued to all reporting entities within the
group in advance of each reporting period end. The submission of
financial information from each reporting entity is supported by a
certification by the responsible financial officer and analytical
review procedures at subsidiary and group levels.
-- Subsidiary certifications: Certifications are provided to the
Audit Committee and the Risk Committees (full and half yearly) and
to the Nomination, Remuneration and Governance Committee (annually)
from the audit, risk and remuneration committees of key material
subsidiary companies confirming amongst other things that:
- Audit - the financial statements of the subsidiary have been
prepared in accordance with group policies, present fairly the
state of affairs of the subsidiary and are prepared on a going
concern basis;
- Risk - the Risk Committee of the subsidiary has carried out
its oversight activities consistent with and in alignment to the
RMF; and
- Remuneration - the Remuneration Committee of the subsidiary
has discharged its obligations in overseeing the implementation and
operation of HSBC's Group Remuneration Policy.
Employees
Health and safety
We are committed to providing a healthy and safe working
environment for everyone. We strive to ensure we adopt best health
and safety management practices across the organisation and aim for
standards that reflect our core values.
Chief operating officers have overall responsibility for
ensuring that global policies, procedures and safeguards are put
into practice locally, and that all legal requirements are met.
To put our commitment into practice, we delivered a range of
programmes in 2020 to help us understand and manage effectively the
risks we face and improve the buildings in which we operate:
-- Based on expert medical advice, we created safe workplaces
globally, designed to protect our employees, contractors and
customers from the risk of Covid-19. We carried out around 1,700
Covid-19 related workplace enhancements globally, with measures
involving: enhanced cleaning, training and awareness, public
hygiene and track and trace.
-- We updated our advice on working from home, providing more
awareness and best practice on good ergonomics and well-being to be
adopted during these unprecedented times.
-- We delivered an improved health and safety training and
awareness programme to 245,000 of our employees and contractors
globally, ensuring roles and responsibilities were clear and
understood.
-- We competed the annual safety inspection on all of our
buildings globally, subject to local Covid-19 restrictions, to
ensure we were meeting our standards and continuously improving our
safety performance.
-- We continued to focus on enhancing the safety culture in our
supply chain through our SAFER Together programme, covering the
five key elements of best practice safety culture, including
speaking up about safety, and recognising excellence. Our 2020
safety climate survey results showed a continued year on year
increase in safety culture, and significantly above the industry
average.
-- Our Eat Well Live Well programme continued through educating
and informing our colleagues on how to make healthy food and drink
choices. We enhanced a programme to provide digital educational and
information resources, including a suite of videos and recipe
ideas. The programme was runner up in the 2020 Global Healthy
Workplace Awards.
-- We put in place effective storm preparation controls and
processes to ensure the protection of our people and operations. In
2020 there were 41 named storms, that passed over 2,316 of our
buildings, and resulted in no injuries or business impact.
Employee health and safety
Footnotes 2020 2019 2018
---------
Number of workplace - - -
fatalities
--------- ---- ----
Number of major
injuries to employees 1 2 3 1
--------- ---- ------
All injury rate
per 100,000 employees 35 130 87
--------- ---- ------
1 Fractures, dislocation, concussion, hospitalisation, unconsciousness.
1
Diversity and inclusion
Our employees and the societies they represent and serve span
many cultures, communities and continents. We believe this
diversity makes us stronger, and we are dedicated to building a
diverse and connected workforce where everyone feels a sense of
belonging. In Europe, we have carried out actions to drive
improvements in representation and sentiment across multiple
diversity strands, strengthen our employee networks, and improve
our diversity data. Our diversity focus goes beyond gender to
include ethnicity, disability and LGBT+.
Key achievements
In Europe, we have launched the ethnicity inclusion campaign
which aims to diversify our workforce ethnicity profile and have
adapted it to local circumstances.
A podcast about ethnicity was recorded with the CEO of Europe
and the Head of HR and shared with colleagues.
Exchange meetings to discuss ethnicity and multiculturalism were
organised in several countries e.g. Bermuda and France.
We have again been recognised for the range of our work to
support LGBT+ people as one of only 17 companies 'named as
Stonewall Top Global Employer', and in Europe we have actively
participated in the #24 hours of Pride through several virtual
events in the UK, Poland, Greece, Germany, Malta, Luxembourg,
France, Channel Islands, Ireland, Italy and Bermuda. In Italy we
have also joined an external association which supports employers
in implementing Diversity policies mostly on LGBT+ inclusion. In
the UK we are headline sponsors of Birmingham Pride. In 2020, our
LGBT+ ERG Pride was a finalist of the UK LGBT Awards.
We are working to increase Employee Resources Groups (ERG)
representation across Europe. New chapters were created in 2020,
like Balance (gender) in Germany, Pride (LGBT+) in Luxembourg and
Embrace (Ethnicity) in Bermuda and South Africa.
Our ERGs are actively involved in supporting employees locally.
Balance, our ERG dedicated to gender diversity, has also a European
representation and for the second year have run a programme (Taste
of the Top) to give exposure to female talent allowing them to
cover a week of leave for very senior positions. In Italy, we are
now a member of Valore D - Association to promote female talent at
all levels. In Germany, more than 300 employees participated in the
events to launch the Balance ERG.
Under the patronage of the President of Malta, we have partnered
with other organisations to sponsor the Malta Businesswoman of the
Year Awards which aims to promote and recognise outstanding female
leaders, and empower women to reach their full potential.
