TIDM48CF
RNS Number : 5904Q
HSBC Bank plc
21 February 2023
21 February 2023
HSBC Bank plc
Annual Report and Accounts
In fulfilment of its obligations under sections 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 2022 Annual Report and Accounts for the year ended 31 December
2022.
The document is now available on the Company's website:
http://www.hsbc.com/investor-relations/subsidiary-company-reporting
The document has also been submitted to the National Storage
Mechanism (NSM) and will shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
HSBC Bank plc
Annual Report and Accounts 2022
Registered number - 00014259
Contents
Page
Strategic Report
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Highlights 3
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Key themes of 2022 3
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Key financial metrics 5
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About HSBC Group 6
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Purpose and strategy 6
Our Global Businesses 9
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ESG Overview 10
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Key Performance Indicators 14
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Economic background and outlook 15
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Financial summary 15
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Risk overview 24
Report of the Directors
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Risk 26
Corporate Governance Report 101
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- Directors 101
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- Company Secretary 103
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- Board of Directors 104
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- Directors' emoluments 104
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- Board committees 104
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- Dividends 108
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- Internal control 108
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- Employees 111
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- Auditors 112
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* Articles of association, conflicts of interest and
indemnification of directors 112
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- Statement on going concern 114
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* Statement of directors' responsibilities in respect
of the financial statements 115
Independent Auditors' Report 116
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Financial Statements
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Financial statements 113
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Notes on the financial statements 124
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Presentation of Information
This document comprises the Annual Report and Accounts 2022 for
HSBC Bank plc ('the bank' or 'the company') 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.
Contents of the linked websites are not incorporated into this
document.
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 2022 contains certain forward-
looking statements with respect to the company's financial
condition; results of operations and business, including the
strategic priorities; financial, investment and capital targets;
and the company's ability to contribute to the Group's
Environmental, social and governance ('ESG') targets, commitments
and ambitions described herein.
Statements that are not historical facts, including statements
about the company's beliefs and expectations, are forward-looking
statements. Words such as 'may', 'will', 'should', 'expects',
'targets', 'anticipates', 'intends', 'plans', 'believes', 'seeks',
'estimates', 'potential' and 'reasonably possible', or the negative
thereof, other variations thereon or similar expressions are
intended to identify forward-looking statements. These statements
are based on current plans, information, data, 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. The company 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
statements. Written and/or oral forward-looking statements may also
be made in the periodic reports to the US Securities and Exchange
Commission, offering circulars and prospectuses, press releases and
other written materials, and in oral statements made by the
company's Directors, officers or employees to third parties,
including financial analysts. 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. These
include, but are not limited to:
-- changes in general economic conditions in the markets in
which the company operates, such as new, continuing or deepening
recessions, prolonged inflationary pressures and fluctuations in
employment and creditworthy customers beyond those factored into
consensus forecasts (including, without limitation, as a result of
the Russia-Ukraine war and, to a lesser extent, the Covid-19
pandemic); the Russia-Ukraine war and the Covid-19 pandemic and
their impact on global economies and the markets where the company
operates, which could have a material adverse effect on (among
other things) the company's financial condition, results of
operations, prospects, liquidity, capital position and credit
ratings; deviations from the market and economic assumptions that
form the basis for the company's ECL measurements (including,
without limitation, as a result of the Russia-Ukraine war,
inflationary pressures and the Covid-19 pandemic); changes in
foreign exchange rates and interest rates; volatility in equity
markets; lack of liquidity in wholesale funding or capital markets,
which may affect the company's ability to meet its obligations
under financing facilities or to fund new loans, investments and
businesses; geopolitical tensions or diplomatic developments, both
in Europe and in other regions such as Asia,
-- producing social instability or legal uncertainty, such as
the Russia-Ukraine war (including the continuation and escalation
thereof) and the related imposition of sanctions and trade
restrictions, the UK's relationship with the EU, supply chain
restrictions and disruptions, sustained increases in energy prices
and key commodities and diplomatic tensions between China and the
US, extending to the UK and the EU, alongside other potential areas
of tension, which may adversely affect the group by creating
regulatory, reputational and market risks; the efficacy of
government, customer, and the company's and the Group's actions in
managing and mitigating ESG risks, in particular climate risk,
nature-related risks and human rights risks, and in supporting the
global transition to net zero carbon emissions, each of which can
impact the company both directly and indirectly through its
customers and which may result in potential financial and
non-financial impacts; illiquidity and downward price pressure in
national real estate markets; adverse changes in central banks'
policies with respect to the provision of liquidity support to
financial markets; heightened market concerns over sovereign
creditworthiness in over-indebted countries; adverse changes in the
funding status of public or private defined benefit pensions;
societal shifts in customer financing and investment needs,
including consumer perception as to the continuing availability of
credit; exposure to counterparty risk, including third parties
using us as a conduit for illegal activities without the company's
knowledge; the discontinuation of certain key Ibors and the
development of near risk-free benchmark rates, as well as the
transition of legacy Ibor contracts to near risk-free benchmark
rates, which exposes the company to material execution risks,
including in relation to the effectiveness of the Group's Ibor
remediation strategy, and increases some financial and
non-financial risks; and price competition in the market segments
that the company serves;
-- changes in government policy and regulation, including the
monetary, interest rate and other policies of central banks and
other regulatory authorities in the principal markets in which the
company operates and the consequences thereof (including, without
limitation, actions taken as a result of the impact of the
Russia-Ukraine war on inflation and as a result of the Covid-19
pandemic); initiatives to change the size, scope of activities and
interconnectedness of financial institutions in connection with the
implementation of stricter regulation of financial institutions in
key markets worldwide; revised capital and liquidity benchmarks,
which could serve to deleverage bank balance sheets and lower
returns available from the current business model and portfolio
mix; changes to tax laws and tax rates applicable to the company,
including the imposition of levies or taxes designed to change
business mix and risk appetite; the practices, pricing or
responsibilities of financial institutions serving their consumer
markets; expropriation, nationalisation, confiscation of assets and
changes in legislation relating to foreign ownership; the UK's
relationship with the EU, which continues to be characterised by
uncertainty and political disagreement, particularly with respect
to the regulation of financial services, despite the signing of the
Trade and Cooperation Agreement ('TCA') between the UK and the EU;
changes in UK macro-economic and fiscal policy as a result of the
change in UK government leadership, which may result in
fluctuations in the value of the pound sterling; general changes in
government policy that may significantly influence investor
decisions; the costs, effects and outcomes of regulatory reviews,
actions or litigation, including any additional compliance
requirements; and the effects of competition in the markets where
we operate, including increased competition from non-bank financial
services companies; and
-- factors specific to the company and the Group, including the
company's success in adequately identifying the risks it faces,
such as the incidence of loan losses or delinquency, and managing
those risks (through account management, hedging and other
techniques); the company's ability to achieve its financial,
investment, capital targets and the achievement of the Group's ESG
targets, commitments and ambitions, which may result in the
company's failure to achieve any of the expected benefits of its
strategic priorities; model limitations or
failure, including, without limitation, the impact that high
inflationary pressures, rising interest rates and the consequences
of the Covid-19 pandemic have had on the performance and usage of
financial models, which may require the company to hold additional
capital, incur losses and/or use compensating controls, such as
judgemental post-model adjustments, to address model limitations;
changes to the judgements, estimates and assumptions the company
bases its financial statements on; changes in the company's ability
to meet the requirements of regulatory stress tests; a reduction in
the credit ratings assigned to the company or any of its
subsidiaries, which could increase the cost or decrease the
availability of the company's funding and affect its liquidity
position and net interest margin; changes to the reliability and
security of the company's data management, data privacy,
information and technology infrastructure, including threats from
cyber-attacks, which may impact its ability to service clients and
may result in financial loss, business disruption and/ or loss of
customer services and data; the accuracy and effective use of data,
including internal management information that may not have been
independently verified; changes in insurance customer behaviour and
insurance claim rates; the company's dependence on loan payments
and dividends from subsidiaries to meet its obligations; changes in
accounting standards, including the implementation of IFRS 17
'Insurance Contracts', which may have a material impact on the way
the company prepares its financial statements and (with respect to
IFRS 17) may negatively affect the profitability of HSBC's
insurance business; changes in the company's ability to manage
third-party, fraud and reputational risks inherent in its
operations; employee misconduct, which may result in regulatory
sanctions and/or reputational or financial harm; changes in skill
requirements, ways of working and talent shortages, which may
affect the company's ability to recruit and retain senior
management and diverse and skilled personnel; and changes in the
company's ability to develop sustainable finance and
climate-related products consistent with the evolving expectations
of its regulators, and the company's capacity to measure the
climate impact from its financing activity (including as a result
of data limitations and changes in methodologies), which may affect
the Group's ability to achieve its climate ambition, targets and
commitments, and increase the risk of greenwashing. Effective risk
management depends on, among other things, the company's ability
through stress testing and other techniques to prepare for events
that cannot be captured by the statistical models it uses; the
company's success in addressing operational, legal and regulatory,
and litigation challenges; and other risks and uncertainties we
identify in 'Top and emerging risks' on page 28 of the Annual
Report and Accounts 2022.
s
Highlights
For the year ended 31 December 2022
Reported (loss)/profit before tax
(GBPm)
GBP(959)m
(2021: GBP1,023m); (2020: GBP(1,614)m)
Reported revenue (GBPm)
GBP4,646m
(2021: GBP6,120m); (2020: GBP5,900m)
Reported risk-weighted assets at
period end (GBPbn)
GBP114bn
(2021: GBP107bn); (2020: GBP124bn)
.
Adjusted profit/(loss) before tax
(GBPm)
GBP1,724m
(2021: GBP1,577m); (2020: GBP(184)m)
Total assets at period end (GBPbn)
GBP717bn
(2021: GBP597bn); (2020: GBP681bn)
Common equity tier 1 ratio at period
end (%)
16.8%
(2021: 17.8%); (2020: 15.1%)
Key themes of 2022
HSBC Bank plc continued to support the Group through progress on
our strategic aims, although challenges in the geopolitical and
economic environment remain.
Financial Performance
Our financial performance in 2022 reflected losses associated
with our restructuring initiatives, including impairments of
businesses which have been classified as held-for-sale. These items
resulted in a reported loss before tax. On an adjusted basis,
profit before tax increased due to the benefit of higher interest
rates and a strong performance in MSS. Costs decreased driven by
the impact of our transformation and cost-saving initiatives.
Expected credit losses returned to a charge for the year compared
with a net release in 2021. Read more on pages 16 to 22.
Strategic Transformation
We have continued to progress in our areas of strength and
simplify the group in order to streamline our operating model and
seek to improve returns. During the course of 2022, we continued to
prepare for the completion of the sale of our French retail
operations, announced the sale of our Greece branch operations and
entered into a sale agreement for our Russia business.
We remain focused on implementing our Intermediate Parent
Undertaking ('IPU'), in line with European Union ('EU') Capital
Requirements Directive ('CRD'): HSBC Continental Europe ('HBCE')
acquired HSBC Trinkaus & Burkhardt GmbH ('HSBC Germany') and
HSBC Bank Malta ('HBMT'), and expect to acquire HSBC Private Bank
(Luxembourg) SA in the first half of 2023, subject to receipt of
pending regulatory approvals. More information can be found on
pages 6 and 7 .
Climate Ambition
The Group is committed to a net zero future and recognises that
our planet urgently needs drastic and lasting action to protect our
communities, businesses and the natural environment from the
damaging effects of climate change.
The Group believe they can make the most significant impact by
working with its customers to support their transition to a net
zero global economy. Since 2020, HSBC Bank plc has supported our
customers' transition to net zero and helped build a sustainable
future by providing and facilitating $86.2bn of sustainable
finance, $18.9bn of sustainable investment and $0.1bn of
sustainable infrastructure, as defined in the Group's Sustainable
Finance Data Dictionary 2022. This financing and investment
contributes towards the Group's ambition to provide and facilitate
$750bn to $1tn of sustainable financing and investment by 2030. The
$86.2bn of sustainable finance includes lending facilities provided
and capital markets facilitated transactions.
1 The detailed definitions of the contributing activities for
sustainable finance are available in the Group's revised
Sustainable Finance Data Dictionary 2022. For the Group's ESG Data
Pack, Sustainable Finance Data Dictionary and third-party limited
assurance report, see
www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reportingcentre
Key financial metrics
2022 2021 2020
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For the year (GBPm)
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(Loss)/profit before tax (reported basis) (959) 1,023 (1,614)
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Profit/(loss) before tax (adjusted basis)(1) 1,724 1,577 (184)
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Net operating income before change in expected
credit losses and other credit impairment charges
(reported basis)(2) 4,646 6,120 5,900
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(Loss)/profit attributable to the parent company (408) 1,041 (1,488)
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At 31 December (GBPm)
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Total equity attributable to shareholders of the
parent company 23,875 23,584 23,666
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Total assets 717,353 596,611 681,150
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Risk-weighted assets(3,8) 114,171 106,703 124,353
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Loans and advances to customers (net of impairment
allowances) 72,614 91,177 101,491
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Customer accounts 215,948 205,241 195,184
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Capital ratios (%)(3,8)
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Common equity tier 1 16.8 17.8 15.1
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Tier 1 20.2 21.4 18.5
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Total capital 31.7 31.9 27.5
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Leverage ratio (%)(4,8) 5.5 4.2 4.0
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Performance, efficiency and other ratios (annualised
%)
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Return on average ordinary shareholders' equity(5) (3.1) 4.3 (7.9)
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Return on tangible equity (%)(6) 5.5 6.1 (2.7)
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Cost efficiency ratio (reported basis()7 115.2 89.2 113.6
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Cost efficiency ratio (adjusted basis)(7) 70.9 80.9 89.6
Ratio of customer advances to customer accounts 33.6 44.4 52.0
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1 Adjusted performance is computed by adjusting reported results
for the effect of significant items as detailed on pages 18 to
20.
2 Net operating income before change in expected credit losses
and other credit impairment charges is also referred to as
revenue.
3 Unless otherwise stated, regulatory capital ratios and
requirements are based on the transitional arrangements of the
Capital Requirements Regulation in force at the time. These include
the regulatory transitional arrangements for IFRS 9 'Financial
Instruments', which are explained further on page 80. References to
EU regulations and directives (including technical standards)
should, as applicable, be read as references to the UK's version of
such regulation and/or directive, as onshored into UK law under the
European Union (Withdrawal) Act 2018, and as may be subsequently
amended under UK law.
4 The leverage ratio is calculated using the end point
definition of capital and the IFRS 9 regulatory transitional
arrangements, in line with the UK leverage rules that were
implemented on 1 January 2022, and excludes central bank claims and
cash pooling netting. Comparatives for 2021 are reported based on
the disclosure rules in force at that time, and include claims on
central banks.
5 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.
6 The RoTE is calculated by adjusting reported profit
attributable to ordinary shareholders by excluding movements in
PVIF and significant items (net of tax), divided by average
tangible shareholders' equity excluding fair value of own debt,
debit valuation adjustment ('DVA') and other adjustments for the
period. The calculation of this measure includes the UK bank levy
incurred for the first time in 2021, which was previously paid by
the Group. Comparative data have not been re-presented.
7 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).
8 From 30 September 2022, investments in non-financial
institution subsidiaries or participations have been measured on an
equity accounting basis in compliance with UK regulatory
requirements. Comparatives for prior periods have been represented
on a consistent basis with the current year.
About HSBC Group
With assets of $3.0tn and operations in 62 countries and
territories at 31 December 2022, HSBC is one of the largest banking
and financial services organisations in the world. Approximately 39
million customers bank with the Group and the Group employs around
219,000 full-time equivalent staff. The Group has around 182,000
shareholders in 128 countries and territories.
Purpose and strategy
HSBC's purpose and ambition
The Group's purpose is 'Opening up a world of opportunity' and
the Group's ambition is to be the preferred international financial
partner for the Group's 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 is implementing its strategy at pace across the four
strategic pillars aligned to its purpose, values and ambition
announced in February 2021.
The Group's strategy centres on four key pillars: focus on our
areas of strength, digitise at scale to adapt our operating model
for the future; energise our organisation for growth and support
the transition to a net zero global economy.
Focus on our strengths: in each of our global businesses, the
Group will focus on areas where we are strongest and have
opportunities to grow.
Digitise at scale: the Group will focus 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: the Group is moving to a leaner and simpler
organisation that is energised and fit for the future. The Group
aims to inspire a dynamic culture and champion inclusion across the
organisation, as well as help employees develop future skills.
Transition to net zero: the Group's ambition is to support the
transition to a net zero global economy. The Group has set out an
ambitious plan to aim to become a net zero bank, to support
customers in their transition, and to unlock new climate
solutions.
HSBC in Europe
Europe is an important part of the global economy, accounting
for roughly 40% of global trade and one-quarter of global Gross
Domestic Product (UNCTAD, IMF 2021). In addition, Europe is the
world's top exporter of services and second largest exporter of
manufactured goods (UNCTAD, IMF 2021). HSBC Bank plc facilitates
trade within Europe and between Europe and other jurisdictions
where the HSBC Group has a presence.
With assets of GBP717bn at 31 December 2022, HSBC Bank plc is
one of Europe's largest banking and financial services
organisations. We employ around 14,400 people across our locations.
HSBC Bank plc is responsible for HSBC's European business, apart
from UK retail and most UK commercial banking activity which, post
ring-fencing, are managed by HSBC UK Bank plc.
HSBC Bank plc operates as one integrated business with two main
hubs in London and Paris.
HSBC Bank plc is present in 20 markets(1) . We are organised
around the principal operating units detailed below, which
represent the region to customers, regulators, employees and other
stakeholders.
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.
HBCE comprises our Paris hub, its EU branches (Belgium, Czech
Republic, Greece, Ireland, Italy, Luxembourg, Netherlands, Poland,
Spain and Sweden), Germany and Malta. We are creating an integrated
Continental European bank anchored on Paris to better serve our
clients and simplify our organisation.
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 strategy and progress
on our 2022 commitments
Our ambition in Europe is to be the leading international
wholesale bank connecting East and West, with a complementary
Wealth business, an efficient operating model and a robust control
framework (see our global businesses on page 9).
HSBC Bank plc exists to open up a world of opportunity for our
customers by connecting them to international markets. Europe is
the largest trading region in the world and Asia is Europe's
biggest and fastest growing external trading partner (UNCTAD, IMF
2021). We are well positioned to capitalise on this opportunity and
play a pivotal role for the Group.
We expect Europe to continue to deliver change in 2023 to drive
our ambition, the majority of announced transformation has been
completed (see 'Focus on our strengths' for more information). In
parallel to completing our transformation work, we are
repositioning for growth and are well placed to seek to deliver
strong financial performance. Further detail can be found
below.
In 2022, Europe faced significant inflationary pressure,
resulting in rapid central bank interest rate rises. We expect to
continue operating in a volatile environment. Further information
as to how we have and will continue to support and engage with our
stakeholders can be found on page 10.
Below we provide a progress update on our commitments and
strategic initiatives for 2022.
Focus on our strengths
Through our transformation programme we are building a leaner,
simpler bank with a sharper strategic focus. We have redesigned our
franchise around the needs of our international clients and
maintaining product and service capability where clients demand
them. We intend to be a market leader in sustainable financing and
assist the Group in meeting its climate ambition for net zero
operations and supply chain by 2030.
New regulation in the EU provides an opportunity to simplify our
structure. In response to the requirement for an IPU in line with
EU CRD V, HBCE acquired HSBC Germany and HBMT in the second half of
2022, and expects to acquire HSBC Private Bank (Luxembourg) SA in
the first half of 2023. This remains subject to regulatory
approvals for which the process has now started.
During 2022, HBCE has continued to prepare for the completion of
the sale, of our French retail business which is expected in the
second half of 2023, subject to regulatory approval. Until
completion
of the planned transaction, the business remains part of, and
will be managed by HBCE. Please see Note 34: Assets held for sale
and liabilities of disposal groups held for sale, for further
financial information on the transaction on page 186.
Following a strategic review of our business in Greece, an
agreement has been signed to sell HBCE's branch operations in
Greece to Pancreta Bank SA. The transaction is subject to
regulatory approval and is expected to complete in the first half
of 2023.
Following a strategic review of HSBC Europe BV (a wholly-owned
subsidiary of HSBC Bank plc), we have stopped taking on new
business and clients in our Russian operations. The value of
foreign currency customer deposits and RUB deposits is now minimal.
HSBC Europe BV has entered into an agreement to sell its
wholly-owned subsidiary HSBC Bank (RR) (Limited Liability Company),
subject to regulatory and governmental approvals. Such sale is
currently expected to occur in the first half of 2023.
HSBC Group has implemented a new operating model for its Private
Banking activities, in which HSBC Private Bank (Luxembourg) SA will
become a central hub for HBCE's Private Banking clients. These
clients will be served via a Paris branch of HSBC Private Bank
(Luxembourg) SA. This will enable us to provide an enhanced product
range to clients leveraging our infrastructure in Luxembourg.
Digitise at scale
We continue to invest in the digitisation of our global
businesses, which is central to our strategy. Within Europe, Wealth
and Personal Banking ('WPB') is focused on enhancing our engagement
between clients and relationship managers, and allowing clients to
self-serve at a time that suits them. For example, we further
enhanced our digital portfolio and risk analysis platform, which
furthered Private Bank advisers' ability to make suitable
investment recommendations to clients using a more holistic
approach to risk management. For our Retail customers, we have
placed efforts into reducing paper waste in connection with the
bank statements, with 33,000 bank statements viewed or downloaded
in the Channel Islands. Looking ahead, we will seek to deploy
secure and private communications via social media channels between
clients and relationship managers. We also plan to introduce new
ESG-centred reporting.
We are committed to maintaining our core strength in Global
Payments Solutions ('GPS'), formerly known as Global Liquidity and
Cash Management ('GLCM'). In 2022, we successfully delivered Real
Time Payment capability in Luxembourg. GPS have improved our
offering for customers in HSBCnet by enabling new features such as
allowing customers to track and create recurring SEPA payments. GPS
also enhanced the Liquidity Management Dashboard functionality,
improving customers' ability to create and manage cash flow
forecasts. By December 2022, we had 288 customers using the
dashboard.
Our strategy within Global Trade and Receivables Finance
('GTRF') Europe is to help make trade easier, faster and safer,
whilst seeking to deliver sustainable and profitable growth.
Throughout 2022, we enhanced our digital channel HSBCnet and
strengthened collaborations with third-party platforms. Examples of
third-party collaboration include Komgo, a bank-agnostic platform
that provides solutions to our customers to manage trade finance
needs, and Contour, a blockchain solution that fully digitises
letters of credit.
As at year end, 85% of trade transactions across Europe were
conducted digitally as we continue to see an increase in clients
adopting digital solutions.
For digital currencies and assets, we have made significant
progress in 2022 in building a strategic tokenisation platform
('HSBC Orion') in Global Banking and Markets. HSBC Orion launched
the world's first GBP tokenised bond in January 2023.
The platform allows natively digital bonds to be registered and
issued, fully supports both primary and secondary market trading
and is part of our ambition to widen the adoption of digital
assets.
In Foreign Exchange we continue to enhance 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.
Energise for growth
Empowering our organisation and energising our employees is
critical to Europe's success and remains a key focus. We made good
progress against our people strategy including our diversity and
inclusion agenda and are committed to offering colleagues the
opportunities to develop their skills whilst building our talent
pipelines to support the achievement of our strategic
priorities.
We are committed to increasing diverse representation in Europe,
especially at senior levels and in 2023 we aim to significantly
increase sponsorship and accountability for achieving our goals.
Our Diversity and Inclusion Council defines and drives specific
actions across our D&I strands, supported by our pan-European
Employee Resource Group 'Inclusive Europe'.
To support the Group's climate ambitions to become net zero in
its operations and supply chain by 2030, and align its financed
emissions to the Paris Agreement goal of net zero by 2050, the
Group launched the Sustainability Academy in 2022. The Academy is
available to all colleagues across the Group and serves as a
central point for colleagues to access learning plans and curated
resources, and develop practical skills. The Group have partnered
with some leading educational institutions such as Imperial College
Business School and will continue to update the academy with new
research and content related to ESG issues, including those related
to social and governance issues.
We have strengthened the training we provide to leaders to help
them support colleagues through the changing environment we are
facing. We have continued the executive development programme for
our most senior leaders, which focuses on the shifting expectations
of our enterprise wide leadership cadre, embedding the clarity and
alignment to achieve our goals and tackling strategic change.
For our Managing Director population, we have taken into
consideration that leadership development will vary depending on
individual career experiences and tenure in role. Our executive
curriculum contains an array of programmes to meet varying
leadership development personas and topics focus on a range of
issues including critical skills areas such as influence,
inclusion, and Agile methodologies. During 2022, we launched two
Managing Director development programmes: 1) Shaping your
Leadership; to help new Managing Directors sharpen their focus and
define how they will 'show-up' as one of HSBC's most senior
leaders, 2) Shaping HSBC, which focuses on the experimentation
required to enhance the leadership skills that will drive
adaptability, innovation and unleash the talent of our people to
enable HSBC to thrive in a time of disruption and complexity.
We continue to focus on the development of people managers who
are key to shaping the experience of, and development of, our
colleagues. We have recently refreshed our core People Manager
Excellence curriculum which covers 40 skills structured around four
modules that are available in face-to-face and virtual formats. The
modules focus on: 1) Your Role; connecting managers with HSBCs
purpose and personal energetic leadership, 2) Your People; creating
energy, commitment and high performance within your team, 3) Your
work; managing productivity and delivering against outcomes, and 4)
Your Team; building high performing collaborative teams.
Complimentary digital learning pathways will also be made
available to support the development contained within the four
modules.
Transition to net zero
Part of the Group's ambition to be a net zero bank is to achieve
net zero carbon emissions in our operations and supply chain by
2030.
The Group has three elements to the strategy: reduce, replace
and remove. The Group plan to first focus on reducing carbon
emissions from consumption, and then replacing remaining emissions
with low-carbon alternatives in line with the Paris Agreement. The
Group plan to remove the remaining emissions that cannot be reduced
or replaced by procuring, in accordance with prevailing regulatory
requirements, high-quality offsets at a later stage.
In October 2020, the Group announced an ambition to reduce its
energy consumption by 50% by 2030, against a 2019 baseline. In
2022, HSBC Bank plc implemented energy efficiency measures and a
strategic reduction of our office footprint, across our office
spaces and data centres.
These measures include:
-- Embedding 100% renewable energy in our Germany offices;
-- Further installation of LED lighting and optimisation of
lighting timing controls in France, Switzerland, Spain and Germany;
and
-- Improvements to heating, ventilation and air conditioning
systems throughout the HSBC Bank plc office portfolio to reduce
energy consumption and increase efficiency.
As part of the Group's ambition to achieve 100% renewable power
across our operations by 2030, HSBC Bank plc continue to look for
opportunities to procure green energy in each of our markets.
HSBC Bank plc is managing the gradual resumption of employee
travel in line with the Group's aim to halve travel emissions by
2030 compared with pre-pandemic levels.
For further information on the transition to net zero, please
see the ESG review in the Group's Annual Reports and Accounts for
the year ended 31 December 2022.
