TIDM57HB
RNS Number : 2750I
Hongkong & Shanghai Banking Corp Ld
20 March 2018
The Hongkong and Shanghai Banking Corporation Limited 2017
Annual Report and Accounts
In fulfilment of its obligations under section 4.1.3 and
6.3.5(1) of the Disclosure and Transparency Rules, The Hongkong and
Shanghai Banking Corporation Limited (the "Company") hereby
releases the unedited full text of its 2017 Annual Report and
Accounts for the year ended 31 December 2017.
The document is now available on the Company's website,
www.hsbc.com.hk.
Pursuant to Listing Rule 9.6.1, a copy of the above document has
been submitted to the UK Listing Authority and will shortly be
available for inspection at the UK Listing Authority's Document
Viewing Facility via the National Storage Mechanism which is
located at http://www.morningstar.co.uk/uk/NSM.
Printed copies of the Annual Report and Accounts can be obtained
from the following address:
HSBC Holdings plc
Group Company Secretaries Department
8 Canada Square
London E14 5HQ
The Hongkong and Shanghai Banking
Corporation Limited
Annual Report and Accounts 2017
Contents
Page
Certain defined terms 1
----------------------------
Cautionary statement
regarding forward-looking
statements 1
----------------------------
Chinese translation 1
---------------------------- ----
Financial Highlights 2
Report of the Directors 3
Financial Review 9
Risk 12
Capital 34
Statement of Directors'
Responsibilities 38
Auditor's Report 39
---------------------------- ----
Certain defined terms
This document comprises the Annual Report and Accounts 2017 for
The Hongkong and Shanghai Banking Corporation Limited ('the Bank')
and its subsidiaries (together 'the group'). References to 'HSBC',
'the Group' or 'the HSBC Group' within this document mean HSBC
Holdings plc together with its subsidiaries. Within this document
the Hong Kong Special Administrative Region of the People's
Republic of China is referred to as 'Hong Kong'. The abbreviations
'HK$m' and 'HK$bn' represent millions and billions (thousands of
millions) of Hong Kong dollars respectively.
Cautionary statement regarding
forward-
looking statements
This Annual Report and Account contains certain forward-looking
statements with respect to the financial condition, results of
operations and business of the group.
Statements that are not historical facts, including statements
about the Bank's beliefs and expectations, are forward-looking
statements. Words such as 'expects', 'anticipates', 'intends',
'plans', 'believes', 'seeks', 'estimates', 'potential' and
'reasonably possible', variations of these words and similar
expressions are intended to identify forward-looking statements.
These statements are based on current plans, estimates and
projections, and therefore undue reliance should not be placed on
them. Forward-looking statements speak only as of the date they are
made, and it should not be assumed that they have been revised or
updated in the light of new information or future events.
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.
Chinese translation
A Chinese translation of the Annual Report and Accounts is
available upon request from: Communications (Asia), Level 32, HSBC
Main Building, 1 Queen's Road Central, Hong Kong. The report is
also available, in English and Chinese, on the Bank's website at
www.hsbc.com.hk.
Financial Highlights
2017 2016
HK$m HK$m
--------- -----------
For the year
Net operating income before loan impairment
charges 186,443 168,152
---------
Profit before tax 115,619 102,707
---------
Profit attributable to shareholders 88,530 78,646
---------
At the year-end
Total shareholders' equity 696,480 628,006
---------
Total equity 752,986 679,136
---------
Total capital 522,244 491,302
---------
Customer accounts 5,138,272 4,900,004
---------
Total assets 7,943,346 7,548,952
---------
Ratios % %
Return on average ordinary shareholders'
equity 13.7 13.0
Post-tax return on average total assets 1.2 1.1
Cost efficiency ratio 43.5 44.5
---------
Net interest margin 1.88 1.75
---------
Advance-to-deposits ratio 64.8 57.8
---------
Capital ratios
- Common equity tier 1 capital 15.9 16.0
- Tier 1 capital 17.0 17.2
- Total capital 18.9 19.0
--------------------------------------------- --------- ---------
Established in Hong Kong and Shanghai in 1865, The Hongkong and
Shanghai Banking Corporation Limited is the founding member of the
HSBC Group - one of the world's largest banking and financial
services organisations. It is the largest bank incorporated in Hong
Kong and one of Hong Kong's three note-issuing banks. It is a
wholly-owned subsidiary of HSBC Holdings plc, the holding company
of the HSBC Group, which has an international network organised
into five geographical regions: Europe, Asia, Middle East and North
Africa, North America and Latin America.
The Hongkong and Shanghai Banking Corporation Limited
Incorporated in the Hong Kong SAR with limited liability
Registered Office and Head Office: HSBC Main Building, 1 Queen's
Road Central, Hong Kong
Telephone: (852) 2822 1111 Facsimile: (852) 2810 1112 Web: www.hsbc.com.hk.
Report of the Directors
Principal Activities
The group provides a comprehensive range of domestic and
international banking and related financial services, principally
in the Asia-Pacific region.
Asia Strategy
HSBC Group's aim is to be the world's leading international
bank. As a subsidiary of the HSBC Group, the group applies a
disciplined approach in managing its portfolio of businesses to
focus on areas where it has a clear competitive advantage. The
Group has set clear strategic actions to capture growth
opportunities arising from (i) fast-growing trade corridors and
(ii) increasing wealth creation in our priority growth markets.
These include delivering growth from our international network,
capturing opportunities from the Belt and Road Initiative,
extending our market-leading capability in renminbi products, and
specific plans to prioritise and accelerate investments in
Association of Southeast Asian Nations countries, the Pearl River
Delta, and our Insurance and Asset Management businesses in the
region. We will continue to implement HSBC Global Standards as a
competitive advantage and to increase the quality of earnings.
The group's strong presence across the Asia-Pacific region will
help maintain its competitive advantage in connecting business
opportunities within the region, as well as between Asia-Pacific
and other parts of the world.
Financial Statements
The state of affairs of the Bank and the group, and the
consolidated profit of the group, are shown on pages 46 to 97.
Subordinated liabilities, Preference Shares and Share
Capital
Details on subordinated liabilities issued by the group are set
out in notes 25 and 35. Details on preference shares and share
capital of the Bank are set out in notes 26, 27 and 28 on the
Financial Statements.
Dividends
The interim dividends paid in respect of 2017 are set out in
note 6 on the Financial Statements.
Directors
The Directors at the date of this report are set out below:
Stuart Thomson Gulliver(#)
Chairman
He is the Group Chief Executive
and an executive Director
of HSBC Holdings plc. He
will step down from his
roles in HSBC Holdings plc
and as Chairman of the Bank
on 20 February 2018. He
holds a Master's Degree
in Jurisprudence from Oxford
University.
Peter Tung Shun Wong
Deputy Chairman & Chief
Executive
He is a Group Managing Director
and Member of the Group
Management Board of HSBC
Holdings plc; a non-executive
Director of Hang Seng Bank
Limited; Vice Chairman and
non-executive Director of
Bank of Communications Co.,
Ltd.; and an independent
non-executive Director of
Cathay Pacific Airways Limited.
He is also the Chairman
of HSBC Bank (China) Company
Limited; and a Director
of HSBC Bank Malaysia Berhad.
He holds a Bachelor of Arts,
a Master of Business Administration
and a Master of Science
from Indiana University.
Laura May Lung Cha*, GBM
Deputy Chairman
She is an independent non-executive
Director of HSBC Holdings
plc. She is also an independent
non-executive Director of
China Telecom Corporation
Limited, Unilever PLC and
Unilever N.V.. She holds
a Bachelor of Arts from
University of Wisconsin-Madison
and a Juris Doctor from
University of Santa Clara
Law School. She is also
admitted to practice in
the State of California
and in Federal Courts.
---------------------------------------
Zia Mody*
Deputy Chairman
She is a partner of AZB
& Partners and an independent
non-executive Director of
CLP Holdings Limited. She
holds a Bachelor of Arts
(Law) from Cambridge University
and a Master of Laws from
Harvard University.
Graham John Bradley*
He is the Non-Executive
Chairman and a Director
of HSBC Bank Australia Limited.
He is also Chairman and
Non-executive Director of
Graincorp Limited; Chairman
and Director of EnergyAustralia
Holdings Limited; Chairman
of Infrastructure New South
Wales and Chairman and Director
of Virgin Australia International
Holdings Limited. He holds
a Bachelor of Arts in LLB
(Hons I) from Sydney University
and an LLM from Harvard
University.
---------------------------------------
Louisa Wai Wan Cheang
She is the Vice-Chairman
and Chief Executive of Hang
Seng Bank Limited; an International
Advisor of China Union Pay;
and a Group General Manager
of HSBC Holdings plc. She
holds a Bachelor of Social
Sciences from The University
of Hong Kong. She is also
an Honorary Certified Financial
Management Planner of The
Hong Kong Institute of Bankers.
---------------------------------------
Dr Christopher Wai Chee
Cheng*, GBS, OBE
He is the Chairman of Wing
Tai Properties Limited;
an independent non-executive
Director of NWS Holdings
Ltd.; and an independent
non-executive Director of
Eagle Asset Management (CP)
Limited. He holds a Bachelor
of Business Administration
from University of Notre
Dame; a Master of Business
Administration from Columbia
University; a Doctorate
in Social Sciences honoris
causa from The University
of Hong Kong and an Honorary
Degree of Doctor of Business
Administration from the
Hong Kong Polytechnic University.
---------------------------------------
Dr Raymond Kuo Fung Ch'ien*,
GBS, CBE
He is independent non-executive
Chairman of Hang Seng Bank
Limited. He is also an independent
non-executive Director of
China Resources Power Holdings
Company Limited, Swiss Re
Limited and Swiss Re Asia
Pte. Ltd. He holds a Bachelor
of Arts from Rockford College
and a Master of Arts and
Doctor of Philosophy (Economics)
from University of Pennsylvania.
---------------------------------------
Yiu Kwan Choi*
He is an independent Non-Executive
Director of HSBC Bank (China)
Company Limited. He holds
a higher certificate in
Accountancy from Hong Kong
Polytechnic University and
is a Fellow Member of The
Hong Kong Institute of Bankers.
He was the Deputy Chief
Executive of the Hong Kong
Monetary Authority ('HKMA')
in charge of Banking Supervision
when he retired in January
2010. Before this, he was
Deputy Chief Executive of
the HKMA in charge of Monetary
Policy and Reserves Management
from June 2005 to August
2007 and held various senior
positions in the HKMA including
Executive Director (Banking
Supervision), Head of Administration,
and Head of Banking Policy
from 1993 to 2005.
---------------------------------------
John Michael Flint(#)
He is the Group Chief Executive
Designate of HSBC Holdings
plc. He will succeed Stuart
Gulliver as Chairman of
the Bank and as Group Chief
Executive and executive
Director of HSBC Holdings
plc effective from 21 February
2018. He holds a Bachelor
of Arts (Hons) in Economics
from Portsmouth Polytechnic.
His previous roles with
the Group include: Chief
Executive of Retail Banking
and Wealth Management, Chief
of Staff to the Group Chief
Executive and Group Head
of Strategy and Planning,
Chief Executive Officer
of Global Asset Management
and Group Treasurer and
Deputy Head of Global Markets.
---------------------------------------
Irene Yun-lien Lee*
She is the executive Chairman
of Hysan Development Company
Limited and an independent
non-executive Director of
Hang Seng Bank Limited,
Cathay Pacific Airways Limited
and CLP Holdings Limited.
She holds a Bachelor of
Arts (Distinction) in History
of Art from Smith College,
Northampton, Massachusetts,
USA. She is also a member
of the Honourable Society
of Gray's Inn, UK and a
Barrister-at-Law in England
and Wales.
---------------------------------------
Jennifer Xinzhe Li*
She is the Chief Executive
Officer and General Partner
of Baidu Capital, having
previously been the Chief
Financial Officer of Baidu,
Inc. and is also an independent
non-executive Director of
Philip Morris International
Inc. She holds a Bachelor
of Arts from Tsinghua University
and a Master of Business
Administration from University
of British Columbia.
---------------------------------------
Victor Tzar Kuoi Li(#)
He is the Managing Director
and Deputy Chairman and
an Executive Director of
CK Asset Holdings Limited;
the Group Co-Managing Director
and Deputy Chairman of CK
Hutchison Holdings Limited;
the Chairman of CK Infrastructure
Holdings Limited and CK
Life Sciences Int'l., (Holdings)
Inc.; a Non-executive Director
of Power Assets Holdings
Limited and HK Electric
Investments Manager Limited;
a Non-executive Director
and the Deputy Chairman
of HK Electric Investments
Limited; and Co-Chairman
of Husky Energy Inc. He
is also the Deputy Chairman
of Li Ka Shing Foundation
Limited, Li Ka Shing (Overseas)
Foundation and Li Ka Shing
(Canada) Foundation. He
holds a Bachelor of Science
degree in Civil Engineering,
a Master of Science degree
in Civil Engineering, both
received from Stanford University;
and an honorary degree,
Doctor of Laws, honoris
causa (LL.D.) from The University
of Western Ontario.
---------------------------------------
Bin Hwee Quek (née
Chua)*
She is an independent non-executive
Director of CapitaLand Commercial
Trust Management Limited
and Mapletree Oakwood Holdings
Pte. Ltd. She is also a
Director of several government
organisations in Singapore,
including Duke-NUS Graduate
Medical School, Health Promotion
Board, Maritime and Port
Authority of Singapore,
and National Heritage Board.
She chairs four Audit Committees.
She was an audit partner
with Price Waterhouse Singapore
and later, PricewaterhouseCoopers
(PwC) Singapore, for 26
years. A member of the PwC
Singapore and PwC Asia leadership
teams, she held many leadership
positions including Vice
Chairman of PwC Singapore
and Deputy Markets Leader
of PwC Asia Pacific and
Americas. She holds a Bachelor
of Accountancy (Hons) from
The University of Singapore
and is a Chartered Accountant
with the Institute of Singapore
Chartered Accountants.
---------------------------------------
John Robert Slosar*
He is the Chairman and a
Director of Cathay Pacific
Airways Limited, Swire Pacific
Limited, John Swire & Sons
(H.K.) Limited and Swire
Properties Limited; the
Chairman and Executive Director
of Hong Kong Aircraft Engineering
Company Limited; and a non-executive
Director of Air China Limited.
He holds a Bachelor in Economics
from Columbia University
and a Bachelor in Economics
and M.A. from the University
of Cambridge.
---------------------------------------
Kevin Anthony Westley*,
BBS
He is an independent Non-executive
Director of Hutchison Port
Holdings Management Pte.
Ltd. and Fu Tak Iam Foundation
Limited and a member of
the investment committee
of The West Kowloon Cultural
Development Authority. He
holds a Bachelor of Arts
(Hons) from the University
of London (LSE) and is a
Fellow of the Institute
of Chartered Accountants
in England and Wales.He
was the Chairman (from 1996)
and Chief Executive (from
1992) of HSBC Investment
Bank Asia Limited (formerly
named as Wardley Limited)
until his retirement in
2000 and subsequently acted
as an advisor to the Bank
and the Group in Hong Kong.
---------------------------------------
Marjorie Mun Tak Yang*,
GBS
She is the Chairman of Esquel
Holdings Inc. She holds
a B.Sc. in Mathematics from
Massachusetts Institute
of Technology; and a Master
of Business Administration
from Harvard Business School.
---------------------------------------
Tan Sri Dr Francis Sock
Ping Yeoh*, CBE
He is Managing Director
of YTL Corporation Berhad,
YTL E-Solutions Berhad,
YTL Land & Development Berhad
and YTL Power International
Berhad. He holds a Bachelor
of Science (Hons) in Civil
Engineering and an Honorary
Doctorate of Engineering
from the University of Kingston.
---------------------------------------
* Independent non-executive
Director
# Non-executive Director
=======================================
During the year, Rosanna Wong retired on 24 April 2017 and Rose
Lee resigned on 1 July 2017. Louisa Cheang was appointed on 14
September 2017, Yiu Kwan Choi was appointed on 3 October 2017 and
Bin Hwee Quek was appointed on 14 November 2017. John Flint was
appointed on 16 January 2018. Save for the above, all the Directors
served throughout the year.
A list of the directors of the Bank's subsidiary undertakings
(consolidated in the financial statements) during the period from 1
January 2017 to the date of this report will be available on the
Bank's website
https://www.personal.hsbc.com.hk/1/2/hk/regulatory-disclosures.
Secretary
The Board has resolved that Neil Olofsson will succeed Paul
Stafford as Corporation Secretary with effect from 1 April
2018.
Permitted Indemnity Provision
The Bank's Articles of Association provide that the Directors
and other officers for the time being of the Bank shall be
indemnified out of the Bank's assets against any liability incurred
by them or any of them as the holder of any such office or
appointment to a person other than the Bank or an associated
company of the Bank in connection with any negligence, default,
breach of duty or breach of trust in relation to the Bank or
associated company (as the case may be).
In addition, the Bank's ultimate holding company, HSBC Holdings
plc, has maintained directors' and officers' liability insurance
providing appropriate cover for the directors and officers within
the Group, including the Directors of the Bank and its
subsidiaries.
Directors' Interests in Transactions, Arrangements or
Contracts
No transactions, arrangements or contracts that were significant
in relation to the Bank's business and in which a Director or his
or her connected entities had, directly or indirectly, a material
interest were entered into by or subsisted with the Bank's holding
companies, its subsidiaries or any fellow subsidiaries during the
year.
Directors' Rights to Acquire Shares or Debentures
To help align the interests of employees with shareholders,
executive Directors of the Bank and those executive Directors of
HSBC Holdings plc are eligible to be granted conditional awards
over ordinary shares in HSBC Holdings plc by that company (being
the ultimate holding company) under the HSBC Share Plan 2011 and
the HSBC International Employee Share Purchase Plan.
Executive Directors of the Bank and those executive Directors of
HSBC Holdings plc are eligible to receive an annual incentive award
based on the outcome of the performance measures set out in their
annual performance scorecard. Annual incentive awards are normally
delivered in cash and/or shares; these generally have a deferral
rate of 60% or 40% if the annual incentive award is GBP500,000 or
below. The period of which the annual incentive award would be
deferred is determined in accordance with the requirements of the
Prudential Regulation Authority ('PRA') Remuneration Rules, i.e.
seven years for Senior Managers (individuals in PRA and Financial
Conduct Authority ('FCA') designation Senior Management Functions),
five years for Risk Managers, and three years for other Material
Risk Takers ('MRTs'). From January 2017 onwards, all share awards
granted to MRTs are subject to a minimum retention period of one
year as opposed to six months previously. However, for certain
individuals whose variable pay awards will be deferred for at least
five years and who are not considered to be members of senior
management, their retention period may be kept at six months.
All unvested deferred awards made under the HSBC Share Plan 2011
are subject to the application of malus, i.e. the cancellation and
reduction of unvested deferred awards. All paid or vested variable
pay awards made to Identified Staff and MRTs will be subject to
clawback for a period of seven years from the date of award. For
Senior Managers, this may be extended to 10 years in the event of
an ongoing internal or regulatory investigation at the end of the
seven-year period.
Executive Directors and other senior executives are subject to
minimum shareholding requirements. Individuals are given five years
from 2014 or (if later) their appointment to build up the
recommended levels of shareholding. HSBC operates an anti-hedging
policy; all employees including executive Directors are required to
certify each year that they have not entered into any personal
hedging strategies in relation to their holdings of HSBC
shares.
The HSBC International Employee Share Purchase Plan is an
employee share purchase plan offered to employees in Hong Kong
since 2013 and has been extended to further countries in the HSBC
Group from 2014. For every three shares in HSBC Holdings plc
purchased by an employee ('Investment Shares'), a conditional award
to acquire one share is granted ('Matching Shares'). The employee
becomes entitled to the Matching Shares subject to continued
employment with HSBC and retention of the Investment Shares until
the third anniversary of the start of the relevant plan year.
During the year, Stuart Gulliver, Peter Wong, Louisa Cheang and
Rose Lee acquired or were awarded shares of HSBC Holdings plc under
the terms of the HSBC Share Plan 2011. Apart from these
arrangements, at no time during the year was the Bank, its holding
companies, its subsidiaries or any fellow subsidiaries a party to
any arrangements to enable the Directors to acquire benefits by
means of the acquisition of shares in or debentures of the Bank or
any other body corporate.
Donations
Donations made by the Bank and its subsidiaries during the year
amounted to HK$386m (2016: HK$344m).
Compliance with the Banking (Disclosure) Rules
The Directors are of the view that the Annual Report and
Accounts 2017 and Banking Disclosure Statements 2017, which will be
published separately, fully comply with the Banking (Disclosure)
Rules made under section 60A of the Banking Ordinance.
Auditor
The Annual Report and Accounts have been audited by
PricewaterhouseCoopers ('PwC'). A resolution to reappoint PwC as
auditor of the Bank will be proposed at the forthcoming AGM.
Corporate Governance
The Bank is committed to high standards of corporate governance.
As an Authorised Institution, the Bank is subject to and complies
with the Hong Kong Monetary Authority ('HKMA') Supervisory Policy
Manual CG-1 'Corporate Governance of Locally Incorporated
Authorised Institutions'.
Board of Directors
The Board, led by the Chairman, provides entrepreneurial
leadership of the Bank within a framework of prudent and effective
controls which enables risks to be assessed and managed. The
Directors are collectively responsible for the long-term success of
the Bank and delivery of sustainable value to shareholders. The
Board sets the strategy and risk appetite for the group and
approves capital and operating plans presented by management for
the achievement of the strategic objectives it has set.
Directors
The Bank has a unitary Board. The authority of each Director is
exercised in Board meetings where the Board acts collectively. As
at 20 February 2018, the Board comprised the Chairman, Deputy
Chairman and Chief Executive, two Deputy Chairmen who are
independent non-executive Directors, one Director with executive
responsibilities for a subsidiary's operations, two non-executive
Directors and another 11 independent non-executive Directors.
Independent non-executive Directors
Independent non-executive Directors do not participate in the
daily business management of the Bank. They bring an external
perspective, constructively challenge and help develop proposals on
strategy, scrutinise the performance of management in meeting
agreed goals and objectives, and monitor the risk profile and
reporting of performance of the Bank. The independent non-executive
Directors bring experience from a number of industries and business
sectors, including the leadership of large complex multinational
enterprises. The Board has determined that there are 13 independent
non-executive Directors. In making this determination, it was
agreed that there are no relationships or circumstances likely to
affect the judgement of the independent non-executive Directors,
with any relationships or circumstances that could appear to do so
not considered to be material.
Chairman and Chief Executive
The roles of Chairman and Chief Executive are separate and held
by experienced full-time employees of the HSBC Group. There is a
clear division of responsibilities between leading the Board and
the executive responsibility for running the Bank's business.
The Chairman provides leadership to the Board and is responsible
for the overall effective functioning of the Board. The Chairman is
responsible for the development of strategy and the oversight of
implementation of Board approved strategies and direction. The
Chief Executive is responsible for ensuring implementation of the
strategy and policy as established by the Board and the day-to-day
running of operations. The Chief Executive is chairman of the
Executive Committee. Each Asia-Pacific Global Business and Global
Function head reports to the Chief Executive.
Board Committees
The Board has established various committees consisting of
Directors and senior management. The committees include the
Executive Committee, Audit Committee, Risk Committee, Nomination
Committee, Remuneration Committee and Chairman's Committee. The
chairmen of the Executive Committee and of each Board committee
that includes independent non-executive Directors reports to each
subsequent Board meeting on the relevant committee's
proceedings.
The Board has also established an Asset and Liability Management
Committee, a Risk Management Meeting and a Financial Crime Risk
Management Committee. The Executive Committee has the delegated
authority to approve any changes in the membership and terms of
reference of the Asset and Liability Management Committee, Risk
Management Meeting and the Financial Crime Risk Management
Committee. Furthermore, the Board has also established Financial
System Risk Advisory Committees for North Asia and South Asia as
sub-committees of the Risk Committee. The Risk Committee has the
delegated authority to approve any changes in the membership and
terms of reference of these two sub-committees.
The Board and each Board committee have terms of reference to
document their responsibilities and governance procedures. The key
roles of the committees are described in the paragraphs below.
Executive Committee
The Executive Committee is responsible for the exercise of all
of the powers, authorities and discretions of the Board in so far
as they concern the management, operations and day-to-day running
of the group, in accordance with such policies and directions as
the Board may from time to time determine, with power to
sub-delegate. A schedule of items that require the approval of the
Board is maintained.
The Bank's Deputy Chairman and Chief Executive, Peter Wong, is
Chairman of the Committee. The current members of the Committee
are: Diana Cesar (Chief Executive Officer Hong Kong), Pui Mun Chan
(Head of Regulatory Compliance Asia-Pacific), Raymond Cheng (Chief
Operating Officer Asia-Pacific), Gordon French (Head of Global
Banking and Markets Asia-Pacific), Kathleen Gan (Chief Financial
Officer Asia-Pacific), Tony Cripps (Chief Executive Officer
Singapore), Mukhtar Hussain (Chief Executive Officer Malaysia),
Darren Furnarello (Head of Financial Crime Compliance,
Asia-Pacific), David Liao (Chief Executive Officer China), Kevin
Martin (Regional Head of Retail Banking and Wealth Management
Asia-Pacific), Mark McKeown (Chief Risk Officer, Asia-Pacific),
Jayant Rikhye (Chief Executive Officer India), Siew Meng Tan
(Regional Head of Global Private Banking Asia-Pacific), Matthew
Lobner (Head of Strategy and Planning, Asia-Pacific and Head of
International Asia-Pacific), Susan Sayers (Regional General
Counsel, Asia-Pacific), Stuart Tait (Regional Head of Commercial
Banking, Asia-Pacific), Donna Wong (Head of Human Resources
Asia-Pacific), Helen Wong (Chief Executive Officer Greater China).
Paul Stafford (Corporation Secretary) is the Committee Secretary.
In attendance are: Kaber Mclean (Head of Remediation Management
Office, Asia-Pacific), Malcolm Wallis (Head of Communications
Asia-Pacific), Martin Tricaud (Chief Executive Officer Australia)
and Philip Miller (Senior Assistant Company Secretary). The
Committee met 12 times in 2017.
Asset and Liability Management Committee
The Asset and Liability Management Committee is chaired by the
Chief Financial Officer and is an advisory committee to provide
recommendations and advice to support the Chief Financial Officer's
individual accountability for issues and risks with regards to
capital, liquidity risk, funding risk, interest rate risk in the
banking book, structural foreign exchange risk and
structural/strategic equity risk. The Committee consists of Peter
Wong, the Bank's Deputy Chairman and Chief Executive, the Head of
Asset, Liability and Capital Management, Asia-Pacific, the Head of
Balance Sheet Management, Asia-Pacific and other senior executives
of the Bank, most of whom are members of the Executive Committee.
The Committee met 12 times in 2017.
Risk Management Meeting
The Risk Management Meeting is chaired by the Chief Risk Officer
and is a formal governance committee established to provide
recommendations and advice requested to the Chief Risk Officer on
enterprise-wide management of all risks and the policies and
guidelines for the management of risk within the Bank. The Meeting
consists of Peter Wong, the Bank's Deputy Chairman and Chief
Executive, the Head of Global Internal Audit, Asia-Pacific and
other senior executives of the Bank, most of whom are members of
the Executive Committee. The Committee met 12 times in 2017.
Financial Crime Risk Management Committee
The Financial Crime Risk Management Committee, established in
August 2017, is chaired by the Bank's Deputy Chairman and Chief
Executive and is a formal governance committee established to
ensure effective enterprise-wide management of financial crime risk
within the Asia-Pacific Region and to support the Chief Executive
Officer in discharging his financial crime risk responsibilities.
The Committee consists of the Regional Head of Financial Crime
Compliance, Asia-Pacific, the Regional Head of Financial Crime
Threat Mitigation, Asia-Pacific, the Regional Head of Operational
Risk, Asia-Pacific, the Regional Reputational Risk and Client
Selection Lead, Asia-Pacific, the Regional Head of Remediation
Office, Asia-Pacific, the Regional Global Standards Execution Lead,
Asia-Pacific, the Head of Global Internal Audit, Asia-Pacific, the
Regional Head of Financial Crime Risk Chief Operating Officer,
Asia-Pacific and other senior executives of the Bank, most of whom
are members of the Executive Committee. The Committee met five
times in 2017.
Audit Committee
The Audit Committee has non-executive responsibility for
oversight of and advice to the Board on matters relating to
financial reporting.
The current members of the Committee, all being independent
non-executive Directors, are Kevin Westley (Chairman of the
Committee), Graham Bradley, Choi Yiu Kwan, Irene Lee and Jennifer
Li. The Committee met five times in 2017.
The Audit Committee monitors the integrity of the financial
statements and oversees the internal control systems over financial
reporting, covering all material controls. The Committee reviews
the adequacy of resources, qualifications and experience of staff
of the accounting and financial reporting function and their
training programmes and budget. The Committee also reviews the
financial statements before submission to the Board. It also
monitors and reviews the effectiveness of the internal audit
function and reviews the Bank's financial and accounting policies
and practices. The Committee advises the Board on the appointment
of the external auditor and is responsible for oversight of the
external auditor. As part of the oversight process, the Committee
reviews minutes of meetings of subsidiaries' Audit Committees and
the Asset and Liability Management Committee.
Risk Committee
The Risk Committee has non-executive responsibility for
oversight of and advice to the Board on high-level risk-related
matters and risk governance. The current members of the Committee,
all being independent non-executive Directors, are Graham Bradley
(Chairman of the Committee), Dr Christopher Cheng, Choi Yiu Kwan,
Irene Lee, Zia Mody and Kevin Westley. The Committee met five times
in 2017.
A Financial System Risk Advisory Committee for South Asia
(formerly named the Financial System Vulnerabilities Committee for
India) was established by the Board as a sub-committee of the Risk
Committee on 1 January 2017. The Committee is responsible for the
review, monitoring and advice on the effectiveness of the policies,
procedures and the controls framework established relating to
financial crime and financial system abuse risks specific to South
Asia (i.e. India, Bangladesh, Mauritius and Sri Lanka). The current
members of the Committee, all being external professional advisors,
are Nehchal Sandhu (Chairman of the Committee), Nicholas Langman
and Richard Boucher. The Chairman of the Committee is a member of
the HSBC Holdings plc Financial System Vulnerabilities Committee.
The Committee met five times in 2017.
A Financial System Risk Advisory Committee for North Asia was
established by the Board as a sub-committee of the Risk Committee
on 15 June 2017. The Committee is responsible for the review,
monitoring and advice on the effectiveness of the policies,
procedures and the controls framework established relating to
financial crime and financial system abuse risks specific to North
Asia (i.e. mainland China, Hong Kong, Taiwan, Macau, Japan and
Korea). The current members of the Committee are David Irvine
(Chairman of the Committee) and Ambrose Lee, both being external
professional advisors, and Choi Yiu Kwan, who is an independent
non-executive Director of the Bank. The Chairman of the Committee
is a member of the HSBC Holdings plc Financial System
Vulnerabilities Committee. The Committee met two times in 2017.
All of the Bank's activities involve, to varying degrees, the
measurement, evaluation, acceptance and management of risk or
combinations of risks. The Board, advised by the Risk Committee,
requires and encourages a strong risk culture which shapes the
Bank's attitude to risk. The Bank's risk governance is supported by
the Group's enterprise-wide risk management framework which
provides a clear policy of risk ownership and accountability of all
staff for identifying, assessing and managing risks within the
scope of their assigned responsibilities. This personal
accountability, reinforced by clear and consistent employee
communication on risk that sets the tone from senior leadership,
the governance structure, mandatory learning and remuneration
policy, helps to foster a disciplined and constructive culture of
risk management and control throughout the group.
The Board and the Risk Committee oversee the maintenance and
development of a strong risk management framework by continually
monitoring the risk environment, top and emerging risks facing the
group and mitigating actions planned and taken. The Risk Committee
recommends the approval of the group's risk appetite statement to
the Board and monitors performance against the key performance/risk
indicators included within the statement. The Risk Committee
monitors the risk profiles for all of the risk categories within
the group's business. The Committee also monitors the effectiveness
of the Bank's risk management and internal controls, including
operational and compliance controls, and risk management systems.
Regular reports from the Risk Management Meeting, which is the
executive body responsible for overseeing risk, are also presented
at each Risk Committee meeting to report on these items.
Nomination Committee
The Nomination Committee is responsible for leading the process
for Board and senior management appointments and for identifying
and nominating, for the approval of the Board, candidates for
appointment to the Board and certain senior management roles.
Appointments to the Board are subject to the approval of the HKMA.
The Committee considers plans for orderly succession to the Board
and the appropriate balance of skills and experience on the
Board.
The current members of the Committee, being a majority of
independent non-executive Directors, are Marjorie Yang (Chairman of
the Committee), Stuart Gulliver (Chairman of the Board) and Laura
Cha. The Deputy Chairman and Chief Executive attends each meeting
of the Committee. The Committee met two times in 2017.
A rigorous selection process, overseen by the Nomination
Committee and based upon agreed requirements using an external
search consultancy, is followed in relation to the appointment of
non-executive Directors. Before recommending an appointment of a
Director to the Board, the Committee evaluates the Board
composition including balance of skills, knowledge and experience,
as well as diversity and the role and capabilities required. In
identifying suitable Board candidates, the Committee considers
candidates' backgrounds, knowledge and experience (including
international experience) to promote diversity of views, and takes
into account the required time commitment and any potential
conflicts of interest.
During the year, the Nomination Committee made recommendations
to the Board for the appointments of Louisa Cheang, Yiu Kwan Choi,
Bin Hwee Quek and John Flint.
Chairman's Committee
The Chairman's Committee acts on behalf of the Board either in
accordance with authority delegated by the Board from time to time,
or as specifically set out within its terms of reference. The
Committee meets with such frequency and at such times as it may
determine, and can implement previously agreed strategic decisions,
approve specified matters subject to their prior review by the full
Board, and act exceptionally on urgent matters within its terms of
reference.
The current members of the Committee comprise the Chairman of
the Board, the Deputy Chairman and Chief Executive, the
non-executive Deputy Chairmen and the Chairmen of the Audit and
Risk Committees. The Committee met three times in 2017.
Remuneration Committee
Following revisions to the HKMA's Supervisory Policy Manual CG-1
'Corporate Governance of Locally Incorporated Authorised
Institutions (AI)', the Board approved the establishment of a
Remuneration Committee with effect from 1 January 2018. The new
Committee will review and approve remuneration matters for the
performance year 2018 onwards. The current members of the
Committee, all being independent non-executive Directors, are Irene
Lee (Chairman of the Committee), Marjorie Yang, Christopher Cheng,
Jennifer Li and Bin Hwee Quek. The Committee held its first meeting
in January 2018.
Before the establishment of the Remuneration Committee and the
revisions to the HKMA Supervisory Policy Manual, it was acceptable
for the Group Remuneration Committee established by the ultimate
holding company, HSBC Holdings plc, to assist the Board in
discharging its responsibilities for remuneration matters. The
Group Remuneration Committee, comprising independent non-executive
Directors, is responsible for setting the principles, parameters
and governance framework for the Group's remuneration policy
applicable to all Group employees. It oversees the application of
the policy to the wider employee population, including employees in
subsidiaries and branches, subject to local regulations. It is also
responsible for assessing that there are effective safeguards in
place to ensure that remuneration policies are clearly aligned with
the Group's risk appetite and the regulatory requirements that the
Group is required to comply with.
Remuneration Strategy
Our remuneration strategy is designed to reward competitively
the achievement of long-term sustainable performance, and attract
and motivate the very best people who are committed to maintaining
a long-term career with the Group while performing their role in
the long-term interests of our stakeholders. We believe that
remuneration is an important tool for instilling the right
behaviours and driving and encouraging actions that are aligned to
organisational values and expectations.
Our remuneration strategy as approved by the Group Remuneration
Committee is based on the following principles:
-- An alignment to performance at all levels (individual,
business and Group) taking into account both 'what' has been
achieved and 'how' it has been achieved. The 'how' helps ensure
that performance is sustainable in the longer term against HSBC's
values, conduct and risk and compliance standards.
-- Being informed, but not driven by, market position and
practice. Market benchmarks are sourced through independent
specialists and provide an indication of the range of pay levels
and employee benefits provided by our competitors.
-- Targeting pay for employees across the full market range
depending upon their individual performance and that of the Group.
An individual's position in this market range will also vary
depending upon their performance in any given year.
-- Compliance with relevant regulation across all of our countries and territories.
The Bank's remuneration strategy is aligned to the Group's
remuneration strategy, the details of which are contained within
the Annual Report and Accounts 2017 of HSBC Holdings plc.
An annual review of the Bank's remuneration strategy and its
operation is commissioned externally and carried out independently
of management. The review conducted by Deloitte LLP confirms that
the Bank's remuneration policy is consistent with the principles
set out in the HKMA Supervisory Policy Manual CG-5 'Guideline on a
Sound Remuneration System'.
Banking structural reform and recovery and resolution
planning
Globally there have been a number of developments relating to
banking structural reform and the introduction of recovery and
resolution regimes, sometimes referred to as 'living wills' for
banks. As part of the regime, banks are working with regulators to
establish legal and operating structures which can allow them to be
resolved in an orderly manner in the event of failure, minimising
disruption to financial stability and the risk to public funds.
In Hong Kong, the Financial Institutions (Resolution) Ordinance
('FIRO') was passed by the Legislative Council in 2016 and came
into effect in Hong Kong on 7 July 2017. The FIRO establishes the
legal basis for a resolution regime in Hong Kong to mitigate the
risks posed by the failure of systemically important financial
institutions to the stability and effective working of the Hong
Kong financial system.
Internationally, the Group is working with our primary
regulators to develop and agree a resolution strategy for the
Group. In Hong Kong, under the FIRO, there are a number of options
available to regulators for implementing an orderly resolution of a
failed bank. These options include a bail-in stabilisation option,
which will allow regulators to recapitalise a failing bank by
imposing losses on its shareholders and certain creditors, thereby
stabilising and restoring it to viability. Banks need to have
sufficient loss-absorbing capacity ('LAC'), which can be written
down or converted into equity in the event of failure to ensure the
effective use of the bail-in option. Details on LAC requirements
and operations of bail-in in Hong Kong are expected to be further
progressed in 2018.
For the group, the preferred resolution strategy is a bail-in at
an intermediate holding company ('IHC') level in Hong Kong to
recapitalise the group as a whole. The IHC in Hong Kong will be the
resolution entity for the group, whereby adequate LAC will be
available in a form that will be bailed in at the point of
resolution. An IHC was incorporated in Hong Kong as a direct
subsidiary of HSBC Holdings plc in 2017, with the transfer of the
group to the IHC expected to progress during 2018. This is an
internal legal entity restructuring and will not impact the
business and management of the group.
In addition, similar to all Global Systemically Important Banks
('G-SIBs'), the Group is working with our regulators to mitigate or
remove critical inter-dependencies between our subsidiaries to
further facilitate the resolution of the Group. In particular, in
order to remove operational dependencies (where one subsidiary bank
provides critical services to another), the Group is in the process
of transferring critical services from our subsidiary banks to a
separate internal group of service companies ('ServCo group'). In
2017, the HBAP group began to transfer certain properties and
employees in Hong Kong to the ServCo group, which is not a
subsidiary of HBAP but of HSBC Holdings plc. There were no changes
to employment terms and conditions or pension benefits as a result
of these transfers. Transfers of additional employees, critical
shared services and assets in Hong Kong are expected to progress in
2018.
Business review
The Bank is exempt from the requirement to prepare a business
review under section 388(3) of the Companies Ordinance Cap. 622
since it is a wholly-owned subsidiary of HSBC Holdings plc.
On behalf of the Board
Stuart Gulliver, Chairman
20 February 2018
Financial Review
Results for 2017
Profit before tax for 2017 reported by The Hongkong and Shanghai
Banking Corporation Limited ('the Bank') and its subsidiaries
(together 'the group') increased by HK$12,912m, or 13%, to HK$
115,619m
Consolidated income statement and balance sheet data
by global business
(Audited)
Retail
Banking Global Global
and Wealth Commercial Banking Private Corporate
Management Banking and Markets Banking Centre(1) Total
HK$m HK$m HK$m HK$m HK$m HK$m
Year ended 31 Dec
2017
Net interest income 50,789 31,237 19,147 1,868 7,196 110,237
Net fee income 20,695 10,443 9,936 1,916 160 43,150
Net trading income 2,056 2,976 16,161 963 1,054 23,210
Net income/(expense)
from financial instruments
designated at fair
value 15,903 (416) 19 - (126) 15,380
Gains less losses
from financial investments 149 64 1 - 1,894 2,108
Dividend income 36 1 - - 195 232
Net insurance premium
income/(expense) 53,275 2,933 - - (32) 56,176
Other operating income 1,488 336 189 51 2,676 4,740
Total operating income 144,391 47,574 45,453 4,798 13,017 255,233
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Net insurance claims
and benefits paid
and movement in liabilities
to policyholders (65,941) (2,849) - - - (68,790)
Net operating income
before loan impairment
charges and other
credit risk provisions 78,450 44,725 45,453 4,798 13,017 186,443
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Loan impairment
(charges)/releases
and other credit
risk provisions (1,907) (2,157) (451) (2) 80 (4,437)
Net operating income 76,543 42,568 45,002 4,796 13,097 182,006
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Operating expenses (34,807) (16,115) (20,653) (2,679) (6,813) (81,067)
Operating profit 41,736 26,453 24,349 2,117 6,284 100,939
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Share of profit in
associates and joint
ventures 86 - - - 14,594 14,680
Profit before tax 41,822 26,453 24,349 2,117 20,878 115,619
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Balance at 31 Dec
2017
--------------------------------- ----------- ---------- ------------ -------- ---------- ------------
Net loans and advances
to customers 1,049,006 1,143,241 1,004,350 115,064 17,319 3,328,980
Customer accounts 2,701,399 1,311,873 905,991 187,825 31,184 5,138,272
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Year ended 31 Dec
2016
Net interest income 43,632 26,945 17,367 1,444 7,520 96,908
Net fee income 17,949 10,355 9,502 1,278 218 39,302
Net trading income 1,377 2,450 17,168 1,007 2,062 24,064
Net income/(expense)
from financial instruments
designated at fair
value 3,591 (276) 91 - 164 3,570
Gains less losses
from financial investments 335 249 33 - 615 1,232
Dividend income 67 1 - - 166 234
Net insurance premium
income/(expense) 52,954 3,004 - - (46) 55,912
Other operating income 7,792 473 1,143 15 2,093 11,516
Total operating income 127,697 43,201 45,304 3,744 12,792 232,738
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Net insurance claims
and benefits paid
and movement in liabilities
to policyholders (61,280) (3,306) - - - (64,586)
Net operating income
before loan impairment
charges and other
credit risk provisions 66,417 39,895 45,304 3,744 12,792 168,152
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Loan impairment
(charges)/releases
and other credit
risk provisions (2,133) (2,469) (874) 4 (82) (5,554)
Net operating income 64,284 37,426 44,430 3,748 12,710 162,598
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Operating expenses (32,520) (14,971) (19,413) (2,332) (5,567) (74,803)
Operating profit 31,764 22,455 25,017 1,416 7,143 87,795
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Share of profit in
associates and joint
ventures 148 - - - 14,764 14,912
Profit before tax 31,912 22,455 25,017 1,416 21,907 102,707
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Balance at 31 Dec
2016
--------------------------------- ----------- ---------- ------------ -------- ---------- ------------
Net loans and advances
to customers 936,310 996,772 791,522 91,574 17,936 2,834,114
Customer accounts 2,537,128 1,286,368 857,583 192,163 26,762 4,900,004
--------------------------------- ---------- --------- ----------- ------- --------- ---------
1 Includes inter-segment elimination
Results Commentary
(Unaudited)
The group reported profit before tax of HK$115,619m, an increase
of 13% compared with 2016, driven by higher net interest income,
higher net fee income and higher income (net of claims) from
insurance business.
Net interest income increased by HK$13,329m, or 14%, compared
with 2016, driven by Hong Kong mainly from wider customer deposit
spreads and higher yields on financial investments, which benefited
from interest rate rises since late 2016, coupled with balance
sheet growth, mainly in loans and advances to customers.
Net fee income increased by HK$3,848m, or 10%, compared with
2016, mainly in Hong Kong from higher securities brokerage, unit
trust and funds under management due to higher turnover from
favourable equity market sentiment in 2017, and to a lesser extent
from higher mandatory provident fund and underwriting fees.
Net trading income decreased by HK$854m, or 4%, driven by
mainland China from foreign exchange translation losses on foreign
currency denominated financial assets, higher interest expense and
revaluation losses on structured deposits, coupled with higher
revaluation losses on foreign currency funding swaps. The decrease
in net trading income was also due to unfavourable valuation
adjustments on derivative contracts from the narrowing of own
credit spreads, mainly in Hong Kong and Australia. These were
partly offset by higher net trading income in insurance business in
Hong Kong, mainly from the favourable revaluation of foreign
currency swaps. Net trading income in Taiwan also increased, mainly
from higher revaluation gains on foreign currency funding
swaps.
Net income from financial instruments designated at fair value
increased by HK$11,810m, driven by revaluation gains on the equity
portfolio held by the insurance business in Hong Kong from strong
equity market performance in 2017. To the extent that investment
returns are attributable to policyholders, there is an
offsetting movement reported under 'Net insurance claims and
benefits paid and movement in liabilities to policyholders'.
Gains less losses from financial investments increased by
HK$876m, mainly reflecting the gain on disposal of our
available-for-sale investment in Vietnam Technological and
Commercial Joint Stock Bank ('Techcom Bank').
Other operating income decreased by HK$6,776m, driven by lower
favourable movements in the present value of in-force insurance
business, mainly in Hong Kong and Singapore due to unfavourable
actuarial assumption updates. This was partly offset by higher
gains from the revaluation of investment properties.
Net insurance claims and benefits paid and movement in
liabilities to policyholders increased by HK$4,204m, reflecting
higher investment returns to policyholders due to strong equity
market performance in 2017, partly offset by the impact from lower
favourable movements in the present value of in-force business.
Loan impairment charges and other credit risk provisions
decreased by HK$1,117m, or 20%, with decreases across various
countries, notably in Singapore from impairment releases in CMB, in
India mainly from the non-recurrence of impairment charges in
GB&M, coupled with releases in CMB, in mainland China from
lower impairment charges mainly in CMB, and in Australia mainly due
to the non-recurrence of a charge in GB&M. These were partly
offset by higher impairment charges in Hong Kong, mainly in
CMB.
Total operating expenses increased by HK$6,264m, or 8%, mainly
in IT-related costs and professional and consultancy expenses to
support business growth, and continued investment in regulatory and
compliance programmes, coupled with higher staff costs mainly due
to higher performance-related pay.
Share of profit in associates and joint ventures decreased by
HK$232m, or 2%, mainly from the impact of foreign exchange
translation.
Net interest income
(Unaudited)
2017 2016
HK$m HK$m
Net interest income 110,237 96,908
---------
Average interest-earning assets 5,850,010 5,527,461
---------
Net interest margin % %
Spread 1.80 1.67
---------
Contribution from net free funds 0.08 0.08
Total 1.88 1.75
---------------------------------- --------- ---------
Net interest income ('NII') increased by HK$13,329m, or 14%
compared with 2016, driven by Hong Kong mainly from wider customer
deposit spreads and higher yields on financial investments, which
benefited from interest rate rises since late 2016, coupled with
balance sheet growth, mainly in loans and advances to customers.