Gender diversity statistics
Our overall female representation is improving and we are
committed to building a strong pipeline of female talent to improve
gender balance in senior leadership across Europe. Our target was
22.9% of women in senior leadership (Global Career Band 0-3) roles
by the end of 2020. The outcome for 2020 was 22.4% of women in
senior leadership roles.
Female representation by management level:
-- All grades: 50%
-- Clerical grades: 71%
-- Junior management: 60%
-- Management: 43%
-- Senior management: 26%
-- Executive management: 12%
--
--
Employment of people with a disability
We believe in providing equal opportunities for all employees.
The employment of people with a disability is included in this
commitment. The recruitment, training, career development and
promotion of people with a disability are based on the aptitudes
and abilities of the individual. Should employees become disabled
during their employment with us, efforts are made to continue their
employment and, if necessary, appropriate training and reasonable
equipment and facilities are provided.
A number of countries have dedicated teams to ensure that
barriers to work are removed for colleagues.
The new French and German headquarters have been designed to be
fully accessible. We have supported our colleagues with
disabilities through the lockdown; for instance, in France we have
held individual calls and have made home office adjustments.
Learning and talent development
The development of our people continues to be core to the
success of our organisation as we develop and implement practices
that identify talent, and build broad employee capability to ensure
an appropriate supply of high calibre individuals with the right
values, skills and experience for current and future senior
management positions.
During 2020 our ongoing drive to make HSBC University available
to all in HSBC received significant impetuous given the pandemic
and the operational impact this had on face-to-face training. Given
the challenge we re-launched our leadership essentials curriculum
in live online format and increased our digital learning channels
so that our people could undertake an increasing range of personal
development while working remotely.
Over 2,000* HSBC Europe participants attended one of HSBC
University's flagship personal development programmes in 2020. The
most popular programmes remained focused on developing skills to
effectively lead functions and teams across HSBC, with increased
focus on doing this in a virtual world. We also saw significant
demand for new programmes that supported the need to effectively
lead change in HSBC, identify and work with team members on matters
of Mental Health and the importance of skills and knowledge that
ensures that HSBC has a diverse and inclusive approach to hiring
new personnel.
*As at end of November 2020
Employee relations
We consult with and, where appropriate, negotiate with employee
representative bodies where we have them. We also aim to maintain
well-developed communications and consultation programmes with all
employee representative bodies and there have been no material
disruptions to our operations from labour disputes during the past
five years.
Disclosure of information to auditors
The directors are not aware that there is any relevant audit
information (as defined in the Companies Act 2006) of which the
bank's auditors are unaware and processes are in place to ensure
that the bank's auditors are aware of any relevant audit
information.
Auditors
PricewaterhouseCoopers LLP ('PwC') are the external auditors to
the bank. PwC has expressed its willingness to continue in office
and the Board recommends that PwC be re-appointed as the bank's
auditors. A resolution proposing the re-appointment of PwC as the
bank's auditors, and giving authority to the Audit Committee to
determine its remuneration, will be submitted to the forthcoming
AGM.
Branches
HSBC Bank plc currently has branches in nine jurisdictions. As
part of the bank's contingency planning for Brexit, all of its
former branches in the European Union were de-registered except for
those in France and Luxembourg.
Disclosures required pursuant to the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008 as
updated by Companies (Miscellaneous Reporting) Regulations 2018 can
be found on the following pages:
Engagement with employees
(Sch.7 Para 11 and 11A 2008/2018 Pages 10
Regs), s172 Statement) and 11
Engagement with suppliers,
customers and others in
a business relationship
with the bank (Sch.7 Para
11B 2008 Regs) Page 10
Policy concerning the employment
of disabled persons (Sch.7
Para 10 2008 Regs) Page 93
Financial Instruments (Sch.7 Pages 32
Para 6 2008 Regs) to 70
Note 14,
Hedge accounting policy Pages 151
(Sch.7 Para 6 2008 Regs) to 156
.
Articles of Association, Conflicts
of interest
and indemnification of Directors
The bank's Articles of Association gives the Board authority to
approve Directors' conflicts and potential conflicts of interest.
The Board has adopted policies and procedures for the approval of
Directors' conflicts or potential conflicts of interest. On
appointment, new Directors are advised of the process for dealing
with conflicts and a review of those conflicts that have been
authorised, and the terms of those authorisations, is routinely
undertaken by the Board. The Articles of Association provide that
Directors and directors of associated companies are entitled to be
indemnified out of the assets of the bank against claims from third
parties in respect of certain liabilities. Such indemnity
provisions have been in place during the financial year and remain
in place but have not been utilised by the Directors. Additionally,
all Directors have the benefit of directors' and officers'
liability insurance.
Research and Development
In the ordinary course, the lines of business develop new
products and services.
Events after the Balance Sheet Date
After 31 December 2020, the bank acquired the remaining 0.67%
non-controlling interest in its subsidiary HSBC Trinkaus &
Burkhardt AG, making it wholly-owned. This followed the bank's
acquisition of an 18.6% non-controlling interest during 2020. Refer
to Note 34 Events after the balance sheet date.
Statement on going concern
The Directors consider it appropriate to prepare the financial
statements on the going concern basis. In making their going
concern assessment, the Directors have considered a wide range of
detailed information relating to present and potential conditions,
including profitability, cash flows, capital requirements and
capital resources.
Further information relevant to the assessment is provided in
the Strategic Report and the Report of the Directors, in
particular:
-- a description of the group's strategic direction;
-- a summary of the group's financial performance and a review of performance by business;
-- the group's approach to capital management and its capital position; and
-- the top and emerging risks facing the group, as appraised by
the Directors, along with details of the group's approach to
mitigating those risks and its approach to risk management in
general.
