TIDM57HB
RNS Number : 9078U
Hongkong & Shanghai Banking Corp Ld
03 August 2020
3 August 2020
The Hongkong and Shanghai Banking Corporation Limited
2020 Interim Report
In fulfilment of its obligations under sections 4.2.2, 6.3.3(2)
and 6.3.5(1) of the Disclosure Guidance and Transparency Rules ,
The Hongkong and Shanghai Banking Corporation Limited (the
"Company") hereby releases the unedited full text of its 2020
Interim Report for the half-year ended 30 June 2020.
The document is now available on the Company's website at:
https://www.hsbc.com.hk/legal/regulatory-disclosures .
The document has also been submitted to the National Storage
Mechanism (NSM) and will shortly be available for inspection
at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism .
The Hongkong and Shanghai Banking
Corporation Limited
Interim Report 2020
Contents
Page
Certain defined terms 1
-------------------------------------------
Cautionary statement regarding
forward-looking statements 1
-------------------------------------------
Chinese translation 1
-------------------------------------------
Additional information 1
------------------------------------------- ----
Highlights 2
-------------------------------------------
Financial review 3
-------------------------------------------
Risk 8
-------------------------------------------
Capital 23
-------------------------------------------
Statement of Directors' responsibilities 24
-------------------------------------------
Independent review report by
PricewaterhouseCoopers 25
-------------------------------------------
Interim condensed consolidated
financial statements 26
-------------------------------------------
Consolidated income statement 26
-------------------------------------------
Consolidated statement of comprehensive
income 27
-------------------------------------------
Consolidated balance sheet 28
-------------------------------------------
Consolidated statement of cash
flows 29
-------------------------------------------
Consolidated statement of changes
in equity 30
-------------------------------------------
Notes on the Interim condensed
consolidated financial statements 32
Basis of preparation and significant
1 accounting policies 32
2 Dividends 33
---- ------------------------------------- ----
3 Loans and advances to customers 34
----
4 Financial investments 34
----
Interests in associates and
5 joint ventures 35
6 Customer accounts 37
---- ------------------------------------- ----
Fair values of financial instruments
7 carried at fair value 37
---- ------------------------------------- ----
Fair values of financial instruments
8 not carried at fair value 38
Contingent liabilities, contractual
9 commitments and guarantees 38
10 Segmental analysis 39
---- ------------------------------------- ----
11 Related party transactions 40
----
Legal proceedings and regulatory
12 matters 40
---- ------------------------------------- ----
Interim Report 2020 and statutory
13 accounts 41
14 Ultimate holding company 41
---- ------------------------------------- ----
Certain defined terms
This document comprises the Interim
Report 2020 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 Interim Report 2020 contains certain forward-looking
statements with respect to the financial condition, results of
operations and business of the group.
Statements that are not historical facts, including statements
about the group's beliefs and expectations, are forward-looking
statements. Words such as 'expects', 'anticipates', 'intends',
'plans', 'believes', 'seeks', 'estimates', 'potential' and
'reasonably possible', variations of these words and similar
expressions are intended to identify forward-looking statements.
These statements are based on current plans, estimates and
projections, and therefore undue reliance should not be placed on
them.
Forward-looking statements speak only as of the date they are
made. The Hongkong and Shanghai Banking Corporation Limited makes
no commitment to revise or update any forward-looking statements to
reflect events or circumstances occurring or existing after the
date of any forward-looking statement.
Forward-looking statements involve inherent risks and
uncertainties. Readers are cautioned that a number of factors could
cause actual results to differ, in some instances materially, from
those anticipated or implied in any forward-looking statement.
Chinese translation
A Chinese translation of the Interim Report 2020 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.
Additional information
The Banking Disclosure Statement at 30 June 2020, which is
prepared in accordance with the Banking (Disclosure) Rules made
under section 60A of the Banking Ordinance and the Financial
Institutions (Resolution) (Loss-absorbing Capacity Requirements -
Banking Sector) Rules made under section 19(1) of the Financial
Institutions (Resolution) Ordinance, will be published on our
website at www.hsbc.com.hk.
Highlights
Financial highlights
-- Profit before tax down 29% to HK$51,667m (HK$72,867m in the first half of 2019).
-- Attributable profit down 26% to HK$40,846m (HK$55,489m in the first half of 2019).
-- Return on average ordinary shareholders' equity of 10.2% (14.8% in the first half of 2019).
-- Total assets up 5% to HK$9,097bn (HK$8,662bn at the end of 2019).
-- Common equity tier 1 ratio of 16.7% (17.2% at the end of
2019), total capital ratio of 20.3% (21.0% at the end of 2019).
-- Cost efficiency ratio of 43.9% (40.7% for the first half of 2019).
Media enquiries to : Patrick Humphris Telephone no: + 852 2822
2052
Vinh Tran Telephone no: + 852 2822 4924
Financial review
Consolidated income statement and balance sheet data by global business(1,2)
Wealth Global
and Personal Commercial Banking Corporate
Banking Banking and Markets Centre(3) Total
HK$m HK$m HK$m HK$m HK$m
Half-year to 30 Jun 2020
Net interest income/(expense) 33,332 18,979 12,284 (3,637) 60,958
------------
Net fee income 10,897 4,717 4,987 77 20,678
------------ --------- ----------- --------- ---------
Net income/(expense) from financial
instruments measured at fair value (1,268) 1,597 12,848 2,392 15,569
------------ --------- ----------- --------- ---------
Gains less losses from financial
investments 644 375 337 (15) 1,341
------------------------------------------- ------------ --------- ----------- --------- ---------
Net insurance premium income/(expense) 28,282 2,787 - (306) 30,763
Other operating income/(expense) 4,941 123 442 (378) 5,128
------------------------------------------- ------------ --------- ----------- --------- ---------
Total operating income/(expense) 76,828 28,578 30,898 (1,867) 134,437
------------------------------------------- ------------ --------- ----------- --------- ---------
Net insurance claims and benefits
paid and movement in liabilities to
policyholders (29,128) (2,564) - 201 (31,491)
Net operating income/(expense) before
change in expected credit losses and
other credit impairment charges 47,700 26,014 30,898 (1,666) 102,946
------------------------------------------- ------------ --------- ----------- --------- ---------
- Of which: external 37,966 28,721 39,034 (2,775) 102,946
inter-segment 9,734 (2,707) (8,136) 1,109 -
Change in expected credit losses and
other credit impairment charges (3,329) (9,535) (1,238) (10) (14,112)
Net operating income/(expense) 44,371 16,479 29,660 (1,676) 88,834
------------------------------------------- ------------ --------- ----------- --------- ---------
Operating expenses (22,650) (9,271) (11,286) (2,009) (45,216)
Operating profit/(loss) 21,721 7,208 18,374 (3,685) 43,618
------------------------------------------- ------------ --------- ----------- --------- ---------
Share of profit in associates and
joint ventures (82) - - 8,131 8,049
------------------------------------------- ------------ --------- ----------- --------- ---------
Profit before tax 21,639 7,208 18,374 4,446 51,667
------------------------------------------- ------------ --------- ----------- --------- ---------
Balance at 30 Jun 2020
Loans and advances to customers (net) 1,402,816 1,228,971 1,044,434 3,143 3,679,364
Customer accounts 3,199,609 1,343,461 1,060,524 473 5,604,067
------------------------------------------- ------------ --------- ----------- --------- ---------
Half-year to 30 Jun 2019
---------------------------------------------- ----------
Net interest income/(expense) 36,124 22,498 13,714 (7,747) 64,589
---------
Net fee income 11,211 5,400 4,921 57 21,589
Net income from financial instruments
measured at fair value 10,272 1,262 8,992 6,753 27,279
Gains less losses from financial investments 125 110 123 1 359
--------- --------- --------- ------ ---------
Net insurance premium income/(expense) 32,975 3,224 - (13) 36,186
Other operating income 7,166 298 395 462 8,321
--------- --------- --------- ------ ---------
Total operating income/(expense) 97,873 32,792 28,145 (487) 158,323
---------------------------------------------- --------- --------- --------- ------ ---------
Net insurance claims and benefits
paid and movement in liabilities to
policyholders (43,011) (3,125) - - (46,136)
Net operating income/(expense) before
change in expected credit losses and
other credit impairment charges 54,862 29,667 28,145 (487) 112,187
---------------------------------------------- --------- --------- --------- ------ ---------
- Of which: external 41,687 31,135 41,664 (2,299) 112,187
inter-segment 13,175 (1,468) (13,519) 1,812 -
---------------------------------------------- --------- --------- --------- ------ ---------
Change in expected credit losses and
other credit impairment charges (855) (979) (204) (1) (2,039)
----------------------------------------------
Net operating income/(expense) 54,007 28,688 27,941 (488) 110,148
---------------------------------------------- --------- --------- --------- ------ ---------
Operating expenses (22,555) (9,318) (11,783) (2,028) (45,684)
Operating profit/(loss) 31,452 19,370 16,158 (2,516) 64,464
---------------------------------------------- --------- --------- --------- ------ ---------
Share of profit in associates and
joint ventures 282 - - 8,121 8,403
--------- --------- --------- ------ ---------
Profit before tax 31,734 19,370 16,158 5,605 72,867
---------------------------------------------- --------- --------- --------- ------ ---------
Balance at 30 Jun 2019
----------------------------------------------
Loans and advances to customers (net) 1,372,745 1,275,999 1,048,492 1,253 3,698,489
Customer accounts 3,009,355 1,291,000 988,774 444 5,289,573
---------------------------------------------- --------- --------- --------- ------ ---------
1 Effective from the second quarter of 2020, the reportable
segments have been changed to reflect the merging of Retail Banking
and Wealth Management and Global Private Banking to form Wealth and
Personal Banking ('WPB'), and the re-allocation of Balance Sheet
Management from Corporate Centre to the global businesses.