NII also increased in mainland China from balance sheet growth,
higher re-investment yields on financial investments, coupled with
lower cost of funds, in Australia from balance sheet growth and
lower cost of funds, and in Singapore mainly from balance sheet
growth.
Average interest-earning assets increased by HK$323bn, or 6%,
compared with 2016, driven by Hong Kong mainly due to an increase
in loans and advances to customers, notably in corporate term
lending and mortgages.
Net interest margin increased by 13 basis points compared with
2016, driven by Hong Kong, although increases were also noted in
mainland China and Australia.
In Hong Kong, the net interest margin for the Bank increased by
14 basis points, mainly due to wider customer deposit spreads and
higher re-investment yields on financial investments following
interest rate increases, coupled with a change in asset
portfolio
mix due to growth in customer lending. These increases were
partly offset by an increase in financial liabilities to meet the
'Total Loss Absorbing Capacity' requirement, coupled with
compressed lending spreads.
At Hang Seng Bank, the net interest margin increased by 12 basis
points, mainly from improved customer deposit spreads and higher
re-investment yields on financial investments following interest
rate increases and a change in asset portfolio mix due to growth in
customer lending, partly offset by compressed lending spreads.
In mainland China, the net interest margin increased, driven by
higher yield from portfolio mix changes due to growth in customer
lending, higher re-investment yields from financial investments,
coupled with lower cost of funds which benefited from increases in
savings and current account deposits, partly offset by reduced
lending spreads. In Australia, the net interest margin increased
mainly from lower cost of funds following successive interest rate
cuts by the Reserve Bank of Australia in 2016, while yield
decreased to a lesser extent due to a change in asset portfolio mix
as customer lending grew.
Insurance income
(Unaudited)
Included in net operating income are the following
revenues earned by the insurance business
2017 2016
HK$m HK$m
Net interest income 12,580 11,543
Net fee income 2,800 2,044
Net trading loss (11) (1,126)
Net income from financial instruments
designated at fair value 15,486 3,315
Net insurance premium income 56,176 55,912
Movement in PVIF 305 7,306
Other operating income 475 771
Total operating income 87,811 79,765
----------------------------------------------- ------- -------
Net insurance claims and benefits paid
and movement in liabilities to policyholders (68,790) (64,586)
Net operating income 19,021 15,179
----------------------------------------------- ------- -------
Net operating income from the insurance business increased by
HK$3,842m, or 25%, driven by favourable market conditions in
2017.
Net interest income increased by 9% from growth in insurance
fund size, reflecting net inflows from new and renewal of life
insurance premiums.
Net trading loss decreased mainly due to favourable revaluation
of foreign currency swaps in Hong Kong against revaluation losses
reported last year.
Net income from financial instruments designated at fair value
increased significantly, driven by revaluation gains on the equity
portfolio supporting insurance contracts, reflecting strong equity
market performance in Hong Kong. To the extent that these gains are
attributable to policyholders, there is an offsetting movement
reported under 'Net insurance claims and benefits paid and movement
in liabilities to policyholders'.
Net insurance premium income increased slightly, as the increase
in Hong Kong from new business sales and higher renewals was partly
offset by a new reinsurance agreement, coupled with lower insurance
premium income in Singapore due to lower new business sales.
The lower favourable movements in the present value of in-force
business ('PVIF') was driven by Hong Kong and Singapore. The PVIF
movement in Hong Kong was due to the less favourable interest rate
assumption update, and also reflected future sharing of higher
investment returns with policyholders. The PVIF movement in
Singapore was due to changes in actuarial assumptions reflecting
regulatory driven changes, and the impact from lapse rate
experience and market interest rate movements. These were partly
offset by a corresponding movement in 'Net insurance claims and
benefits paid and movement in liabilities to policyholders'.
Balance sheet
(Unaudited)
The consolidated balance sheet at 31 December 2017 is set out in
the Financial Statements.
Gross loans and advances to customers grew by HK$495bn, or 17%,
to HK$3,342bn. Gross loans and advances in Hong Kong increased by
HK$314bn, or 18%, largely from increases in corporate and
commercial lending, coupled with growth in residential mortgages
and other personal lending. Gross loans and advances to customers
also increased in mainland China, Australia, Singapore, Malaysia,
Taiwan and India.
Overall credit quality remained strong, with total gross
impaired loans and advances as a percentage of gross loans and
advances standing at 0.53% at the end of 2017, compared with 0.68%
at the end of December 2016. Loan impairment charges as a
percentage of average gross customer advances remained low at 0.14%
for 2017 (2016: 0.20%).
Interest in associates and joint ventures
At 31 December 2017, an impairment review on the group's
investment in Bank of Communications Co., Ltd ('BoCom') was carried
out and it was concluded that the investment was not impaired based
on our value in use calculation (see note 15 on the Financial
Statements for further details). In future periods, the value in
use may increase or decrease depending on the effect of changes to
model inputs. It is expected that the carrying amount will increase
in 2018 due to retained earnings earned by BoCom. At the point
where the carrying amount exceeds the value in use, the group will
determine whether an impairment exists. If so, the group would
continue to recognise its share of BoCom's profit or loss, but the
carrying amount would be reduced to equal the value in use, with a
corresponding reduction in income, unless the market value has
increased to a level above the carrying amount.
Customer deposits rose by HK$238bn, or 5%, to HK$5,138bn. At 31
December 2017, the advances-to-deposits ratio was 64.8%, compared
with 57.8% at 31 December 2016.
Shareholders' equity grew by HK$68bn to HK$696bn at 31 December
2017, mainly reflecting current year's profit, net of dividend
payment, coupled with an increase in foreign exchange reserve due
to appreciation of various currencies against the Hong Kong
dollar.
Risk Management
(Unaudited)
All the group's activities involve to varying degrees, the
measurement, evaluation, acceptance and management of risk or
combinations of risks. As a provider of banking and financial
services, we actively manage risk as a core part of our day-to-day
activities.
This section describes the enterprise-wide risk management
framework, and the significant policies and practices employed by
HSBC in managing its material risks.
Risk management framework
The HSBC Group Head Office formulates high-level risk management
policies for the HSBC Group worldwide. We use an
enterprise-wide
risk management framework at all levels of the organisation and
across all risk types. It is underpinned by a strong risk culture
and is reinforced by HSBC Values and our Global Standards.
The framework fosters continuous monitoring of the risk
environment and an integrated evaluation of risks and their
interactions. It also ensures a consistent approach to monitoring,
managing and mitigating the risks we accept and incur in our
activities.
The following diagram and descriptions summarise key aspects of
the framework: the governance and structure; the risk management
tools; and our risk culture, which together help align employee
behaviour with our risk appetite.
Key aspects of risk management framework
Key components of our risk management framework
HSBC Values and risk culture
Risk governance Non-executive risk The Board approves risk
governance appetite, plans and performance
targets which sets the
'tone from the top' and
is advised by the Group
Risk Committee.
=========================================
Executive risk governance Responsible for the enterprise-wide
management of all risks,
including key policies
and frameworks for the
management of risk within
the group.
=========================================
Roles and Three lines of defence Our 'Three lines of defence'
responsibilities model model defines roles and
responsibilities for risk
management. An Independent
Risk function ensures the
necessary balance in risk/return
decisions.
=========================================
Processes Risk appetite Processes to identify,
and tools monitor and mitigate risks
to ensure we remain within
our risk appetite.
Enterprise-wide risk
management tools
Active risk management:
identification/assessment,
monitoring, management
and reporting
Internal Policies and procedures Policies and procedures
controls define the minimum requirements
for the controls required
to manage our risks
==================
Control activities The operational risk management
framework defines minimum
standards and processes
for managing operational
risks and internal controls.
Systems and infrastructure Systems and/or processes
that support the identification,
capture and exchange of
information to support
risk management activities.
==================
Systems and tools
Our risk culture
Risk culture refers to HSBC's norms, attitudes and behaviours
related to risk awareness, risk taking and risk management.
HSBC has long recognised the importance of a strong risk
culture, the fostering of which is a key responsibility of senior
executives. Our risk culture is reinforced by HSBC Values and our
Global Standards. It is instrumental in aligning the behaviours of
individuals with our attitude to assuming and managing risk, which
helps to ensure that our risk profile remains in line with our risk
appetite.
We use clear and consistent employee communications on risk to
convey strategic messages and set the tone from senior management.
A suite of mandatory training on risk and compliance topics is
deployed to embed skills and understanding in order to strengthen
our risk culture and reinforce the attitude to risk in the
behaviour expected of employees, as described in our risk
policies.
Mandatory training materials are updated regularly, describing
technical, cultural and ethical aspects of the various risks
assumed by the group and how they should be managed effectively.
Staff are supported in their roles by a disclosure line which
enables them to report matters of concern confidentially.
Our risk culture is reinforced by our approach to remuneration.
Individual awards, including those for executives, are based on
compliance with HSBC Values and the achievement of financial and
non-financial objectives which are aligned to our risk appetite and
global strategy.
Risk governance structure
The Board has ultimate responsibility for the effective
management of risk and approves the group's risk appetite. It is
advised by the Risk Committee on risk appetite and its alignment
with strategy, risk governance and internal controls, and
high-level risk related matters.
Executive accountability for the ongoing monitoring, assessment
and management of risk resides with the group's Chief Risk Officer,
supported by the Risk Management Meeting ('RMM').
The management of financial crime risk resides with the group's
Chief Executive Officer. He is supported by the Financial Crime
Risk Management Committee.
Day-to-day responsibility for risk management is delegated to
senior managers with individual accountability for decision making.
All employees have a role to play in risk management. These roles
are defined using the three lines of defence model, which takes
into account the Group's business and functional structures.
Responsibilities
All employees are required to identify, assess and manage risk
within the scope of their responsibilities as part of the three
lines of defence model.
Three lines of defence
To create a robust control environment to manage risks, we use
an activity-based three lines of defence model. This model
delineates management accountabilities and responsibilities for
risk management and the control environment.
The model underpins our approach to risk management by
clarifying responsibilities, encouraging collaboration and enabling
efficient coordination of risk and control activities.
The three lines of defence are summarised below:
-- The first line of defence owns the risks and is responsible
for identifying, recording, reporting and managing them and
ensuring that the right controls and assessments are in place to
mitigate these risks.
-- The second line of defence sets the policy and guidelines for
managing the risks, provides advice and guidance in relation to the
risk, and challenges the first line of defence on effective risk
management.
-- The third line of defence is Internal Audit, which provides
independent and objective assurance of the adequacy of the design
and operational effectiveness of the Group's risk management
framework and control governance process.
Independent Risk function
-- The group's Risk function, headed by the group's Chief Risk
Officer, is responsible for enterprise-wide risk oversight. This
includes establishing and monitoring of risk profiles and
forward-looking risk identification and management. The group's
Risk function is made up of sub-functions covering all risks to our
operations and forms part of the second line of defence. It is
independent from the global businesses, including sales and trading
functions, to provide challenge, appropriate oversight and balance
in risk/return decisions.
Enterprise-wide risk management tools
The Group uses a range of tools to identify, monitor and manage
risk. The key enterprise-wide risk management tools are summarised
below.
Risk appetite
Our risk appetite encapsulates consideration of financial and
non-financial risks and is expressed in both quantitative and
qualitative terms. It is applied at the global business level, at
the country level, and to material operating entities.
The group's risk appetite defines its desired forward-looking
risk profile and informs the strategic and financial planning
process. It is also integrated within other risk management tools
such as stress testing and our top and emerging risks report to
ensure consistency in risk management practices.
The group sets out the aggregated level and risk types it
accepts in order to achieve its business objectives in a Risk
Appetite Statement ('RAS'). This is reviewed on an ongoing basis,
with formal approval from the Board every six months on the
recommendation of the group's Risk Committee.
The group's actual performance is reported monthly against the
approved RAS to the RMM, enabling senior management to monitor the
risk profile and guide business activities to balance risk and
return. This allows risks to be promptly identified and mitigated,
and inform risk-adjusted remuneration to drive a strong risk
culture across the group.
Global businesses and strategic countries are required to have
their own RASs, which are subject to assurance to ensure they
remain directionally aligned to the group's RAS. All RASs and
business activities are guided and underpinned by a set of
qualitative principles. Additionally, quantitative metrics are
defined along with appetite and tolerance thresholds for key risk
areas.
Risk map
The group risk map provides a point-in-time view of its risk
profile across a suite of risk categories. It assess the potential
for these risks to materially impact the group's financial results,
reputation or business sustainability. Risk stewards assign
'current' and 'projected' risk ratings, supported by commentary.
Risks that have an 'Amber' or 'Red' risk rating require monitoring
and mitigating action plans to be either in place or initiated to
manage the risk down to acceptable levels.
Top and emerging risks
We use a top and emerging risks process to provide a
forward-looking view of issues that have 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 our
regions and global businesses, for any risks that may require
global escalation, updating our top and emerging risks as
necessary.
We define a 'top risk' as a thematic issue that may form and
crystallise between six months and one year, and has the potential
to materially affect the group's financial results, reputation or
business model. It may arise across any combination of risk types,
countries or global businesses. The impact may be well understood
by senior management and some mitigating actions may already be in
place. Stress tests of varying granularity may already have been
carried out to assess the impact.
An 'emerging risk' is defined as a thematic issue with large
unknown components that may form and crystallise beyond a one year
time horizon. If it were to materialise, it could have a
significant material effect on a combination of the group's
long-term strategy, profitability and reputation. Existing
management action plans are likely to be minimal, reflecting the
uncertain nature of these risks at this stage. Some high-level
analysis and/or stress testing may have been carried out to assess
the potential impact.
Our top and emerging risks are discussed on page 16.
Stress testing
HSBC operates a comprehensive stress testing programme that
supports our risk management and capital planning. It includes
execution of stress tests mandated by our regulators, as well as
internal stress tests and reverse stress tests. Our stress testing
is carried out within a robust governance framework, supported by
dedicated teams and is overseen at the most senior level of the
group.
Our stress testing programme assesses our capital strength
through a rigorous examination of our resilience to external
shocks. It also helps us understand and mitigate risks and informs
our decisions about capital levels.
Internal stress tests are an important element in our risk
management and capital management frameworks. Our capital plan is
assessed through a range of stress scenarios which explore risks
identified by management. They include potential adverse
macroeconomic, geopolitical and operational risk events, and other
potential events that are specific to the group. The selection of
scenarios reflects our top and emerging risks identification
process and our risk appetite. Stress testing analysis helps
management understand the nature and extent of vulnerabilities to
which the bank is exposed. Using this information, management
decides whether risks can or should be mitigated through management
actions or, if they were to crystallise, should be absorbed through
capital. This in turn informs decisions about preferred capital
levels.
Reverse stress tests are conducted annually at Group and, where
required, subsidiary entity level in order to understand which
potential extreme conditions would make our business model
non-viable. Reverse stress testing identifies potential stresses
and vulnerabilities which the group might face, and helps inform
early-warning triggers, management actions and contingency plans
designed to mitigate risks.
Risks managed by HSBC
The material risk types associated with our banking and
insurance manufacturing operations are described in the tables
below.
Description of risks - banking operations
(Audited)
Measurement, monitoring
Risks Arising from and management of risk
Credit risk
The risk of Credit risk:
financial * Credit risk arises principally from direct lending, * is measured as the amount which could be lost if a
loss if a trade finance and leasing business, but also from customer or counterparty fails to make repayments;
customer certain other products such as guarantees and
or derivatives.
counterparty * is monitored using various internal risk management
fails to meet measures and within limits approved by individuals
an obligation within a framework of delegated authorities; and
under a
contract.
* is managed through a robust risk control framework
which outlines clear and consistent policies,
principles and guidance for risk managers.
Liquidity and
funding risk
Liquidity risk Liquidity and funding
is the risk * Liquidity risk arises from mismatches in the timing risk:
that of cash flows. * is measured using a range of metrics including
we do not have liquidity coverage ratio and net stable funding
sufficient ratio;
financial * Funding risk arises when illiquid asset positions
resources to cannot be funded at the expected terms and when
meet our required. * is monitored against the Group's liquidity and
obligations funding risk framework; and
as they fall
due or that we
can only do so * is managed on a stand-alone basis with no reliance on
at an any Group entity (unless pre-committed) or central
excessive bank unless this represents routine established
cost. Funding business-as-usual market practice.
risk is the
risk
that funding
considered to
be
sustainable,
and therefore
used to fund
assets, is not
sustainable
over
time.
------------------------------------------------------------ ------------------------------------------------------------
Market risk
The risk that Exposure to market Market risk:
movements in risk is separated * is measured in terms of value at risk ('VaR'), which
market into two portfolios: measures the potential losses on risk positions over
factors, * Trading portfolios a specified time horizon for a given level of
such as confidence, and assessed using stress testing;
foreign
exchange * Non-trading portfolios
rates, * is monitored using VaR, stress testing and other
interest measures including the sensitivity of net interest
rates, income and the sensitivity of structural foreign
credit exchange; and
spreads,
equity prices
and commodity * is managed using risk limits approved by the RMM for
prices, will the group and the various global businesses.
reduce our
income
or the value
of our
portfolios.
--------------- ------------------------------------------------------------ ------------------------------------------------------------
Operational risk
The risk to Operational risk:
achieving * Operational risk arises from day-to-day operations or * is measured using the risk and control assessment
our strategy external events, and is relevant to every aspect of process, which assesses the level of risk and
or objectives our business. effectiveness of controls;
as a result of
inadequate or
failed * Regulatory compliance risk and financial crime risk * is monitored using key indicators and other internal
internal are discussed below. control activities; and
processes,
people
and systems or * is primarily managed by global business and
from external functional managers who identify and assess risks,
events. implement controls to manage them and monitor the
effectiveness of these controls using the operational
risk management framework.
--------------- ------------------------------------------------------------ ------------------------------------------------------------
Regulatory compliance risk
The risk that Regulatory compliance
we fail to * Regulatory compliance risk is part of operational risk:
observe risk, and arises from the risks associated with * is measured by reference to identified metrics,
the letter and breaching our duty to clients and other incident assessments, regulatory feedback and the
spirit of all counterparties, inappropriate market conduct and judgement and assessment of our regulatory compliance
relevant laws, breaching other regulatory requirements. teams;
codes, rules,
regulations
and * is monitored against the first line of defence risk
standards of and control assessments, the results of the
good market monitoring and control assurance activities of the
practice, second line of defence functions, and the results of
and incur internal and external audits and regulatory
fines inspections; and
and penalties
and suffer
damage * is primarily managed by establishing and
to our communicating appropriate policies and procedures,
business training employees in them, and monitoring activity
as a to help ensure their observance. Proactive risk
consequence. control and/or remediation work is undertaken where
required .
--------------- ------------------------------------------------------------ ------------------------------------------------------------
Financial crime risk
The risk that Financial crime risk:
we knowingly * Financial crime risk is part of operational risk and * is measured by reference to identified metrics,
or unknowingly arises from day-to-day banking operations. incident assessments, regulatory feedback and the
help parties judgement and assessment of our Financial Crime Risk
to commit or teams;
to further
potentially
illegal * is monitored against our financial crime risk
activity appetite statements and metrics, the results of the
through HSBC. monitoring and control activities of the second line
of defence functions, and the results of internal and
external audits and regulatory inspections; and
* is managed by establishing and communicating
appropriate policies and procedures, training
employees in them, and monitoring activity to assure
their observance. Proactive risk control and/or
remediation work is undertaken where required.
--------------- ------------------------------------------------------------ ------------------------------------------------------------
Other material risks
-------------------------------------------------------------------------------------------------------------------------------------------
Reputational risk
The risk of Reputational risk:
failure * Primary reputational risks arise directly from an * is measured by reference to our reputation as
to meet action or inaction by HSBC, its employees or indicated by our dealings with all relevant
stakeholders' associated parties that are not the consequence of stakeholders, including media, regulators, customers
expectations another type of risk. Secondary reputational risks and employees;
as a result of are those arising indirectly and are a result of a
any event, failure to control any other risks.
behaviour, * is monitored through a reputational risk management
action or framework that is integrated into the Group's broader
inaction, risk management framework; and
either by HSBC
itself, our
employees * is managed by every member of staff and is covered by
or those with a number of policies and guidelines. There is a clear
whom we are structure of committees and individuals charged with
associated, mitigating reputational risk.
that might
cause
stakeholders
to form a
negative
view of the
Group.
--------------- ------------------------------------------------------------ ------------------------------------------------------------
Pension risk
The risk that Pension risk:
the * Pension risk arises from investments delivering an * is measured in terms of the schemes' ability to
performance inadequate return, adverse changes in interest rates generate sufficient funds to meet the cost of their
of assets held or inflation, or members living longer than expected. accrued benefits;
in pension Pension risk includes operational risks listed above.
plans
is * is monitored through the specific risk appetite; and
insufficient
to cover
existing * is managed through the appropriate pension risk
pension governance structure.
liabilities
resulting in
an increase in
obligation to
support the
plans.
Sustainability
risk
The risk that Sustainability risk:
financial * Sustainability risk arises from the provision of * is measured assessing the potential sustainability
services financial services to companies or projects which effect of a customer's activities and assigning a
provided to indirectly result in unacceptable impacts on people Sustainability Risk Rating to all high risk
customers or on the environment. transactions;
by the group
indirectly
result * is monitored by the RMM and by Group Sustainability
in Risk; and
unacceptable
impacts on
people * is managed using sustainability risk policies
or on the covering project finance lending and sector-based
environment. sustainability policies for sectors and themes with
potentially high environmental or social impacts.
--------------- ------------------------------------------------------------ ------------------------------------------------------------
Our insurance manufacturing subsidiaries are separately
regulated from our banking operations. Risks in the insurance
entities are managed using methodologies and processes appropriate
to insurance manufacturing operations, but remain subject to
oversight at group level. Our insurance operations are also
subject to some of the same risks as our banking operations, which
are covered by the group's respective risk management
processes.
Description of risks - insurance manufacturing operations
Measurement, monitoring
Risks Arising from and management of risk
Insurance
risks
The risk that, Insurance risk:
over time, the * The cost of claims and benefits can be influenced by * is measured in terms of life insurance liabilities
cost of many factors, including mortality and morbidity and economic capital allocated to insurance
acquiring experience, as well as lapse and surrender rates. underwriting risk;
and
administering
an insurance * is monitored through a framework of approved limits
contract and and delegated authorities; and
paying claims
and benefits
may exceed the * is managed through a robust risk control framework
total amount which outlines clear and consistent policies,
of premiums principles and guidance. This includes using product
and design, underwriting, reinsurance and claims-handling
investment procedures.
income
received.
Financial
risks
Our ability to Exposure to financial Financial risks:
effectively risks arises * are measured separately for each type of risk:
match from:
the * market risk of changes in the fair values of
liabilities financial assets or their future cash flows; * market risks are measured in terms of exposure to
arising under fluctuations in key financial variables;
insurance
contracts * credit risk; and
with the asset * credit risk is measured as the amount which could be
portfolios lost if a counterparty fails to make repayments; and
that * liquidity risk of entities being unable to make
back them is payments to policyholders as they fall due.
contingent on * liquidity risk is measured using internal metrics
the management including stressed operational cash flow projections;
of financial
risks and the
extent to * are monitored within within a framework of approved
which limits and delegated authorities; and
these risks
are
borne by the * are managed through a robust risk control framework
policyholders. which outlines clear and consistent policies,
principles and guidance. This includes using product
design, asset liability matching and bonus rates.
--------------- ----------------------------------------------------------- --------------------------------------------------------------
Top and emerging risks
(Unaudited)
Our approach to identifying and monitoring top and emerging
risks is described on page 13. Our current key top and emerging
risks are as follows:
-- Deferred Prosecution Agreement and related agreements and consent orders
-- Adverse credit risk outlook
-- Cyber threat and unauthorised access to systems
-- Elevated regional political risk
-- Financial crime risk environment
-- Regulatory developments with adverse impact on business model and profitability
-- Impact of organisational change and regulatory demand on employees
Deferred Prosecution Agreement and related agreements and
consent orders
HSBC was subject to a deferred prosecution agreement ('US DPA').
The US DPA and the work of the independent compliance monitor ('the
Monitor') are discussed on page 29.
In December 2017, the US DPA agreement expired as HSBC lived up
to all of its commitments. The US Department of Justice ('DoJ')
conveyed its expectation prior to the DPA's expiration that HSBC
would follow through on certain requests that had been made by the
DoJ. The risk of enforcement in the US remains high due to a number
of factors, including that Monitor's reports will continue to be
provided to the DoJ through to the end of July 2018. The role of
the Monitor will continue under the appointment of the UK FCA.
Financial crime risks that may arise from clearing payments on
behalf of HSBC affiliates, particularly US dollar transactions, has
heightened. If clearing banks fail to conduct adequate due
diligence on clients, including affiliates, or the affiliates do
not remediate with urgency any control deficiencies in this regard,
it could result in the curtailment of currency clearing services
for certain Group affiliates.
Mitigating actions
-- We are working to ensure that the reforms we have put in
place are both effective and sustainable over the longterm. Work in
this area will continue to be consistent with the strategic
objective of implementing the most effective standards to combat
financial crime across our operations globally.
Adverse credit risk outlook
Following the 19th National Congress in October 2017, the
Chinese Government increased its effort in reigning in shadow
banking, aggressive overseas acquisitions, reforming the financial
markets including capital flow and renminbi volatility. Private
sector corporates ('POEs') that are highly leveraged and / or with
weak corporate governance are likely to be particularly vulnerable
in this trend of increased regulatory scrutiny and tightening
liquidity.
Trade relations among major economies including the US, mainland
China, European Union, Japan, etc., remain fluid, with occasional
rhetoric by national leaders that pose the threat of trade
disruptions. The fact that trade policies are often used as tactics
in wider geopolitical negotiations brings further uncertainty.
Mitigating actions
-- We continue to focus on strengthening client selection and
early risk identification, while staying close to future
regulations that are currently in draft stage.
-- We stress test those portfolios of particular concern to
identify sensitivity to loss, with management actions taken to
control appetite where necessary.
-- Reviews of key portfolios are undertaken regularly to ensure
that individual customer or portfolio risks are understood, and
that the level of facilities offered and our ability to manage
through any downturn are appropriate.
Cyber threat and unauthorised access to systems
The group and other public and private organisations continue to
be the targets of increasingly sophisticated cyber attacks.
Ransomware and distributed denial of service attacks appear to be
an increasingly dominant threat to the financial industry, which
may result in disruption to our operations and customer-facing
websites or loss of customer data.
Mitigating actions
-- We continue to strengthen and invest significantly in our
ability to prevent, detect and respond to the ever-increasing and
sophisticated threat of cyber-attacks. Specifically, we continue to
enhance our capabilities to protect against increasingly
sophisticated malware, denial of service attacks and data leakage
prevention as well as enhancing our security event detection and
incident response processes.
-- We participate in intelligence sharing with both law
enforcement and industry schemes to help improve our understanding
of, and ability to respond to, the evolving threats faced by
ourselves and our peers within our industry.
Elevated regional political risk
Tensions continue to rise between North Korea and the US as a
result of North Korean progress in its missile and nuclear
programmes. The stronger Chinese enforcement of UN sanctions on
North Korea may not halt further missile and nuclear tests. Any
escalation could have a significant impact on regional and global
trade.
Mitigating actions
-- We continuously monitor the geopolitical outlook, in
particular in countries where we have material exposures and/or a
physical presence.
-- We use internal stress tests and scenario analysis as well as
regulatory stress test programmes, to adjust limits and exposures
to reflect our risk appetite and mitigate risks as appropriate. Our
internal credit risk ratings of sovereign counterparties take into
account geopolitical developments that could potentially disrupt
our portfolios and businesses.
Financial crime risk environment
Financial institutions remain under considerable regulatory
scrutiny regarding their ability to prevent and detect financial
crime. Financial crime threats continue to evolve, often in tandem
with geopolitical developments. The financial crime risks related
to the use of innovative financial technology are not yet fully
understood, while the changing sanctions regulatory landscape
presents execution challenges.
Mitigating actions
-- We continued to enhance our Financial Crime Risk function.
-- We strengthened governance processes during 2017 by
establishing formal financial crime risk governance committees at
global business and country levels of the organisation. This will
help to ensure appropriate oversight and escalation of issues to
the Financial Crime Risk Management Committee of the group.
-- We are working to develop enhanced risk management
capabilities through better use of sophisticated analytical
techniques.
Regulatory developments with adverse impact on business model
and profitability
Financial service providers continue to face stringent
regulatory and supervisory requirements, particularly in the areas
of capital and liquidity management, conduct of business, financial
crime, internal control frameworks, the use of models and the
integrity of financial services delivery. The competitive landscape
in which the group operates may be significantly altered by future
regulatory changes and government intervention.
Mitigating actions
-- We are fully engaged with governments and regulators in the
countries in which we operate to help ensure that new requirements
are considered properly by regulatory authorities and the financial
sector and can be implemented effectively.
Impact of organisational change and regulatory demand on
employees
Our success in delivering the group's strategic priorities, as
well as significant regulatory change programmes, depends in part
on the retention of key members of our management team and wider
employee base. The ability to continue to attract, train, motivate
and retain highly qualified professionals in an employment market
where expertise is often in short supply and mobile is critical,
and may depend on factors beyond our control, including economic,
market and regulatory conditions.
Mitigating actions
-- Through dedicated work streams, we continue to develop
succession plans using a broad array of talent-sourcing channels
for key management roles, which are reviewed on a regular
basis.
-- Risks related to organisational change are subject to close
management oversight. A range of actions are being developed to
address the risks associated with the group's major change
initiatives.
Credit Risk
(Audited)
Credit risk generates the largest regulatory capital requirement
of the risks we incur. The group has standards, policies and
procedures dedicated to controlling and monitoring risk from all
such activities. The group's principal credit risk management
procedures and policies, which follow policies established by HSBC
Group Head Office, include the following:
-- Formulating credit policies which are consistent with the
Group credit policy and documenting these in detail in dedicated
manuals.
-- Establishing and maintaining the group's large credit
exposure policy. This policy delineates the group's maximum
exposures to individual customers, customer groups and other risk
concentrations.
-- Establishing and complying with lending guidelines on the
group's attitude towards, and appetite for, lending to specified
market sectors and industries.
-- Undertaking an objective assessment of risk. All commercial
non-bank credit facilities originated by the group in excess of
designated limits are subject to review prior to the facilities
being committed to customers.
-- Controlling exposures to banks and other financial
institutions. The group's credit and settlement risk limits to
counterparties in the finance and government sectors are designed
to optimise the use of credit availability and avoid excessive risk
concentration.
-- Managing exposures to debt securities by establishing
controls in respect of the liquidity of securities held for trading
and setting issuer limits for financial investments. Separate
portfolio limits are established for asset-backed securities and
similar instruments.
-- Controlling cross-border exposures to manage country and
cross-border risk through the imposition of country limits, with
sub-limits by maturity and type of business.
-- Controlling exposures to selected industries. When necessary,
restrictions are imposed on new business, or exposures in the
group's operating entities are capped.
-- Maintaining and developing risk ratings in order to
categorise exposures meaningfully and facilitate focused management
of the attendant risks. Rating methodology is based upon a wide
range of financial analytics together with market data-based tools
which are core inputs to the assessment of counterparty risk.
Although automated risk-rating processes are increasingly used for
the larger facilities, ultimate responsibility for setting risk
grades rests in each case with the final approving executive. Risk
grades are reviewed frequently and amendments, where necessary, are
implemented promptly.
Both the group's Risk Management Meeting ('RMM') and HSBC Group
Head Office receive regular reports on credit exposures. These
include information on large credit exposures, concentrations,
industry exposures, levels of impairment provisioning and country
exposures.
RMM has the responsibility for risk approval authorities and
approving definitive risk policies and controls. It monitors risk
inherent to the financial services business, receives reports,
determines action to be taken and reviews the efficacy of the risk
management framework.
The Executive Committee ('EXCO') and RMM are supported by a
dedicated group risk function headed by the Chief Risk Officer, who
is a member of both EXCO and RMM and reports to the Chief
Executive.
The Risk Committee also has responsibility for oversight and
advice to the Board on risk matters. The key responsibilities of
the Risk Committee in this regard include preparing advice to the
Board on the overall risk appetite tolerance and strategy within
the group, and seeking such assurance as it may deem appropriate
that account has been taken of the current and prospective
macroeconomic and financial environment. The Risk Committee is also
responsible for the periodic review of the effectiveness of the
internal control and risk management frameworks and advising the
Board on all high level risk matters. The Risk Committee approves
the appointment and removal of the group Chief Risk Officer.
(i) Credit exposure
Maximum exposure to credit risk
(Audited)
Our credit exposure is spread across a broad range of asset
classes, including derivatives, trading assets, loans and advances
to customers, placings with and advances to banks and financial
investments.
The following table presents the maximum exposure to credit risk
from balance sheet and off-balance sheet financial instruments,
before taking account of any collateral held or other credit
enhancements (unless such credit enhancements meet accounting
offsetting requirements). For financial assets recognised on the
balance sheet, the maximum exposure to credit risk equals their
carrying amount; for financial guarantees and similar contracts
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 that are irrevocable over the life of
the respective facilities, it is generally the full amount of the
committed facilities.
Maximum exposure to credit risk before collateral
held or other credit enhancements
2017 2016
HK$m HK$m
Cash and sight balances at central banks 208,073 213,783
----------
Items in the course of collection from
other banks 25,714 21,401
----------
Hong Kong Government certificates of indebtedness 267,174 242,194
----------
Trading assets 389,133 299,719
----------
Derivatives 300,243 479,807
----------
Financial assets designated at fair value 18,656 17,853
----------
Reverse repurchase agreements - non-trading 330,890 271,567
----------
Placings with and advances to banks 433,005 463,211
----------
Loans and advances to customers 3,328,980 2,834,114
----------
Financial investments 1,711,598 1,826,640
----------
Amounts due from Group companies 227,729 242,773
----------
Other assets 93,610 84,162
----------
Financial guarantees and other credit-related
contingent liabilities 57,353 64,017
----------
Loan and other credit-related commitments 2,779,845 2,655,816
----------
At 31 Dec 10,172,003 9,717,057
--------------------------------------------------- ---------- ---------
Total exposure to credit risk remained broadly unchanged in 2017
with loans and advances continuing to be the largest element.
(ii) Credit quality of financial instruments
(Audited)
Five broad classifications describe the credit quality of the
group's lending and debt securities portfolios. Each of these
classifications encompasses a range of more granular, internal
credit rating grades assigned to wholesale and retail lending
businesses, as well as ratings attributed by external agencies to
debt securities.
For debt securities and certain other financial instruments,
external ratings have been aligned to five credit quality
classifications based on the mapping of related customer risk
ratings ('CRR') to external credit ratings. The mapping is reviewed
on a regular basis.
There is no direct correlation between internal and external
ratings at the granular level, except insofar as both fall within
one of the five classifications.
Sovereign Other
debt securities debt securities Wholesale lending
and bills and bills and derivatives Retail lending
----------------- -----------------
12 month
External External Internal probability Internal
credit credit credit of default credit Expected
rating rating rating % rating(1) loss %
Credit quality
classification
BBB and A- and CRR1 to EL(2)
Strong above above CRR2 0 - 0.169 1 to EL2 0 - 0.999
Good BBB- to BBB+ to CRR3 0.170 EL3 1.000
BB BBB- - 0.740 - 4.999
Satisfactory BB- to BB+ to CRR4 to 0.741 EL4 to 5.000
B, B, CRR5 - 4.914 EL5 - 19.999
and unrated and unrated
Sub-standard B- to B- to CRR6 to 4.915 EL6 to 20.000
C C CRR8 - 99.999 EL8 - 99.999
Impaired Default Default CRR9 to 100 EL9 to 100+ or
CRR10 EL10 defaulted(3)
----------------- ----------------- ----------------- --------- ------------ ----------- --------------
1 We observe the disclosure convention that, in addition to
those classified as EL9 to EL10, retail accounts classified EL1 to
EL8 that are delinquent by 90 days or more are considered impaired,
unless individually they have been assessed as not impaired (see
page 21, 'Ageing analysis of past due but not impaired financial
instruments').
2 Expected loss.
3 The EL percentage is derived through a combination of PD and
LGD, and may exceed 100% in circumstances where the LGD is above
100%, reflecting the cost of recoveries. Please refer to note 36
for definitions of PD and LGD.
Credit quality classification definitions
(Audited)
-- Strong: Exposures demonstrate a strong capacity to meet
financial commitments, with negligible or low probability of
default and/or low levels of expected loss. Retail accounts operate
within product parameters and only exceptionally show any period of
delinquency.
-- Good: Exposures require closer monitoring and demonstrate a
good capacity to meet financial commitments, with low default risk.
Retail accounts typically show only short periods of delinquency,
with any losses expected to be minimal following the adoption of
recovery processes.
-- Satisfactory: Exposures require closer monitoring and
demonstrate an average to fair capacity to meet financial
commitments, with moderate default risk. Retail accounts typically
show only short periods of delinquency, with any losses expected to
be minor following the adoption of recovery processes.
-- Sub-standard: Exposures require varying degrees of special
attention and default risk of greater concern. Retail portfolio
segments show longer delinquency periods of generally up to 90 days
past due and/or expected losses are higher due to a reduced ability
to mitigate these through security realisation or other recovery
processes.
-- Impaired: Exposures have been assessed, individually or
collectively, as impaired. The group observes the convention,
reflected in the credit quality classification definitions above,
that all retail accounts delinquent by 90 days or more are
considered impaired. Such accounts may occur in any retail EL
grade, whereby in the higher credit quality grades, the grading
assignment will reflect the offsetting of the impact of delinquency
status by credit risk mitigation in one form or another.
Granular risk rating scales
(Audited)
The CRR 10-----grade scale summarises a more granular underlying
23-grade scale of obligor probability of default ('PD'). All HSBC
wholesale customers are rated using the 10-or 23-grade scale,
depending on the degree of sophistication of the Basel II approach
adopted for the exposure.
The EL 10-grade scale for retail business summarises a more
granular underlying EL scale for these customer segments; this
combines obligor and facility/product risk factors in a composite
measure. The external ratings cited above have, for clarity of
reporting, been assigned to the credit quality classifications
defined for internally-rated exposures.
The basis of reporting reflects risk rating systems under the
HSBC Group's Basel II programme and extends the range of financial
instruments covered in the presentation of portfolio credit
quality.
Impairment is not measured for financial instruments held in
trading portfolios or designated at fair value, as assets in such
portfolios are managed according to movements in fair value, and
the fair value movement is taken directly through the income
statement.
Distribution of financial instruments by credit quality
(Audited)
Neither past due nor
impaired
Past
due
Sub- not Impairment
Strong Good Satisfactory standard impaired Impaired allowances Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------------------------------------
At 31 Dec 2017
---------------------------------------
Items in the
course of collection
from other banks 24,420 219 1,075 - - - - 25,714
Trading assets 324,060 27,258 37,216 599 389,133
Derivatives 253,480 38,202 7,855 706 300,243
Financial assets
designated at
fair value 17,032 855 767 2 18,656
Reverse repurchase
agreements -
non-trading 249,043 50,103 31,744 - - - - 330,890
Placings with
and advances
to banks held
at amortised
cost 401,097 28,366 3,433 109 - - - 433,005
Loans and advances
to customers
held at amortised
cost 1,772,405 805,145 696,882 20,136 29,878 17,579 (13,045) 3,328,980
---------------------------------------
* personal 992,682 101,938 56,398 641 18,930 4,686 (2,106) 1,173,169
* corporate and commercial 666,138 649,775 604,638 19,139 8,742 12,695 (10,728) 1,950,399
* non-bank financial institutions 113,585 53,432 35,846 356 2,206 198 (211) 205,412
Financial investments 1,628,709 40,980 41,909 - - - - 1,711,598
Other assets 40,817 19,582 31,945 593 486 187 - 93,610
Total 4,711,063 1,010,710 852,826 22,145 30,364 17,766 (13,045) 6,631,829
--------------------------------------- --------- --------- ------------ -------- -------- -------- -------- ---------
At 31 Dec 2016
Items in the
course of collection
from other banks 19,557 103 1,740 1 - - - 21,401
Trading assets 248,523 23,449 27,348 399 299,719
Derivatives 404,360 62,446 11,923 1,078 479,807
Financial assets
designated at
fair value 16,741 463 649 - 17,853
Reverse repurchase
agreements -
non-trading 204,144 49,580 17,835 8 - - - 271,567
Placings with
and advances
to banks held
at amortised
cost 427,060 31,786 4,031 334 - - - 463,211
Loans and advances
to customers
held at amortised
cost 1,406,265 741,754 624,632 28,304 26,473 19,378 (12,692) 2,834,114
---------------------------------------
* personal 894,151 80,243 46,548 1,120 18,230 4,388 (2,198) 1,042,482
* corporate and commercial 441,340 608,415 551,446 26,923 7,864 14,777 (10,419) 1,640,346
* non-bank financial institutions 70,774 53,096 26,638 261 379 213 (75) 151,286
Financial investments 1,716,823 71,072 38,745 - - - - 1,826,640
Other assets 33,048 17,873 30,598 2,105 382 156 - 84,162
--------- --------- ------------ -------- -------- -------- -------- ---------
Total 4,476,521 998,526 757,501 32,229 26,855 19,534 (12,692) 6,298,474
--------------------------------------- --------- --------- ------------ -------- -------- -------- -------- ---------
1 The above table does not include balances due from Group companies.
(iii) Ageing analysis of past due but not impaired financial instruments
(Audited)
The amounts in the following table reflect exposures designated
as past due but not impaired. Examples of exposures designated
as
past due but not impaired include loans that have missed the
most recent payment date but on which there is no evidence of
impairment, and short-term trade facilities past due more than 90
days for technical reasons, such as delays in documentation, but
where there is no concern over the creditworthiness of the
counterparty.
Ageing analysis of past due but not impaired financial
instruments
Up to 30-59 60-89 90-180 Over 180
29 days days days days days Total
HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2017
Loans and advances
to customers
held at amortised
cost(1) 24,976 3,572 1,326 4 - 29,878
---------------------------
- personal 15,272 2,704 954 - - 18,930
- corporate
and commercial 7,498 868 372 4 - 8,742
- non-bank
financial institutions 2,206 - - - - 2,206
Other assets 98 35 54 59 240 486
25,074 3,607 1,380 63 240 30,364
--------------------------- -------- ------ ----- ------ -------- ------
At 31 Dec 2016
Loans and advances
to customers
held at amortised
cost(1) 21,182 3,865 1,421 5 - 26,473
- personal 14,402 2,818 1,010 - - 18,230
- corporate
and commercial 6,499 949 411 5 - 7,864
- non-bank
financial institutions 281 98 - - - 379
Other assets 206 42 28 51 55 382
21,388 3,907 1,449 56 55 26,855
--------------------------- -------- ------ ----- ------ -------- ------
1 The majority of the loans and advances to customers that are
operating within revised terms following restructuring are excluded
from this table.
(iv) Impaired loans and advances
(Audited)
The group's policy for recognising and measuring impairment
allowances on both individually assessed loans and advances and
those which are collectively assessed on a portfolio basis is
described in note 1.2(d) on the Financial Statements.
Analyses of impairment allowances at 31 December 2017, and the
movement of such allowances during the year, are disclosed in note
11 on the Financial Statements.
Impaired loans and advances are those that meet any of the
following criteria:
-- wholesale loans and advances classified as CRR 9 or CRR 10.
These grades are assigned when the bank considers that either the
customer is unlikely to pay its credit obligations in full, without
recourse to security, or when the customer is past due 90 days or
more on any material credit obligation to the group;
-- retail loans and advances:
- classified as EL 9 or EL 10; or
- classified as EL 1 to EL 8 with 90 days and over past due;
renegotiated loans and advances that have been subject to a
change in contractual cash flows as a result of a concession which
the lender would not otherwise consider, and where it is probable
that without the concession the borrower would be unable to meet
its contractual payment obligations in full, unless the concession
is insignificant and there are no other indicators of impairment.
Renegotiated loans remain classified as impaired until there is
sufficient evidence to demonstrate a significant reduction in the
risk of non-payment of future cash flows, and there are no other
indicators of impairment. For loans that are assessed for
impairment on a collective basis, the evidence to support
reclassification as no longer impaired typically comprises a
history of payment performance against the original or revised
terms, depending on the nature and volume of renegotiation and the
credit risk characteristics surrounding the renegotiation. For
loans that are assessed for impairment on an individual basis, all
available evidence is assessed on a case-by-case basis.
(v) Impairment assessment
(Audited)
It is the group's policy that each operating entity in the group
creates impairment allowances for impaired loans promptly and
appropriately.
For details of our impairment policies on loans and advances and
financial investments, see notes 1.2(d) and 1.2(e) on the Financial
Statements.
Impairment and credit risk mitigation
The existence of collateral has an impact when calculating
impairment on individually assessed impaired loans. If exposures
are secured, the current net realisable value of the collateral
will be taken into account when assessing the need for an
impairment allowance. No impairment allowance is recognised in
cases where all amounts due are expected to be settled in full on
realisation of the security.
Personal lending portfolios are generally assessed for
impairment on a collective basis as the portfolios typically
consist of large groups of homogeneous loans. Two methods are used
to calculate allowances on a collective basis: a roll rate
methodology or a more basic formulaic approach based on historical
losses. We continue to review the impairment allowance methodology
used for retail banking and small business portfolios to ensure
that the assumptions used in our collective assessment models
continue to appropriately reflect the period of time between a loss
event occurring and the account proceeding to delinquency and
eventual write-off.
-- The historical loss methodology is typically used to
calculate collective impairment allowances for secured, or low
default portfolios, until the point at which they are individually
identified and assessed as impaired. For loans which are
collectively assessed using historical loss methodology, the
historical loss rate is derived from the average contractual
write-off net of recoveries over a defined period. The net
contractual write-off rate is the actual amount of loss experienced
after the realisation of collateral and receipt of recoveries.
-- A roll rate methodology is more commonly adopted for
unsecured portfolios when there are sufficient volumes of empirical
data to develop robust statistical models.
The nature of the collective allowance assessment prevents
individual collateral values or loan-to-value ('LTV') ratios from
being included within the calculation. However, the loss rates used
in the collective assessment are adjusted for the collateral
realisation experiences which will vary depending on the LTV
composition of the portfolio.
For wholesale collectively assessed loans and secured personal
lending, historical loss methodologies are applied to estimate
impairment losses which have been incurred but not individually
identified. Loss rates are derived from the observed contractual
write-off net of recoveries over a defined period of at least 60
months. The net contractual write-off rate is the actual amount of
loss experienced after realisation of collateral and receipt of
recoveries. These historical loss rates are adjusted by an economic
factor which adjusts the historical averages to better represent
current economic conditions affecting the portfolio. In order to
reflect the likelihood of a loss event not being identified and
assessed, an emergence period assumption is applied. This reflects
the period between a loss occurring and its identification. The
emergence period is estimated by the group, and in some cases by
local management for each identified portfolio. The factors that
may influence this estimation include economic and market
conditions, customer behaviour, portfolio management information,
credit management techniques and collection and recovery
experiences in the market. A fixed range for the period between a
loss occurring and its identification is not defined across the
group and as it is assessed empirically on a periodic basis, it may
vary over time as these factors change.