In addition, the objectives, policies and processes for managing
credit, liquidity and market risk are set out in the 'Report of the
Directors: Risk'.
The Directors' Report comprising pages 22 to 96 was approved by
the Board on 22 February 2021 and is signed on its behalf by.
By order of the Board
J Fleurant
Director
HSBC Bank plc
22 February 2021
Registered number 14259
Statement of directors' responsibilities in respect of the financial
statements
The directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulation.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have prepared the group and company financial statements in
accordance with international accounting standards in conformity
with the Companies Act 2006. Additionally, the Financial Conduct
Authority's Disclosure Guidance and Transparency Rules require the
directors to prepare the group and company financial statements in
accordance with international financial reporting standards adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union, and additionally, the international financial
reporting standards ('IFRSs') as issued by the International
Accounting Standards Board ('IASB'), including interpretations
issued by the IFRS Interpretations Committee relating to 'Interest
Rate Benchmark Reform - Phase 2', which amends IFRS 9, IAS 39
'Financial Instruments', IFRS 7 'Financial Instruments', IFRS 4
'Insurance Contracts' and IFRS 16 'Leases'.
Under company law, directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the group and company and of the
profit or loss of the group and company for that period. In
preparing the financial statements, the directors are required
to:
-- select suitable accounting policies and then apply them consistently;
-- state whether, for the group and company, international
accounting standards in conformity with the requirements of the
Companies Act 2006 and, for the group, international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union, have been followed,
subject to any material departures disclosed and explained in the
financial statements;
-- make judgements and accounting estimates that are reasonable and prudent; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the group and company
will continue in business.
The directors are also responsible for safeguarding the assets
of the group and company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the group's and
company's transactions and disclose with reasonable accuracy at any
time the financial position of the group and company and enable
them to ensure that the financial statements comply with the
Companies Act 2006.
The directors are responsible for the maintenance and integrity
of the company's financial statements published on the ultimate
parent company's website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Directors' confirmations
Each of the directors, whose names and functions are listed in
the Corporate Governance Report, confirm that, to the best of their
knowledge:
-- the group and company financial statements, which have been
prepared in accordance with international financial reporting
standards adopted pursuant to Regulation (EC) No 1606/2002 as it
applies in the European Union, give a true and fair view of the
assets, liabilities, financial position and loss of the group and
loss of the company; and
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
group and company, together with a description of the principal
risks and uncertainties that it faces
By order of the Board
J Fleurant
Director
HSBC Bank plc
22 February 2021
Registered number 14259
Independent auditors' report to the members of HSBC Bank plc
Report on the audit of the financial statements
Opinion
In our opinion, HSBC Bank plc's group financial statements and
company financial statements (the 'financial statements'):
-- give a true and fair view of the state of the group's and of
the company's affairs as at 31 December 2020 and of the group's
loss and the group's and the company's cash flows for the year then
ended;
-- have been properly prepared in accordance with international
accounting standards in conformity with the requirements of the
Companies Act 2006; and
-- have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements, included within the
HSBC Bank plc Annual Report and Accounts 2020 (the 'Annual
Report'), which comprise:
-- the consolidated balance sheet as at 31 December 2020;
-- the consolidated income statement and consolidated statement
of comprehensive income for the year then ended;
-- the consolidated statement of cash flows for the year then ended;
-- the consolidated statement of changes in equity for the year then ended;
-- the HSBC Bank plc balance sheet as at 31 December 2020;
-- the HSBC Bank plc statement of cash flows for the year then ended;
-- the HSBC Bank plc statement of changes in equity for the year then ended; and
-- the notes on the financial statements, which include a
description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit
Committee.
Separate opinion in relation to international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union
As explained in note 1.1(a) to the financial statements, the
group, in addition to applying international accounting standards
in conformity with the requirements of the Companies Act 2006, has
also applied international financial reporting standards adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union.
In our opinion, the group financial statements have been
properly prepared in accordance with international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in note 1.1(a) to the financial statements, the
group, in addition to applying international accounting standards
in conformity with the requirements of Companies Act 2006, has also
applied international financial reporting standards ('IFRS's) as
issued by the International Accounting Standards Board
('IASB').
In our opinion, the group financial statements have been
properly prepared in accordance with IFRSs as issued by the
IASB.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) ('ISAs (UK)') and applicable law. Our
responsibilities under ISAs (UK) are further described in the
Auditors' responsibilities for the audit of the financial
statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Independence
We remained independent of the group in accordance with the
ethical requirements that are relevant to our audit of the
financial statements in the UK, which includes the FRC's Ethical
Standard, as applicable to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance
with these requirements.
To the best of our knowledge and belief, we declare that
non-audit services prohibited by the FRC's Ethical Standard were
not provided to the group.
Other than those disclosed in note 6 on the financial
statements, we have provided no non-audit services to the group in
the period under audit.
Our audit approach
Overview
Audit materiality
-- Overall group materiality: GBP222 million (2019: GBP221
million), based on 1% of Tier 1 capital.
-- Overall company materiality: GBP142 million (2019: GBP146
million), based on 1% of Tier 1 capital.
Audit scope
We performed audits of the complete financial information of two
components, namely the UK non-ring-fenced bank and HSBC Continental
Europe.
For six further components, specific audit procedures were
performed over selected significant account balances and financial
statement note disclosures.