Comparatives have been re-presented to conform to the current
year's presentation. Further details on the change in reportable
segments are set out in note 10 'Segmental analysis' on the Interim
condensed consolidated financial statements.
2 The financial information included in this table forms part of
the Interim condensed consolidated financial statements, which have
been reviewed by PricewaterhouseCoopers.
3 Includes inter-segment elimination.
Financial review
The commentary in this financial review compares the group's
financial performance for the half-year ended 30 June 2020 with the
half-year ended 30 June 2019 unless otherwise stated.
Result commentary
The group reported profit before tax of HK$51,667m, a decrease
of HK$21,200m, or 29%.
Net interest income decreased by HK$3,631m, or 6%. Excluding the
unfavourable foreign exchange impact, net interest income decreased
by HK$2,631m, or 4%, driven by Hong Kong due to narrower customer
deposit spreads and lower reinvestment yields as market interest
rates decreased, partly offset by balance sheet growth. The
decrease in Hong Kong was partly offset by increases in India,
primarily from lower funding costs on customer deposits, coupled
with balance sheet growth, and in Japan and Taiwan due to lower
funding costs as market interest rates decreased.
Net fee income decreased by HK$911m, or 4%, mainly in Commercial
Banking ('CMB') from lower trade-related fees, remittance and
credit facility fees. Net fee income in Wealth and Personal Banking
('WPB') also decreased, mainly from lower credit cards income due
to lower customer spending as a consequence of the Coronavirus
Disease 2019 ('Covid-19') pandemic, coupled with lower income from
unit trusts, account services fee income and insurance agency
commissions. These were partly offset by higher securities
brokerage revenue, mainly in Hong Kong due to higher equity market
turnover in the first half of 2020.
Net income from financial instruments held for trading or
managed on a fair value basis increased by HK$1,149m, or 6%, mainly
in Hong Kong from higher Foreign Exchange ('FX') trading, partly
offset by lower Rates and Credit trading, and in mainland China
from higher revaluation gains on trading bonds and lower interest
expense on structured deposits, partly offset by unfavourable
movements on FX and interest rate swaps. Increases were also noted
in Korea from favourable movement on structured deposits, and in
Indonesia and India, mainly from higher FX and Rates trading
income, partly offset by decreases in Taiwan and Japan from
unfavourable revaluation on funding swaps.
Net income from assets and liabilities of insurance business,
including related derivatives, measured at fair value through
profit or loss decreased by HK$12,729m, or 146%, driven by the
unfavourable equity market performance in Hong Kong in the first
half of 2020 as compared to the favourable equity market
performance in the first half of 2019, which resulted in
revaluation losses on equities held to back insurance liabilities.
To the extent that these losses are attributable to policyholders,
the losses are offset by a corresponding movement in 'Net insurance
claims and benefits paid and movement in liabilities to
policyholders'.
Net insurance premium income decreased by HK$5,423m, or 15%,
driven by lower new business sales, partly offset by higher
renewals business. This was largely offset by a corresponding
movement in 'Net insurance claims and benefits paid and movement in
liabilities to policyholders'.
Other operating income decreased by HK$3,193m, or 38%, driven by
the unfavourable movement in the present value of in-force
insurance business ('PVIF'), and from the unfavourable revaluation
on investment properties, mainly in Hong Kong. The movement in PVIF
was partly offset by a corresponding movement in 'Net insurance
claims and benefits paid and movement in liabilities to
policyholders'.
Net insurance claims and benefits paid and movement in
liabilities to policyholders decreased by HK$14,645m, or 32%,
reflecting lower investment returns to policyholders from the
unfavourable equity market performance in the first half of 2020,
lower claims from lower business sales and the unfavourable
movement in the present value of in-force insurance business.
Change in expected credit losses and other credit risk
provisions increased by HK$12,073m, or 592%, with increases across
all global businesses, mainly from charges relating to the global
impact of Covid-19 and a deteriorating forward economic outlook.
The increase also reflected higher charges related to specific
wholesale exposures, including a significant charge related to a
corporate exposure in Singapore in CMB.
Total operating expenses decreased by HK$468m, or 1%. Excluding
the favourable foreign exchange impact, operating expenses
increased by HK$230m, or 1%, reflecting an increase in investments,
mainly IT-related costs to enhance our digital capabilities. The
increase was largely offset by lower employee compensation and
benefits, driven by lower performance-related pay and lower average
headcount, partly offset by wage inflation across the region.
Share of profit in associates and joint ventures decreased by
HK$354m, or 4%, driven by the unfavourable foreign exchange impact.
Excluding this impact, share of profit in associates and joint
ventures, the largest of which is from Bank of Communications Co.,
Limited, increased by HK$21m.
Net interest income
Half-year to
30 Jun 30 Jun
2020 2019
HK$m HK$m
Net interest income 60,958 64,589
---------
Average interest-earning assets 6,729,095 6,437,120
---------
% %
Net interest spread 1.71 1.86
--------- ---------
Contribution from net free funds 0.11 0.16
--------- ---------
Net interest margin 1.82 2.02
---------------------------------- --------- ---------
Net interest income ('NII') decreased by HK$3,631m, or 6%.
Excluding the unfavourable foreign exchange impact, net interest
income decreased by HK$2,631m, or 4%, driven by Hong Kong due to
narrower customer deposit spreads and lower reinvestment yields as
market interest rates decreased, partly offset by balance sheet
growth. The decrease in Hong Kong was partly offset by increases in
India, primarily from lower funding costs on customer deposits as a
result of successive central bank rate cuts, coupled with balance
sheet growth, and in Japan and Taiwan due to lower funding costs as
market interest rates decreased.
Average interest-earning assets increased by HK$292bn, or 5%,
driven by Hong Kong, mainly from an increase in loans and advances
to customers, notably in corporate term lending and residential
mortgages. Increases were also noted in Singapore and mainland
China, driven by balance sheet growth, notably in financial
investments and customer advances.
Net interest margin decreased by 20 basis points, driven by Hong
Kong and mainland China.
At the Bank's operations in Hong Kong, the net interest margin
for the Bank decreased by 26 basis points, primarily from narrower
customer deposit spreads and lower reinvestment yields on financial
investments as market interest rates decreased.