(vi) Collateral and other credit enhancements
(Audited)
Loans and advances
Although collateral can be an important mitigant of credit risk,
it is the group's general practice to lend on the basis of the
customer's ability to meet their obligations out of their cash flow
resources rather than rely on the value of security offered.
Depending on the customer's standing and the type of product,
facilities may be provided unsecured. For other lending, a charge
over collateral is obtained and considered in determining the
credit decision and pricing. In the event of default, the bank may
use the collateral as a source of repayment.
Depending on its form, collateral can have a significant
financial effect in mitigating our exposure to credit risk. The
tables below provide a quantification of the value of fixed charges
we hold over a borrower's specific asset (or assets) where we have
a history of enforcing, and are able to enforce the collateral in
satisfying a debt in the event of the borrower failing to meet its
contractual obligations, and can be realised by sale in an
established market or where the collateral is cash. The collateral
valuation in the tables below excludes any adjustments for
obtaining and selling the collateral.
We may also manage our risk by employing other types of
collateral and credit risk enhancements, such as second charges,
other liens and unsupported guarantees, but the valuation of such
mitigants is less certain and their financial effect has not been
quantified. In particular, loans shown in the tables below as not
collateralised may benefit from such credit mitigants.
Personal lending
(Audited)
Residential mortgages including loan commitments by
level of collateral
2017 2016
HK$m HK$m
Unimpaired loans
Fully collateralised 905,997 807,534
Partially collateralised
- greater than 100% LTV (A) 420 320
- collateral value on A 378 206
--------- --------
Not collateralised 44 15
At 31 Dec 906,461 807,869
------------------------------------ --------- --------
Impaired loans
Fully collateralised 2,223 1,913
- less than 70% LTV 1,635 1,410
- 71% to 90% LTV 498 372
- 91% to 100% LTV 90 131
--------- --------
Partially collateralised
- greater than 100% LTV (B) 80 51
- collateral value on B 69 42
--------- --------
Not collateralised 1 1
2,304 1,965
At 31 Dec 908,765 809,834
------------------------------------ --------- --------
The above table shows residential mortgage lending including
off-balance sheet loan commitments, by level of collateral. The
collateral included in the table above consists of fixed first
charges on real estate.
The LTV ratio is calculated as the gross on-balance sheet
carrying amount of the loan and any off-balance sheet loan
commitment at the balance sheet date divided by the value of
collateral. The methodologies for obtaining residential property
collateral values vary throughout the group, but are typically
determined through a combination of professional appraisals, house
price indices or statistical analysis. Valuations are updated on a
regular basis and,
as a minimum, at intervals of every three years. Valuations are
conducted more frequently when market conditions or portfolio
performance are subject to significant change or where a loan is
identified and assessed as impaired.
Other personal lending
Other personal lending consists primarily of personal loans,
overdrafts and credit cards, all of which are generally unsecured,
except lending to private banking customers which are generally
secured.
Corporate, commercial and non-bank financial institutions
lending
(Audited)
Collateral held is analysed below separately for commercial real
estate and for other corporate, commercial and non-bank
financial
institutions lending. This reflects the difference in level of
collateral held on the portfolios. In each case, the analysis
includes off-balance sheet loan commitments, primarily undrawn
credit lines.
Commercial real estate loans and advances including
loan commitments by level of collateral
2017 2016
HK$m HK$m
Rated CRR/EL 1 to 7 392,706 318,874
--------
Not collateralised 143,315 98,601
Fully collateralised 236,710 211,694
Partially collateralised (A) 12,681 8,579
-------- --------
- collateral value on A 7,616 4,283
--------
Rated CRR/EL 8 3 3
--------
Not collateralised - -
Fully collateralised 3 2
Partially collateralised (B) - 1
- collateral value on B - 1
--------
Rated CRR/EL 9 to 10 128 168
--------
Not collateralised 10 25
Fully collateralised 72 101
Partially collateralised (C) 46 42
-------- --------
- collateral value on C 33 46
--------
At 31 Dec 392,837 319,045
------------------------------------- -------- --------
The collateral included in the table above consist of fixed
first charges on real estate and charges over cash for the
commercial real estate sector. The table includes lending to major
property developers which is typically secured by guarantees or is
unsecured.
The value of commercial real estate collateral is determined
through a combination of professional and internal valuations and
physical inspection. Due to the complexity of collateral valuations
for commercial real estate, local valuation policies determine the
frequency of review based on local market conditions. Revaluation
are sought with greater frequency where, as part of the regular
credit assessment of the obligor, material concerns arise in
relation to the transaction which may reflect on the underlying
performance of the collateral, or in circumstances where an
obligor's credit quality has declined sufficiently to cause concern
that the principal payment source may not fully meet the obligation
(i.e. the obligor's credit quality classification indicates it is
at the lower end e.g. sub-standard, or approaching impaired).
Other corporate, commercial and non-bank financial
institutions loans and advances rated CRR/EL 8 to
10 only, including loan
commitments, by level of collateral
(Audited)
2017 2016
HK$m HK$m
Rated CRR/EL 8 1,492 3,258
Not collateralised 331 3,139
Fully collateralised 68 24
Partially collateralised (A) 1,093 95
- collateral value on A 97 25
Rated CRR/EL 9 to 10 12,774 15,033
Not collateralised 7,236 6,581
Fully collateralised 2,858 3,472
Partially collateralised (B) 2,680 4,980
- collateral value on B 1,625 2,081
At 31 Dec 14,266 18,291
-------------------------------------- ------- -------
The collateral used in the assessment of the above primarily
includes first legal charges over real estate and charges over cash
in the commercial and industrial sector, and charges over cash and
marketable financial instruments in the financial sector.
It should be noted that the table above excludes other types of
collateral which are commonly taken for corporate and commercial
lending such as unsupported guarantees and floating charges over
the assets of a customer's business. While such mitigants have
value, and often provide rights in insolvency, their assignable
value is insufficiently certain. They are assigned no value for
disclosure purposes.
As with commercial real estate, the value of real estate
collateral included in the table above is generally determined
through a combination of professional and internal valuations and
physical inspection. The frequency of revaluation is undertaken on
a similar basis to commercial real estate loans and advances;
however, for lending activities that are not predominantly
commercial real
estate-oriented, collateral value is not as strongly correlated
to principal repayment performance. Collateral values will
generally be refreshed when an obligor's general credit performance
deteriorates and it is necessary to assess the likely performance
of secondary sources of repayment should reliance upon them prove
necessary. For this reason, the table above reports values only for
customers with CRR 8 to 10, reflecting that these loans and
advances generally have valuations which are comparatively recent.
For the purposes of the table above, cash is valued at its nominal
value and marketable securities at their fair value.
Placings with and advances to banks
(Audited)
Placings with and advances to banks are typically unsecured. At
31 December 2017, 2% of the placings with and advances to banks
rated CRR/EL 1 to 7, including loan commitments, are fully
collateralised (2016: 4%).
Derivatives
(Audited)
The International Swaps and Derivatives Association ('ISDA')
Master Agreement is our preferred agreement for documenting
derivatives activity. It provides the contractual framework within
which dealing activity across a full range of over the counter
('OTC') products is conducted, and contractually binds both parties
to apply close-out netting across all outstanding transactions
covered by an agreement if either party defaults or another
pre-agreed termination event occurs. It is common, and our
preferred practice, for the parties to execute a Credit Support
Annex ('CSA') in conjunction with the ISDA Master Agreement. Under
a CSA, collateral is passed between the parties to mitigate the
counterparty risk inherent in outstanding positions. The majority
of our CSAs are with financial institution clients. Please refer to
note 33 'Offsetting of financial assets and liabilities' for
further details.
Other credit risk exposures
(Audited)
In addition to collateralised lending described above, other
credit enhancements are employed and methods used to mitigate
credit risk arising from financial assets. These are described in
more detail below.
Government, bank and other financial institution-issued
securities may benefit from additional credit enhancement, notably
through government guarantees that reference these assets.
Corporate-issued debt securities are primarily unsecured. Debt
securities issued by banks and financial institutions include
asset-backed securities ('ABS') and similar instruments, which are
supported by underlying pools of financial assets. Credit risk
associated with ABS is reduced through the purchase of credit
default swap ('CDS') protection.
The group's maximum exposure to credit risk includes financial
guarantees and similar arrangements that it issues or enters into,
and loan commitments to which it is irrevocably committed.
Depending on the terms of the arrangement, the bank may have
recourse to additional credit mitigation in the event that a
guarantee is called upon, or a loan commitment is drawn and
subsequently defaults. Further information about these arrangements
is provided in note 31 'Contingent liabilities and
commitments'.
Liquidity and Funding Risk Management
(Audited)
Liquidity and funding risk management framework
HSBC has an internal liquidity and funding risk management
framework ('LFRF') which aims to allow it to withstand very severe
liquidity stresses. It is designed to be adaptable to changing
business models, markets and regulations.
The management of liquidity and funding is primarily undertaken
locally (by country) in our operating entities in compliance with
the Group's LFRF, and with practices and limits set by the Group
Management Board ('GMB') through the RMM and approved by the Board.
Our general policy is that each defined operating entity should be
self-sufficient in funding its own activities.
The Group Treasurer, who reports to the Group CFO, has
responsibility for the oversight of the LFRF. Asset, Liability and
Capital Management ('ALCM') teams are responsible for the
application of the LFRF at a local operating entity level.
As part of the HSBC Group's ALCM, we have established Asset and
Liability Management Committees ('ALCOs') at the group and
operating entity level. The terms of reference of all ALCOs include
the monitoring and control of liquidity and funding.
Operating entities are predominately defined on a country basis
to reflect our local management of liquidity and funding.
Typically, an operating entity will be defined as a single branch
or legal entity.
The Board is ultimately responsible for determining the types
and magnitude of liquidity risk that the group is able to take
and
ensuring that there is an appropriate organisation structure for
managing this risk. Under authorities delegated by the Board, the
group ALCO is responsible for managing all ALCM issues including
liquidity and funding risk management.
The group ALCO delegates to the group Tactical Asset and
Liability Management Committee ('TALCO') the task of reviewing
various analyses of the group pertaining to sites' liquidity and
funding. TALCO's primary responsibilities include but are not
limited to:
-- reviewing the funding structure of operating entities and the
allocation of liquidity among them; and
-- monitoring liquidity and funding limit breaches and providing
direction to those operating entities that have not been able to
rectify breaches on a timely basis.
Compliance with liquidity and funding requirements is monitored
by local ALCO who report to the group ALCO on a regular basis. This
process includes:
-- maintaining compliance with relevant regulatory requirements of the operating entity;
-- projecting cash flows under various stress scenarios and
considering the level of liquid assets necessary in relation
thereto;
-- monitoring liquidity and funding ratios against internal and regulatory requirements;
-- maintaining a diverse range of funding sources with adequate back-up facilities;
-- managing the concentration and profile of term funding;
-- managing contingent liquidity commitment exposures within pre-determined limits;
-- maintaining debt financing plans;
-- monitoring of depositor concentration in order to avoid undue
reliance on large individual depositors and ensuring a satisfactory
overall funding mix; and
-- maintaining liquidity and funding contingency plans. These
plans identify early indicators of stress conditions and describe
actions to be taken in the event of difficulties arising from
systemic or other crises, while minimising adverse long-term
implications for the business.
The LFRF is delivered using the following key aspects:
-- stand-alone management of liquidity and funding by operating entity;
-- minimum liquidity coverage ratio ('LCR') requirement for each operating entity;
-- minimum net stable funding ratio ('NSFR') requirement for each operating entity;
-- legal entity depositor concentration limit;
-- three-month and 12-month cumulative rolling term contractual
maturity limits covering deposits from banks, deposits from
non-bank financial institutions and securities issued;
-- annual individual liquidity adequacy assessment ('ILAA') by principal operating entity;
-- minimum LCR requirement by currency;
-- intraday liquidity;
-- liquidity funds transfer pricing; and
-- forward-looking funding assessments.
The two key objectives of the ILAA process are to:
-- demonstrate that all material liquidity and funding risks are
captured within the internal framework; and
-- validate the operating entity's risk tolerance/appetite by
demonstrating that reverse stress testing scenarios are acceptably
remote; and vulnerabilities have been assessed through the use of
severe stress scenarios.
Management of liquidity and funding risk
Liquidity coverage ratio
(Unaudited)
The LCR aims to ensure that a bank has sufficient unencumbered
high-quality liquid assets ('HQLA') to meet its liquidity needs in
a 30-calendar-day liquidity stress scenario. HQLA consist of cash
or assets that can be converted into cash at little or no loss of
value in markets.
At 31 December 2017, all the group's operating entities were
within the LCR risk tolerance level established by the Board and
applicable under the LFRF.
Net stable funding ratio
(Unaudited)
The NSFR requires institutions to maintain sufficient stable
funding relative to required stable funding, and reflects a bank's
long-term funding profile (funding with a term of more than a
year). It is designed to complement the LCR.
At 31 December 2017, all the group's operating entities were
within the NSFR risk tolerance level established by the Board and
applicable under the LFRF.
Depositor concentration and term funding maturity
concentration
(Unaudited)
The LCR and NSFR metrics assume a stressed outflow based on a
portfolio of depositors within each deposit segment. The validity
of these assumptions is challenged if the portfolio of depositors
is not large enough to avoid depositor concentration. Operating
entities are exposed to term re-financing concentration risk if the
current maturity profile results in future maturities being overly
concentrated in any defined period.
At 31 December 2017, all the group's operating entities were
within the risk tolerance levels set for depositor concentration
and term funding maturity concentration. These risk tolerances were
established by the Board and applicable under the LFRF.
Sources of funding
(Audited)
Our primary sources of funding are customer current accounts and
customer savings deposits payable on demand or at short notice. We
issue wholesale securities (secured and unsecured) to supplement
our customer deposits and change the currency mix, maturity profile
or location of our liabilities.
Currency mismatch
(Audited)
The group allows currency mismatches to provide some flexibility
in managing the balance sheet structure and to carry out foreign
exchange trading, on the basis that there is sufficient liquidity
in the swap market to support currency conversion in periods of
stress. The group sets limits on LCR by currency for all material
currencies based on liquidity in the swap markets. These limits are
approved and monitored by ALCO.
Additional contractual obligations
(Unaudited)
Under the terms of our current collateral obligations under
derivative contracts (which are ISDA compliant CSA contracts), the
additional collateral required to post in the event of one-notch
and two-notch downgrade in credit ratings is immaterial.
Liquidity regulation
(Unaudited)
The Banking (Liquidity) Rules ('BLR') were introduced by the
HKMA in 2014 and became effective from 1 January 2015. The group is
required to calculate its LCR on a consolidated basis in accordance
with rule 11(1) of the BLR. During 2017 the group is required to
maintain an LCR of not less than 80%, increasing in steps of 10%
each year to not less than 100% by January 2019.
The average LCRs for the period are as follows:
Quarter ended
31 Dec 30 Sep 30 Jun 31 Mar 31 Dec 30 Sept 30 Jun 30 Mar
2017 2017 2017 2017 2016 2016 2016 2016
% % % % % % % %
Average LCRs 153.6 158.0 162.1 170.9 184.9 189.6 193.6 186.6
-------------- ------ ------ ------ ------ ------ ------- ------ ------
The liquidity position of the group remained strong in 2017. The
average LCR decreased by 31.3% from 184.9% for the quarter ended 31
December 2016 to 153.6% for the quarter ended 31 December 2017,
mainly as a result of the growth in loans and advances to
customers.
The majority of HQLA included in the LCR are Level 1 assets as
defined in the BLR, which consist mainly of government debt
securities.
The total weighted amount of HQLA for the period are as
follows:
Weighted amount (average value) at
quarter ended
31 Dec 30 Sep 30 Jun 31 Mar 31 Dec 30 Sept 30 Jun 31 Mar
2017 2017 2017 2017 2016 2016 2016 2016
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
Level 1
assets 1,405,999 1,387,825 1,374,550 1,497,076 1,580,397 1,533,814 1,512,512 1,510,252
Level 2A
assets 65,248 67,923 60,895 60,761 59,571 64,572 64,381 55,134
Level 2B
assets 20,071 18,961 15,064 11,147 10,954 12,250 10,136 7,266
--------------
Total 1,491,318 1,474,709 1,450,509 1,568,984 1,650,922 1,610,636 1,587,029 1,572,652
-------------- --------- --------- --------- --------- --------- --------- --------- ---------
Further details of the group's liquidity information disclosures
can be viewed in the Banking Disclosure Statement 2017, which will
be available in the Regulatory Disclosure Section of our website:
www.hsbc.com.hk.
Market Risk
(Audited)
Market risk is the risk that movements in market factors,
including foreign exchange rates and commodity prices, interest
rates, credit spreads and equity prices, will reduce our income or
the value of our portfolios.
There were no significant changes to our policies and practices
for the management of market risk in 2017.
Exposure to market risk
Exposure to market risk
is separated into two portfolios:
* Trading portfolios comprise positions arising from
market-making and warehousing of customer-derived
positions.
* Non-trading portfolios comprise positions that
primarily arise from the interest rate management of
our retail and commercial banking assets and
liabilities, financial investments designated as
available-for-sale and held-to-maturity, and
exposures arising from our insurance operations.
============================================================
The diagram below illustrates the main business areas where
trading and non-trading market risks reside and market risk
measures to monitor and limit exposures.
Risk Trading
types risk
* Foreign exchange and commodities * Structural foreign exchange
* Interest rates * Interest rates
* Credit spreads * Credit spreads
* Equities
-----------------------------------
Global GB&M incl GB&M, BSM,
business BSM GPB, CMB
and RBWM
-----------------------------------
Risk VaR | Sensitivity VaR | Sensitivity
measure | Stress | Stress
Testing Testing
---------- ---------------------------------------- -----------------------------------
Note-Balance Sheet Management ('BSM'), for external reporting
purposes, forms part of Corporate Centre while daily operations and
risk are managed within GB&M.
Where appropriate, the group applies similar risk management
policies and measurement techniques to both trading and non-trading
portfolios. The group's objective is to manage and control market
risk exposures in order to optimise return on risk while
maintaining a market profile consistent with the status as a member
of one of the world's largest banking and financial services
organisations.
The nature of the hedging and risk mitigation strategies
performed across the group corresponds to the market risk
management instruments available within each operating
jurisdiction. These strategies range from the use of traditional
market instruments, such as interest rate swaps, to more
sophisticated hedging strategies to address a combination of risk
factors arising at portfolio level.
Market risk governance
(Unaudited)
Market risk is managed and controlled through limits approved by
the Risk Management Meeting of the GMB for HSBC Holdings plc and
the various global businesses. These limits are allocated across
business lines and to the group's legal entities. The management of
market risk is principally undertaken in Global Markets through
risk limits. Value at Risk limits are set for portfolios, products,
and risk types, with market liquidity and business need being the
primary factors in determining the level of limits set.
Each major operating entity has an independent market risk
management and control function which is responsible for measuring
market risk exposures in accordance with the policies defined by
Group Risk, and monitoring and reporting these exposures against
the prescribed limits on a daily basis. Each operating entity is
required to assess the market risks arising on each product in its
business and to transfer them to either its local Markets unit for
management, or to separate books managed under the supervision of
the local ALCO.
Our aim is to ensure that all market risks are consolidated
within operations that have the necessary skills, tools, management
and governance to manage them. In certain cases where the market
risks cannot be fully transferred, we identify the impact of
varying scenarios on valuations or on net interest income resulting
from any residual risk positions.
Model risk is governed through Model Oversight Committees
('MOCs') at the regional and Global Wholesale Credit and Market
Risk ('WCMR') level. They have direct oversight and approval
responsibility for all traded risk models utilised for risk
measurement and management and stress testing. The MOCs prioritise
the development of models, methodologies and practices used for
traded risk management and ensure that they remain within our risk
appetite and business plans. The Markets MOC reports into the Group
MOC, which oversees all risk types at Group level. Group MOC
informs the Risk Management Meeting of the GMB about material
issues at least on a bi-annual basis. The Risk Management Meeting
is the Group's 'Designated Committee' according to the regulatory
rules and it has delegated day-to-day governance of all traded risk
models to the Global WCMR MOC.
Our control of market risk in the trading and non-trading
portfolios is based on a policy of restricting individual
operations to trading within a list of permissible instruments
authorised for each site by Group Risk, of enforcing new product
approval procedures, and of restricting trading in the more complex
derivative products only to sites with appropriate levels of
product expertise and robust control systems.
Market risk measures
(Audited)
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with our risk
appetite. We use a range of tools to monitor and limit market risk
exposures including sensitivity analysis, VaR and stress
testing.
Sensitivity analysis
(Unaudited)
Sensitivity analysis measures the impact of individual market
factor movements on specific instruments or portfolios including
interest rates, foreign exchange rates and equity prices, for
example, the impact of a one basis point change in yield. We use
sensitivity measures to monitor the market risk positions within
each risk type.
Sensitivity limits are set for portfolios, products and risk
types, with the depth of the market being one of the principal
factors in determining the level of limits set.
Value at risk
VaR is a technique that estimates the potential losses on risk
positions as a result of movements in market rates and prices over
a specified time horizon and to a given level of confidence. The
use of VaR is integrated into market risk management and is
calculated for all trading positions regardless of how the group
capitalises those exposures. Where there is no approved internal
model, the group uses the appropriate local rules to capitalise
exposures.
In addition, the group calculates VaR for non-trading portfolios
in order to have a complete picture of market risk. Where VaR is
not calculated explicitly, alternative tools are used as summarised
in the Market Risk stress testing section below.
Our models are predominantly based on historical simulation
which incorporate the following features:
-- historical market rates and prices are calculated with
reference to foreign exchange rates and commodity prices, interest
rates, equity prices and the associated volatilities;
-- potential market movements utilised for VaR are calculated
with reference to data from the past two years; and
-- VaR measures are calculated to a 99% confidence level and use a one-day holding period.
The models also incorporate the effect of the option features on
the underlying exposures. The nature of the VaR models means that
an increase in observed market volatility will lead to an increase
in VaR without any changes in the underlying positions.
VaR model limitations
Although a valuable guide to risk, VaR should always be viewed
in the context of its limitations. For example:
-- the use of historical data as a proxy for estimating future
events may not encompass all potential events, particularly those
which are extreme in nature;
-- the use of a holding period assumes that all positions can be
liquidated or the risks offset during that period. This may not
fully reflect the market risk arising at times of severe
illiquidity, when the holding period may be insufficient to
liquidate or hedge all positions fully;
-- the use of a 99% confidence level, by definition does not
take into account losses that might occur beyond this level of
confidence; and
-- VaR is calculated on the basis of exposures outstanding at
the close of business and therefore does not necessarily reflect
intra-day exposures.
Back-testing
We routinely validate the accuracy of our VaR models by
back-testing them against both actual and hypothetical profit and
loss against the trading VaR numbers. Hypothetical profit and loss
excludes non-modelled items such as fees, commissions and revenues
of intra-day transactions.
We would expect on average to see two to three profits, and two
or three losses, in excess of VaR at the 99% confidence level over
a one-year period. The actual number of profits or losses in excess
of VaR over this period can therefore be used to gauge how well the
models are performing. We back-test our group-level VaR which
reflects the full legal entity scope of the group, including
entities that do not have local permission to use VaR for
regulatory purposes.
Risk not in VaR framework
(Unaudited)
The RNIV framework aims to manage and capitalise material market
risks that are not adequately covered in the VaR model.
Risk factors are reviewed on a regular basis and either
incorporated directly in the VaR models, where possible, or
quantified through the VaR-based RNIV approach or a stress test
approach within the RNIV framework. The outcome of the VaR-based
RNIV is included in the VaR calculation and back-testing; a
stressed VaR RNIV is also computed for the risk factors considered
in the VaR-based RNIV approach. Stress-type RNIVs include a gap
risk exposure measure to capture risk on non-recourse margin loans
and a de-peg risk measure to capture risk to pegged and
heavily-managed currencies.
Stress testing
(Audited)
Stress testing is an important tool that is integrated into our
market risk management framework to evaluate the potential impact
on portfolio values of more extreme, although plausible, events or
movements in a set of financial variables. In such abnormal
scenarios, losses can be much greater than those predicted by VaR
modelling.
Stress testing is implemented at the legal entity, regional,
sites and the overall group levels. A standard set of scenarios is
utilised consistently across all sites within the group. Scenarios
are tailored to capture the relevant events or market movements at
each level. The risk appetite around potential stress losses for
the region is set and monitored against referral limits.
Market risk reverse stress tests are undertaken based upon the
premise that there is a fixed loss. The stress testing process
identifies which scenarios lead to this loss. The rationale behind
the reverse stress test is to understand scenarios which are beyond
normal business settings that could have contagion and systemic
implications.
Stressed VaR and stress testing, together with reverse stress
testing, provide management with insights regarding the 'tail risk'
beyond VaR for which the group's appetite is limited.
Market risk in 2017
(Unaudited)
Asian markets proved resilient to geopolitical/political shocks
in 2017 with robust economic growth, low inflation and subdued
market risk volatility generating rising asset prices for Asian
equities and fixed income markets. The prospect of continued US
interest rate hikes could attract capital outflows from emerging
markets and increase the cost of the USD funding globally and drain
funding liquidity away from the emerging markets. Geopolitical
events including the Korea Peninsula and US policy priorities were
among the key drivers for market volatility in 2017.
Trading portfolios
(Audited)
Value at risk of the trading portfolios
Trading VaR predominantly resides within Global Markets. This
was higher at 31 December 2017 compared to 31 December 2016 due to
an increase in the credit trading VaR and interest rate trading
VaR, which was driven by increase in the inventory position of the
fixed income business.
The trading VaR for the year is shown in the table below.
Trading value at risk, 99% 1 day(1)
Foreign
exchange Interest Credit Portfolio
and commodity rate Equity spread diversification(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2017
Year end 48 128 19 69 (123) 141
Average 48 118 13 28 111
Maximum 84 202 25 73 189
------------------ -------------- -------- ------ ------- --------------------- -----
At 31 Dec 2016
Year end 27 95 14 17 (56) 97
Average 52 108 13 23 110
Maximum 78 161 26 54 181
------------------ -------------- -------- ------ ------- --------------------- -----
1 Trading portfolios comprise positions arising from the
market-making and warehousing of customer-derived positions.
2 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types, for example,
interest rate, equity and foreign exchange, together in one
portfolio. It is measured as the difference between the sum of the
VaR by individual risk type and the combined total VaR. A negative
number represents the benefit of portfolio diversification. As the
maximum and minimum occur on different days for different risk
types, it is not meaningful to calculate a portfolio
diversification benefit for these measures.
Non-trading portfolios
(Unaudited)
Banking book interest rate risk is the risk of an adverse impact
to earnings or capital due to changes in market interest rates. The
risk arises from timing mismatches in the repricing of non-traded
assets and liabilities and is the potential adverse impact of
changes in interest rates on earnings and capital. In its
management of the risk, the group aims to mitigate the impact of
future interest rate movements which could reduce future net
interest income, while balancing the cost of hedging activities to
the current revenue stream. Monitoring the sensitivity of projected
net interest income under varying interest rate scenarios is a key
part of this.
In order to manage structural interest rate risk, non-traded
assets and liabilities are transferred to Balance Sheet Management
('BSM') based on their repricing and maturity characteristics. For
assets and liabilities with no defined maturity or repricing
characteristics, behaviouralisation is used to assess the interest
rate risk profile. BSM manages the banking book interest rate
positions transferred to it within the approved limits. Local ALCOs
are responsible for monitoring and reviewing their overall
structural interest rate risk position. Interest rate
behaviouralisation policies have to be formulated in line with the
Group's behaviouralisation policies and approved at least annually
by local ALCOs.
Sensitivity of net interest income
A principal part of our management of non-traded interest rate
risk is to monitor the sensitivity of expected net interest income
at least quarterly under varying interest rate scenarios
(simulation modelling), where all other economic variables are held
constant.
Sensitivity of net interest income reflects the group's
sensitivity of earnings due to changes in market interest rates.
Entities forecast net interest income sensitivities across a range
of interest rate scenarios based on a static balance sheet
assumption. Sites include business line interest rate pass-on
assumptions, re-investment of maturing assets and liabilities at
market rates per shock scenario and prepayment risk. BSM is
modelled based on no management actions i.e. the risk profile at
the month end is assumed to remain constant throughout the forecast
horizon.
Structural foreign exchange exposures
(Unaudited)
Structural foreign exchange exposures, monitored using
sensitivity analysis, represent net investments in subsidiaries,
branches and associates, the functional currencies of which are
currencies other than the HK dollar. An entity's functional
currency is that of the primary economic environment in which the
entity operates.
Exchange differences on structural exposures are recognised in
'Other comprehensive income'.
We hedge structural foreign exchange exposures only in limited
circumstances. Our structural foreign exchange exposures are
managed with the primary objective of ensuring, where practical,
that our consolidated capital ratios and the capital ratios of
individual banking subsidiaries are largely protected from the
effect of changes in exchange rates. This is usually achieved by
ensuring that, for each subsidiary bank, the ratio of structural
exposures in a given currency to risk-weighted assets ('RWA')
denominated in that currency is broadly equal to the capital ratio
of the subsidiary in question.
We may also transact hedges where a currency in which we have
structural exposures is considered likely to revalue adversely, and
it is possible in practice to transact a hedge. Any hedging is
undertaken using forward foreign exchange contracts which are
accounted for under Hong Kong Financial Reporting Standards
('HKFRS') as hedges of a net investment in a foreign operation, or
by financing with borrowings in the same currencies as the
functional currencies involved.
The group had the following structural foreign currency
exposures that were not less than 10% of the total net structural
foreign currency positions:
HK$m
LCYm equivalent
At 31 Dec 2017
Renminbi 181,740 218,262
------- -----------
At 31 Dec 2016
Renminbi 170,111 189,993
---------------- ------- -----------
Operational Risk
(Unaudited)
Operational risk is the risk to achieving our strategy or
objectives as a result of inadequate or failed internal processes,
people and systems or from external events. Responsibility for
minimising operational risk lies with HSBC's staff. All staff are
required to manage the operational risks of the business and
operational activities for which they are responsible.
Operational risk management framework
HSBC's Operational Risk Management Framework ('ORMF') is our
overarching approach for managing operational risk, the purpose of
which is to:
-- identify and manage our operational risks in an effective manner;
-- remain within the operational risk appetite, which helps the
organisation to understand the level of risk it is willing to
accept; and
-- drive forward-looking risk awareness and assist management focus.
Business and functional managers throughout the organisation are
responsible for maintaining an acceptable level of internal control
commensurate with the scale and nature of operations, and for
identifying and assessing risks, designing controls and monitoring
the effectiveness of these controls. The ORMF helps managers to
fulfil these responsibilities by defining a standard risk
assessment methodology and providing a tool for the systematic
reporting of operational loss data.
A centralised database is used to record the results of the
operational risk management process. Operational risk and control
self-assessments are input and maintained by business units.
Business and functional management and business risk and control
managers monitor the progress of documented action plans to address
shortcomings. To ensure that operational risk losses are
consistently reported and monitored at group level, all group
companies are required to report individual losses when the net
loss is expected to exceed US$10,000, and to aggregate all other
operational risk losses under US$10,000. Losses are entered into
the Group Operational Risk database and are reported to the group
Risk Management Meeting on a monthly basis.
Activities to strengthen our risk culture and better embed the
use of the ORMF were further implemented in 2017. In particular,
the use of the activity-based 'Three lines of defence' model sets
out roles and responsibilities for managing operational risks on a
daily basis.
Exposures
(Unaudited)
HSBC continues to strengthen those controls that manage our most
material risks by:
-- further embedding Global Standards to ensure that we know and
protect our customers, ask the right questions and escalate
concerns;
-- increased monitoring and enhanced detective controls to
manage those fraud risks which arise from new technologies and new
ways of banking;
-- strengthening internal security controls to prevent cyber-attacks;
-- improving controls and security to protect customers when using digital channels.
-- enhancing controls associated with IT privileged access.
Regulatory Compliance Risk
(Unaudited)
Overview
The Regulatory Compliance ('RC') function provides independent,
objective oversight and challenge and promotes a
compliance-oriented culture, supporting the business in delivering
fair outcomes for customers, maintaining the integrity of financial
markets and achieving HSBC's strategic objectives.
Key risk management processes
We regularly review our policies and procedures. Global policies
and procedures require the prompt identification and escalation of
any actual or potential regulatory breach to RC. Reportable events
are escalated to the RMM and the Risk Committee, as
appropriate.
Conduct of business
In 2017, we continued to take steps to raise our standards
relating to conduct, which included:
-- delivering further global mandatory conduct training to all employees in 2018;
-- incorporating the assessment of expected values and
behaviours as key determinants in recruitment, performance
appraisal and remuneration processes;
-- improving our Group-wide market surveillance capability;
-- introducing policies and procedures to strengthen support for
potentially vulnerable customers;
-- enhancing the quality and depth of conduct management
information and how it is used across the Group;
-- implementing an assessment process to check the effectiveness
of our conduct initiatives across the Group; and
-- assessing conduct standards and practices within our key
third-party suppliers and distributors.
Financial Crime Risk
(Unaudited)
Overview
HSBC continued its progress towards implementing an effective
financial crime risk management capability across the Group. The
Group completed the roll-out of major compliance systems and
shifted our focus towards embedding a sustainable approach to
financial crime risk management everywhere we operate. This was
underpinned by the implementation of a target operating model for
the Financial Crime Risk function and by the completion of a
country-by-country assessment against our financial crime risk
framework.
Key risk management processes
During 2017, HSBC introduced a strengthened financial crime risk
management governance framework, mandating Financial Crime Risk
Management Committees with a standardised agenda at country, region
and global business line levels.
We strengthened our approach to affiliate risk management,
implementing an effective Group-level process to assess and
remediate affiliate risk, and established a strong investigations
and analytical capability to enable us to proactively identify
emergent risk issues.
The Monitor
Under the agreements entered into with the US Department of
Justice ('DoJ') and the UK Financial Conduct Authority ('FCA') in
2012, including the five-year Deferred Prosecution Agreement
('DPA'), the Monitor was appointed in July 2013 for an expected
five-year period to produce annual assessments of the effectiveness
of the Group's anti-money laundering ('AML') and sanctions
compliance programme. Additionally, under the cease and desist
order issued by the US Federal Reserve Board ('FRB') in 2012, the
Monitor also serves as an independent consultant to conduct annual
assessments.
On 11 December 2017 with the DoJ's agreement, the DPA expired.
Consistent with the DPA, the DoJ filed a motion with the US
District Court for the Eastern District of New York seeking the
dismissal of the charges deferred by the DPA. The motion was
granted and the charges were dismissed on 12 December 2017. The
Monitor will continue working in his capacity as a Skilled Person
and Independent Consultant for a period of time at the FCA's and
FRB's discretion.
Reputational Risk
(Unaudited)
Reputational risk is the failure to meet stakeholder
expectations as a result of any event, behaviour, action or
inaction, either by HSBC itself, our employees or those with whom
we are associated, that might cause stakeholders to form a negative
view of HSBC.
Reputational risk relates to perceptions, whether based on fact
or otherwise. Stakeholders' expectations are constantly changing
and thus reputational risk is dynamic and varies between
geographies, groups and individuals. As a global bank, we show
unwavering commitment to operating, and to be seen to be operating,
to the high standards we have set for ourselves in every
jurisdiction. Any lapse in standards of integrity, compliance,
customer service or operating efficiency represents a potential
reputational risk.
A number of measures to enhance our anti-money laundering,
sanctions and other regulatory compliance frameworks have been
taken and/or are ongoing. These measures, which should also serve
over time to enhance our reputational risk management, include the
following:
-- simplifying our business through the progressive
implementation of our Group strategy, including the adoption of a
global financial crime risk filter, which should help to
standardise our approach to doing business in higher risk
countries;
-- an increase in reputational risk resources in each region in
which we operate, and the introduction of a central case management
and tracking process for reputational risk and client relationship
matters;
-- the creation of combined reputational risk and client
selection committees within the global businesses, with a clear
process to escalate and address matters at the appropriate
level;
-- the continued roll-out of training and communication about
the HSBC Values programme that defines the way everyone in the
Group should act, and seeks to ensure that the Values are embedded
into our operations; and
-- the continuous development and implementation of Global
Standards around financial crime compliance, which underpin our
businesses. This includes ensuring globally consistent application
of policies that govern AML and sanctions compliance
provisions.
HSBC has zero tolerance for knowingly engaging in any business,
activity or association where foreseeable reputational damage has
not been considered and mitigated. There must be no barriers to
open discussion and escalation of issues that could affect the
Group negatively. While there is a level of risk in every aspect of
business activity, appropriate consideration of potential harm to
HSBC's good name must be a part of all business decisions.
Detecting and preventing illicit actors' access to the global
financial system calls for constant vigilance and we will continue
to cooperate closely with all governments to achieve success. This
is integral to the execution of our strategy, to HSBC Values and to
preserving and enhancing our reputation.
Risks of insurance manufacturing operations
(Audited)
The majority of the risk in our insurance business derives from
manufacturing activities and can be categorised as financial risk
and insurance risk. Financial risks include market risk, credit
risk and liquidity risk. Insurance risk is the risk, other than
financial risk, of loss transferred from the holder of the
insurance contract to the issuer (HSBC).
HSBC's bancassurance model
We operate an integrated bancassurance model which provides
insurance products principally for customers with whom we have a
banking relationship. The insurance contracts we sell relate to the
underlying needs of our banking customers, which we can identify
from our point-of-sale contacts and customer knowledge. The
majority of sales are of savings and investment products.
By focusing largely on personal and small and medium-sized
enterprise businesses, we are able to optimise volumes and
diversify individual insurance risks.
We choose to manufacture these insurance products in HSBC
subsidiaries based on an assessment of operational scale and risk
appetite. Manufacturing insurance allows us to retain the risks and
rewards associated with writing insurance contracts by keeping part
of the underwriting profit and investment income within the group.
It also reduces distribution costs for our products by using our
established branch network, and enables us to control the quality
of the sale process and the products themselves to ensure our
customers receive products which address their specific needs at
the best value. We have life insurance manufacturing operations in
six locations: mainland China, Hong Kong, India, Macau, Malaysia
and Singapore.
Where we do not have the risk appetite or operational scale to
be an effective insurance manufacturer, we engage with a handful of
leading external insurance companies in order to provide insurance
products to our customers through our banking network and direct
channels. These arrangements are generally structured with our
exclusive strategic partners and earn the group a combination of
commissions, fees and a share of profits. We distribute insurance
products in all of our geographical regions. Insurance products are
sold through all global businesses, but predominantly by RBWM and
CMB through our branches and direct channels.
Risk management of insurance manufacturing operations
Governance
Insurance risks are managed to a defined risk appetite, which is
aligned to the Group risk appetite and risk management framework,
including the Group's 'Three lines of defence' model. The group
Insurance Risk Management Meeting oversees the control framework
globally and is accountable to the RBWM Risk Management Meeting on
risk matters relating to insurance business.
The monitoring of the risks within the insurance operations is
carried out by the Insurance Risk teams. Specific risk functions,
including wholesale credit & market risk, operational risk,
information security risk and financial crime compliance, support
insurance risk teams in their respective areas of expertise.
Measurement
The risk profile of our insurance manufacturing businesses is
measured using an economic capital approach. Assets and liabilities
are measured on a market value basis and a capital requirement is
defined to ensure that there is a less than one-in-200 chance of
insolvency over a one-year time horizon, given the risks that the
businesses are exposed to. The methodology for the economic capital
calculation is largely aligned to the pan-European Solvency II
insurance capital regulation. The economic capital coverage ratio
(economic net asset value divided by the economic capital
requirement) is a key risk appetite measure. In addition to
economic capital, the regulatory solvency ratio is also a metric
used to manage risk appetite on an entity basis.
The tables below show the composition of assets and liabilities
by contract type. 91% (2016: 92%) of both assets and liabilities
are derived from Hong Kong.
Balance sheet of insurance manufacturing subsidiaries
by type of contract
Other
Non-linked Linked assets
contracts(1) contracts(2) and liabilities(3) Total
HK$m HK$m HK$m HK$m
At 31 Dec 2017
Financial assets:
- financial assets designated
at fair value 66,497 53,408 2,278 122,183
------------- ------------- ------------------- -------
- derivatives 1,336 1 2 1,339
------------- ------------- ------------------- -------
- financial investments -
held-to-maturity 274,909 - 26,034 300,943
------------- ------------- ------------------- -------
- financial investments -
available-for-sale 49,268 - 695 49,963
------------- ------------- ------------------- -------
- other financial assets 23,599 1,398 3,671 28,668
------------- ------------- ------------------- -------
Total financial assets 415,609 54,807 32,680 503,096
------------------------------- ------------- ------------- ------------------- -------
Reinsurance assets 15,974 155 - 16,129
------------- ------------- ------------------- -------
PVIF - - 44,621 44,621
------------- ------------- ------------------- -------
Other assets 8,279 4 4,026 12,309
------------- ------------- ------------------- -------
Total assets 439,862 54,966 81,327 576,155
------------------------------- ------------- ------------- ------------------- -------
Liabilities under investment
contracts designated at fair
value 30,364 7,905 - 38,269
------------- ------------- ------------------- -------
Liabilities under insurance
contracts 391,348 46,669 - 438,017
------------- ------------- ------------------- -------
Deferred tax 409 - 7,668 8,077
------------- ------------- ------------------- -------
Other liabilities - - 12,330 12,330
------------- ------------- ------------------- -------
Total liabilities 422,121 54,574 19,998 496,693
------------------------------- ------------- ------------- ------------------- -------
Total equity - - 79,462 79,462
------------------------------- ------------- ------------- ------------------- -------
Total equity and liabilities 422,121 54,574 99,460 576,155
------------------------------- ------------- ------------- ------------------- -------
At 31 Dec 2016
Financial assets:
- financial assets designated
at fair value 56,863 48,644 107 105,614
- derivatives 660 17 1 678
- financial investments -
held-to-maturity 238,126 - 22,641 260,767
- financial investments -
available-for-sale 43,412 - 1,071 44,483
- other financial assets 24,194 1,091 3,955 29,240
Total financial assets 363,255 49,752 27,775 440,782
------------------------------- ------------- ------------- ------------------- -------
Reinsurance assets 10,321 1,308 - 11,629
PVIF - - 44,077 44,077
Other assets 7,665 3 3,894 11,562
Total assets 381,241 51,063 75,746 508,050
------------------------------- ------------- ------------- ------------------- -------
Liabilities under investment
contracts designated at fair
value 29,511 6,792 - 36,303
Liabilities under insurance
contracts 342,134 44,036 - 386,170
Deferred tax 159 - 6,981 7,140
Other liabilities - - 10,540 10,540
Total liabilities 371,804 50,828 17,521 440,153
Total equity - - 67,897 67,897
------------------------------- ------------- ------------- ------------------- -------
Total equity and liabilities 371,804 50,828 85,418 508,050
------------------------------- ------------- ------------- ------------------- -------
1 Comprises life non-linked insurance contracts, non-linked
investment contracts and remaining non-life insurance
contracts.
2 Comprises life linked insurance contracts and linked
investment contracts.
3 Comprises shareholder assets and liabilities.
Stress and scenario testing
Stress testing forms a key part of the risk management framework
for the insurance business. We participate in local and Group-wide
regulatory stress tests, including the Bank of England stress test
of the banking system, the Hong Kong Monetary Authority stress
test, and individual country insurance regulatory stress tests.
These have highlighted that a key risk scenario for the
insurance business is a prolonged low interest rate environment. In
order to mitigate the impact of this scenario, the insurance
operations have a range of strategies that could be employed
including the hedging of investment risk, repricing current
products to reflect lower interest rates, improving risk
diversification, moving towards less capital intensive products,
and developing investment strategies to optimise the expected
returns against the cost of economic capital.
Key Risk Types
The key risks for our insurance operations are market risks (in
particular interest rate and equity) and credit risks, followed by
insurance underwriting risks and operational risks. Liquidity risk,
while significant for the bank, is minor for our insurance
operations.
Market risk (insurance)
Market risk is the risk of changes in market factors affecting
capital or
profit. Market factors include interest rates, equity and growth
assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued.
Our most significant life insurance products are contracts with
discretionary participating features ('DPF') issued in Hong Kong.
These products typically include some form of capital guarantee or
guaranteed return, on the sums invested by the policyholders, to
which discretionary bonuses are added if allowed by the overall
performance of the funds. These funds are primarily invested in
bonds with a proportion allocated to other asset classes, to
provide customers with the potential for enhanced returns.
DPF products expose HSBC to the risk of variation in asset
returns, which will impact our participation in the investment
performance. In addition, in some scenarios the asset returns can
become insufficient to cover the policyholders' financial
guarantees, in which case the shortfall has to be met by HSBC.
Reserves are held against the cost of such guarantees, calculated
by stochastic modelling.
For unit-linked contracts, market risk is substantially borne by
the policyholders, but some market risk exposure typically remains
as fees earned are related to the market value of the linked
assets.
All our insurance manufacturing subsidiaries have market risk
mandates which specify the investment instruments in which they are
permitted to invest and the maximum quantum of market risk which
they may retain. They manage market risk by using, among others,
some or all of the techniques listed below, depending on the nature
of the contracts written:
-- For products with DPF, adjusting bonus rates to manage the
liabilities to policyholders. The effect is that a significant
portion of the market risk is borne by the policyholders.
-- Asset and liability matching where asset portfolios are
structured to support projected liability cash flows. The group
manages its assets using an approach that considers asset quality,
diversification, cash flow matching, liquidity, volatility and
target investment return. It is not always possible to match asset
and liability durations due to uncertainty over the receipt of all
future premiums and the timing of claims; and because the forecast
payment dates of liabilities may exceed the duration of the longest
dated investments available. We use models to assess the effect of
a range of future scenarios on the values of financial assets and
associated liabilities, and ALCOs employ the outcomes in
determining how best to structure asset holdings to support
liabilities.
--
Using derivatives to protect against adverse market movements or
better match liability cash flows.
-- For new products with investment guarantees, considering the
cost when determining the level of premiums or the price
structure.
-- Periodically reviewing products identified as higher risk,
which contain investment guarantees and embedded optionality
features linked to savings and investment products for active
management.
-- Designing new products to mitigate market risk, such as
changing the investment return sharing portion between
policyholders and the shareholder.
-- Exiting, to the extent possible, investment portfolios whose risk is considered unacceptable.
-- Repricing premiums charged to policyholders.
The following table illustrates the effects of selected interest
rate, equity price and foreign exchange rate scenarios on our
profit for the year and the total equity of our insurance
manufacturing subsidiaries.