Key audit matters
The following areas were identified as key audit matters. These
are discussed in further detail in the Appendix:
-- Impact of Covid-19 (group and company)
-- Expected credit loss ('ECL') provision for loans and advances (group and company)
-- Valuation of financial instruments (group and company)
-- The present value of in-force long-term insurance contracts ('PVIF') asset (group)
-- Investments in subsidiaries (company)
-- Information Technology ('IT') Access Management (group and company)
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial
statements. In particular, we looked at where the directors made
subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and
considering future events that are inherently uncertain.
Capability of the audit in detecting irregularities, including
fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined in the Auditors' responsibilities for
the audit of the financial statements section, to detect material
misstatements in respect of irregularities, including fraud. The
extent to which our procedures are capable of detecting
irregularities, including fraud, is detailed below.
Based on our understanding of the group and industry, we
identified that the principal risks of non-compliance with laws and
regulations related to the Financial Conduct Authority's ('FCA')
regulations, the Prudential Regulation Authority's ('PRA')
regulations, UK Listing Rules, Pensions legislation, Anti-Bribery
and Corruption legislation, Anti-Money Laundering legislation and
UK tax legislation. We considered the extent to which
non-compliance might have a material effect on the financial
statements. We also considered those laws and regulations that have
a direct impact on the preparation of the financial statements such
as the Companies Act 2006. We evaluated management's incentives and
opportunities for fraudulent manipulation of the financial
statements (including the risk of override of controls), and
determined that the principal risks were related to posting
inappropriate journal entries to increase revenue or reduce costs,
creation of fictitious transactions to hide losses or to improve
financial performance, and management bias in accounting estimates.
The group engagement team shared this risk assessment with the
component auditors so that they could include appropriate audit
procedures in response to such risks in their work. Audit
procedures performed by the group engagement team and/or component
auditors included:
-- Review of correspondence with and reports to the regulators, including the PRA and FCA;
-- Review of reporting to the Audit Committee and Risk Committee
in respect of compliance and legal matters;
-- Review of legal correspondence with legal advisors;
-- Enquiries of management and review of internal audit reports
in so far as they related to the financial statements;
-- Obtaining legal confirmations from legal advisors relating to
material litigation and compliance matters;
-- Challenging assumptions and judgements made by management in
their significant accounting estimates, in particular in relation
to valuation of certain complex level 3 financial instrument
portfolios, expected credit loss provision for loans and advances,
valuation of PVIF assets, and investments in subsidiaries (see
related key audit matters below);
-- Performing procedures to confirm existence of transactions
including obtaining confirmations from third parties; and
-- Identifying and testing journal entries meeting specific
fraud criteria, including those posted with certain descriptions,
posted and approved by the same individual, backdated journals or
posted by infrequent and unexpected users.
There are inherent limitations in the audit procedures described
above. We are less likely to become aware of instances of
non-compliance with laws and regulations that are not closely
related to events and transactions reflected in the financial
statements. Also, the risk of not detecting a material misstatement
due to fraud is higher than the risk of not detecting one resulting
from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through
collusion.
Key audit matters
Key audit matters are those matters that, in the auditors'
professional judgement, were of most significance in the audit of
the financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had
the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters, and any comments we make on the
results of our procedures thereon, were addressed in the context of
our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on
these matters.
This is not a complete list of all risks identified by our
audit.
The PVIF asset and impact of Covid-19 are new key audit matters
this year. Goodwill and Tax judgements, which were key audit
matters last year, are no longer included because of changes in
risk assessment and relative materiality of these balances.
Otherwise, the key audit matters below are consistent with last
year.
The key audit matters are discussed further in the Appendix.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the
group and the company, the accounting processes and controls, and
the industry in which they operate.
HSBC Bank plc is structured into three divisions being Global
Banking & Markets, Commercial Banking and Wealth and Personal
Banking, which are supported by a Corporate Centre. The divisions
operate across a number of operations, subsidiary entities and
branches ('components') throughout Europe. Within the group's main
consolidation and financial reporting system, the consolidated
financial statements are an aggregation of the components. Each
component submits their financial information to the group in the
form of a consolidation pack.
In establishing the overall approach to the group and company
audit, we scoped using the balances included in the consolidation
pack. We determined the type of work that needed to be performed
over the components by us, as the group engagement team, or
auditors within PwC UK and from other PwC network firms operating
under our instruction ('component auditors').
As a result of our scoping, for the group we determined that
audits of the complete financial information of the UK
non-ring-fenced bank ('UK NRFB') and HSBC Continental Europe were
necessary, owing to their financial significance. We instructed
component auditors, PwC UK and PwC France to perform the audits of
these components. Our interactions with component auditors included
regular communication throughout the audit, including the issuance
of instructions, a review of working papers relating to the key
audit matters and formal clearance meetings. The group audit
engagement partner was also the partner on the audit of the UK NRFB
significant component.
We then considered the significance of other components in
relation to primary statement account balances and note
disclosures. In doing this we also considered the presence of any
significant audit risks and other qualitative factors (including
history of misstatements through fraud or error). For six
components, specific audit procedures were performed over selected
significant account balances. For the remainder, the risk of
material misstatement was mitigated through group audit procedures
including testing of entity level controls and group and company
level analytical review procedures.
Certain group-level account balances were audited by the group
engagement team.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating
the effect of misstatements, both individually and in aggregate on
the financial statements as a whole.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Financial statements - group Financial statements - company
Overall materiality GBP222 million (2019: GBP221 GBP142 million (2019: GBP142
million). million).
How we determined 1% of Tier 1 capital. 1% of Tier 1 capital.
it
Rationale for benchmark Tier 1 capital is used as Tier 1 capital is used as
applied a benchmark as it is considered a benchmark as it is considered
to be a key driver of HSBC to be a key driver of HSBC
Bank plc's decision making Bank plc's decision making
process and has been a primary process and has been a primary
focus for regulators. focus for regulators.