At Hang Seng Bank, the net interest margin decreased by 30 basis
points, mainly from narrower customer deposit spreads and lower
reinvestment yields on financial investments as market interest
rates decreased, partly offset by a change in the asset portfolio
mix due to growth in customer advances.
In mainland China, the decrease in the net interest margin was
driven by narrower customer deposit spreads and lower reinvestment
yields on financial investments as market interest rates decreased,
coupled with the impact from more debt securities issued to support
business operations and lower contribution of net free funds.
In India and Taiwan, the net interest margin increased,
primarily due to lower cost of funds as market interest rates
decreased.
Net fee income
Half-year to
30 Jun 30 Jun
2020 2019
HK$m HK$m
Funds under management 3,634 3,526
----------------------------- ------ ------
Account services 1,049 1,374
------ ------
Cards 3,366 4,218
------ ------
Credit facilities 1,478 1,842
------ ------
Unit trusts 3,100 3,812
------ ------
Broking income 2,879 1,926
------ ------
Underwriting 733 803
------ ------
Remittances 1,237 1,435
------ ------
Global custody 1,891 1,870
------ ------
Imports/Exports 1,446 1,656
------ ------
Insurance agency commission 783 959
------ ------
Other 4,104 3,810
------ ------
Fee income 25,700 27,231
----------------------------- ------ ------
Fee expense (5,022) (5,642)
----------------------------- ------ ------
Net fee income 20,678 21,589
----------------------------- ------ ------
Net income from financial instruments measured at fair value
through profit or loss
Half-year to
30 Jun 30 Jun
2020 2019
HK$m HK$m
Net income/(expense) arising on:
---------------------------------------------------------------
Net trading activities(1) 18,361 21,633
--------------------------------------------------------------- ------ ------
Other instruments managed on fair value basis(2) 916 (3,505)
------
Net income from financial instruments held for trading
or managed on a fair value basis(2) 19,277 18,128
--------------------------------------------------------------- ------ ------
Financial assets held to meet liabilities under insurance
and investment contracts (3,507) 10,081
--------------------------------------------------------------- ------
Liabilities to customers under investment contracts (492) (1,351)
--------------------------------------------------------------- ------ ------
Net income/(expense) from assets and liabilities of insurance
businesses, including related derivatives, measured at
fair value through profit or loss (3,999) 8,730
--------------------------------------------------------------- ------ ------
Changes in fair value of designated debts issued and
related derivatives(2) 119 318
--------------------------------------------------------------- ------
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss 172 103
--------------------------------------------------------------- ------ ------
Net income from financial instruments measured at fair
value through profit or loss 15,569 27,279
--------------------------------------------------------------- ------ ------
1 The presentation has been updated to align with the
presentation in the Annual Report and Accounts 2019. Comparatives
have been re-presented to conform to the current year's
presentation.
2 In the second half of 2019, the definition of 'Changes in fair
value of designated debts issued and related derivatives' has been
updated to include debt instruments which are issued for funding
purposes and are designated under the fair value option to reduce
an accounting mismatch, previously reported as 'Other instruments
managed on fair value basis' under 'Net income from financial
instruments held for trading or managed on a fair value basis'.
Comparatives have been re-presented to conform to the current
year's presentation.
Other operating income
Half-year to
30 Jun 30 Jun
2020 2019
HK$m HK$m
Movement in present value of in-force long-term insurance
business 4,512 6,610
------ ------
Gains/(losses) on investment properties (693) 308
-----------------------------------------------------------
Other(1) 1,309 1,403
----------------------------------------------------------- ------ ------
Other operating income 5,128 8,321
----------------------------------------------------------- ------ ------
1 Includes mainly recoveries from fellow group companies.
Insurance business
Results of insurance manufacturing operations and insurance distribution
income earned by the group's bank channels
Half-year to
30 Jun 30 Jun
2020 2019
HK$m HK$m
--------
Insurance manufacturing operations(1)
--------
Net interest income 7,605 7,122
------- -------
Net fee expense (1,668) (2,606)
------- -------
Net income/(expense) from financial instruments measured
at fair value (4,102) 8,339
------- -------
Net insurance premium income 31,062 36,212
------- -------
Change in present value of in-force long-term insurance
business 4,512 6,610
------- -------
Other operating income/(expenses) (294) 227
------- -------
Total operating income 37,115 55,904
-------------------------------------------------------------- ------- -------
Net insurance claims and benefits paid and movement in
liabilities to policyholders (31,692) (46,136)
------- -------
Net operating income before change in expected credit
losses and other credit impairment charges 5,423 9,768
Change in expected credit losses and other credit impairment
charges (565) (19)
Net operating income 4,858 9,749
Total operating expenses (1,094) (1,018)
Operating profit 3,764 8,731
Share of profit in associates and joint ventures (83) 282
------- -------
Profit before tax 3,681 9,013
-------------------------------------------------------------- ------- -------
Annualised new business premiums of insurance manufacturing
operations 8,611 14,099
-------------------------------------------------------------- ------- -------
Distribution income earned by banking operations 2,424 3,394
-------------------------------------------------------------- ------- -------
1 The results presented for insurance manufacturing operations
are shown before elimination of intercompany transactions with the
group's
non-insurance operations.
Profit before tax from the insurance manufacturing business
decreased by HK$5,332m, or 59%, driven by the unfavourable equity
market performance and lower new business volumes in the first half
of 2020.
Net interest income increased by 7% as net premium inflows from
new business and renewals increased fixed income assets held to
back insurance liabilities.
Net income from financial instruments measured at fair value
decreased significantly, primarily due to adverse equity market
performance in Hong Kong and Singapore.
Net insurance premium income decreased, mainly in Hong Kong and
Singapore due to lower new business volumes.
The unfavourable movement in the present value of in-force
long-term insurance business ('PVIF') reflected a decrease in the
value of new business written in the period, primarily in Hong Kong
and Singapore in line with the lower business volumes.
To the extent that the above gains or losses are attributable to
policyholders, there is an offsetting movement reported under 'Net
insurance claims and benefits paid and movement in liabilities to
policyholders'.
Change in expected credit losses and other credit impairment
charges
Half-year to
30 Jun 30 Jun
2020 2019
HK$m HK$m
Change in expected credit losses
Loans and advances to banks and customers 12,325 1,923
-------------------------------------------------------------- ------ -----
* new allowances net of releases 12,646 2,381
* recoveries of amounts previously written off (321) (458)
Loan commitments and guarantees 987 45
-------------------------------------------------------------- ------ -----
Other financial assets 800 71
-------------------------------------------------------------- ------ -----
Change in expected credit losses and other credit impairment
charges 14,112 2,039
-------------------------------------------------------------- ------ -----
The change in expected credit losses ('ECL') as a percentage of
average gross customer advances was 0.66% for the first half of
2020 (first half of 2019: 0.11%). The increase in ECL mainly
reflected charges related to the global impact of Covid-19 and
a deteriorating forward economic outlook. In addition, ECL in
the first half of 2020 also included a significant charge related
to a corporate exposure in Singapore in CMB.
Operating expenses
Half-year to
30 Jun 30 Jun
2020 2019
HK$m HK$m
Employee compensation and benefits 17,453 19,615
------- ------
General and administrative expenses 21,030 20,859
------- ------
Depreciation of property, plant and equipment 4,657 4,040
------- ------
Amortisation and impairment of intangible assets 2,076 1,170
------- ------
Operating expenses 45,216 45,684
-------------------------------------------------- ------- ------
Employee compensation and benefits decreased by HK$2,162m, or
11%. Excluding the impact from foreign exchange, employee
compensation and benefits decreased by HK$1,759m, or 9%, driven by
lower performance-related pay and lower average headcount, partly
offset by wage inflation across the region.
General and administrative expenses increased by HK$171m, or 1%.
Excluding the impact from foreign exchange, general and
administrative expenses increased by HK$411m, or 2%, largely due to
an increase in investments, mainly IT-related costs to enhance our
digital capabilities. The increase was largely offset by decreases
in marketing expenses, professional expenses and premises and
equipment costs.