31 Dec 2017 31 Dec 2016
Impact Impact
on profit Impact on profit Impact
after on after on
tax for total tax for total
the year equity the year equity
HK$m HK$m HK$m HK$m
+100 basis points parallel
shift in yield curves 97 (4,525) (56) (4,137)
-100 basis points parallel
shift in yield curves (651) 4,976 (371) 4,575
10% increase in equity prices 1,534 1,643 1,345 1,347
10% decrease in equity prices (1,560) (1,669) (1,354) (1,357)
10% increase in USD exchange
rate compared to all currencies 177 177 143 143
10% decrease in USD exchange
rate compared to all currencies (177) (177) (143) (143)
---------------------------------- --------- ------ --------- ------
Where appropriate, the effects of the sensitivity tests on
profit after tax and total equity incorporate the impact of the
stress on the PVIF. The relationship between the profit and total
equity and the risk factors is non-linear; therefore the results
disclosed should not be extrapolated to measure sensitivities to
different levels of stress. For the same reason, the impact of the
stress is not symmetrical on the upside and downside. The
sensitivities reflect the established risk sharing mechanism with
policyholders for participating products, and are stated before
allowance for management actions which may mitigate the effect of
changes in the market environment. The sensitivities presented
allow for adverse changes in policyholders' behaviour that may
arise in response to changes in market rates.
Interest rate movements have a greater impact on total equity as
changes in market value of available-for-sale bonds are not
recognised in profit after tax.
Credit risk (insurance)
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet their obligation under a contract. It
arises in two main areas for our insurance manufacturers:
-- risk associated with credit spread volatility and default by
debt security counterparties after investing premiums to generate a
return for policyholders and shareholders; and
-- risk of default by reinsurance counterparties and
non-reimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect of
these items are shown in the table on page 31.
Our insurance manufacturing subsidiaries are responsible for the
credit risk, quality and performance of their investment
portfolios. Our assessment of the creditworthiness of issuers and
counterparties is based primarily upon internationally recognised
credit ratings and other publicly available information. Investment
credit exposures are monitored against limits by our local
insurance manufacturing subsidiaries, and are aggregated and
reported to Group Insurance Credit Risk and Group Credit Risk
functions. Stress testing is performed by Group Insurance on
investment credit exposures using credit spread sensitivities and
default probabilities.
We use tools to manage and monitor credit risk. These include a
credit report containing a watch-list of investments with current
credit concerns, primarily investments that may be at risk of
future impairment or where high concentrations to counterparties
are present in the investment portfolio. The report is circulated
monthly to senior management in Group Insurance and the individual
country Chief Risk Officers to identify investments which may be at
risk of future impairment.
Credit risk on assets supporting unit-linked liabilities is
predominantly borne by the policyholders; therefore our exposure is
primarily related to liabilities under non-linked insurance and
investment contracts and shareholders' funds. The credit quality of
insurance financial assets is included in the table on page 20.
The credit quality of the reinsurers' share of liabilities under
insurance contracts is assessed as 'strong' or 'good' (as defined
on page 19), with 100% of the exposure being neither past due nor
impaired (2016: 100%).
Liquidity risk (insurance)
Liquidity risk is the risk that an insurance operation, though
solvent, either does not have sufficient financial resources
available to meet its obligations when they fall due, or can secure
them only at excessive cost.
Risk is managed by cashflow matching and maintaining sufficient
cash resources; investing in high-credit-quality investments with
deep and liquid markets, monitoring investment concentrations and
restricting them where appropriate, and establishing committed
contingency borrowing facilities. Insurance manufacturing
subsidiaries are required to complete quarterly liquidity risk
reports for Group Insurance Risk function and an annual review of
the liquidity risks to which they are exposed.
The following table shows the expected undiscounted cash flows
for insurance contract liabilities at 31 December 2017. The
liquidity risk exposure is wholly borne by the policyholders in the
case of unit-linked business and is shared with the policyholders
for non-linked insurance. The remaining contractual maturity of
investment contract liabilities is included in the table on page
81.
Expected maturity of insurance contract liabilities
Expected cash flows (undiscounted)
Within 5-15 Over
1 year 1-5 years years 15 years Total
HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2017
Non-linked insurance contracts 37,445 133,236 268,173 291,343 730,197
------- --------- ------- --------- -------
Linked insurance contracts 4,523 20,357 32,084 48,606 105,570
------- --------- ------- --------- -------
41,968 153,593 300,257 339,949 835,767
-------------------------------- ------- --------- ------- --------- -------
At 31 Dec 2016
Non-linked insurance contracts 28,980 118,623 255,449 252,421 655,473
Linked insurance contracts 3,025 16,492 35,559 70,238 125,314
32,005 135,115 291,008 322,659 780,787
-------------------------------- ------- --------- ------- --------- -------
Insurance risk
Insurance risk is the risk of loss through adverse experience,
in either timing or amount, of insurance underwriting parameters
(non-economic assumptions). These parameters include mortality,
morbidity, longevity, lapses and unit costs.
The principal risk we face is that, over time, the cost of the
contract, including claims and benefits may exceed the total amount
of premiums and investment income received. The table on page 32
analyses our life insurance risk exposures by type of contract.
HSBC Insurance primarily manages and mitigates its insurance
risk through asset and liability management, product design,
pricing and overall proposition management (e.g. management of
lapses by introducing surrender charges), underwriting policy,
claims management process and reinsurance which cedes risks above
our acceptable thresholds to an external reinsurer thereby limiting
our exposure.
Present value of in-force long-term insurance business
In calculating PVIF, expected cash flows are projected after
adjusting for a variety of assumptions made by each insurance
operation to reflect local market conditions and management's
judgement of future trends, and after applying risk margins to
reflect any uncertainty in the underlying assumptions. Variations
in actual experience and changes to assumptions can contribute to
volatility in the results of the insurance business.
Actuarial Control Committees for each key insurance entity meet
on a quarterly basis to review and approve assumptions proposed for
use in the determination of the PVIF. All changes to non-economic
assumptions, economic assumptions that are not observable and model
methodology must be approved by the Actuarial Control
Committee.
Economic assumptions are either set in a way that is consistent
with observable market values or, in certain markets, long-term
economic assumptions are used. Setting such assumptions involves
the projection of long-term interest rates and the time horizon
over which observable market rates trend towards these long-term
assumptions. The assumptions are informed by relevant historical
data and by research and analysis performed by the Group's Economic
Research team and external experts, including regulatory bodies.
The valuation of PVIF will be sensitive to any changes in these
long-term assumptions in the same way that it is sensitive to
observed market movements, and the impact of such changes is
included in the sensitivities presented below.
The group sets the risk discount rate applied to the PVIF
calculation by starting from a risk-free rate curve and adding
explicit allowances for risks not reflected in the best estimate
cash flow modelling. Where shareholders provide options and
guarantees to policyholders, the cost of these options and
guarantees is an explicit reduction to PVIF.
The following table shows the impact on the PVIF from changes in
the risk-free rate at 31 December, across all insurance
manufacturing subsidiaries.
Impact on
PVIF
2017 2016
HK$m HK$m
+ 100 basis points
shift in risk-free
rate 166 67
- 100 basis points
shift in risk-free
rate 1,513 379
--------------------- ------- ----
The impact on PVIF shown above, as well as the impacts on profit
after tax and net assets shown below, are illustrative only and
employ simplified scenarios. It should be noted that the effects
may not be linear and, therefore, the results cannot be
extrapolated. The sensitivities reflect the established risk
sharing mechanism with policyholders for participating products,
but do not incorporate other actions that could be taken by
management to mitigate effects, nor do they take account of
consequential changes in policyholders' behaviour.
Non-economic assumptions
The table below shows the sensitivity of profit and total equity
to reasonably possible changes in non-economic assumptions across
all our insurance manufacturing subsidiaries.
Impact on Impact on
2017 results 2016 results
Profit Profit
after Total after Total
tax equity tax equity
HK$m HK$m HK$m HK$m
10% increase in mortality and/or
morbidity rates (454) (454) (464) (464)
10% decrease in mortality and/or
morbidity rates 459 459 467 467
10% increase in lapse rates (434) (434) (398) (398)
10% decrease in lapse rates 495 495 452 452
10% increase in expense rates (328) (328) (331) (331)
10% decrease in expense rates 315 315 318 318
---------------------------------- ------- ------ ------- ------
Mortality and morbidity risk is typically associated with life
insurance contracts. The effect on profit of an increase in
mortality or morbidity depends on the type of business being
written.
Sensitivity to lapse rates depends on the type of contracts
being written. In general, for life insurance contracts a policy
lapse has two offsetting effects on profits, which are the loss of
future income on the lapsed policy and the existence of surrender
charge
recouped at policy lapse. The net impact depends on the relative
size of these two effects which varies with the type of
contracts.
Expense rates risk is the exposure to a change in the cost of
administering insurance contracts. To the extent that increased
expenses cannot be passed on to policyholders, an increase in
expense rates will have a negative effect on our profits.
Capital
Capital Management
(Audited)
Our approach to capital management is driven by our strategic
and organisational requirements, taking into account the
regulatory, economic and commercial environment in which we
operate.
It is our objective to maintain a strong capital base to support
the development of our business and to meet regulatory capital
requirements at all times. To achieve this, our policy is to hold
capital in a range of different forms and all capital raising is
agreed with major subsidiaries as part of their individual and the
group's capital management processes.
The policy on capital management is underpinned by a capital
management framework, which enables us to manage our capital in a
consistent manner. The framework defines regulatory capital and
economic capital as the two primary measures for the management and
control of capital.
Capital measures:
-- economic capital is the internally calculated capital
requirement to support risks to which we are exposed and forms a
core part of the internal capital adequacy assessment process;
and
-- regulatory capital is the capital which we are required to
hold in accordance with the rules established by regulators.
Our capital management process is articulated in our annual
capital plan which is approved by the Board. The plan is drawn up
with the objective of maintaining both an appropriate amount of
capital and an optimal mix between the different components of
capital. Each subsidiary manages its own capital to support its
planned business growth and meet its local regulatory requirements
within the context of the approved annual group capital plan. In
accordance with the Capital Management Framework, capital generated
by subsidiaries in excess of planned requirements is returned to
the Bank, normally by way of dividends.
The Bank is primarily the provider of capital to its
subsidiaries and these investments are substantially funded by the
Bank's own capital issuance and profit retention. As part of its
capital management process, the Bank seeks to maintain a prudent
balance between the composition of its capital and that of its
investment in subsidiaries.
The principal forms of capital are included in the following
balances on the consolidated balance sheet: share capital, other
equity instruments, retained earnings, other reserves, preference
shares and subordinated liabilities.
Externally imposed capital requirements
(Unaudited)
The Hong Kong Monetary Authority ('HKMA') supervises the group
on both a consolidated and solo-consolidated basis and therefore
receives information on the capital adequacy of, and sets capital
requirements for, the group as a whole and on a solo-consolidated
basis. Individual banking subsidiaries and branches are directly
regulated by their local banking supervisors, who set and monitor
their capital adequacy requirements. In most jurisdictions,
non-banking financial subsidiaries are also subject to the
supervision and capital requirements of local regulatory
authorities.
The group uses the advanced internal ratings-based approach to
calculate its credit risk for the majority of its
non-securitisation exposures and the internal ratings-based
(securitisation) approach to determine credit risk for its banking
book securitisation exposures. For market risk, the group uses an
internal models approach to calculate its general market risk for
the risk categories of interest rate exposures, foreign exchange
(including gold) exposures, and equity exposures. The group also
uses an internal models approach to calculate its market risk in
respect of specific
risk for interest rate exposures and equity exposures. The group
uses the standardised (market risk) approach for calculating other
market risk positions as well as trading book securitisation
exposures, and the standardised (operational risk) approach to
calculate its operational risk.
During the year, the individual entities within the group and
the group itself complied with all of the externally imposed
capital requirements of the HKMA.
Basel III
(Unaudited)
Since December 2010, the Basel Committee has developed a
comprehensive set of reform measures covering additional capital,
leverage and liquidity requirements, commonly referred to as 'Basel
III'.
The Basel III capital rules set out the minimum common equity
tier 1 ('CET1') requirement of 4.5% and a minimum total capital
requirement of 8% from 1 January 2015.
The Banking (Capital) (Amendment) Rules 2014 came into effect on
1 January 2015 to implement the Basel III capital buffer
requirements in Hong Kong. The changes include the phase-in from
2016 to 2019 of the Capital Conservation Buffer ('CCB') which is
designed to ensure banks build up capital outside periods of stress
of 2.5% of RWAs, the Countercyclical Capital Buffer ('CCyB') which
is set on an individual country basis and is built up during
periods of excess credit growth to protect against future losses,
and the Higher Loss Absorbency ('HLA') requirement for Domestic
Systemically Important Banks ('D-SIB') of up to 3.5% of RWAs. The
CCyB for Hong Kong is 1.25% from 1 January 2017 and 1.875% from 1
January 2018. The HKMA announced on 10 January 2018 that it will be
increased to 2.5% from 1 January 2019. This increase is consistent
with the Basel III phase-in arrangements for the CCyB. On 16 March
2015, the HKMA announced the designation of the group as a D-SIB
and the HLA requirement to be 2.5% of RWAs which started to
phase-in from 0.625% in 2016 and will reach full implementation in
2019. On 29 December 2017, the HKMA confirmed the designation of
the group as a D-SIB as well as the HLA requirements.
Total Loss Absorbing Capacity proposals
(Unaudited)
In November 2014, as part of the 'too big to fail' agenda, the
Financial Stability Board ('FSB') published proposals for Total
Loss-absorbing Capacity ('TLAC') for Global Systemically Important
Banks ('G-SIBs'). In November 2015, the FSB issued its final term
sheet on TLAC which set the minimum TLAC requirement to be 16% of
RWAs from 1 January 2019, rising to 18% from 1 January 2022. In
addition, there must be sufficient TLAC to meet a leverage ratio
requirement of 6% from 1 January 2019, rising to 6.75% by 1 January
2022.
Leverage Ratio
(Unaudited)
Basel III introduces a simple non risk-based leverage ratio as a
complementary measure to the risk-based capital requirements. It
aims to constrain the build-up of excess leverage in the banking
sector, introducing additional safeguards against model risk and
measurement errors. The ratio is a volume-based measure calculated
as Basel III tier 1 capital divided by total on- and off-balance
sheet exposures.
Basel III provides for a transitional period for the
introduction of this ratio, comprising a supervisory monitoring
period that started in 2011 and a parallel run period from January
2013 and completed by 2017. The Banking (Capital) (Amendment) Rules
2017 came into effect on 1 January 2018. This includes the
implementation of the leverage ratio framework in Hong Kong with
the minimum leverage ratio requirement of 3%.
At
31 Dec 31 Dec
2017 2016
% %
Leverage ratio 6.3 6.3
---------
Capital and
leverage ratio
exposure measure HK$m HK$m
-------------------
Tier 1 capital 468,021 444,872
Total exposure
measure 7,477,306 7,018,046
------------------- --------- ---------
Leverage ratio at 31 December 2017 remained stable compared with
31 December 2016. Further details regarding the group's leverage
positions can be viewed in the Banking Disclosure Statement 2017,
which will be available in the Regulatory Disclosures section of
our website: www.hsbc.com.hk.
Capital adequacy at 31 December 2017
(Unaudited)
The following tables show the capital ratios, RWAs and capital
base as contained in the 'Capital Adequacy Ratio' return submitted
to the HKMA on a consolidated basis under the requirements of
section 3C(1) of the Banking (Capital) Rules.
The basis of consolidation for financial accounting purposes is
described in note 1 on the Financial Statements and differs from
that used for regulatory purposes. Further information on the
regulatory consolidation basis and a full reconciliation between
the group's accounting and regulatory balance sheets can be viewed
in the Banking Disclosure Statement 2017, which will be available
in the Regulatory Disclosures section of our website
www.hsbc.com.hk. Subsidiaries not included in the group's
consolidation for regulatory purposes are securities and insurance
companies and the capital invested by the group in these
subsidiaries is deducted from regulatory capital, subject to
certain thresholds.
The Bank and its banking subsidiaries maintain regulatory
reserves to satisfy the provisions of the Banking Ordinance and
local regulatory requirements for prudential supervision purposes.
At 31 December 2017, the effect of this requirement is to reduce
the amount of reserves which can be distributed to shareholders by
HK$27,703m (31 December 2016: HK$25,931m).
There are no relevant capital shortfalls in any of the group's
subsidiaries at 31 December 2017 (31 December 2016: nil) which are
not included in its consolidation group for regulatory
purposes.
Capital ratios
(Unaudited)
At
31 Dec 31 Dec
2017 2016
% %
Common equity
tier 1 ('CET1')
capital ratio 15.9 16.0
Tier 1 capital
ratio 17.0 17.2
Total capital
ratio 18.9 19.0
------------------ ------ ------
Risk-weighted assets by
risk type
(Unaudited)
At
31 Dec 31 Dec
2017 2016
HK$m HK$m
Credit risk 2,205,845 2,027,690
Counterparty
credit risk 134,793 171,150
Market risk 115,081 90,454
Operational
risk 302,890 299,295
Total 2,758,609 2,588,589
-------------- --------- ---------
Risk-weighted assets by
global business
(Unaudited)
At
31 Dec 31 Dec
2017 2016
HK$m HK$m
Retail Banking
and Wealth Management 404,771 365,094
Commercial Banking 927,472 832,810
Global Banking
and Markets 951,294 899,276
Global Private
Banking 29,983 27,262
Corporate Centre 445,089 464,147
Total 2,758,609 2,588,589
------------------------ --------- ---------
Capital Base
(Unaudited)
The following table sets out the composition of the group's
capital base under Basel III at 31 December 2017. The position at
31 December 2017 benefits from transitional arrangements which will
be phased out.
Capital base
(Unaudited)
At
31 Dec 31 Dec
2017 2016
HK$m HK$m
----------------------------------------------------- --------- -----------
Common equity tier 1 ('CET1') capital
Shareholders' equity 610,307 551,776
-------- --------
- shareholders' equity per balance sheet 696,480 628,006
- revaluation reserve capitalisation issue (1,454) (1,454)
- other equity instruments (14,737) (14,737)
- unconsolidated subsidiaries (69,982) (60,039)
Non-controlling interests 24,416 22,676
- non-controlling interests per balance
sheet 56,506 51,130
- non-controlling interests in unconsolidated
subsidiaries (8,590) (6,442)
- surplus non-controlling interests disallowed
in CET1 (23,500) (22,012)
Regulatory deductions to CET1 capital (196,030) (160,144)
- valuation adjustments (1,485) (2,020)
- goodwill and intangible assets (15,347) (14,029)
- deferred tax assets net of deferred
tax liabilities (2,237) (1,566)
- cash flow hedging reserve 135 222
- changes in own credit risk on fair valued
liabilities (183) (1,195)
- defined benefit pension fund assets (79) (62)
- significant capital investments in unconsolidated
financial sector entities (86,046) (57,395)
- property revaluation reserves(1) (63,085) (58,168)
- regulatory reserve (27,703) (25,931)
Total CET1 capital 438,693 414,308
----------------------------------------------------- -------- --------
Additional tier 1 ('AT1') capital
Total AT1 capital before regulatory deductions 39,203 47,897
- perpetual subordinated loans 14,737 14,737
- perpetual non-cumulative preference
shares 19,367 25,228
- allowable non-controlling interests
in AT1 capital 5,099 7,932
Regulatory deductions to AT1 capital (9,875) (17,333)
- significant capital investments in unconsolidated
financial sector entities (9,875) (17,333)
Total AT1 capital 29,328 30,564
Total tier 1 capital 468,021 444,872
Tier 2 capital
----------------------------------------------------- --------- -----------
Total tier 2 capital before regulatory
deductions 67,874 67,536
- perpetual cumulative preference shares 1,563 1,551
- perpetual subordinated debt 3,126 3,102
- term subordinated debt 18,418 21,472
- property revaluation reserves(1) 29,043 26,830
- impairment allowances and regulatory
reserve eligible for inclusion in tier
2 capital 15,724 14,581
Regulatory deductions to tier 2 capital (13,651) (21,106)
- significant capital investments in unconsolidated
financial sector entities (13,651) (21,106)
Total tier 2 capital 54,223 46,430
----------------------------------------------------- -------- --------
Total capital 522,244 491,302
----------------------------------------------------- -------- --------
1 Includes the revaluation surplus on investment properties
which is reported as part of retained earnings and adjustments made
in accordance with the Banking (Capital) Rules issued by the
HKMA.
A detailed breakdown of the group's CET1 capital, AT1 capital,
Tier 2 capital and regulatory deductions can be viewed in the
Banking Disclosure Statement 2017, which will be available in the
Regulatory Disclosures section of our website www.hsbc.com.hk.
The following table shows the pro-forma Basel III end point
basis position once all transitional arrangements have been phased
out based on the Transition Disclosures Template. It should be
noted that the pro-forma Basel III end point basis position takes
no account of, for example, any future profits or management
actions. In addition, the current regulations or their application
may change before full implementation. Given this, the final impact
on the group's capital ratios may differ from the pro-forma
position, which is a mechanical application of the current rules to
the balance sheet at 31 December 2017; it is not a projection. On
this pro-forma basis, the group's CET1 ratio is 15.2% (2016:
14.7%), which is above the Basel III minimum requirement, plus
expected regulatory capital buffer requirements.
Reconciliation of capital from transitional basis
to a pro-forma Basel III end point basis
(Unaudited)
At
31 Dec 31 Dec
2017 2016
HK$m HK$m
CET1 capital on a transitional basis 438,693 414,308
Transitional provisions: Significant capital
investments in unconsolidated financial
sector entities (19,750) (34,666)
----------------------------------------------------- ------- -------
CET1 capital end point basis 418,943 379,642
----------------------------------------------------- ------- -------
AT1 capital on a transitional basis 29,328 30,564
Grandfathered instruments: Perpetual non-cumulative
preference shares (19,367) (25,228)
Transitional provisions: 6,406 10,799
Allowable non-controlling interests in
AT1 capital (3,469) (6,534)
Significant capital investments in unconsolidated
financial sector entities 9,875 17,333
------- -------
AT1 capital end point basis 16,367 16,135
----------------------------------------------------- ------- -------
Tier 2 capital on a transitional basis 54,223 46,430
Grandfathered instruments: (5,287) (6,115)
Perpetual cumulative preference shares (1,563) (1,551)
Perpetual subordinated debt (3,126) (3,102)
Term subordinated debt (598) (1,462)
------- -------
Transitional provisions: Significant capital
investments in unconsolidated financial
sector entities 9,875 17,333
Tier 2 capital end point basis 58,811 57,648
----------------------------------------------------- ------- -------
Statement of Directors' Responsibilities
The following statement, which should be read in conjunction
with the Auditor's statement of their responsibilities set out in
their report on pages 39-44, is made with a view to distinguishing
for shareholders the respective responsibilities of the Directors
and of the Auditor in relation to the Financial Statements.
The Directors of The Hongkong and Shanghai Banking Corporation
Limited ('the Bank') are responsible for the preparation of the
Bank's Annual Report and Accounts, which contains the consolidated
financial statements of the Bank and its subsidiaries (together
'the group'), in accordance with applicable law and
regulations.
The Hong Kong Companies Ordinance requires the Directors to
prepare for each financial year the consolidated financial
statements for the group, and the balance sheet for the Bank.
The Directors are responsible for ensuring adequate accounting
records are kept that are sufficient to show and explain the
group's transactions, such that the group's financial statements
give a true and fair view.
The Directors are responsible for preparing the consolidated
financial statements that give a true and fair view and are in
accordance with Hong Kong Financial Reporting Standards ('HKFRSs')
issued by the Hong Kong Institute of Certified Public Accountants.
The Directors have elected to prepare the Bank's balance sheet on
the same basis.
The Directors, whose names and functions are set out in the
'Report of the Directors' on pages 3-8 of this Annual Report and
Accounts, confirm to the best of their knowledge that:
-- the consolidated financial statements, which have been
prepared in accordance with HKFRSs and in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the group and the undertakings included in the consolidation
taken as a whole; and
-- the management report represented by the Financial Review,
the Risk and Capital Reports includes a fair review of the
development and performance of the business and the position of the
group and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that the group faces.
On behalf of the Board
Stuart Gulliver
Chairman
20 February 2018
Independent auditor's report to the shareholder of
The Hongkong
and Shanghai Banking Corporation Limited (incorporated
in Hong Kong with limited liability)
Opinion
What we have audited
The consolidated financial statements of The Hongkong and
Shanghai Banking Corporation Limited ('the Bank') and its
subsidiaries (together, 'the group') set out on pages 46 to 97,
which comprise the:
-- consolidated balance sheet as at 31 December 2017;
-- consolidated income statement for the year then ended;
-- consolidated statement of comprehensive income for the year then ended;
-- consolidated statement of changes in equity for the year then ended;
-- consolidated statement of cash flows for the year then ended; and
-- notes on the consolidated financial statements, which include
a summary of significant accounting policies.
Our opinion
In our opinion, the consolidated financial statements give a
true and fair view of the consolidated financial position of the
group as at 31 December 2017, and of its consolidated financial
performance and consolidated cash flows for the year then ended in
accordance with Hong Kong Financial Reporting Standards ('HKFRSs')
issued by the Hong Kong Institute of Certified Public Accountants
('HKICPA') and have been properly prepared in compliance with the
Hong Kong Companies Ordinance.
Basis for Opinion
We conducted our audit in accordance with Hong Kong
Standards on Auditing ('HKSAs') issued by the HKICPA.
Our responsibilities under those standards are further
described in the Auditor's Responsibilities for the
Audit of the Consolidated Financial Statements section
of our report.
We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for
our opinion.
Independence
We are independent of the group in accordance with
the HKICPA's Code of Ethics for Professional Accountants
('the Code'), and we have fulfilled our other ethical
responsibilities in accordance with the Code.
==========================================================
Key Audit Matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the
consolidated financial statements for the current period. These
matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters.
Key audit matters identified in our audit are summarised as
follows:
-- IT access management
-- Investment in associate - Bank of Communications Co., Limited ('BoCom')
-- The present value of in-force long-term insurance business
('PVIF') and liabilities under non-linked life insurance
contracts
-- Impairment of loans and advances to customers
-- HKFRS 9 expected credit losses
-- The impact of HSBC's strategic actions
IT Access Management
Nature of the Key Audit Matter Matters discussed with the
Audit Committee
All banks are highly dependent The status on remediation
on technology due to the of access controls was discussed
significant number of transactions at several Audit Committee
that are processed daily. meetings during the year.
The audit approach relies Controls were enhanced during
extensively on automated 2017 to respond to our audit
controls and therefore on findings and to reduce the
the effectiveness of controls risks over privileged access
over IT systems. to IT infrastructure such
In the previous year, we as databases and operating
identified and reported that systems. However, given the
the entity's controls over scale and complexity of the
access to applications, operating remediation, there were still
systems and data in the financial actions to be taken during
reporting process required the year to ensure that controls
improvements. Access management are fully embedded and operate
controls are critical to effectively.
ensure that changes to applications By the end of the financial
and underlying data are made year, management had put
in an appropriate manner. in place controls to address
Appropriate access controls the critical operating system
contribute to mitigating and database related matters
the risk of potential fraud previously reported. Management
or errors as a result of continue to progress remediation
changes to applications and relating to the management
data. of business application access.
Management implemented several
remediation activities that
contributed to reducing the
risk over access management
in the financial reporting
process. These included implementation
of group-wide preventative
and detective controls across
critical applications and
infrastructure. However,
due to the pervasive nature
of access management issues,
we continued to assess the
risk of a material misstatement
arising from access to technology
as significant for the audit.
How our audit addressed the Key Audit Matter
Access rights were tested over applications, operating
systems and databases relied upon for financial reporting.
Specifically, the audit tested that:
* new access requests for joiners were properly
reviewed and authorised;
* user access rights were removed on a timely basis
when an individual left or moved role;
* access rights to applications, operating systems and
databases were periodically monitored for
appropriateness; and
* highly privileged access is restricted to appropriate
personnel.
Other areas that were independently assessed included
password policies, security configurations, controls
over changes to applications and databases; and that
business users, developers and production support
personnel did not have access to change applications,
the operating system or databases in the production
environment.
As a consequence of deficiencies identified in the
controls, a range of other procedures were performed:
* where inappropriate access was identified, we
understood the nature of the access, and obtained
additional evidence on the appropriateness of the
activities performed;
* additional substantive testing was performed on
specific year-end reconciliations (i.e. custodian,
bank account and suspense account reconciliations)
and confirmations with external counterparties;
* testing was performed on other compensating controls
such as business performance reviews;
* testing was performed over controls that prevent
inappropriate combinations of access; and
* a list of users' access permissions was obtained and
manually compared to other access lists where
segregation of duties was deemed to be of higher risk,
for example users having access to general ledger
systems.
A significant amount of the group's technology processes
and controls were undertaken in shared service centres
located outside of Hong Kong. Our audit testing of
access rights controls was also performed in the shared
service centre locations.
Relevant references in the Annual Report and Accounts
2017
Risk: Top and Emerging Risks, page 16; Operational
Risk, page 28
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Investment in associate - Bank of Communications Company,
Limited ('BoCom')
Nature of the Key Audit Matter Matters discussed with the
Audit Committee
The Bank's investment in Discussions with the Audit
BoCom is accounted for as Committee were focused on:
an associate, using the equity * the continued appropriateness of the value in use
method. model given the period of time that the carrying
For seven consecutive year value has been in excess of market value;
ends, the market value of
BoCom has been below the
carrying value. At 31 December * the key assumptions used in the model with a
2017, the market value based particular focus on the assumptions with the highest
on the share price was HK$59.7bn level of uncertainty. Following these discussions,
lower than the carrying value. the long-term profit growth rate, discount rate and
This is considered an indicator long-term asset growth rate assumptions were
of potential impairment under reassessed and updated; and
HKFRS. An impairment test
was performed by the Bank
using a value in use model * the reasonably possible alternative assumptions,
to estimate the investment's particularly where they had the most impact on the
value assuming it continues value in use calculation.
to be held in perpetuity
rather than sold. On this
basis, no impairment was At 31 December, the Bank
recorded and the share of confirmed its view that the
BoCom's profits has been model and assumptions were
recognised in the consolidated appropriate and not inconsistent
income statement. with information obtained
The value in use model determines in its capacity as a shareholder
the present value of the and board member of BoCom.
Bank's share of BoCom's future
cash flows. The model is
dependent on many assumptions,
both short-term and long-term
in nature. These assumptions
are derived from a combination
of management estimates,
analysts' forecasts and market
data, and are highly judgemental.
How our audit addressed the Key Audit Matter
* With the assistance of our valuation experts, the
appropriateness of the model was reviewed and the
discount rate used within the model was independently
recalculated.
* Inputs used in the determination of assumptions
within the model were challenged and corroborating
information was obtained with reference to external
market information, third-party sources including
analyst reports, and historical publicly available
BoCom information.
* The controls in place over the model were tested,
including senior management review controls over the
inputs, assumptions and output of the model.
* A meeting in September 2017 between management and
senior BoCom executive management, held specifically
to identify facts or circumstances impacting
management assumptions, was observed.
* The mathematical accuracy of the model was tested.
* Disclosures made in the Annual Report and Accounts
2017 in relation to BoCom were reviewed.
Relevant references in the Annual Report and Accounts
2017
Financial Review, page 11
Note 1: Basis of preparation and significant accounting
policies, page 53
Note 15: Interests in associates and joint ventures,
page 72-75
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The present value of in-force long-term insurance
business ('PVIF') and liabilities under non-linked
life insurance contracts
Nature of the Key Audit Matter Matters discussed with the
Audit Committee
The group has recorded an We discussed with the Audit
asset for PVIF of HK$44,621 Committee the results of
million and liabilities under our testing procedures over
non-linked life insurance key assumptions used in the
contracts of HK$391,348 million valuation of the PVIF asset
as at 31 December 2017. and the liabilities under
The determination of these non-linked life insurance
balances requires the use contracts including testing
of appropriate actuarial of changes made during the
methodologies and also highly reporting period to the models
judgemental assumptions. and to the basis of the determination
Such assumptions include of key assumptions.
the long-term economic returns
of insurance contracts issued,
assumptions over policyholder
behaviour such as longevity,
mortality and persistency,
and management assumptions
over the future costs of
obtaining and maintaining
the group's insurance business.
Small movements in these
assumptions can have a material
impact on the PVIF asset
and the liabilities under
non-linked life insurance
contracts.
How our audit addressed the Key Audit Matter
The controls that management had established over
the valuation of the PVIF asset and the liabilities
under non-linked life insurance contracts were tested.
These included controls over policy data reconciliations
from the policyholder administration system to the
actuarial valuation system, controls over assumption
setting, controls over the review and determination
of valuation methodology, system access and user acceptance
testing controls over the actuarial models used, and
controls over the production and approval of the actuarial
results.
The appropriateness of the models, methodologies and
assumptions used (including assumptions over the long-term
economic returns of insurance contracts issued, assumptions
over policyholder behaviour such as longevity, mortality
and persistency, and assumptions relating to future
costs of obtaining and maintaining the insurance business)
were reviewed with the assistance of our actuarial
experts.
Management's key judgements and assumptions were evaluated
and challenged with the assistance of our actuarial
experts. Our challenge and evaluation included whether
these judgements were supported by relevant experience,
market information and formed a reasonable basis for
setting the assumptions.
Relevant references in the Annual Report and Accounts
2017
Risk: Risks of insurance manufacturing operations,
page 30-33
Note 1: Basis of preparation and significant accounting
policies, page 58
Note 16: Goodwill and intangible assets, page 76
Note 24: Liabilities under insurance contracts, page
79
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Impairment of loans and advances to customers
Nature of the Key Audit Matter Matters discussed with the
Audit Committee
Impairment allowances represent We discussed with the Audit
management's best estimate Committee details of our
of the losses incurred within testing procedures and our
the loan portfolios at the findings over individual
balance sheet date. They and collective impairment
are calculated on a collective allowances.
basis for portfolios of loans We also discussed with the
of a similar nature and on Audit Committee changes to
an individual basis for significant risk factors relevant to
impaired loans. The calculation the collective allowance
of both collective and individual models as well as judgements
impairment allowances is made on individually significant
inherently judgemental for loan impairments and the
any bank. compliance of these changes
Collective impairment allowances and judgements with accounting
are calculated using models standards.
which approximate the impact
of current economic and credit
conditions on large portfolios
of loans. The inputs to these
models are based on historical
loss experience with judgement
applied to determine the
assumptions used to calculate
impairment. Model overlays
are applied where data driven
parameters or calculations
are not considered representative
of current risks or conditions
of the loan portfolios.
For specific impairments,
judgement is required to
determine when an impairment
event has occurred and then
to estimate the expected
future cash flows related
to that loan. The audit focus
was primarily on wholesale
impairment due to the materiality
of the loan balances and
associated impairment allowances,
and the subjective nature
of the impairment calculation.
How our audit addressed the Key Audit Matter
For collective impairment allowances, controls over
the completeness and accuracy of the data input to
the models were tested. Controls over the appropriateness
of the models used to determine the impairment allowance
and management review controls of key assumptions
to the models were tested.
The appropriateness of the collective modelling methodology
was independently assessed by reference to the accounting
standards and model calculations were tested through
re-performance.
The appropriateness of management's judgements was
also independently assessed with respect to calculation
methodology and segmentation, economic factors and
judgemental overlays, the period of historical loss
rates and loss emergence periods used.
For impairment allowances on individual loans, the
controls over credit file review processes, the reasonableness
of cash flow assumptions for impaired loans, the approval
of external collateral valuation vendors, and controls
over the approval and recording of significant individual
impairment charges were tested.
For impairment allowances on individual loans, the
appropriateness of provisioning methodologies and
policies was independently assessed for a sample of
loans. An independent view was formed on the level
of allowances booked based on review of the detailed
loan, security and counterparty information in the
credit files, including management's evidence to determine
when the impairment event occurred and, where available,
independently obtained market information. Calculations
within a sample of discounted cash flows were re-performed.
Relevant references in the Annual Report and Accounts
2017
Risk: Credit Risk, page 17-24
Note 1: Basis of preparation and significant accounting
policies, page 55
Note 2: Operating profit - Loan impairment charges
and other credit risk provisions, page 61
Note 11: Impairment of loans and advances to customers,
page 70
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HKFRS 9 Expected Credit Losses
Nature of the Key Audit Matter Matters discussed with the
Audit Committee
This is a new and complex Status updates were provided
accounting standard which during the year due to the
has required considerable complexity and size of the
judgement and interpretation implementation program. The
in its implementation. These Audit Committee reviewed
judgements have been key the Global Public Policy
in the development of the Committee paper issued in
new models which have been July 2017 which promotes
built and implemented to the high-quality audit of
measure the expected credit the accounting for expected
losses on loans measured credit losses.
at amortised cost. An assessment on the more
There is a large number of judgemental interpretations
data inputs required by these made by management was shared
models. The data is from with the Audit Committee.
a number of systems that These included the determination
have not been used previously of what constitutes a significant
for the preparation of the increase in credit risk for
accounting records. This retail portfolios, the life
increases the risk of completeness of retail and wholesale revolving
and accuracy of the data products and the judgements
that has been used to create made in applying forward
assumptions and is used to economic guidance to the
operate the models. In some impairment calculation.
cases, the lack of available We highlighted significant
data and quality of data post model adjustments that
has led to reasonable alternatives had been recorded to address
being sought to allow calculations challenges in data availability
to be performed. and quality or areas of model
weakness.
Perspectives were shared
on the control environment
over the disclosure of the
impact of adopting HKFRS
9.
How our audit addressed the Key Audit Matter
* Controls over the selection and approval of the
accounting policy were tested. This included our
assessment of the compliance of the technical
accounting papers prepared by management with the
HKFRS 9 requirements for expected credit losses.
* Controls over model governance and model development
were tested. Our modelling specialists tested the
modelling methodology for material portfolios.
* Risk based testing of models, including independent
validation of certain assumptions and model
effectiveness tests, was performed.
* Testing of the review controls performed by
management to assess the reasonableness of the
disclosed impact of adopting HKFRS 9 was performed.
Relevant references in the Annual Report and Accounts
2017
Note 1: Basis of preparation and significant accounting
policies, page 51-52
-------------------------------------------------------------------------
The impact of HSBC's strategic actions
Nature of the Key Audit Matter Matters discussed with the
Audit Committee
Auditing standards require An initial view of the impact
that we consider the inherent of the strategic actions
risk of the potential for was agreed with the Audit
management override of controls. Committee during the planning
2017 was the final year for stage of the audit. At that
HSBC Holdings plc ('HSBC') time we set out a test plan
to achieve the outcomes set around financial numbers
out in the strategic actions in the consolidated financial
communicated to shareholders statements that were inherently
in June 2015. We considered subject to the risk of override.
whether this increased the The initial view was re-assessed
incentive for management as certain key performance
to over-ride controls given indicators became more sensitive
the external pressure to to underlying changes in
meet the targets. revenue and costs. Certain
We assessed such plans inherently additional procedures relating
increase the incentive that to cost recognition were
controls may be overridden, agreed with the Audit Committee.
and this inherent increase
in incentive does not reflect
other specific concern about
the Bank or its management.
Achievement of these strategic
actions is not subject to
audit. However, some of the
key performance indicators
used to track HSBC's performance
are derived from the group's
consolidated financial statements
and our test plan was established
to reflect the risk that
the group's financial numbers
may be misstated.
How our audit addressed the Key Audit Matter
* Reviewed and challenged changes to accounting
policies, judgements and their application.
* Performed additional substantive tests on journals,
specifically considering cut off of revenue and
expenses.
* Tested the clearance of long outstanding
reconciliation differences, such as those in
intercompany reconciliations, including the
appropriateness of the classification and reporting
period.
Relevant references in the Annual Report and Accounts
2017
Report of the Directors: Asia Strategy, page 3
Risk: Operational Risk, page 28
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Other Information
The directors are responsible for the other information. The
other information comprises the information included in the
Financial Highlights, Report of Directors, Financial Review, Risk,
Capital and Statement of Directors' Responsibilities sections of
the Annual Report and Accounts 2017, but does not include the
consolidated financial statements and our auditor's report thereon,
which we obtained prior to the date of this auditor's report. The
other information also includes the Banking Disclosure Statement
2017 and the list of the directors of the Bank's subsidiary
undertakings (consolidated in the financial statements) during the
period from 1 January 2017 to 20 February 2018, which are expected
to be made available to us after the date of this auditor's
report.
Our opinion on the consolidated financial statements does not
cover the other information and we do not and will not express any
form of assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other
information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed on the other information
that we obtained prior to the date of this auditor's report, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report in this regard.
When we read the Banking Disclosure Statement 2017 and the list
of the directors of the Bank's subsidiary undertakings
(consolidated in the financial statements) during the period from 1
January 2017 to 20 February 2018, if we conclude that there is a
material misstatement therein, we are required to communicate the
matter to the Audit Committee and take appropriate action
considering our legal rights and obligations.
Responsibilities of Directors and the Audit Committee for the
Consolidated Financial Statements
The directors are responsible for the preparation of the
consolidated financial statements that give a true and fair view in
accordance with HKFRSs issued by the HKICPA and the Hong Kong
Companies Ordinance, and for such internal control as the directors
determine is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the consolidated financial statements, the
directors are responsible for assessing the group's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so.
The Audit Committee is responsible for overseeing the group's
financial reporting process.
Auditor's Responsibilities for the Audit of the Consolidated
Financial Statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. We report our
opinion solely to you, as a body, in accordance with section 405 of
the Hong Kong Companies Ordinance and for no other purpose. We do
not assume responsibility towards or accept liability to any other
person for the contents of this report.
Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with HKSAs will
always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of
these consolidated financial statements.
As part of an audit in accordance with HKSAs, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the group's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by the directors.
-- Conclude on the appropriateness of the directors' use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the group's
ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in
our auditor's report to the related disclosures in the consolidated
financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor's report. However, future
events or conditions may cause the group to cease to continue as a
going concern.
-- Evaluate the overall presentation, structure and content of
the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair
presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the group to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for
our audit opinion.
We communicate with the Audit Committee regarding, among other
matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide the Audit Committee with a statement that we
have complied with relevant ethical requirements regarding
independence and communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence,
and where applicable, related safeguards.
From the matters communicated with the Audit Committee, we
determine those matters that were of most significance in the audit
of the consolidated financial statements for the current period and
are therefore the key audit matters. We describe these matters in
our auditor's report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
The engagement partner on the audit resulting in this
independent auditor's report is Mr. Mervyn Robert John Jacob.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, 20 February 2018
Financial Statements
Page
Consolidated income
statement 46
-----------------------------------
Consolidated statement
of comprehensive income 47
----------------------------------- ----
Consolidated balance
sheet 48
----------------------------------- ----
Consolidated statement
of cash flows 49
-----------------------------------
Consolidated statement
of changes in equity 50
----------------------------------- ----
Notes on the Financial
Statements
Basis of preparation
and significant accounting
1 policies 51
------------------------------
2 Operating profit 60
------------------------------ ----
3 Insurance income 62
------------------------------ ----
Employee compensation
4 and benefits 62
5 Tax expense 65
6 Dividends 66
7 Trading assets 66
------------------------------ ----
8 Derivatives 66
Financial assets designated
9 at fair value 68
----
Loans and advances
10 to customers 68
---
Impairment of loans
11 and advances to customers 70
12 Financial investments 71
----
Assets pledged, assets
transferred and collateral
13 received 71
14 Investments in subsidiaries 72
----
Interests in associates
15 and joint ventures 72
----
Goodwill and intangible
16 assets 76
Property, plant and
17 equipment 77
--- ------------------------------ ----
Prepayments, accrued
18 income and other assets 77
19 Customer accounts 78
------
20 Trading liabilities 78
------
Financial liabilities
designated at fair
21 value 78
Debt securities in
22 issue 78
Accruals and deferred
income, other liabilities
23 and provisions 78
Liabilities under insurance
24 contracts 79
------
25 Subordinated liabilities 79
26 Preference shares 80
------
27 Share capital 80
28 Other equity instruments 80
Maturity analysis of
29 assets and liabilities 81
Analysis of cash flows
payable under financial
liabilities by remaining
30 contractual maturities 83
Contingent liabilities
31 and commitments 84
32 Other commitments 84
Offsetting of financial
assets and financial
33 liabilities 85
34 Segmental analysis 85
35 Related party transactions 87
Fair values of financial
instruments carried
36 at fair value 89
Fair values of financial
instruments not carried
37 at fair value 91
38 Structured entities 92
Bank balance sheet
and statement of changes
39 in equity 94
Legal proceedings and
40 regulatory matters 95
41 Ultimate holding company 97
Events after the balance
42 sheet date 97
-----
Approval of financial
43 statements 97
----- ---------------------------- ------
Consolidated Financial Statements
Consolidated income statement
for the year ended 31 December
2017 2016
Notes HK$m HK$m
Net interest income 2a 110,237 96,908
----------------------------------------------- ------ -------
* interest income 138,081 122,564
- interest expense (27,844) (25,656)
------- -------
Net fee income 2b 43,150 39,302
----------------------------------------------- ------ ------- -------
- fee income 52,312 47,139
----------------------------------------------- ------
* fee expense (9,162) (7,837)
----------------------------------------------- ------ ------- -------
Net trading income 2c 23,210 24,064
----------------------------------------------- ------ ------- -------
Net income from financial instruments
designated at fair value 2d 15,380 3,570
----------------------------------------------- ------ -------
Gains less losses from financial investments 2e 2,108 1,232
----------------------------------------------- ------ -------
Dividend income 232 234
----------------------------------------------- ------ -------
Net insurance premium income 3a 56,176 55,912
----------------------------------------------- ------ ------- -------
Other operating income 2f 4,740 11,516
----------------------------------------------- ------
Total operating income 255,233 232,738
----------------------------------------------- ------ ------- -------
Net insurance claims and benefits paid
and movement in liabilities to policyholders 3b (68,790) (64,586)
----------------------------------------------- ------ -------
Net operating income before loan impairment
charges and other credit risk provisions 186,443 168,152
----------------------------------------------- ------ ------- -------
Loan impairment charges and other credit
risk provisions 2g (4,437) (5,554)
----------------------------------------------- ------ -------
Net operating income 182,006 162,598
----------------------------------------------- ------ ------- -------
Employee compensation and benefits 4a (40,095) (38,896)
----------------------------------------------- ------
General and administrative expenses 2h (34,786) (29,917)
----------------------------------------------- ------
Depreciation of property, plant and equipment 17 (4,650) (4,493)
----------------------------------------------- ------
Amortisation and impairment of intangible
assets (1,536) (1,497)
----------------------------------------------- ------ ------- -------
Total operating expenses (81,067) (74,803)
----------------------------------------------- ------
Operating profit 100,939 87,795
----------------------------------------------- ------ ------- -------
Share of profit in associates and joint
ventures 14,680 14,912
----------------------------------------------- ------ -------
Profit before tax 115,619 102,707
----------------------------------------------- ------ ------- -------
Tax expense 5 (19,601) (17,912)
----------------------------------------------- ------ -------
Profit for the year 96,018 84,795
----------------------------------------------- ------ -------
Profit attributable to shareholders of
the parent company 88,530 78,646
----------------------------------------------- ------ -------
Profit attributable to non-controlling
interests 7,488 6,149
----------------------------------------------- ------ ------- -------
Consolidated statement of comprehensive income
for the year ended 31 December
2017 2016
HK$m HK$m
--------------------------------------------------- -------- ----------
Profit for the year 96,018 84,795
--------------------------------------------------- ------- -------
Other comprehensive income/(expense)
-------- ----------
Items that will be reclassified subsequently
to the income statement when specific conditions
are met:
Available-for-sale investments: 1,609 499
- fair value gains/(losses) 3,346 (430)
---------------------------------------------------
- fair value gains reclassified to the
income statement on disposal (2,118) (1,226)
---------------------------------------------------
- amounts reclassified to the income statement
in respect of impairment losses 5 2
---------------------------------------------------
- fair value losses transferred to the
income statement on hedged items 451 2,296
---------------------------------------------------
- income taxes (75) (143)
--------------------------------------------------- ------- -------
Cash flow hedges: 607 (802)
- fair value gains/(losses) (6,780) 1,354
---------------------------------------------------
- fair value (gains)/losses reclassified
to the income statement 7,506 (2,295)
---------------------------------------------------
- income taxes (119) 139
--------------------------------------------------- ------- -------
Share of other comprehensive income/(expense)
of associates and joint venture (852) 1,266
------- -------
Exchange differences 25,387 (15,241)
--------------------------------------------------- -------
Items that will not be reclassified subsequently
to the income statement:
Changes in fair value of financial liabilities
designated at fair value arising from changes
in own credit risk(1) (209) -
--------------------------------------------------- ------- -------
- before income taxes (250) -
---------------------------------------------------
- income taxes 41 -
--------------------------------------------------- ------- -------
Property revaluation: 8,864 3,147
--------------------------------------------------- -------
- fair value gains taken to equity 10,442 3,825
---------------------------------------------------
- income taxes (1,578) (678)
--------------------------------------------------- ------- -------
Remeasurement of defined benefit asset/liability: 1,371 833
---------------------------------------------------
- before income taxes 1,640 1,016
---------------------------------------------------
- income taxes (269) (183)
--------------------------------------------------- ------- -------
Other comprehensive income for the year,
net of tax 36,777 (10,298)
--------------------------------------------------- ------- -------
Total comprehensive income for the year 132,795 74,497
--------------------------------------------------- ------- -------
Attributable to:
---------------------------------------------------
- shareholders of the parent company 123,739 68,577
---------------------------------------------------
- non-controlling interests 9,056 5,920
--------------------------------------------------- ------- -------
Total comprehensive income for the year 132,795 74,497
--------------------------------------------------- ------- -------
1 On 1 January 2017, the group adopted the requirements of Hong
Kong Financial Reporting Standard ('HKFRS') 9 relating to the
presentation of gains and losses on financial liabilities
designated at fair value. As a result, the effect of changes in
fair value of those liabilities arising from changes in own credit
risk is presented in other comprehensive income. As permitted by
the transitional requirements of HKFRS 9, comparatives have not
been restated.