Tier 1 capital was also used as the benchmark in the prior year.
The basis for determining materiality was re-evaluated and we
considered other benchmarks, such as profit before tax. Tier 1
capital is a common benchmark for wholly owned banking
subsidiaries, because of the focus on financial stability. Tier 1
capital was determined to continue to be an appropriate benchmark
given the importance of this metric to the HSBC Bank plc decision
making process and to principal users of the financial statements,
including the ultimate holding company HSBC Holdings plc.
We use performance materiality to reduce to an appropriately low
level the probability that the aggregate of uncorrected and
undetected misstatements exceeds overall materiality. Specifically,
we use performance materiality in determining the scope of our
audit and the nature and extent of our testing of account balances,
classes of transactions and disclosures, for example in determining
sample sizes. Our performance materiality was 75% of overall
materiality, amounting to GBP166m for the group financial
statements and GBP106m for the company financial statements. In
determining the performance materiality, we considered a number of
factors - the history of misstatements, our risk assessment and
aggregation risk and the effectiveness of controls - and concluded
that an amount at the upper end of our normal range was
appropriate.
For each component in the scope of our group audit, we allocated
a materiality that is less than our overall group materiality. The
range of materiality allocated across components was GBP10m to
GBP119m. Certain components were audited to a local statutory audit
materiality that was also less than our overall group
materiality.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP7m (group audit
and company audit) (2019: GBP6m) as well as misstatements below
those amounts that, in our view, warranted reporting for
qualitative reasons.
Conclusions relating to going concern
Our evaluation of the directors' assessment of the group's and
the company's ability to continue to adopt the going concern basis
of accounting included:
-- Performing a risk assessment to identify factors that could
impact the going concern basis of accounting, including the impact
of Covid-19 on the operations and financial performance and
position of the group.
-- Understanding and evaluating the group's financial forecasts
and the group's stress testing of liquidity and regulatory capital,
including the severity of the stress scenarios that were used.
-- Reading and evaluating the adequacy of the disclosures made
in the financial statements in relation to going concern.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
group's and the company's ability to continue as a going concern
for a period of at least twelve months from when the financial
statements are authorised for issue.
In auditing the financial statements, we have concluded that the
directors' use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
However, because not all future events or conditions can be
predicted, this conclusion is not a guarantee as to the group's and
the company's ability to continue as a going concern.
Our responsibilities and the responsibilities of the directors
with respect to going concern are described in the relevant
sections of this report.
Reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our auditors'
report thereon. The directors are responsible for the other
information. Our opinion on the financial statements does not cover
the other information and, accordingly, we do not express an audit
opinion or, except to the extent otherwise explicitly stated in
this report, any form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If we
identify an apparent material inconsistency or material
misstatement, we are required to perform procedures to conclude
whether there is a material misstatement of the financial
statements or a material misstatement of the other information. If,
based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to
report that fact. We have nothing to report based on these
responsibilities.
With respect to the Strategic Report and Report of the
Directors, we also considered whether the disclosures required by
the UK Companies Act 2006 have been included.
Based on our work undertaken in the course of the audit, the
Companies Act 2006 requires us also to report certain opinions and
matters as described below.
Strategic Report and Report of the Directors
In our opinion, based on the work undertaken in the course of
the audit, the information given in the Strategic Report and Report
of the Directors for the year ended 31 December 2020 is consistent
with the financial statements and has been prepared in accordance
with applicable legal requirements.
In light of the knowledge and understanding of the group and
company and their environment obtained in the course of the audit,
we did not identify any material misstatements in the Strategic
Report and Report of the Directors.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial
statements
As explained more fully in the Statement of directors'
responsibilities in respect of the financial statements, the
directors are responsible for the preparation of the financial
statements in accordance with the applicable framework and for
being satisfied that they give a true and fair view. The directors
are also responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, the directors are
responsible for assessing the group's and the company's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or the company or to cease operations, or have no realistic
alternative but to do so.
Auditors' responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditors' report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
Our audit testing might include testing complete populations of
certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited
number of items for testing, rather than testing complete
populations. We will often seek to target particular items for
testing based on their size or risk characteristics. In other
cases, we will use audit sampling to enable us to draw a conclusion
about the population from which the sample is selected.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors' report.
Use of this report
This report, including the opinions, has been prepared for and
only for the company's members as a body in accordance with Chapter
3 of Part 16 of the Companies Act 2006 and for no other purpose. We
do not, in giving these opinions, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
-- we have not obtained all the information and explanations we require for our audit; or
-- adequate accounting records have not been kept by the
company, or returns adequate for our audit have not been received
from branches not visited by us; or
-- certain disclosures of directors' remuneration specified by law are not made; or
-- the company financial statements are not in agreement with
the accounting records and returns.
We have no exceptions to report arising from this
responsibility.
Appointment
Following the recommendation of the Audit Committee, we were
appointed by the directors on 31 March 2015 to audit the financial
statements for the year ended 31 December 2015 and subsequent
financial periods. The period of total uninterrupted engagement is
six years, covering the years ended 31 December 2015 to 31 December
2020.
Claire Sandford
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
22 February 2021
Appendix: Key audit matters
The key audit matters are discussed below together with an
explanation of how the audit was tailored to address these specific
areas.
Impact of Covid-19 (group and company)
The impact of the Covid-19 pandemic has resulted in unprecedented economic
conditions and resulting government support programmes and regulatory
interventions to support businesses and people. The Covid-19 pandemic
has also changed the way that companies operate their businesses, with
one of most substantial impacts being the transition to remote working.