Amortisation and impairment of intangible assets increased by
HK$906m, or 77%, driven by impairment on intangible assets and
higher amortisation charges, reflecting an increase in investments
to enhance our digital capabilities.
Share of profit in associates and joint ventures
At 30 June 2020, an impairment review on the group's investment
in Bank of Communications Co., Limited ('BoCom') was carried out
and it was concluded that the investment was not impaired based on
our value-in-use calculation (see note 5 on the Interim condensed
consolidated financial statements for further details). As
discussed in that note, 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 due
to retained profits earned by BoCom. At the point where the
carrying amount exceeds the value-in-use, impairment would be
recognised. 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.
An impairment review would continue to be performed at each
subsequent reporting period, with the carrying amount and income
adjusted accordingly.
Risk
Principal risks and uncertainties
The group continuously monitors and identifies risks. Our
principal risks are credit risk, liquidity and funding risk,
pension risk, market risk, resilience risk, regulatory compliance
risk, financial crime and fraud risk, model risk, as well as
financial and insurance risks from our insurance manufacturing
operations. A description of principal risks and a summary of our
current policies and practices regarding the management of risk is
set out on pages 20 to 21 in the 'Risk' section of the Annual
Report and Accounts 2019.
We have maintained a consistent approach to risk management
throughout our history, helping to ensure we protect customers'
funds, lend responsibly and support economies.
The first half of 2020 has been marked by unprecedented global
economic events, leading to banks playing an expanded role to
support society and customers. The Coronavirus Disease 2019
('Covid-19') outbreak and its impact on the global economy have
impacted many of our customers' business models and income,
requiring significant levels of support from both governments and
banks. In response, we have enhanced our approach to the management
of risk in this rapidly changing environment.
Throughout the Covid-19 outbreak, we have supported our
customers and adapted our operational processes. Our people,
processes and systems have responded to the changes needed to serve
our customers throughout this time. Operational resilience has been
particularly evident in Hong Kong, where we have maintained high
levels of service throughout the Covid-19 outbreak and the
continuing domestic social unrest.
The performance of our operations has varied in different
geographies, but overall the balance sheet and liquidity of the
group remain strong. This has helped us to respond to the economic
recovery as government lockdowns ease, as seen in mainland
China.
Key geopolitical risks also heightened during the first half of
2020, with US-China tensions continuing to escalate, including
those in relation to Hong Kong following the passing of the Hong
Kong National Security Law, termination of the preferential
treatment afforded to Hong Kong under the 1992 Hong Kong Policy Act
by the US, and US's issuance of the Hong Kong Autonomy Act. The
Hong Kong Autonomy Act provides authority to impose primary
sanctions against entities and individuals determined to have
undermined Hong Kong's autonomy and can impose secondary sanctions
against non-US financial institutions as a result of certain
activities. In addition, we further observe heightened corporate
and national competition over ownership of technologies.
Prevailing market turmoil and temporary forbearance regulations
are causing concerns on model performance and reliability across
business and functions, resulting in businesses utilising more
professional judgement to interpret outcomes.
To meet the additional challenges, we supplemented our existing
approach to risk management with additional tools and practices. We
increased our focus on the quality and timeliness of the data used
to inform management decisions, through measures such as early
warning indicators, prudent active risk management of our risk
appetite, and ensuring regular communication with our Board and
other key stakeholders.
Our current top and emerging risks are summarised below and
discussed in more detail on pages 15 to 18 of the Annual Report and
Accounts 2019.
Externally driven
Geopolitical and ^ We monitor developments in geopolitical risk
macroeconomic risk and assess what impacts these may have on our
portfolios. Covid-19 has resulted in an unprecedented
global economic slowdown with a significant increase
in credit stress in the portfolio. Across the
group, we have increased the frequency and depth
of the monitoring activities on the portfolios.
We performed stress tests and other sectoral
reviews to identify portfolios or customers who
were experiencing or were likely to experience
financial difficulty as a result of Covid-19.
We are increasing resources to help address the
increased level of credit defaults in the current
environment and are monitoring the impact of
prolonged low interest rates.
Cyber threat and > We endeavour to protect the group and our customers
unauthorised access by strengthening our cyber defences, helping
to systems us to execute our business priorities safely
and keep our customers' information secure. Our
data-driven approach, grounded in strong controls
that mitigate advanced cyber threats, enhances
our capability in threat detection, access controls,
and resiliency.
------------------------ ---------------------------------------------------------
Regulatory developments > We monitor closely for regulatory developments
including conduct, and engage with regulators as appropriate, to
with adverse impact help ensure that new regulatory requirements,
on business model such as those in response to the Covid-19 outbreak,
and profitability are implemented effectively and in a timely way.
------------------------ ---------------------------------------------------------
Financial crime > During the first half of 2020, we continued to
risk environment improve the effectiveness of our financial crime
controls in accordance with our specific regulatory
obligations. The application of both advanced
analytics and artificial intelligence remain
key elements of our next generation of tools
to fight financial crime, and our investment
in these areas is ongoing. As fraudulent activity
is often more prevalent in times of crisis, we
have put in place additional measures to help
minimise and detect fraud.
------------------------ ---------------------------------------------------------
Ibor transition ^ We are focused on developing near risk-free rates
('RFRs') along the supporting processes and systems
to make them available to our customers. Our
programme is concurrently developing the capability
to transition, through repapering outstanding
London Interbank Offered Rate ('Libor') and Euro
Overnight Index Average ('Eonia') contracts.
We continue to engage with industry participants
and the official sector to support an orderly
transition.
------------------------ ---------------------------------------------------------
Climate-related > We continue to improve how we identify, oversee
risks and manage climate-related risks, both physical
risks and the transition to a low carbon economy.
Our Board-approved risk appetite statement contains
a qualitative statement, which is being further
enhanced this year. Our risk management priorities
are focusing on: assessing the physical and transition
risk in our wholesale credit portfolio; reviewing
retail mortgage exposures in respect of natural
hazard risk; and developing scenarios internally
for risk management, planning and stress testing.
We continue to engage with our stakeholders,
in particular with regard to how we compile related
data and disclosures.
------------------------ ---------------------------------------------------------
Internally driven
Risks arising from > We have set up a third-party risk management
the receipt of programme so we can better identify, understand,
services from third mitigate and manage the risks that arise from
parties the outsourcing of services. The programme, due
to conclude in the second half of 2020, aims
to ensure adherence to our internal third-party
risk policy and framework. We have worked closely
with our third-party service providers, which
have faced constraints and enhanced oversight
on their operations during the Covid-19 outbreak.
There has been no major impact to our services
during the period.
------------------------ ---------------------------------------------------------
Data management > We continue to enhance and advance our insights,
data aggregation, reporting and decisions through
ongoing improvement and investments in data governance,
data quality, data privacy, data architecture,
machine learning and artificial intelligence
capabilities. We are continuing to work to modernise
our data infrastructure, leveraging cloud technologies
to increase flexibility and scalability and improve
our fit-for-purpose data.
------------------------ ---------------------------------------------------------
^ Risk heightened during first half 2020
> Risk remained at the same level as 2019
Key developments in the first half
of 2020
There were no material changes to the policies and practices for
the management of risk, as described in the Annual Report and
Accounts 2019. However, where required, appropriate exceptional
handling approaches were exercised in response to Covid-19
developments.
We have been actively managing the risks resulting from Covid-19
and its impacts on our customers and operations during the first
half of 2020, as well as other key risks described in this
section.
We remain committed to investing in the reliability and
resilience of our IT systems and critical services that support all
parts of our business. We do so to protect our customers,
affiliates and counterparties, and to help ensure that we minimise
any disruption to services that could result in reputational and
regulatory consequences. We continue to operate in a challenging
environment in which cyber threats are prevalent. We continue to
invest in business and technical controls to defend against these
threats.
In the first half of 2020, we enhanced our risk management in
the following areas:
-- In January 2020, we simplified our approach and articulation
of risk management, through the combination of the Enterprise Risk
Management Framework and the Operational Risk Management Framework
to create a single simplified HSBC Risk Management Framework.