Supporting our Customers
The Group understands that financial institutions have a
critical role to play in achieving the transition to a net zero
global economy. The most significant contribution we can make is by
mobilising finance to support our portfolio of customers in their
transition to decarbonise.
Since 2020, HSBC Bank plc has supported our customers'
transition to net zero and helped build a sustainable future by
providing and facilitating $86.2bn of sustainable finance, $18.9bn
of sustainable investment and $0.1bn of sustainable infrastructure,
as defined in the Group's Sustainable Finance Data Dictionary
2022.
This financing and investment contributes towards the Group's
ambition to provide and facilitate $750bn to $1tn of sustainable
financing and investment by 2030. The $86.2bn of sustainable
finance includes lending facilities provided and capital markets
facilitated transactions.
Given the Group's global presence and relationships with our
customers across industries, the Group recognise the role it can
play in catalysing the global transition to net zero. The Group is
well positioned to finance the transition in developing and
emerging economies, mobilising capital to help enable sustainable
business models and an inclusive, just and resilient
transition.
For example, in 2022, HBCE acted as a sustainability
coordinator, book runner and mandated lead arranger for a $150m
sustainability-linked revolving credit facility for company: Nordic
Semiconductor. The technology company which specialises in
designing ultra-low power performance wireless systems,
incorporated for the first time, sustainability-linked key
performance indicators and an ESG roadmap within its business to
help achieve their sustainability targets by 2030.
The breakdown of the Group's sustainable finance and investment
progress is included in its ESG Data pack. The detailed definitions
of the contributing activities for sustainable finance are
available in the Group's Sustainable Finance Data Dictionary 2022.
For the Group's ESG Data Pack, Sustainable Finance Data Dictionary
and PwC Assurance Report, see
www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.
Unlocking New Climate Solutions
The Group understands the need to find new solutions to increase
the pace of change if the world is to achieve the Paris Agreement's
goal of net zero by 2050. Therefore, the Group is working closely
with a range of partners to accelerate investment in natural
resources, technology and sustainable infrastructure to reduce
emissions and help address climate change.
HSBC Group partnered with the World Resources Institute and
World Wildlife Fund ('WWF') in 2020 to launch its $100m
philanthropic programme, Climate Solutions Partnership, with the
aim to accelerate support for innovative solutions tackling climate
change. This five-year philanthropic initiative aims to identify
and remove barriers to scale for climate change solutions. As part
of this, in France, two projects are being delivered in partnership
with the French National Forestry Office and the Earthworm
Foundation. These projects aim to better enable CO2 capture,
preserve biodiversity and engage the community, helping to support
a net zero and sustainable future.
Our Global Businesses
The Group manages its products and services through its three
global businesses: Global Banking and Markets ('GBM'); Commercial
Banking ('CMB'); Wealth and Personal Banking ('WPB'); and the
Corporate Centre (comprising: certain legacy assets, central
stewardship costs, and interests in our associates and joint
ventures) .
Business segments
Our operating model has the following material segments: a GBM
business which is further split into three reportable segments:
MSS, GB and GBM Other (as defined below), CMB, WPB and a Corporate
Centre. These segments are supported by Digital Business Services
and eleven global functions, including Risk, Finance, Compliance,
Legal, Marketing and Human Resources.
Markets & Securities Global Banking GBM Other Commercial Banking Wealth and Personal
Services ('MSS') ('GB') ('CMB') Banking ('WPB')
Markets & Securities Global Banking GBM Other primarily We have a clear In Europe, Wealth
Services is delivers tailored comprises Principal strategy to be and Personal Banking
a products group financial solutions Investments and the leading serves customers
that services to corporate GBM's share of international with their financial
customers of and institutional the Group's Markets corporate bank needs through
all Global Businesses clients worldwide Treasury function. in Europe. We a number of business
and institutional opening up The Principal help connect our areas including
clients across opportunities Investments portfolio European customers Retail Banking,
the financial through the is focused on to our international Private Banking,
sector globally. strength of delivering investments network of Wealth Management,
We offer clients our global that align to relationship Insurance and
a range of services network and the group's strategy managers and product Asset Management.
and capabilities capabilities. and seeks to specialists; Our core retail
including trading, We provide deliver strong supporting proposition offers
financing and a comprehensive returns across their growth ambitions a full suite of
securities services suite of services a diversified and targets. Our products including
across asset including capital portfolio. Our products are designed personal banking,
classes and markets, advisory, commitment to to support clients mortgages, loans,
geographies, lending, trade sustainable private in their international credit cards,
supported by services and equity funds growth and range savings, investments
dedicated sales global payments contributes directly from term loans and insurance.
and research services. to the Group's to region-wide Alongside this,
teams. Our European aim to provide treasury and trade WPB offers various
Our European teams take and facilitate solutions. We propositions in
teams play a a client-centric $750bn and $1tn see the greatest certain markets,
key role in approach bringing of sustainable opportunity to including Premier;
providing access together relationship finance and investment deliver and grow as well as wealth
to FX, commodities, and product by 2030. value for the solutions, financial
Equities and expertise to Group by supporting planning and
Fixed Income deliver financial European clients international
offerings, bridging solutions customised with international services. In the
emerging and to suit our subsidiaries in Channel Islands
developed markets, clients' growth Asia and other and the Isle of
and collaborating ambitions and regions; our internal Man, we serve
with other global financial objectives. performance measures local Islanders
businesses to We work closely are aligned to as well as
provide clients with our business this outcome. international
across the Group partners including Commercial Banking customers, the
with commoditised MSS, WPB and is at the centre majority of whom
and bespoke CMB, to provide of creating revenue are customers
solutions that a range of synergies within of HSBC in other
seek to support tailored products the Group: we markets, through
their growth and services collaborate closely our HSBC Expat
ambitions. that seek to with our Global proposition.
meet the needs Banking and Markets Our Private Banking
of international colleagues to proposition serves
clients across provide expertise high net worth
the company. in capital finance and ultra-high
Global Banking and advisory solutions net worth clients.
Europe operates to support our Whilst these clients
as an integral Commercial Banking are based all
part of the clients. Our trade over the world,
global business teams within booking centres
and contributes Commercial are based in the
significant Banking also provide Channel Islands
revenues to import and export and Isle of Man,
other regions, finance solutions France and Germany,
particularly to Global Banking which facilitate
Asia, through and Markets clients. customers with
our European We also support a total relationship
client base, our clients to balance greater
supporting unlock efficiencies than $2m. The
the Europe in their Treasury range of services
ambition to structures through available to private
be the leading our Global Payments banking clients
international Solutions team. includes investment
wholesale bank, As the European management, Private
partly by benefiting economy pivots Wealth Solutions
from the client to a net zero and bespoke lending
network managed carbon economy, such as lending
outside Europe. we are expanding against financial
our services and assets and residential
products to provide mortgage financing
customers with for high-end
innovative sustainable properties.
finance solutions Private Banking
and ensuring our hosts a 'Next
relationship managers Generation' programme
are positioned of events to support
to support our our clients' next
clients' transition generation in
to net zero. building and retaining
the wealth within
the family. The
private bank offers
this through its
philanthropy advisory
to our clients,
which looks at
business succession
planning. We continue
to focus on meeting
the needs of our
customers, the
communities we
serve, and our
people, whilst
working to build
the bank of the
future.
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Adjusted profit/(loss) before tax by business segment
GBP472m GBP486m GBP(329)m GBP785m GBP577m
(2021: GBP(8)m); (2021: GBP589m); (2021: GBP99m); (2021: GBP490m); (2021: GBP323m);
(2020: GBP20m) (2020: GBP55m) (2020: GBP(52)m) (2020: GBP152m) (2020: GBP(132)m)
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
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.
ESG Overview
We conduct our business to support the sustained success of our
customers, employees and other stakeholders.
Our approach
We are guided by the Group's purpose to open up a world of
opportunity for our colleagues, customers and communities. Our
purpose is underpinned by the Group's values: we value difference;
we succeed together; we take responsibility; and we get it done.
The Group's purpose and values help us to deliver our strategy and
unlock long-term value for our stakeholders.
As an international bank with significant breadth and scale, we
understand that our climate, economies, societies, supply chains
and people's lives are interconnected.The Group recognise they can
play an important role in tackling ESG challenges. The Group
focuses its efforts on three areas: the transition to net zero,
building inclusion and resilience, and acting responsibly.
Fair outcomes
We are focused on running a strong and sustainable business that
puts the customer first, values good governance, and gives our
stakeholders confidence in how we do what we do. Our conduct
approach helps to guide us to do the right thing and to focus on
the impact we have for our customers and the financial markets in
which we operate. For further information on conduct, see page 6.
For further details on our purpose-led conduct approach framework,
see www.hsbc.com/who-we-are. Our section 172 statement, detailing
our Directors' responsibility to stakeholders, can be found on page
12.
Our colleagues
We aspire to open up a world of opportunity for our colleagues
and build an inspiring, dynamic culture where the best talent want
to work.
We value difference and we continue to build an inclusive
workforce that is representative of the communities we serve. We
set and report on progress made against the Group-wide gender and
ethnic diversity goals.
Understanding the experience of colleagues is central to our
efforts. Through our employee Snapshot survey, we capture our
colleagues' views on topics such as hybrid working and well-being.
In 2022, over 8,000 colleagues responded to the survey across
Europe, a participation rate of 54%. Developing the skills of
colleagues is critical to energising our organisation. We foster a
culture of learning through a range of resources that provide
colleagues with a breadth of educational materials and development
opportunities.
Our Climate ambition
The Group has set a climate ambition to become net zero in its
operations and its supply chain by 2030, and align its financed
emissions to the Paris Agreement goal of net zero by 2050. In 2022,
the Group expanded coverage of sectors for on-balance sheet
financed emissions targets, recognising the challenge of evolving
methodologies and data limitations.
Transition to net zero represents one of the Group's four
strategic pillars. At the core of it is an ambition to support our
customers on their transition to net zero, so that the greenhouse
gas emissions from our portfolio of clients reaches net zero by
2050. The summary of the Group's Transition to net zero disclosure
can be found on page 47 of the HSBC Holdings plc ESG review
2022.
Engaging with our stakeholders
Engaging with our stakeholders is core to being a responsible
business. To determine material topics that our stakeholders are
interested in, we conduct a number of activities throughout the
year, including engagements outlined in the table below.
Material
topics highlighted
Our stakeholders How we engage by the engagement
Customers Our customers' Customer
voices are heard advocacy
through our interactions
with them, surveys
and by listening
to their complaints
---------------- ----------------------------
Employees Our colleagues' Employee
voices are heard training
through our employee Diversity
Snapshot survey, and inclusion
Exchange meetings, Employee
and our 'speak-up' engagement
channels, including
our global whistleblowing
platform, HSBC
Confidential
---------------- ----------------------------
Investors Our ordinary shares Strategic
are held by our progress
parent HSBC Holdings ESG policies
plc, however external Risk management
parties invest
in our bond issuance.
We engage with
these investors
via our investor
relations programme
which enables investor
queries alongside
a broader programme
of management meetings
and market engagement
---------------- ----------------------------
Communities We welcome dialogue Financial
with external stakeholders, Inclusion
including non-governmental and Community
organisations ('NGOs') Investment
and other civil
societies groups.
We engage directly
on specific issues
and by taking part
in external forums
and working groups
---------------- ----------------------------
Regulators We proactively Anti-bribery
and governments engage with regulators and Corruption
and governments
to facilitate strong
relationships via
virtual and in-person
meetings, responses
to consultations
individually and
jointly via the
industry bodies
---------------- ----------------------------
Suppliers Our ethical and Supply Chain
environmental code Management
of conduct for Human Rights
suppliers of goods
and services sets
out how we intend
to engage with
our suppliers on
ethical and environmental
performance
---------------- ----------------------------
Supporting our stakeholders facing a rising cost of living
We know that many of our customers are facing increasing cost of
living pressures from higher inflation, and we are committed to
helping them. Colleagues across our global businesses have been
contacting our customers to provide them with access to
support.
Our ESG metrics and targets
The Group has established targets that guide how we do business,
including how we operate and how we serve our customers. These
include targets designed to help us achieve our environmental and
social sustainability goals.
They also help us to improve employee advocacy, the diversity of
senior leadership and strengthen our market conduct.
The targets for these measures are linked to the pillars of our
ESG strategy: transitioning to net zero, building inclusion and
resilience, and acting responsibly.
To help us achieve our ESG ambitions, a number of measures are
included in the annual incentive scorecards of the Europe Chief
Executive and Executive Committee members.
Below we set out how we have made progress against the
ESG-related ambitions and targets.
Environmental - Transition to net zero
One of the Group's strategic pillars is to support the
transition to a net zero global economy. The Group's ambition is to
align its financed emissions to the Paris Agreement goal to achieve
net zero by 2050. The Paris Agreement aims to limit the rise in
global temperatures to well below 2degC, preferably to 1.5degC,
above pre-industrial levels.
The transition to net zero is one of the biggest challenges for
our generation. Success will require governments, customers and
finance providers to work together. The Group's global footprint
means that many of its clients operate in high-emitting sectors and
regions that face the greatest challenge in reducing emissions.
This means that the Group's transition will be challenging but is
an opportunity to make an impact.
The Group recognises that to achieve its climate ambition it
needs to be transparent on the opportunities, challenges, related
risks and progress it makes. To deliver on the ambition requires
enhanced processes and controls, and new sources of data. The Group
continues to invest in climate resources and skills, and develop
its business management process to integrate climate impacts. Until
systems, processes, controls and governance are enhanced, certain
aspects of the Group's reporting will rely on manual sourcing and
categorisation of data. In 2023, the Group will continue to expand
its disclosures. Reporting will need to evolve to keep pace with
market developments.
At the end of 2022, HSBC Bank plc achieved 63% cumulative
reduction in absolute operational greenhouse gas emissions compared
to a 2019 baseline in France, Germany, Switzerland and Malta. HSBC
Bank plc continues to work to support the Group's ambition to
achieve net zero in its own operations and supply chain by
2030.
Since 2020, HSBC Bank plc has supported our customers'
transition to net zero and helped build a sustainable future by
providing and facilitating $86.2bn of sustainable finance, $18.9bn
of sustainable investment and $0.1bn of sustainable infrastructure,
as defined in the Group's Sustainable Finance Data Dictionary 2022.
This financing and investment contributes towards the Group's
ambition to provide and facilitate $750bn to $1tn of sustainable
financing and investment by 2030. The $86.2bn of sustainable
finance includes lending facilities provided and capital markets
facilitated transactions.
We continue to engage with our clients on their transition plans
and to provide them with financing solutions to support their
sustainability goals.
For further information regarding the Group's environmental
footprint, please visit
https://www.hsbc.com/who-we-are/our-climate-strategy/becoming-a-net-zero-bank.
Social - Build inclusion and resilience
-- Our Snapshot employee engagement(1) score was 47% as at the
end of 2022, an increase of 1% compared to 2021;
-- Our ethnic diversity goal(2) for 2022 was to increase black
heritage colleagues in senior leadership roles in the UK to 2.2%.
We exceeded this target and reached 2.4%; and
-- In 2022, we reached 24.6% senior leadership(3) roles held by women up from 23.8% in 2021.
Governance - Acting responsibly
96%(4) of HSBC Bank plc staff completed conduct training in
2022, which covers Conduct and Regulatory Compliance topics
including: market abuse, conflicts of interest and treating
customers fairly.
1 Employee engagement index is our headline measure of how
employees feel about HSBC. HSBC Bank plc's score is low compared to
the Group, key contributors are ongoing transformation and the
challenging external environment in Europe. However, we are seeing
year on year improvements and will continue to embed a positive and
inclusive culture where our colleagues can thrive.
2 Our 2022 ethnicity goal of 2.2% includes UK RFB and NRFB.
3 Senior leadership is classified as those at band 3 and above
in the Group's global career band structure. Our 2022 gender
diversity target of 26.4% is cascaded by Group and inclusive of our
operations in Bermuda; we reached 25.1% by end of 2022 at the
regional level. We missed our 2022 target, our focus on improving
gender balance in senior leadership across Europe remains a
priority for HSBC Bank plc executive committee for 2023.
4 The completion rate shown relates to the 2021/22 'Taking
Responsibility' Compliance training module which is categorised as
'required' learning for Global employees. Unlike with mandatory
training, a formal target is not established for 'required'
learning modules and non-completion is performance managed.
Responsible Business Culture
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
More information about the Group's assessment of climate risk
can be found in the HSBC Holdings plc Annual Report and Accounts
2022.
Employee matters
We are opening up a world of opportunity for our colleagues
through building an inclusive organisation that values difference,
takes responsibility and seeks different perspectives for the
overall benefit of our customers.
We promote an environment where our colleagues can expect to be
treated with dignity and respect. We are an organisation that acts
where we find behaviours that fall short. Our index measuring
colleagues' confidence in speaking up is at 67% in 2022.
At times our colleagues may need to speak up about behaviours in
the workplace. We encourage colleagues to speak to their line
manager in the first instance, and our annual employee Snapshot
survey showed 82% feel comfortable doing so. We recognise that at
times people may not feel comfortable speaking up through the usual
channels. HSBC Confidential is our global whistleblowing channel,
allowing our colleagues past and present to raise concerns
confidentially and, if preferred, anonymously (subject to local
laws).
We aspire to be an organisation that is representative of the
communities which we serve. To achieve this, we set goals that will
build sustainable lasting change. We are focused on increasing
women and black heritage colleagues in senior leadership roles and
whilst we have made good progress, we know there is more to be
done.
To support our ambition, we encourage our colleagues to
self-identify their ethnicity data where legally permissible. At a
European level, we are limited in our collection of ethnicity data
and can only report in: UK, Channel Islands and the Isle of Man
('CIIOM'), and South Africa. However, we are continuing to drive
open dialogue and action to strengthen our employee networks and
improved our diversity data where possible.
Communities
The Group has a long-standing commitment to help support the
communities in which it operates. Through charitable partnerships
and volunteering opportunities, our people share their skills and
create a positive impact on society. The Group's global reach is
its unique strength and bringing together diverse people, ideas and
perspectives, helps us open up opportunities and build a more
inclusive world.
In 2022, HSBC Bank plc continued to work with our charity
partners across Europe to promote employability and financial
capabilities in disadvantaged communities, and respond to local
needs:
- HBCE partnered with charities Cresus and Adie to deliver
programmes that enhance financial capability and entrepreneurship
amongst disadvantaged individuals in their respective
communities.
- HBMT supported local disadvantaged young people through its
charitable partnership with the Prince's Trust Foundation and the
'Prince's Trust International Achieve programme' to develop
employable skills.
In 2022, HSBC Bank plc collectively donated GBP1.8m to
charitable programmes and was further supported by our employees'
contribution of 1,540 volunteer hours in various community
activities and projects during work time.
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 Statement on Human Rights. This
statement, along with our statements under the UK's Modern Slavery
Act, is available on
www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.
Anti-corruption and anti-bribery
We are committed to high standards of ethical behaviour and
operate a zero-tolerance approach to bribery and corruption. We
consider such activity to be unethical and contrary to good
corporate governance.
HSBC requires compliance with all applicable anti-bribery and
corruption ('AB&C') laws in all markets and jurisdictions in
which we operate. These include the UK Bribery Act and France's
'Sapin II' law. We have a global AB&C policy, which gives
practical effect to these laws and regulations, but also requires
compliance with the spirit of laws and regulations to demonstrate
our commitment to ethical behaviours and conduct as part of our
environmental, social and corporate governance.
The global AB&C policy sets out the key principles and
minimum control requirements that enable HSBC to mitigate bribery
and corruption risk. Mandatory AB&C training is provided to all
staff, with additional targeted training tailored to the roles of
individuals. HSBC carries out regular risk assessments, monitoring
and testing of its AB&C programme and maintains clear
whistleblowing policies and processes to ensure that individuals
can confidentially report concerns.
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 11
-------------------------- --------------
The company's employees Pages 10 to
13 and 101 to
102
-------------------------- --------------
Social matters Page 11
-------------------------- --------------
Respect for human Page 12
rights
-------------------------- --------------
Anti-corruption and Page 12
anti-bribery matters
-------------------------- --------------
Business model Page 9
-------------------------- --------------
Principal risks Page 24
-------------------------- --------------
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/Conduct.
Section 172 statement
This section, from pages 12 to 13 forms our section 172
statement and addresses the requirements of the Companies
(Miscellaneous Reporting) Regulations 2018. It describes how the
Directors have performed their duty to promote the success of the
bank, including how they have considered and engaged with
stakeholders and, in particular, how they have taken account of the
matters set out in section 172(1)(a) to (f) of the Companies Act
2006 (the 'Act').
The Board considered a range of factors when making decisions
and is supported in the discharge of its responsibilities by:
a. an induction programme and ongoing training for Directors to
provide an understanding of our business and financial performance
and prospects;
b. management processes which help 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 involve engagement with
stakeholders where relevant, to support appropriate decision
making; and
c. agenda planning for Board and committee meetings to provide
sufficient time for the consideration and discussion of key
matters.
Stakeholder Engagement
The Board understands the importance of effective engagement
with its stakeholders and is committed to open and constructive
dialogue. Engagement with stakeholders takes place at the holding
company level and at the operational level. On certain issues, the
Board may engage directly with stakeholders. The outcomes from such
stakeholder engagement feeds into Board discussions and decision
making. This approach allows the Board to better understand the
impact of the bank's actions on its stakeholders and respond to the
challenges facing the bank. The relevance of each stakeholder group
varies depending on the specific decision being taken by the Board.
Not every decision the Board makes will necessarily result in a
positive outcome for all stakeholders.
As a result of both its direct stakeholder interactions and the
reporting and information on stakeholder engagement it receives
about its six key stakeholders, namely customers, employees,
shareholders and investors, regulators and governments, suppliers,
and communities, the Board seeks to understand, and have regard to,
the interests and priorities of these stakeholders.
The two examples provided below of principal discussions and
decisions taken by the Board in 2022 show how the Directors and
Board respectively discharged their individual and collective
responsibility for promoting the long-term success of the bank and
took different stakeholder considerations into account in reaching
a decision or forming a view.
For further details regarding the role of the Board and the way
in which it makes decisions, including key activities during 2022,
please see page 95 to 96.
Customers
As one of Europe's largest banking and financial services
organisations our corporate and institutional customers are at the
core of the bank's business model: without customers there would be
no bank. We have a clear vision to be the leading international
wholesale bank in Europe, complemented by a targeted wealth and
personal banking business. The Board strives to ensure it has a
broad understanding of customers, their needs and challenges, and
to give full consideration to these when its approval is sought on
matters such as material acquisitions, disposals, investments,
large scale change or transformation programmes.
Throughout 2022, geopolitical and economic uncertainty has given
our customers additional challenges and senior management have
engaged directly with customers to better understand their issues
and difficulties and how the bank can respond to them. During this
period, the Board has been provided with customer feedback and key
performance indicators, such as net promoter scores, customer
complaints, customer on-boarding times and satisfaction survey
results. The Board schedule also included Commercial Banking,
Wealth and Personal Banking, Global Banking and Markets deep dive
strategy sessions which incorporated discussions on customer
interactions, customer surveys, complaints feedback and product
developments to meet customers' needs.
Employee (Workforce Engagement)
Employees are critical to the success of the bank, its
sustainability and long-term future. Understanding employee
sentiment and how we are addressing feedback is a key area of Board
focus. During the year, the Board received regular updates from
senior management on the progression of our people priorities
covering various employee-focused initiatives across culture,
leadership, talent, skills, inclusion, wellbeing and colleague
experience. Further information on people priorities can be found
under Employee at page 101- 112 .
Feedback from employees is gathered via various mechanisms
including surveys, exchange meetings and 'speak up' channels and
reported to the Board. The Board is presented bi-annually with a
culture dashboard which has been developed to track progress in
embedding a positive and inclusive culture across the business.
Board focus on employees was heightened due to the ongoing
transformation programme and the need for continuing consideration
of the impact on employees when making Board decisions.
The Board remained committed to building active communication
and feedback channels with employees across the region in 2022.
During the year, three cohorts were specifically targeted given
their importance to the bank's strategy and their role in building
a robust leadership pipeline. These included: i) Executive
Committee member's direct reports, ii) Subsidiary Board members,
and iii) Flagship Talent programme including participants from
Accelerating Female Leaders, Explore, and Accelerating into
Leadership programmes. Further details of the bank's engagement
with employees can be found on pages 10 to 11 and 101 to 102.
Shareholders and Investors
The bank is a wholly owned subsidiary of HSBC Holdings plc and,
as such, the Board took into account the implications of its
decisions with regard to its shareholder, HSBC Holdings plc, and
its debt security investors. Examples of how it fulfilled this
include:
-- the Board Chair and Committee Chairs engaged with Group
counterparts and attended Group forums and Group committee
meetings, together with Executive Directors, to engage on common
issues and strategic priorities;
-- Board review and approval of HSBC Bank plc specific components of Group programmes; and
-- Board consideration of the strength of the balance sheet to
ensure that the ability to pay principal or interest on its debt
securities was not at risk.
Regulators and Governments
During the year, Directors met regularly with regulators both in
the UK and Europe. It is central to the success of the bank that it
has constructive relationships with regulators and governments and
that there is a mutual understanding on expectations and challenges
given their impact on customers, the business model and the bank's
strategy.
The Board receives regular updates on how HSBC interacts with
regulators globally and at the European level. Understanding
regulators' views and priorities in this way shapes and influences
Board discussions and decision making.
Suppliers
Suppliers are critical to supporting the infrastructure and
operations of the business and we work with suppliers to ensure
mutually beneficial relationships. Examples of Board engagement
with suppliers during 2022 include:
-- the Chief Operating Officer's regular reports on third-party
supplier matters covering key suppliers' operational resilience and
how we work with suppliers to mitigate impact to our customers;
and
-- oversight of progress of implementing contractual changes
with third party suppliers to adopt new Standard Contractual
Clauses to meet 'Schrems II decision' data requirements.
Communities
The bank has legal, regulatory and social responsibilities to
the communities in which it operates and the environment and is
conscious of the need to manage the societal and environmental
impact of its business when making decisions. During the year the
Board received regular updates on matters spanning human rights and
environmental and climate issues.
Principal Decisions
Set out below are some of the principal decisions made by the
Board during 2022. In each case, in taking such decisions, the
Directors exercised their statutory duties under section 172(1)
(a)-(f) of the Companies Act 2006.
Liability Management Exercise - Tender Offer
A key regulatory responsibility of the Board is to periodically
assess the bank's capital and liquidity position and associated
risks in a structured way, while also considering management
proposals in support of the bank's financial strength and capital
efficiency.
Mindful of the bank's continued focus on balance sheet
optimisation, and broader regulatory expectations, management
undertook an exercise to review potential liability management
actions relating to its issued debt securities.
The review resulted in a formal proposal being brought to the
Board, recommending the bank make an invitation to holders of
certain legacy debt securities to tender any and all of such debt
securities for purchase by the bank for cash, subject to certain
conditions being satisfied.