A substantial proportion of the group's employees have been working
remotely during 2020, with some consequential changes on their processes
and the control environment, some of which were relevant for financial
reporting purposes. Our audit team has also been working remotely for
most of 2020, as have most of our teams auditing the components and
operational centres.
The impact of the Covid-19 pandemic and resulting uncertainty has impacted
a number of the estimates in the group's financial statements and in
the company's financial statements. The impact on the most significant
accounting judgements and our audit is set out in the following other
key audit matters in this report:
* Expected credit losses - Impairment on loans and
advances to customers
* Impairment of investment in subsidiaries
We discussed our assessment of the impact of Covid-19 on the group's
operations and control environment with the Audit Committee. We also
explained how we planned to execute our audit with substantially all
of our audit team working remotely.
We engaged with the Audit Committee, Board and management in a manner
consistent with our previous audits, albeit remotely using video and
telephone calls. Substantially all of the information and audit evidence
we needed for the audit was provided in electronic format. We shared
information, including the audit evidence provided to us by the group,
using share-screen functionality in video calls and our secure encrypted
information sharing software. Where we would have previously inspected
physical evidence, for example our stock counts of precious metals,
these audit procedures were performed virtually using video technology.
We understood and assessed the transition of group employees to working
remotely on the control environment relevant to financial reporting,
and reflected this in our audit approach for new or changed processes
and controls.
Where the group undertook new business activities as a result of Covid-19,
for example, the government sponsored lending programmes, we assessed
the audit risks and designed appropriate audit procedures.
We were not able to visit any of the audit teams for the significant
components and operations centres during our 2020 audit. However, we
engaged with and directed these teams in a manner consistent with our
previous audits using video and telephone calls. This included 'virtual
visits' to certain locations, in which we met with both the audit teams
and local management. To ensure we were satisfied with the audits performed
by the audit teams for the significant components, we evaluated and
reviewed audit evidence by remotely reviewing electronic audit files
or using share-screen functionality in video calls.
Risks related to Covid-19, page 29; Audit Committee, page 90.
Expected credit losses - Impairment of loans and advances to customers
(group and company)
Determining expected credit losses ('ECL') involves management judgement
and is subject to a high degree of estimation uncertainty, both of
which have significantly increased as a result of Covid-19.
Management makes various assumptions when estimating ECL. The significant
assumptions that we focused on in our audit included those with greater
levels of management judgement and for which variations had the most
significant impact on ECL. Specifically, these included:
* forward looking economic scenarios and their
likelihoods;
* customer risk ratings ('CRRs'), probability of
defaults and significant increase in credit risk
criteria;and
* the recoverability of credit impaired wholesale
exposures.
The modelling methodologies that use these assumptions, as well as
other data, to estimate ECL are complex and not standardised. The modelling
methodologies are developed using historical experience, which can
result in limitations in their reliability to appropriately estimate
ECL. These limitations are often addressed with adjustments, which
are inherently judgemental and subject to estimation uncertainty.
The impact of the Covid-19 pandemic has resulted in unprecedented economic
conditions that vary across countries and industry sectors. Covid-19
related government support programmes and regulatory interventions
have impacted economic factors such as GDP and unemployment, and consequently
the extent and timing of customer defaults.
These factors have increased the uncertainty around judgements made
in determining the severity and likelihood of macroeconomic variable
('MEV') forecasts across the different economic scenarios used in ECL
models. Furthermore, these conditions are outside the bounds of historical
experience used to develop the models and where models produce plausible
results, resulting in significantly greater limitations in their reliability
to estimate ECLs.
Management has made significant adjustments to ECL to address these
limitations through management judgemental adjustments to modelled
outcomes. The nature and extent of these limitations and the resulting
changes to ECL varies across retail and wholesale portfolios across
the group. In addition, certain models have been redeveloped during
2020.
The determination of CRRs is based on quantitative scorecards, with
qualitative adjustments for relevant factors. The extent of qualitative
adjustments has increased due to Covid-19. The uncertainty caused by
Covid-19 also increases judgement involved in estimating expected cash
flows and collateral valuations for specific impairments on credit
impaired wholesale exposures.
We held discussions with the Audit Committee covering governance and
controls over ECL, with a significant focus on the impact of Covid-19.
We also discussed a number of other areas, including:
* the severity and likelihood of MEV forecasts in
economics scenarios, across countries for the impact
of Covid-19;
* the determination and migration of customer risk
ratings;
* assumptions around the recoverability of significant
wholesale exposures;
* the identification and assessment of model
limitations and resulting changes and adjustments to
ECL, in particular for approaches adopted in response
to Covid-19;
* models that were redeveloped during the year;
* model validation and monitoring; and
* the disclosures made to explain ECL, in particular
the impact of Covid-19 on determining ECL and the
resulting estimation uncertainty.
We assessed the design of governance and controls over the estimation
of ECLs, as well as testing how effectively they operated. We observed
management's review and challenge governance forums for (1) the determination
of MEV forecasts and their likelihood for different economic scenarios,
and (2) the assessment of ECL for Wholesale portfolios ECL, including
the assessment of model limitations and approval of any resulting adjustments
to modelled outcomes or their replacement with ECLs based on management's
judgements.
We also tested controls over:
* Model validation and monitoring;
* Credit reviews that determine CRRs for wholesale
customers;
* the input of critical data into source systems and
the flow and transformation of critical data between
source systems to the impairment models;
* the calculation and approval of management
judgemental adjustments to modelled outcomes.