-- The global model risk policy and associated standards were
revised to improve how we manage model risk and meet enhanced
expectations. The new policy, which includes updated controls
around model monitoring and model use, will be implemented over a
six-month period commencing on
1 May 2020.
-- We continued to focus on simplifying our approach to
non-financial risk management. We are driving more effective
oversight and better end-to-end identification and management of
non-financial risks.
-- We continued to improve the effectiveness of our financial
crime controls in accordance with our specific regulatory
obligations. We continued to invest in both advanced analytics and
artificial intelligence, which remains key components of our next
generation of tools to fight financial crime.
Areas of special interest
During the first half of 2020, a number of areas were considered
as part of our top and emerging risks because of the effect they
have on the group. We place particular focus in this section on
geopolitical and macroeconomic risk, risks related to Covid-19,
risks to our operations and portfolios and Ibor transition.
Geopolitical and macroeconomic risk
The Covid-19 outbreak has dominated the political and economic
landscape for the first six months of 2020. The twin shocks of a
public health emergency and the resultant economic fallout have
been felt around the world, and hit both advanced and emerging
markets. The closure of borders threatened medical and food
supplies for many markets, and there is the potential for these
countries and territories to focus efforts on building resilient
supply chains closer to home to be less vulnerable to global
shocks.
The Covid-19 outbreak has heightened existing US-China tensions.
US executive branch and congressional action has put pressure on
the initial 'phase one' provisions under the trade agreement signed
in January 2020. Frictions span an increasing range of issues
including trade, technology and human rights. The Covid-19 outbreak
has accelerated US's efforts to try to reduce reliance on China in
strategic industries such as sensitive technology, pharmaceuticals
and precursor chemicals.
Hong Kong has also emerged as an additional source of tension in
US-China relations, with potential ramifications for the group,
including the impact of sanctions as well as regulatory,
reputational and market risks for the group. While Hong Kong has
experienced lower levels of social unrest in 2020, disagreements
over the interpretation of the 'one country, two systems' model may
continue to drive protest activity in the lead-up to the
Legislative Council elections.
While UK-China relations have historically been shaped by strong
trade and investment, there are also emerging challenges. Following
the passage of the Hong Kong National Security Law, the UK
government has offered residency rights and a path to citizenship
for British National (Overseas) passport holders in Hong Kong. In
addition, both UK and Hong Kong have suspended their extradition
treaties with each other. The rollout of the UK 5G
telecommunications network has also complicated relations. On 14
July, new restrictions on Huawei Technologies Co., Ltd were
announced under the Telecoms Security Bill. These issues have the
potential to impact bilateral commercial relationships
adversely.
Emerging and frontier markets are suffering particularly heavily
from the Covid-19 outbreak, in light of healthcare shortcomings,
widespread labour informality, exposure to commodities production
and often weak policy frameworks and buffers. Multilateral
institutions have mobilised support for the weaker frontier
markets, with the World Bank and G20 marshalling efforts to
implement a standstill on debt to public-sector institutions. The
International Monetary Fund has also, to date, lent US$25bn in
emergency funds to over 70 countries. However, negotiations on debt
to the private sector will prove more difficult, and may result in
sovereign debt restructuring and defaults for several
countries.
Most developed markets are expected to recover from the crisis,
albeit after some permanent business closures and job losses. The
majority of developed markets are also expected to not achieve
pre-crisis growth rates or activity levels for the foreseeable
future. These countries and territories should be able to shoulder
the higher public deficits and debt necessary to offset private
sector weakness, given the continuing low cost of servicing public
debt. However, a group of developed markets entered the Covid-19
crisis on weak economic and fiscal footing and suffered high
healthcare and economic costs. Although Eurozone progress in
mutualisation of the debt should help to support recoveries and
keep debt servicing costs down in the near term, there are concerns
that permanently higher debt burdens will eventually lead to
economies questioning their sustainability.
The contraction in the global economy has had varying effects on
our customers, with many of them experiencing financial
difficulties. This has resulted in an increase in expected credit
losses ('ECL') as explained further in Credit Risk section.
Risks related to Covid-19
Covid-19 and its effect on the global economy have impacted our
customers and our performance, and the future effects are
uncertain. The outbreak has necessitated governments to respond at
unprecedented levels to protect public health, local economies and
livelihoods. It has impacted countries and territories at different
times and to varying degrees as it has developed. The varying
government measures in response have added challenges, given the
rapid pace of change and significant operational demands. The speed
at which countries and territories will be able to unwind their
lockdown measures and return to pre-Covid-19 economic levels will
vary based on levels of infection and local political decisions.
There remains a risk of subsequent waves of infection.
Government restrictions on mobility implemented by governments
around the world to limit the spread of Covid-19 resulted in a
sharp contraction in global economic activity in the first half of
this year. At the same time, governments also took steps designed
to soften the extent of the damage to investment, trade and labour
markets. Economic activity is expected to gradually recover in the
second half of the year but there is significant uncertainty
associated with the pace and scale of recovery. In our Central
scenario, Gross Domestic Product ('GDP') contracts sharply in 2020
in all of our major markets, except mainland China. GDP growth in
mainland China is expected to be positive in 2020, although the
rate of growth is expected to be significantly lower compared with
previous years. Strong recovery in economic activity is expected in
2021, but this is contingent on successful containment of the virus
and the evolution of other top risks including political unrest in
Hong Kong and tensions between the US and China. It also relies on
the willingness and ability of households and businesses to return
towards pre-crisis spending levels. While GDP is expected to grow
strongly in our major markets in 2021, the Central scenario
projects a more gradual decline in the unemployment rate in several
of our key markets.
There is a material risk of a renewed drop in economic activity.
The economic fallout from Covid-19 risks is increasing inequality
across markets that had already suffered from civil unrest. This
will leave the burden on governments and central banks to keep up
or increase fiscal and monetary stimulus. After financial markets
suffered a precipitous fall in the early phases of the spread of
Covid-19, they rebounded although remain volatile. Depending on the
degree to which global economic growth suffers permanent losses,
financial asset prices may suffer a further sharp fall.
Governments and central banks in major economies have deployed
extensive measures to support their local populations. Measures
implemented by governments included income support to households
and funding support to businesses. Central banks' measures included
cuts to rates, support to funding markets and asset purchases.
These measures are expected to be unwound gradually as government
restrictions ease and as activity increases. Central banks are
expected to maintain record-low interest rates for a considerable
period of time and the debt burden of governments is expected to
rise significantly.
We initiated market-specific measures to support our personal
and business customers through these challenging times. These
included mortgage assistance, payment holidays, the waiving of
certain fees and charges, and liquidity relief for businesses
facing market uncertainty and supply chain disruption. These
measures have been well received and we remain responsive to our
customers' changing needs. We are also working closely with
governments and supporting national schemes that focus on the parts
of the economy most impacted by Covid-19. In Hong Kong, we provided
immediate liquidity relief to businesses facing market uncertainty
and supply chain pressures. For details of our customer relief
programmes, see page 18.
The rapid introduction and varying nature of these government
support schemes, as well as customer expectations, can lead to
risks as the group implements large-scale changes in a short period
of time. This has led to operational issues including complex
conduct considerations, increased reputational risks, and a
heightened risk of fraud.
At 30 June 2020, our common equity tier 1 ('CET1') ratio was
16.7%, compared with 17.2% at 31 December 2019, and our liquidity
coverage ratio ('LCR') was 162.0%. Our capital, funding and
liquidity position will help us to continue supporting our
customers throughout the Covid-19 outbreak.
In many of our markets, the Covid-19 outbreak has led to a
weakening in GDP, a key input used for calculating ECL, and there
remains the risk of more adverse economic scenarios given the
ongoing impact of the Covid-19 outbreak. Furthermore, ECL will
increase from other parts of our business impacted by the
disruption to supply chains. The impact will vary by sectors of the
economy, with heightened risk to the oil and gas, transport and
discretionary consumer sectors being observed in the first stages
of the outbreak. The impact of the outbreak on the long-term
prospects of businesses in these sectors is uncertain and may lead
to significant ECL charges on specific exposures, which may not be
fully captured by ECL modelling techniques. In addition, in times
of crisis, fraudulent activity is often more prevalent, leading to
potentially significant ECL charges.