Prior to approval, the Board constructively challenged and
engaged with senior management to consider the capital and
liquidity impact on the bank's balance sheet. As part of its
considerations, the Board took in to account the impact of the
project on the bank's key stakeholders, in particular its investors
in such instruments and its obligations to, and relationship with,
its regulators. In considering stakeholders, the Board also
considered its minimum requirements for own funds and eligible
liabilities and how the legacy securities were treated from a
regulatory capital perspective.
In reaching its decision, the Board acknowledged the rationale
for the proposal in the context of seeking to further enhance
efficiencies in the bank's capital structure. The Board also
acknowledged the Bank of England's ('BoE') resolvability assessment
of major UK banks, which welcomed action being taken, where it is
appropriate and proportionate to do so, to reduce the stock of
legacy capital securities issued from non-resolution entities to
holders outside the group. Having taken all of these and other
factors into account, and subject to market and economic
conditions, the Board approved the proposed tender offer in respect
of the chosen legacy securities, which was subsequently announced
on 14 November 2022.
European Transformation - Malta Transfer
For a number of years, management have considered the most
appropriate organisational structure within Continental Europe to
help execute the bank's Europe transformation strategy. In addition
to this review, management acknowledged the need for banking
entities to comply with the requirement under the CRD V to
establish an EU IPU structure by the end of 2023. The review
included a formal proposal being brought to the Board in October
2022, recommending the sale of HSBC Europe BV's entire shareholding
in HBMT to the group's EU IPU, HBCE.
Prior to approval, the Board reviewed and assessed options
presented by management to achieve compliance with the CRD V
requirements. The Board constructively engaged with management to
consider the financial and regulatory implications and the likely
consequence of the proposal on the bank's key stakeholders, as
appropriate. Mindful of longer-term consequences of decisions and
the impact on operations, as well as HBMT's local listing, the
Board also carefully considered the approach to valuation and
purchaser protections for the transaction.
In reaching its decision, the Board acknowledged the rationale
for the recommendation in the context of regulatory expectations
and that HBCE had also provided its in-principle approval for the
recommendation. Having taken these factors into consideration,
including an assessment of the financial merits and risks, investor
and regulatory engagement, the Board agreed to proceed with the
proposal, as subsequently completed on 30 November 2022.
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 Organisation for Economic Co-operation and Development
('OECD') Standard for Automatic Exchange of Financial Account
Information (also known as the Common Reporting Standard);
-- the 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
2022 2021 2020
----------------------- ----------------- ------------------- -------------------
(Loss)/profit before
tax (reported) (GBPm) (959) 1,023 (1,614)
----------------------- ----------------- ------------------- -------------------
Profit/(loss) before
tax (adjusted) (GBPm) 1,724 1,577 (184)
Cost efficiency
ratio (reported)
(%) 115.2 89.2 113.6
----------------------- ----------------- ------------------- -------------------
Cost efficiency
ratio (adjusted)
(%) 70.9 80.9 89.6
----------------------- ----------------- ------------------- -------------------
Return on tangible
equity (%) 5.5 6.1 (2.7)
----------------------- ----------------- ------------------- -------------------
Common equity tier
1 capital ratio
(%) 16.8 17.8 15.1
----------------------- ----------------- ------------------- -------------------
Profit/(loss) before tax (reported/adjusted): Reported
profit/(loss) before tax is the profit/(loss) as reported under
IFRS. Adjusted profit/(loss) before tax adjusts the reported
profit/(loss) for the effect of significant items as detailed on
pages 18 to 19.
Reported loss before tax in 2022 was GBP(959)m compared with a
profit before tax of GBP1,023m in 2021. This was primarily driven
by lower reported revenue, which reflected an impairment on the
planned disposal of our retail banking operations in France and
losses associated with the planned sale of our operations in Russia
and Greece. Expected credit losses and other credit impairment
charges ('ECL') were a net charge, largely reflecting stage 3
charges in Global Banking and CMB. This compared with a net release
in 2021 primarily related to Covid-19 related allowances built up
in 2020. Reported operating expenses were lower primarily driven by
lower variable pay and the impact of our transformation cost-saving
initiatives partly offset by higher restructuring and other related
costs.
Share of profit/(loss) from associates recognised a loss of
GBP30m compared with a gain of GBP191m in 2021.
Adjusted profit before tax was GBP1,7 24m, up GBP146m compared
with GBP1,577m in 2021. This was driven by a strong revenue
performance and lower operating expenses, partly offset by higher
ECL. The increase in revenue was largely driven by higher net
interest income in all of our global businesses, mainly due to
interest rate rises. Revenue in Markets and Securities Services
('MSS') was also strong, mainly in Global Foreign Exchange and
Equities. This was driven by increased client activity due to
elevated market volatility and the macroeconomic impacts from
rising inflation and increasing interest rates, and reflecting
robust risk management. This was partly offset by lower valuation
gains in Principal Investments ('PI') compared with 2021.
Operating expenses decreased, driven by lower performance
related pay and the impact of our transformation cost-saving
initiatives.
Reported cost efficiency ratio was 26.0 percentage points higher
compared with 2021 driven by lower revenue partly offset by lower
operating expenses. Reported revenue decreased by 24.1% and
operating expenses decreased by 2.0%, mainly driven by the factors
mentioned above.
Adjusted cost efficiency ratio improved by 10.0 percentage
points from 2021, reflecting higher revenue and lower costs.
Revenue increased by 7.1%, due to higher net interest income driven
by the high interest rate environment and higher trading revenue in
MSS. Operating expenses decreased by 6.1%, mainly driven by factors
mentioned above.
Return on tangible equity ('RoTE') is computed by adjusting
reported profit attributable to ordinary shareholders by excluding
movements in PVIF and significant items (net of tax), divided by
average tangible shareholders' equity excluding fair value of own
debt, debit valuation adjustment ('DVA') and other adjustments for
the period. The adjustment to reported results and reported equity
excludes amounts attributable to non-controlling interests.
We provide RoTE as a way of assessing our performance, which is
closely aligned to our capital positions.
CET1 capital ratio represents the ratio of common equity tier 1
capital to total risk-weighted assets ('RWA'). 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 of 16.8% in 2022 decreased by 1.0% from
2021, mainly due to an increase in RWAs.
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 11 and Corporate Governance
section on pages 94 to 102.
Customer service, awards and satisfaction
MSS
Our customers are at the heart of what we do and we are
committed to delivering services and capabilities that meet their
needs and help them fulfil their ambitions.
In 2022, we won numerous awards and consistently ranked highly
with our European clients, including winning Currency Manager of
the Year at the European Pension Awards, Best Prime Broker -
Emerging Markets at the HFM European Services Awards (for the 10th
consecutive year), ranking number one for 'UK Research', 'UK
Overall Broker' and 'Emerging EMEA Equity Research, Sales
and Corporate Access' in the Institutional Investor 2022 Survey
and also ranking number one for 'UK Fund Accounting and
Administration provider', 'Top 200 Asset Managers' and 'Rest of the
World' in the R&M Investor Services Survey for Europe.
These accolades, coupled with multiple milestones and
achievements in sustainable finance, demonstrate our leading
capabilities to support clients locally and connect them to markets
and expertise in the East, as well the key role Europe plays in
supporting the Group's strategic priorities.
GB
Within Global Banking Europe we remain committed to providing
excellent customer experience and continue to strive towards
improving our proposition to meet client needs.
In 2022, HSBC received industry recognition across a number of
product capabilities offered to our Global Banking clients
including being recognised as number one Best Services for Trade
Finance in Western Europe by Euromoney in their Trade Finance
Survey and number one for Cash Management in the UK in the 2022
Euromoney Market Leaders survey.
Aligned with our purpose of opening up opportunities for our
clients, HSBC also won six bond awards from Environmental Finance
in 2022. These awards also highlight the continued strength and
differentiation of our Sustainability capabilities globally as well
as the role we play in Europe helping our clients transition to net
zero.
CMB
Customer experience and satisfaction are priorities for
Commercial Banking in Europe. We measure a number of operational
metrics on customer service levels and gather direct customer
feedback to ensure our solutions and channels remain relevant and
fit for our customers' digital needs today. Our centralised booking
model in Paris for our pan-European customers enables us to
regionally cover and manage customers through a consistent and
streamlined level of service.
This also ensures our Relationship Managers can support and
cover customers using a common toolkit. Looking ahead, we will
continue to measure how we deploy resources to our customers
looking to expand and grow internationally, whilst also supporting
them with their transition plans to achieve net zero.
WPB
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. One example is iNPS ('Interactions Net Promoter
Score') which measures interactions with our customers. In 2022
Channel Islands and Isle of Man ('CIIOM') Islands iNPS scored 14
against a target of 15 for mobile and 46 against a target of 50 for
Premier Relationship Managers. The Expat proposition scored 24
against a target of 6 for Online, and Premier Relationship Managers
scored 55 against a target of 46. 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, reducing processing costs and
driving the sustainability agenda. We are on track to transition
30% of cheques (up to the value of GBP500) away from the branch to
mobile, improving customer service with 2,500 cheques deposited to
date.
Private Banking remains committed to enhancing our digital
capabilities and offering, with improved internal platforms and
software to support the delivery of excellent client service.
Within Switzerland, Luxembourg and Channel Islands service
improvements have been delivered within the E-Banking platform
including client access to on-demand statements.
We recognise that enhancing customer satisfaction is an evolving
process and are committed to ensure our investments and focus are
prioritised to achieve this.
Economic background and outlook
UK
Falling real incomes are driving the UK's economic slowdown
UK consumer price inflation remains very high. In January 2023,
the annual inflation rate fell to 10.1%, the third consecutive
monthly fall. While inflation may have peaked at 11.1% in October,
cost pressures are still high and inflation could remain close to
10% through Q1 2023 before decreasing further. Thanks partly to
falls in wholesale energy prices, the BoE forecasts that headline
inflation could fall below 4% by Q4 2023.
Underlying inflation pressures could prove more persistent. In
December 2022, UK services inflation hit its highest rate since
1992, though it fell back in January 2023. The UK labour market
continues to be characterised by a constrained supply of workers,
across sectors and skill levels, which could also add to core
inflation pressure. The unemployment rate was close to multi-decade
lows at 3.7% in the three months ended December 31, 2022. Wage
growth, while strong, has not kept pace with inflation. Total
nominal average weekly earnings were up 5.9% year-on-year in the
three months ended December 31, 2022, while real pay on the same
basis fell by 3.1%.
The real-terms income squeeze contributed to a fall in GDP of
0.2% quarter-on-quarter in Q3 2022, though an extra Bank Holiday
for the Queen's funeral may also have played a role. However, GDP
was flat in Q4 2022, meaning the UK economy narrowly avoided
slipping into technical recession. Even so, the underlying growth
picture still looks challenging.
The BoE has raised Bank Rate at each policy meeting since
December 2021, taking it to 4.0% in February 2023. This has already
started to weigh on the housing market, with benchmark price
indices showing falls in October and November 2022. In early
February 2023, market prices implied that UK Bank Rate would peak
at over 4.5% in mid-2023 with cuts expected to begin from Q4
2023.
Eurozone
Headline inflation falling and growth slowing
The eurozone economy was resilient through the second half of
2022. GDP grew 0.3% quarter on quarter in Q3, with a strong
contribution from household spending despite high inflation.
Preliminary data showed that the eurozone economy expanded again in
Q4 2022, with GDP rising 0.1% quarter on quarter. The modest
expansion means the eurozone also avoided slipping in to recession
in 2022. With household savings rates still high, this resilience
partly reflects government support measures.
Eurozone inflation remains high, even though it is estimated to
have already reached its peak, having hit an all-time high of 10.6%
in October 2022 and falling to 8.5% in the preliminary estimate for
January 2023.
These elevated rates of inflation will weigh on real-terms
incomes and, in turn, household spending. As the recent falls in
wholesale energy prices start to feed through to consumers,
headline inflation should fall further during the course of 2023.
Declines in core inflation have been less pronounced, with core
inflation of 5.2% in January 2023.
The ongoing inflationary squeeze on real-terms incomes means
that a mild eurozone recession still seems likely, even though
indicators of economic activity in early 2023 were resilient. The
depth of any recession should be backstopped by a supportive labour
market, not least because in Europe many firms can make use of
government-backed short-time working schemes.
Financial summary
Use of alternative performance
measures
Our reported results are prepared in accordance with
International Financial Reporting Standards ('IFRSs'), as detailed
in the Financial Statements starting on page 113.
In measuring our performance, we supplement our IFRS figures
with non-IFRS measures, which constitute alternative performance
measures under European Securities and Markets Authority guidance
and non-GAAP financial measures defined and presented in accordance
with US Securities and Exchange Commission rules and regulations.
These measures include those derived from our reported results in
order to eliminate factors that distort year-on-year comparisons.
The 'adjusted performance' measure used throughout this report is
described below. All alternative performance measures are described
and reconciled to the closest reported financial measure when
used.
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.
Summary consolidated income statement for the year ended
2022 2021 2020
GBPm GBPm GBPm
---------------- -------------------------------- ---------------------------------- ----------------------------------
Net interest
income 1,904 1,754 1,898
---------------- -------------------------------- ---------------------------------- ----------------------------------
Net fee income 1,261 1,413 1,400
---------------- -------------------------------- ---------------------------------- ----------------------------------
Net income from
financial
instruments
measured
at fair value 1,751 3,432 2,314
---------------- -------------------------------- ---------------------------------- ----------------------------------
Gains less
losses from
financial
investments (60) 60 95
---------------- -------------------------------- ---------------------------------- ----------------------------------
Net insurance
premium income 1,787 1,906 1,559
---------------- -------------------------------- ---------------------------------- ----------------------------------
Losses/gains
recognised on
Assets held for
sale (1,947) 67 -
---------------- -------------------------------- ---------------------------------- ----------------------------------
Other operating
income 356 527 417
---------------- -------------------------------- ---------------------------------- ----------------------------------
Total operating
income(1) 5,052 9,159 7,683
Net insurance
claims,
benefits paid
and movement
in liabilities
to
policyholders (406) (3,039) (1,783)
---------------- -------------------------------- ---------------------------------- ----------------------------------
Net operating
income before
change in
expected
credit losses
and other
credit
impairment
charges(2) 4,646 6,120 5,900
---------------- -------------------------------- ---------------------------------- ----------------------------------
Change in
expected credit
losses and
other
credit
impairment
charges (222) 174 (808)
---------------- -------------------------------- ---------------------------------- ----------------------------------
Net operating
income 4,424 6,294 5,092
Total operating
expenses
excluding
impairment
of goodwill and
other
intangible
assets(1) (5,365) (5,416) (5,903)
Impairment of
goodwill and
other
intangible
assets 12 (46) (802)
---------------- -------------------------------- ---------------------------------- ----------------------------------
Operating
(loss)/profit (929) 832 (1,613)
---------------- -------------------------------- ---------------------------------- ----------------------------------
Share of
(loss)/profit
in associates
and joint
ventures (30) 191 (1)
---------------- -------------------------------- ---------------------------------- ----------------------------------
(Loss)/profit
before tax (959) 1,023 (1,614)
Tax credit 561 23 136
---------------- -------------------------------- ---------------------------------- ----------------------------------
(Loss)/profit
for the year (398) 1,046 (1,478)
---------------- -------------------------------- ---------------------------------- ----------------------------------
(Loss)/profit
attributable to
the parent
company (408) 1,041 (1,488)
---------------- -------------------------------- ---------------------------------- ----------------------------------
Profit
attributable to
non-controlling
interests 10 5 10
---------------- -------------------------------- ---------------------------------- ----------------------------------
1 Total operating income and expense include significant items as detailed on pages 16 to 19.
2 Net operating income before change in expected credit losses
and other credit impairment charges is also referred to as
revenue.
2
Reported performance
Reported loss before tax was GBP(959)m, compared with a profit
before tax in 2021 of GBP1,023m, a decrease of GBP1,982m. The
reported loss in 2022 included impairments of GBP1,947m, mainly due
to the reclassification of our retail banking operations in France
to held for sale, and net ECL charges compared with a net release
in 2021. This was partly offset by a reduction in operating
expenses.
Reported revenue was GBP1,474m lower, largely reflecting
impairments on the planned disposals of our retail banking
operations in France, and our operations in Russia and Greece in
2022. Revenue also decreased in GBM Other mainly driven by lower
favourable valuation gains in PI and a net loss of GBP91m from the
buy-back of legacy securities to optimise the bank's future funding
costs.
This decrease was partly offset by a strong performance in
Markets and Securities Services ('MSS') and higher revenue from
interest rate rises, notably in Global Payments Solutions ('GPS')
in Global Banking and CMB. During 3Q22, we renamed our Global
Liquidity and Cash Management ('GLCM') business to Global Payments
Solutions as we reshape our payments proposition
into a technology-enabled, globally connected payments
franchise, to better support our clients' needs and facilitate
commerce.
In WPB, revenue grew supported by higher interest rates and
higher revenue in insurance manufacturing driven by assumption
updates, primarily reflecting favourable investment assumptions on
asset management rebates for unit-linked investments and
profit-sharing levels.
Reported operating expenses decreased, mainly driven by lower
performance-related pay and the impact of our transformation
cost-saving initiatives. This was partly offset by higher
restructuring and other related costs.
In addition, there was also a loss compared with a gain in 2021
recognised from our share of profit/(loss) from associates.
Net interest income ('NII') increased by GBP150m or 9% compared
with the prior year. This included higher net interest expense in
Corporate Centre (up by GBP565m compared with 2021) associated with
funding of our Markets business in MSS generating trading income.
Excluding this, NII was up by GBP694m mainly in CMB (GBP277m) and
Global Banking (GBP335m) driven by the higher interest rate
environment, notably in GPS.
Net fee income decreased by GBP152m or 11% compared with the
prior year, notably in Global Debt Markets in MSS and Global
Banking, driven by lower underwriting fees as market activity fell
due
to the effect of the Russia-Ukraine war and wider macroeconomic
uncertainties. This compared with a strong 2021 when corporates
raised finance as initial Covid-19 restrictions were eased. This
reduction was partly offset by higher income in GPS, as volumes
grew and we delivered on our strategic initiatives.
Net income from financial instruments measured at fair value
decreased by GBP1,681m or 49%, primarily in WPB. This decrease was
driven by lower returns on financial assets supporting insurance
contracts where the policyholder is subject to part or all of the
investment risk.
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.
The decrease in WPB was partly offset by higher revenue in MSS,
mainly reflecting strong client activity and robust risk
management, notably in Global Foreign Exchange, due to elevated
market volatility resulting from the Russia-Ukraine war and
macroeconomic impacts from rising inflation and increasing interest
rates. Revenue also benefited from favourable fair value movements
in preference shares holdings in VISA in CMB and WPB.
Gains less losses from financial investments decreased by
GBP120m, mainly driven by losses on the disposal of bonds held at
fair value through other comprehensive income ('FVOCI') in Markets
Treasury. This compared with gains in the prior year.
Net insurance premium income decreased by GBP119m or 6%, in WPB,
from insurance manufacturing revenue driven by lower new business
volumes.
Losses/gains recognised on Assets held for sale of GBP(1,947m)
mainly driven by an impairment on the planned disposals of the
retail banking operations in France GBP1,711m, branch operations in
Russia of GBP212m and Greece of GBP87m in 2022. This compared with
a gain of GBP65m from sale of a property in Germany in 2021.
Net insurance claims, benefits paid and movement in liabilities
to policyholders decreased by GBP2,633m or 87% in the insurance
business in WPB. The decrease was driven by lower returns on
financial assets supporting contracts where the policyholder is
subject to part or all of the investment risks.
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'.
Other operating income decreased by GBP171m or 32%, mainly in
GBM Other due to lower intercompany recharge recoveries from other
entities in the Group, with an offsetting decrease in operating
expenses. This was partly offset by higher revenue in insurance
manufacturing in WPB driven by assumption updates.
Changes in expected credit losses and other credit impairment
charges ('ECL') were a charge of GBP222m in 2022, compared with a
release of GBP174m in 2021. The charge in 2022 was mainly driven by
higher stage 3 charges in Global Banking and in CMB reflecting
heightened levels of uncertainty and inflationary pressures. This
compared with a net release of stage 1 and stage 2 allowances in
2021 primarily relating to Covid-19 related allowances built up in
2020.
Total operating expenses excluding impairment of goodwill and
other intangible assets decreased by GBP51m or 1%, mainly driven by
lower variable pay and the impact of continued cost discipline as
well as lower intercompany costs recharges. This was partly offset
by an increase of GBP137m in restructuring and other related
costs.
Impairment of goodwill and other intangible assets was a release
of GBP12m compared with an impairment charge on non-financial
assets of GBP(46)m in 2021.
Share of (loss)/profit in associates and joint ventures was a
loss of GBP30m compared with a profit of GBP191m in 2021 due to the
recovery in asset valuations. The loss in 2022 included a GBP24m
true-up of prior year valuations in the underlying investments of
an associate.
Tax credit of GBP561m was GBP538m higher compared with 2021. The
effective tax rate of 58.5% for 2022 was driven by underlying
losses before tax, non-recurring items including recognition of
previously unrecognised deferred tax assets in France and a tax
credit of GBP105m from movement in provisions for uncertain tax
positions.
The tax credit in 2021 of GBP23m included favourable
non-recurring items in respect of tax rate changes, prior period
adjustments and the recognition of previously unrecognised deferred
tax assets in France.
Adjusted performance
Significant revenue items by business segment - (gains)/losses for
the year ended
GBM Corporate
MSS GB Other CMB WPB Centre Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------------------- ----- ----- ------ ----- ----- --------- -----
31 Dec 2022
-------------------------------------------------------- ----- ----- ------ ----- ----- --------- -----
Reported revenue 2,446 1,571 (108) 1,433 (80) (616) 4,646
-------------------------------------------------------- ----- ----- ------ ----- ----- --------- -----
Significant revenue items (33) - 100 (1) 1,572 498 2,136
- fair value movements on financial
instruments(1) (35) - (6) (1) - (1) (43)
--------------------------------------------------------
- restructuring and other related
costs(2) 2 - 106 - - 126 234
- European restructurings - - - - 1,572 373 1,945
-------------------------------------------------------- ----- ----- ------ ----- ----- ---------
Adjusted revenue 2,413 1,571 (8) 1,432 1,492 (118) 6,782
-------------------------------------------------------- ----- ----- ------ ----- ----- --------- -----
31 Dec 2021
-------------------------------------------------------- ----- ----- ------ ----- ----- --------- -----
Reported revenue 2,043 1,367 310 1,096 1,276 28 6,120
-------------------------------------------------------- ----- ----- ------ ----- ----- --------- -----
Significant revenue items 12 - 269 (1) (1) (69) 210
* fair value movements on financial instruments(1) 12 - (5) (1) (1) - 5
- restructuring and other related
costs(2) - - 274 - - (69) 205
-------------------------------------------------------- ----- ----- ------ ----- ----- ---------
Adjusted revenue 2,055 1,367 579 1,095 1,275 (41) 6,330
-------------------------------------------------------- ----- ----- ------ ----- ----- --------- -----
31 Dec 2020
-------------------------------------------------------- ----- ----- ------ ----- ----- --------- -----
Reported revenue 1,966 1,381 437 1,132 1,035 (51) 5,900
-------------------------------------------------------- ----- ----- ------ ----- ----- --------- -----
Significant revenue items 2 - 187 1 - (93) 97
-------------------------------------------------------- ----- ----- ------ ----- ----- --------- -----
* fair value movements on financial instruments(1) 2 - 2 1 - (2) 3
--------------------------------------------------------
- restructuring and other related
costs(2) - - 185 - - (91) 94
-------------------------------------------------------- ----- ----- ------ ----- ----- ---------
Adjusted revenue 1,968 1,381 624 1,133 1,035 (144) 5,997
-------------------------------------------------------- ----- ----- ------ ----- ----- --------- -----
1 Includes fair value movements on non-qualifying hedges and
debit valuation adjustments on derivatives.
2 Includes losses associated with the RWA reduction commitments.
Significant cost items by business segment - (recoveries)/charges for
the year ended
GBM Corporate
MSS GB Other CMB WPB Centre Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
31 Dec 2022
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
Reported operating expenses (1,940) (932) (402) (663) (917) (499) (5,353)
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
Significant cost items - - 84 70 9 384 547
* restructuring and other related costs - - 68 61 2 327 458
- European restructurings - - 16 9 7 57 89
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- ---------------------
Adjusted operating expenses (1,940) (932) (318) (593) (908) (115) (4,806)
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
31 Dec 2021
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
Reported operating expenses (2,064) (918) (588) (611) (981) (300) (5,462)
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
Significant cost items - - 103 (1) 6 236 344
* restructuring and other related costs - - 103 (1) 6 213 321
- European restructurings - - - - - 23 23
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- ---------------------
Adjusted operating expenses (2,064) (918) (485) (612) (975) (64) (5,118)
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
31 Dec 2020
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
Reported operating expenses (1,950) (878) (1,351) (773) (1,169) (584) (6,705)
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
Significant cost items 1 - 679 114 41 498 1,333
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
* restructuring and other related costs - - 218 79 5 377 679
----------------------------------------------------------
- European restructurings - - - - - - -
----------------------------------------------------------
* settlements and provisions in connection with legal
and regulatory 1 - - - - 8 9
----------------------------------------------------------
- impairment of other intangible
assets - - 461 35 36 113 645
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- ---------------------
Adjusted operating expenses (1,949) (878) (672) (659) (1,128) (86) (5,372)
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
Net impact on profit/(loss) before tax by business segment
GBM Corporate
MSS GB Other CMB WPB Centre Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- ------------------- -------------------
31 Dec 2022
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- ------------------- -------------------
Reported profit/(loss) before
tax 505 486 (513) 716 (1,004) (1,149) (959)
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- ------------------- -------------------
Net impact on reported profit
and loss (33) - 184 69 1,581 882 2,683
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- ------------------- -------------------
* Significant revenue items (33) - 100 (1) 1,572 498 2,136
--------------------------------
* Significant cost items - - 84 70 9 384 547
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- -------------------
Adjusted profit/(loss) before
tax 472 486 (329) 785 577 (267) 1,724
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- ------------------- -------------------
31 Dec 2021
Reported profit/(loss) before
tax (20) 589 (273) 492 318 (83) 1,023
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- ------------------- -------------------
Net impact on reported profit
and loss 12 - 372 (2) 5 167 554
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- ------------------- -------------------
* Significant revenue items 12 - 269 (1) (1) (69) 210
--------------------------------
* Significant cost items - - 103 (1) 6 236 344
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- -------------------
Adjusted profit/(loss) before
tax (8) 589 99 490 323 84 1,577
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- ------------------- -------------------
31 Dec 2020
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Reported profit/(loss) before
tax 17 55 (918) 37 (173) (632) (1,614)
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- ------------------- -------------------
Net impact on reported profit
and loss 3 - 866 115 41 405 1,430
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- ------------------- -------------------
* Significant revenue items 2 - 187 1 - (93) 97
--------------------------------
* Significant cost items 1 - 679 114 41 498 1,333
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- -------------------
Adjusted profit/(loss) before
tax 20 55 (52) 152 (132) (227) (184)
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- ------------------- -------------------
Adjusted performance
Adjusted profit before tax was GBP1,724m, up GBP147m or 9%
compared with 2021. This reflected higher revenue and lower
operating expenses partly offset by higher ECL and a loss in our
share of profit in associates and joint ventures compared with a
gain in 2021.