Consolidated balance sheet
at 31 December
2017 2016
Notes HK$m HK$m
------------------------------------------------- ------ --------- -----------
Assets
------------------------------------------------- ------
Cash and sight balances at central banks 208,073 213,783
------------------------------------------------- ------ ---------
Items in the course of collection from
other banks 25,714 21,401
------------------------------------------------- ------ --------- ---------
Hong Kong Government certificates of
indebtedness 267,174 242,194
------------------------------------------------- ------
Trading assets 7 496,434 371,634
------------------------------------------------- ------ ---------
Derivatives 8 300,243 479,807
------------------------------------------------- ------ --------- ---------
Financial assets designated at fair value 9 122,646 106,016
------------------------------------------------- ------ --------- ---------
Reverse repurchase agreements - non-trading 330,890 271,567
------------------------------------------------- ------ --------- ---------
Placings with and advances to banks 433,005 463,211
------------------------------------------------- ------ ---------
Loans and advances to customers 10 3,328,980 2,834,114
------------------------------------------------- ------ ---------
Financial investments 12 1,720,873 1,835,351
------------------------------------------------- ------ ---------
Amounts due from Group companies 35 227,729 242,773
------------------------------------------------- ------ --------- ---------
Interests in associates and joint ventures 15 144,717 125,792
------------------------------------------------- ------ --------- ---------
Goodwill and intangible assets 16 59,865 56,936
------------------------------------------------- ------ --------- ---------
Property, plant and equipment 17 116,336 111,640
------------------------------------------------- ------ ---------
Deferred tax assets 5 2,156 1,503
------------------------------------------------- ------ --------- ---------
Prepayments, accrued income and other
assets 18 158,511 171,230
------------------------------------------------- ------
Total assets 7,943,346 7,548,952
------------------------------------------------- ------ --------- ---------
Liabilities
------------------------------------------------- ------
Hong Kong currency notes in circulation 267,174 242,194
------------------------------------------------- ------
Items in the course of transmission to
other banks 38,283 37,753
------------------------------------------------- ------ --------- ---------
Repurchase agreements - non-trading 47,170 27,810
------------------------------------------------- ------
Deposits by banks 201,697 192,479
------------------------------------------------- ------ ---------
Customer accounts 19 5,138,272 4,900,004
------------------------------------------------- ------ ---------
Trading liabilities 20 231,365 188,470
------------------------------------------------- ------ ---------
Derivatives 8 309,353 462,458
------------------------------------------------- ------ --------- ---------
Financial liabilities designated at fair
value 21 49,278 51,116
------------------------------------------------- ------ ---------
Debt securities in issue 22 38,394 25,235
------------------------------------------------- ------ ---------
Retirement benefit liabilities 4c 2,222 3,867
------------------------------------------------- ------
Amounts due to Group companies 35 265,688 198,038
------------------------------------------------- ------
Accruals and deferred income, other liabilities
and provisions 23 110,687 99,487
------------------------------------------------- ------ --------- ---------
Liabilities under insurance contracts 24 438,017 386,170
------------------------------------------------- ------ ---------
Current tax liabilities 5 3,242 1,619
------------------------------------------------- ------ --------- ---------
Deferred tax liabilities 5 24,391 21,401
------------------------------------------------- ------ --------- ---------
Subordinated liabilities(1) 25 4,090 4,836
------------------------------------------------- ------ ---------
Preference shares 26 21,037 26,879
------------------------------------------------- ------ --------- ---------
Total liabilities 7,190,360 6,869,816
------------------------------------------------- ------ --------- ---------
Equity
------------------------------------------------- ------
Share capital 27 151,360 114,359
------------------------------------------------- ------ ---------
Other equity instruments 28 14,737 14,737
------------------------------------------------- ------ ---------
Other reserves 123,417 85,886
------------------------------------------------- ------
Retained earnings 406,966 413,024
------------------------------------------------- ------ ---------
Total shareholders' equity 696,480 628,006
------------------------------------------------- ------
Non-controlling interests 56,506 51,130
------------------------------------------------- ------ --------- ---------
Total equity 752,986 679,136
------------------------------------------------- ------
Total equity and liabilities 7,943,346 7,548,952
------------------------------------------------- ------ --------- ---------
Consolidated statement of cash flows
for the year ended 31 December
(Re-presented)
2017 2016
HK$m HK$m
-------------------------------------------------- --------- -----------
Profit before tax 115,619 102,707
--------
Adjustments for non-cash items:
--------- -----------
Depreciation, amortisation and impairment 6,202 6,008
-------- --------
Net gain from investing activities (3,564) (1,211)
-------- --------
Share of profits in associates and joint
ventures (14,680) (14,912)
-------- --------
(Gain)/loss on disposal of subsidiaries,
businesses, associates and joint ventures 186 (1)
-------- --------
Loan impairment losses gross of recoveries
and other credit risk provisions 5,330 6,712
-------------------------------------------------- -------- --------
Provisions (618) (7)
-------- --------
Share-based payment expense 970 1,019
-------- --------
Other non-cash items included in profit
before tax 510 (6,313)
-------- --------
Elimination of exchange differences (36,213) 7,450
-------- --------
Changes in operating assets and liabilities
--------- -----------
Change in net trading securities and derivatives (55,262) (70,563)
-------- --------
Change in loans and advances to banks and
customers (491,235) (81,543)
-------- --------
Change in reverse repurchase agreements
- non-trading (75,091) (15,267)
-------------------------------------------------- -------- --------
Change in financial assets designated at
fair value (16,630) (7,991)
-------- --------
Change in other assets 144,752 (97,460)
-------- --------
Change in deposits by banks and customer
accounts 247,486 304,113
-------- --------
Change in repurchase agreements - non-trading 19,360 11,652
-------- --------
Change in debt securities in issue 13,159 (15,624)
-------- --------
Change in financial liabilities designated
at fair value (1,838) 346
-------- --------
Change in other liabilities 63,627 117,955
-------- --------
Dividends received from associates 4,556 4,664
-------- --------
Contributions paid to defined benefit plans (722) (1,889)
-------- --------
Tax paid (14,674) (18,222)
-------- --------
Net cash from operating activities (88,770) 231,623
-------------------------------------------------- -------- --------
Purchase of financial investments (721,925) (746,997)
Proceeds from the sale and maturity of financial
investments 749,277 608,186
-------------------------------------------------- -------- --------
Purchase of property, plant and equipment (2,997) (3,009)
-------------------------------------------------- -------- --------
Proceeds from sale of property, plant and
equipment and assets held for sale 5,572 2
-------------------------------------------------- -------- --------
Proceeds from disposal of customer loan
portfolios 2,004 388
-------- --------
Net investment in intangible assets (2,831) (1,825)
-------- --------
Cash outflow on purchase of subsidiaries (1,757) -
-------- --------
Net cash from investing activities 27,343 (143,255)
-------------------------------------------------- -------- --------
Issue of ordinary share capital and other
equity instruments 1,744 18,307
--------
Redemption of preference shares and other
equity instruments (6,022) (9,688)
--------
Subordinated loan capital issued(1) 76,433 63,982
--------
Subordinated loan capital repaid(1) (18,737) (3,110)
--------
Dividends paid to shareholders of the parent
company and non-controlling interests (60,892) (49,593)
--------
Net cash from financing activities (7,474) 19,898
--------
Net increase/(decrease) in cash and cash
equivalents (68,901) 108,266
-------------------------------------------------- -------- --------
Cash and cash equivalents at 1 Jan 752,705 658,397
--------
Exchange differences in respect of cash
and cash equivalents 34,234 (13,958)
--------
Cash and cash equivalents at 31 Dec 718,038 752,705
-------------------------------------------------- --------
Cash and cash equivalents comprise:(2)
---------
- cash and balances at central banks 208,073 213,783
--------
- items in the course of collection from
other banks 25,714 21,401
--------
- loans and advances to banks of one month
or less 293,499 311,734
--------
- reverse repurchase agreements with banks
of one month or less 152,104 167,872
--------
- treasury bills, other bills and certificates
of deposit less than three months 76,931 75,668
--------
- less: items in the course of transmission
to other banks (38,283) (37,753)
-------------------------------------------------- -------- --------
Interest received was HK$136,539m (2016: HK$123,812m), interest
paid was HK$28,324m (2016: HK$27,403m) and dividends received were
HK$175m (2016: HK$208m).
1 Changes in subordinated liabilities (including those issued to
group companies) during the year included amounts from issuance and
repayments as presented above, and non-cash changes from foreign
exchange gains (HK$673m) and fair value gains (HK$130m).
2 The amount of cash and cash equivalents that are subject to
exchange control and regulatory restrictions amounted to
HK$199,336m at 31 December 2017 (2016: HK$182,494m).
In 2017, we enhanced the presentation of the consolidated
statement of cash flows. As a result of this change, certificates
of deposit with maturity of more than three months and financial
investments held for backing liabilities to long-term policyholders
are now presented as investing activities (previously presented as
operating activities). Comparatives have been re-presented
accordingly.
Consolidated statement of changes in equity
Other reserves
Available- Cash Total
Other Property for-sale flow Foreign share- Non-
Share equity Retained revaluation investment hedge exchange holders' controlling Total
capital instruments earnings reserve reserve reserve reserve Other(1) equity interests equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------------------------------------------------------ --------
At 1 Jan 2017 114,359 14,737 413,024 53,763 6,189 (793) (31,861) 58,588 628,006 51,130 679,136
------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- --------- -------
Profit for
the year - - 88,530 - - - - - 88,530 7,488 96,018
Other comprehensive
income/(expense)
(net of tax) - - 976 8,144 636 596 24,913 (56) 35,209 1,568 36,777
------------------------------------------------------------ ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- --------- -------
* available-for-sale investments - - - - 1,422 - - - 1,422 187 1,609
------------------------------------------------------------
- cash flow
hedges - - - - - 596 - - 596 11 607
* changes in fair value of financial liabilities
designated at fair value arising from changes in own
credit risk(2) - - (207) - - - - - (207) (2) (209)
------------------------------------------------------------
- property
revaluation - - - 8,144 - - - - 8,144 720 8,864
* actuarial gains on defined benefit asset/liability - - 1,193 - - - - - 1,193 178 1,371
------------------------------------------------------------
* share of other comprehensive expense of associates
and joint ventures - - (10) - (786) - - (56) (852) - (852)
------------------------------------------------------------
- exchange
differences - - - - - - 24,913 - 24,913 474 25,387
------------------------------------------------------------ ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- --------- -------
Total comprehensive
income/(expense)
for the year - - 89,506 8,144 636 596 24,913 (56) 123,739 9,056 132,795
------------------------------------------------------------ ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- --------- -------
Shares issued 1,744 - - - - - - - 1,744 - 1,744
------------------------------------------------------------ ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- --------- -------
Dividends
paid(3) - - (56,260) - - - - - (56,260) (4,632) (60,892)
------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- --------- -------
Movement in
respect of
share-based
payment arrangements - - (73) - - - - (324) (397) (9) (406)
------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- --------- -------
Transfers
and other
movements(4
,5 ,6) 35,257 - (39,231) (3,526) - - - 7,148 (352) 961 609
------------------------------------------------------------ ------- ----------- ------- -------- ------- --- ----- ------- ------- ------- --------- -------
At 31 Dec
2017 151,360 14,737 406,966 58,381 6,825 (197) (6,948) 65,356 696,480 56,506 752,986
------------------------------------------------------------ ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- --------- -------
At 1 Jan 2016 96,052 14,737 380,381 52,099 4,880 (35) (16,991) 53,078 584,201 51,685 635,886
---------------------------------------------------------- ------- ------ ------- ------ ----- ---- ------- ------ ------- ------ -------
Profit for
the year - - 78,646 - - - - - 78,646 6,149 84,795
---------------------------------------------------------- ------- ------ ------- ------ -------
Other comprehensive
income/(expense)
(net of tax) - - 542 3,123 1,309 (758) (14,870) 585 (10,069) (229) (10,298)
* available-for-sale investments - - - - 622 - - - 622 (123) 499
----------------------------------------------------------
- cash flow
hedges - - - - - (758) - - (758) (44) (802)
* property revaluation - - (245) 3,123 - - - - 2,878 269 3,147
----------------------------------------------------------
* actuarial gains on defined benefit asset/liability - - 793 - - - - - 793 40 833
----------------------------------------------------------
* share of other comprehensive income/(expense) of
associates and joint ventures - - (6) - 687 - - 585 1,266 - 1,266
----------------------------------------------------------
* exchange differences - - - - - - (14,870) - (14,870) (371) (15,241)
----------------------------------------------------------
Total comprehensive
income/(expense)
for the year - - 79,188 3,123 1,309 (758) (14,870) 585 68,577 5,920 74,497
---------------------------------------------------------- ------- ------ ------- ------ ----- ---- ------- ------ ------- ------ -------
Shares issued 18,307 - - - - - - - 18,307 - 18,307
------ ------- ------ -------
Dividends
paid(3) - - (43,296) - - - - - (43,296) (6,297) (49,593)
------- ------ ------- ------- ----- ---- ------- ------
Movement in
respect of
share-based
payment arrangements - - 235 - - - - (258) (23) (3) (26)
---------------------------------------------------------- ------- ------ ------- ------- ----- ---- ------- ------ ------- ------ -------
Transfers
and other
movements(5) - - (3,484) (1,459) - - - 5,183 240 (175) 65
------- ------ ------- ------ ----- ---- ------- ------ ------- ------ -------
At 31 Dec
2016 114,359 14,737 413,024 53,763 6,189 (793) (31,861) 58,588 628,006 51,130 679,136
---------------------------------------------------------- ------- ------ ------- ------ ----- ---- ------- ------ ------- ------ -------
1 The other reserves mainly comprise share of associates' other
reserves, purchase premium arising from transfer of business within
the HSBC Group and the share-based payment reserve. The share-based
payment reserve is used to record the amount relating to share
awards and options granted to employees of the group directly by
HSBC Holdings plc.
2 On 1 January 2017, the group adopted the requirements of Hong
Kong Financial Reporting Standard ('HKFRS') 9 relating to the
presentation of gains and losses on financial liabilities
designated at fair value. As a result, the effect of changes in
fair value of those liabilities arising from changes in own credit
risk is presented in retained earnings. As permitted by the
transitional requirements of HKFRS 9, comparatives have not been
restated.
3 Including distributions paid on perpetual subordinated loans
classified as equity under HKFRSs.
4 In 2017, the Bank redeemed US$775m (HK$6,022m) of preference
shares which were classified as a financial liability in the
consolidated balance sheet. The redemption was made by a payment
out of distributable profits. The amount of preference shares has
been credited to share capital with a corresponding adjustment to
retained earnings in accordance with the capital maintenance
requirements of the Companies Ordinance. In 2013, the Bank redeemed
US$3,745m (HK$29,235m) of preference shares in the same manner.
This amount was also credited to share capital with a corresponding
adjustment to retained earnings in accordance with the capital
maintenance requirements of the Companies Ordinance. The total
amount credited to share capital with a corresponding adjustment to
retained earnings in 2017 in respect of these transactions was
HK$35,257m. This amount is non-distributable.
5 The movement from retained earnings to other reserves includes
the relevant transfers in associates according to local regulatory
requirements.
6 The movement from property revaluation reserve to other
reserves includes HK$2,100m relating to transfer of properties to a
fellow subsidiary as part of the Recovery & Resolution Plan as
set out in the Report of the Directors on page 7-8.
Notes on the Consolidated Financial Statements
1 Basis of preparation and significant accounting
policies
------------------------------------------------
1.1 Basis of preparation
(a) Compliance with Hong Kong Financial Reporting Standards
The consolidated financial statements of The Hongkong and
Shanghai Banking Corporation Limited ('the Bank') and its
subsidiaries (together 'the group') have been prepared in
accordance with Hong Kong Financial Reporting Standards ('HKFRSs')
as issued by the Hong Kong Institute of Certified Public
Accountants ('HKICPA') and accounting principles generally accepted
in Hong Kong. These financial statements also comply with the
requirements of the Hong Kong Companies Ordinance (Cap. 622) which
are applicable to the preparation of financial statements.
Standards adopted during the year ended 31 December 2017
The group has adopted the requirements of HKFRS 9 'Financial
Instruments' relating to the presentation of gains and losses on
financial liabilities designated at fair value from 1 January 2017.
As a result, the effect of changes in fair value of those
liabilities arising from changes in own credit risk is presented in
other comprehensive income with the remaining effect presented in
profit or loss. As permitted by the transitional requirements of
HKFRS 9, comparatives have not been restated. The adoption
increased profit after tax by HK$209m for the year ended 2017, with
the opposite effect on other comprehensive income and no effect on
net assets.
There were no other new standards applied in 2017. However,
during 2017, the group adopted a number of amendments to standards
which had an insignificant effect on the consolidated financial
statements of the group.
(b) Future accounting developments
Minor amendments to HKFRSs
The group has not early applied any of the amendments effective
after 31 December 2017, except the requirements of HKFRS 9
'Financial Instruments' relating to the presentation of gains and
losses on financial liabilities designated at fair value, which was
adopted from 1 January 2017.
Major new HKFRSs
The HKICPA has published HKFRS 9 'Financial Instruments', HKFRS
15 'Revenue from Contracts with Customers', HKFRS 16 'Leases' and
HKFRS 17 'Insurance Contracts'.
HKFRS 9 'Financial Instruments'
In September 2014, the HKICPA issued HKFRS 9 'Financial
Instruments', which is the comprehensive standard to replace HKAS
39 'Financial Instruments: Recognition and Measurement', and
includes requirements for classification and measurement of
financial assets and liabilities, impairment of financial assets
and hedge accounting.
Classification and measurement
The classification and measurement of financial assets will
depend on how these are managed (i.e the entity's business model)
and their contractual cash flow characteristics. These factors
determine whether the financial assets are measured at amortised
cost, fair value through other comprehensive income ('FVOCI') or
fair value through profit or loss ('FVPL'). The combined effect of
the application of the business model and the contractual cash flow
characteristics tests may result in some differences in the
population of financial assets measured at amortised cost or fair
value compared with HKAS 39.
Impairment
The impairment requirements apply to financial assets measured
at amortised cost and FVOCI, lease receivables and certain loan
commitments and financial guarantee contracts. At initial
recognition, an impairment allowance (or provision in the case of
commitments and guarantees) is required for expected credit losses
('ECL') resulting from default events that are possible within the
next 12 months ('12-month ECL'). In the event of a significant
increase in credit risk, an allowance (or provision) is required
for ECL resulting from all possible default events over the
expected life of the financial instrument ('lifetime ECL').
Financial assets where 12-month ECL is recognised are considered to
be 'stage 1'; financial assets which are considered to have
experienced a significant increase in credit risk are in 'stage 2';
and financial assets for which there is objective evidence of
impairment so are considered to be in default or otherwise credit
impaired are in 'stage 3'.
The assessment of credit risk and the estimation of ECL are
required to be unbiased and probability-weighted, and should
incorporate all available information which is relevant to the
assessment including information about past events, current
conditions and reasonable and supportable forecasts of economic
conditions at the reporting date. In addition, the estimation of
ECL should take into account the time value of money. As a result,
the recognition and measurement of impairment is intended to be
more forward-looking than under HKAS 39, and the resulting
impairment charge will tend to be more volatile. HKFRS 9 will also
tend to result in an increase in the total level of impairment
allowances, since all financial assets will be assessed for at
least 12-month ECL and the population of financial assets to which
lifetime ECL applies is likely to be larger than the population for
which there is objective evidence of impairment in accordance with
HKAS 39.
Hedge accounting
The general hedge accounting requirements aim to simplify hedge
accounting, creating a stronger link with risk management strategy
and permitting hedge accounting to be applied to a greater variety
of hedging instruments and risks. However, they do not explicitly
address macro hedge accounting strategies, which are particularly
important for banks. As a result, HKFRS 9 includes an accounting
policy choice to remain with HKAS 39 hedge accounting.
Transitional impact
With the exception of the provisions relating to the
presentation of gains and losses on financial liabilities
designated at fair value, which were adopted from 1 January 2017,
the requirements of HKFRS 9 'Financial Instruments' will be adopted
from 1 January 2018. HKFRS 9 includes an accounting policy choice
to continue with HKAS 39 hedge accounting, which the group has
exercised, although it will implement the revised hedge accounting
disclosures required by the related amendments to HKFRS 7
'Financial Instruments: Disclosures'. The classification and
measurement and impairment requirements are applied retrospectively
by adjusting the opening balance sheet at the date of initial
application, with no requirement to restate comparative periods.
The group does not intend to restate comparatives.
The adoption of HKFRS 9 is expected to reduce net assets at 1
January 2018 by HK$7,290m, with classification and measurement
changes reducing net assets by HK$4,674m, impairment reducing net
assets by HK$4,187m, and the resulting changes to deferred tax
increasing net assets by HK$1,571m. There is no material impact on
the group's capital resources.
HKFRS 15 'Revenue from Contracts with Customers'
In July 2014, the HKICPA issued HKFRS 15 'Revenue from Contracts
with Customers' and it is effective for annual periods beginning on
or after 1 January 2018. HKFRS 15 provides a principles-based
approach for revenue recognition, and introduces the concept of
recognising revenue for performance obligations as they are
satisfied. The group will adopt the standard on its mandatory
effective date, and the standard will be applied on a retrospective
basis, recognising the cumulative effect, if any, of initially
applying the standard as an adjustment to the opening balance of
retained earnings. The group has assessed the impact of HKFRS 15
and expects that the standard will have no significant effect, when
applied, on the consolidated financial statements of the group.
HKFRS 16 'Leases'
In May 2016, the HKICPA issued HKFRS 16 'Leases' with an
effective date of annual periods beginning on or after 1 January
2019. HKFRS 16 results in lessees accounting for most leases within
the scope of the standard in a manner similar to the way in which
finance leases are currently accounted for under HKAS 17 'Leases'.
Lessees will recognise a 'right of use' asset and a corresponding
financial liability on the balance sheet. The asset will be
amortised over the length of the lease and the financial liability
measured at amortised cost. Lessor accounting remains substantially
the same as in HKAS 17. The group is currently assessing the impact
of HKFRS 16 and it is not practicable to quantify the effect as at
the date of the publication of these financial statements. Existing
operating lease commitments are set out in note 32.
HKFRS 17 'Insurance contracts'
HKFRS 17 'Insurance contracts' was issued in January 2018, and
sets out the requirements that an entity should apply in accounting
for insurance contracts it issues and reinsurance contracts it
holds. HKFRS 17 is effective from 1 January 2021, and the group is
considering its impact.
(c) Foreign currencies
Items included in each of the group's entities are measured
using the currency of the primary economic environment in which the
entity operates (the 'functional currency'). The group's
consolidated financial statements are presented in Hong Kong
dollars.
Transactions in foreign currencies are recorded at the rate of
exchange on the date of the transaction. Assets and liabilities
denominated in foreign currencies are translated at the rate of
exchange at the balance sheet date except non-monetary assets and
liabilities measured at historical cost that are translated using
the rate of exchange at the initial transaction date. Exchange
differences are included in other comprehensive income or in the
income statement depending on where the gain or loss on the
underlying item is recognised.
In the consolidated financial statements, the assets,
liabilities and results of foreign operations whose functional
currency is not Hong Kong dollars are translated into the group's
presentation currency at the reporting date. Exchange differences
arising are recognised in other comprehensive income. On disposal
of a foreign operation, exchange differences previously recognised
in other comprehensive income are reclassified to the income
statement.
(d) Presentation of information
Certain disclosures required by HKFRSs have been included in the
audited sections of the Annual Report and Accounts as follows:
-- Consolidated income statement and balance sheet data by
global business are included in the 'Financial Review' on page
9.
-- Disclosures concerning the nature and extent of risks
relating to banking and insurance activities are included in the
'Risk' section on pages 14 to 28 and pages 30 to 33.
-- Capital disclosures are included in the 'Capital' section on page 34.
In accordance with the group's policy to provide disclosures
that help other stakeholders to understand the group's performance,
financial position and changes thereto, the information provided in
the Notes on the Financial Statements, the Risk section and the
Capital section goes beyond the minimum levels required by
accounting standards, statutory and regulatory requirements. In
addition, the group assesses good practice recommendations issued
from time to time by relevant regulators and standard setters and
will assess the applicability and relevance of such guidance,
enhancing disclosures where appropriate.
(e) Critical accounting estimates and judgements
The preparation of financial information requires the use of
estimates and judgements about future conditions. In view of the
inherent uncertainties and the high level of subjectivity involved
in the recognition or measurement of items highlighted as the
critical accounting estimates and judgements in note 1.2 below, it
is possible that the outcomes in the next financial year could
differ from those on which management's estimates are based,
resulting in materially different conclusions from those reached by
management for the purposes of the 2017 Financial Statements.
Management's selection of the group's accounting policies which
contain critical estimates and judgements reflects the materiality
of the items to which the policies are applied and the high degree
of judgement and estimation uncertainty involved.
(f) Segmental analysis
The group's chief operating decision-maker is the Executive
Committee which operates as a general management committee under
the direct authority of the Board and operating segments are
reported in a manner consistent with the internal reporting
provided to the Executive Committee.
Measurement of segmental assets, liabilities, income and
expenses is in accordance with the group's accounting policies.
Segmental income and expenses include transfers between segments
and these transfers are conducted at arm's length. Shared costs are
included in segments on the basis of the actual recharges made.
(g) Going concern
The financial statements are prepared on a going concern basis,
as the Directors are satisfied that the group and parent company
have the resources to continue in business for the foreseeable
future. In making this assessment, the Directors have considered a
wide range of information relating to present and future
conditions, including future projections of profitability, cash
flows and capital resources.
1.2 Summary of significant accounting policies
(a) Consolidation and related policies
Investments in subsidiaries
Where an entity is governed by voting rights, the group
consolidates when it holds, directly or indirectly, the necessary
voting rights to pass resolutions by the governing body. In all
other cases, the assessment of control is more complex and requires
judgement of other factors, including having exposure to
variability of returns, power to direct relevant activities and
whether power is held as agent or principal.
Business combinations are accounted for using the acquisition
method. The amount of non-controlling interest is measured either
at fair value or at the non-controlling interest's proportionate
share of the acquiree's identifiable net assets. This election is
made for each business combination.
The Bank's investments in subsidiaries are stated at cost less
impairment losses.
Goodwill
Goodwill is allocated to cash-generating units for the purpose
of impairment testing. Impairment testing is performed at least
annually, or whenever there is an indication of impairment.
Interests in associates
The group classifies investments in entities over which it has
significant influence, and that are neither subsidiaries nor joint
arrangements, as associates.
Investments in associates are recognised using the equity
method. The attributable share of the results and reserves of
associates are included in the consolidated financial statements of
the group based on either financial statements made up to 31
December or pro-rated amounts adjusted for any material
transactions or events occurring between the date of financial
statements available and 31 December.
Investments in associates are assessed at each reporting date
and tested for impairment when there is an indication that the
investment may be impaired. Goodwill on acquisitions of interests
in associates is not tested separately for impairment but is
assessed as part of the carrying amount of the investment.
Critical accounting estimates and judgements
Impairment testing of investments in associates involves
significant judgement in determining the value in
use, and in particular estimating the present values
of cash flows expected to arise from continuing to
hold the investment. The most significant judgements
relate to the impairment testing of our investment
in Bank of Communications ('BoCom'). Key assumptions
used in estimating BoCom's value in use, the sensitivity
of the value in use calculation to different assumptions
and a sensitivity analysis that shows the changes
in key assumptions that would reduce the excess of
value in use over the carrying amount (the 'headroom')
to nil are described in note 15.
==========================================================
(b) Income and expenses
Operating income
Interest income and expense
Interest income and expense for all financial instruments,
excluding those classified as held for trading or designated at
fair value are recognised in 'Interest income' and 'Interest
expense' in the income statement using the effective interest
method. However, as an exception to this, interest on debt
securities issued by the group that are designated under the fair
value option and derivatives managed in conjunction with those debt
securities are included in interest expense.
Interest on impaired financial assets is recognised using the
rate of interest used to discount the future cash flows for the
purpose of measuring the impairment loss.
Non-interest income and expense
Fee income is earned from a diverse range of services provided
by the group to its customers. Fee income is accounted for as
follows:
-- income earned on the execution of a significant act is
recognised as revenue when the act is completed (for example, fees
arising from negotiating a transaction, such as the acquisition of
shares, for a third party); and
-- income earned from the provision of services is recognised as
revenue as the services are provided (for example, asset management
services).
Net trading income comprises all gains and losses from changes
in the fair value of financial assets and financial liabilities
held for trading, together with the related interest income,
expense and dividends.
Dividend income is recognised when the right to receive payment
is established. This is the ex-dividend date for listed equity
securities, and usually the date when shareholders approve the
dividend for unlisted equity securities.
Net income from financial instruments designated at fair value
includes all gains and losses from changes in the fair value of
financial assets and liabilities designated at fair value through
profit or loss, including derivatives that are managed in
conjunction with those financial assets and liabilities, and
liabilities under investment contracts. Interest income, interest
expense and dividend income in respect of those financial
instruments are also included, except for interest arising from
debt securities issued by the group and derivatives managed in
conjunction with those debt securities, which is recognised in
'Interest expense'.
The accounting policies for insurance premium income are
disclosed in note 1.2(f).
(c) Valuation of financial instruments
All financial instruments are initially recognised at fair
value. Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair value
of a financial instrument on initial recognition is generally its
transaction price (that is, the fair value of the consideration
given or received). However, if there is a difference between the
transaction price and the fair value of financial instruments whose
fair value is based on a quoted price in an active market or a
valuation technique that uses only data from observable markets,
the group recognises the difference as a trading gain or loss at
inception ('day 1 gain or loss'). In all other cases, the entire
day 1 gain or loss is deferred and recognised in the income
statement over the life of the transaction until the transaction
matures or is closed out, the valuation inputs become observable or
the group enters into an offsetting transaction.
The fair value of financial instruments is generally measured on
an individual basis. However, in cases where the group manages a
group of financial assets and liabilities according to its net
market or credit risk exposure, the fair value of the group of
financial instruments is measured on a net basis but the underlying
financial assets and liabilities are presented separately in the
financial statements, unless they satisfy the HKFRSs offsetting
criteria.
Critical accounting estimates and judgements
The majority of valuation techniques employ only observable
market data. However, certain financial instruments
are valued on the basis of valuation techniques that
feature one or more significant market inputs that
are unobservable, where the measurement of fair value
is more judgemental.
============================================================
(d) Financial instruments measured at amortised cost
Loans and advances to banks and customers, held-to-maturity
investments and most financial liabilities are measured at
amortised cost. The carrying value of these financial assets at
initial recognition includes any directly attributable transactions
costs. If the initial fair value is lower than the cash amount
advanced, such as for some leveraged finance and syndicated lending
activities, the difference is deferred and recognised over the life
of the loan (as described in paragraph (c) above) through the
recognition of interest income, unless the loan becomes
impaired.
The group may commit to underwrite loans on fixed contractual
terms for specified periods of time. When the loan arising from the
lending commitment is expected to be held for trading, the
commitment to lend is recorded as a derivative. When the group
intends to hold the loan, a provision on the loan commitment is
only recorded where it is probable that the group will incur a
loss.
Impairment of loans and advances
Losses for impaired loans are recognised when there is objective
evidence that impairment of a loan or portfolio of loans has
occurred. Losses which may arise from future events are not
recognised.
Individually assessed loans and advances
The factors considered in determining whether a loan is
individually significant for the purposes of assessing impairment
include the size of the loan, the number of loans in the portfolio,
the importance of the individual loan relationship and how this is
managed. Loans that are determined to be individually significant
will be individually assessed for impairment, except when volumes
of defaults and losses are sufficient to justify treatment under a
collective methodology.
Loans considered as individually significant are typically to
corporate and commercial customers, are for larger amounts and are
managed on an individual basis. For these loans, the group
considers on a case-by-case basis at each balance sheet date
whether there is any objective evidence that a loan is
impaired.
The determination of the realisable value of security is based
on the most recently updated market value at the time the
impairment assessment is performed. The value is not adjusted for
expected future changes in market prices, though adjustments are
made to reflect local conditions such as forced sale discounts.
Impairment losses are calculated by discounting the expected
future cash flows of a loan, which include expected future receipts
of contractual interest, at the loan's original effective interest
rate or an approximation thereof, and comparing the resultant
present value with the loan's current carrying amount.
Collectively assessed loans and advances
Impairment is assessed collectively to cover losses which have
been incurred but have not yet been identified on loans subject to
individual assessment or for homogeneous groups of loans that are
not considered individually significant, generally retail lending
portfolios.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of impairment
has been specifically identified on an individual basis are grouped
together according to their credit risk characteristics for a
collective impairment assessment. This assessment captures
impairment losses that the group has incurred as a result of events
occurring before the balance sheet date which the group is not able
to identify on an individual loan basis, and that can be reliably
estimated. When information becomes available which identifies
losses on individual loans within a group, those loans are removed
from the group and assessed individually.
Homogeneous groups of loans and advances
Statistical methods are used to determine collective impairment
losses for homogeneous groups of loans not considered individually
significant. The methods that are used to calculate collective
allowances are:
-- When appropriate empirical information is available, the
group utilises roll-rate methodology, which employs statistical
analyses of historical data and experience of delinquency and
default to reliably estimate the amount of the loans that will
eventually be written off as a result of the events occurring
before the balance sheet date. Individual loans are grouped using
ranges of past due days and statistical estimates are made of the
likelihood that loans in each range will progress through the
various stages of delinquency and become irrecoverable.
Additionally, individual loans are segmented based on their credit
characteristics; such as industry sector, loan grade or product. In
applying this methodology, adjustments are made to estimate the
periods of time between a loss event occurring, for example through
a missed payment, and its confirmation through write-off (known as
the loss identification period). Current economic conditions are
also evaluated when calculating the appropriate level of allowance
required to cover inherent loss. In certain highly-developed
markets, models also take into account behavioural and account
management trends as revealed in, for example, bankruptcy and
rescheduling statistics.
-- When the portfolio size is small or when information is
insufficient or not reliable enough to adopt a roll-rate
methodology, the group adopts a basic formulaic approach based on
historical loss rate experience, or a discounted cash flow model.
Where a basic formulaic approach is undertaken, the period between
a loss event occurring and its identification is explicitly
estimated by local management, and is typically between six and 12
months.
Write-off of loans and advances
Loans (and the related impairment allowance accounts) are
normally written off, either partially or in full, when there is no
realistic prospect of recovery. Where loans are secured, this is
generally after receipt of any proceeds from the realisation of
security. In circumstances where the net realisable value of any
collateral has been determined and there is no reasonable
expectation of further recovery, write-off may be earlier.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequent
period, and the decrease can be related objectively to an event
occurring after the impairment was recognised, the excess is
written back by reducing the loan impairment allowance account
accordingly. The write-back is recognised in the income
statement.
Assets acquired in exchange for loans
When non-financial assets acquired in exchange for loans as part
of an orderly realisation are held for sale, these assets are
recorded as 'Assets held for sale' and reported in 'Accruals and
deferred income, other liabilities and provisions'.
Renegotiated loans
Loans subject to collective impairment assessment whose terms
have been renegotiated are no longer considered past due, but are
treated as up to date loans for measurement purposes once a minimum
number of payments required have been received. Where collectively
assessed loan portfolios include significant levels of renegotiated
loans, these loans are segregated from other parts of the loan
portfolio for the purposes of collective impairment assessment to
reflect their risk profile. Loans subject to individual impairment
assessment, whose terms have been renegotiated, are subject to
ongoing review to determine whether they remain impaired. The
carrying amounts of loans that have been classified as renegotiated
retain this classification until maturity or derecognition.
A loan that is renegotiated is derecognised if the existing
agreement is cancelled and a new agreement made on substantially
different terms or if the terms of an existing agreement are
modified such that the renegotiated loan is substantially a
different financial instrument. Any new loans that arise following
derecognition events will continue to be disclosed as renegotiated
loans and are assessed for impairment as above.
Critical accounting estimates and judgements
Loan impairment allowances represent management's
best estimate of losses incurred in the loan portfolios
at the balance sheet date. Management is required
to exercise judgement in making assumptions and estimates
when calculating loan impairment allowances on both
individually and collectively assessed loans and advances.
Collective impairment allowances are subject to estimation
uncertainty, in part because it is not practicable
to identify losses on an individual loan basis due
to the large number of individually insignificant
loans in the portfolio. The estimation methods include
the use of statistical analyses of historical information,
supplemented with significant management judgement,
to assess whether current economic and credit conditions
are such that the actual level of incurred losses
is likely to be greater or less than historical experience.
Where changes in economic, regulatory or behavioural
conditions result in the most recent trends in portfolio
risk factors being not fully reflected in the statistical
models, risk factors are taken into account by adjusting
the impairment allowances derived solely from historical
loss experience.
Risk factors include loan portfolio growth, product
mix, unemployment rates, bankruptcy trends, geographical
concentrations, loan product features, economic conditions
such as national and local trends in housing markets,
the level of interest rates, portfolio seasoning,
account management policies and practices, changes
in laws and regulations and other influences on customer
payment patterns. Different factors are applied in
different regions and countries to reflect local economic
conditions, laws and regulations. The methodology
and the assumptions used in calculating impairment
losses are reviewed regularly in the light of differences
between loss estimates and actual loss experience.
For example, roll rates, loss rates and the expected
timing of future recoveries are regularly benchmarked
against actual outcomes to ensure they remain appropriate.
For individually assessed loans, judgement is required
in determining whether there is objective evidence
that a loss event has occurred and, if so, the measurement
of the impairment allowance. In determining whether
there is objective evidence that a loss event has
occurred, judgement is exercised in evaluating all
relevant information on indicators of impairment,
including the consideration of whether payments are
contractually past-due and the consideration of other
factors indicating deterioration in the financial
condition and outlook of borrowers affecting their
ability to pay.
A higher level of judgement is required for loans
to borrowers showing signs of financial difficulty
in market sectors experiencing economic stress, particularly
where the likelihood of repayment is affected by the
prospects for refinancing or the sale of a specified
asset. For those loans where objective evidence of
impairment exists, management determine the size of
the allowance required based on a range of factors
such as the realisable value of security, the likely
dividend available on liquidation or bankruptcy, the
viability of the customer's business model and the
capacity to trade successfully out of financial difficulties
and generate sufficient cash flow to service debt
obligations.
The exercise of judgement requires the use of assumptions
which are highly subjective and very sensitive to
the risk factors, in particular to changes in economic
and credit conditions across a large number of geographical
areas. Many of the factors have a high degree of interdependency
and there is no single factor to which our loan impairment
allowances as a whole are sensitive.
==================================================================
Non-trading reverse repurchase, repurchase and similar
agreements
When debt securities are sold subject to a commitment to
repurchase them at a predetermined price ('repos'), they remain on
the balance sheet and a liability is recorded in respect of the
consideration received. Securities purchased under commitments to
resell ('reverse repos') are not recognised on the balance sheet
and an asset is recorded in respect of the initial consideration
paid. Non-trading repos and reverse repos are measured at amortised
cost. The difference between the sale and repurchase price or
between the purchase and resale price is treated as interest and
recognised in net interest income over the life of the
agreement.
Contracts that are economically equivalent to reverse repurchase
or repurchase agreements (such as sales or purchases of debt
securities entered into together with total return swaps with the
same counterparty) are accounted for similarly to, and presented
together with, reverse repurchase or repurchase agreements.
(e) Financial instruments measured at fair value
Available-for-sale financial assets
Available-for-sale financial assets are recognised on the trade
date when the group enters into contractual arrangements to
purchase those instruments, and are normally derecognised when they
are either sold or redeemed. They are subsequently remeasured at
fair value, and changes therein are recognised in other
comprehensive income until the assets are either sold or become
impaired. Upon disposal, the cumulative gains or losses in other
comprehensive income are recognised in the income statement as
'Gains less losses from financial investments'.
Impairment of available-for-sale financial assets
Available-for-sale financial assets are assessed at each balance
sheet date for objective evidence of impairment. Impairment losses
are recognised in the income statement within 'Loan impairment
charges and other credit risk provisions' for debt instruments and
within 'Gains less losses from financial investments' for
equities.
Available-for-sale debt securities
In assessing objective evidence of impairment at the reporting
date, the group considers all available evidence, including
observable data or information about events specifically relating
to the securities which may result in a shortfall in the recovery
of future cash flows. A subsequent decline in the fair value of the
instrument is recognised in the income statement when there is
objective evidence of impairment as a result of decreases in the
estimated future cash flows. Where there is no further objective
evidence of impairment, the decline in the fair value of the
financial asset is recognised in other comprehensive income. If the
fair value of a debt security increases in a subsequent period, and
the increase can be objectively related to an event occurring after
the impairment loss was recognised in the income statement, or the
instrument is no longer impaired, the impairment loss is reversed
through the income statement.
Available-for-sale equity securities
A significant or prolonged decline in the fair value of the
equity below its cost is objective evidence of impairment. In
assessing whether it is significant, the decline in fair value is
evaluated against the original cost of the asset at initial
recognition. In assessing whether it is prolonged, the decline is
evaluated against the continuous period in which the fair value of
the asset has been below its original cost at initial
recognition.
All subsequent increases in the fair value of the instrument are
treated as a revaluation and are recognised in other comprehensive
income. Subsequent decreases in the fair value of the
available-for-sale equity security are recognised in the income
statement to the extent that further cumulative impairment losses
have been incurred. Impairment losses recognised on the equity
security are not reversed through the income statement.
Financial instruments designated at fair value
Financial instruments, other than those held for trading, are
classified in this category if they meet one or more of the
criteria set out below, and are so designated irrevocably at
inception:
-- the use of the designation removes or significantly reduces an accounting mismatch;
-- when a group of financial assets, liabilities or both is
managed and its performance is evaluated on a fair value basis, in
accordance with a documented risk management or investment
strategy; and
-- where financial instruments contain one or more non-closely related embedded derivatives.
Designated financial assets are recognised when the group enters
into contracts with counterparties, which is generally on trade
date, and are normally derecognised when the rights to the cash
flows expire or are transferred. Designated financial liabilities
are recognised when the group enters into contracts with
counterparties, which is generally on settlement date, and are
normally derecognised when extinguished. Subsequent changes in fair
values are recognised in the income statement in 'Net income from
financial instruments designated at fair value'.
Under this criterion, the main classes of financial instruments
designated by the group are:
Long-term debt issues
The interest and/or foreign exchange exposure on certain fixed
rate debt securities issued has been matched with the interest
and/or foreign exchange exposure on certain swaps as part of a
documented risk management strategy.
Financial assets and financial liabilities under unit-linked and
non-linked investment contracts
A contract under which the group does not accept significant
insurance risk from another party is not classified as an insurance
contract, other than investment contracts with discretionary
participation features ('DPF'), but is accounted for as a financial
liability. See note 1.2(f) for investment contracts with DPF and
contracts where the group accepts significant insurance risk.
Customer liabilities under linked and certain non-linked investment
contracts issued by insurance subsidiaries and the corresponding
financial assets are designated at fair value. Liabilities are at
least equivalent to the surrender or transfer value which is
calculated by reference to the value of the relevant underlying
funds or indices. Premiums receivable and amounts withdrawn are
accounted for as increases or decreases in the liability recorded
in respect of investment contracts. The incremental costs directly
related to the acquisition of new investment contracts or renewing
existing investment contracts are deferred and amortised over the
period during which the investment management services are
provided.
Derivatives
Derivatives are financial instruments that derive their value
from the price of underlying items such as equities, interest rates
or other indices. Derivatives are recognised initially and are
subsequently measured at fair value, with changes in fair value
generally recorded in the income statement. Derivatives are
classified as assets when their fair value is positive or as
liabilities when their fair value is negative. This includes
embedded derivatives which are bifurcated from the host contract
when they meet the definition of a derivative on a
stand-alone basis and are required by HKFRSs to be accounted for
separately from the host contract.
Gains and losses from changes in the fair value of derivatives
that do not qualify for hedge accounting are reported in 'Net
trading income'. Gains and losses on derivatives managed in
conjunction with financial instruments designated at fair value are
reported in 'Net income from financial instruments designated at
fair value' together with the gains and losses on the economically
hedged items. Where the derivatives are managed with debt
securities issued by the group that are designated at fair value,
the contractual interest is shown in 'Interest expense' together
with the interest payable on the issued debt.
Hedge accounting
When derivatives are held for risk management purposes they are
designated in hedge relationships where the required criteria for
documentation and hedge effectiveness are met. The group enters
into fair value hedges, cash flow hedges or hedges of net
investments in foreign operations as appropriate to the risk being
hedged.