The significant changes in economic and market drivers, customer
behaviours and government actions caused by Covid-19 have also
impacted the performance of financial models. These include retail
and wholesale credit models such as HKFRS loss models, capital
models, traded risk models and models used in the asset/liability
management processes. This has required more ongoing monitoring and
more frequent testing across the group, particularly for credit
models. It has also resulted in the use of compensating controls,
specifically as overlays on top of model outputs to provide a more
appropriate assessment. By their nature, such compensating controls
require a significant degree of management judgement and
assumptions to be applied, and there is a risk that future actual
results or performance may differ from such judgements and
assumptions.
The performance and usage of models over the next 12-18 months
will continue to be impacted significantly by the consequences of
Covid-19. It is too early in the current situation to be certain of
the magnitude of change required for models. However, it is likely
that capital, credit risk and HKFRS models will need to be
re-calibrated, or in some cases, may need to be replaced with the
development of alternative models. The effectiveness of the
existing models will depend, in large, on the depth and length of
the economic downturn faced by the world's economies.
As a result of Covid-19, business continuity plans have been
implemented. Despite high levels of working from home, the majority
of service level agreements, both internal and external, are being
maintained. We have experienced no major impacts to supply chains
from our third-party service providers. The risk of damage or theft
of our physical assets or criminal injury to our employees remains
unchanged. No significant incidents have impacted our buildings or
staff. Expedited decisions to ensure the continuity of critical
customer services are being documented through governance.
There remain significant uncertainties in assessing the duration
of the Covid-19 outbreak and its impact, and how this will evolve
through 2020 and beyond. A prolonged period of significantly
reduced economic activity as a result of the impact of the outbreak
would have a materially adverse effect on our financial results,
prospects, liquidity, capital position and credit ratings. We
continue to monitor the situation closely, given the novel and
prolonged nature of the outbreak, additional mitigating actions may
be required.
Risks to our operations and portfolios
The economic outlook as a result of Covid-19 remains uncertain
with a number of industries adversely impacted. Improving trends
have been noted for mainland China and New Zealand with regards to
the Covid-19 outbreak, whilst cases continue to increase in other
jurisdictions such as Hong Kong, Australia, India and
Indonesia.
In the first half of 2020, US-China tensions have continued to
escalate, including those in relation to Hong Kong. In June 2020,
the National People's Congress of China enacted the Hong Kong
National Security Law. In response, the US took steps to terminate
the preferential treatment afforded to Hong Kong under the 1992
Hong Kong Policy Act. Additionally, the US President signed into
law the Hong Kong Autonomy Act and issued an Executive Order,
providing authority to impose primary sanctions against entities
and individuals determined to have undermined Hong Kong's autonomy.
The Hong Kong Autonomy Act also provides authority to impose
secondary sanctions against non-US financial institutions
determined to have conducted a significant transaction for any
individual or entity subject to primary sanctions under the Act.
There are other steps that have been taken by the US as well, as
tensions with China rise.
Domestic social unrest in Hong Kong remains a risk, with
investor and business sentiment in some sectors remaining dampened.
There are concerns that ongoing tensions could result in an
increasingly fragmented trade and regulatory environment, with the
retail and leisure sectors being particularly affected by the lack
of tourists. However, the financial services sector in Hong Kong
has remained strong and has benefited from stable liquidity
conditions.
The plans to rollout 5G telecommunications technology in several
countries and its importance to future standard-setting and
economic growth is likely to lead to heightened corporate and
national competition over ownership of the relevant
technologies.
We continue to carefully manage our exposures and conduct
regular stress tests to assess the resilience of our balance sheet
and our capital adequacy. These are used to consider our risk
appetite and provide insights into our financial stability. Our
operational resilience has been strongly tested during the Covid-19
outbreak and we have continued to maintain a high level of service
to clients during this period in markets that remain at different
levels of recovery. Our Hong Kong operations in particular have
shown resilience in continuing to operate in times of domestic
social unrest, the Covid-19 outbreak and heightened geopolitical
risks. However, this will continue to be closely monitored.
We continue to believe in the core elements of our strategy such
as targeting growth on the Greater Bay Area and the ASEAN region,
and that we are well placed to be able to support opportunities as
the economy recovers from the Covid-19 outbreak.
Ibor transition
The Financial Stability Board has observed that the decline in
interbank short-term unsecured funding poses structural risks for
interest rate benchmarks that reference these markets. In response,
regulators and central banks in various jurisdictions have convened
national working groups to identify alternative benchmark rates
(near risk-free rates or 'RFRs') for these Ibors and, where
appropriate, to facilitate an orderly transition to these
rates.
Following the announcement by the UK's FCA in July 2017 that it
will no longer persuade or require banks to submit rates for the
Libor after 2021, the national working groups for the affected
currencies were tasked with facilitating an orderly transition of
the relevant Libors to their chosen alternative benchmark rates.
The euro working group is also responsible for facilitating an
orderly transition of the Eonia to the euro short-term rate as a
result of Eonia not being made compliant with the EU Benchmark
Regulation.
Regulators have reiterated that firms cannot rely on Libor being
published after the end of 2021 but acknowledge that Covid-19 may
impact on transition plans.
National working groups, regulators and governments have also
recognised that certain Libor contracts genuinely have no or
inappropriate alternatives and no realistic ability to be
renegotiated or amended prior to Libor's cessation. In response,
the US government and the European Commission intend to implement
legislation that gives market participants the confidence to
transition these 'tough legacy' contracts to the recommended
benchmark replacement without the fear of legal repercussions.
Similarly, in June 2020, the UK government announced that it would
grant powers to the FCA to enable continued publication of a Libor
number using a different and more robust methodology and inputs,
and therefore reduce disruption to any holders of these tough
legacy contracts. However, there is no certainty as to whether the
FCA will exercise these powers or in what form the revised
methodology would take, and the FCA has consequently encouraged
users of Libor to renegotiate or amend as many contracts as
possible before Libor's cessation.
HSBC established the Ibor transition programme with the
objective of facilitating an orderly transition from a number of
Ibors for HSBC and its clients. During the first half of 2020, the
group's Ibor transition has developed as follows:
We continue to develop our capabilities to offer RFR-based
products and the supporting processes and systems. The Covid-19
outbreak has impacted the speed with which we are able to develop
these capabilities and many of our customers' readiness to adopt
RFR-based products. Consequently, the sale of Libor and Eonia
contracts with maturities beyond 2021, known as legacy contracts,
will continue for longer than initially anticipated. This is likely
to increase the volume of legacy contracts that will need to be
transitioned.
The programme is also continuing to develop the capability to
transition legacy Libor and Eonia contracts at scale. The Covid-19
outbreak has also affected the pace with which many of our
customers will have been preparing to adopt RFR-based products.
Therefore, it has likely affected the pace at which they will
transition their legacy contracts to RFRs. Consequently, we expect
legacy contract transition to occur over a shortened time period.
In combination with the greater number of legacy contracts
requiring transition, this increases the overall level of execution
risk on the transition process, which could potentially increase
the level of conduct and operational risks.
In addition to the heightened conduct and operational risks, the
process of adopting new reference rates may expose the group to an
increased level of financial risk, such as potential earnings
volatility resulting from contract modifications and changes in
hedge accounting relationships. Furthermore, the transition to
alternative reference rates could have a range of adverse impacts
on our business, including legal proceedings or other actions
regarding the interpretation and enforceability of provisions in
Ibor-based contracts, and regulatory investigations or reviews in
respect of our preparation and readiness for the replacement of
Ibor with alternative reference rates. We continue to engage with
industry participants, the official sector and our clients to
support an orderly transition and the mitigation of the risks
resulting from the transition.
Credit risk
Overview
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet an obligation under a contract. Credit
risk arises principally from direct lending, trade finance and
leasing business, but also from other products, such as guarantees
and credit derivatives.