Adjusted revenue increased by GBP452m or 7% compared with 2021.
This increase was primarily in Global Payments Solutions ('GPS')
within Global Banking and CMB, driven by the positive impact of
interest rate rises and balance sheet growth. In MSS, strong
revenue performance, notably in Global Foreign Exchange, Securities
Services and Equities, was driven by strong client activity and
robust risk management. Revenue also increased in WPB reflecting
higher net interest income driven by rising interest rates and
higher revenue in insurance manufacturing driven by assumption
updates.
This increase was partly offset by a reduction in GBM Other,
mainly driven by lower favourable valuation gains in PIs and a net
loss from the buy-back of legacy securities to optimise the bank's
future funding costs.
Adjusted ECL were a net charge of GBP222m compared with a net
credit of GBP174m in 2021. In 2022, the net charge was mainly
driven higher stage 3 charges in Global Banking and CMB. This
compared with a net release of stage 1 and stage 2 allowances in
2021 reflecting an improved economic outlook and stabilisation of
credit risk.
Adjusted operating expenses decreased by GBP312m or 6%, mainly
reflecting the impact of our transformation cost-saving initiatives
and lower performance-related pay. In addition, there was a lower
UK bank levy charge, which included a credit of GBP44m relating to
2021 charges, and lower VAT costs in France due to an update in the
VAT recovery rate and the recognition of a recovery of VAT paid in
2021.
Share of (loss)/profit in associates and joint ventures was a
loss of GBP30m compared with a profit of GBP191m in 2021. The loss
in 2022 included a GBP24m true-up of prior year valuations in the
underlying investments of the Business Growth Fund ('BGF').
Markets and Securities Services
Adjusted profit before tax was GBP472m compared with a loss
before tax of GBP(8)m in 2021. This was driven by strong revenue
performance and lower operating expenses.
Adjusted revenue increased by GBP358m or 17%, mainly in Global
Foreign Exchange (up by GBP305m). This was driven by increased
client activity due to elevated market volatility and the
macroeconomic impacts from rising inflation, increasing interest
rates and a strengthening of the US dollar, resulting in a strong
trading performance. Revenue also increased in Securities Services
(up GBP72m) driven by higher interest rates and transaction
volumes. In Equities, revenue was higher by GBP32m as 2022 included
a one-off gain on disposal of an associate of GBP61m following a
merger event. This increase was partly offset lower client activity
as a result of inflation concerns and lack of investor appetite in
2022.
In Securities Financing, revenue was down by GBP49m, mainly due
to margin compression in repurchase agreements ('repos'). This
reflected volatility due to the macro-economic environment,
including central bank policies on interest rates. By contrast,
revenue was up in Prime Finance driven by growth in client
franchise revenue, up 10%, despite challenging market
conditions.
Revenue also decreased in Global Debt Markets (down by GBP23m),
mainly driven by lower primary issuances and reduced client
activity due to challenging market conditions.
Adjusted operating expenses decreased by GBP124m or 6%, largely
driven by a decrease in performance-related pay and the impact of
our transformation cost-saving initiatives; partly offset by the
impact of higher inflation.
Global Banking
Adjusted profit before tax was GBP486m, a decrease of GBP103m or
17% compared with 2021. This was largely driven by higher ECL,
partly offset by higher revenue.
Adjusted revenue increased by GBP204m or 15%, mainly in GPS (up
by GBP389m) driven by margin growth reflecting the rising global
interest rate environment and strategic initiatives to grow fee
income. In contrast, Capital Markets and Advisory revenue decreased
by GBP124m, in line with the reduced market fee pool and adverse
valuation movements on leveraged loans.
Adjusted ECL were a net charge of GBP153m compared with a net
credit of GBP139m in 2021. The net charge in 2022 was mainly driven
by higher stage 3 charges, notably in non-bank financial
institutions and real estate sectors. This compared with a net
release of stage 1 and stage 2 allowances in 2021 primarily
relating to Covid-19 related allowances built up in 2020.
Adjusted operating expenses were GBP14m or 2% higher compared
with 2021, reflecting the impact of higher inflation and strategic
investments, partly offset by the impact of our ongoing cost
discipline.
Global Banking and Markets Other
Adjusted loss before tax was GBP(329)m, compared with a profit
before tax of GBP99m in 2021. This was largely driven by lower
revenue, partly offset by lower operating expenses.
Adjusted revenue decreased by GBP587m, mainly in PIs driven by
lower valuation gains of GBP209m compared with 2021. Revenue also
decreased driven by a net loss from the buy-back of legacy
securities to optimise the bank's future funding costs, and also
lower intercompany recoveries of costs from other entities in the
Group. There was also a decrease in revenue allocated from Markets
Treasury.
Adjusted operating expenses decreased by GBP167m or 35% compared
with 2021, reflecting the move of certain GBM costs from the bank
to other entities in the Group (offset by lower intercompany
recoveries in revenue). The decrease in operating expenses was also
driven by lower UK Bank levy in 2022, which included a credit
relating to 2021 charges.
Commercial Banking
CMB performed strongly in 2022 as we continued to implement our
strategy to focus on serving our international customers.
Adjusted profit before tax was GBP785m, up by GBP295m compared
with 2021. This was mainly driven by higher revenue and lower
operating expenses, partly offset by ECL charges.
Adjusted revenue increased by GBP337m or 31% compared with 2021.
This was primarily in GPS (up by GBP294m) driven by the higher
interest rate environment and growth in average deposit balances.
There was also an increase in collaboration revenue from MSS
products (up GBP36m), notably Global Foreign Exchange.
Additionally, revenue also benefited from favourable fair value
movements in our holding of preference shares in VISA and an
increase in revenue from Markets Treasury.
This was partly offset by a decrease in Credit and Lending
revenue of GBP43m, in part due to an increase in the cost of
funds.
Adjusted ECL were a net charge of GBP54m compared with a net
release of GBP7m in 2021. The net charge in 2022 was largely driven
by stage 3 charges in France and Germany, partly offset by a
release of stage 1 and stage 2 allowances. This compared with a net
release in 2021 of Covid-19-related allowances previously built up
in 2020.
Adjusted operating expenses decreased by GBP19m or 3%, driven by
continued cost discipline on discretionary spend and
through hiring efficiencies, as well as from the impact of our
cost-saving initiatives. The decrease was also driven by an update
in the VAT recovery rate and the recognition of a recovery of VAT
paid in 2021 in France.
Wealth and Personal Banking ('WPB')
Adjusted profit before tax of GBP577m, up GBP254m compared with
2021. This was primarily due to higher revenue and lower operating
expenses, partly offset by higher ECL.
Adjusted revenue increased by GBP217m or 17%, mainly CIIOM from
deposits (up GBP147m) due to the higher interest rate environment
and growth in average balances. Revenue also increased in insurance
manufacturing (up by GBP58m) due to assumptions changes and
experience variances, primarily reflecting favourable investment
assumptions on asset management rebates for unit-linked investments
and profit-sharing levels. There were also favourable fair value
movements in our holding of preference shares in VISA of
GBP33m.
Adjusted ECL were a net charge of GBP7m compared with a net
release of GBP23m in 2021. The net charge in 2022 mainly reflected
a more normalised level of charges including provisions relating to
a deterioration in the forward economic outlook due to heightened
levels of uncertainty and inflationary pressures. The net release
in 2021 was from Covid-19-related allowances previously built up in
2020.
Adjusted operating expenses decreased by GBP67m or 7%. This was
driven by the benefits of our cost-saving initiatives and a
reduction due to the increase in the VAT recovery rate and the
recognition of a recovery of VAT paid in 2021 in France.
Corporate Centre
Adjusted loss before tax of GBP267m compared with a profit
before tax of GBP84m in 2021. This was mainly driven by a loss in
associates and joint ventures compared with a gain in the first
half of 2021, as well as lower revenue.
Adjusted revenue was lower by GBP77m, mainly driven by the
non-recurrence of a fair value gain of GBP32m in 2021 from a
long-standing investment in a Germany-based brokerage company.
There was also lower valuation gains of GBP12m in Legacy Credit
portfolios.
Adjusted ECL were GBP5m higher compared with 2021, mainly driven
by losses in Legacy Credit.
Adjusted operating expenses increased by GBP51m, largely driven
by higher margin on recharges from UK ServCo and higher
intercompany recharges from entities in the Group.
Shares of (loss)/profit in associates and joint ventures was a
loss of GBP28m, of which GBP24m was due to a true-up of prior year
valuations in the underlying investments of the BGF. This compared
with a profit of GBP191m in 2021 due to the recovery in asset
valuations.
Dividends
The consolidated reported profit for the year attributable to
the shareholders of the bank was GBP(408)m.
A special dividend was declared/paid on CET1 capital in
2022.
Further information about the results is given in the
consolidated income statement on page 114.
Review of business position
Summary consolidated balance sheet at 31 Dec
2022 2021
GBPm GBPm
------------------------------------------------------------- ------------------------ ----------------------------
Total assets 717,353 596,611
------------------------------------------------------------- ------------------------ ----------------------------
* cash and balances at central banks 131,433 108,482
-------------------------------------------------------------
* trading assets 79,878 83,706
-------------------------------------------------------------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 15,881 18,649
* derivatives 225,238 141,221
-------------------------------------------------------------
* loans and advances to banks 17,109 10,784
-------------------------------------------------------------
* loans and advances to customers 72,614 91,177
-------------------------------------------------------------
* reverse repurchase agreements - non-trading 53,949 54,448
-------------------------------------------------------------
* financial investments 32,604 41,300
-------------------------------------------------------------
* assets held for sale 21,214 9
-------------------------------------------------------------
* other assets 67,433 46,835
Total liabilities 693,337 572,896
------------------------------------------------------------- ------------------------ ----------------------------
* deposits by banks 20,836 32,188
-------------------------------------------------------------
* customer accounts 215,948 205,241
-------------------------------------------------------------
* repurchase agreements - non-trading 32,901 27,259
-------------------------------------------------------------
* trading liabilities 41,265 46,433
-------------------------------------------------------------
* financial liabilities designated at fair value 27,287 33,608
-------------------------------------------------------------
* derivatives 218,867 139,368
-------------------------------------------------------------
* debt securities in issue 7,268 9,428
-------------------------------------------------------------
24,711 -
* liabilities of disposal groups held for sale
-------------------------------------------------------------
* liabilities under insurance contracts 19,987 22,264
-------------------------------------------------------------
* other liabilities 84,267 57,107
Total equity 24,016 23,715
------------------------------------------------------------- ------------------------ ----------------------------
Total shareholders' equity 23,875 23,584
------------------------------------------------------------- ------------------------ ----------------------------
Non-controlling interests 141 131
------------------------------------------------------------- ------------------------ ----------------------------
Total reported assets were 20.2% higher than at 31 December
2021. The group maintained a strong and liquid balance sheet with
the ratio of customer advances to customer accounts decreasing to
33.6% from 44.4% as at 31 December 2021 driven by reclassification
of French retail loans following the announcement of the sale to
assets held for sale as well as ongoing loan book optimisation
efforts.
Assets
Cash and balances at central banks increased by 21.2% as a
result of increased customer deposits and decreased balances in
reverse repos and advances to customers.
Trading assets and financial assets designated at fair value
slightly reduced due to a reduction in Prime business and GDM
activities on the basis of market conditions in 2022.
Derivative assets increased by 59.5% due to market movements in
interest rates and FX rates.
Non-trading reverse repos decreased by 0.9% primarily due to
changes in market conditions.
Financial investments decreased by 21.1% as a result of
optimisation strategy.
Liabilities
Customer accounts increased by 5.2%, which is consistent with
our funding strategy to grow customer deposits and increase stable
funding.
Total of trading liabilities and financial liabilities
designated at fair value balances has decreased by 14.4%.
Debt securities in issue decreased by 22.9% in line with the
funding strategy.
Non-trading repos increased by 20.7% as a result of market
activities.
Derivative liabilities increased by 57.0%. This is in line with
derivative assets as the underlying risk is broadly matched.
Equity
Total shareholder's equity remained broadly unchanged as
compared to 2021.
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
2022 2021 2020
GBPm GBPm GBPm
-------------------------------- ------------------- --------------------- ---------------------
Interest income 6,535 3,149 4,086
-------------------------------- ------------------- --------------------- ---------------------
Interest expense (4,631) (1,395) (2,188)
-------------------------------- ------------------- --------------------- ---------------------
Net interest income 1,904 1,754 1,898
-------------------------------- ------------------- --------------------- ---------------------
Average interest-earning assets 372,159 354,324 369,617
-------------------------------- ------------------- --------------------- ---------------------
% %%
-------------------------------- ------------------- --------------------- --------------------
Gross interest yield(1) 1.53 0.51 0.74
-------------------------------- ------------------- --------------------- ---------------------
Less: gross interest payable(1) (1.23) (0.01) (0.27)
-------------------------------- ------------------- --------------------- ---------------------
Net interest spread(2) 0.30 0.50 0.47
-------------------------------- ------------------- --------------------- ---------------------
Net interest margin(3) 0.51 0.50 0.51
-------------------------------- ------------------- --------------------- ---------------------
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
2022 2021 2020
------------------------------------------ ------------------------------------------------------ ------------------------------------------------------
Average Interest Average Interest Average Interest
balance income Yield(1) balance income Yield(1) balance income Yield(1)
GBPm GBPm % GBPm GBPm % GBPm GBPm %
Short term funds
and
loans and
advances to
banks 144,826 1,115 0.77 119,025 (221) (0.19) 90,841 (113) (0.12)
----------------- ------------- ----------------- -------- -------------- ------------------- ----------------- -------------- ------------------- -----------------
Loans and
advances to
customers 91,882 2,177 2.37 99,151 1,585 1.60 116,518 2,058 1.77
----------------- ------------- ----------------- -------- -------------- ------------------- ----------------- -------------- ------------------- -----------------
Reverse
repurchase
agreements
- non-trading 56,144 1,099 1.96 57,630 (132) (0.23) 68,573 22 0.03
----------------- ------------- ----------------- -------- -------------- ------------------- ----------------- -------------- ------------------- -----------------
Financial
investments 37,949 633 1.67 45,142 497 1.10 51,335 652 1.27
----------------- ------------- ----------------- -------- -------------- ------------------- ----------------- -------------- ------------------- -----------------
Other
interest-earning
assets 41,358 686 1.66 33,376 67 0.20 42,350 118 0.28
----------------- ------------- ----------------- -------- -------------- ------------------- ----------------- -------------- ------------------- -----------------
Total
interest-earning
assets 372,159 5,710 1.53 354,324 1,796 0.51 369,617 2,737 0.74
----------------- ------------- ----------------- -------- -------------- ------------------- ----------------- -------------- ------------------- -----------------
1 Interest yield calculations include negative interest on
assets recognised as interest expense in the income statement.
Summary of interest expense by type of liability and equity
2022 2021 2020
-------------------------------------------- --------------------------------------------
Average Interest Average Interest Average Interest
balance expense Cost(1) balance expense Cost(1) balance expense Cost(1)
GBPm GBPm % GBPm GBPm % GBPm GBPm %
Deposits by banks 31,930 55 0.17 32,891 (186) (0.57) 28,812 (60) (0.21)
Customer accounts 164,681 1,742 1.06 150,048 95 0.06 143,807 321 0.22
----------------- ------------- ------------------ ------- -------------- ------------------- ------- -------------- ------------------- -------
Repurchase
agreements
- non-trading 31,898 680 2.13 32,916 (192) (0.58) 38,829 (129) (0.33)
----------------- ------------- ------------------ ------- -------------- ------------------- ------- -------------- ------------------- -------
Debt securities
in issue
- non-trading 29,385 589 2.00 38,727 258 0.67 52,781 546 1.03
----------------- ------------- ------------------ ------- -------------- ------------------- ------- -------------- ------------------- -------
Other
interest-bearing
liabilities 50,301 739 1.47 36,811 68 0.18 47,384 160 0.34
----------------- ------------- ------------------ ------- -------------- ------------------- ------- -------------- ------------------- -------
Total
interest-bearing
liabilities 308,195 3,805 1.23 291,393 43 0.01 311,613 838 0.27
----------------- ------------- ------------------ ------- -------------- ------------------- ------- -------------- ------------------- -------
1 Interest payable calculations include negative interest on
liabilities recognised as interest income in the income
statement.
Reconciliation of alternative performance
measures
Return on average ordinary shareholders' equity and return on
average tangible equity
Return on average ordinary shareholders' equity ('RoE') is
computed by taking profit attributable to the ordinary shareholders
of the parent company ('reported results'), divided by average
ordinary shareholders' equity ('reported equity') for the period.
The adjustment to reported results and reported equity excludes
amounts attributable to non-controlling interests and holders of
preference shares and other equity instruments.
Return on average tangible equity ('RoTE') is computed by
adjusting reported results for the movements in the present value
of in-force long-term insurance business ('PVIF') and for
impairment of goodwill and other intangible assets (net of tax),
divided by average reported equity adjusted for goodwill,
intangibles and PVIF for the period.
RoTE excluding significant items is annualised profit
attributable to ordinary shareholders, excluding changes in PVIF,
significant items and bank levy (net of tax), divided by average
tangible shareholders' equity excluding fair value of own debt, DVA
and other adjustments for the period.
We provide RoTE ratio in addition to RoE as a way of assessing
our performance, which is closely aligned to our capital
position.
Return on average ordinary shareholders' equity and return on average
tangible equity
Year ended
31 Dec 31 Dec 31 Dec
2022 2021 2020
GBPm GBPm GBPm
-------------------- -------------------------------- --------------------------------- ---------------------------------
Profit
-------------------- -------------------------------- --------------------------------- ---------------------------------
Profit attributable
to the ordinary
shareholders
of the parent
company (611) 847 (1,643)
-------------------- -------------------------------- --------------------------------- ---------------------------------
Decrease/(increase)
in PVIF (net of
tax) (105) (149) 59
-------------------- -------------------------------- --------------------------------- ---------------------------------
Profit attributable
to the ordinary
shareholders,
excluding other
intangible assets
impairment
and PVIF (716) 698 (1,584)
-------------------- -------------------------------- --------------------------------- ---------------------------------
Significant items
(net of tax) 1,753 468 1,050
-------------------- -------------------------------- --------------------------------- ---------------------------------
Profit attributable
to the ordinary
shareholders,
excluding PVIF and
significant items 1,037 1,166 (534)
-------------------- -------------------------------- --------------------------------- ---------------------------------
Equity
-------------------- -------------------------------- --------------------------------- ---------------------------------
Average total
shareholders'
equity 23,550 23,629 24,457
-------------------- -------------------------------- --------------------------------- ---------------------------------
Effect of average
preference shares
and other
equity instruments (3,888) (3,722) (3,722)
-------------------- -------------------------------- --------------------------------- ---------------------------------
Average ordinary
shareholders'
equity 19,662 19,907 20,735
-------------------- -------------------------------- --------------------------------- ---------------------------------
Effect of PVIF (net
of tax) (727) (553) (464)
-------------------- -------------------------------- --------------------------------- ---------------------------------
Significant items
and other
adjustments (net
of tax) (240) (92) (733)
-------------------- -------------------------------- --------------------------------- ---------------------------------
Average tangible
equity excluding
PVIF, significant
items and other
adjustments 18,695 19,262 19,538
-------------------- -------------------------------- --------------------------------- ---------------------------------
Ratio
-------------------- -------------------------------- --------------------------------- ---------------------------------
Return on average
ordinary
shareholders'
equity
(annualised) (3.1) 4.3 (7.9)
-------------------- -------------------------------- --------------------------------- ---------------------------------
Return on average
tangible equity
(annualised) (3.8) 3.6 (8.1)
-------------------- -------------------------------- --------------------------------- ---------------------------------
Adjusted Return on
average tangible
equity
(annualised) 5.5 6.1 (2.7)
-------------------- -------------------------------- --------------------------------- ---------------------------------
Risk overview
The group continuously identifies, assesses, manages 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, climate 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, our 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 26 to 93.
We have reviewed our list of top and emerging risks and changed
the title of 'Regulatory focus on conduct of business' risk to
'Evolving regulatory environment' risk to reflect the broad
regulatory agenda, including conduct. Credit risk has been added to
reflect the current economic environment.
Externally driven
Geopolitical Our operations and portfolios are exposed to risks associated
and macroeconomic p with political instability, civil unrest and military conflict,
risk which could lead to disruption of our operations, physical
risk to our staff and/or physical damage to our assets.
Heightened geopolitical tensions including the ongoing Russia-Ukraine
war, alongside the economic impacts that continue to result
from the Covid-19 pandemic, have also disrupted supply chains
globally. These events and rising inflation in the European
region have created a marked economic slowdown which will
affect our customers and our business.
------------------ --- ----------------------------------------------------------------------
Credit risk We regularly undertake detailed reviews of our portfolios
-- and proactively manage credit facilities to customers and
sectors likely to come under stress as a result of current
macroeconomic and geopolitical events including the Russia-Ukraine
war and the recessionary pressures across Europe. Particular
emphasis has been maintained on the Real Estate, Construction
and Contracting, Retail and Leverage portfolios. We have
increased the frequency and depth of our monitoring activities
with stress tests and other sectoral reviews performed to
identify portfolios or customers who are likely to experience
financial difficulty through the slowdown in economic activity.
------------------ --- ----------------------------------------------------------------------
Cyber threat We face a risk of service disruption from external and internal
and unauthorised u malicious activity. In response to the recent geopolitical
access to events, we have further strengthened our monitoring approach.
systems We operate a continuous improvement programme to protect
our technology operations, and to counter a fast evolving
cyber threat environment.
------------------ --- ----------------------------------------------------------------------
Evolving The compliance risk environment remains complex, given heightened
regulatory u geopolitical tensions and consequent macroeconomic impacts.
environment There remains increased regulatory focus on operational
risk and cyber resilience, economic impacts (including on customers),
crypto-asset-related risks and sanctions, and wider anti-money
laundering controls. These, alongside an increased focus
on how financial services organisations demonstrate active
management of and compliance with regulatory obligations
and wider expectations, may result in change requirements
across the group in the short to medium term. We continue
to monitor regulatory and wider industry developments closely
and engage with regulators as appropriate.
------------------ --- ----------------------------------------------------------------------
Financial We continue to support our customers against a backdrop
crime and p of complex geopolitical, socio-economic and technological
fraud risk challenges, including the Russia-Ukraine war. We are monitoring
the impacts of the Russia-Ukraine war on the group, and
using our sanctions compliance capabilities to respond to
evolving sanctions regulations, noting the challenges that
arise in implementing the unprecedented volume and diverse
set of sanctions and trade restrictions.
------------------ --- ----------------------------------------------------------------------
Ibor transition We remain exposed to regulatory compliance, legal and resilience
q risks as contracts transition away from demising Ibor benchmarks
to new reference rates. As a result, we continue to consider
the fairness of client outcomes, our compliance with regulatory
expectations and the operation of our systems and processes.
The key risks are diminishing in line with our process implementation
as we have transitioned all but a small number of contracts
in demised Ibors, and are well progressed in transitioning
contracts in remaining demising Ibors, specifically US dollar
Libor.
------------------ --- ----------------------------------------------------------------------
Environmental, We are subject to ESG risks relating to climate change,
social and p greenwashing, nature and human rights. This risk has increased
governance owing to the pace and volume of regulatory developments
risk globally and stakeholders placing more emphasis on financial
institutions' actions and investment decisions in respect
of ESG matters. Failure to meet these evolving expectations
may result in financial and non-financial risks for the
group, including adverse reputational consequences.
------------------ --- ----------------------------------------------------------------------
Internally driven
People risk We monitor workforce capacity and capability requirements
p in line with our published growth strategy, in conjunction
with risks related to employment relations practices, culture,
and conduct. People risk has heightened in 2022 compared
to 2021, mainly resulting from the many transformation and
restructuring activities concomitantly happening in the
region. The main risk drivers the region is exposed to are
capacity and capability risks associated with talent attraction
and retention, coupled with the effects of the current geopolitical
tensions on our employees and markets' economies. Strong
oversight continues to be maintained over people risks arising
from change activity. Measures are being rolled out to support
our people while transitioning to new business models as
well as with challenges resulting from the current heightened
inflationary pressures.
---------------- ---------------------------------------------------------------------
IT systems We continue to monitor and improve our IT systems and network
infrastructure p resilience, both on our premises and on the Cloud to minimise
and operational service disruption and improve customer experience. To support
resilience the business strategy, we strengthened our end to end management,
build and deployment controls and system monitoring capabilities.
We are seeing increased demand on customer support centres
and our business operations as a result of the current economic
environment and there is additional focus on our operational
resilience. We continue to seek to reduce the complexity
of our technology estate and consolidate our core banking
systems onto a single strategic platform.
---------------- ---------------------------------------------------------------------
Execution Failure to effectively prioritise, manage and/or deliver
risk p transformation within the group impacts our ability to achieve
our strategic objectives. Given the scale, complexity and
pace of strategic change within the group, we must monitor,
manage and oversee change execution risk to make sure our
change portfolio and initiatives continue to deliver the
right outcomes for our customers, people, regulators, investors
and communities.
---------------- ---------------------------------------------------------------------
Model risk Evolving regulatory requirements are driving material changes
u to the way model risk is managed across the banking industry,
with particular focus on capital models. New technologies
such as machine learning are driving changes to the model
landscape, and the group's strategic focus on climate risk
requires the development of new methods that will effectively
model climate-related factors and activities. A key area
of focus is ensuring our standards, processes and controls
are adequate to identify, measure and manage the resulting
model risks. New Bank of England guidance on model risk
management will require greater focus on the management
of model risks across the bank.
---------------- ---------------------------------------------------------------------
Data risk We use data to serve our customers and run our operations,
p often in real-time within digital experiences and processes.
If our data is not accurate and timely, our ability to serve
customers, operate with resilience or meet regulatory requirements
could be impacted. We need to ensure that data is kept confidential,
and that we comply with the growing number of laws and increasing
expectations from regulators concerning data privacy controls
and the cross-border movement of data.
---------------- ---------------------------------------------------------------------
Third party We procure services and goods from a range of third parties.
risk u It is critical that we have appropriate risk management
policies and processes over the selection and governance
of third parties. This includes third parties' supply networks,
particularly for key activities that could affect our operational
resilience. Any deficiency in the management of risks associated
with our third parties could affect our ability to support
our customers and meet regulatory expectations.
---------------- ---------------------------------------------------------------------
-- New risk introduced in 2022
p Risk has heightened during 2022
u Risk remains at the same level
as 2021
q Risk has decreased during 2022
On behalf of the Board
David Watts
Director
20 February 2023
Registered number 00014259
Risk
Page
Our approach to risk 26
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Our risk appetite 26
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Risk management 28
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Key developments and risk profile 28
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Top and emerging risks 28
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Externally driven 29
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Internally driven 33
Our material banking and insurance
risks 35
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Credit risk 37
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Treasury risk 78
Market risk 88
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Climate risk 92
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Resilience risk 93
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Regulatory compliance risk 93
----------------------------------- ----
Financial crime risk 95
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Model risk 96
----------------------------------- ----
Insurance manufacturing operations
risk Overview 97
----------------------------------- ----
.