Fair value hedge
Changes in the fair value of derivatives are recorded in the
income statement, along with changes in the fair value of the
hedged assets or liabilities attributable to the hedged risk. If a
hedge relationship no longer meets the criteria for hedge
accounting, hedge accounting is discontinued; the cumulative
adjustment to the carrying amount of the hedged item is amortised
to the income statement on a recalculated effective interest rate
over the residual period to maturity, unless the hedged item has
been derecognised, in which case it is recognised in the income
statement immediately.
Cash flow hedge
The effective portion of gains and losses on hedging instruments
is recognised in other comprehensive income; the ineffective
portion of the change in fair value of hedging instruments that are
part of a cash flow hedge relationship is recognised immediately in
the income statement within 'Net trading income'. The accumulated
gains and losses recognised in other comprehensive income are
reclassified to the income statement in the same periods in which
the hedged item affects profit or loss. In hedges of forecast
transactions that result in recognition of a non-financial asset or
liability, previous gains and losses recognised in other
comprehensive income are included in the initial measurement of the
asset or liability. When a hedge relationship is discontinued, any
cumulative gain or loss recognised in other comprehensive income
remains in equity until the forecast transaction is recognised in
the income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss previously
recognised in other comprehensive income is immediately
reclassified to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted
for in a similar way to cash flow hedges. The effective portion of
gains and losses on the hedging instrument is recognised in other
comprehensive income; other gains and losses are recognised
immediately in the income statement. Gains and losses previously
recognised in other comprehensive income are reclassified to the
income statement on the disposal, or part disposal, of the foreign
operation.
Derivatives that do not qualify for hedge accounting
Non-qualifying hedges are derivatives entered into as economic
hedges of assets and liabilities for which hedge accounting was not
applied.
(f) Insurance contracts
A contract is classified as an insurance contract where the
group accepts significant insurance risk from another party by
agreeing to compensate that party on the occurrence of a specified
uncertain future event. An insurance contract may also transfer
financial risk, but is accounted for as an insurance contract if
the insurance risk is significant. In addition, the group issues
investment contracts with discretionary participation features
('DPF') which are also accounted for as insurance contracts as
required by HKFRS 4 'Insurance Contracts'.
Net insurance premium income
Premiums for life insurance contracts are accounted for when
receivable, except in unit-linked insurance contracts where
premiums are accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting
period as the premiums for the direct insurance contracts to which
they relate.
Net insurance claims and benefits paid and movements in
liabilities to policyholders
Gross insurance claims for life insurance contracts reflect the
total cost of claims arising during the year, including claim
handling costs and any policyholder bonuses allocated in
anticipation of a bonus declaration.
Maturity claims are recognised when due for payment. Surrenders
are recognised when paid or at an earlier date on which, following
notification, the policy ceases to be included within the
calculation of the related insurance liabilities. Death claims are
recognised when notified.
Reinsurance recoveries are accounted for in the same period as
the related claim.
Liabilities under insurance contracts
Liabilities under non-linked life insurance contracts are
calculated by each life insurance operation based on local
actuarial principles. Liabilities under unit-linked life insurance
contracts are at least equivalent to the surrender or transfer
value, which is calculated by reference to the value of the
relevant underlying funds or indices.
Future profit participation on insurance contracts with DPF
Where contracts provide discretionary profit participation
benefits to policyholders, liabilities for these contracts include
provisions for the future discretionary benefits to policyholders.
These provisions reflect the actual performance of the investment
portfolio to date and management's expectation of the future
performance of the assets backing the contracts, as well as other
experience factors such as mortality, lapses and operational
efficiency, where appropriate. This benefit may arise from the
contractual terms, regulation, or past distribution policy.
Investment contracts with DPF
While investment contracts with DPF are financial instruments,
they continue to be treated as insurance contracts as required by
HKFRS 4. The group therefore recognises the premiums for those
contracts as revenue and recognises as an expense the resulting
increase in the carrying amount of the liability.
In the case of net unrealised investment gains on these
contracts, whose discretionary benefits principally reflect the
actual performance of the investment portfolio, the corresponding
increase in the liabilities is recognised in either the income
statement or other comprehensive income, following the treatment of
the unrealised gains on the relevant assets. In the case of net
unrealised losses, a deferred participating asset is recognised
only to the extent that its recoverability is highly probable.
Movements in the liabilities arising from realised gains and losses
on relevant assets are recognised in the income statement.
Present value of in-force long-term insurance business
The value placed on insurance contracts that are classified as
long-term insurance business or long-term investment contracts with
DPF and are in force at the balance sheet date is recognised as an
asset. The asset represents the present value of the equity
holders' interest in the issuing insurance companies' profits
expected to emerge from these contracts written at the balance
sheet date. The PVIF asset is presented gross of attributable tax
in the balance sheet and movements in the PVIF asset are included
in 'Other operating income' on a gross of tax basis.
Critical accounting estimates and judgements
The value of PVIF depends upon assumptions regarding
future events. The PVIF is determined by discounting
those expected future profits using appropriate assumptions
in assessing factors such as future mortality, lapse
rates and levels of expenses, and a risk discount
rate that reflects the risk premium attributable to
the respective contracts. The PVIF incorporates allowances
for both non-market risk and the value of financial
options and guarantees. The assumptions are reassessed
at each reporting date and changes in the estimates
which affect the value of PVIF are reflected in the
income statement.
=============================================================
(g) Property
Land and buildings
Land and buildings held for own use are carried at their
revalued amount, being the fair value at the date of the
revaluation less any subsequent accumulated depreciation and
impairment losses.
Revaluations are performed by professional qualified valuers, on
a market basis, with sufficient regularity to ensure that the net
carrying amount does not differ materially from the fair value.
Surpluses arising on revaluation are credited firstly to the income
statement, to the extent of any deficits arising on revaluation
previously charged to the income statement in respect of the same
land and buildings, and are thereafter taken to the 'Property
revaluation reserve'. Deficits arising on revaluation are first set
off against any previous revaluation surpluses included in the
'Property revaluation reserve' in respect of the same land and
buildings, and are thereafter recognised in the income
statement.
Buildings held for own use which are situated on leasehold land
where it is possible to reliably separate the value of the building
from the value of the leasehold land at inception of the lease are
revalued by professional qualified valuers, on a depreciated
replacement cost basis or surrender value, with sufficient
regularity to ensure that the net carrying amount does not differ
materially from the fair value.
Leasehold land and buildings are depreciated over the shorter of
the unexpired terms of the leases or the remaining useful
lives.
The Government of Hong Kong owns all the land in Hong Kong and
permits its use under leasehold arrangements. Similar arrangements
exist in mainland China. At inception of the lease, where the cost
of land is known or can be reliably determined and the term of the
lease is not less than 50 years, the group records its interests in
leasehold land and land use rights as land and buildings held for
own use. Where the term is less than 50 years, the group records
its interests as operating leases.
Where the cost of the land is unknown or cannot be reliably
determined, and the leasehold land and land use rights are not
clearly held under an operating lease, they are accounted for as
land and buildings held for own use.
Investment properties
The group holds certain properties as investments to earn
rentals or for capital appreciation, or both, and those investment
properties are included on balance sheet at fair value with changes
in fair value being recognised in the income statement.
(h) Employee compensation and benefits
Post-employment benefit plans
The group operates a number of pension schemes (including
defined benefit and defined contribution) and post-employment
benefit schemes.
Payments to defined contribution plans are charged as an expense
as the employees render service.
Defined benefit pension obligations are calculated using the
projected unit credit method. The net charge to the income
statement mainly comprises the service cost and the net interest on
the net defined benefit asset or liability and is presented in
operating expenses.
Re-measurements of the net defined benefit asset or liability,
which comprise actuarial gains and losses, return on plan assets
(excluding interest) and the effect of the asset ceiling (if any,
excluding interest), are recognised immediately in other
comprehensive income. The net defined benefit asset or liability
represents the present value of defined benefit obligations reduced
by the fair value of plan assets after applying the asset ceiling
test where the net defined benefit surplus is limited to the
present value of available refunds and reductions in future
contributions to the plan.
(i) Tax
Income tax comprises current tax and deferred tax. Income tax is
recognised in the income statement except to the extent that it
relates to items recognised in other comprehensive income or
directly in equity, in which case it is recognised in the same
statement in which the related item appears.
Current tax is the tax expected to be payable on the taxable
profit for the year and any adjustment to tax payable in respect of
previous years. The group provides for potential current tax
liabilities that may arise on the basis of the amounts expected to
be paid to the tax authorities.
Deferred tax is recognised on temporary differences between the
carrying amounts of assets and liabilities in the balance sheet and
the amounts attributed to such assets and liabilities for tax
purposes. Deferred tax is calculated using the tax rates expected
to apply in the periods in which the assets will be realised or the
liabilities settled.
Current and deferred tax is calculated based on tax rates and
laws enacted, or substantively enacted, by the balance sheet
date.
(j) Provisions, contingent liabilities and guarantees
Provisions
Provisions are recognised when it is probable that an outflow of
economic benefits will be required to settle a present legal or
constructive obligation which has arisen as a result of past events
and for which a reliable estimate can be made.
Critical accounting estimates and judgements
Provisions
Judgement is involved in determining whether a present
obligation exists and in estimating the probability,
timing and amount of any outflows. Professional expert
advice is taken on the assessment of litigation, property
(including onerous contracts) and similar obligations.
Provisions for legal proceedings and regulatory matters
typically require a higher degree of judgement than
other types of provisions. When matters are at an
early stage, accounting judgements can be difficult
because of the high degree of uncertainty associated
with determining whether a present obligation exists,
and estimating the probability and amount of any outflows
that may arise. As matters progress, management and
legal advisers evaluate on an ongoing basis whether
provisions should be recognised, revising previous
judgements and estimates as appropriate. At more advanced
stages, it is typically easier to make judgements
and estimates around a better defined set of possible
outcomes. However, the amount provisioned can remain
very sensitive to the assumptions used. There could
be a wide range of possible outcomes for any pending
legal proceedings, investigations or inquiries. As
a result, it is often not practicable to quantify
a range of possible outcomes for individual matters.
It is also not practicable to meaningfully quantify
ranges of potential outcomes in aggregate for these
types of provisions because of the diverse nature
and circumstances of such matters and the wide range
of uncertainties involved.
===========================================================
Contingent liabilities, contractual commitments and
guarantees
Contingent liabilities
Contingent liabilities, which include certain guarantees and
letters of credit pledged as collateral security and contingent
liabilities related to legal proceedings or regulatory matters, are
not recognised in the financial statements but are disclosed unless
the probability of settlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts which are not
classified as insurance contracts are recorded initially at their
fair value, which is generally the fee received or present value of
the fee receivable.
The Bank has issued financial guarantees and similar contracts
to other group entities. The group elects to account for certain
guarantees as insurance contracts in the Bank financial statements,
in which case they are measured and recognised as insurance
liabilities. This election is made on a contract by contract basis,
and is irrevocable.
2 Operating profit
-----------------
(a) Net interest income
Within net interest income, there is an amount of HK$277m (2016:
HK$374m) interest income recognised on impaired financial assets in
the year.
(b) Net fee income
2017 2016
HK$m HK$m
Account services 2,863 3,063
Funds under management 7,000 5,771
Cards 7,622 7,063
Credit facilities 2,886 2,825
Broking income 4,386 3,131
Imports/exports 3,627 3,771
Unit trusts 6,987 5,855
Underwriting 1,477 1,188
Remittances 3,316 3,324
Global custody 3,626 3,450
Insurance agency commission 1,982 1,746
Other 6,540 5,952
Fee income 52,312 47,139
----------------------------- ------ ------
Fee expense (9,162) (7,837)
43,150 39,302
----------------------------- ------ ------
Net fee income includes
2017 2016
HK$m HK$m
Net fee income includes the following:
Net fee income, other than amounts included
in determining the effective interest rate,
arising from financial assets or financial
liabilities that are not held for trading
or designated at fair value 11,031 11,602
------ ------
- fee income 15,443 14,892
----------------------------------------------
- fee expense (4,412) (3,290)
------ ------
Net fee income on trust and other fiduciary
activities where the group holds or invests
assets on behalf of its customers 8,904 7,706
------
- fee income 9,843 8,551
----------------------------------------------
- fee expense (939) (845)
---------------------------------------------- ------ ------
(c) Net trading income
2017 2016
HK$m HK$m
Dealing profits 15,847 18,195
Net interest income on trading activities 4,194 3,718
------------------------------------------- ------ ------
Dividend income from trading securities 3,146 2,074
Gains from hedging activities 23 77
Fair value hedges
------------------------------------------- ------- ---------
- net loss on hedged items attributable
to the hedged risk (850) (2,550)
- net gain on hedging instruments 835 2,598
Cash flow hedges
------- ---------
- net hedging gain 38 29
------------------------------------------- ------ ------
23,210 24,064
------------------------------------------- ------ ------
(d) Net income from financial instruments designated at fair value
2017 2016
HK$m HK$m
Income on assets designated at fair value
which back insurance and investment contracts 18,162 4,104
------
Increase in fair value of liabilities to
customers under investment contracts (2,555) (651)
15,607 3,453
------------------------------------------------- ------ -----
Net change in fair value of other financial
assets/liabilities designated at fair value(1) (242) 102
Interest income on financial assets and
liabilities designated at fair value 15 15
15,380 3,570
------------------------------------------------- ------ -----
1 On 1 January 2017, the group adopted the requirements of Hong
Kong Financial Reporting Standard ('HKFRS') 9 relating to the
presentation of gains and losses on financial liabilities
designated at fair value. As a result, the effect of changes in
fair value of those liabilities arising from changes in own credit
risk is presented in other comprehensive income and taken to
retained earnings. In 2016, the group recognised a HK$62m gain from
changes in the fair value of the group's issued debt securities
arising from changes in own credit risk.
(e) Gains less losses from financial investments
2017 2016
HK$m HK$m
Gains on disposal of available-for-sale
securities 2,113 1,234
----------------------------------------- ----- -----
Impairment of available-for-sale equity
investments (5) (2)
----------------------------------------- ----- -----
2,108 1,232
----------------------------------------- ----- -----
There were no gains or losses on the disposal of
held-to-maturity investments in the year (2016: nil).
(f) Other operating income
2017 2016
HK$m HK$m
Movement in present value of in-force insurance
business 305 7,306
----- ------
Gains on investment properties 416 36
----- ------
Gains/(losses) on disposal of property,
plant and equipment and assets held for
sale 77 (57)
----- ------
Gains/(losses) on disposal of subsidiaries,
associates and business portfolios (186) 1
----- ------
Rental income from investment properties 426 400
------------------------------------------------- ----- ------
Other 3,702 3,830
------------------------------------------------- ----- ------
4,740 11,516
------------------------------------------------- ----- ------
Other included net losses on loans and receivables of HK$75m
(2016: gain of HK$146m). There were no gains or losses on disposal
of financial liabilities measured at amortised cost in the year
(2016: nil).
(g) Loan impairment charges and other credit risk provisions
2017 2016
HK$m HK$m
Individually assessed impairment charges: 2,194 3,380
------ ------
- new charges 4,239 5,224
- releases (1,865) (1,567)
- recoveries (180) (277)
------------------------------------------- ------ ------
Collectively assessed impairment charges 2,136 2,065
Other credit risk provisions 107 109
4,437 5,554
------------------------------------------- ------ ------
There were no impairment charges against available-for-sale debt
securities and held-to-maturity investments in the year (2016:
nil).
(h) General and administrative expenses
2017 2016
HK$m HK$m
Premises and equipment 7,814 7,772
------ ------
- rental expenses 3,717 3,665
-----------------------------------------
- other premises and equipment expenses 4,097 4,107
----------------------------------------- ------ ------
Marketing and advertising expenses 2,785 2,909
----------------------------------------- ------ ------
Other administrative expenses 24,187 19,236
----------------------------------------- ------ ------
34,786 29,917
----------------------------------------- ------ ------
Included in operating expenses were direct operating expenses of
HK$32m (2016: HK$27m) arising from investment properties that
generated rental income in the year. Direct operating expenses
arising from investment properties that did not generate rental
income amounted to HK$4m (2016: HK$4m).
Included in operating expenses were minimum lease payments under
operating leases of HK$3,598m (2016: HK$3,675m).
(i) Auditors' remuneration
Auditors' remuneration amounted to HK$122m (2016: HK$82m).
3 Insurance Income
-----------------
(a) Net insurance premium income
Non-linked Linked
insurance insurance Total
HK$m HK$m HK$m
---------- ---------- ---------
2017
Gross insurance premium income 61,577 1,669 63,246
--------- --------- ------
Reinsurers' share of gross insurance
premium income (7,052) (18) (7,070)
--------------------------------------
54,525 1,651 56,176
-------------------------------------- --------- --------- ------
2016
Gross insurance premium income 57,349 2,522 59,871
Reinsurers' share of gross insurance
premium income (3,930) (29) (3,959)
-------------------------------------- --------- --------- ------
53,419 2,493 55,912
-------------------------------------- --------- --------- ------
(b) Net insurance claims and benefits paid and movement in liabilities to policyholders
Non-linked Linked
insurance insurance Total
HK$m HK$m HK$m
---------- ---------- ---------
2017
Gross claims and benefits paid and
movement in liabilities to policyholders 65,671 8,841 74,512
Claims, benefits and surrenders paid 19,765 7,239 27,004
Movement in liabilities 45,906 1,602 47,508
--------- --------- ------
Reinsurers' share of claims and benefits
paid and movement in liabilities (6,894) 1,172 (5,722)
Reinsurers' share of claims, benefits
and surrenders paid (1,727) (1,715) (3,442)
Reinsurers' share of movement in liabilities (5,167) 2,887 (2,280)
--------- --------- ------
58,777 10,013 68,790
---------------------------------------------- --------- --------- ------
2016
Gross claims and benefits paid and
movement in liabilities to policyholders 63,473 4,472 67,945
Claims, benefits and surrenders paid 19,099 2,395 21,494
Movement in liabilities 44,374 2,077 46,451
Reinsurers' share of claims and benefits
paid and movement in liabilities (3,514) 155 (3,359)
Reinsurers' share of claims, benefits
and surrenders paid (319) (80) (399)
Reinsurers' share of movement in liabilities (3,195) 235 (2,960)
59,959 4,627 64,586
---------------------------------------------- --------- --------- ------
4 Employee compensation and benefits
-----------------------------------
(a) Employee compensation and benefits
2017 2016
HK$m HK$m
Wages and salaries 36,485 35,376
------
Social security costs 1,110 1,022
------ ------
Retirement benefit costs 2,500 2,498
------
- defined contribution plans 1,685 1,505
- defined benefit plans 815 993
------
40,095 38,896
------------------------------ ------ ------
'Wages and salaries' include the effect of share-based payments
arrangements as follows:
2017 2016
HK$m HK$m
----- -------
Restricted share awards 944 985
---------------------------------------- ----- -----
Savings-related shares and other share
option plans 108 107
---------------------------------------- ----- -----
1,052 1,092
---------------------------------------- ----- -----
(b) Directors' emoluments
The aggregate emoluments of the Directors of the Bank disclosed
pursuant to section 4 of the Companies (Disclosure of Information
about Benefits of Directors) Regulation were HK$111m (2016:
HK$102m). This comprises fees of HK$9m (2016: HK$9m) and other
emoluments of HK$102m (2016: HK$93m) which includes contributions
to pension schemes of HK$1m (2016: HK$1m). Non-cash benefits which
are included in other emoluments mainly relate to share-based
payment awards, and the provision of housing and furnishing.
Details on loans to directors are set out in note 35.
(c) Retirement benefit pension plans
The group operates a number of retirement benefit plans, with a
total cost of HK$2,500m (2016: HK$2,498m), the largest of which is
the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme
('the Principal Plan').
In Hong Kong, the Principal Plan covers employees of the Bank
and certain other local employees of the Group. The Principal Plan
comprises a funded defined benefit scheme (which provides a lump
sum on retirement but is now closed to new members) and a defined
contribution scheme. The latter was established on 1 January 1999
for new employees, and the group has been moving to defined
contribution plans for all new employees. Since the defined benefit
element of the Principal Plan is a final salary lump sum scheme,
its exposure to longevity risk and interest rate risk is
limited.
The trustee assumes the overall responsibility for the Principal
Plan but a management committee and a number of sub-committees have
also been established. These committees have been established to
broaden the governance and manage the concomitant issues.
The Principal Plan is predominantly a funded plan with assets
which are held in trust funds separate from the group. The
actuarial funding valuation of the Principal Plan is reviewed at
least on a triennial basis or in accordance with local practice and
regulations. The actuarial assumptions used to conduct the
actuarial funding valuation of the Principal Plan vary according to
the economic conditions.
The defined benefit scheme of the Principal Plan mainly invests
in bonds with a smaller portion in equities and each investment
manager has been assigned a benchmark applicable to their
respective asset class. The target asset allocations for the
portfolio are as follows: Bonds 65% and Equity 35%.
(i) Cumulative actuarial losses recognised in other
comprehensive income in respect of defined benefit plans
2017 2016
HK$m HK$m
At 1 January (7,287) (8,303)
------
Actuarial gains recognised in other comprehensive
income 1,640 1,016
------
At 31 December (5,647) (7,287)
--------------------------------------------------- ------ ------
(ii) Net asset/(liability) under defined benefit pension plans
Net defined benefit liability
Present
Fair value
value of defined Net defined
of plan benefit benefit
assets obligations liability
HK$m HK$m HK$m
------------ -------------
At 1 Jan 2017 14,755 (18,552) (3,797)
------- ----------- ----------
Service cost - (722) (722)
------------------------------------------------- ------- ----------- ----------
Current service cost - (748) (748)
Past service cost and gains from settlements(1) - 26 26
------- ----------- ----------
Net interest expense on the net defined
benefit liability 281 (362) (81)
------- ----------- ----------
Remeasurement effects recognised in
other comprehensive income 1,633 7 1,640
------- ----------- ----------
- return on plan assets (excluding
interest income) 1,633 - 1,633
- actuarial gains - 7 7
------------------------------------------------- ------- ----------- ----------
Exchange differences and other movements(2) (450) 482 32
------- ----------- ----------
Contributions by the group 722 - 722
------- ----------- ----------
Benefits paid (1,774) 1,839 65
------------------------------------------------- ------- ----------- ----------
At 31 Dec 2017 15,167 (17,308) (2,141)
------------------------------------------------- ------- ----------- ----------
Retirement benefit liabilities recognised
on the balance sheet (2,222)
-------------------------------------------------
Retirement benefit assets recognised
on the balance sheet (within 'Prepayment,
accrued income and other assets') 81
Present value of defined benefit obligation
relating to:
- actives (17,044)
- pensioners (264)
------------------------------------------------- -------- ----------- -------------
Net defined benefit liability (continued)
Present
Fair value
value of defined Net defined
of plan benefit benefit
assets obligations liability
HK$m HK$m HK$m
-------- ------------ -------------
At 1 Jan 2016 13,974 (19,736) (5,762)
Service cost - (878) (878)
--------------------------------------------
Current service cost - (846) (846)
Past service cost and losses from
settlements(1) - (32) (32)
-------- ----------- ----------
Net interest income/(expense) on
the net defined benefit liability 303 (415) (112)
Remeasurement effects recognised
in other comprehensive income 91 925 1,016
- return on plan assets (excluding
interest income) 91 - 91
- actuarial gains - 925 925
-------- ----------- ----------
Exchange differences and other movements (19) 28 9
Contributions by the group 1,889 - 1,889
Benefits paid (1,483) 1,524 41
--------------------------------------------
At 31 Dec 2016 14,755 (18,552) (3,797)
-------------------------------------------- ------- ----------- ----------
Retirement benefit liabilities recognised
on the balance sheet (3,867)
Retirement benefit assets recognised
on the balance sheet (within 'Prepayment,
accrued income and other assets') 70
-------- ------------ ----------
Present value of defined benefit
obligation relating to:
-------- ------------ -------------
- actives (18,300)
- pensioners (252)
-------------------------------------------- -------- ----------- -------------
1 Gains/(losses) from settlements arise as the difference
between assets distributed and liabilities extinguished on
settlements.
2 Other movements in 2017 included the impact from transfer of
certain employees to a fellow subsidiary.
The group expects to make HK$740m of contributions to defined
benefit pension plans during 2018.
(iii) Fair value of plan assets by asset classes
2017 2016
Quoted
Quoted market
market price
price in
in active Thereof active Thereof
Value market HSBC Value market HSBC
HK$m HK$m HK$m HK$m HK$m HK$m
Fair value of plan
assets 15,167 15,167 321 14,755 14,755 1,348
------ ---------- -------
- equities 4,791 4,791 - 5,260 5,260 -
- bonds 9,539 9,539 - 7,358 7,358 -
- other(1) 837 837 321 2,137 2,137 1,348
-------------------- ------ ---------- ------- ------ ------- -------
1 Other mainly consists of cash and deposits.
(iv) Benefits expected to be paid from the Principal Plan
Benefits expected to be paid from the Principal Plan to retirees
over each of the next five years, and in aggregate for the five
years thereafter, are as follows:
2018 2019 2020 2021 2022 2023-2027
HK$m HK$m HK$m HK$m HK$m HK$m
HSBC Group Hong Kong Local
Staff Retirement Benefit Scheme 559 861 980 1,093 1,049 3,854
---------------------------------- ---- ---- ---- ----- ----- ---------
(v) The Principal Plan's principal actuarial financial assumptions
The present value of the Principal Plan's obligation was
HK$10,086m (2016: HK$11,215m). The principal actuarial assumptions
used to calculate the group's obligations for the Principal Plan
for the year, and used as the basis for measuring the expenses in
relation to the Principal Plan, were as follows:
2017 2016
% p.a. % p.a.
Discount rate 1.70 1.80
Rate of pay increase 3.0 3.0
Mortality table HKLT2016(1) HKLT2015
---------------------- ----------- ----------
1 HKLT2016- Hong Kong Life Tables 2016.
The group determines the discount rates to be applied to its
obligations in consultation with the Principal Plan's local
actuary, on the basis of current average yields of Hong Kong
Government bonds and Hong Kong Exchange Fund Notes, with maturities
consistent with those of the defined benefit obligations.
(vi) Actuarial assumption sensitivities
The discount rate and rate of pay increase are sensitive to
changes in market conditions arising during the reporting period.
The following table shows the financial impact of assumption
changes on the Principal Plan at year end:
2017 2016
Impact on Pension Obligation: HK$m HK$m
----- -------
Discount rate
-----
- increase of 25bps (183) (215)
- decrease of 25bps 189 222
----
Rate of pay increase
-----
- increase of 25bps 193 227
- decrease of 25bps (188) (221)
------------------------------- ---- ----
5 Tax expense
------------
The Bank and its subsidiaries in Hong Kong have provided for
Hong Kong profits tax at the rate of 16.5% (2016: 16.5%) on the
profits for the year assessable in Hong Kong. Overseas branches and
subsidiaries have similarly provided for tax in the countries in
which they operate at the appropriate rates of tax ruling in 2017.
Deferred taxation is provided for in accordance with the group's
accounting policy in note 1.2(i).
The charge for taxation in the income statement comprises:
2017 2016
HK$m HK$m
Current tax 18,801 15,754
------ ------
- Hong Kong taxation - on current year
profit 10,489 8,567
- Hong Kong taxation - adjustments in respect
of prior years (3) (74)
- overseas taxation - on current year profit 8,588 7,598
- overseas taxation - adjustments in respect
of prior years (273) (337)
------ ------
Deferred tax 800 2,158
------ ------
- origination and reversal of temporary
differences 805 2,159
- effect of changes in tax rates 3 13
- adjustments in respect of prior years (8) (14)
------ ------
19,601 17,912
----------------------------------------------- ------ ------
Reconciliation between taxation charge and accounting
profit at applicable tax rates
2017 2016
HK$m HK$m
Profit before tax 115,619 102,707
Notional tax on profit before tax, calculated
at the rates applicable to profits in the
countries concerned 21,915 19,727
Effects of profits in associates and joint
ventures (2,333) (2,390)
Non-taxable income and gains (2,623) (1,951)
Local taxes and overseas withholding taxes 810 1,275
Permanent disallowables 1,001 957
Others 831 294
Tax expense 19,601 17,912
----------------------------------------------- ------- -------
Movements of deferred tax assets and liabilities
Impairment
Accelerated Insurance allowances
capital technical Expense on financial Revaluation
allowances provisions provisions assets of properties Other Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
2017
Assets 108 - 961 674 - 2,415 4,158
Liabilities (626) (7,323) - - (12,768) (3,339) (24,056)
At 1 Jan (518) (7,323) 961 674 (12,768) (924) (19,898)
---------------- --------- ---------- ----------- ----------- ------------ ------ -------
Exchange and
other
adjustments 9 (44) 84 18 396 (15) 448
Income
statement (149) (50) 251 (201) 283 (934) (800)
Equity - - - - (1,578) (408) (1,986)
At 31 Dec (658) (7,417) 1,296 491 (13,667) (2,281) (22,236)
---------------- --------- ---------- ----------- ----------- ------------ ------ -------
Assets(1) 93 - 1,296 491 - 2,154 4,034
Liabilities(1) (751) (7,417) - - (13,667) (4,435) (26,270)
---------------- --------- ---------- ----------- ----------- ------------ ------ -------
Impairment
Accelerated Insurance allowances Revaluation
capital technical Expense on financial of
allowances provisions provisions assets properties Other Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------- ----------- ------------- --------------- ------------ ------- ----------
2016
Assets(1) 132 - 983 1,107 - 718 2,940
Liabilities(1) (643) (6,134) - (249) (12,503) (374) (19,903)
At 1 Jan (511) (6,134) 983 858 (12,503) 344 (16,963)
----------------- --------- ---------- --------- ----------- ----------- ------ -------
Exchange and
other
adjustments (2) 24 (274) 6 125 198 77
Charge/(credit)
to income
statement (5) (1,213) 252 (190) 288 (1,290) (2,158)
Charge/(credit)
to reserves - - - - (678) (176) (854)
At 31 Dec (518) (7,323) 961 674 (12,768) (924) (19,898)
----------------- --------- ---------- --------- ----------- ----------- ------ -------
Assets(1) 108 -- 961 674 - 2,415 4,158
Liabilities(1) (626) (7,323) - - (12,768) (3,339) (24,056)
----------------- --------- ---------- ------------- --------------- ----------- ------ -------
1 After netting off balances within countries, the balances as
disclosed in the accounts are as follows: deferred tax assets
HK$2,156m (2016: HK$ 1,503m); and deferred tax liabilities
HK$24,391m (2016: HK$21,401m).
The amount of unused tax losses for which no deferred tax asset
is recognised in the balance sheet is HK$2,572m (2016: HK$2,497m).
Of this amount, HK$1,898m (2016: HK$2,047m) has no expiry date and
the remaining will expire within 10 years.
Deferred tax of HK$2,321m (2016: HK$1,334m) has been provided in
respect of distributable reserves or post-acquisition reserves of
associates that, on distribution or sale, would attract withholding
tax.
Deferred tax is not recognised in respect of the group's
investments in subsidiaries and branches where remittance or other
realisation is not probable, and for those associates and interests
in joint ventures where it has been determined that no additional
tax will arise.
6 Dividends
----------
Dividends to ordinary shareholders of the parent company
2017 2016
HK$ per HK$ per
share HK$m share HK$m
Ordinary dividends paid
* fourth interim dividend in respect of the previous
financial year approved and paid during the year 0.56 25,438 0.44 17,065
----------------------------------------------------------- ------- ------ ------- ------
- first interim dividend paid 0.22 10,000 0.20 8,500
------- ------ ------- ------
- second interim dividend
paid 0.22 10,000 0.19 8,500
------- ------ ------- ------
- third interim dividend paid 0.22 10,000 0.19 8,500
------- ------ ------- ------
Total 1.22 55,438 1.02 42,565
----------------------------------------------------------- ------- ------ ------- ------
The Directors have declared a fourth interim dividend in respect
of the financial year ended 31 December 2017 of HK$0.36 per
ordinary share (HK$16,559m) (2016: HK$0.56 per ordinary share
(HK$25,438m)).
Distributions on other equity instruments
2017 2016
HK$m HK$m
US$1,900m floating rate perpetual subordinated
loans (interest rate at one year US dollar
LIBOR plus 3.84%) 822 731
------------------------------------------------ ---- ----
7 Trading assets
---------------
2017 2016
HK$m HK$m
Treasury and other eligible bills 100,566 91,908
Debt securities 250,730 180,501
Equity shares 107,301 71,915
Other(1) 37,837 27,310
At 31 Dec 496,434 371,634
----------------------------------- ------- -------
1 'Other' trading assets primarily include settlement accounts with banks and customers.
8 Derivatives
------------
Use of derivatives
The group transacts derivatives for three primary purposes: to
create risk management solutions for clients, to manage the
portfolio risk arising from client business, and to manage and
hedge the group's own risks. Derivatives (except for derivatives
which are designated as effective hedging instruments) are held for
trading. Within the held for trading classification are two types
of derivative instruments: those used in sales and trading
activities, and those used for risk management purposes but which
for various reasons do not meet the qualifying criteria for hedge
accounting. The second category includes derivatives managed in
conjunction with financial instruments designated at fair value.
These activities are described more fully below.
The group's derivative activities give rise to significant open
positions in portfolios of derivatives. These positions are managed
constantly to ensure that they remain within acceptable risk
levels. When entering into derivative transactions, the group
employs the same credit risk management framework to assess and
approve potential credit exposures that it uses for traditional
lending.
Fair values of derivatives by product type
Fair value - Assets Fair value - Liabilities
Cash Fair Cash Fair
flow value flow value
Trading hedges hedges Total Trading hedges hedges Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------- ------- -------
Foreign Exchange 198,483 2,449 - 200,932 201,829 3,575 - 205,404
Interest rate 145,569 62 2,369 148,000 147,460 70 632 148,162
Equity 22,116 - - 22,116 25,106 - - 25,106
Credit 5,591 - - 5,591 5,970 - - 5,970
Commodity
and other 1,228 - - 1,228 2,335 - - 2,335
Gross total 372,987 2,511 2,369 377,867 382,700 3,645 632 386,977
------------------ ------- ------- ------- ------- -------- ------- ------- -------
Offset (77,624) (77,624)
At 31 Dec
2017 300,243 309,353
------------------ ------- ------- ------- ------- -------- ------- ------- -------
Foreign Exchange 363,707 6,570 - 370,277 350,787 1,322 - 352,109
------- -------
Interest rate 150,263 22 2,534 152,819 150,590 247 813 151,650
Equity 22,350 - - 22,350 24,653 - - 24,653
-------
Credit 2,431 - - 2,431 2,437 - - 2,437
-------
Commodity
and other 4,529 - - 4,529 4,208 - - 4,208
------- -------
Gross total 543,280 6,592 2,534 552,406 532,675 1,569 813 535,057
------------------ ------- ------- ------- ------- -------- ------- ------- -------
Offset (72,599) (72,599)
At 31 Dec
2016 479,807 462,458
------------------ ------- ------- ------- ------- -------- ------- ------- -------
Notional contract amounts of derivatives by product
type
Cash Fair
flow value
Trading hedges hedges Total
HK$m HK$m HK$m HK$m
---------- ------- ------- ------------
Foreign Exchange 18,928,664 132,198 - 19,060,862
Interest rate 26,655,864 29,109 268,927 26,953,900
Equity 762,895 - - 762,895
Credit 659,200 - - 659,200
Commodity and other 82,181 - - 82,181
At 31 Dec 2017 47,088,804 161,307 268,927 47,519,038
--------------------- ---------- ------- ------- ----------
Foreign Exchange 18,076,732 140,665 - 18,217,397
-------
Interest rate 18,871,195 46,049 262,940 19,180,184
Equity 604,504 - - 604,504
Credit 474,160 - - 474,160
Commodity and other 140,339 - - 140,339
------- -------
At 31 Dec 2016 38,166,930 186,714 262,940 38,616,584
--------------------- ---------- ------- ------- ----------
Trading derivatives
Most of the group's derivative transactions relate to sales and
trading activities. Sales activities include the structuring and
marketing of derivative products to customers to enable them to
take, transfer, modify or reduce current or expected risks. Trading
activities include market-making and risk management.
Hedging derivatives
The group uses derivatives (principally interest rate and
currency swaps) for hedging purposes in the management of its own
asset and liability portfolios and structural positions. This
enables the group to optimise the overall costs to the group of
accessing debt capital markets, and to mitigate the market risk
which would otherwise arise from structural imbalances in the
maturity and other profiles of its assets and liabilities.
The accounting treatment of hedging transactions varies
according to the nature of the instrument hedged and the type of
hedging transaction. Derivatives may qualify as hedges for
accounting purposes if they are fair value hedges, cash flow
hedges, or hedges of net investments in foreign operations.
(a) Fair value hedges
The group's fair value hedges principally consist of interest
rate swaps that are used to protect against changes in the fair
value of fixed-rate long-term financial instruments due to
movements in market interest rates.
(b) Cash flow hedges
The group's cash flow hedges consist principally of interest
rate and currency swaps that are used to protect against exposures
to variability in future interest and principal cash flows on
non-trading assets and liabilities which bear interest at variable
rates or which are expected to be re-funded or reinvested in the
future. The amounts and timing of future cash flows, representing
both principal and interest flows, are projected for each portfolio
of financial assets and liabilities on the basis of their
contractual terms and other relevant factors, including estimates
of prepayments and defaults. The aggregate principal balances and
interest cash flows across all portfolios over time form the basis
for identifying gains and losses on the effective portions of
derivatives designated as cash flow hedges of forecast
transactions.
Amount transferred to the income statement in respect of cash
flow hedges included a gain of HK$1,834m (2016: HK$2,286m gain)
taken to 'Net interest income' and a loss of HK$8,602m (2016:
HK$341m loss) taken to 'Net trading income'. The group does not
have any qualifying cash flow hedges that involve non-financial
assets or non-financial liabilities (2016: none).
The gains and losses on ineffective portions of such derivatives
are recognised immediately in 'Net trading income'. During the year
to 31 December 2017, an insignificant amount was recognised due to
hedge ineffectiveness and termination of forecast transactions
(2016: insignificant amount).
The schedule of forecast principal balances on which the
expected interest cash flows arise as at 31 December 2017 is as
follows:
More than 5 years
3 months or less
but less but more
3 months than 1 than 1 More than
or less year year 5 years
HK$m HK$m HK$m HK$m
-----------
At 31 Dec 2017
Cash inflows from assets 84,212 117,592 57,189 321
Cash outflows from liabilities (6,251) (6,171) (6,171) -
Net cash inflows 77,961 111,421 51,018 321
-------------------------------- ------- -------- -------- ---------
At 31 Dec 2016
Cash inflows from assets 92,356 135,219 82,205 -
Cash outflows from liabilities (6,329) (6,329) (5,695) -
Net cash inflows 86,027 128,890 76,510 -
-------------------------------- ------- -------- -------- ---------
Derivatives valued using models with unobservable inputs
Any initial gain or loss on financial instruments where the
valuation is dependent on unobservable parameters is deferred over
the life of the contract or until the instrument is redeemed,
transferred or sold or the fair value becomes observable. All
derivatives that are part of qualifying hedging relationships have
valuations based on observable market parameters.
The aggregate unobservable inception profit yet to be recognised
in the income statement is immaterial.
9 Financial assets designated at fair value
------------------------------------------
2017 2016
HK$m HK$m
Treasury and other eligible bills 514 418
Debt securities 18,142 17,435
Equity shares 103,990 88,163
----------------------------------- ------- -------
At 31 Dec 122,646 106,016
----------------------------------- ------- -------
10 Loans and advances to customers
--- --------------------------------
2017 2016
HK$m HK$m
Gross loans and advances to customers 3,342,025 2,846,806
Impairment allowances (13,045) (12,692)
At 31 Dec 3,328,980 2,834,114
--------------------------------------- --------- ---------
The following analysis of loans and advances to customers is
based on the categories used by the HSBC Group.
Analysis of loans and advances to customers based
on categories used by the HSBC Group
Rest
Hong of
Kong Asia-Pacific Total
At 31 Dec 2017 HK$m HK$m HK$m
---------- ------------- ------------
Residential mortgages(1) 549,247 306,541 855,788
Credit card advances 61,672 27,696 89,368
Other personal 156,121 73,998 230,119
------------------------------------------ --------- ------------ ---------
Total personal 767,040 408,235 1,175,275
------------------------------------------ --------- ------------ ---------
Commercial, industrial and international
trade 488,705 422,672 911,377
Commercial real estate 245,279 69,247 314,526
Other property-related lending 275,744 85,036 360,780
Government 39,558 5,509 45,067
Other commercial 171,438 157,939 329,377
Total corporate and commercial 1,220,724 740,403 1,961,127
------------------------------------------ --------- ------------ ---------
Non-bank financial institutions 116,915 84,917 201,832
------------------------------------------ --------- ------------ ---------
Settlement accounts 3,021 770 3,791
Total financial 119,936 85,687 205,623
------------------------------------------ --------- ------------ ---------
Gross loans and advances to customers 2,107,700 1,234,325 3,342,025
------------------------------------------ --------- ------------ ---------
Individually assessed impairment
allowances (3,429) (4,800) (8,229)
Collectively assessed impairment
allowances (2,240) (2,576) (4,816)
--------- ------------ ---------
Net loans and advances to customers 2,102,031 1,226,949 3,328,980
------------------------------------------ --------- ------------ ---------
At 31 Dec 2016
Residential mortgages(1) 492,989 267,619 760,608
Credit card advances 58,289 22,665 80,954
Other personal 132,171 70,947 203,118
Total personal 683,449 361,231 1,044,680
------------------------------------------ --------- ------------ ---------
Commercial, industrial and international
trade 428,035 384,227 812,262
Commercial real estate 198,579 55,786 254,365
Other property-related lending 221,919 69,911 291,830
Government 20,230 2,405 22,635
Other commercial 136,729 132,944 269,673
------------------------------------------ --------- ------------ ---------
Total corporate and commercial 1,005,492 645,273 1,650,765
------------------------------------------ --------- ------------ ---------
Non-bank financial institutions 103,311 45,611 148,922
Settlement accounts 1,337 1,102 2,439
------------------------------------------ --------- ------------ ---------
Total financial 104,648 46,713 151,361
------------------------------------------ --------- ------------ ---------
Gross loans and advances to customers 1,793,589 1,053,217 2,846,806
------------------------------------------ --------- ------------ ---------
Individually assessed impairment
allowances (2,960) (5,099) (8,059)
Collectively assessed impairment
allowances (1,959) (2,674) (4,633)
Net loans and advances to customers 1,788,670 1,045,444 2,834,114
------------------------------------------ --------- ------------ ---------
1 Residential mortgages include Hong Kong Government Home
Ownership Scheme loans of HK$36,976m (2016: HK$30,215m).
The geographical information shown above has been classified by
the location of the principal operations of the subsidiary and by
the location of the branch responsible for advancing the funds.
Loans and advances to customers include equipment
leased to customers under finance leases and hire
purchase contracts having the
characteristics of finance leases
2017 2016
Present Present
value value
of the Unearned Total of the Unearned Total
minimum future minimum minimum future minimum
lease finance lease lease finance lease
payments income payments payments income payments
HK$m HK$m HK$m HK$m HK$m HK$m
Amounts receivable
- within one year 1,968 584 2,552 2,151 677 2,828
- after one year
but within five
years 6,582 1,922 8,504 7,764 1,951 9,715
- after five years 19,229 3,594 22,823 18,296 3,346 21,642
----------------------- -------- -------- --------- -------- -------- ---------
27,779 6,100 33,879 28,211 5,974 34,185
----------------------- -------- -------- --------- -------- -------- ---------
Impairment allowances (82) (28)
Net investment
in finance leases
and hire purchase
contracts 27,697 28,183
----------------------- -------- -------- --------- -------- -------- -----------
11 Impairment of loans and advances to customers
--- ----------------------------------------------
Impaired loans and advances to customers are those loans and
advances where objective evidence exists that full repayment of
principal or interest is considered unlikely. Individually assessed
allowances are made after taking into account the value of
collateral in respect of such loans and advances.
The geographical information shown below has been classified by
the location of the principal operations of the subsidiary and by
the location of the branch responsible for advancing the funds.
Rest
Hong of
Kong Asia-Pacific Total
HK$m HK$m HK$m
At 31 Dec 2017
Gross loans and advances to customers
Individually assessed impaired gross
loans and advances 6,284 9,259 15,543
Collectively assessed 2,101,416 1,225,066 3,326,482
- impaired loans and advances 673 1,363 2,036
- non-impaired loans and advances 2,100,743 1,223,703 3,324,446
--------- ------------ ---------
Total gross loans and advances to
customers 2,107,700 1,234,325 3,342,025
----------------------------------------- --------- ------------ ---------
Impairment allowances (5,669) (7,376) (13,045)
- individually assessed (3,429) (4,800) (8,229)
- collectively assessed (2,240) (2,576) (4,816)
Net loans and advances 2,102,031 1,226,949 3,328,980
----------------------------------------- --------- ------------ ---------
Fair value of collateral which has
been taken into account in respect
of individually assessed impaired
loans and advances to customers 2,666 4,806 7,472
Individually assessed impaired gross
loans and advances as a
percentage of gross loans and advances
to customers 0.3% 0.8% 0.5%
Total allowances as a percentage
of total gross loans and advances 0.3% 0.6% 0.4%
At 31 Dec 2016
Gross loans and advances to customers
Individually assessed impaired gross
loans and advances 6,808 10,731 17,539
Collectively assessed 1,786,781 1,042,486 2,829,267
- impaired loans and advances 720 1,119 1,839
- non-impaired loans and advances 1,786,061 1,041,367 2,827,428
--------- ------------ ---------
Total gross loans and advances to
customers 1,793,589 1,053,217 2,846,806
----------------------------------------- --------- ------------ ---------
Impairment allowances (4,919) (7,773) (12,692)
- individually assessed (2,960) (5,099) (8,059)
- collectively assessed (1,959) (2,674) (4,633)
--------- ------------ ---------
Net loans and advances 1,788,670 1,045,444 2,834,114
----------------------------------------- --------- ------------ ---------
Fair value of collateral which has
been taken into account in respect
of individually assessed impaired
loans and advances to customers 3,258 5,488 8,746
Individually assessed impaired gross
loans and advances as a
percentage of gross loans and advances
to customers 0.4% 1.0% 0.6%
Total allowances as a percentage
of total gross loans and advances 0.3% 0.7% 0.4%
----------------------------------------- ---------- ------------- ------------
Movement in impairment allowances on loans and advances
to customers
Individually Collectively
assessed assessed Total
HK$m HK$m HK$m
At 1 Jan 2017 8,059 4,633 12,692
Amounts written off (2,189) (2,806) (4,995)
Recoveries of loans and advances
written off in previous years 180 713 893
Net charge to income statement (note
2g) 2,194 2,136 4,330
Unwinding of discount of loan impairment (235) (17) (252)
Exchange and other adjustments 220 157 377
At 31 Dec 2017 8,229 4,816 13,045
------------------------------------------ ----------- ----------- ------
At 1 Jan 2016 7,040 4,489 11,529
Amounts written off (2,334) (2,694) (5,028)
Recoveries of loans and advances
written off in previous years 277 881 1,158
Net charge to income statement (note
2g) 3,380 2,065 5,445
Unwinding of discount of loan impairment (310) (58) (368)
Exchange and other adjustments 6 (50) (44)
At 31 Dec 2016 8,059 4,633 12,692
------------------------------------------ ------ ------ ------
12 Financial investments
--- ----------------------
2017 2016
HK$m HK$m
Available-for-sale 1,419,930 1,574,584
--------- ---------
- treasury and other eligible bills 539,014 688,369
- debt securities 871,641 877,504
- equity shares 9,275 8,711
--------- ---------
Held-to-maturity 300,943 260,767
---------
- treasury and other eligible bills 699 -
-------------------------------------
- debt securities 300,244 260,767
--------- ---------
At 31 Dec 1,720,873 1,835,351
------------------------------------- --------- ---------
13 Assets pledged, assets transferred and collateral
received
--- --------------------------------------------------
Financial assets pledged as collateral
2017 2016
HK$m HK$m
Treasury bills, debt securities, equities
and deposits 225,590 206,526
------------------------------------------- ------- -------
The above shows assets where a charge has been granted to secure
liabilities on a legal and contractual basis. These transactions
are conducted under terms that are usual and customary to
collateralised transactions including, where relevant, standard
securities lending, repurchase agreements and derivative
margining.