During the first half of 2020, due to the unique market
conditions in the Covid-19 crisis, we expanded operational
practices to provide short-term support to customers under the
current policy framework. For further details of market-specific
measures to support our personal and business customers, see page
18. There have been no material changes to credit risk policy.
For the wholesale and retail mentioned in the credit risk
section, wholesale mainly refers to Commercial Banking and Global
Banking and Markets, whereas retail primarily consists of exposures
to individuals under Wealth and Personal Banking.
A summary of our current policies and practices for the
management of credit risk is set out in 'Credit risk management' on
pages 22 to 23 of the Annual Report and Accounts 2019.
Summary of credit risk
The following table provides an overview of the group's credit
risk by stage and industry, and the associated ECL coverage. The
financial assets recorded in each stage have the following
characteristics:
-- Stage 1: These financial assets are unimpaired and without
significant increase in credit risk on which a 12-month allowance
for ECL is recognised.
-- Stage 2: A significant increase in credit risk has been
experienced on these financial assets since initial recognition for
which a lifetime ECL is recognised.
-- Stage 3: There is objective evidence of impairment and the
financial assets are therefore considered to be in default or
otherwise credit impaired on which a lifetime ECL is
recognised.
-- POCI: Financial assets that are purchased or originated at a
deep discount are seen to reflect the incurred credit losses on
which a lifetime ECL is recognised.
Summary of credit risk (excluding debt instruments measured at fair
value through other comprehensive income ('FVOCI')) by stage
distribution and ECL coverage by industry sector(3)
Gross carrying/nominal
amount Allowance for ECL ECL coverage %
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total 1 2 3 POCI Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % % %
------- ------ ---- --------- ------- ------- -------- ----- -------- ----- ----- ----- ----- -------
Loans
and advances
to customers 3,057,331 621,812 26,298 913 3,706,354 (4,277) (7,667) (14,779) (267) (26,990) 0.1 1.2 56.2 29.2 0.7
-----
* personal 1,299,665 87,681 6,618 - 1,393,964 (2,196) (3,193) (1,626) - (7,015) 0.2 3.6 24.6 - 0.5
* corporate(1) 1,556,547 477,535 19,665 910 2,054,657 (1,936) (4,191) (13,138) (264) (19,529) 0.1 0.9 66.8 29.0 1.0
---------------------------------
* financial institutions(2) 201,119 56,596 15 3 257,733 (145) (283) (15) (3) (446) 0.1 0.5 100.0 100.0 0.2
---------------------------------
Loans
and advances
to banks 384,637 17,246 - - 401,883 (40) (21) - - (61) 0.0 0.1 - - 0.0
---------------------------------
Other
financial
assets 1,698,035 35,486 153 1 1,733,675 (530) (323) (20) - (873) 0.0 0.9 13.1 - 0.1
---------------------------------
Loan and
other
credit-related
commitments 1,653,298 80,889 114 - 1,734,301 (265) (660) (29) - (954) 0.0 0.8 25.4 - 0.1
---------------------------------
* personal 1,214,073 8,101 80 - 1,222,254 - - - - - - - - - -
---------------------------------
* corporate(1) 351,495 60,040 34 - 411,569 (247) (639) (29) - (915) 0.1 1.1 85.3 - 0.2
---------------------------------
* financial institutions(2) 87,730 12,748 - - 100,478 (18) (21) - - (39) 0.0 0.2 - - 0.0
---------------------------------
Financial
guarantee 20,410 13,879 461 - 34,750 (20) (105) (81) - (206) 0.1 0.8 17.6 - 0.6
* personal 4,130 10 6 - 4,146 - (6) (1) - (7) 0.0 60.0 16.7 - 0.2
* corporate(1) 15,092 13,507 455 - 29,054 (18) (99) (80) - (197) 0.1 0.7 17.6 - 0.7
---------------------------------
* financial institutions(2) 1,188 362 - - 1,550 (2) - - - (2) 0.2 - - - 0.1
---------------------------------
At 30
Jun 2020 6,813,711 769,312 27,026 914 7,610,963 (5,132) (8,776) (14,909) (267) (29,084) 0.1 1.1 55.2 29.2 0.4
--------------------------------- --------- ------- ------ ---- --------- ------ ------ ------- ---- ------- ----- ----- ----- ----- -----
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector
(continued)
Gross carrying/nominal
amount Allowance for ECL ECL coverage %
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total 1 2 3 POCI Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % % %
--------- ------- ------ ----- --------- ------- ------- ------- ----- -------- ----- ----- ----- ----- -------
Loans
and advances
to customers 3,423,956 296,522 16,639 1,152 3,738,269 (3,480) (4,615) (8,999) (300) (17,394) 0.1 1.6 54.1 26.0 0.5
* personal 1,351,575 45,606 5,575 - 1,402,756 (1,732) (2,646) (1,325) - (5,703) 0.1 5.8 23.8 - 0.4
* corporate(1) 1,850,316 222,819 10,914 1,149 2,085,198 (1,622) (1,844) (7,525) (297) (11,288) 0.1 0.8 68.9 25.8 0.5
* financial institutions(2) 222,065 28,097 150 3 250,315 (126) (125) (149) (3) (403) 0.1 0.4 99.3 100.0 0.2
Loans
and advances
to banks 328,355 579 - - 328,934 (26) (3) - - (29) 0.0 0.5 - - 0.0
---------------------------------
Other
financial
assets 1,530,910 9,884 167 2 1,540,963 (214) (77) (50) - (341) 0.0 0.8 29.9 - 0.0
---------------------------------
Loan and
other
credit-related
commitments 1,601,934 27,967 104 - 1,630,005 (303) (236) (21) - (560) 0.0 0.8 20.2 - 0.0
---------------------------------
* personal 1,158,805 5,311 69 - 1,164,185 - (1) - - (1) - 0.0 - - 0.0
* corporate(1) 378,362 18,495 35 - 396,892 (293) (230) (21) - (544) 0.1 1.2 60.0 - 0.1
* financial institutions(2) 64,767 4,161 - - 68,928 (10) (5) - - (15) 0.0 0.1 - - 0.0
Financial
guarantee 34,496 6,634 33 - 41,163 (29) (20) (13) - (62) 0.1 0.3 39.4 - 0.2
* personal 4,377 - 3 - 4,380 - - (3) - (3) - - 100.0 - 0.1
* corporate(1) 28,530 6,410 30 - 34,970 (29) (20) (10) - (59) 0.1 0.3 33.3 - 0.2
* financial institutions(2) 1,589 224 - - 1,813 - - - - - - - - - -
At 31
Dec 2019 6,919,651 341,586 16,943 1,154 7,279,334 (4,052) (4,951) (9,083) (300) (18,386) 0.1 1.4 53.6 26.0 0.3
--------------------------------- --------- ------- ------ ----- --------- ------ ------ ------ ---- ------- ----- ----- ----- ----- -------
The above table does not include balances due from Group
companies.
1 Includes corporate and commercial.
2 Includes non-bank financial institutions.
3 The financial information included in this table forms part of
the Interim condensed consolidated financial statements, which have
been reviewed by PricewaterhouseCoopers.
Measurement uncertainty and sensitivity analysis of ECL
estimates
(Reviewed by PricewaterhouseCoopers)
The recognition and measurement of ECL involves the use of
significant judgement and estimation. We form multiple economic
scenarios based on economic forecasts, apply these assumptions to
credit risk models to estimate future credit losses, and
probability-weight the results to determine an unbiased ECL
estimate.
Methodology
Our methodology in relation to the adoption and generation
of
economic scenarios is described on pages 27 to 30 of the Annual
Report and Accounts 2019. There have been no significant
changes during the first half of 2020.
Description of consensus economic scenarios
The economic assumptions presented in this section have been
formed by HSBC with reference to external forecasts specifically
for the purpose of calculating ECL. The emergent nature of the
Covid-19 outbreak at the end of 2019 meant that our view of the
distribution of risks, as disclosed in the Annual Report and
Accounts 2019, did not, on a forward-looking basis, consider the
impact of the virus. Our consensus Central scenario at the 2019
year-end projected moderate growth over a five-year horizon, with
strong prospects for employment and a gradual increase in policy
interest rates by central banks in the major economies of Europe
and North America. The onset of the virus has led to a fundamental
reassessment of our central forecast and the distribution of
risks.