Our approach to risk
Our risk appetite
We recognise the importance of a strong risk 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 the consideration of financial
and non-financial risks. We define financial risk as the risk of a
financial loss as a result of business activities. We actively take
these types of risks to maximise shareholder value and profits.
Non-financial risk is defined as the risk to achieving our
strategy or objectives as a result of inadequate or failed internal
processes, people and systems, or from external events.
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.
Our Risk Committee focuses on risk governance and ensures 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 bank's Nomination,
Remuneration and Governance 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 and the current geopolitical risks. Actively managing
non-financial risks is crucial to serving our customers effectively
and having a positive impact on society. During 2022 we continued
to strengthen the control environment and our approach to the
management of non-financial risks, 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 non-financial 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
All our people are responsible for identifying and managing risk
within the scope of their roles. Roles are defined using the three
lines of defence model, which takes into account our business and
functional structures.
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 in line
with risk appetite, 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
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 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 tests, conducted throughout
2022, considered combinations of various potential impacts as
identified in our top and emerging risks, in particular the impact
of the Russia-Ukraine war, geopolitical tensions and trade wars,
and operational risk.
In Q4 2022, the Group participated in the BoE Annual Cyclical
Scenario ('ACS') stress testing exercise. The ACS focused on higher
global interest rates in the face of a series of global cost shocks
and high and persistent global inflation. Unemployment, also
increased sharply. The impact of traded risk shocks was included,
linked to a financial market scenario consistent with the content
and calibration of the macroeconomic scenario.
This stress scenario was more severe than the Global Financial
Crisis for both the UK and the world.
The scenario reflected the impact of weaker household real
income growth, lower confidence and tighter financial conditions
resulting in severe domestic and global recessions.
The BoE will publish the results in summer 2023.
In response to regulatory requirements and internal drivers,
separately to the stress tests already mentioned, we are developing
our capabilities to model the impact of climate risk on our bank,
specifically physical and transition risk.
In 2022, we have considered four bespoke scenarios that were
designed to articulate our view of the range of potential outcomes
for global climate change. In our climate scenario analysis, we
consider, separately: transition risk arising from the process of
moving to a net zero economy, including changes in policy,
technology, consumer behaviour and stakeholder perception, which
will each impact borrowers' operating income, financing
requirements and asset values; and physical risk arising from the
increased frequency and severity of weather events, such as
hurricanes and floods, or chronic shifts in weather patterns, which
will each impact property values, repair costs and lead to business
interruptions.
These scenarios, which reflect different levels of physical and
transition risk and are varied by severity and probability, were:
the Net Zero scenario, which aligns with the Group net zero
strategy and is consistent with the Paris Agreement; the Current
Commitments scenario, which assumes that climate action is limited
to the current governmental commitments and pledges; the Downside
Transition Risk scenario, which assumes that climate action is
delayed until 2030; and the Downside Physical Risk scenario, which
assumes climate action is limited to current governmental
policies.
We consider our Current Commitments scenario as the most likely
scenario to transpire over the next five years. Under the Current
Commitments scenario, we expect moderate levels of losses relating
to transition risks. However, the rise in global warming will lead
to increasing levels of physical risk losses in later years. Based
on this scenario the potential impact on expected credit losses is
not considered material over the next five years, as the impacts of
climate risk will emerge later in the following decades.
Key developments and risk profile
Key developments in 2022
We actively managed the risks related to the Russia-Ukraine war
and broader macroeconomic and geopolitical uncertainties, as well
as other key risks described in this section.
In addition, we enhanced our risk management in the following
areas:
-- We have continued to improve our risk governance decision
making, particularly with regard to the governance of treasury risk
to ensure senior executives have appropriate oversight and
visibility of macroeconomic trends around inflation and interest
rates.
-- We enhanced our enterprise risk reporting processes to place
a greater focus on our emerging risks, including by capturing the
materiality, oversight and individual monitoring of these
risks.
-- We have further strengthened our third-party risk policy and
processes to improve control and oversight of our material third
parties that are key to maintaining our operational resilience, and
to meet new and evolving regulatory requirements.
-- We have continued to embed, the governance and oversight
around model adjustments, related processes for IFRS 9 models and
financial reporting processes.
-- Through our climate risk programme we have continued to embed
climate considerations throughout the firm, including updating the
scope of our programme to cover all risk types, expanding the scope
of climate related training and developing new climate risk metrics
to monitor and manage exposures.
-- We continued to improve the effectiveness of our financial
crime controls, deploying advanced analytics capabilities into our
markets. We are refreshing our financial crime policies, ensuring
they remain up-to-date and address changing and emerging risks. We
continue to monitor regulatory changes.
Top and emerging risks
We use a top and emerging risks process to provide a
forward-looking view of issues with the potential to threaten the
execution of our strategy or operations over the medium to long
term.
We proactively assess the internal and external risk
environment, as well as review the themes identified across the
European region and the group's businesses, for any risks that may
require escalation. We update our top and emerging risks as
necessary.
Our current top and emerging risks are as follows.
Externally driven
Geopolitical and macroeconomic risk
The Russia-Ukraine war has had far-reaching geopolitical and
economic implications. The group is monitoring the impacts of the
war and continues to respond to the further economic sanctions and
trade restrictions that have been imposed on Russia in response. In
particular, significant sanctions and trade restrictions against
Russia have been put in place by the US, the UK and the EU, as well
as other countries. Such sanctions and restrictions have
specifically targeted certain Russian government officials,
politically exposed persons, business people, Russian oil imports,
energy products, financial institutions and other major Russian
companies, as well as more generally applicable investment, export,
and import bans and restrictions. In response to such sanctions and
trade restrictions, as well as asset flight, Russia has implemented
certain countermeasures. Further sanctions, trade restrictions and
Russian counter sanctions may adversely affect the group, its
customers and the markets in which we operate by creating
regulatory, reputational and market risks.
Our business in Russia principally serves multinational
corporate clients headquartered in other countries, is not
accepting new business or customers, and is consequently on a
declining trend. Following a strategic review, HSBC Europe BV (a
wholly-owned subsidiary of HSBC Bank plc) has entered into an
agreement to sell its wholly-owned subsidiary HSBC Bank (RR)
(Limited Liability Company), subject to regulatory and governmental
approvals.
Global commodity markets have been significantly impacted by the
Russia-Ukraine war and localised Covid-19 outbreaks, leading to
continued supply chain disruptions. This has resulted in European
product shortages and increased prices for both energy and
non-energy commodities, such as food. Despite falls in wholesale
energy prices in late 2022 and early 2023, which may provide
relief, ongoing pass-through of input price rises means we do not
expect underlying inflationary pressures to ease significantly in
the near term. These issues have exacerbated inflation across the
region. Prolonged spells of relatively mild seasonal weather, and
diversification of fuel services have nevertheless helped Europe to
substantially reduce risks of energy rationing over the winter
months.
Rising global inflation has prompted the ECB to tighten monetary
policy. The combined pressure of inflation and interest rate rises
may lead to pressures on customers and their ability to repay debt.
The ECB has increased its benchmark rate by 300bps since July 2022.
Further interest rate increases by the ECB are anticipated in light
of inflation forecasts. Investors appear less willing to tolerate
expansionary fiscal policies in the context of high debt ratios. An
economic slowdown, possibly a recession in parts of the EU and the
UK, could slow the pace of tightening in our major markets.
However, should interest rates need to rise beyond what is
currently expected, a realignment of market expectations could
cause turbulence in financial asset prices.
Second order impacts from the Russia-Ukraine war and other
geopolitical events remain uncertain and may lead to significant
credit losses on specific exposures, which may not be fully
captured in our ECL estimates. Higher inflationary concerns and
interest rate expectations across the region are also having an
impact on ECL. In line with existing practice we have continued to
carry out enhanced monitoring of model outputs and the use of model
overlays, including management adjustments based on the expert
judgement of senior credit risk managers to reflect current market
inflation and interest rate conditions where they have not been
incorporated in the underlying macroeconomic scenarios. Inflation
and rising interest rates have been considered both directly in
certain models, and assessed via adjustments where not directly
considered.
Whilst many of the government programmes implemented during the
Covid-19 pandemic to support businesses and individuals have
ceased, these have impacted the level of credit losses, which in
turn may have impacted the longer-term reliability of loss and
capital models.
Negotiations between the UK and the EU over the operation of the
Northern Ireland Protocol are continuing. While there are signs
that differences may be diminishing, failure to reach agreement
could have implications for the future operation of the EU-UK TCA.
In June 2022, the UK government published proposed legislation that
seeks to amend the Protocol in a number of respects. In response,
the EU launched infringement procedures against the UK, and is
evaluating the UK response, received in September 2022. If the
proposed legislation were to pass, and infringement procedures
progressed, it could further complicate the terms of trade between
the UK and the EU and potentially prevent progress in other areas
such as financial services. We are monitoring the situation
closely, including the potential impacts on our customers.
Our business could also be adversely affected by economic or
political developments in regions of the world outside Europe. This
reflects our extensive business links, through members of the Group
and other entities, in Asia and elsewhere. Tensions between China
and the US, extending to the UK, the EU, India and other countries,
and political developments in Hong Kong and Taiwan, may adversely
affect the group.
The US, the UK, the EU and other countries have imposed various
sanctions and trade restrictions on China. In response to foreign
sanctions and trade restrictions, China has also announced
sanctions, trade restrictions and laws that could impact the group
and its customers.
High Covid-19 vaccination rates and acquired population immunity
in 2022 across the European region have reduced the public health
risks and the need for restrictions. New Covid-19 variants and
sub-variants pose a continuing risk and could result in the
European governments reintroducing restrictions, potentially
impacting our personal and business customers.
Our Central macroeconomic scenario, which has the highest
probability weighting in our IFRS 9 'Financial Instruments'
calculations of ECL, assumes low growth and a higher inflation
environment. However, due to the rapidly changing economic
conditions, the potential for forecast dispersion and volatility
remain high, impacting the degree of accuracy and certainty of our
Central scenario forecast. The level of volatility depends on
various factors, including but not limited to: commodity price
increases, supply chain constraints and the monetary policy
response to inflation. There is also uncertainty with respect to
the relationship between the economic drivers and the historical
loss experience, which has required adjustments to modelled ECLs in
cases where we determined that the model was unable to capture the
material underlying risks. For further details of our Central and
other scenarios, see 'Measurement uncertainty and sensitivity
analysis of ECL estimates' on page 48.
Mitigating actions
-- We closely monitor geopolitical and economic developments
including the impacts of the Russia-Ukraine war and undertake
scenario analysis and stress testing where appropriate. This helps
us to take portfolio actions where necessary, including seeking to
ensure enhanced monitoring and amending our risk appetite.
-- We continue to monitor the EU's relationship with the UK, and
assess the potential impact on our people, operations and
portfolios.
-- We continue to monitor our risk profile closely in the
context of the current geopolitical and macroeconomic situation,
and given the significant uncertainties, additional mitigating
actions may be required.
Credit risk
Credit risk has increased driven chiefly by the impacts and
uncertainty caused by the current geopolitical and macroeconomic
environment. Economic prospects and therefore the outlook for
credit risk across our key markets will be driven by a number of
factors including how inflationary pressures are managed across the
EU and the UK, and whether a global recession develops, exacerbated
by the ongoing Russia-Ukraine war.
Mitigating actions
-- Reviews of key credit portfolios are undertaken regularly to
seek to ensure that individual customer or portfolio risks are
understood and our management of the level of facilities offered
through the economic downturn is appropriate.
-- We continue to monitor high risk wholesale industry sectors
closely and in 2022 we undertook specific reviews of portfolios
showing vulnerability such as Real Estate, Retail, Construction and
Contracting and Wholesale Trade.
-- Detailed performance monitoring is reviewed on a monthly
basis, which includes early warning indicators and a view of
concentration risks. Portfolio limits and exposures are re-assessed
and reductions implemented where appropriate.
-- We stress test portfolios of particular concern to identify
sensitivity to loss under a range of scenarios, with management
actions being taken to seek to rebalance exposures and to manage
risk appetite where necessary.
Cyber threat and unauthorised access to systems
Together with other organisations, we continue to operate in an
increasingly hostile cyber threat environment. These threats
include potential unauthorised access to customer accounts, attacks
on our systems or those of our third-party suppliers and require
ongoing investment in business and technical controls to defend
against them.
Mitigating actions
-- We continuously evaluate threat levels for the most prevalent
cyber-attack types and their potential outcomes. To further protect
the group and our customers and help ensure the safe expansion of
our business lines, we continue to strengthen our controls to
reduce the likelihood and impact of advanced malware, data leakage,
exposure through third parties and security vulnerabilities.
-- We seek 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 colleagues remain aware of
cybersecurity issues and know how to report incidents.
-- We report and review cyber risk and control effectiveness 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 its mitigating actions.
-- We participate globally in industry bodies and working groups
to collaborate on tactics employed by cyber-crime groups and to
collaborate in defending, detecting and preventing cyber-attacks on
financial organisations.
Evolving regulatory environment risk
We aim to keep abreast of the emerging regulatory compliance and
conduct agenda, which currently includes, but is not limited to:
ESG matters; ensuring good customer outcomes; addressing customer
vulnerabilities due to cost of living pressures; regulatory
compliance; regulatory reporting; employee compliance, including
use of e-communication channels; and the proposed reforms to the UK
financial services sector, known as the Edinburgh Reforms.
We monitor regulatory developments closely and engage with
regulators, as appropriate, to help ensure new regulatory
requirements are implemented effectively and in a timely way.
The competitive landscape in which the group operates may be
impacted by future regulatory changes and government
intervention.
Mitigating actions
-- We monitor for regulatory developments to understand the
evolving regulatory landscape and seek to respond with changes in a
timely way.
-- We continue to support work that is focussed on the
implementation of UK Consumer Duty requirements.
-- We engage with governments and regulators to make a
contribution to regulations and to try and ensure that new
requirements are considered properly and can be implemented
effectively. We hold regular meetings with relevant authorities to
discuss strategic contingency plans, including those arising from
geopolitical issues.
-- Our simplified conduct approach has been embedded to align to
our purpose and values, in particular the value 'we take
responsibility'.
Financial crime and fraud risk
Financial institutions remain under considerable regulatory
scrutiny regarding their ability to detect and prevent financial
crime, which continues to evolve. Challenges include managing
conflicting laws and approaches to legal and regulatory regimes,
and implementing the unprecedented volume and diverse set of
sanctions, notably as a result of the Russia-Ukraine war.
Amid rising inflation and increasing cost of living pressures,
we face increasing regulatory expectations with respect to
increases in internal and external fraud and the abuse of
vulnerable customers for financial crime.
The digitisation of financial services continues to have an
impact on the payments ecosystem, with an increasing number of
market entrants and payment mechanisms, not all of which are
subject to the same level of regulatory scrutiny or regulations as
financial institutions. This presents ongoing challenges in terms
of maintaining required levels of payment transparency, notably
where financial institutions serve as intermediaries. Developments
around digital assets and currencies have continued at pace, with
an increasing regulatory and enforcement focus on the financial
crimes linked to these types of assets.
Expectations with respect to the intersection of ESG issues and
financial crime as our organisation, customers and suppliers
transition to net zero, continue to increase, focussed on potential
'greenwashing,' human rights issues and environmental crimes.
We also continue to face increasing challenges presented by
national data privacy requirements, which may affect our ability to
manage financial crime risks holistically and effectively.
Mitigating actions
-- We continue to manage sanctions and trade restrictions
through the use of, and enhancements to, our existing controls.
-- We continue to develop our fraud controls, and invest in
capabilities to fight financial crime through the application of
advanced analytics and artificial intelligence.
-- We are looking at the impact of a rapidly changing payments
ecosystem, as well as risks associated with direct and indirect
exposure to digital assets and currencies, in an effort to ensure
our financial crime controls remain appropriate.
-- We are assessing our existing policies and control framework
so that developments relating to the ESG space are considered and
the risks mitigated.
-- We engage with regulators, policymakers and relevant
international bodies, seeking to address data privacy challenges
through international standards, guidance and legislation.
Ibor transition
Interbank offered rates ('Ibors') have previously been used
extensively to set interest rates on different types of financial
transactions and for valuation purposes, risk measurement and
performance benchmarking.
Following the UK's Financial Conduct Authority ('FCA')
announcement 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, we have been actively
working to transition legacy contracts from Ibors to products
linked to near risk-free replacement rates ('RFRs') or alternative
reference rates.
The publication of sterling, Swiss franc, euro and Japanese yen
Libor interest rate benchmarks, as well as Euro Overnight Index
Average ('Eonia'), ceased from the end of 2021. The group's Ibor
transition programme, which is tasked with the development of RFR
products and the transition of legacy Ibor products, has continued
to support the transition of a limited number of remaining
contracts in sterling and Japanese yen Libor, which were published
using a 'synthetic' interest rate methodology during 2022. The
remaining 'tough legacy' sterling contracts have required
protracted client discussions where contracts are complex or
restructuring of facilities is required. Following the cessation of
publication of 'synthetic' Japanese yen Libor after 31 December
2022, and the announcements by the FCA, in September and November
2022, that 'synthetic' sterling Libor rates will cease to be
published on 31 March 2023 for one and six- month sterling Libor,
or 31 March 2024 for three-month sterling Libor, we have or are
prepared to transition or remediate the remaining few contracts
outstanding as at 31 December 2022 in advance of those cessation
dates.
For the cessation of the publication of US dollar Libor from 30
June 2023, we have implemented the majority of required processes,
technology and RFR product capabilities throughout the group in
preparation for upcoming market events and continue to transition
outstanding legacy contracts through the first half of 2023. We
continue to make steady progress with the transition of the
outstanding legacy committed lending facilities. Transition of our
derivatives portfolio is progressing well with most clients reliant
on industry mechanisms to transition to RFRs. For the limited
number of bilateral derivatives trades where an alternative
transition path is required client engagement is continuing. For
certain products and contracts, including bonds and syndicated
loans, we remain reliant on the continued support of agents and
third parties, but we continue to progress those contracts
requiring transition. We continue to monitor contracts that may be
potentially more challenging to transition and may need to rely
upon legislative solutions. Additionally, following the FCA's
consultation in November 2022 proposing that US dollar Libor is to
be published using a 'synthetic' methodology for a defined period,
we will continue to work with our clients to support them through
the transition of their products if transition is not completed by
30 June 2023.
We remain mindful of the various factors that have an impact on
the Ibor remediation strategy for our regulatory capital
instruments, including, but not limited to, timescales for
cessation of relevant Ibor rates.
We remain committed in seeking to remediate or mitigate relevant
risks relating to Ibor-demise, as appropriate, on our outstanding
regulatory capital instruments before the relevant calculation
dates, which may occur post-cessation of the relevant Ibor rate or
rates.
For US dollar Libor and other demising Ibors, we continue to be
exposed to, and actively monitor, risks including:
-- Regulatory compliance and conduct risks, as the transition of
legacy contracts to RFRs or alternative rates, or sales of products
referencing RFRs, may not deliver fair client outcomes;
-- Resilience and operational risks, as changes to manual and
automated processes, made in support of new RFR methodologies, and
the transition of large volumes of Ibor contracts may lead to
operational issues;
-- Legal risk, as issues arising from the use of legislative
solutions and from legacy contracts that the group is unable to
transition may result in unintended or unfavourable outcomes for
clients and market participants, which could potentially increase
the risk of disputes;
-- Model risk, as there is a risk that changes to our models, to
replace Ibor-related data, adversely affect the accuracy of model
outputs; and
-- Market risk, because as a result of differences in Libor and
RFR interest rates, we are exposed to basis risk resulting from the
asymmetric adoption of rates across assets, liabilities and
products.
While the level of risk is diminishing in line with our process
implementation and continued transition of contracts, we will
continue to monitor these risks through the remainder of the
transition of legacy contracts. Throughout 2023, we continue to be
committed to engaging with our clients and investors to seek to
complete an orderly transition of contracts that reference the
remaining demising Ibors.
Mitigating actions
-- The group Ibor transition programme, which is overseen by the
group Chief Risk Officer, will continue to deliver IT and
operational processes to meet its objectives.
-- We carry out extensive training, communication and client
engagement to facilitate appropriate selection of new rates and
products.
-- We have dedicated teams in place to support the transition.
-- We have actively transitioned legacy contracts and ceased
entering into new contracts based on demised or demising Ibors,
other than those allowed under regulatory exemptions, and
implemented associated monitoring and controls.
-- We assess, monitor and dynamically manage risks arising from
Ibor transition, and implement specific mitigating controls when
required.
-- We continue to actively engage with regulatory and industry
bodies to mitigate risks relating to 'tough legacy' contracts.
Financial instruments impacted by Ibor reforms
Interest Rate Benchmark Reform Phase 2, the amendments to IFRS's
issued in August 2020, represents the second phase of the IASB's
project on the effects of interest rate benchmark reform. The
amendments address issues affecting financial statements when
changes are made to contractual cash flows and hedging
relationships.
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.
(Audited)
Financial instruments
yet to transition to
alternative benchmarks,
by main benchmark(3)
USD Libor GBP Libor Others(1)
At 31 Dec 2022 GBPm GBPm GBPm
----------------------------------- -------------------------- -------------------------- -------------------------
Non-derivative financial assets(2)
----------------------------------- -------------------------- -------------------------- -------------------------
Loans and advances to customers 4,350 83 18
----------------------------------- -------------------------- -------------------------- -------------------------
Financial investments 1,072 - -
----------------------------------- -------------------------- -------------------------- -------------------------
Others 554 35 -
----------------------------------- -------------------------- -------------------------- -------------------------
Total non-derivative financial
assets 5,976 118 18
----------------------------------- -------------------------- -------------------------- -------------------------
Non-derivative financial
liabilities
----------------------------------- -------------------------- -------------------------- -------------------------
Subordinated liabilities 1,287 - -
----------------------------------- -------------------------- -------------------------- -------------------------
Others 560 - -
----------------------------------- -------------------------- -------------------------- -------------------------
Total non-derivative financial 1,847 - -
liabilities
----------------------------------- -------------------------- -------------------------- -------------------------
Derivative notional contract amount
----------------------------------- -------------------------- -------------------------- -------------------------
Foreign exchange 6,754 - -
----------------------------------- -------------------------- -------------------------- -------------------------
Interest rate 1,636,679 56 2,031
----------------------------------- -------------------------- -------------------------- -------------------------
Others - - 487
----------------------------------- -------------------------- -------------------------- -------------------------
Total derivative notional contract
amount 1,643,433 56 2,518
----------------------------------- -------------------------- -------------------------- -------------------------
At 31 Dec 2021
------------------------------------- ------------------------ ------------------------- --------------------------
Non-derivative financial assets(2)
------------------------------------- ------------------------ ------------------------- --------------------------
Loans and advances to customers 5,999 2,562 26
------------------------------------- ------------------------ ------------------------- --------------------------
Financial investments 1,171 140 -
------------------------------------- ------------------------ ------------------------- --------------------------
Others 693 499 -
------------------------------------- ------------------------ ------------------------- --------------------------
Total non-derivative financial assets 7,863 3,201 26
------------------------------------- ------------------------ ------------------------- --------------------------
Non-derivative financial
liabilities(2) 0
------------------------------------- ------------------------ ------------------------- --------------------------
Subordinated liabilities 1,145 - -
------------------------------------- ------------------------ ------------------------- --------------------------
Others 479 181 -
------------------------------------- ------------------------ ------------------------- --------------------------
Total non-derivative financial
liabilities 1,624 181 -
------------------------------------- ------------------------ ------------------------- --------------------------
Derivative notional contract amount 0
------------------------------------- ------------------------ ------------------------- --------------------------
Foreign exchange 8,288 1,568 1,080
------------------------------------- ------------------------ ------------------------- --------------------------
Interest rate 1,567,577 215,377 77,738
Total derivative notional contract
amount 1,575,865 216,945 78,818
------------------------------------- ------------------------ ------------------------- --------------------------
1 Comprises financial instruments referencing other significant
benchmark rates yet to transition to alternative benchmarks (euro
Libor, Swiss franc Libor, Eonia, SOR, THBFIX, MIFOR and Sibor).
Announcements were made by regulators during 2022 on the cessation
of the Canadian dollar offered rate ('CDOR'), and Mexican Interbank
equilibrium interest rate ('TIIE'), which will eventually
transition to the Canadian overnight repo rate average ('CORRA'),
and a new Mexican overnight fall-back rate, respectively.
Therefore, CDOR, and TIIE are also included in Others during the
current period.
2 Gross carrying amount excluding allowances for expected credit losses.
The amounts in the above table relate to the group's main
operating entities where we have material exposures impacted by
Ibor reform, including in the United Kingdom, France and Germany.
The amounts provide an indication of the extent of the group's
exposure to the Ibor benchmarks that 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 beyond the date by which the
reference interest rate benchmark is expected to cease; and
-- are recognised on the group's consolidated balanc e sheet.
Environmental, social and governance ('ESG') risk
We are subject to financial and non-financial risks associated
with ESG related matters. Our current areas of focus are climate
risk, nature-related risks and human rights risks. These can impact
us both directly and indirectly through our business activities and
relationships.
Focus on climate-related risk in particular increased over 2022,
owing to the importance, pace and volume of policy development and
regulatory changes on climate risk management, stress testing and
scenario analysis and disclosures. Climate change can have an
impact across HSBC's risk taxonomy through both transition risk,
arising from the move to a low-carbon economy, such as through
policy, regulatory and technological changes, and physical risk
impacts due to increasing severity and/or frequency of severe
weather or other climatic events, such as rising sea levels and
flooding, which could affect our ability to conduct our day-to-day
operations.
Our most material risks in terms of managing climate risk relate
to corporate financing within our banking portfolio. We continue to
explore and test methodologies for quantifying how climate risks
could impact the individual credit profiles of our clients across
various sectors.
Our credit risk policy further embeds climate risk
considerations into our corporate credit decisions. We are also
developing and rolling out a climate risk assessment, also known as
the client Transition Engagement Questionnaire, to corporate
clients to help determine the level of transition risk exposure
which may affect our credit decisioning and helping to ensure that
the transition plans are consistent with HSBC Group's targets and
commitments.
We also delivered training to select colleagues in the Risk
function to raise awareness of how climate risk is likely to impact
certain high transition risk sectors and the associated credit risk
considerations.
In addition to financial risks arising in our corporate banking
portfolio, we could also face increased reputational, legal and
regulatory risks as we make progress towards the HSBC Group's net
zero ambition, with stakeholders likely to place greater focus on
our actions, such as the development of climate-related policies,
the HSBC Group's and our disclosures and financing and investment
decisions relating to the HSBC Group's ambition.
We will face additional risks if we are perceived to mislead
stakeholders regarding our climate strategy, the climate impact of
a product or service, or regarding the commitments of our
customers. Climate risk may also impact on model risk, as the
uncertain impacts of climate change and data and methodology
limitations present challenges to creating reliable and accurate
model outputs.