We involved our economic experts in assessing the reasonableness of
the severity and likelihood of MEV forecasts. These assessments considered
the sensitivity of ECLs to variations in the severity and likelihood
of MEVs for different economic scenarios.
We involved our modelling experts in assessing the appropriateness
of modelling methodologies that were redeveloped during the year, and
for a sample of those models, we independently reperformed the modelling
for certain aspects of the ECL calculation. We also assessed the appropriateness
of modelling methodologies that did not change during the year, giving
specific consideration to Covid-19 and whether post model adjustments
('PMAs') were needed. In addition, we performed testing over:
* the compliance of ECL methodologies and assumptions
with the requirements of IFRS9;
* a sample of critical data used in the year end ECL
calculation and to estimate management judgemental
adjustments;
* critical data, assumptions and discounted cash flows
for a sample of credit impaired wholesale exposures;
* a sample of CRRs applied to wholesale exposures.
We evaluated and tested the Credit Risk disclosures made in the financial
statements.
Credit risk, page 32; Audit Committee, page 89.
.
Valuation of financial instruments (group and company)
The financial instruments held by the group range from those that are
traded daily on active markets with quoted prices, to more complex
and bespoke positions. The valuation of these financial instruments
can require the use of complex valuation models and/or prices or inputs
which are not readily observable in the market.
Where significant pricing inputs are unobservable, the financial instruments
are classified as Level 3 ('L3'), per the IFRS 13 fair value hierarchy.
Determining unobservable inputs in fair value measurement involves
management judgement and is subject to a high degree of estimation
uncertainty. There is also a risk that certain L3 portfolios are not
valued appropriately due to the complexity of the trades, specifically
where valuation modelling techniques result in significant limitations
or where there is greater uncertainty around the choice of an appropriate
pricing methodology.
Valuation of the following L3 portfolios was therefore classified as
a significant risk for the audit:
* The most material L3 financial instruments which are
dependent on unobservable inputs are the group's
holding of private equity ('PE') investments held by
the Global Banking and Markets and the Insurance
businesses. Covid-19 has resulted in markets being
more volatile and the level of judgement surrounding
the valuation of these investments increases in times
of heightened market volatility. Fair value of the
group's PE investments is estimated using commonly
accepted valuation methodologies, which are set out
in the International Private Equity and Venture
Capital Valuation Guidelines and includes the use of
net asset value ('NAV') statements from fund managers,
the price of recent investments, the use of market
comparables or discounted cash flow models. The fair
values of most PE investments held at 31 December
2020 are based on NAV statements provided by fund
managers.
* Bermudan swaptions and asset backed securities held
by the Global Markets business. These investments
have a significant risk attached to the valuation
methodology due to the complexity of the valuation
models and lack of observable pricing inputs.
* The most material fair valuation adjustments also
form part of our significant risk: Own Credit Spread
('OCS') adjustments for issued debt instruments held
at fair value and Bid-offer. These have been
identified as a significant risk due to their
underlying modelling complexity as well as
unobservability of the inputs and changes to
methodology that were applied during the year.
We discussed with the Audit Committee the appropriateness of the PE
valuation approaches for PE investments and the governance and controls
over determining fair values, in particular when markets are more volatile.
We also discussed the results of our review of changes to fair valuation
adjustment methodologies and the results of our substantive testing
which included independent revaluation of a range of financial instruments,
including a sample of Level 3 positions.
For fair values based on NAV statements from fund managers, we inspected
NAV statements and engaged our valuation experts to test management's
assessment of the reliability of those valuations. For these valuations,
we also:
* Compared fair value movements to movements in
relevant market information, such as industry
indices;
* Agreed NAV statements from fund managers to audited
fund financial statements where they were available;
and
* Performed back testing of fair values to any recent
transactions.
For fair values based on complex valuation models and significant unobservable
inputs, such as bermudan swaptions and asset backed securities, we
performed the following:
* Tested the design and operating effectiveness of key
controls supporting the identification and
measurement of the valuation of financial instruments,
including the independent price verification process.
* Engaged our valuation experts to perform independent
revaluation of a sample of trades to determine if
management's estimates fell within a reasonable
range. The revaluation covered a range of product
classes and was performed across Level 1, 2 and 3 of
the group's IFRS 13 fair value hierarchy. The testing
was increased for those Level 3 positions determined
to be a significant risk.
* For OCS and bid-offer adjustments we engaged our
valuation experts to assess the methodology changes
applied in 2020 and underlying assumptions and
compare with our knowledge of current industry
practice. Controls over the calculation of these
adjustments were also tested.
We also evaluated the adequacy and extent of disclosures made in the
financial statements in relation to valuation of L3 financial instruments.
Audit Committee, page 89; Note 11: Fair values of financial instruments
carried at fair value, page 141.
Measurement of the present value of in-force long-term insurance contracts
('PVIF') (group)
The group has a present value of in-force long-term insurance contracts
('PVIF') asset of GBP647 million, of which GBP440 million relates to
HSBC Assurance Vie, a subsidiary of HSBC Continental Europe.
The valuation of PVIF is determined using models to estimate the present
value of profits expected to emerge from the book of in-force policies
over the expected duration of the underlying policies. The determination
of these balances requires the use of appropriate actuarial methodologies
and assumptions. Changes in methodologies and assumptions can have
a significant impact on the PVIF asset.
The valuation methodology requires a number of economic and demographic
assumptions. The significant assumptions that we focused our audit
on were those with greater levels of management judgement and for which
variations had the most significant impact on the asset. Specifically,
these included interest rates, lapse rates and expense rate assumptions.