Hong Kong currency notes in circulation are secured by the
deposit of funds in respect of which the Hong Kong Government
certificates of indebtedness are held.
Transferred financial assets not qualifying for full
derecognition and associated financial liabilities
2017 2016
Carrying Carrying Carrying Carrying
amount amount amount amount
of transferred of associated of transferred of associated
assets liabilities assets liabilities
HK$m HK$m HK$m HK$m
Repurchase agreements 77,151 45,778 61,738 21,851
Securities lending agreements 3,209 63 3,506 -
80,360 45,841 65,244 21,851
------------------------------- --------------- -------------- --------------- --------------
The financial assets shown above include amounts transferred to
third parties that do not qualify for derecognition, notably debt
securities held by counterparties as collateral under repurchase
agreements. As the substance of these transactions is secured
borrowings, the collateral assets continue to be recognised in full
and the related liabilities, reflecting the group's obligation to
repurchase the transferred assets for a fixed price at a future
date, are also recognised on the balance sheet. As a result of
these transactions, the group is unable to use, sell or pledge the
transferred assets for the duration of the transactions. The group
remains exposed to interest rate risk, credit risk and market risk
on these pledged instruments. The counterparty's recourse is not
limited to the transferred assets.
Collateral accepted as security for assets
2017 2016
HK$m HK$m
Fair value of the collateral permitted
to sell or repledge in the absence of
default 642,318 531,561
Fair value of collateral actually sold
or repledged 102,382 86,287
---------------------------------------- ------- -------
These transactions are conducted under terms that are usual and
customary to standard securities borrowing and reverse repurchase
agreements.
14 Investment in subsidiaries
--- ---------------------------
Principal subsidiaries of the Bank
The group's
interest
in issued
share
capital/registered
Place Principal or charter
of incorporation activity capital
Hang Seng Bank Limited Hong Kong Banking 62.14%
HSBC Bank (China) Company Limited PRC(1) Banking 100%
HSBC Bank Malaysia Berhad Malaysia Banking 100%
HSBC Bank Australia Limited(2) Australia Banking 100%
HSBC Bank (Taiwan) Limited(2) Taiwan Banking 100%
HSBC Bank (Singapore) Limited Singapore Banking 100%
-------------------
Retirement
benefits
and life
HSBC Life (International) Limited(2) Bermuda insurance 100%
-------------------------------------- ------------------ ----------- -------------------
1 People's Republic of China.
2 Held indirectly.
All the above subsidiaries are included in the group's
consolidated financial statements. All these subsidiaries make
their financial statements up to 31 December.
The principal places of business are the same as the places of
incorporation except for HSBC Life (International) Limited which
operates mainly in Hong Kong.
The proportion of voting rights held is the same as the
proportion of ownership interest held.
The principal subsidiaries are regulated banking and insurance
entities in the Asia-Pacific region and, as such, are required to
maintain certain minimum levels of capital and liquid assets to
support their operations. The effect of these regulatory
requirements is to limit the extent to which the subsidiaries may
transfer funds to the Bank in the form of repayment of shareholder
loans or cash dividends.
Subsidiary with material non-controlling interest
2017 2016
Hang Seng Bank Limited
Ownership interest and voting rights
held by non-controlling interests 37.86% 37.86%
HK$m HK$m
Profit attributable to non-controlling
interests 7,579 6,138
Accumulated non-controlling interests
of the subsidiary 54,919 50,601
Dividends paid to non-controlling interests 4,632 6,297
Summarised financial information (before
intra-group eliminations):
- Assets 1,478,418 1,377,242
- Liabilities 1,326,339 1,236,556
- Net operating income before loan impairment 35,498 30,563
- Profit for the year 20,003 16,204
- Other comprehensive income 3,969 (582)
--------- ---------
- Total comprehensive income 23,972 15,622
-----------------------------------------------
15 Interests in associates and joint ventures
--- -------------------------------------------
2017 2016
HK$m HK$m
Share of net assets 140,670 121,985
Goodwill 4,071 3,787
Intangible assets - 58
Deferred tax on intangible assets - (14)
Impairment (24) (24)
----------------------------------- ------- -------
At 31 Dec 144,717 125,792
-----------------------------------
The above balance represented the group's interests in
associates.
Principal associate
Place of incorporation The group's interest in issued share capital
Bank of Communications Co., People's Republic
Ltd of China 19.03%
----------------------------- ------------------------
Bank of Communications Co., Ltd. is listed on recognised stock
exchanges. The fair value represents valuation based on the quoted
market price of the shares held (Level 1 in the fair value
hierarchy) and amounted to HK$81,987m at 31 December 2017
(2016: HK$79,160m).
Bank of Communications Co., Limited ('BoCom')
The group's significant influence in BoCom was established via
representation on BoCom's Board of Directors and participation in a
Technical Cooperation and Exchange Programme ('TCEP'). Under the
TCEP, a number of HSBC staff have been seconded to assist in the
maintenance of BoCom's financial and operating policies.
Impairment testing
At 31 December 2017, the fair value of the group's investment in
BoCom had been below the carrying amount for approximately 68
months. As a result, the group performed an impairment test on the
carrying amount, which confirmed that there was no impairment at 31
December 2017.
At
31 Dec 2017 31 Dec 2016
Carrying Fair Carrying Fair
VIU value value VIU value value
HK$bn HK$bn HK$bn HK$bn HK$bn HK$bn
----- -------- --------
BoCom 143.2 141.7 82.0 124.8 122.8 79.2
------- ----- -------- ------ ----- -------- ------
Basis of recoverable amount
The impairment test was performed by comparing the recoverable
amount of BoCom, determined by a value-in-use ('VIU') calculation,
with its carrying amount. The VIU calculation uses discounted cash
flow projections based on management's estimates of earnings. Cash
flows beyond the short to medium- term are then extrapolated in
perpetuity using a long-term growth rate to derive a terminal
value, which comprises the majority of the VIU. An imputed capital
maintenance charge ('CMC') is calculated to reflect expected
regulatory capital requirements, and is deducted from forecast cash
flows. The principal inputs to the CMC calculation include
estimates of asset growth, the ratio of risk-weighted assets to
total assets, and the expected minimum regulatory capital
requirements. An increase in the CMC as a result of a change to
these principal inputs would reduce VIU. Additionally, management
considers other factors (including qualitative factors) to ensure
that the inputs to the VIU calculation remain appropriate.
Significant management judgement is required in estimating the
future cash flows of BoCom.
Key assumptions in VIU calculation
-- Long-term profit growth rate: 3% (2016: 5%) for periods after
2020, which does not exceed forecast GDP growth in mainland China
and is within the range forecast by external analysts.
-- Long-term asset growth rate: 3% (2016: 4%) for periods after
2020, which is the rate that assets are expected to grow to achieve
long-term profit growth of 3%.
-- Discount rate: 11.85% (2016: 13%) which is based on a Capital
Asset Pricing Model ('CAPM') calculation for BoCom, using market
data. Management also compares the rate derived from the CAPM with
discount rates from external sources. The discount rate used is
within the range of 10.2% to 13.4% (2016: 10.2% to 15%) indicated
by external sources.
-- Loan impairment charge as a percentage of customer advances:
ranges from 0.66% to 0.82% (2016: 0.72% to 0.87%) in the short to
medium-term and are largely based on forecasts disclosed by
external analysts. For periods after 2020, the ratio is 0.7% (2016:
0.7%), slightly higher than the historical average.
-- Risk-weighted assets as a percentage of total assets: 62%
(2016: 62%) for all forecast periods. This is consistent with the
forecasts disclosed by external analysts.
-- Cost-income ratio: ranges from 37.1% to 38% (2016: 40%) in
the short-to medium-term. This is slightly higher than the
forecasts disclosed by external analysts.
The long-term profit growth rate, long-term asset growth rate
and discount rate assumptions were updated in 2017 to better align
with market practice when setting long- term assumptions in VIU
calculations. The long-term profit growth rate was set at the lower
end of the range forecast by external analysts and there was a
corresponding change to the long-term asset growth rate. These
changes reduced management's uncertainty in respect of estimated
future cash flows and accordingly the discount rate was set based
on CAPM with no adjustment for uncertainty in future cash
flows.
The following table shows the change to each key assumption in
the VIU calculation that on its own would reduce the headroom to
nil:
Key assumption Changes to key assumption to reduce headroom to nil
* Long-term profit growth rate
* Decrease by 7 basis points
* Long-term asset growth rate
* Increase by 7 basis points
* Discount rate
* Increase by 9 basis points
* Loan impairment charge as a percentage of customer
advances * Increase by 1 basis point
* Risk-weighted assets as a percentage of total assets * Increase by 44 basis points
* Cost-income ratio * Increase by 32 basis points
The following table further illustrates the impact on VIU of
reasonably possible changes to key assumptions. This reflects the
sensitivity of the VIU to each key assumption on its own and it is
possible that more than one favourable and/or unfavourable change
may occur at the same time. The selected rates of reasonably
possible changes to key assumptions is largely based on external
analysts' forecasts which can change period to period.
Favourable change Unfavourable change
Increase Decrease
in VIU VIU in VIU VIU
bps HK$bn HK$bn bps HK$bn HK$bn
At 31 December 2017
Long-term profit growth rate +200 51.5 194.7 - - 143.2
Long-term asset growth rate -20 4.2 147.4 +200 (55.4) 87.8
Discount rate -35 5.7 148.9 +65 (9.5) 133.7
2017 to 2020:
0.90%
2021
onwards:
Loan impairment charge as a percentage of customer advances 2017 to 2020: 0.71% 2021 onwards: 0.70% 1.1 144.3 0.77% (10.0) 133.2
Risk-weighted assets as a percentage of total assets -60 1.9 145.1 +30 (1.0) 142.2
Cost-income ratio -173 11.7 154.9 - - 143.2
--- ----- -----
At 31 December 2016
Long-term profit growth rate - - 124.8 -150 (25.7) 99.1
Long-term asset growth rate -80 13.6 138.4 - - 124.8
Discount rate -100 18.1 142.9 - - 124.8
2016 to 2019:
0.93%
2020
onwards:
Loan impairment charge as a percentage of customer advances - - 124.8 0.80% (8.4) 116.4
Risk-weighted assets as a percentage of total assets -30 0.8 125.6 +170 (4.7) 120.1
Cost-income ratio -170 7.3 132.1 +250 (10.6) 114.2
---
Considering the interrelationship of the changes set out in the
table above, management estimates that the reasonably possible
range of VIU is HK$115.1bn to HK$165.2bn (2016: HK$83.8bn to
HK$147.1bn).
Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December.
For the year ended 31 December 2017, the group included the
associate's results on the basis of financial statements made up
for the 12 months to 30 September 2017, but taking into account the
financial effect of significant transactions or events in the
period from 1 October 2017 to 31 December 2017.
At 30 Sep
2017 2016
HK$m HK$m
Selected balance sheet information of
BoCom
----------------------------------------------
Cash and balances at central banks 1,141,256 1,069,067
Loans and advances to banks and other
financial institutions 940,983 786,695
Loans and advances to customers 5,179,210 4,390,644
Other financial assets 3,017,209 2,413,593
Prepayment, accrued income and other assets 458,039 382,370
Total assets 10,736,697 9,042,369
---------------------------------------------- ---------- ---------
Deposits by banks and other financial
institutions 2,868,142 2,306,842
Customer accounts 5,844,883 5,280,905
Other financial liabilities 967,143 542,533
Other liabilities 254,525 216,071
Total liabilities 9,934,693 8,346,351
---------------------------------------------- ---------- ---------
Total equity 802,004 696,018
---------------------------------------------- ---------- ---------
Total equity attributable to:
- ordinary shareholders 723,784 625,727
- non-controlling interests 6,311 3,417
- preference shareholders 71,909 66,874
----------
Reconciliation of BoCom's net assets to
carrying amount in the group's consolidated
financial statements
The group's share of net assets 137,769 119,104
Add: Goodwill 3,958 3,681
Add: Intangible assets - 44
Carrying amount 141,727 122,829
---------------------------------------------- ---------- ---------
For the 12
months ended
30 Sep
2017 2016
HK$m HK$m
Selected income statement information
of BoCom
Net interest income 148,688 160,016
Net fee and commission income 44,401 42,641
Loan impairment charges (33,400) (33,252)
Depreciation and amortisation (10,460) (9,437)
Tax expense (17,411) (21,734)
Profit for the year 80,172 78,796
Other comprehensive income (4,860) 6,795
Total comprehensive income 75,312 85,591
Dividends received from BoCom 4,401 4,503
---------------------------------------------- ---------- ---------
Other associates
Summarised aggregate financial information in respect of
associates not individually material
At
31 Dec 31 Dec
2017 2016
HK$m HK$m
Carrying value 2,990 2,963
The group's share of:
- assets 7,465 6,213
- liabilities 4,588 3,357
------
- profit or loss from continuing operations 160 167
- total comprehensive income 160 167
Other expense related to investment in
an associate:
- Impairment of an associate 24 24
--------------------------------------------- ------ ------
At 31 December 2017, the group's share of associates' contingent
liabilities was HK$303,541m (2016: HK$273,500m).
16 Goodwill and intangible assets
--- -------------------------------
Goodwill and intangible assets include goodwill arising on
business combinations, the present value of in-force long-term
insurance business, and other intangible assets.
2017 2016
HK$m HK$m
Goodwill 7,128 6,201
Present value of in-force long-term insurance
business 44,621 44,077
Other intangible assets 8,116 6,658
----------------------------------------------- ------ ------
At 31 Dec 59,865 56,936
----------------------------------------------- ------ ------
The present value of in-force long-term insurance business
('PVIF')
(i) PVIF specific assumptions
The following are the key long-term assumptions used in the
computation of PVIF for Hong Kong, being the main life insurance
operations:
At
31 Dec 31 Dec
2017 2016
% %
Weighted average risk free rate 2.02 2.09
Weighted average risk discount rate 6.20 6.34
Expenses inflation 3.00 3.00
------------------------------------- ------ ------
(ii) Movement in PVIF for the year ended 31 December
2017 2016
HK$m HK$m
At 1 Jan 44,077 36,897
Value of new business written during the
year 6,597 6,048
Movements arising from in-force business:
- expected return (3,687) (2,622)
- experience variances (180) 225
- changes in operating assumptions (1,685) 2,675
Investment return variances (638) 2,004
Changes in investment assumptions (178) (1,062)
Other adjustments 76 38
------ ------
Changes in PVIF 305 7,306
------------------------------------------- ------ ------
Exchange differences and other 239 (126)
------------------------------------------- ------ ------
At 31 Dec 44,621 44,077
------------------------------------------- ------ ------
17 Property, plant and equipment
--- ------------------------------
Movement in property, plant and equipment
2017 2016
Land Investment Investment
and buildings properties Equipment Land and buildings properties Equipment
HK$m HK$m HK$m HK$m HK$m HK$m
Cost or valuation
At 1 Jan 95,134 10,629 22,092 94,000 10,716 24,539
------------ ----------- --------
Exchange and other
adjustments 621 2 585 (480) (2) (218)
------------ ----------- --------
Additions 765 - 2,232 489 - 2,520
------------ ----------- --------
Disposals (312) - (2,292) (20) - (4,749)
------------ ----------- -------- ------------- ---
Transfers(1) (5,106) - - - - -
------------ ----------- --------- ------------------ -----------
Elimination of
accumulated
depreciation on
revalued
land and
buildings (2,353) - - (2,575) - -
---
Surplus on
revaluation 9,479 1,379 - 3,825 36 -
------------ ----------- -------- --------
Reclassifications (609) 607 - (105) (121) -
------------ ----------- -------- --------
At 31 Dec 97,619 12,617 22,617 95,134 10,629 22,092
------------ ----------- --------
Accumulated
depreciation
At 1 Jan 169 - 16,046 167 - 19,024
------------ ----------- -------- ------------- ---
Exchange and other
adjustments 22 - 469 (3) - (167)
------------ ----------- -------- ------------- ---
Charge for the
year 2,678 - 1,972 2,598 - 1,895
------------ ----------- -------- ------------- ---
Disposals (306) - (2,180) (18) - (4,706)
------------ ----------- -------- ------------- ---
Elimination of
accumulated
depreciation on
revalued
land and
buildings (2,353) - - (2,575) - -
At 31 Dec 210 - 16,307 169 - 16,046
------------ ----------- -------- ------------- ---
Net book value at
31 Dec 97,409 12,617 6,310 94,965 10,629 6,046
Total at 31 Dec 116,336 111,640
------------------- ---------------- ----------- -------- ------------------ ------------------ --------
1 During the year, certain properties have been transferred to a
fellow subsidiary as part of the Recovery and Resolution Plan as
set out in the Report of Directors on page 7-8. The balance
represented the carrying value of these properties on the date of
transfer.
The carrying amount of land and buildings, had they been stated
at cost less accumulated depreciation, would have been as
follows:
2017 2016
HK$m HK$m
Cost less accumulated depreciation 19,358 21,967
------------------------------------ ------ ------
Valuation of land and buildings and investment properties
The group's land and buildings and investment properties were
revalued in November 2017 and updated for any material changes at
31 December 2017. The basis of valuation for land and buildings and
investment properties was open market value, depreciated
replacement cost or surrender value as noted in note 1.2(g). The
resultant values are Level 3 in the fair value hierarchy. The fair
values for land and buildings are determined by using direct
comparison approach which values the properties in their respective
existing states and uses, assuming sale with immediate vacant
possession and by making reference to comparable sales evidence.
The valuations take into account the characteristics of the
properties (unobservable inputs) which include the location, size,
shape, view, floor level, year of completion and other factors
collectively. The premium or discount applied to the
characteristics of the properties is within minus 20% and plus 20%.
In determining the open market value of investment properties,
expected future cash flows have been discounted to their present
values. The net book value of 'Land and buildings' includes
HK$8,853m (2016: HK$12,249m) in respect of properties which were
valued using the depreciated replacement cost method or surrender
value.
Land and buildings and investment properties in Hong Kong, Macau
and mainland China, represent 96% by value of the group's
properties subject to valuation. The valuations were carried out by
Cushman & Wakefield Limited who have recent experience in the
location and type of properties and who are members of the Hong
Kong Institute of Surveyors. Properties in 11 countries,
representing 4% by value of the group's properties, were valued by
different independent professionally qualified valuers.
18 Prepayments, accrued income and other assets
--- ---------------------------------------------
2017 2016
HK$m HK$m
Prepayments and accrued income 24,541 21,505
Bullion 44,555 69,894
Acceptances and endorsements 36,720 32,290
Reinsurers' share of liabilities under
insurance contracts (note 24) 15,734 11,368
Current tax assets 2,485 3,537
Other accounts 34,476 32,636
At 31 Dec 158,511 171,230
---------------------------------------- ------- -------
Prepayments, accrued income and other assets included HK$93,610m
(2016: HK$84,162m) of financial assets, the majority of which were
measured at amortised cost.
19 Customer accounts
---
2017 2016
HK$m HK$m
Current accounts 1,078,661 991,562
Savings accounts 3,057,145 2,946,379
Other deposit accounts 1,002,466 962,063
------------------------ --------- ---------
At 31 Dec 5,138,272 4,900,004
------------------------ --------- ---------
20 Trading liabilities
--- --------------------
2017 2016
HK$m HK$m
Debt securities in issue 20,755 25,702
-------
Short positions in securities 83,024 79,048
-------
Deposits by banks 9,984 9,557
-------
Customer accounts 117,602 74,163
------------------------------- ------- -------
At 31 Dec 231,365 188,470
------------------------------- ------- -------
21 Financial liabilities designated at fair value
--- -----------------------------------------------
2017 2016
HK$m HK$m
Debt securities in issue 11,010 14,814
------
Liabilities to customers under investment
contracts 38,268 36,302
------ ------
At 31 Dec 49,278 51,116
------------------------------------------- ------ ------
At 31 December 2017, the carrying amount of the debt securities
in issue was HK$27m higher than the contractual amount at maturity
(2016: HK$58m). At 31 December 2017, the accumulated loss in fair
value attributable to changes in credit risk for debt securities in
issue was HK$8m (2016: HK$39m gain).
22 Debt securities in issue
--- -------------------------
2017 2016
HK$m HK$m
Bonds and medium-term note 59,266 59,218
-------
Other debt securities in issue 10,893 6,533
-------
Total debt securities in issue 70,159 65,751
-------------------------------------------- ------- -------
Included within:
-------------------------------------------- -------- ----------
- trading liabilities (note 20) (20,755) (25,702)
-------------------------------------------- ------- -------
- financial liabilities designated at fair
value (note 21) (11,010) (14,814)
-------------------------------------------- ------- -------
At 31 Dec 38,394 25,235
-------------------------------------------- ------- -------
23 Accruals and deferred income, other liabilities
and provisions
--- ------------------------------------------------
2017 2016
HK$m HK$m
Accruals and deferred income 25,880 24,409
Acceptances and endorsements 36,720 32,290
Share-based payment liability to HSBC Holdings
plc 2,268 1,945
Other liabilities 45,193 39,676
Provisions for liabilities and charges 626 1,167
At 31 Dec 110,687 99,487
------------------------------------------------ ------- ------
Accruals and deferred income, other liabilities and provisions
included HK$102,902m (2016: HK$91,602m) of financial liabilities
which were measured at amortised cost.
Movement in provision for liabilities and charges during the
year is set out below:
2017 2016
Restructuring
costs Others Total Restructuring costs Others Total
HK$m HK$m HK$m HK$m HK$m HK$m
--------------- ------ ------ --------------------- ------ --------
At 1 Jan 786 381 1,167 801 402 1,203
Additions 110 232 342 647 171 818
Amounts utilised (728) (84) (812) (200) (68) (268)
Unused amounts reversed (14) (109) (123) (438) (97) (535)
Exchange and other movements 38 14 52 (24) (27) (51)
At 31 Dec 192 434 626 786 381 1,167
----------- ----- ----- ---------------- --- ----- -----
24 Liabilities under insurance contracts
--- --------------------------------------
2017 2016
Reinsurers'
Gross share(2) Net Gross Reinsurers' share(2) Net
HK$m HK$m HK$m HK$m HK$m HK$m
Non-linked insurance
contracts(1)
At 1 Jan 342,134 (10,077) 332,057 298,576 (7,151) 291,425
Claims and benefits paid (19,765) 1,727 (18,038) (19,099) 319 (18,780)
Increase/(decrease) in
liabilities to policyholders 65,671 (6,894) 58,777 63,473 (3,514) 59,959
Foreign exchange and other
movements 3,308 (380) 2,928 (816) 269 (547)
At 31 Dec 391,348 (15,624) 375,724 342,134 (10,077) 332,057
------- ---------- ------- ------- ------------------ -------
Linked insurance contracts
At 1 Jan 44,036 (1,291) 42,745 42,244 (1,392) 40,852
Claims and benefits paid (7,239) 1,715 (5,524) (2,395) 80 (2,315)
Increase in liabilities to
policyholders 8,841 1,172 10,013 4,472 155 4,627
Foreign exchange and other
movements 1,031 (1,706) (675) (285) (134) (419)
At 31 Dec 46,669 (110) 46,559 44,036 (1,291) 42,745
------- ---------- ------- ------- ------------------ -------
Total liabilities to
policyholders 438,017 (15,734) 422,283 386,170 (11,368) 374,802
------- ---------- ------- ------- ------------------ -------
1 Includes liabilities under non-life insurance contracts.
2 Amounts recoverable from reinsurance of liabilities under
insurance contracts are included in the consolidated balance sheet
in 'Prepayment, accrued income and other assets'.
25 Subordinated liabilities
Subordinated liabilities consist of undated primary capital
notes and other loan capital having an original term to maturity of
five years or more.
2017 2016
HK$m HK$m
----- -------
US$400m Undated floating rate primary capital notes 3,126 3,102
MYR500m Fixed rate (5.05%) subordinated bonds due 2027, callable from 2022(1) 964 869
-----
MYR500m Fixed rate (4.35%) subordinated bonds due 2022, callable from 2017(2) - 865
At 31 Dec 4,090 4,836
----- -----
1 The interest rate on the MYR500m 5.05% callable subordinated
bonds due 2027 will increase by 1% from November 2022.
2 In Jun 2017, the group exercised its call option for MYR500m
4.35% callable subordinated bonds before expiry date.
Subordinated liabilities issued to group entities are not
included in the above.
26 Preference shares
Irredeemable preference shares, issued and fully paid
2017 2016
HK$m HK$m
---------
At 1 Jan 26,879 28,415
--------
Redeemed during the year (6,022) (1,550)
-------------------------------------- -------- -------
Exchange and other movements 180 14
-------- -------
At 31 Dec 21,037 26,879
-------------------------------------- -------- -------
The preference shares were issued at the then nominal value, and
may be redeemed subject to 30 days' notice in writing to
shareholders and with the prior consent of the Hong Kong Monetary
Authority. In the event of redemption, holders of the shares shall
be entitled to receive the issue price of US$1 per share held
together with any unpaid dividends for the period since the annual
dividend payment date immediately preceding the date of redemption,
subject to the Bank having sufficient distributable profits. The
holders of the preference shares are entitled to one vote per share
at shareholders' meetings of the Bank.
The number of issued non-cumulative irredeemable preference
shares at 31 December 2017 was 2,478m (2016: 3,253m) and 775m were
redeemed during the year. No non-cumulative irredeemable preference
shares were issued during the year (2016: nil).
The number of issued cumulative irredeemable preference shares
at 31 December 2017 was 200m (2016: 200m). No cumulative
irredeemable preference shares were issued during the year (2016:
nil).
There was INR870m (2016: INR870m) of authorised preference share
capital, comprising 8.7m compulsorily convertible preference shares
('CCPS') of INR100 each in the share capital of a subsidiary, HSBC
InvestDirect Securities (India) Private Limited ('HSBC
InvestDirect'). The CCPS were issued and fully paid in 2009 at a
nominal value of INR100 each. These shares may be converted into
fully paid equity shares of HSBC InvestDirect at any time after one
year to 10 years from the date of allotment of the CCPS by written
notice. The conversion shall be made at par or premium as may be
determined by the Board of HSBC InvestDirect at the time of the
conversion. The CCPS shall carry a fixed dividend of 0.001% of the
face value per annum. After 10 years following the allotment of the
CCPS, all outstanding CCPS shall be converted at par or premium as
may be determined by the Board of HSBC InvestDirect at the time of
the conversion. HSBC InvestDirect did not convert any CCPS during
2017 (2016: nil). The number of issued CCPS at 31 December 2017 was
8.7m (2016: 8.7m). No CCPS were issued during the year (2016:
nil).
27 Share capital
2017 2016
HK$m HK$m
------- ---------
Ordinary share capital 116,103 114,359
-------
Other(1) 35,257 -
At 31 Dec 151,360 114,359
------------------------ ------- -------
Ordinary shares issued and fully paid
2017 2016
HK$m Number HK$m Number
-------
At 1 Jan 114,359 45,743,491,798 96,052 38,420,982,901
------- --------------
Issued during the year 1,744 697,500,000 18,307 7,322,508,897
------------------------ ------- -------------- ------- --------------
At 31 Dec 116,103 46,440,991,798 114,359 45,743,491,798
------------------------ ------- -------------- ------- --------------
1 In 2017, the Bank redeemed US$775m (HK$6,022m) of preference
shares which were classified as a financial liability in the
consolidated balance sheet (see note 26). The redemption was made
by a payment out of distributable profits and the amount was
transferred from retained earnings to share capital in accordance
with the requirements of the Companies Ordinance. In 2013, the Bank
redeemed US$3,745m (HK$29,235m) of preference shares in the same
manner. This amount was also transferred from retained earnings to
share capital during the year to conform to the current period
treatment. The total amount transferred from retained earnings to
share capital during the year in respect of these transactions was
HK$35,257m. This amount is non-distributable.
698m new ordinary shares were issued during 2017 (2016: 7,323m)
at an issue price of HK$2.5 each for general corporate purposes.
The holders of the ordinary shares are entitled to receive
dividends as declared from time to time, rank equally with regard
to the Bank's residual assets and are entitled to one vote per
share at shareholder meetings of the Bank.
28 Other equity instruments
Other equity instruments comprise additional tier 1 capital
instruments in issue which are accounted for in equity.
2017 2016
HK$m HK$m
US$1,000m Floating rate perpetual subordinated
loan, callable from Dec 2019(1) 7,756 7,756
US$900m Floating rate perpetual subordinated
loan, callable from Dec 2019(1) 6,981 6,981
At 31 Dec 14,737 14,737
------------------------------------------------ ------ ------
1 Interest rate at one year US dollar LIBOR plus 3.84%.
The additional tier 1 capital instruments are perpetual
subordinated loans on which coupon payments may be cancelled at the
sole discretion of the Bank. The subordinated loans will be written
down at the point of non-viability on the occurrence of a trigger
event as defined in the Banking (Capital) Rules. They rank higher
than ordinary shares in the event of a wind-up.
29 Maturity analysis of assets and liabilities
The following is an analysis of assets and liabilities by
remaining contractual maturities at the balance sheet date:
Due Due
between between Due
Due 1 and 3 and between No
within 3 12 1 and 5 Due after contractual Trading Non-trading
1 month months months years 5 years maturity instruments derivatives Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2017
Assets
Cash and sight
balances at
central banks 208,073 - - - - - - - 208,073
Items in the
course of
collection
from other
banks 25,714 - - - - - - - 25,714
---
Hong Kong
Government
certificates
of
indebtedness 267,174 - - - - - - - 267,174
Trading assets - - - - - - 496,434 - 496,434
------- ---
Derivatives - - - - - - 295,363 4,880 300,243
Financial
assets
designated at
fair value 1,151 472 2,634 11,273 3,126 103,990 - - 122,646
------- ---
Reverse
repurchase
agreements -
non-trading 212,556 62,050 16,472 39,812 - - - - 330,890
Placings with
and advances
to banks 282,259 74,043 37,210 30,874 8,619 - - - 433,005
Loans and
advances to
customers 664,326 315,163 538,683 1,011,144 812,709 (13,045) - - 3,328,980
-------
Financial
investments 205,333 352,076 364,037 489,165 301,021 9,241 - - 1,720,873
Amounts due
from Group
companies 66,025 151,749 860 556 80 - 8,459 - 227,729
Interests in
associates and
joint ventures - - - - - 144,717 - - 144,717
Goodwill and
intangible
assets - - - - - 59,865 - - 59,865
Property, plant
and equipment - - - - - 116,336 - - 116,336
------- ---
Deferred tax
assets - - - - - 2,156 - - 2,156
---
Prepayment,
accrued income
and other
assets 51,204 28,554 13,862 11,098 7,193 46,600 - - 158,511
Total assets 1,983,815 984,107 973,758 1,593,922 1,132,748 469,860 800,256 4,880 7,943,346
------- ---
Liabilities
Hong Kong
currency notes
in circulation 267,174 - - - - - - - 267,174
------- ---
Items in the
course of
transmission
to other banks 38,283 - - - - - - - 38,283
Repurchase
agreements -
non-trading 45,000 2,170 - - - - - - 47,170
Deposits by
banks 192,187 2,840 6,437 233 - - - - 201,697
Customer
accounts 4,727,204 217,307 177,150 16,337 274 - - - 5,138,272
------- ---
Trading
liabilities - - - - - - 231,365 - 231,365
Derivatives - - - - - - 305,076 4,277 309,353
Financial
liabilities
designated at
fair value 199 - 2,621 8,365 - 38,093 - - 49,278
------- ---
Debt securities
in issue 1,189 2,677 8,995 21,114 4,419 - - - 38,394
---
Retirement
benefit
liabilities - - - - - 2,222 - - 2,222
Amounts due to
Group
companies 106,368 1,919 519 47,643 96,243 - 12,996 - 265,688
Accruals and
deferred
income, other
liabilities
and provisions 45,746 37,421 18,088 4,164 233 5,035 - - 110,687
Liabilities
under
insurance
contracts(1) 6,595 - - - - 431,422 - - 438,017
Current tax
liabilities 487 200 2,114 441 - - - - 3,242
Deferred tax
liabilities - - - - - 24,391 - - 24,391
------- ---
Subordinated
liabilities(2) - - - 964 - 3,126 - - 4,090
---
Preference
shares - - - - - 21,037 - - 21,037
---
Total
liabilities 5,430,432 264,534 215,924 99,261 101,169 525,326 549,437 4,277 7,190,360
---
Due Due
between between Due
Due 1 and 3 and between Due No
within 3 12 1 and 5 after 5 contractual Trading Non-trading
1 month months months years years maturity instruments derivatives Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2016
Assets
Cash and sight
balances at
central banks 213,783 - - - - - - - 213,783
Items in the
course of
collection
from other
banks 21,401 - - - - - - - 21,401
---
Hong Kong
Government
certificates
of
indebtedness 242,194 - - - - - - - 242,194
Trading assets - - - - - - 371,634 - 371,634
---
Derivatives - - - - - - 470,681 9,126 479,807
---
Financial
assets
designated at
fair value 39 822 2,990 11,545 2,457 88,163 - - 106,016
---
Reverse
repurchase
agreements -
non-trading 194,445 50,958 22,001 4,163 - - - - 271,567
---
Placings with
and advances
to banks 301,295 92,212 41,753 20,404 7,547 - - - 463,211
---
Loans and
advances to
customers 558,198 291,528 465,166 816,370 715,544 (12,692) - - 2,834,114
Financial
investments 242,389 416,605 367,518 544,873 255,251 8,715 - - 1,835,351
---
Amounts due
from Group
companies 135,084 76,240 12,233 1,673 209 - 17,334 - 242,773
---
Interests in
associates and
joint ventures - - - - - 125,792 - - 125,792
Goodwill and
intangible
assets - - - - - 56,936 - - 56,936
Property, plant
and equipment - - - - - 111,640 - - 111,640
---
Deferred tax
assets - - - - - 1,503 - - 1,503
---
Prepayment,
accrued income
and other
assets 38,585 33,731 14,128 10,553 2,451 71,782 - - 171,230
---
Total assets 1,947,413 962,096 925,789 1,409,581 983,459 451,839 859,649 9,126 7,548,952
---
Liabilities
Hong Kong
currency notes
in circulation 242,194 - - - - - - - 242,194
---
Items in the
course of
transmission
to other banks 37,753 - - - - - - - 37,753
---
Repurchase
agreements -
non-trading 26,281 1,529 - - - - - - 27,810
---
Deposits by
banks 168,968 14,247 8,936 304 24 - - - 192,479
---
Customer
accounts 4,481,361 232,651 163,848 21,710 434 - - - 4,900,004
---
Trading
liabilities - - - - - - 188,470 - 188,470
---
Derivatives - - - - - - 460,076 2,382 462,458
---
Financial
liabilities
designated at
fair value 206 - 4,401 10,150 222 36,137 - - 51,116
---
Debt securities
in issue 1,549 408 7,440 11,818 4,020 - - - 25,235
---
Retirement
benefit
liabilities - - - - - 3,867 - - 3,867
Amounts due to
Group
companies 99,072 961 301 3 84,288 - 13,413 - 198,038
---
Accruals and
deferred
income, other
liabilities
and provisions 37,411 38,329 15,005 2,896 231 5,615 - - 99,487
Liabilities
under
insurance
contracts(1) 2,263 - - - - 383,907 - - 386,170
---
Current tax
liabilities 95 226 1,273 25 - - - - 1,619
---
Deferred tax
liabilities - - - - - 21,401 - - 21,401
Subordinated
liabilities(2) - - 865 - 869 3,102 - - 4,836
---
Preference
shares - - - - - 26,879 - - 26,879
---
Total
liabilities 5,097,153 288,351 202,069 46,906 90,088 480,908 661,959 2,382 6,869,816
---
1 Liabilities under insurance contracts for which notice on
claims have been received are included under 'Due within 1 month'.
The remaining balance is included under 'No contractual
maturity'.
2 The maturity for subordinated liabilities is based on the
earliest date on which the group is required to pay, i.e. the
callable date.
30 Analysis of cash flows payable under financial liabilities by remaining contractual
maturities
Due Due
Due between between Due
within 3 and 1 and after
On demand 3 months 12 months 5 years 5 years Total
HK$m HK$m HK$m HK$m HK$m HK$m
--------- --------- ---------- -------- -------- -----------
At 31 Dec 2017
Hong Kong currency notes in circulation 267,174 - - - - 267,174
Items in the course of transmission to
other banks - 38,283 - - - 38,283
Repurchase agreements - non-trading 11,829 35,554 - - - 47,383
Deposits by banks 163,030 32,048 6,467 267 - 201,812
Customer accounts 4,229,543 717,651 179,389 17,795 281 5,144,659
Trading liabilities 231,365 - - - - 231,365
Derivatives 304,970 412 1,820 1,253 411 308,866
Financial liabilities designated at fair
value 199 32 2,724 8,524 38,069 49,548
Debt securities in issue 40 4,026 9,521 22,421 4,753 40,761
Amounts due to Group companies 40,004 82,614 4,495 67,306 113,635 308,054
Other financial liabilities 8,870 69,010 16,515 3,287 218 97,900
Subordinated liabilities - 25 74 1,361 3,634 5,094
Preference shares - 283 412 2,781 27,990 31,466
--------- --------- ---------- -------- -------- ---------
5,257,024 979,938 221,417 124,995 188,991 6,772,365
--------- --------- ---------- -------- -------- ---------
Loan commitments 1,821,774 640,726 14,437 4,678 97 2,481,712
Financial guarantee and credit risk
related guarantee contracts 57,353 - - - - 57,353
7,136,151 1,620,664 235,854 129,673 189,088 9,311,430
--------- --------- ---------- -------- -------- ---------
At 31 Dec 2016
Hong Kong currency notes in circulation 242,194 - - - - 242,194
Items in the course of transmission to
other banks - 37,753 - - - 37,753
Repurchase agreements - non-trading 14,987 12,833 - - - 27,820
Deposits by banks 132,574 50,929 9,096 317 27 192,943
Customer accounts 4,009,208 706,984 167,132 24,172 469 4,907,965
Trading liabilities 188,470 - - - - 188,470
Derivatives 459,667 523 999 545 26 461,760
Financial liabilities designated at fair
value 206 56 4,594 10,437 36,330 51,623
Debt securities in issue - 2,170 7,658 12,412 4,455 26,695
Amounts due to Group companies 47,847 66,251 2,199 10,088 95,265 221,650
Other financial liabilities 12,634 58,489 12,856 1,711 210 85,900
Subordinated liabilities - 29 933 313 4,356 5,631
Preference shares - 225 531 3,022 34,433 38,211
--------- --------- ---------- -------- -------- ---------
5,107,787 936,242 205,998 63,017 175,571 6,488,615
--------- --------- ---------- -------- -------- ---------
Loan commitments 1,699,275 567,212 16,580 4,486 64 2,287,617
Financial guarantee and credit risk
related guarantee contracts 64,017 - - - - 64,017
--------- --------- ---------- -------- -------- ---------
6,871,079 1,503,454 222,578 67,503 175,635 8,840,249
--------- --------- ---------- -------- -------- ---------
The balances in the above tables incorporates all cash flows
relating to principal and future coupon payments on an undiscounted
basis (except for trading liabilities and trading derivatives).
Trading liabilities and trading derivatives have been included in
the 'On demand' time bucket as trading liabilities are typically
held for short periods of time. The undiscounted cash flows payable
under hedging derivative liabilities are classified according to
their contractual maturity. Investment contract liabilities have
been included in financial liabilities designated at fair value,
whereby the policyholders have the options to surrender or transfer
at any time, and are reported in the 'Due after 5 years' time
bucket. A maturity analysis prepared on the basis of the earliest
possible contractual repayment date (assuming that all surrender
and transfer options are exercised) would result in all investment
contracts being presented as falling due within one year or less.
The undiscounted cash flows potentially payable under loan
commitments and financial guarantee contracts are classified on the
basis of the earliest date they can be called. Cash flows payable
in respect of
customer accounts are primarily contractually repayable on
demand or at short notice.
31 Contingent liabilities and commitments
(a) Off-balance sheet contingent liabilities and commitments
2017 2016
HK$m HK$m
-------------------------------------------------- --------- -----------
Contingent liabilities and financial guarantee
contracts
Guarantees and irrevocable letters of
credit pledged as collateral security 288,833 257,863
---------
Other contingent liabilities 1,059 1,696
---------
At 31 Dec 289,892 259,559
-------------------------------------------------- --------- ---------
Commitments
Documentary credits and short term trade-related
transactions 28,045 30,080
---------
Forward asset purchases and forward forward
deposits placed 8,198 6,235
-------------------------------------------------- ---------
Undrawn formal standby facilities, credit
lines and other commitments to lend 2,445,468 2,251,302
--------------------------------------------------
At 31 Dec 2,481,711 2,287,617
-------------------------------------------------- --------- ---------
The above table discloses the nominal principal amounts of
commitments (excluding capital commitments), guarantees and other
contingent liabilities, which represent the amounts at risk should
contracts be fully drawn upon and clients default. The amount of
the loan commitments shown above reflects, where relevant, the
expected level of take-up of pre-approved facilities. As a
significant portion of guarantees and commitments is expected to
expire without being drawn upon, the total of the contractual
amounts is not representative of future liquidity requirements.
(b) Guarantees (including financial guarantee contracts)
The group provides guarantees and similar undertakings on behalf
of both third-party customers and other entities within the Group.
These guarantees are generally provided in the normal course of
banking business. The principal types of guarantees provided, and
the maximum potential amount of future payments which the group
could be required to make, were as follows:
2017 2016
HK$m HK$m
------------------------------------------ ------- ---------
Guarantees in favour of third parties 270,925 235,991
- financial guarantees(1) 50,621 52,831
- other guarantees(2) 220,304 183,160
------- -------
Guarantees in favour of other HSBC Group
entities 17,908 21,872
At 31 Dec 288,833 257,863
------------------------------------------ ------- -------
1 Financial guarantees are contracts that require the issuer to
make specified payments to reimburse the holder for a loss incurred
because a specified debtor fails to make payment when due in
accordance with the original or modified terms of a debt
instrument. The amounts in the above table are nominal principal
amounts.
2 Other guarantees include re-insurance letters of credit
related to particular transactions, trade-related letters of credit
issued without provision for the issuing entity to retain title to
the underlying shipment, performance bonds, bid bonds, standby
letters of credit and other transaction-related guarantees.
The amounts disclosed in the above table reflect the group's
maximum exposure under a large number of individual guarantee
undertakings. The risks and exposures from guarantees are captured
and managed in accordance with HSBC's overall credit risk
management policies and procedures. Guarantees are subject to an
annual credit review process.
32 Other commitments
--- ------------------
Capital commitments
At 31 December 2017, capital commitments, mainly related to the
commitment for purchase of premises, were HK$7,097m
(2016: HK$2,945m).
Lease commitments
The group leases certain properties and equipment under
operating leases. The leases normally run for a period of one to 10
years and may include an option to renew. Lease payments are
usually adjusted annually to reflect market rentals. None of the
leases include contingent rentals. Future minimum lease payments
under non-cancellable operating leases for premises and equipment
are as follows:
2017 2016
HK$m HK$m
Amounts payable within
- one year or less 2,948 2,974
- five years or less but over one year 4,277 4,545
- over five years 874 658
At 31 Dec 8,099 8,177
---------------------------------------- ----- -----
33 Offsetting of financial assets and financial liabilities
--- ---------------------------------------------------------
Amounts subject to enforceable netting arrangements
Effects of offsetting in
the Amounts not offset in the
balance sheet balance sheet
Amounts Amounts not
reported subject to
in the enforceable Balance
Gross Amounts balance Financial Non-cash Cash Net netting sheet
amounts offset sheet instruments collateral collateral amount arrangements(1) total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2017
Financial
assets(2)
Derivatives 353,713 (77,624) 276,089 (234,555) (4,926) (28,992) 7,616 24,154 300,243
Reverse repos,
stock
borrowing and
similar
agreements
classified as: 550,165 (12,689) 537,476 - (537,348) (62) 66 23,487 560,963
------- ------- --------- -------- -------
- trading
assets 8,966 - 8,966 - (8,966) - - - 8,966
- non-trading
assets 541,199 (12,689) 528,510 - (528,382) (62) 66 23,487 551,997
------- ------- --------- -------- -------
Loans and
advances to
customers at
amortised cost - - - - - - - - -
903,878 (90,313) 813,565 (234,555) (542,274) (29,054) 7,682 47,641 861,206
------- ------- --------- -------- -------
Financial
liabilities(3)
Derivatives 366,456 (77,624) 288,832 (234,555) (4,738) (27,959) 21,580 20,521 309,353
------- ------- --------- -------- -------
Repos, stock
lending and
similar
agreements
classified as: 94,755 (12,689) 82,066 - (81,847) - 219 27,617 109,683
- trading
liabilities 687 - 687 - (686) - 1 - 687
- non-trading
liabilities 94,068 (12,689) 81,379 - (81,161) - 218 27,617 108,996
------- ------- --------- -------- -------
Customer
accounts at
amortised cost - - - - - - - - -
461,211 (90,313) 370,898 (234,555) (86,585) (27,959) 21,799 48,138 419,036
------- ------- --------- -------- -------
At 31 Dec 2016
Financial
assets(2)
Derivatives 528,961 (72,599) 456,362 (339,755) (19,420) (38,762) 58,425 23,445 479,807
Reverse repos,
stock
borrowing and
similar
agreements
classified as: 451,804 (2,358) 449,446 - (446,189) (455) 2,802 14,608 464,054
- trading
assets 1,393 - 1,393 - (1,387) - 6 - 1,393
- non-trading
assets 450,411 (2,358) 448,053 - (444,802) (455) 2,796 14,608 462,661
Loans and
advances to
customers at
amortised cost 15,042 (15,042) - - - - - - -
995,807 (89,999) 905,808 (339,755) (465,609) (39,217) 61,227 38,053 943,861
Financial
liabilities(3)
Derivatives 511,784 (72,599) 439,185 (339,755) (6,286) (49,836) 43,308 23,273 462,458
Repos, stock
lending and
similar
agreements
classified as: 62,679 (2,358) 60,321 - (60,079) (2) 240 12,590 72,911
- trading
liabilities 142 - 142 - (142) - - - 142
- non-trading
liabilities 62,537 (2,358) 60,179 - (59,937) (2) 240 12,590 72,769
Customer
accounts at
amortised cost 15,042 (15,042) - - - - - - -
589,505 (89,999) 499,506 (339,755) (66,365) (49,838) 43,548 35,863 535,369
1 These exposures continue to be secured by financial
collateral, but we may not have sought or been able to obtain a
legal opinion evidencing enforceability of the offsetting
right.