We face reporting risk in relation to our climate disclosures,
as any data, methodologies and standards we have used may evolve
over time in line with market practice, regulation or owing to
developments in climate science. While emissions reporting has
improved over time, data remains of limited quality and
consistency. The use of inconsistent or incomplete data and models
could result in suboptimal decision making. Any changes could
result in revisions to our internal frameworks and reported data,
and could mean that reported figures are not reconcilable or
comparable year on year. We may also have to re-evaluate our
progress towards the HSBC Group's climate-related targets in future
and this could result in reputational, legal and regulatory
risks.
There is increasing evidence that a number of nature-related
risks beyond climate change, which include risks that can be
represented more broadly by impact and dependence on nature, can
and will have significant economic impact. These risks arise when
the provision of natural services, such as water availability, air
quality, and soil quality, is compromised by overpopulation, urban
development, natural habitat and ecosystem loss, ecosystem
degradation arising from economic activity and other environmental
stresses beyond climate change. They can show themselves in various
ways, including through macroeconomic, market, credit,
reputational, legal and regulatory risks, for both HSBC and our
customers. We continue to engage with investors, regulators and
customers on nature-related risks to evolve our approach and
understand best practice risk mitigation.
Regulation and disclosure requirements in relation to human
rights, and to modern slavery in particular, are increasing.
Businesses are expected to be transparent about their efforts to
identify and respond to the risk of negative human rights impacts
arising from their business activities and relationships.
Mitigating actions
-- Our product design, management and governance processes have
been adapted to help ensure that climate risk factors are
effectively and consistently considered. We also aim to enhance our
approach to greenwashing risk management.
-- We have established a climate risk appetite which helps
support the oversight and management of the risks from climate
change and supports the business on helping to deliver the HSBC
Group's climate ambition in a safe and sustainable way. The metrics
implemented include exposure to high risk transition sectors in our
wholesale portfolio. We continue to review our risk appetite to try
and ensure that it captures the most material climate risks and
develop appropriate metrics to measure and monitor these risks.
-- We have enhanced and expanded the use of a client Transition
Engagement Questionnaire to better understand our exposure to the
highest transition risk sectors and we continue to engage with our
customers to understand and help support their transition away from
high carbon activities.
-- We implement HSBC Group's sustainability risk policies as
part of its broader reputational risk framework. We focus our
policies on sensitive sectors which may have a high adverse impact
on people or on the environment and in which we have a significant
number of customers. In December 2022, the HSBC Group announced an
updated policy covering the broader energy system including
upstream oil and gas, oil and gas power generation, coal, hydrogen,
renewables and hydropower, nuclear, biomass and energy from waste.
In addition, the HSBC Group also expanded on its thermal coal
phase-out policy in which the HSBC Group committed not to provide
new finance or advisory services for the specific purpose of the
conversion of existing coal-to-gas fired power plants or new
metallurgical coal mines. We intend to use our relationships to
partner with corporate customers to help them transition to cleaner
and safer energy alternatives.
-- In 2021, the HSBC Group joined several industry working
groups dedicated to helping assess, and manage, nature-related
risks, such as the Taskforce on Nature-related Financial Disclosure
('TNFD'). We will use these outputs to help assess the availability
of internal nature related data, and identify opportunities to
enhance our capabilities further.
-- In 2022, building on an earlier review which had identified
modern slavery and discrimination as priority human rights issues,
the HSBC Group conducted a comprehensive review to refresh our
salient human rights issues, which are the human rights at risk of
the most severe negative impact through our business activities and
relationships. The review identified five salient human rights
issues, including the right to decent work and the right to
equality and freedom from discrimination, amongst others. The HSBC
Group incorporated additional human rights elements into its
existing procurement processes and supplier code of conduct, we are
applying the approach being developed by HSBC Group to inform our
own management of this risk.
-- Climate stress tests and scenarios are being used to further
improve our understanding of our risk exposures for use in risk
management and business decision making.
For further details on our approach to climate risk management,
see 'Climate risk' on page 86.
Internally driven
People risk
Our success in delivering our strategic priorities and managing
the regulatory and legislative environment proactively depends on
the development and retention of our leadership and high-performing
employees.
The ability to continue to attract, develop and retain talent is
primarily impacted by a competitive labour market across the EU and
the UK, coupled with heightened inflationary pressures. While
challenges resulting from transformation continued in 2022, these
are expected to reduce as we progress with programme execution. The
current people risk outlook is expected to remain heightened for
the first half of 2023.
Mitigating actions
-- We seek to 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.
-- We monitor people risks that have arisen from organisational
restructuring. Talent attraction and retention actions are rolled
out; focus and emphasis on our strategy, values and purpose are
maintained; and improved capacity and enhanced workload management
through demand planning review and strengthening are applied.
-- We aim to have robust plans in place, driven by senior
management, to help mitigate the effect of external factors that
may impact our employment practices. Political, legislative, and
regulatory challenges are closely monitored to try and minimise the
impact on the attraction and retention of talent and key
performers.
-- We carefully monitor the impact of the rising cost of living
across the region. Our fixed pay principles consider the impact of
inflation on our employees across the region recognising the pay
pressure that exists and the related people risk impact.
-- We deploy a Future Skills Curriculum to all employees through
the HSBC University to help provide 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.
IT systems infrastructure and operational resilience
We operate an extensive and complex technology landscape, which
must remain resilient in order to support customers, the group and
markets where we operate. Risks arise where technology is not
understood, maintained, or developed appropriately. We remain
committed to investing in the reliability and resilience of our IT
systems and critical services. The group does so in order to
protect its customers, affiliates and counterparties, and to help
ensure they do not receive disruption to services that could result
in reputational, legal and regulatory consequences. Increased
pressure has been seen on our business operations and customer
support centres as our people, processes and systems have responded
to meet the current economic environment.
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. We invest both to improve
system resilience and to test service continuity. We continue to
ensure security is built into our software development life cycle
and to seek to improve our testing processes and tools.
-- We continue to upgrade our IT systems, simplify our service
provision and replace older IT infrastructure and applications.
-- We manage implementation risks arising from the
simplification of our technology estate continuously via 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 the group to maintain
a strong focus on execution risk. This requires robust management
of significant resource-intensive and time-sensitive programmes
that are due to execute in 2023. Risks arising from the magnitude
and complexity of change planned in 2023 may include regulatory
censure, reputational damage and/or financial losses. Current major
initiatives include managing the operational implications of the
planned disposal of our retail banking operations in France, large
transformation programmes including the simplification and
integration of our IT systems and other restructuring programmes
across Europe.
Mitigating actions
-- Change execution risk was added to our risk taxonomy and
control library in 2022, so that the risk can be defined, assessed,
managed, reported and overseen in the same way as the group's other
material risks.
-- Our prioritisation and governance processes for significant
programmes are monitored by the HSBC Bank plc and Group's Executive
Committees.
-- We continue to work to strengthen our change management
practices in order to try and deliver sustainable change, increased
adoption of agile ways of working, and a more consistent standard
of delivery. For HSBC Bank plc, this
includes strengthening the embedding of an improved Group-wide
change framework which sets out the mandatory principles and
standards to be adhered to when leading and delivering change.
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. Significant
increases in global inflation and interest rates have impacted the
reliability and accuracy of both credit risk and traded risk
models.
We continued to prioritise the redevelopment of internal
ratings-based ('IRB'), internal model approach ('IMA') and internal
model methods ('IMM') models, as part of the IRB repair and Basel
III programmes with a key focus on enhancing the quality of data
used as model inputs. A number of these models have been submitted
to the PRA and the European Central Bank ('ECB') for feedback and
approval is in progress.
Some IMM models have been approved for use and feedback has been
received for some IRB models. Climate risk modelling is a key focus
as our commitment to sustainability has become a critical part of
the group's strategy.
Mitigating actions
-- We have continued to embed the enhanced monitoring, review
and challenge of expected 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.
-- Model Risk Management works closely with our lines of
business to ensure that our models meet regulatory requirements as
well as risk management, pricing, liquidity and capital management
needs. Internal Audit provides assurance over the risk management
framework for models.
-- Additional assurance work is performed by the model risk
governance teams, which act as second lines of defence. The teams
test whether controls implemented by model users comply with model
risk policy and if model risk standards are adequate.
-- Models using advanced machine learning techniques are
validated and monitored to try and ensure that model risks arising
from the usage of those algorithms have adequate oversight and
review.
-- A framework to manage the range of risks that are generated
by these advanced techniques is being developed to try and capture
the multi-disciplinary nature of these risks.
Data risk
We use multiple systems and growing quantities of data to
support our customers. Risk arises if data is incorrect,
unavailable, misused, or unprotected. We need to meet external
regulatory obligations and laws that cover data, such as the Basel
Committee on Banking Supervision's 239 guidelines and the General
Data Protection Regulation ('GDPR').
Mitigating actions
-- Through our global data management framework, we monitor the
quality, availability and security of data that supports our
customers and internal processes. We work towards resolving any
identified data issues in a timely manner.
-- We have made improvements to our data policies. We are
implementing an updated control framework to enhance the end-to-end
management of data risk.
-- We aim to protect customer data through our data privacy
framework, which establishes practices, design principles and
guidelines that enable us to demonstrate compliance with data
privacy laws and regulations.
--
-- We seek to continue to modernise our data and analytics
infrastructure through investments in Cloud technology, data
visualisation, machine learning and artificial intelligence.
-- We educate our employees on data risk and data management. We
delivered regular mandatory training on how to protect and manage
data appropriately.
Third Party risk
We use third parties to provide a range of goods and services.
Risks arising from the use of third-party providers and their
supply chain may be harder to identify.
It is critical that we ensure we have appropriate risk
management policies, processes and practices over the selection,
governance and oversight of third parties and their supply chain,
particularly for key activities that could affect our operational
resilience.
Any deficiency in the management of risks associated with our
third parties could affect our ability to support our customers and
meet regulatory expectations.
Mitigating actions
-- We have enhanced our control framework for the use of
third-party providers to seek to ensure risks associated with these
arrangements are understood and managed effectively by our
businesses and functions across the group.
-- We continue to enhance the effective management of our
intra-group arrangements as we have for external third-party
arrangements using the same control standards.
-- We are implementing the changes required by new regulations as set by our regulators.
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 (continued)
Credit risk (see page 36)
The risk of Credit risk arises Credit risk is:
financial principally from direct * measured as the amount that could be lost if a
loss if a lending, trade finance customer or counterparty fails to make repayments;
customer and leasing business,
or counterparty but also from certain
fails to meet other products such * monitored using various internal risk management
an as guarantees and derivatives. measures and within limits approved by individuals
obligation within a framework of delegated authorities; and
under
a contract.
* managed through a robust risk control framework that
outlines clear and consistent policies, principles
and guidance for risk managers.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Treasury risk (see page 75)
The risk of Treasury risk arises Treasury risk is:
having from changes to the * measured through appetites set as target and minimum
insufficient respective resources ratios;
capital, and risk profiles driven
liquidity or by customer behaviour,
funding management decisions * monitored and projected against appetites and using
resources to or the external environment. stress and scenario testing; and
meet
financial
obligations * managed through control of resources in conjunction
and satisfy with risk profiles and cashflows.
regulatory
requirements,
including
the risk of
adverse
impact on
earnings
or capital due
to
structural
foreign
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 84)
The risk that Exposure to market Market risk is:
movements risk is separated into * measured using sensitivities, value at risk ('VaR')
in market two portfolios: and stress testing, giving a detailed picture of
factors * trading portfolios; and potential gains and losses for a range of market
such as foreign movements and scenarios, as well as tail risks over
exchange rates, specified time horizons;
interest rates, * non-trading portfolios.
credit spreads,
equity prices * monitored using VaR, stress testing and other
and Market risk exposures measures, including the sensitivity of net interest
commodity arising from our insurance income and the sensitivity of structural foreign
prices operations are discussed exchange; and
will reduce our on page 90.
income or the
value * managed using risk limits approved by the risk
of our management meeting ('RMM') and the RMM in various
portfolios. global businesses.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Climate risk (see page 86)
Climate risk Climate risk can materialise Climate risk is:
relates through: * measured using a variety of risk appetite metrics and
to the * physical risk, which arises from the increased Key Management Indicators, which assess the impact of
financial frequency and severity of weather events; climate risk across the risk taxonomy;
and
non-financial
impacts that * transition risk, which arises from the process o * monitored using stress testing; and
may f
arise as a moving to a low-carbon economy; and
result * managed through adherence to risk appetite thresholds
of climate and via specific policies.
change * greenwashing risk, which arises from the act of
and the move to knowingly or unknowingly misleading stakeholders
a greener regarding our strategy relating to climate, the
economy. climate impact/benefit of a product or service,
or
the climate commitments or performance of our
customers.
Resilience risk (see page 87)
Resilience risk Resilience risk arises Resilience risk is:
is the risk from failures or inadequacies * measured through a range of metrics with defined
that in processes, people, maximum acceptable impact tolerances, and against our
we are unable systems or external agreed risk appetite.
to events. These may be
provide driven by rapid technological
critical innovation, changing * monitored through oversight of enterprise processes,
services to our behaviours of our consumers, risks, controls and strategic change programmes; and
customers, cyber-threats and attacks,
affiliates, cross border dependencies,
and and third party relationships. * managed by continuous monitoring and thematic
counterparties reviews.
as a result of
sustained
and significant
operational
disruption.
Regulatory compliance risk (see page
87)
Regulatory Regulatory compliance Regulatory compliance risk is:
compliance risk arises from the * measured by reference to risk appetite, identified
risk is the failure to observe metrics, incident assessments, regulatory feedback
risk the letter and spirit and the judgement and assessment of our regulatory
associated with of relevant laws, codes, compliance teams;
breaching our rules, regulations
duty and standards of good
to clients and practice. This could * monitored against the first line of defence risk and
other result in poor market control assessments, the results of the monitoring
counterparties, or customer outcomes and control assurance activities of the second line
inappropriate leading to fines, penalties of defence functions, and the results of internal and
market and reputational damage external audits and regulatory inspections; and
conduct and to our business.
breaching
related * managed by establishing and communicating appropriate
financial policies and procedures, training employees in them
services and monitoring activity to help ensure their
regulatory observance. Proactive risk control and/or remediation
standards. work is undertaken where required.
Financial crime risk (see page 88)
Financial crime Financial crime risk Financial crime risk is:
risk is the arises from day-to-day * measured by reference to risk appetite, identified
risk banking operations metrics, incident assessments, regulatory feedback
of knowingly or involving customers, and the judgement of, and assessment by, our
unknowingly third parties and employees. regulatory compliance teams;
helping
parties to
commit * monitored against the first line of defence risk and
or to further control assessments, the results of the monitoring
potentially and control assurance activities of the second line
illegal of defence functions, and the results of internal and
activity external audits and regulatory inspections; and
through HSBC,
including
money * managed by establishing and communicating appropriate
laundering, policies and procedures, training employees in them
fraud, bribery and monitoring activity to help ensure their
and observance. Proactive risk control and/or remediation
corruption, tax work is undertaken where required.
evasion,
sanctions
breaches, and
terrorist
and
proliferation
financing.
Model risk (see page 89)
Model risk is Model risk arises in Model risk is:
the both financial and * measured by reference to model performance tracking
potential for non-financial contexts and the output of detailed technical reviews, with
adverse whenever business decision key metrics including model review statuses and
consequences making includes reliance findings;
from on models.
business
decisions * monitored against model risk appetite statements,
informed by insight from the independent review function,
models, feedback from internal and external audits, and
which can be regulatory reviews; and
exacerbated
by errors in
methodology, * managed by creating and communicating appropriate
design or the policies, procedures and guidance, training
way colleagues in their application, and supervising
they are used. 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 90)
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 90)
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 2022
There were no material changes to the policies and practices for
the management of credit risk in 2022. We continued to apply the
requirements of IFRS 9 'Financial Instruments' within the Credit
Risk sub-function. For certain retail portfolios we enhanced the
significant increase in credit risk ('SICR') approach to capture
relative movements in probability of default ('PD') since
origination.
For our retail portfolios, we adopted the EBA 'Guidelines on the
application of definition of default' during 2022 and, for our
wholesale portfolios, these guidelines were adopted during 2021.
Adoption of these guidelines did not have a material impact on our
portfolios and comparative disclosures have not been restated.
We actively managed the risks related to macroeconomic
uncertainties, including inflation, fiscal and monetary policy, the
Russia-Ukraine war, broader geopolitical uncertainties, the
continued risks resulting from the Covid-19 pandemic.
For further details, see 'Top and emerging risks' on page
28.
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, data and forward economic guidance
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.
We have a centralised process for generating unbiased and
independent global economic scenarios. Scenarios are subject to a
process of review and challenge by a dedicated team, as well as
regional groupings. Each quarter, the scenarios and probability
weights are reviewed and checked for consistency with the economic
conjuncture and current economic and financial risks. These are
subject to final review and approval by senior management in a
Forward Economic Guidance Global Business Impairment Committee.
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. Regional management review forums
have representatives from Credit Risk and Finance. Required members
of the forums 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 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
rating rating rating % rating PD %
------------------------ ----------------- --------------- --------- ------------ -------- ---------------------
Quality
classification(1,2)
------------------------ ----------------- --------------- --------- ------------ -------- ---------------------
Strong BBB and A- and CRR1 to 0 - 0.169 Band 1 0.000 -
above above CRR2(1) and 2 0.500
------------------------ ----------------- --------------- --------- ------------ -------- ---------------------
Good BBB- to BBB+ to CRR3 0.170 - Band 3 0.501 -
BB BBB- 0.740 1.500
------------------------ ----------------- --------------- --------- ------------ -------- ---------------------
BB- to BB+ to CRR4 to 0.741 - Band 4 1.501 -
Satisfactory B and unrated B and unrated CRR5 4.914 and 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.
============================================================
Forborne loans and advances
(Audited)
Forbearance measures consist of concessions towards an obligor
that is experiencing or about to experience difficulties in meeting
its financial commitments.
We continue to class loans as forborne when we modify the
contractual payment terms due to having significant concerns about
the borrowers' ability to meet contractual payments when they were
due.
In 2022, we expanded our definition of forborne to capture
non-payment-related concessions, such as covenant waivers. For our
wholesale portfolio, we began identifying non-payment-related
concessions in 2021 when our internal policies were changed. For
our retail portfolios, we began identifying them during 2022.
The comparative disclosures have been presented under the prior
definition of forborne for the wholesale and retail portfolios.
For details of our policy on derecognised renegotiated loans,
see Note 1.2(i) on the financial statements.
Credit quality of forborne loans
For wholesale lending, where payment related forbearance
measures result in a diminished financial obligation or if there
are other indicators of impairment, the loan will be classified as
credit impaired if it is not already so classified. All facilities
with a customer, including loans that have not been modified, are
considered credit impaired following the identification of a
payment-related forborne loan. For retail lending, where a material
payment-related concession has been granted, the loan will be
classified as credit impaired.
In isolation, non-payment forbearance measures may not result in
the loan being classified as credit impaired unless combined with
other indicators of credit impairment. These are classed as
performing forborne loans for both wholesale and retail
lending.
Wholesale and retail lending forborne 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. Any forborne loans not considered
credit impaired will remain forborne for a minimum of two years
from the date that credit impairment no longer applies. For
wholesale and retail lending, any forbearance measures granted on a
loan already classed as forborne results in customer being classed
as credit impaired.
Forborne loans and recognition of expected credit losses
(Audited)
Forborne loans expected credit loss assessments reflect the
higher rates of losses typically experienced with these types of
loans such that they are in stage 2 and stage 3. The higher rates
are more pronounced in unsecured retail lending requiring further
segmentation. For wholesale lending, forborne 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
forborne 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. However, in
exceptional circumstances to achieve a fair customer outcome, and
in line with regulatory expectations, 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 and territories where
local regulation or legislation constrain earlier write-off, or
where the realisation of collateral for secured real estate lending
takes more time. Write-off, either partially or in full, may be
earlier when there is no reasonable expectation of further
recovery, for example, in the event of a bankruptcy or equivalent
legal proceedings. Collection procedures may continue after
write-off.
Credit risk in 2022
At 31 December 2022, gross loans and advances to customers and
banks of GBP91bn decreased by GBP12bn, compared with 31 December
2021. This included favourable foreign exchange movements of GBP3bn
and a GBP22bn decrease due to a reclassification of businesses to
assets held for sale, including our retail banking operations in
France.
The reclassification of assets held for sale resulted in a
decrease of loans and advances to customers, of which GBP2bn
pertaining to wholesale and GBP19bn to personal banking. For loans
and advances to banks, the reclassification resulted in a decrease
of GBP1bn.
Excluding foreign exchange movements and the reclassification of
assets held for sale, there was GBP1bn decrease in personal loans
and advances, offset by GBP1bn increase in wholesale loans and
advances to customers. Loans and advances to banks increased by
GBP7bn.
At 31 December 2022, the allowance for ECL excluding foreign
exchange movements and the reclassification of assets held for
sale, in relation to loans and advances to customers increased by
GBP50m from 31 December 2021.
This was attributable to:
-- a GBP46m increase in wholesale loans and advances to
customers, of which GBP44m was driven by stages 1 and 2; and
-- a GBP4m increase in personal loans and advances to customers,
of which GBP7m was driven by stages 1 and 2.
Stage 3 balances at 31 December 2022 remained broadly stable
compared with 31 December 2021.
The ECL charge for 2022 was GBP222m, inclusive of recoveries.
Inflation, recession and high interest rates combined with an
unstable geopolitical environment and the effects of a global
supply chain disruption have contributed to elevated degrees of
uncertainty during the year. At 31 December 2022, as a result of
this uncertainty, additional stage 1 and 2 allowances have been
recorded.
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 GBP1,240m at 31 December
2021 to GBP1,370m at 31 December 2022.
The allowance for ECL at 31 December 2022 comprised of GBP1,283m
(2021: GBP1,168m) in respect of assets held at amortised cost,
GBP87m (2021: GBP72m) in respect of loans and other credit related
commitments, and financial guarantees, and GBP24m (2021: GBP19m) 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 2022 31 Dec 2021
-------------------------------------------------------------------------- --------------------------------------------------------------------------
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 73,717 (1,103) 92,331 (1,154)
-------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------
- personal 6,013 (55) 25,394 (163)
--------------
- corporate
and
commercial 55,004 (937) 56,087 (964)
--------------
- non-bank
financial
institutions 12,700 (111) 10,850 (27)
-------------- ------------------------------------ ------------------------------------ ------------------------------------
Loans and
advances to
banks at
amortised
cost 17,152 (43) 10,789 (5)
-------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------
Other
financial
assets
measured at
amortised
cost 269,755 (137) 202,137 (9)
-------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------
- cash and
balances at
central banks 131,434 (1) 108,482 -
--------------
- items in the
course of
collection
from other
banks 2,285 - 346 -
--------------
- Hong Kong - - - -
Government
certificates
of
indebtedness
--------------
- reverse
repurchase
agreements -
non trading 53,949 - 54,448 -
--------------
- financial
investments 3,248 - 10 -
--------------
- other
assets(2) 55,634 (3) 38,851 (9)
--------------
- assets held
for sale(6) 23,205 (133) - -
-------------- ------------------------------------ ------------------------------------ ------------------------------------
Total gross
carrying
amount on
balance
sheet 360,624 (1,283) 305,257 (1,168)
-------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------
Loans and
other credit
related
commitments 126,457 (67) 115,695 (55)
-------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------
- personal 2,116 - 2,269 (1)
--------------
- corporate
and
commercial 68,441 (62) 63,352 (48)
--------------
- financial 55,900 (5) 50,074 (6)
-------------- ------------------------------------ ------------------------------------ ------------------------------------
Financial
guarantees(3) 5,327 (20) 11,054 (17)
-------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------
- personal 23 - 26 -
--------------
- corporate
and
commercial 3,415 (19) 9,894 (16)
--------------
- financial 1,889 (1) 1,134 (1)
-------------- ------------------------------------ ------------------------------------ ------------------------------------
Total nominal
amount off
balance
sheet(4) 131,784 (87) 126,749 (72)
-------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------
492,408 (1,370) 432,006 (1,240)
-------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------
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') 29,248 (24) 41,188 (19)
-------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------
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 116 includes both financial and non-financial assets,
including cash collateral and settlement accounts.
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.
6 For further details on gross carrying amounts and allowances
for ECL related to assets held for sale, see 'Assets held for sale'
on page 186.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied (continued)
(Audited)
------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
31 Dec 2022 31 Dec 2021
--------------------------------------------------------------------------- --------------------------------------------------------------------------
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 37,370 (378) 34,286 (350)
--------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
- personal 3,584 (12) 3,680 (6)
---------------
- corporate and
commercial 22,456 (247) 21,182 (308)
---------------
- non-bank
financial
institutions 11,330 (119) 9,424 (36)
--------------- ------------------------------------- ------------------------------------ ------------------------------------
Loans and
advances to
banks at
amortised
cost 14,529 (43) 6,782 (4)
--------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Other financial
assets
measured
at amortised
cost 169,321 (3) 135,033 (1)
--------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
- cash and
balances at
central banks 78,442 (1) 63,008 -
---------------
- items in the
course of
collection
from other
banks 1,863 - 211 -
- reverse
repurchase
agreements-non
trading 43,055 - 39,708 -
---------------
- financial
investments 6,378 - 3,337 -
---------------
- other
assets(2) 39,583 (2) 28,769 (1)
--------------- ------------------------------------- ------------------------------------ ------------------------------------
Total gross
carrying
amount on
balance sheet 221,220 (424) 176,101 (355)
--------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Loans and other
credit related
commitments 35,692 (31) 31,255 (29)
--------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
- personal 886 - 589 -
---------------
- corporate and
commercial 18,900 (28) 19,175 (26)
---------------
- financial 15,906 (3) 11,491 (3)
--------------- ------------------------------------- ------------------------------------ ------------------------------------
Financial
guarantees(3) 1,363 (12) 1,270 (7)
--------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
- personal 3 - 3 -
---------------
- corporate and
commercial 827 (11) 527 (6)
---------------
- financial 533 (1) 740 (1)
--------------- ------------------------------------- ------------------------------------ ------------------------------------
Total nominal
amount off
balance
sheet(4) 37,055 (43) 32,525 (36)
--------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
258,275 (467) 208,626 (391)
--------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Memorandum Memorandum
allowance allowance
Fair value for ECL(5) Fair value for ECL(5)
GBPm GBPm GBPm GBPm
--------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Debt
instruments
measured at
FVOCI 12,206 (4) 23,152 (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 116 includes both financial and non-financial assets,
including cash collateral and settlement accounts.