We discussed with the Audit Committee the methodologies and significant
assumptions used by management to determine the value of the PVIF asset.
We tested controls in place over governance, changes to significant
assumptions and model methodology used to determine the PVIF asset.
With the support of our actuarial specialists, we assessed the appropriateness
of the models, methodologies and assumptions used.
For economic assumptions, including interest rates, we:
* understood the methodology utilised in the derivation
of economic assumptions;
* assessed the consistency between the derived economic
assumptions with market information; and
* assessed the consistency of the approach taken to
derive the assumptions with the group's policy.
For demographic assumptions, including lapse and expense rates, we:
* understood the underlying basis for those
assumptions;
* assessed the consistency of the chosen assumptions
with recent experience; and
* assessed the adherence of the choice of the
assumption choices to the group's policy.
Insurance manufacturing operations risk in 2020, page 83; Audit Committee,
page 89; Note 20 Goodwill and intangible assets, page 161
Impairment of investment in subsidiaries (company)
The impact of the Covid-19 pandemic has resulted in unprecedented economic
conditions, impacting the performance of the group in both 2020 and
the outlook into 2021 and beyond.This is considered by management to
be an indicator of impairment on the investment in subsidiaries.
An impairment test was performed by management on the company's two
most material investments in subsidiaries, HSBC Continental Europe
and HSBC Germany Holdings GmbH, using a value in use model to estimate
the recoverable amount. The recoverable amount was higher than the
carrying value for both these investments and therefore no impairment
was recorded. The investment in HSBC Continental Europe and HSBC Germany
Holdings GmbH was GBP4.3bn and GBP1.6bn at 31 December 2020, respectively.
For all other investments in subsidiaries an impairment test was performed
by management which considered the net assets compared to the carrying
value of each subsidiary which resulted in no impairment being recognised.
The methodology in the Value-in-Use ('VIU') model is dependent on various
assumptions, both short term and long term in nature. These assumptions,
which are subject to estimation uncertainty, are derived from a combination
of management's judgement, experts engaged by management and market
data. The significant assumptions that we focused our audit on were
those with greater levels of management judgement and for which variations
had the most significant impact on the recoverable amount. Specifically,
these included forecast cash flows for 2021 to 2025, regulatory capital
requirements, long term growth rates and discount rates.
We discussed the appropriateness of methodologies used and significant
assumptions with the Audit Committee, giving consideration to the macroeconomic
environment, as well as Covid-19 and the group's strategy. We considered
reasonably possible alternatives for significant assumptions. We also
discussed the disclosures made in relation to investment in subsidiaries,
including the use of sensitivity analysis to explain estimation uncertainty
and the conditions that would result in an impairment being recognised.
We tested controls in place over the forecasted cash flow assumptions
used to determine the recoverable amounts. We assessed the appropriateness
of the methodology used, and the mathematical accuracy of the calculations,
to estimate the recoverable amounts. In respect of the significant
assumptions, our testing included the following:
* Challenging the achievability of management's
forecast cash flows;
* Obtaining and evaluating evidence where available for
critical data relating to significant assumptions,
from a combination of historic experience and
external market and other group financial
information;
* Assessing whether the cash flows included in the
model were in accordance with the relevant accounting
standard;
* Assessing the sensitivity of the VIU to reasonable
variations in significant assumptions, both
individually and in aggregate; and
* Determining a reasonable range for the discount rate
used within the model, with the assistance of our
valuation experts, and comparing it to the discount
rate used by management.
We evaluated and tested the disclosures made in the financial statements
in relation to investment in subsidiaries.
Audit Committee, page 89; Note 18: Investments in subsidiaries, page
158.
Information Technology ('IT') access management (group and company)
The group has operations across a number of countries supporting a
wide range of products and services, resulting in an IT environment
that is large, complex and increasingly reliant on third parties. The
group's financial reporting processes rely upon a significant element
of this IT environment, both within Finance and the business and operations
more broadly.
Access management controls are an important part of the IT environment
to ensure both access and changes made to systems and data are appropriate.
Our audit approach planned to rely extensively on the effectiveness
of IT access management controls.
As part of our audit work in prior periods, control deficiencies were
identified in relation to IT access management for systems and data
relevant to financial reporting. Management has an ongoing remediation
programme to address these matters.
The significance of IT access management to our audit was discussed
at Audit Committee meetings during the year, as well as progress on
management's remediation programme, control deficiencies identified
and our related audit responses.
IT access management controls were tested for systems and data relevant
to financial reporting that we planned to rely upon as part of our
audit. Specifically we tested controls over:
* Authorising new access requests;
* The timely removal of access rights;
* Periodic monitoring of the appropriateness of access
rights to systems and data;
* Restricting highly privileged access to appropriate
personnel;
* The accuracy of information about IT users to
facilitate access management;
* Segregation of access across IT and business
functions;
* Changes made to systems and data; and
* Understanding and assessing reliance on third parties,
including Service Organisation controls reports.
We also independently assessed password policies and system configurations,
and performed substantive audit procedures in relation to access right
removal, privileged access, IT user information and segregation of
duties.
We performed further testing where control deficiencies were identified,
including:
* Where inappropriate access was identified, we
understood and assessed the nature of the access, and
where required, obtained additional evidence on the
appropriateness of activities performed; and
* Identified and tested compensating business controls
and performed other audit procedures where IT
compensating controls were not sufficient to address
the audit risk.
Audit Committee, page 89; Internal control, page 91.
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END
ACSVXLBLFLLXBBL
(END) Dow Jones Newswires
February 23, 2021 04:11 ET (09:11 GMT)
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