2 Amounts presented in the balance sheet included balances due
from Group companies of HK$262,159m (2016: HK$254,849m).
3 Amounts presented in the balance sheet included balances due
to Group companies of HK$132,091m (2016: HK$160,702m).
Financial assets and financial liabilities are offset and the
net amount is reported in the balance sheet when there is a legally
enforceable right to offset the recognised amounts and there is an
intention to settle on a net basis, or realise the asset and settle
the liability simultaneously ('the offset criteria').
The 'Amounts not offset in the balance sheet' for derivatives
and reverse repurchase/repurchase, stock borrowing/lending and
similar arrangements include transactions where:
-- the counterparty has an offsetting exposure with the group
and a master netting or similar arrangement is in place with a
right of set off only in the event of default, insolvency or
bankruptcy, or the offset criteria are otherwise not satisfied;
and
-- cash and non-cash collaterals are received and pledged in
respect of the transactions described above.
34 Segmental analysis
--- -------------------
The group's operating segments are organised into four global
businesses and a Corporate Centre. The group's chief operating
decision-maker, the Executive Committee ('EXCO'), regularly reviews
operating activities on a number of bases, including by global
businesses and by countries. Although the chief operating
decision-maker reviews information on a number of bases, business
performance is assessed and capital resources are allocated by
global business, and the segmental analysis is presented on that
basis. The global businesses are therefore considered our
reportable segments under HKFRS 8.
Information provided to EXCO is measured in accordance with
HKFRSs. The group's operations are closely integrated and,
accordingly, the presentation of data includes internal allocations
of certain items of income and expenses. These allocations include
the costs of certain support services and global functions to the
extent that they can be meaningfully attributed to operational
business lines and geographical regions. While such allocations
have been made on a systematic and consistent basis, they
necessarily involve a degree of subjectivity. Costs which are not
allocated to global businesses are included in the 'Corporate
Centre'. Where relevant, income and expenses amounts presented
include the results of inter-segment funding along with
inter-company and inter-business line transactions. All such
transactions are undertaken on arm's length terms. The intra-group
elimination items for the global businesses are presented in the
Corporate Centre.
The group provides a comprehensive range of banking and related
financial services to its customers organised by global
business:
-- Retail Banking and Wealth Management ('RBWM') serves personal
customers. We take deposits and provide transactional banking
services to enable customers to manage their day to day finances
and save for the future. We selectively offer credit facilities to
assist customers in their short or longer-term borrowing
requirements; and we provide financial advisory, broking, insurance
and investment services to help them manage and protect their
financial futures.
-- Commercial Banking ('CMB') is segmented into Corporate, to
serve both corporate and mid-market companies with more
sophisticated financial needs, and Business Banking, to serve
small- and medium-sized enterprises ('SMEs'), enabling
differentiated coverage of our target customers. This allows us to
provide continuous support to companies as they grow both
domestically and internationally, and ensures a clear focus on
internationally aspirant customers.
-- Global Banking and Markets ('GB&M') provides tailored
financial solutions to major government, corporate and
institutional clients worldwide. GB&M operates a long-term
relationship management approach to build a full understanding of
clients' financial requirements. Sector-focused client service
teams comprising relationship managers and product specialists
develop financial solutions to meet individual client needs.
-- Global Private Banking ('GPB') provides investment management
and trustee solutions to high net worth individuals and their
families. We aim to meet the needs of our clients by providing
excellent customer service, leveraging our global footprint and
offering a comprehensive suite of solutions.
-- Corporate Centre was established to align certain functions
of the group. The Corporate Centre includes Balance Sheet
Management, certain interests in associates and joint ventures, as
well as the results of our financing operations and central support
costs with associated recoveries.
Performance by global business is presented in the 'Financial
Review' section.
Information by geographical region
Rest of
Hong Kong Asia-Pacific Intra-segment elimination Total
HK$m HK$m HK$m HK$m
2017
Total operating income 187,935 70,397 (3,099) 255,233
Profit before tax 73,577 42,042 - 115,619
Total assets 5,643,940 2,923,926 (624,520) 7,943,346
Total liabilities 5,263,539 2,551,341 (624,520) 7,190,360
----------------------------------- --------- ------------- ----------------------- ---------
Credit commitments and contingent
liabilities (contract amounts) 1,500,456 1,271,147 - 2,771,603
----------------------------------- --------- ------------- ----------------------- ---------
2016
Total operating income 165,957 70,491 (3,710) 232,738
Profit before tax 60,645 42,062 - 102,707
Total assets 5,416,727 2,625,900 (493,675) 7,548,952
Total liabilities 5,062,172 2,301,319 (493,675) 6,869,816
----------------------------------- --------- ------------- ----------------------- ---------
Credit commitments and contingent
liabilities (contract amounts) 1,413,979 1,133,197 - 2,547,176
----------------------------------- --------- ------------- ----------------------- ---------
Information by country
Non-current
Revenue(1) assets(2)
2017 2016 2017 2016
HK$m HK$m HK$m HK$m
Hong Kong 125,698 108,165 111,164 106,513
-------
Mainland China 14,264 14,307 150,778 130,167
------- -------
Australia 6,636 6,537 871 821
-------
India 8,372 7,761 2,108 1,919
-------
Indonesia 4,395 4,467 3,851 3,810
-------
Malaysia 5,663 5,794 833 761
-------
Singapore 9,054 9,327 1,404 1,333
-------
Taiwan 3,295 2,798 2,325 2,127
-------
Other 9,066 8,996 2,963 2,840
------- ------- ------- -------
Total 186,443 168,152 276,297 250,291
------- ------- ------- -------
1 Revenue (defined as 'Net operating income before loan
impairment charges and other credit risk provisions') is
attributable to countries based on the location of the principal
operations of the subsidiary or branch.
2 Non-current assets consist of property, plant and equipment,
goodwill, other intangible assets, interests in associates and
joint ventures and certain other assets.
35 Related party transactions
--- ---------------------------
The group's related parties include the parent, fellow
subsidiaries, associates, joint ventures, retirement benefit plans
for the group's employees, Key Management Personnel, close family
members of Key Management Personnel and entities which are
controlled or jointly controlled by Key Management Personnel or
their close family members.
(a) Inter-company
The group is wholly owned by HSBC Asia Holdings B.V, HSBC Asia
Holdings B.V. is in turn wholly owned by HSBC Asia Holdings (UK)
Limited, which is wholly owned by HSBC Holdings B.V, HSBC Holdings
B.V. is wholly owned by HSBC Finance (Netherlands), which is wholly
owned by HSBC Holdings plc (incorporated in England).
The group entered into transactions with its fellow subsidiaries
in the normal course of business, including the acceptance and
placement of interbank deposits, correspondent banking transactions
and off-balance sheet transactions. The activities were on
substantially the same terms, including interest rates and
security, as for comparable transactions with third-party
counterparties.
The group shares the costs of certain IT projects with its
fellow subsidiaries and also used certain processing services of
fellow subsidiaries on a cost recovery basis. The Bank also acted
as agent for the distribution of retail investment funds for fellow
subsidiaries and paid professional fees for services provided by
fellow subsidiaries. The commissions and fees in these transactions
and services are priced on an arm's length basis.
In 2017, the group acquired HSBC International Trustee Limited
from HSBC Private Bank Holdings (Suisse) SA, a fellow subsidiary
company of the group. The transaction was made on an arm's length
basis.
As part of the recovery and resolution plan, a new service
company ('the ServCo'), which is not a subsidiary of the group but
is indirectly held by the HSBC Holdings plc, has been set up in
Hong Kong. In 2017, the group began to transfer certain properties
and employees performing shared services to the ServCo. There were
no changes to employment terms and conditions or pension benefits
of these employees. Following these transfers, the ServCo has
started to provide services to the group and the group recognised a
management charge of HK$238m to the ServCo for these services,
which is included under 'General and administrative expenses'.
The aggregate amount of income and expenses arising from these
transactions during the year and the balances of amounts due to and
from the relevant parties at the year end were as follows:
2017 2016
Immediate Ultimate
holding holding Fellow Immediate Ultimate holding Fellow
company company subsidiaries holding company company subsidiaries
HK$m HK$m HK$m HK$m HK$m HK$m
Income and
expenses for the
year
Interest income - - 2,447 - - 1,242
Interest
expense(1) 2,739 1,709 625 1,232 559 517
--------
Fee income - 41 2,605 - - 2,482
Fee expense - - 1,100 - - 971
Other operating
income - 1,201 2,506 - 826 2,346
Other operating
expenses(2) 2 2,879 9,632 6 2,387 7,681
--------- -------- ------------- --------------- ---------------- ----------------
At 31 Dec
Assets 1 713 306,099 1 396 353,045
- trading
assets(3) - 202 8,270 - 14 17,320
- derivative
assets - - 79,084 - - 110,669
- other assets(3) 1 511 218,745 1 382 225,056
---------------- ----------------
Liabilities 71,700 94,460 190,831 92,667 26,404 221,589
Trading
liabilities(3) - 2 12,994 - 13 13,400
Financial
liabilities
designated at
fair value(3,4) - 35,866 15 - - 8
Derivative
liabilities - - 70,266 - - 115,743
Other
liabilities(3) 515 1,067 107,449 510 7,714 92,338
Subordinated
liabilities(3,5) 50,255 57,525 - 65,378 18,677 -
Preference shares 20,930 - 107 26,779 - 100
--------- -------- ------------- --------------- ---------------- ----------------
Guarantees - - 17,908 - - 21,872
Commitments - - 14,372 - - 2,578
--------- -------- ------------- --------------- ---------------- ----------------
1 Interest expense included distribution on preference shares
and interest on subordinated liabilities.
2 In 2017, payments were made of HK$432m (2016: HK$682m) for
software costs which were capitalised as intangible assets in the
balance sheet of the group.
3 These balances are presented under 'Amounts due from/to Group
companies' in the consolidated balance sheet.
4 The balance included subordinated liabilities of HK$35,866m to
meet Total Loss Absorbing Capacity ('TLAC') requirement (2016:
nil).
5 The balance included subordinated liabilities of HK$89,889m to
meet TLAC requirement (2016: HK$63,982m).
(b) Share option and share award schemes
The group participates in various share option and share plans
operated by HSBC whereby share options or shares of HSBC are
granted to employees of the group. As disclosed in note 4(a), the
group recognises an expense in respect of these share options and
share awards. The cost borne by the ultimate holding company in
respect of share options is treated as a capital contribution and
is recorded within 'Other reserves'. In respect of share awards,
the group recognises a liability to the ultimate holding company
over the vesting period. This liability is measured at the fair
value of the shares at each reporting date, with changes since the
award dates adjusted through the capital contribution account
within 'Other reserves'. The balances of the capital contribution
and the liability at 31 December 2017 amounted to HK$2,901m and
HK$2,268m respectively (2016: HK$3,225m and HK$1,945m
respectively).
(c) Pension funds
At 31 December 2017, HK$15.1bn (2016: HK$14.0bn) of pension fund
assets under defined benefits and defined contribution schemes for
group employees were under management by group companies. Total
fees paid or payable by pension plans to group companies for
providing fund management, administrative and trustee services
amounted to HK$27m for the year (2016: HK$21m).
(d) Associates and joint ventures
The group provides certain banking and financial services to
associates and joint ventures, including loans, overdrafts,
interest and non-interest bearing deposits and current accounts.
Details of interests in associates and joint ventures are given in
note 15. Transactions and balances during the year with associates
and joint ventures were as follows:
2017 2016
Highest Highest
balance Balance balance Balance
during at during at
the year 31 December the year 31 December
HK$m HK$m HK$m HK$m
Amounts due from associates
- unsubordinated 24,178 19,793 24,147 22,268
--------- ------------
Amounts due from joint ventures
- unsubordinated - - 3 -
--------------------------------- --------- ------------
24,178 19,793 24,150 22,268
--------- ------------ --------- ------------
Amounts due to associates 20,454 9,632 8,625 4,464
--------- ------------
Commitments 1 1 1 1
--------------------------------- --------- ------------ --------- ------------
The disclosure of the year-end balance and the highest balance
during the year is considered the most meaningful information to
represent transactions during the year.
The transactions resulting in amounts due to and from associates
and joint ventures arose in the ordinary course of business and on
substantially the same terms, including interest rates and
security, as for comparable transactions with third--party
counterparties.
(e) Key Management Personnel
Key Management Personnel are defined as those persons having
authority and responsibility for planning, directing and
controlling the activities of the Bank and the group. It includes
members of the Board of Directors and Executive Committee of the
Bank and the Board of Directors and Group Managing Directors of
HSBC Holdings plc.
The following table shows the expense in respect of compensation
for Key Management Personnel of the Bank for services rendered to
the Bank:
2017 2016
HK$m HK$m
Salaries and other short-term benefits 308 285
Retirement benefits 10 10
Share-based payments 110 111
---------------------------------------- ---- ----
428 406
---------------------------------------- ---- ----
Transactions, arrangements and agreements involving
Key Management Personnel
2017 2016
HK$m HK$m
----------------------------------------- ------ --------
During the year
Highest average assets(1) 36,413 21,374
------ ------
Highest average liabilities(1) 55,629 33,658
------ ------
Contribution to group's profit before
tax 899 599
------
At the year end
Guarantees 10,249 3,547
------
Commitments 2,961 2,623
----------------------------------------- ------ ------
1 The disclosure of the highest average balance during the year
is considered the most meaningful information to represent
transactions during the year.
Transactions, arrangements and agreements are entered into by
the group with companies that may be controlled by Key Management
Personnel of the group and their immediate relatives. These
transactions are primarily loans and deposits, and were entered
into in the ordinary course of business and on substantially the
same terms, including interest rates and security, as comparable
transactions with persons or companies of a similar standing or,
where applicable, with other employees. The transactions did not
involve more than the normal risk of repayment or present other
unfavourable features.
No impairment losses have been recorded against balances
outstanding during the year with Key Management Personnel, and
there are no specific impairment allowances on balances with Key
Management Personnel at the year end (2016: nil).
(f) Loans to directors
Directors are defined as the Directors of the Bank, its ultimate
holding company, HSBC Holdings plc and intermediate companies.
Loans to directors also include loans to companies that are
controlled by, and entities that are connected with these
directors. Particulars of loans to directors disclosed pursuant to
section 17 of the Companies (Disclosure of Information about
Benefits of Directors) Regulation are as follows:
Aggregate amount outstanding at
31 Dec Maximum aggregate amount outstanding during the year
2017 2016 2017 2016
HK$m HK$m HK$m HK$m
By the Bank 1,090 1,063 1,213 1,279
By subsidiaries - - 1 1
-----------------
1,090 1,063 1,214 1,280
---------------- --------------- -------------------------- --------------------------
These amounts include principal and interest, and the maximum
liability that may be incurred under guarantees.
36 Fair values of financial instruments carried at
fair value
--- ------------------------------------------------
The fair value of financial instruments is generally measured on
the basis of the individual financial instrument. However, in cases
where the group manages a group of financial assets and financial
liabilities on the basis of its net exposure to either market risks
or credit risk, the group measures the fair value of the group of
financial instruments on a net basis, but presents the underlying
financial assets and liabilities separately in the financial
statements, unless they satisfy the HKFRS offsetting criteria as
described in note 33.
The following table provides an analysis of the basis for the
valuation of financial instruments carried at fair value:
Fair Value Hierarchy
Level Level Level Third-party Inter-
1 2 3 total company(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m
---------
At 31 Dec 2017
Assets
--------- ------- ------ ----------- ----------- -----------
Trading assets(1) 300,646 195,575 213 496,434 - 496,434
--------- ------- ------ ----------- ----------- ---------
Derivatives 4,773 215,869 517 221,159 79,084 300,243
--------- ------- ------ ----------- ----------- ---------
Financial assets
designated at fair
value 90,641 23,567 8,438 122,646 - 122,646
--------- ------- ------ ----------- ----------- ---------
Available-for-sale
investments 916,385 498,512 5,033 1,419,930 - 1,419,930
-----------
Liabilities
--------- ------- ------ ----------- ----------- -----------
Trading liabilities(1) 79,209 141,972 10,184 231,365 - 231,365
--------- ------- ------ ----------- ----------- ---------
Derivatives 4,501 232,627 1,959 239,087 70,266 309,353
--------- ------- ------ ----------- ----------- ---------
Financial liabilities
designated at fair
value(1) - 49,278 - 49,278 - 49,278
------------------------ --------- ------- ------ ----------- ----------- ---------
At 31 Dec 2016
Assets
------------------------
Trading assets(1) 239,646 131,285 703 371,634 - 371,634
Derivatives 3,673 364,062 1,403 369,138 110,669 479,807
Financial assets
designated at fair
value 72,736 29,524 3,756 106,016 - 106,016
Available-for-sale
investments 1,058,461 510,357 5,766 1,574,584 - 1,574,584
------------------------ --------- ------- ------ ----------- ----------- ---------
Liabilities
------------------------ --------- ------- ------ ----------- ----------- -----------
Trading liabilities(1) 75,880 106,768 5,822 188,470 - 188,470
Derivatives 3,684 340,336 2,695 346,715 115,743 462,458
Financial liabilities
designated at fair
value(1) - 50,875 241 51,116 - 51,116
------------------------ --------- ------- ------ ----------- ----------- ---------
1 Amounts with HSBC Group entities are not reflected here.
2 Derivatives balances with HSBC Group entities are largely under 'Level 2'.
Transfers between Level 1 and Level 2 fair values
Assets Liabilities
Designated Held Designated
Held for at fair for at fair
Available-for-sale trading value Derivatives trading value Derivatives
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------------
At 31 Dec 2017
Transfers from
Level 1 to
Level 2 5,424 9,402 - - - - -
------------------ ---------- ----------- -------- ---------- -----------
Transfers from
Level 2 to
Level 1 63,280 - - - - - -
------------------ ---------- ----------- -------- ---------- -----------
At 31 Dec 2016
Transfers from
Level 1 to
Level 2 1,259 - 947 - - - 34
------------------ ---------- ----------- -------- ---------- -----------
Transfers from
Level 2 to
Level 1 - - - - 2,646 - -
------------------ ---------- ----------- -------- ---------- -----------
Transfers between levels of the fair value hierarchy are deemed
to occur at the end of the reporting period. Transfers into and out
of Levels of the fair value hierarchy are primarily attributable to
changes in observability of valuation inputs and price
transparency.
Movements in Level 3 financial instruments
Balances reported in Level 3 increased, mainly in financial
assets designated at fair value due to growth in insurance
business, and in trading liabilities from increased structured
deposits. There were no material transfers from/to Level 1 and 2 as
a result of change in observability of valuation inputs in 2017
(2016: immaterial).
Control framework
Fair values are subject to a control framework designed to
ensure that they are either determined, or validated, by a function
independent of the risk-taker.
For all financial instruments where fair values are determined
by reference to externally quoted prices or observable pricing
inputs to models, independent price determination or validation is
utilised. In inactive markets, direct observation of a traded price
may not be possible. In these circumstances, the group will source
alternative market information to validate the financial
instrument's fair value, with greater weight given to information
that is considered to be more relevant and reliable. For fair
values determined using valuation models, the control framework may
include, as applicable, development or validation by independent
support functions of (i) the logic within valuation models; (ii)
the inputs to those models; (iii) any adjustments required outside
the valuation models; and (iv) where possible, model outputs.
Valuation models are subject to a process of due diligence and
calibration before becoming operational and are calibrated against
external market data on an ongoing basis.
Changes in fair value are generally subject to a profit and loss
analysis process. This process disaggregates changes in fair value
into three high level categories: (i) portfolio changes, such as
new transactions or maturing transactions; (ii) market movements,
such as changes in foreign exchange rates or equity prices; and
(iii) other, such as changes in fair value adjustments.
To this end, the ultimate responsibility for the determination
of fair values lies within the Finance function, which reports to
the Group Finance Director. Finance establishes the accounting
policies and procedures governing valuation, and is responsible for
ensuring that these comply with all relevant accounting
standards.
Determination of fair value
Fair values are determined according to the following
hierarchy:
-- Level 1 - Valuation technique using quoted market price:
Financial instruments with quoted prices for identical instruments
in active markets that the group can access at the measurement
date.
-- Level 2 - Valuation technique using observable inputs:
Financial instruments with quoted prices for similar instruments in
active markets or quoted prices for identical or similar
instruments in inactive markets and financial instruments valued
using models where all significant inputs are observable.
-- Level 3 - Valuation technique with significant unobservable
inputs: Financial instruments valued using valuation techniques
where one or more significant inputs are unobservable.
The judgement as to whether a market is active may include, but
is not restricted to, the consideration of factors such as the
magnitude and frequency of trading activity, the availability of
prices and the size of bid/offer spreads. The bid/offer spread
represents the difference in prices at which a market participant
would be willing to buy compared with the price at which they would
be willing to sell. In inactive markets, obtaining assurance that
the transaction price provides evidence of fair value or
determining the adjustments to transaction prices that are
necessary to measure the fair value of the instrument requires
additional work during the valuation process.
Financial liabilities measured at fair value
Structured notes issued and certain other hybrid instrument
liabilities are included within trading liabilities and are
measured at fair value. The credit spread applied to these
instruments is derived from the spreads at which the group issues
structured notes.
Fair value adjustments
Fair value adjustments are adopted when the group determines
that there are additional factors that would be considered relevant
by a market participant that are not incorporated within the
valuation model. Movements in the level of fair value adjustments
do not necessarily result in the recognition of profits or losses
within the income statement, such as when models are enhanced, fair
value adjustments may no longer be required.
Risk-related adjustments
(i) Bid-offer
HKFRS 13 requires use of the price within the bid-offer spread
that is most representative of fair value. Valuation models will
typically generate mid-market values. The bid-offer adjustment
reflects the extent to which bid-offer costs would be incurred if
substantially all residual net portfolio market risks were closed
using available hedging instruments or by disposing of, or
unwinding the position.
(ii) Uncertainty
Certain model inputs may be less readily determinable from
market data, and/or the choice of model itself may be more
subjective. In these circumstances, an adjustment may be necessary
to reflect the likelihood that market participants would adopt more
conservative values for uncertain parameters and/or model
assumptions, than those used in the group's valuation model.
(iii) Credit valuation adjustment ('CVA') and debit valuation adjustment ('DVA')
The CVA is an adjustment to the valuation of over-the-counter
('OTC') derivative contracts to reflect the possibility that the
counterparty may default and the group may not receive the full
market value of the transactions.
The DVA is an adjustment to the valuation of OTC derivative
contracts to reflect the possibility that the group may default,
and that the group may not pay the full market value of the
transactions.
The group calculates a separate CVA and DVA for each legal
entity, and for each counterparty to which the entity has exposure.
With the exception of central clearing parties, all third-party
counterparties are included in the CVA and DVA calculations, and
these adjustments are not netted across group entities.
The group calculates the CVA by applying the probability of
default ('PD') of the counterparty, conditional on the non-default
of the group, to the group's expected positive exposure to the
counterparty and multiplying the result by the loss expected in the
event of default. Conversely, the group calculates the DVA by
applying the PD of the group, conditional on the non-default of the
counterparty, to the expected positive exposure of the counterparty
to the group and multiplying the result by the loss expected in the
event of default. Both calculations are performed over the life of
the potential exposure.
For most products the group uses a simulation methodology, which
incorporates a range of potential exposures over the life of the
portfolio, to calculate the expected positive exposure to a
counterparty. The simulation methodology includes credit mitigants,
such as counterparty netting agreements and collateral agreements
with the counterparty.
The methodologies do not, in general, account for 'wrong-way
risk' which arises when the underlying value of the derivative
prior to any CVA is positively correlated to the PD of the
counterparty. When there is significant wrong-way risk, a
trade-specific approach is applied to reflect this risk in the
valuation.
(iv) Funding fair value adjustment ('FFVA')
The FFVA is calculated by applying future market funding spreads
to the expected future funding exposure of any uncollateralised
component of the OTC derivative portfolio. The expected future
funding exposure is calculated by a simulation methodology, where
available and is adjusted for events that may terminate the
exposure, such as the default of the group or the counterparty. The
FFVA and DVA are calculated independently.
(v) Model limitation
Models used for portfolio valuation purposes may be based upon a
simplifying set of assumptions that do not capture all material
market characteristics. In these circumstances, model limitation
adjustments are adopted.
(vi) Inception profit (Day 1 profit or loss reserves)
Inception profit adjustments are adopted when the fair value
estimated by a valuation model is based on one or more significant
unobservable inputs.
Effects of changes in significant non-observable assumptions to
reasonably possible alternatives
The key unobservable inputs to Level 3 financial instruments
include volatility and correlation for structured notes and
deposits valued using option models, bid quotes for corporate bonds
valued using approaches that take into account of market
comparables, and multiple items for private equity and strategic
investments. In the absence of an active market, the fair value of
private equity and strategic investments is estimated on the basis
of an analysis of the investee's financial position and results,
risk profile, prospects and other factors, as well as by reference
to market valuations for similar entities quoted in an active
market, or the price at which similar companies have changed
ownership. The change in fair values due to changes in reasonably
possible alternative assumptions for these unobservable inputs is
not significant.
37 Fair values of financial instruments not carried
at fair value
--- -------------------------------------------------
Fair values of financial instruments not carried at fair value
and bases of valuation
Fair Value Hierarchy
Significant
Quoted market price Observable inputs unobservable inputs
Carrying amount Level 1 Level 2 Level 3 Total
HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2017
Assets
Reverse repurchase
agreements -
non-trading 330,890 - 318,849 11,927 330,776
Placings with and
advances to banks 433,005 - 418,652 14,561 433,213
Loans and advances
to customers 3,328,980 - 92,146 3,230,365 3,322,511
Financial
investments - debt
securities 300,244 6,244 303,240 - 309,484
Liabilities
Repurchase
agreements -
non-trading 47,170 - 47,155 - 47,155
Deposits by banks 201,697 - 201,456 233 201,689
Customer accounts 5,138,272 - 5,138,352 - 5,138,352
Debt securities in
issue 38,394 - 38,279 - 38,279
Subordinated
liabilities 4,090 - 993 2,773 3,766
Preference Shares 21,037 - - 21,539 21,539
At 31 Dec 2016
Assets
Reverse repurchase
agreements -
non-trading 271,567 - 260,167 11,839 272,006
Placings with and
advances to banks 463,211 - 451,012 12,215 463,227
Loans and advances
to customers 2,834,114 - 74,856 2,746,942 2,821,798
Financial
investments - debt
securities 260,767 5,099 257,290 - 262,389
Liabilities
Repurchase
agreements -
non-trading 27,810 - 27,809 - 27,809
Deposits by banks 192,479 - 192,133 328 192,461
Customer accounts 4,900,004 - 4,900,114 - 4,900,114
Debt securities in
issue 25,235 - 25,269 - 25,269
Subordinated
liabilities 4,836 - 1,763 2,263 4,026
Preference Shares 26,879 - - 27,285 27,285
Other financial instruments not carried at fair value are
typically short-term in nature or re-price to current market rates
frequently. Accordingly, their carrying amount is a reasonable
approximation of fair value.
Valuation
The fair values of financial instruments that are not carried at
fair value on the balance sheet are calculated as described
below.
Repurchase and reverse repurchase agreements - non-trading
Fair values are estimated by using discounted cash flows,
applying current rates. Fair values approximate carrying amounts as
their balances are generally short dated.
Loans and advances to banks and customers
The fair value of loans and advances is based on observable
market transactions, where available. In the absence of observable
market transactions, fair value is estimated using valuation models
that incorporate a range of input assumptions. Loans are grouped,
as far as possible, into homogeneous groups and stratified by loans
with similar characteristics to improve the accuracy of estimated
valuation outputs. The stratification of a loan book considers all
material factors. The fair value of a loan reflects loan
impairments at the balance sheet date. For impaired loans, fair
value is estimated by discounting the future cash flows over the
time period they are expected to be recovered.
Deposits by banks and customer accounts
Fair values are estimated using discounted cash flows, applying
current rates offered for deposits of similar remaining maturities.
The fair value of a deposit repayable on demand is approximated by
its carrying value.
Debt securities in issue and subordinated liabilities
Fair values are estimated by discounting future cash flows using
discount rates for the applicable maturities and taking own credit
spread into account.
The fair values in this note are stated at a specific date and
may be significantly different from the amounts which will actually
be paid on the maturity or settlement dates of the instruments. In
many cases, it would not be possible to realise immediately the
estimated fair values given the size of the portfolios measured.
Accordingly, these fair values do not represent the value of these
financial instruments to the group as a going concern.
38 Structured entities
--- --------------------
The group enters into certain transactions with customers in the
ordinary course of business which involve the use of structured
entities ('SEs'). The group's arrangements that involve SEs are
authorised centrally when they are established to ensure
appropriate purpose and governance. The activities of SEs
administered by the group are closely monitored by senior
management. The group's transactions with consolidated and
unconsolidated SEs are set out below.
Structured credit transactions
The group provides structured credit products to third-party
professional and institutional investors who wish to obtain
exposure to a reference portfolio of debt instruments. In such
structures, the investor receives returns referenced to the
underlying portfolio by purchasing notes issued by the SEs. The
group enters into contracts with the SE, including derivatives, in
order to pass the required risks and rewards of the reference
portfolios to the SEs.
Securitisations by the group
The group uses SEs to securities customer loans and advances
that it has originated in order to diversify its sources of funding
for asset origination and for capital efficiency purposes. The
loans and advances are transferred by the group to the SEs for
cash, and the SEs issue debt securities to investors to fund the
cash purchases. The group may also act as a derivative counterparty
or provide a guarantee. Credit enhancements to the underlying
assets may be provided to obtain investment grade ratings on the
senior debt issued by the SEs.
Third-party financing SEs
The group also transacts with third-party SEs in the normal
course of business for a number of purposes, for example, to
provide finance to public and private sector infrastructure
projects, for asset and structured finance transactions and for
customers to raise finance against security. The group also has
interests in third-party established structured entities by holding
notes issued by these entities or entering into derivatives where
the group absorbs risk from the entities.
Funds
The group has established and managed funds to provide customers
with investment opportunities. The group, as the fund manager, may
be entitled to receive management and performance fees based on the
assets under management. The group purchases and holds units of
HSBC managed and third-party managed funds in order to facilitate
both business and customer needs. The majority of these funds held
relate to the insurance business. When the group is deemed to be
acting as a principal rather than an agent in its role as a fund
manager, the group controls and hence consolidates these funds.
The group's transactions with consolidated SEs are not
significant.
Unconsolidated structured entities
The maximum exposure to loss from the group's interests in
unconsolidated SEs represents the maximum loss that the group could
incur as a result of its involvement with unconsolidated SEs
regardless of the probability of the loss being incurred. For
commitments and guarantees, the maximum exposure to loss is the
notional amount of potential future losses. For retained and
purchased investments in and loans to unconsolidated SEs, the
maximum exposure to loss is the carrying value of these interests
at the balance sheet reporting date. The maximum exposure to loss
is stated gross of the effects of hedging and collateral
arrangements entered into to mitigate the group's exposure to
loss.
The nature and risk associated with the group's interest in
unconsolidated SEs are set out below.
Securitisations HSBC managed funds Non-HSBC managed funds Other Total
HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2017
Total assets 169,139 684,898 6,003,678 39,478 6,897,193
The group's interest -
assets
Trading assets - 874 - - 874
Financial assets designated
at fair value - 26,016 44,463 - 70,479
Derivatives 1 - - - 1
Loans and advances to
customers 20,200 - - 8,281 28,481
Financial investments - 1,270 391 - 1,661
Other assets - - - 297 297
Total assets in relation to
the group's interests in
the unconsolidated
structured entities(1) 20,201 28,160 44,854 8,578 101,793
------------------ ---------------------- ------ ---------
The group's interest -
liabilities
Derivatives - - - - -
Total liabilities in
relation to the group's
interests in the
unconsolidated structured
entities - - - - -
The group's maximum exposure 20,219 28,160 51,119 11,698 111,196
------------------ ---------------------- ------ ---------
At 31 Dec 2016
Total assets 33,137 567,991 5,784,647 59,374 6,445,149
The group's interest -
assets
Trading assets - 2,272 - - 2,272
Financial assets designated
at fair value - 18,161 44,926 - 63,087
Derivatives - - - 249 249
Loans and advances to
customers 6,786 - - 7,568 14,354
Financial investments - - 797 - 797
Other assets - - - 358 358
Total assets in relation to
the group's interests in
the unconsolidated
structured entities(1) 6,786 20,433 45,723 8,175 81,117
The group's interest -
liabilities
Derivatives - - - 1 1
Total liabilities in
relation to the group's
interests in the
unconsolidated structured
entities - - - 1 1
The group's maximum exposure 7,305 20,434 53,097 8,532 89,368
1 Most of HSBC managed funds and non-HSBC managed funds are held
by the insurance business.
Structured entities sponsored by the group
The amount of assets transferred to unconsolidated structured
entities sponsored by the group during 2017 and 2016 was not
significant.
39 Bank balance sheet and statement of changes in equity
--- ------------------------------------------------------
Bank balance sheet at 31 December 2017
2017 2016
HK$m HK$m
--------- -----------
Assets
Cash and sight balances at central banks 149,529 163,204
Items in the course of collection from other banks 19,172 15,006
Hong Kong Government certificates of indebtedness 267,174 242,194
Trading assets 354,114 274,287
Derivatives 281,552 453,746
Financial assets designated at fair value 463 403
Reverse repurchase agreements - non-trading 203,031 146,398
Placings with and advances to banks 187,495 202,763
Loans and advances to customers 1,832,490 1,575,340
Financial investments 796,384 983,049
Amounts due from Group companies 486,744 450,399
Investments in subsidiaries 89,418 81,801
Interests in associates and joint ventures 39,830 39,830
Goodwill and intangible assets 5,542 4,578
Property, plant and equipment 83,520 82,344
Deferred tax assets 738 530
Prepayments, accrued income and other assets 87,287 108,001
--------- ---------
Total assets 4,884,483 4,823,873
--------- ---------
Liabilities
Hong Kong currency notes in circulation 267,174 242,194
Items in the course of transmission to other banks 28,217 25,350
Repurchase agreements - non-trading 12,243 10,464
Deposits by banks 154,728 139,033
Customer accounts 3,179,845 3,100,506
Trading liabilities 101,529 100,777
Derivatives 289,649 440,528
Financial liabilities designated at fair value 7,838 8,917
Debt securities in issue 27,865 18,255
Retirement benefit liabilities 1,675 2,914
Amounts due to Group companies 337,344 272,210
Accruals and deferred income, other liabilities and provisions 51,929 53,779
Current tax liabilities 1,099 1,119
Deferred tax liabilities 8,758 7,625
Subordinated liabilities 3,126 3,102
Preference shares 20,930 26,779
--------- ---------
Total liabilities 4,493,949 4,453,552
--------- ---------
Equity
Share capital 151,360 114,359
Other equity instruments 14,737 14,737
Other reserves 18,855 8,443
Retained earnings 205,582 232,782
--------- ---------
Total equity 390,534 370,321
Total equity and liabilities 4,884,483 4,823,873
--------- ---------
Bank statement of changes in equity for the year ended 31
December 2017
Other reserves
Available- Cash
Other Property for-sale flow Foreign
Share equity Retained revaluation investment hedge exchange Total
capital instruments earnings reserve reserve reserve reserve Other(1) equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 1 Jan 2017 114,359 14,737 232,782 35,816 2,262 (675) (13,734) (15,226) 370,321
------- -------
Profit for the year - - 62,511 - - - - - 62,511
Other comprehensive income/expense
(net of tax) - - 707 7,252 (538) 557 4,261 - 12,239
- available-for-sale investments - - - - (538) - - - (538)
- cash flow hedges - - - - - 557 - - 557
* changes in fair value of financial liabilities
designated at fair value arising from changes in own
credit risk(2) - - (205) - - - - - (205)
- property revaluation - - - 7,252 - - - - 7,252
- actuarial gains on defined benefit asset/liability - - 912 - - - - - 912
- exchange differences - - - - - - 4,261 - 4,261
------- ------- ------- ---- ------ ---- ------- -------
Total comprehensive income/(expense) for the year - - 63,218 7,252 (538) 557 4,261 - 74,750
------- ------- ------- ---- ------ --- ------- -------
Shares issued 1,744 - - - - - - - 1,744
Dividends paid(3) - - (56,260) - - - - - (56,260)
Movement in respect of share-based payment arrangements - - (103) - - - - (311) (414)
Transfers and other movements(4,6) 35,257 - (34,055) (3,269) (36) - - 2,496 393
------- ------- ------- --- ------ --- ------- -------
At 31 Dec 2017 151,360 14,737 205,582 39,799 1,688 (118) (9,473) (13,041) 390,534
------- ------- ------- ---- ------ ---- ------- -------
At 1 Jan 2016 96,052 14,737 214,938 33,056 1,355 19 (12,867) (15,005) 332,285
Profit for the year - - 59,314 - - - - - 59,314
Other comprehensive income/expense
(net of tax) - - 573 4,082 913 (694) (867) - 4,007
- available-for-sale investments - - - - 913 - - - 913
- cash flow hedges - - - - - (694) - - (694)
- property revaluation - - (173) 4,082 - - - - 3,909
* actuarial gains on defined benefit asset/liability - - 746 - - - - - 746
- exchange differences - - - - - - (867) - (867)
---- ----
Total comprehensive income/(expense) for the year - - 59,887 4,082 913 (694) (867) - 63,321
---- ----
Shares issued 18,307 - - - - - - - 18,307
---- ----
Dividends paid(3) - - (43,296) - - - - - (43,296)
Movement in respect of share-based payment arrangements - - 205 - - - - (215) (10)
Transfers and other movements - - 1,048 (1,322) (6) - - (6) (286)
--- ---
At 31 Dec 2016 114,359 14,737 232,782 35,816 2,262 (675) (13,734) (15,226) 370,321
---- ----
For footnotes, please refer to page 50.
40 Legal proceedings and regulatory matters
--- -----------------------------------------
The group is party to legal proceedings and regulatory matters
in a number of jurisdictions arising out of its normal business
operations. Apart from the matters described below, the Bank
considers that none of these matters are material. The recognition
of provisions is determined in accordance with the accounting
policies set out in note 1.2(j). While the outcome of legal
proceedings and regulatory matters is inherently uncertain,
management believes that, based on the information available to it,
appropriate provisions have been made in respect of these matters
as at 31 December 2017. Any provision recognised does not
constitute an admission of wrongdoing or legal liability. It is not
practicable to provide an aggregate estimate of potential liability
for our legal proceedings and regulatory matters as a class of
contingent liabilities.
Anti-money laundering and sanctions-related matters
In October 2010, HSBC Bank USA entered into a consent cease and
desist order with the Office of the Comptroller of the Currency
(the 'OCC') and the indirect parent of that company, HSBC North
America Holdings Inc. ('HNAH'), entered into a consent cease and
desist order with the US Federal Reserve Board. In 2012, HSBC Bank
USA further entered into an enterprise-wide compliance consent
order (together the 'Orders'). These Orders required improvements
to establish an effective compliance risk management programme
across HSBC's US businesses, including risk management related to
the US Bank Secrecy Act ('BSA') and anti-money laundering ('AML')
compliance. While these Orders remain open, HSBC Bank USA and HNAH
believe that they have taken appropriate steps to bring themselves
into compliance with the requirements of the Orders.
In December 2012, HSBC Holdings plc, HNAH and HSBC Bank USA
entered into agreements with US and UK government and regulatory
agencies regarding past inadequate compliance with the BSA, AML and
sanctions laws. Among those agreements, HSBC Holdings plc and HSBC
Bank USA entered into a five-year deferred prosecution agreement
with, among others, the US Department of Justice ('DoJ') (the 'AML
DPA'); and HSBC Holdings plc consented to a cease-and-desist order
and HSBC Holdings plc and HNAH consented to a civil money penalty
order with the Federal Reserve Board. HSBC Holdings plc also
entered into an agreement with the Office of Foreign Assets Control
('OFAC') regarding historical transactions involving parties
subject to OFAC sanctions, as well as an undertaking with the UK
Financial Conduct Authority to comply with certain forward-looking
AML and sanctions-related obligations. In addition, HSBC Bank USA
entered into civil money penalty orders with the Financial Crimes
Enforcement Network of the US Treasury Department and the OCC.
Under these agreements, HSBC Holdings plc and HSBC Bank USA made
payments totalling US$1.9bn to US authorities and undertook various
further obligations, including, among others, to retain an
independent compliance monitor (who is, for Financial Conduct
Authority ('FCA') purposes, a 'skilled person' under section 166 of
the Financial Services and Markets Act) to produce annual
assessments of the Group's AML and sanctions compliance programme
(the 'Monitor'). Under the cease and desist order issued by the
Federal Reserve Board ('FRB') in 2012, the Monitor also serves as
an independent consultant to conduct annual assessments. In
February 2018, the Monitor delivered his fourth annual follow-up
review report.
Through his country-level reviews, the Monitor identified
potential anti-money laundering and sanctions compliance issues
that HSBC is reviewing further with the DoJ, Federal Reserve Board
and/or Financial Conduct Authority. In particular, the DoJ is
investigating HSBC's handling of a corporate customer's accounts.
In addition, the Financial Crimes Enforcement Network of the US
Treasury Department, as well as the Civil Division of the US
Attorney's Office for the Southern District of New York are
investigating the collection and transmittal of third-party
originator information in certain payments instructed over HSBC's
proprietary payment systems. HSBC is cooperating with all of these
investigations.
In December 2017, the AML DPA expired and the charges deferred
by the AML DPA were dismissed. The Monitor will continue working in
his capacity as a skilled person and independent consultant for a
period of time at the FCA's and FRB's discretion.
Concurrent with entry into the AML DPA, HSBC Bank USA also
entered into two consent orders with the OCC. The first, discussed
above, required HSBC Bank USA to adopt an enterprise-wide
compliance programme. The second required HSBC Bank USA to correct
the circumstances noted in the OCC's report and imposed
restrictions on HSBC Bank USA acquiring control of, or holding an
interest in, any new financial subsidiary, or commencing a new
activity in its existing financial subsidiary, without the OCC's
prior approval.
These settlements with US and UK authorities have led to private
litigation, and do not preclude further private litigation related
to HSBC's compliance with applicable BSA, AML and sanctions laws or
other regulatory or law enforcement actions for BSA, AML, sanctions
or other matters not covered by the various agreements.
Tax investigations
The Bank continues to cooperate with the relevant US and other
authorities, including with respect to clients of the Bank in India
who may have had US tax reporting obligations.
In addition, various tax administration, regulatory and law
enforcement authorities around the world, including in India, are
conducting investigations and reviews of HSBC Swiss Private Bank
and other HSBC companies in connection with allegations of tax
evasion or tax fraud, money laundering and unlawful cross-border
banking solicitation. In February 2015, the Indian tax authority
issued a summons and request for information to the Bank in
India.
The Bank and other HSBC companies are cooperating with the
relevant authorities. There are many factors that may affect the
range of outcomes, and the resulting financial impact, of these
investigations and reviews, which could be significant.
In light of the media attention regarding these matters, it is
possible that other tax administration, regulatory or law
enforcement authorities will also initiate or enlarge similar
investigations or regulatory proceedings.
Mossack Fonseca & Co.
HSBC has received requests for information from various
regulatory and law enforcement authorities around the world
concerning persons and entities believed to be linked to Mossack
Fonseca & Co., a service provider of personal investment
companies. HSBC is cooperating with the relevant authorities.
Based on the facts currently known, it is not practicable at
this time for HSBC to predict the resolution of this matter,
including the timing or any possible impact on HSBC, which could be
significant.
Singapore Interbank Offered Rate ('SIBOR'), Singapore Swap Offer
Rate ('SOR') and Australia Bank Bill Swap Rate ('BBSW')
In July 2016 and August 2016, HSBC and other panel banks were
named as defendants in two putative class actions filed in the New
York District Court on behalf of persons who transacted in products
related to the SIBOR, SOR and BBSW benchmark rates. The complaints
allege, among other things, misconduct related to these benchmark
rates in violation of US antitrust, commodities and racketeering
laws, and state law. In August 2017, the defendants moved to
dismiss the SIBOR and SOR case, and this motion remains pending.
The defendants moved to dismiss the BBSW case in February 2017 and
this motion also remains pending. There are many factors that may
affect the range of outcomes, and the resulting financial impact,
of these matters, which could be significant.
Foreign exchange rate investigations
Various regulators and competition and law enforcement
authorities around the world, including in South Korea, are
conducting civil and criminal investigations and reviews into
trading by HSBC and others on the foreign exchange markets. The
Bank and other HSBC companies are cooperating with these
investigations and reviews.
In August 2016, the DoJ indicted two now-former HSBC employees
and charged them with wire fraud and conspiracy relating to a 2011
foreign exchange transaction. In October 2017, one of the former
employees was found guilty after trial. In January 2018, HSBC
Holdings plc entered into a three-year deferred prosecution
agreement with the Criminal Division of the DoJ (the 'FX DPA'),
regarding fraudulent conduct in connection with two particular
transactions in 2010 and 2011. This concluded the DoJ's
investigation into HSBC's historical foreign exchange activities.
Under the terms of the FX DPA, HSBC has a number of ongoing
obligations, including continuing to cooperate with authorities and
implementing enhancements to its internal controls and procedures
in its Global Markets business, which will be the subject of annual
reports to the DoJ. In addition, HSBC agreed to pay a financial
penalty and restitution.
There are many factors that may affect the range of outcomes and
the resulting financial impact of these investigations, which could
be significant.
Hiring practices investigation
The US Securities and Exchange Commission (the 'SEC') is
investigating multiple financial institutions, including HSBC
Holdings plc, in relation to hiring practices of candidates
referred by or related to government officials or employees of
state-owned enterprises in Asia-Pacific. HSBC has received various
requests for information and is cooperating with the SEC's
investigation.
Based on the facts currently known, it is not practicable at
this time for HSBC to predict the resolution of this matter,
including the timing or any possible impact on HSBC, which could be
significant.
41 Ultimate holding company
--- -------------------------
The ultimate holding company of the Bank is HSBC Holdings plc,
which is incorporated in England.
The largest group in which the accounts of the Bank are
consolidated is that headed by HSBC Holdings plc. The consolidated
accounts of HSBC Holdings plc are available to the public on the
HSBC Group's website at www.hsbc.com or may be obtained from 8
Canada Square, London E14 5HQ, United Kingdom.
42 Events after the balance sheet date
--- ------------------------------------
There have been no events after the balance sheet date that
would require disclosure in these financial statements.
43 Approval of financial statements
--- ---------------------------------
The financial statements were approved and authorised for issue
by the Board of Directors on 20 February 2018.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SEWSUSFASEDD
(END) Dow Jones Newswires
March 20, 2018 06:36 ET (10:36 GMT)
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