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 2022
(Audited)
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(2)
----------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- -----------------------------------
Stage Stage Stage POCI(3) Total Stage Stage Stage POCI(3) Total Stage Stage Stage POCI(3) Total
1 2 3 1 2 3 1 2 3
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- ------------ ---------- ------------------------------ ----- ----- ----- ------- -----
Loans and
advances
to customers
at amortised
cost 63,673 7,817 2,224 3 73,717 (51) (145) (907) - (1,103) 0.1 1.9 40.8 - 1.5
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- ------------ ---------- ------------------------------ ----- ----- ----- ------- -----
- personal 5,293 615 105 - 6,013 (9) (15) (31) - (55) 0.2 2.4 29.5 - 0.9
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 46,671 6,479 1,851 3 55,004 (40) (123) (774) - (937) 0.1 1.9 41.8 - 1.7
-------------------------------------- ----- ----- ----- ------- -----
* non-bank financial institutions 11,709 723 268 - 12,700 (2) (7) (102) - (111) - 1.0 38.1 - 0.9
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- ------------ ---------- ------------------------------ ----- ----- ----- ------- -----
Loans and
advances
to banks
at amortised
cost 16,673 414 65 - 17,152 (6) (21) (16) - (43) - 5.1 24.6 - 0.3
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- ------------ ---------- ------------------------------ ----- ----- ----- ------- -----
Other financial
assets measured
at amortised
cost 267,770 1,662 323 - 269,755 (14) (17) (106) - (137) - 1.0 32.8 - 0.1
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- ------------ ---------- ------------------------------ ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 116,994 9,300 163 - 126,457 (13) (32) (22) - (67) - 0.3 13.5 - 0.1
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- ------------ ---------- ------------------------------ ----- ----- ----- ------- -----
- personal 2,004 107 5 - 2,116 - - - - - - - - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 60,659 7,625 157 - 68,441 (12) (28) (22) - (62) - 0.4 14.0 - 0.1
-------------------------------------- ----- ----- ----- ------- -----
- financial 54,331 1,568 1 - 55,900 (1) (4) - - (5) - 0.3 - - -
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- ------------ ---------- ------------------------------ ----- ----- ----- ------- -----
Financial
guarantees(1) 4,715 528 84 - 5,327 (1) (2) (17) - (20) - 0.4 20.2 - 0.4
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- ------------ ---------- ------------------------------ ----- ----- ----- ------- -----
- personal 20 2 1 - 23 - - - - - - - - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 2,946 387 82 - 3,415 (1) (1) (17) - (19) - 0.3 20.7 - 0.6
-------------------------------------- ----- ----- ----- ------- -----
- financial 1,749 139 1 - 1,889 - (1) - - (1) - 0.7 - - 0.1
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- ------------ ---------- ------------------------------ ----- ----- ----- ------- -----
At 31 Dec
2022 469,825 19,721 2,859 3 492,408 (85) (217) (1,068) - (1,370) - 1.1 37.4 - 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').
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 2022
(Audited) Gross carrying Allowance for ECL ECL coverage %
amount
---------------------------------------------------------------- ---------------------------------------------------------------------- -------------------------
of which: of which: of which: of which: of of
which: which:
30
30 30 1 to and
Stage 1 to and Stage 1 to and Stage 29 >
2 29 DPD(1,2) > DPD(1,2) 2 29 DPD(1,2) > DPD(1,2) 2 DPD(1,2) DPD(1,2)
The group GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- ------------------ -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
Loans and
advances
to customers
at amortised
cost: 7,817 93 331 (145) (2) (2) 1.9 2.2 0.6
------------- ------------------ -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
- personal 615 43 9 (15) (2) (1) 2.4 4.7 11.1
------------- ----- -------- --------
- corporate
and
commercial 6,479 50 296 (123) - (1) 1.9 - 0.3
------------- ----- -------- --------
- non-bank
financial
institutions 723 - 26 (7) - - 1.0 - -
------------- ------------------ -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
Loans and
advances
to banks at
amortised
cost 414 - 8 (21) - - 5.1 - -
------------- ------------------ -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
Other
financial
assets
measured at
amortised
cost 1,662 25 12 (17) - (2) 1.0 - 16.7
------------- ------------------ -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
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 2021 (continued)
(Audited)
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(2)
-------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- -----------------------------------
Stage Stage Stage POCI(3) Total Stage Stage Stage POCI(3) Total Stage Stage Stage POCI(3) Total
1 2 3 1 2 3 1 2 3
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- ------------------------ -------------- -------------- -------------- ------------------------ -------------- ------------- -------------- -------------- -------------- ----- ----- ----- ------- -----
Loans and
advances
to customers
at amortised
cost 80,730 9,121 2,478 2 92,331 (86) (158) (908) (2) (1,154) 0.1 1.7 36.6 100.0 1.2
-------------------------------------- ------------------------ -------------- -------------- -------------- ------------------------ -------------- ------------- -------------- -------------- -------------- ----- ----- ----- ------- -----
- personal 24,255 686 453 - 25,394 (22) (16) (125) - (163) 0.1 2.3 27.6 - 0.6
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 46,237 8,066 1,782 2 56,087 (58) (137) (767) (2) (964) 0.1 1.7 43.0 100.0 1.7
-------------------------------------- ----- ----- ----- ------- -----
* non-bank financial institutions 10,238 369 243 - 10,850 (6) (5) (16) - (27) 0.1 1.4 6.6 - 0.2
-------------------------------------- ------------------------ -------------- -------------- -------------- ------------------------ -------------- ------------- -------------- -------------- -------------- ----- ----- ----- ------- -----
Loans and
advances
to banks
at amortised
cost 10,750 39 - - 10,789 (4) (1) - - (5) - 2.6 - - -
-------------------------------------- ------------------------ -------------- -------------- -------------- ------------------------ -------------- ------------- -------------- -------------- -------------- ----- ----- ----- ------- -----
Other financial
assets measured
at amortised
cost 202,048 47 42 - 202,137 - - (9) - (9) - - 21.4 - -
-------------------------------------- ------------------------ -------------- -------------- -------------- ------------------------ -------------- ------------- -------------- -------------- -------------- ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 107,922 7,571 202 - 115,695 (25) (22) (8) - (55) - 0.3 4.0 - -
-------------------------------------- ------------------------ -------------- -------------- -------------- ------------------------ -------------- ------------- -------------- -------------- -------------- ----- ----- ----- ------- -----
- personal 2,152 114 3 - 2,269 (1) - - - (1) - - - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 56,325 6,829 198 - 63,352 (20) (20) (8) - (48) - 0.3 4.0 - 0.1
-------------------------------------- ----- ----- ----- ------- -----
- financial 49,445 628 1 - 50,074 (4) (2) - - (6) - 0.3 - - -
-------------------------------------- ------------------------ -------------- -------------- -------------- ------------------------ -------------- ------------- -------------- -------------- -------------- ----- ----- ----- ------- -----
Financial
guarantees(1) 10,215 740 99 - 11,054 (3) (7) (7) - (17) - 0.9 7.1 - 0.2
-------------------------------------- ------------------------ -------------- -------------- -------------- ------------------------ -------------- ------------- -------------- -------------- -------------- ----- ----- ----- ------- -----
- personal 23 2 1 - 26 - - - - - - - - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 9,257 540 97 - 9,894 (2) (7) (7) - (16) - 1.3 7.2 - 0.2
-------------------------------------- ----- ----- ----- ------- -----
- financial 935 198 1 - 1,134 (1) - - - (1) 0.1 - - - 0.1
-------------------------------------- ------------------------ -------------- -------------- -------------- ------------------------ -------------- ------------- -------------- -------------- -------------- ----- ----- ----- ------- -----
At 31 Dec
2021 411,665 17,518 2,821 2 432,006 (118) (188) (932) (2) (1,240) - 1.1 33.0 100.0 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 2021 (continued)
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
--------------------------------------------------------------------- ---------------------------------------------------------------------- ----------------------------
of which: of which: of which: of which: of of which:
which:
30 30 1 to 30
Stage 1 to and Stage 1 to and Stage 29 and
2 29 DPD(1,2) > DPD(1,2) 2 29 DPD(1,2) > DPD(1,2) 2 DPD(1,2) > DPD(1,2)
The group GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- --------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- -----------
Loans and
advances
to customers
at amortised
cost 9,121 56 237 (158) (1) (1) 1.7 1.8 0.4
------------- --------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- -----------
- personal 686 49 29 (16) (1) (1) 2.3 2.0 3.4
------------- ----- -------- -----------
- corporate
and
commercial 8,066 7 199 (137) - - 1.7 0.0 -
------------- ----- -------- -----------
- non-bank
financial
institutions 369 - 9 (5) - - 1.4 - -
------------- --------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- -----------
Loans and
advances
to banks at
amortised
cost 39 - - (1) - - 2.6 - -
------------- --------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- -----------
Other
financial
assets
measured at
amortised
cost 47 - - - - - - - -
------------- --------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- -----------
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 2022
(Audited)
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(2)
--------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ -----------------------------------
Stage Stage Stage POCI(3) Total Stage Stage Stage POCI(3) Total Stage Stage Stage POCI(3) Total
1 2 3 1 2 3 1 2 3
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- -------------- -------------- ---------- ------------ ----- ----- ----- ------- -----
Loans and
advances
to customers
at amortised
cost 33,919 2,576 875 - 37,370 (19) (35) (324) - (378) 0.1 1.4 37.0 - 1.0
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- -------------- -------------- ---------- ------------ ----- ----- ----- ------- -----
- personal 3,090 482 12 - 3,584 (2) (7) (3) - (12) 0.1 1.5 25.0 - 0.3
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 20,314 1,547 595 - 22,456 (16) (27) (204) - (247) 0.1 1.7 34.3 - 1.1
-------------------------------------- ----- ----- ----- ------- -----
* non-bank financial institutions 10,515 547 268 - 11,330 (1) (1) (117) - (119) - 0.2 43.7 - 1.1
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- -------------- -------------- ---------- ------------ ----- ----- ----- ------- -----
Loans and
advances
to banks
at amortised
cost 14,299 165 65 - 14,529 (5) (22) (16) - (43) - 13.3 24.6 - 0.3
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- -------------- -------------- ---------- ------------ ----- ----- ----- ------- -----
Other financial
assets
measured
at amortised
cost 169,276 24 21 - 169,321 (2) (1) - - (3) - 4.2 - - -
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- -------------- -------------- ---------- ------------ ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 32,427 3,225 40 - 35,692 (9) (15) (7) - (31) - 0.5 17.5 - 0.1
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- -------------- -------------- ---------- ------------ ----- ----- ----- ------- -----
- personal 874 10 2 - 886 - - - - - - - - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 16,565 2,297 38 - 18,900 (8) (13) (7) - (28) - 0.6 18.4 - 0.1
-------------------------------------- ----- ----- ----- ------- -----
- financial 14,988 918 - - 15,906 (1) (2) - - (3) - 0.2 - - -
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- -------------- -------------- ---------- ------------ ----- ----- ----- ------- -----
Financial
guarantees(1) 1,194 133 36 - 1,363 - (1) (11) - (12) - 0.8 30.6 - 0.9
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- -------------- -------------- ---------- ------------ ----- ----- ----- ------- -----
- personal 2 1 - - 3 - - - - - - - - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 775 17 35 - 827 - - (11) - (11) - - 31.4 - 1.3
-------------------------------------- ----- ----- ----- ------- -----
- financial 417 115 1 - 533 - (1) - - (1) - 0.9 - - 0.2
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- -------------- -------------- ---------- ------------ ----- ----- ----- ------- -----
At 31
Dec 2022 251,115 6,123 1,037 - 258,275 (35) (74) (358) - (467) - 1.2 34.5 - 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 2022
Gross carrying Allowance for ECL ECL coverage %
(Audited) amount
------------------------------------------------------------------ ---------------------------------------------------------------------- -------------------------
of which: of which: of which: of which: of of
which: which:
30
30 30 1 to and
Stage 1 to and Stage 1 to and Stage 29 >
2 29 DPD(1,2) > DPD(1,2) 2 29 DPD(1,2) > DPD(1,2) 2 DPD(1,2) DPD(1,2)
The bank GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- -------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
Loans and
advances
to customers
at amortised
cost: 2,576 26 6 (35) (1) (1) 1.4 3.8 16.7
------------- -------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
- personal 482 26 6 (7) (1) (1) 1.5 3.8 16.7
------------- ----- -------- --------
- corporate
and
commercial 1,547 - - (27) - - 1.7 - -
------------- ----- -------- --------
- non-bank
financial
institutions 547 - - (1) - - 0.2 - -
------------- -------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
Loans and
advances
to banks at
amortised
cost 165 - - (22) - - 13.3 - -
------------- -------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
Other
financial
assets
measured at
amortised
cost 24 - - (1) (1) - 4.2 - -
------------- -------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
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 2021 (continued)
(Audited)
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(2)
-------------------------------------------------------------------------------------------- --------------------------------------------------------------------- -----------------------------------
Stage Stage Stage POCI(3) Total Stage Stage Stage POCI(3) Total Stage Stage Stage POCI(3) Total
1 2 3 1 2 3 1 2 3
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- ---------------------- ---------------- ---------------- ----------- ------------------- -------------- ------------- -------------- ---------- ---------- ----- ----- ----- ------- -----
Loans and
advances
to customers
at amortised
cost 30,105 3,197 984 - 34,286 (33) (47) (270) - (350) 0.1 1.5 27.4 - 1.0
-------------------------------------- ---------------------- ---------------- ---------------- ----------- ------------------- -------------- ------------- -------------- ---------- ---------- ----- ----- ----- ------- -----
- personal 3,544 88 48 - 3,680 (1) (2) (3) - (6) - 2.3 6.3 - 0.2
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 17,608 2,893 681 - 21,182 (28) (45) (235) - (308) 0.2 1.6 34.5 - 1.5
-------------------------------------- ----- ----- ----- ------- -----
* non-bank financial institutions 8,953 216 255 - 9,424 (4) - (32) - (36) - - 12.5 - 0.4
-------------------------------------- ---------------------- ---------------- ---------------- ----------- ------------------- -------------- ------------- -------------- ---------- ---------- ----- ----- ----- ------- -----
Loans and
advances
to banks
at amortised
cost 6,775 7 - - 6,782 (3) (1) - - (4) - 14.3 - - 0.1
-------------------------------------- ---------------------- ---------------- ---------------- ----------- ------------------- -------------- ------------- -------------- ---------- ---------- ----- ----- ----- ------- -----
Other financial
assets
measured
at amortised
cost 134,984 21 28 - 135,033 - - (1) - (1) - - 3.6 - -
-------------------------------------- ---------------------- ---------------- ---------------- ----------- ------------------- -------------- ------------- -------------- ---------- ---------- ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 28,911 2,301 43 - 31,255 (15) (11) (3) - (29) 0.1 0.5 7.0 - 0.1
-------------------------------------- ---------------------- ---------------- ---------------- ----------- ------------------- -------------- ------------- -------------- ---------- ---------- ----- ----- ----- ------- -----
- personal 585 2 2 - 589 - - - - - - - - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 17,010 2,124 41 - 19,175 (12) (11) (3) - (26) 0.1 0.5 7.3 - 0.1
-------------------------------------- ----- ----- ----- ------- -----
- financial 11,316 175 - - 11,491 (3) - - - (3) - - - - -
-------------------------------------- ---------------------- ---------------- ---------------- ----------- ------------------- -------------- ------------- -------------- ---------- ---------- ----- ----- ----- ------- -----
Financial
guarantees(1) 1,060 150 60 - 1,270 (1) - (6) - (7) 0.1 - 10.0 - 0.6
-------------------------------------- ---------------------- ---------------- ---------------- ----------- ------------------- -------------- ------------- -------------- ---------- ---------- ----- ----- ----- ------- -----
- personal 2 1 - - 3 - - - - - - - - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 437 31 59 - 527 - - (6) - (6) - - 10.2 - 1.1
-------------------------------------- ----- ----- ----- ------- -----
- financial 621 118 1 - 740 (1) - - - (1) 0.2 - - - 0.1
-------------------------------------- ---------------------- ---------------- ---------------- ----------- ------------------- -------------- ------------- -------------- ---------- ---------- ----- ----- ----- ------- -----
At 31 Dec
2021 201,835 5,676 1,115 - 208,626 (52) (59) (280) - (391) - 1.0 25.1 - 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 2021 (continued)
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
--------------------------------------------------------------------- -------------------------------------------------------------------- ---------------------------------------
of which: of which: of which: of which: of of which:
which:
1 to 30 1 to 30 1 to 30
Stage 29 and Stage 29 and Stage 29 and
2 DPD(1) > DPD(1) 2 DPD(1) > DPD(1) 2 DPD(1) > DPD(1)
The bank GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- ---------------------- --------------------- ---------------------- ---------------------- ---------------------- -------------------- -------------------- ------ ---------
Loans and
advances
to customers
at amortised
cost: 3,197 19 6 (47) (1) - 1.5 5.3 -
------------- ---------------------- --------------------- ---------------------- ---------------------- ---------------------- -------------------- -------------------- ------ ---------
- Personal 88 19 6 (2) (1) - 2.3 5.3 -
------------- -------------------- ------ ---------
- Corporate
and
commercial 2,893 - - (45) - - 1.6 - -
------------- -------------------- ------ ---------
- Non-bank 216 - - - - - - - -
financial
institutions
------------- ---------------------- --------------------- ---------------------- ---------------------- ---------------------- -------------------- -------------------- ------ ---------
Loans and
advances
to banks at
amortised
cost 7 - - (1) - - 14.3 - -
------------- ---------------------- --------------------- ---------------------- ---------------------- ---------------------- -------------------- -------------------- ------ ---------
Other
financial
assets
measured at
amortised
cost 21 - - - - - - - -
------------- ---------------------- --------------------- ---------------------- ---------------------- ---------------------- -------------------- -------------------- ------ ---------
1 Days past due ('DPD'). Up-to-date accounts in stage 2 are not
shown in amounts presented above.
Stage 2 decomposition as at 31 December 2022
The following disclosure presents the stage 2 decomposition of
gross carrying amount and allowances for ECL for loans and advances
to customers. It also sets out the reasons why an exposure is
classified as stage 2 and therefore presented as a significant
increase in credit risk at 31 December 2022.
The quantitative classification shows gross carrying values and
allowances for ECL for which the applicable reporting date PD
measure exceeds defined quantitative thresholds for retail and
wholesale exposures.
The qualitative classification primarily accounts for credit
risk rating ('CRR') deterioration, watch-and-worry and retail
management judgemental adjustments.
For further details on our approach to the assessment of
significant increase in credit risk, see 'Summary of significant
accounting policies' on page 126.
Loans and advances to customers at 31 December 2022(1)
Gross carrying amount Allowance for ECL
--------------------------------------------- ---------------------------------------------
Corporate Non-bank Corporate Non-bank ECL
and financial and financial Coverage
Personal commercial institutions Total Personal commercial institutions Total % Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Quantitative 557 3,310 379 4,246 (12) (71) (2) (85) 2.0
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Qualitative 56 2,874 319 3,249 (3) (51) (5) (59) 1.8
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
30 DPD
backstop(2) 2 295 25 322 - (1) - (1) 0.3
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Total stage
2 615 6,479 723 7,817 (15) (123) (7) (145) 1.9
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
The bank
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Quantitative 456 1,109 314 1,879 (6) (13) (1) (20) 1.1
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Qualitative 26 438 233 697 (1) (14) - (15) 2.2
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
30 DPD - - - - - - - - -
backstop(2)
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Total stage
2 482 1,547 547 2,576 (7) (27) (1) (35) 1.4
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
1 Where balances satisfy more than one of the above three
criteria for determining a significant increase in credit risk, the
corresponding gross exposure and ECL have been assigned in order of
categories presented.
2 Days past due ('DPD').
Loans and advances to customers at 31 December 2021(1)
Gross carrying amount Allowance for ECL
------------------------------------------- -------------------------------------------
Corporate Non-bank Corporate Non-bank ECL
and financial and financial Coverage
Personal commercial institutions Total Personal commercial institutions Total % Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
----------------- -------- ----------- ------------- ----- -------- ----------- ------------- ----- ---------
Quantitative 561 3,611 162 4,334 (13) (41) (1) (55) 1.3
----------------- -------- ----------- ------------- ----- -------- ----------- ------------- ----- ---------
Qualitative 102 4,260 198 4,560 (2) (96) (4) (102) 2.2
----------------- -------- ----------- ------------- ----- -------- ----------- ------------- ----- ---------
30 DPD
backstop(2) 23 195 9 227 (1) - - (1) 0.4
----------------- -------- ----------- ------------- ----- -------- ----------- ------------- ----- ---------
Total stage
2 686 8,066 369 9,121 (16) (137) (5) (158) 1.7
----------------- -------- ----------- ------------- ----- -------- ----------- ------------- ----- ---------
The bank
----------------- -------- ----------- ------------- ----- -------- ----------- ------------- ----- ---------
Quantitative 26 1,731 95 1,852 (2) (9) - (11) 0.6
----------------- -------- ----------- ------------- ----- -------- ----------- ------------- ----- ---------
Qualitative 62 1,162 121 1,345 - (36) - (36) 2.7
----------------- -------- ----------- ------------- ----- -------- ----------- ------------- ----- ---------
30 DPD - - - - - - - - -
backstop(2)
----------------- -------- ----------- ------------- ----- -------- ----------- ------------- ----- ---------
Total stage
2 88 2,893 216 3,197 (2) (45) - (47) 1.5
----------------- -------- ----------- ------------- ----- -------- ----------- ------------- ----- ---------
1 Where balances satisfy more than one of the above three
criteria for determining a significant increase in credit risk, the
corresponding gross exposure and ECL have been assigned in order of
categories presented.
2 Days past due ('DPD').
Assets held for sale
(Audited)
During 2022, gross loans and advances and related impairment
allowances were reclassified from 'loans and advances to customers'
and 'loans and advances to banks' to 'assets held for sale' in the
balance sheet.
At 31 December 2022, the most material balances held for sale
came from our retail banking operations France.
Disclosures relating to assets held for sale are provided in the
following credit risk tables, primarily where the disclosure is
relevant to the measurement of these financial assets:
-- Maximum exposure to credit risk (page 47);
-- Distribution of financial instruments by credit quality at 31 December (page 57);
Although there was a reclassification on the balance sheet,
there was no separate income statement reclassification. As a
result, charges for loan impairment losses shown in the credit risk
disclosures include loan impairment charges relating to financial
assets classified as 'assets held for sale'.
Loans and other credit-related commitments and financial
guarantees, as reported in credit disclosures, also include
exposures and allowances relating to financial assets classified as
'assets held for sale'.
Loans and advances to customers and banks measured at amortised cost
(Audited)
------------------------------ ----------------------------------
Impairment
allowances
Total gross on loans
loans and and
advances advances
GBPm GBPm
----------------------------------- ------------------------------ ----------------------------------
As reported 90,869 (1,146)
----------------------------------- ------------------------------ ----------------------------------
Reported in 'Assets held for sale' 21,325 (131)
----------------------------------- ------------------------------ ----------------------------------
At 31 Dec 2022 112,194 (1,277)
----------------------------------- ------------------------------ ----------------------------------
At 31 December 2022, gross loans and advances of our retail
banking operations in France were GBP21bn, and the related
impairment allowance for ECL was GBP0.1bn.
Lending balances held for sale continue to be measured at
amortised cost less allowances for impairment and, therefore, such
carrying amounts may differ from fair value.
These lending balances are part of associated disposal groups
that are measured in their entirety at the lower of carrying amount
and fair value less costs to sell. Any difference between the
carrying amount of these assets and their sales price is part of
the overall gain or loss on the associated disposal group as a
whole.
For further details of the carrying amount and the fair value at
31 December 2022 of loans and advances to banks and customers
classified as held for sale, see note 34.
Gross loans and impairment allowances on loans and advances to customers
and banks reported in 'Assets held for sale'
(Audited)
------------------------------------- ------------------------------------- -------------------------------------
Retail
banking
operations
in France Other(1) Total
Gross Loans GBPm GBPm GBPm
------------- ------------------------------------- ------------------------------------- -------------------------------------
Loans and
advances to
customers at
amortised
cost: 20,852 342 21,194
------------- ------------------------------------- ------------------------------------- -------------------------------------
Personal 18,835 253 19,088
------------- ------------------------------------- ------------------------------------- -------------------------------------
Corporate and
Commercial 1,975 89 2,064
------------- ------------------------------------- ------------------------------------- -------------------------------------
Non-bank
financial
institutions 42 - 42
------------- ------------------------------------- ------------------------------------- -------------------------------------
Loans and
advances to
banks at
amortised
cost - 131 131
------------- ------------------------------------- ------------------------------------- -------------------------------------
At 31 Dec
2022 20,852 473 21,325
------------- ------------------------------------- ------------------------------------- -------------------------------------
Impairment
allowance
------------- ------------------------------------- ------------------------------------- -------------------------------------
Loans and
advances to
customers at
amortised
cost: (76) (51) (127)
------------- ------------------------------------- ------------------------------------- -------------------------------------
Personal (73) (38) (111)
------------- ------------------------------------- ------------------------------------- -------------------------------------
Corporate and
Commercial (3) (13) (16)
------------- ------------------------------------- ------------------------------------- -------------------------------------
Non-bank - - -
financial
institutions
------------- ------------------------------------- ------------------------------------- -------------------------------------
Loans and
advances to
banks at
amortised
cost - (4) (4)
------------- ------------------------------------- ------------------------------------- -------------------------------------
At 31 Dec
2022 (76) (55) (131)
------------- ------------------------------------- ------------------------------------- -------------------------------------
1 Comprising assets held for sale relating to the planned sale
of our branch operations in Greece and of our business in
Russia.
The table below analyses the amount of ECL (charges)/releases
arising from assets held for sale. The charges during the period
primarily relate to the retail banking operations in France.
Changes in expected credit losses and other credit impairment
(Audited)
------------------------------------- ------------------------------------
2022 2021
GBPm GBPm
------------------------- ------------------------------------- ------------------------------------
ECL charges arising from:
------------------------- ------------------------------------- ------------------------------------
- Asset held for sale 4 -
------------------------- ------------------------------------- ------------------------------------
- Asset not held for sale 218 -
------------------------- ------------------------------------- ------------------------------------
At 31 Dec 222 -
------------------------- ------------------------------------- ------------------------------------
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 credit 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 and other credit enhancement' section on page 69.
Maximum exposure to credit risk
---------------------- --------------------- ----------------------
(Audited) 2022 2021
---------------------------------------------------------------- ---------------------------------------------------------------------
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 72,614 (8,149) 64,465 91,177 (7,057) 84,120
--------------- ----------------- ----------------------- -------------------- ---------------------- --------------------- ----------------------
- personal 5,958 (1) 5,957 25,231 - 25,231
---------------
- corporate and
commercial 54,067 (7,269) 46,798 55,123 (6,228) 48,895
---------------
- non-bank
financial
institutions 12,589 (879) 11,710 10,823 (829) 9,994
--------------- ----------------- ----------------------- -------------------- ---------------------- ---------------------
Loans and
advances to
banks at
amortised cost 17,109 (145) 16,964 10,784 (88) 10,696
--------------- ----------------- ----------------------- -------------------- ---------------------- --------------------- ----------------------
Other financial
assets held at
amortised cost 268,023 (10,882) 257,141 202,455 (10,239) 192,216
--------------- ----------------- ----------------------- -------------------- ---------------------- --------------------- ----------------------
- cash and
balances at
central banks 131,433 - 131,433 108,482 - 108,482
---------------
- items in the
course of
collection
from other
banks 2,285 - 2,285 346 - 346
- reverse
repurchase
agreements
- non trading 53,949 (10,882) 43,067 54,448 (10,239) 44,209
---------------
- financial
investments 3,248 - 3,248 10 - 10
---------------
- asset held
for sale 21,214 - 21,214
---------------
- other assets 55,894 - 55,894 39,169 - 39,169
--------------- ----------------- ----------------------- -------------------- ---------------------- ---------------------
Derivatives 225,238 (224,444) 794 141,221 (139,668) 1,553
--------------- ----------------- ----------------------- -------------------- ---------------------- --------------------- ----------------------
Total on
balance sheet
exposure
to credit risk 582,984 (243,620) 339,364 445,637 (157,052) 288,585
--------------- ----------------- ----------------------- -------------------- ---------------------- --------------------- ----------------------
Total
off-balance
sheet 150,270 - 150,270 146,261 - 146,261
--------------- ----------------- ----------------------- -------------------- ---------------------- --------------------- ----------------------
- financial and
other
guarantees(1) 22,425 - 22,425 26,840 - 26,840
---------------
- loan and
other
credit-related
commitments 127,845 - 127,845 119,421 - 119,421
--------------- ----------------- ----------------------- -------------------- ---------------------- ---------------------
At 31 Dec 733,254 (243,620) 489,634 591,898 (157,052) 434,846
--------------- ----------------- ----------------------- -------------------- ---------------------- --------------------- ----------------------
The bank
Loans and
advances to
customers
held at
amortised cost 36,992 (8,132) 28,860 33,936 (7,047) 26,889
--------------- ----------------- ---------------------- -------------------- --------------------- ---------------------- ---------------------
- personal 3,572 - 3,572 3,674 - 3,674
---------------
- corporate and
commercial 22,209 (7,264) 14,945 20,874 (6,224) 14,650
---------------
- non-bank
financial
institutions 11,211 (868) 10,343 9,388 (823) 8,565
--------------- ----------------- ---------------------- -------------------- --------------------- ----------------------
Loans and
advances to
banks at
amortised cost 14,486 - 14,486 6,778 - 6,778
--------------- ----------------- ---------------------- -------------------- --------------------- ---------------------- ---------------------
Other financial
assets held at
amortised cost 169,367 (10,427) 158,940 135,109 (9,045) 126,064
--------------- ----------------- ---------------------- -------------------- --------------------- ---------------------- ---------------------
- cash and
balances at
central banks 78,441 - 78,441 63,008 - 63,008
---------------
- items in the
course of
collection
from other
banks 1,863 - 1,863 211 - 211
- reverse
repurchase
agreements
- non trading 43,055 (10,427) 32,628 39,708 (9,045) 30,663
---------------
- financial
investments 6,378 - 6,378 3,337 - 3,337
---------------
- other assets 39,630 - 39,630 28,845 - 28,845
--------------- ----------------- ---------------------- -------------------- --------------------- ----------------------
Derivatives 196,714 (196,505) 209 125,787 (123,964) 1,823
--------------- ----------------- ---------------------- -------------------- --------------------- ---------------------- ---------------------
Total on
balance sheet
exposure
to credit risk 417,559 (215,064) 202,495 301,610 (140,056) 161,554
--------------- ----------------- ---------------------- -------------------- --------------------- ---------------------- ---------------------
Total
off-balance
sheet 44,673 - 44,673 41,034 - 41,034
--------------- ----------------- ---------------------- -------------------- --------------------- ---------------------- ---------------------
- financial and
other
guarantees(1) 8,231 - 8,231 8,592 - 8,592
---------------
- loan and
other
credit-related
commitments 36,442 - 36,442 32,442 - 32,442
--------------- ----------------- ---------------------- -------------------- --------------------- ----------------------
At 31 Dec 462,232 (215,064) 247,168 342,644 (140,056) 202,588
--------------- ----------------- ---------------------- -------------------- --------------------- ---------------------- ---------------------
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 72 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 67 for wholesale lending
and page 72 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.
Amid a deterioration in the economic and geopolitical
environment, management judgements and estimates continued to be
subject to a high degree of uncertainty in relation to assessing
economic scenarios for impairment allowances in 2022.
Inflation, economic contraction and high interest rates combined
with an unstable geopolitical environment and the effects of global
supply chain disruptions have contributed to elevated levels of
uncertainty during the year.
At 31 December 2022, as a result of this uncertainty, additional
stage 1 and 2 impairment allowances were recognised. Management
continued to reflect a degree of caution both in the selection of
economic scenarios and their weightings, and in the use of
management judgemental adjustments, described in more detail
below.
At 31 December 2022, there was a reduction in management
judgemental adjustments compared with 31 December 2021. Adjustments
related to Covid-19 and for sector-specific risks were reduced as
scenarios and modelled outcomes better reflected the key risks at
31 December 2022.
Methodology
Four economic scenarios are used to capture 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 the 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.
Consensus Upside and Downside scenarios are created with reference
to distributions for select markets that capture forecasters' views
of the entire range of outcomes. In the later years of the
scenarios, projections revert to long-term consensus trend
expectations. In the consensus outer scenarios, reversion to trend
expectations is done mechanically with reference to historically
observed quarterly changes in the values of macroeconomic
variables.
The fourth scenario, Downside 2, is designed to represent
management's view of severe downside risks. It is a globally
consistent narrative-driven scenario that explores more extreme
economic outcomes than those captured by the consensus scenarios.
In this scenario, variables do not, by design, revert to long-term
trend expectations. They may instead explore alternative states of
equilibrium, where economic activity moves permanently away from
past trends. The consensus Downside and the consensus Upside
scenarios are each constructed to be consistent with a 10%
probability. The Downside 2 is constructed with a 5% probability.
The Central scenario is assigned the remaining 75%. This weighting
scheme is deemed appropriate for the unbiased estimation of ECL in
most circumstances. However, management may depart from this
probability-based scenario weighting approach when the economic
outlook is determined to be particularly uncertain and risks are
elevated.
In light of ongoing risks, management deviated from this
probability weighting in the fourth quarter of 2022, and assigned
additional weight to outer scenarios.
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.
Economic forecasts remain subject to a high degree of
uncertainty. Upside and Downside scenarios are constructed so that
they encompass the potential crystallisation of a number of key
macro-financial risks.
At the end of 2022, risks to the economic outlook included the
persistence of inflation and its consequences on monetary policy.
Rapid changes to public policy also increased forecast
uncertainty.
In Europe, risks relating to energy pricing and supply security
remain significant. Geopolitical risks also remain significant and
include the possibility of a prolonged and escalating
Russia-Ukraine war, continued disagreements between the US and
other countries with China over a range of economic and strategic
issues, and the evolution of the UK's relationship with the EU.
Economic forecasts for our main markets deteriorated in the
fourth quarter as GDP growth slowed. In Europe high inflation and
rising interest rates have reduced real household incomes and
raised business costs, dampening consumption and investment and
lowering growth expectations. The effects of higher interest rate
expectations and lower growth are evident in asset price
expectations, with house prices forecasts, in particular,
significantly lower.
The scenarios used to calculate ECL in the Annual Report and
Accounts 2022 are described below.
The consensus Central scenario
HSBC's Central scenario reflects a low growth and higher
inflation environment across many of our key markets. The scenario
features an initial period of below-trend GDP growth in most of our
main markets as higher inflation and tighter monetary policy causes
a squeeze on business margins and households' real disposable
income. Growth returns to its long term expected trend in later
years as central banks bring inflation back to target.
Our Central scenario assumes that inflation peaked in most of
our key markets at the end of 2022 but remains high through 2023
before moderating as energy prices stabilise and supply chain
disruptions abate. Central banks are expected to keep raising
interest rates until midway through 2023. Inflation is forecast to
revert to target in most markets, by early 2024.
Global GDP is expected to grow by 1.6% in 2023 in the Central
scenario and the average rate of global GDP growth is 2.5% over the
five-year forecast period. This is below the average growth rate
over the five-year period prior to the onset of the pandemic.
The key features of our Central scenario are:
-- Economic activity in European and North American markets
continues to weaken. Most major economies are forecast to grow in
2023, but at very low rates. Hong Kong and mainland China are
expected to see a recovery in economic activity from 2023 as
Covid-19 related restrictions are lifted.
-- In most markets, unemployment rises moderately from historic
lows as economic activity slows. Labour markets remain fairly tight
across our key markets.
-- Inflation is expected to remain elevated across many of our
key markets driven by energy and food prices. Inflation is
subsequently expected to converge back towards central banks target
rate over the next two years of the forecast.
-- Policy interest rates in key markets will continue to rise in
the near term but at a slower pace. Interest rates will stay
elevated but start to ease as inflation returns to target.
-- The West Texas Intermediate oil price is forecast to average
$72 per barrel over the projection period.
The Central scenario was first created with forecasts available
in November, and reviewed continuously until late December.
Probability weights assigned to the Central scenario are 60% for UK
and France.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Central scenario.
Central scenario 2023-2027
UK France
% %
---------------------------- ----- ------
GDP growth rate
---------------------------- ----- ------
2023: Annual average growth
rate (0.8) 0.2
---------------------------- ----- ------
2024: Annual average growth
rate 1.3 1.6
---------------------------- ----- ------
2025: Annual average growth
rate 1.7 1.5
---------------------------- ----- ------
5-year average 1.1 1.2
---------------------------- ----- ------
Unemployment rate
---------------------------- ----- ------
2023: Annual average rate 4.4 7.6
---------------------------- ----- ------
2024: Annual average rate 4.6 7.5
---------------------------- ----- ------
2025: Annual average rate 4.3 7.3
---------------------------- ----- ------
5-year average 4.3 7.3
---------------------------- ----- ------
House price growth
---------------------------- ----- ------
2023: Annual average growth
rate 0.2 1.8
---------------------------- ----- ------
2024: Annual average growth
rate (3.8) 2.0
---------------------------- ----- ------
2025: Annual average growth
rate 0.7 3.1
---------------------------- ----- ------
5-year average 0.4 2.8
---------------------------- ----- ------
Inflation rate
---------------------------- ----- ------
2023: Annual average rate 6.9 4.6
---------------------------- ----- ------
2024: Annual average rate 2.5 2.0
---------------------------- ----- ------
2025: Annual average rate 2.1 1.8
---------------------------- ----- ------
5-year average 3.1 2.4
---------------------------- ----- ------
Probability 60.0 60.0
---------------------------- ----- ------
The graphs compare the respective Central scenario at the year
end 2021 with current economic expectations at the end of 2022.
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 Central scenario, the consensus Upside
scenario features stronger economic activity in the near term,
before converging to long-run trend expectations. It also
incorporates a faster fall in the rate of inflation than
incorporated in the Central scenario.
The scenario is consistent with a number of key upside risk
themes. These include faster resolution of supply chain issues; a
rapid conclusion to the Russia-Ukraine war; de-escalation of
tensions between the US and China; relaxation of Covid-19 policies
in Asia; and improved relations between the UK and the EU.
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 4.4 (4Q24) 3.1 (1Q24)
------------------- --- ------ --- ------
Unemployment rate 3.5 (4Q23) 6.5 (4Q24)
------------------- --- ------ --- ------
House price growth 4.2 (1Q23) 3.7 (1Q23)
------------------- --- ------ --- ------
Inflation rate 0.7 (1Q24) 0.8 (4Q23)
------------------- --- ------ --- ------
Probability 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. The date
on which the extreme is reached is indicated in parenthesis. For
inflation, lower inflation is interpreted as the 'best'
outcome.
Downside scenarios
Downside scenarios explore the intensification and
crystallisation of a number of key economic and financial
risks.
High inflation and the tighter monetary policy response have
become key concerns for global growth. In the downside scenarios,
supply chain disruptions intensify, exacerbated by an escalation in
the spread of Covid-19 and rising geopolitical tensions drive
inflation higher.
There also remains a risk that energy and food prices rise
further due to the Russia-Ukraine war, increasing pressure on
household budgets and firms' costs.
The possibility of inflation expectations becoming detached from
central bank targets also remains a risk. A wage-price spiral
triggered by higher inflation and pandemic related labour supply
shortages across could put sustained upward pressure on wages,
aggravating cost pressures and the squeeze on household real
incomes and corporate margins. In turn, it raises the risk of a
more forceful policy response from central banks, a steeper
trajectory for interest rates and ultimately, deep economic
recession.
The risks relating to Covid-19 are centred on the emergence of a
new variant with greater vaccine resistance that necessitates a
stringent public health policy. In Asia, with the reopening of
China in December, management of Covid-19 remains a key source of
uncertainty, with the rapid spread of the virus posing a heightened
risk of a new variant emerging.
The geopolitical environment also presents risks, including:
-- a prolonged Russia-Ukraine war with escalation beyond Ukraine's borders;
-- the deterioration of the trading relationship between the UK
and the EU over the Northern Ireland Protocol; and
-- continued differences between the US and other countries with
China, which could affect sentiment and restrict global economic
activity.
The consensus Downside scenario
In the consensus Downside scenario, economic activity is
considerably weaker compared with the Central scenario. In this
scenario, GDP growth weakens below the Central scenario,
unemployment rates rise and asset prices fall.
The scenario features a temporary supply side shock that keeps
inflation higher than the baseline, before the effects of weaker
demand begin to dominate leading to a fall in commodity prices and
to lower inflation.
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 (3.5) (3Q23) (1.4) (3Q23)
--------------------- ------ ------ ----- ------
Unemployment rate 5.8 (2Q24) 8.8 (4Q23)
--------------------- ------ ------ ----- ------
House price growth (10.1) (2Q24) (0.6) (4Q23)
--------------------- ------ ------ ----- ------
Inflation rate (min) (0.4) (4Q24) 0.3 (4Q24)
--------------------- ------ ------ ----- ------
Inflation rate
(max) 10.8 (1Q23) 7.2 (1Q23)
--------------------- ------ ------ ----- ------
Probability 25 25
--------------------- -------------- -------------
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. The date
on which the extreme is reached is indicated in parenthesis. Due to
the nature of the shock to inflation in the downside scenarios,
both the lowest and the highest point is shown in the tables.
Downside 2 scenario
The Downside 2 scenario features a deep global recession and
reflects management's view of the tail of the economic
distribution. It incorporates the crystallisation of a number of
risks simultaneously, including further escalation of the
Russia-Ukraine war, worsening of supply chain disruptions and the
emergence of a vaccine-resistant Covid-19 variant that necessitates
a stringent public health policy response globally.
This scenario features an initial supply-side shock that pushes
up inflation and interest rates higher. This impulse is expected to
prove short lived as a large downside demand pressure causes
commodity prices to correct sharply and global price inflation to
fall as a severe and prolonged recession takes hold.
The following table describes key macroeconomic variables and
the probabilities assigned in the Downside 2 scenario.
Downside 2 scenario 'worst outcome'
UK France
% %
--------------------- ------ ------ ----- ------
GDP growth rate (6.9) (3Q23) (6.8) (4Q23)
--------------------- ------ ------ ----- ------
Unemployment rate 8.7 (2Q24) 10.3 (4Q24)
--------------------- ------ ------ ----- ------
House price growth (22.9) (2Q24) (6.4) (2Q24)
--------------------- ------ ------ ----- ------
Inflation rate (min) (2.3) (2Q24) (2.5) (2Q24)
--------------------- ------ ------ ----- ------
Inflation rate
(max) 13.5 (2Q23) 10.4 (2Q23)
--------------------- ------ ------ ----- ------
Probability 10 10
--------------------- -------------- -------------
Note: Extreme point in the Downside 2 is 'worst outcome' in the
scenario, for example lowest GDP growth and the highest
unemployment rate, in the first two years of the scenario. The date
on which the extreme is reached is indicated in parenthesis. Due to
the nature of the shock to inflation in the downside scenarios,
both the lowest and the highest point is shown in the tables.
Scenario weighting
In reviewing the economic conjuncture, the level of uncertainty
and risk, management has considered both global and
country-specific factors. This has led management to assign
scenario probabilities that are tailored to its view of uncertainty
in individual markets.
Key consideration around uncertainty attached to the Central
scenario projections focused on:
-- the progression of the Covid-19 pandemic in Asian countries
and announcement of removal of Covid-19 measures and travel
restrictions in mainland China and Hong Kong;
-- further tightening of monetary policy and impact on borrowing
costs in interest rate sensitive sectors, such as housing;
-- the risks to gas supply security in Europe and subsequent
impact on inflation and commodity prices and growth; and
-- the ongoing risks to global supply chains.
In the UK, the surge in price inflation and a squeeze on
household real incomes have led to strong monetary policy responses
from central bank. Higher interest rates have increased recession
risks and the prospects for outright decline in house prices.
The UK faces additional challenges from the rise in energy
prices and accompanying deterioration in the terms of trade. For
the UK, the consensus Upside and Central scenarios had a combined
weighting of 65%.
In France, uncertainties around the outlook remain elevated due
to high inflation and Europe's exposure to the Russia-Ukraine war
through the economic costs incurred from the imposition of
sanctions, trade disruption and energy dependence on Russia. The
consensus Upside and Central scenarios had a combined weighting of
65%.
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 remained elevated since 31 December
2021, including judgements relating to:
-- the selection and weighting of economic scenarios, given
rapidly changing economic conditions and a wide dispersion of
economic forecasts. There is judgement in making assumptions about
the effects of inflation and interest, global growth, supply chain
disruption; and
-- estimating the economic effects of those scenarios on ECL,
particularly as the historical relationship between macroeconomic
variables and defaults might not reflect the dynamics of current
macroeconomic conditions.
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 conditions experienced in 2022, and management
judgemental adjustments were still required to support modelled
outcomes.
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 2022.
For our wholesale portfolios, 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 of the performing population.
For our retail portfolios, 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,
segment 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.
This includes refining model inputs and outputs and using
adjustments to ECL based on management judgement and higher-level
quantitative analysis for impacts that are difficult to model.
The effects of management judgemental adjustments are considered
for balances and ECL when determining whether or not a significant
increase in credit risk has occurred and are attributed or
allocated to a stage as appropriate. This is in accordance with the
internal adjustments framework.
Management judgemental adjustments are reviewed under the
governance process for IFRS 9 (as detailed in the section 'Credit
risk management' on page 36). Review and challenge focuses on the
rationale and quantum of the adjustments with a further review
carried out by the second line of defence where significant. For
some management judgemental adjustments, internal frameworks
establish the conditions under which these adjustments should no
longer be required and as such are considered as part of the
governance process. This internal governance process allows
management judgemental adjustments to be reviewed regularly and,
where possible, to reduce the reliance on these through model
recalibration or redevelopment, as appropriate.
The drivers of management judgemental adjustments continue to
evolve with the economic environment and as new risks emerge.
Management judgemental adjustments made in estimating the
scenario-weighted reported ECL at 31 December 2022 are set out in
the following table.
Management judgemental adjustments
to ECL at 31 December 2022(1)
Retail Wholesale Total
GBPm GBPm GBPm
Banks, sovereigns,
government entities
and low-risk counterparties (16) (2) (18)
--------------------------------- -------------------- -------------------- --------------------
Corporate lending
adjustments - (100) (100)
Retail lending Inflation-related
adjustments 8 - 8
--------------------------------- -------------------- -------------------- --------------------
Other macroeconomic-related
adjustments 3 - 3
--------------------------------- -------------------- -------------------- --------------------
Pandemic-related
economic recovery
adjustments - - -
--------------------------------- -------------------- -------------------- --------------------
Other retail lending
adjustments 7 - 7
--------------------------------- -------------------- -------------------- --------------------
Total 2 (102) (100)
--------------------------------- -------------------- -------------------- --------------------
Management judgemental adjustments
to ECL at 31 December 2021
Retail Wholesale Total
GBPm GBPm GBPm
Low-risk counterparties
(banks,sovereigns
and government entities) - (4) (4)
--------------------------- --------------------- --------------------- ---------------------
Corporate lending
adjustments - 31 31
--------------------------- --------------------- --------------------- ---------------------
Retail lending probability
of default adjustments - - -
--------------------------- --------------------- --------------------- ---------------------
Retail model default - - -
timing adjustments
--------------------------- --------------------- --------------------- ---------------------
Macroeconomic-related
adjustments 17 - 17
--------------------------- --------------------- --------------------- ---------------------
Pandemic-related
economic recovery
adjustments 3 - 3
--------------------------- --------------------- --------------------- ---------------------
Other retail lending - - -
adjustments
--------------------------- --------------------- --------------------- ---------------------
Total 20 27 47
--------------------------- --------------------- --------------------- ---------------------
1 Management judgemental adjustments presented in the table
reflect increases or (decreases) to ECL, respectively.
Management judgemental adjustments at 31 December 2022 were a
decrease to ECL of GBP102m for the wholesale portfolio and an
increase to ECL of GBP2m for the retail portfolio.
During 2022, management judgemental adjustments reflected an
evolving macroeconomic outlook and the relationship of the modelled
ECL to this outlook and to late-breaking and sector-specific
risks.
At 31 December 2022, wholesale management judgemental
adjustments were an ECL decrease of GBP102m (31 December 2021:
GBP27m increase).
-- Adjustments relating to low credit-risk exposures decreased
ECL by GBP2m at 31 December 2022 (31 December 2021: GBP4m
decrease). The adjustments mainly relate to standard, monthly
adjustments for bank and sovereign exposures secured by Export
Credit Agency guarantees; the benefit from which is not recognised
in the inbound data. The reduction in ECL for these exposures was
mostly offset by a management overlay on a Russian Bank exposure
due to sanctions. Total net adjustments are broadly flat in
comparison to 31 December 2021.
-- Adjustments to corporate exposures decreased ECL by GBP100m
at 31 December 2022 (31 December 2021: GBP31m increase). The
adjustments mainly relate to standard, monthly adjustments for
corporate exposures secured by Export Credit Agency guarantees and
government Covid-19 guarantees; the benefit from which is not
recognised in the inbound data. The reduction in ECL for these
exposures has been partially offset by management overlays to
reflect increased risk on an individual exposure in France and
increased risk on certain sub-sectors within France. In comparison
to December 2021, the level of management overlay has significantly
reduced as modelled results increasingly reflect the macroeconomic
environment and portfolio risk, resulting in a net underlay rather
than overlay.
At 31 December 2022, retail management judgemental adjustments
were an ECL increase of GBP2m (31 December 2021: GBP20m
increase).
-- Retail lending inflation-related adjustments increased ECL by
GBP8m (31 December 2021: nil). These adjustments addressed where
increasing inflation and interest rates results in affordability
risks which were not fully captured by the modelled output.
-- Other macroeconomic-related adjustments increased ECL by
GBP3m (31 December 2021: GBP17m increase). These adjustments were
primarily in relation to country-specific risks related to future
macroeconomic conditions.
-- Banks, sovereigns, government entities and low-risk
counterparties adjustments decreased ECL by GBP16m (31 December
2021: nil). These adjustments related to the re-alignment of PD
between reporting and origination date for certain parts of the
portfolio.
-- Other retail lending adjustments increased ECL by GBP7m (31
December 2021: nil), reflecting all other data, model and
management judgemental adjustments.
-- Pandemic-related economic recovery adjustments were removed
during 2022 as scenarios stabilised.
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 at the balance sheet date.
There is a particularly high degree of estimation uncertainty in
numbers representing more severe risk scenarios when assigned a
100% weighting.
For wholesale credit risk exposures, the sensitivity analysis
excludes ECL and financial instruments related to defaulted (stage
3) obligors. It is generally impracticable to separate the effect
of macroeconomic factors in individual assessments of obligors in
default. The measurement of stage 3 ECL is relatively more
sensitive to credit factors specific to the obligor than future
economic scenarios, and loans to defaulted obligors are a small
portion of the overall wholesale lending exposure, even if
representing the majority of the allowance for ECL. Therefore, the
sensitivity analysis to macroeconomic scenarios does not capture
the residual estimation risk arising from wholesale stage 3
exposures. Due to the range and specificity of the credit factors
to which the ECL is sensitive, it is not possible to provide a
meaningful alternative sensitivity analysis for a consistent set of
risks across all defaulted obligors.
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 tables present the 100%
weighted results. These exclude portfolios held by the insurance
business and small portfolios, and as such cannot be directly
compared with personal and wholesale lending presented in other
credit risk tables. Additionally, in both the wholesale and retail
analysis, the comparative period results for Downside 2 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.
The wholesale and retail sensitivity analysis is stated
inclusive of management judgmental adjustments, as appropriate to
each scenario.
Wholesale analysis
IFRS 9 ECL sensitivity to future
economic conditions(1,2,3)
UK France
GBPm GBPm
-------------------------- ------- -------
ECL of loans and advances
to customers at
31 December 2022
-------------------------- ------- -------
Reported ECL 84 94
-------------------------- ------- -------
Consensus scenarios
-------------------------- ------- -------
Central scenario 64 87
-------------------------- ------- -------
Upside scenario 51 77
-------------------------- ------- -------
Downside scenario 91 104
-------------------------- ------- -------
Downside 2 scenario 271 124
Gross carrying amount(2) 143,037 148,417
-------------------------- ------- -------
IFRS 9 ECL sensitivity to future
economic conditions
UK France
GBPm GBPm
-------------------------- ------- -------
ECL of loans and advances
to customers at
31 December 2021
-------------------------- ------- -------
Reported ECL 104 98
-------------------------- ------- -------
Consensus scenarios
-------------------------- ------- -------
Central scenario 90 89
-------------------------- ------- -------
Upside scenario 71 78
-------------------------- ------- -------
Downside scenario 109 120
-------------------------- ------- -------
Downside 2 scenario 189 138
-------------------------- ------- -------
Gross carrying amount(2) 142,450 120,955
-------------------------- ------- -------
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 Excludes defaulted obligors. For a detailed breakdown of
performing and non-performing wholesale portfolio exposures, see
page 67.
Retail analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France(2)
GBPm GBPm
----------------------------- ------------------------ ----------------------
ECL of loans and advances
to customers at 31 December
2022
----------------------------- ------------------------ ----------------------
Reported ECL 7 87
----------------------------- ------------------------ ----------------------
Consensus scenarios
----------------------------- ------------------------ ----------------------
Central scenario 6 86
----------------------------- ------------------------ ----------------------
Upside scenario 6 84
----------------------------- ------------------------ ----------------------
Downside scenario 7 88
----------------------------- ------------------------ ----------------------
Downside 2 scenario 12 92
----------------------------- ------------------------ ----------------------
Gross carrying amount 2,037 18,987
----------------------------- ------------------------ ----------------------
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
GBPm GBPm
-------------------------- ------------------------ -----------------------
ECL of loans and advances
to customers at
31 December 2021
Reported ECL 5 91
-------------------------- ------------------------ -----------------------
Consensus scenarios
-------------------------- ------------------------ -----------------------
Central scenario 4 91
-------------------------- ------------------------ -----------------------
Upside scenario 4 91
-------------------------- ------------------------ -----------------------
Downside scenario 5 92
-------------------------- ------------------------ -----------------------
Downside 2 scenario 10 93
-------------------------- ------------------------ -----------------------
Gross carrying amount 2,007 18,295
-------------------------- ------------------------ -----------------------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 Includes balances and ECL which have been reclassified from
'loans and advances to customers' to 'assets held for sale' in the
balance sheet. This also includes any balances and ECL which
continue to be reported as personal lending in 'loans and advances
to customers' that are in accordance with the basis of inclusion
for Retail sensitivity analysis .
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