Economic forecasts are subject to a high degree of uncertainty
in the current environment. Limitations of forecasts and economic
models require a greater reliance on management judgement in
addressing both the error inherent in economic forecasts and in
assessing associated ECL outcomes. The main factors that affect
uncertainty across our key markets are:
-- epidemiological concerns, including a possible resurgence of
the virus later in 2020 and in 2021;
-- the ability of new or continued restrictions in individual
markets to affect global growth due to deep cross-border trade and
financial linkages;
-- the ability of governments and central banks to continue to
limit the economic damage through support measures;
-- country-specific differences in the progression of Covid-19
and the associated responses by public authorities which imply
differentiation in the degree of uncertainty across our key
markets;
-- the potential for other geopolitical and macroeconomic risks
to affect growth and economic stability as the world recovers from
Covid-19-related restrictions.
This volatility in data, and in forecasts is reflected in
management's choice of scenarios, in probability weights and in
their assessment of ECL outcomes.
The scenarios used to calculate ECL in the Interim condensed
consolidated financial statements are described below.
The consensus Central scenario
HSBC's Central scenario features a 'V-shaped' shock to economic
activity as characterised by a deep, initial contraction in GDP,
followed by a sharp recovery. This 'V-shape' in activity reflects
the unique nature of this downturn and is driven by restrictions on
mobility and activity imposed by governments to reduce the spread
of the virus. The Central scenario further assumes that the
stringent restrictions on activity employed across several
countries and territories in the first half of 2020 will not be
repeated, allowing economic activity to rebound. Minimal long-term
damage to economic prospects is expected, allowing economic growth
across our key markets to return to their trend rates.
Cross-country differences in the depth of the contraction and the
speed and scale of subsequent recovery reflect timing differences
in the progression of the virus, national level differences in
restrictions imposed and the scale of support measures.
Global GDP is expected to contract by 3.9% in 2020 and reach
4.8% in 2021. The average rate of global GDP growth is expected to
be 2.7% over the forecast period 2020-2025, which is slightly lower
than the average growth rate over the 2015-2019 period.
The unique circumstances surrounding the current fall in
economic activity make it difficult to compare current prospects
for global economic activity with previous recessions. However, we
note that the depth of the contraction in global economic activity
and the subsequent recovery are both expected to be sharper than
experienced during the last global downturn of 2008-09.
Across the major markets in Asia, we note:
-- Expectations of GDP growth are mostly negative (with the
exception of mainland China) in 2020, with the worst quarter
expected either in the first or second quarter depending on the
timing of the spread of Covid-19 and subsequent restrictions on
mobility. GDP is forecast to recover strongly in 2021.
-- The unemployment rate is expected to rise sharply in most of
our major markets, before reverting gradually back to pre-crisis
levels over the forecast horizon.
-- Inflation is expected to fall sharply in 2020 in line with
the slowdown in economic activity, before increasing to gradually
converge to central bank targets in our key markets over the
forecast period.
-- Governments have provided extensive support to households and
corporates across Asia. Fiscal deficits are expected to increase
sharply in 2020 before reducing in later years of the projection
period. Sovereign indebtedness is expected to increase sharply as a
result.
-- Major central banks have lowered their main policy interest
rates, implemented emergency support measures for funding markets
and either restarted or increased quantitative easing programmes in
order to support the economy and the financial system. Interest
rates are expected to remain close to the zero lower bound over the
projection horizon.
-- The West Texas Intermediate oil price is forecast to average
US$37 per barrel over the projection period.
The Central scenario has been created with forecasts available
in May. The weight HSBC has chosen to give the Central scenario
reflects management's view of the higher degree of uncertainty that
currently prevails in key markets. The Central scenario has been
assigned a 70% weight across all of our markets.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Central scenario.
Central scenario (2020 Q3 - 2025
Q2)
Mainland
Hong Kong China
GDP growth (%)
Annual average growth
rate: 2020 (4.8) 1.4
---------- ----------
Annual average growth
rate: 2021 4.2 8.1
-------------------------- ---------- ----------
1Q22-2Q25: average
growth 2.3 5.3
-------------------------- ---------- ----------
(2.6)
3Q20-2Q22: worst quarter (Q320) 3.3 (Q421)
-------------------------- ---------- ----------
Unemployment rate
(%)
---------- ----------
Annual average rate:
2020 4.6 4.5
---------- ----------
Annual average rate:
2021 4.1 4.2
-------------------------- ---------- ----------
1Q22-2Q25: average 3.7 3.9
-------------------------- ---------- ----------
3Q20-2Q22: worst quarter 4.8 (Q320) 4.6 (Q320)
-------------------------- ---------- ----------
House Price Index
(%)
---------- ----------
Annual average growth
rate: 2020 (7.9) 1.8
---------- ----------
Annual average growth
rate: 2021 0.4 2.6
-------------------------- ---------- ----------
1Q22-2Q25: average
growth 3.4 5.4
-------------------------- ---------- ----------
(11.5)
3Q20-2Q22: worst quarter (Q320) 1.3 (Q121)
-------------------------- ---------- ----------
10-year bond yield
(%)
-------------------------- ---------- ----------
Annual average rate:
2020 1.2 N/A(1)
---------- ----------
Annual average rate:
2021 1.7 N/A(1)
-------------------------- ---------- ----------
1Q22-2Q25: average 2.2 N/A(1)
-------------------------- ---------- ----------
3Q20-2Q22: worst quarter 1.2 (Q320) N/A(1)
-------------------------- ---------- ----------
Probability (%) 70 70
-------------------------- ---------- ----------
1 N/A - not required in credit models.
The consensus Upside scenario
Compared to the consensus Central scenario, the consensus Upside
scenario features a faster recovery in economic activity during the
first two years, before converging to long-run trends. Despite this
feature, 2020 continues to be a year of contraction in GDP growth
and several quarters elapse before global activity reaches the
level attained at the end of 2019, just prior to the onset of the
virus.
The scenario is consistent with a number of key upside risk
themes. These include orderly global abatement of Covid-19 via
successful containment and/or the development of a vaccine,
de-escalation of tensions between the US and China, continued
support from fiscal and monetary policy, stronger oil prices and
de-escalation of geopolitical tensions in Hong Kong.
Probability weights assigned to the Upside scenario range from
5% to 10%. These weights reflect management's view of the potential
for more positive outcomes relative to the Central scenario in our
key markets.
The consensus Downside scenario
Global real GDP growth contracts significantly in 2020 in the
Downside scenario with a sharp increase in unemployment and falls
in asset prices and inflation before gradually recovering towards
its long-run trend. Compared with the Central scenario, this
recovery is considerably weaker.
The scenario is consistent with our key downside risks. These
include renewed outbreaks of Covid-19 and/or slower easing of
restriction of travel and activity, an intensification of tensions
between the US and China, further risks to economic growth in Hong
Kong and weaker commodity prices.
A weight of either 15% or 20% has been assigned to the consensus
Downside scenario to reflect management's view of the risks and
severity across key markets.
Alternative Downside scenario
A global downside scenario has been created to reflect
management's view of extreme risks. This 'U-shaped' scenario
assumes that a number of HSBC's top risks crystallise
simultaneously and results in an extremely severe and long-lived
recession. This scenario has been assigned a 5% probability across
all markets.
The range of macroeconomic projections across the various
scenarios is shown in the table below:
Outer scenario ranges (3Q20-2Q25)
Mainland
Hong Kong China
------------- -------------
GDP growth (%) (1.5) to
(15.8) 3.9 to
(Q320) (7.2) (Q421)
(Q320) (Q320)
------------- -------------
Unemployment rate 4.5 to 4.5 to
(%) 8 (Q320) 6.1 (Q320)
(Q121) (Q122)
------------- -------------
House price index (10.3) 3.3 to
(%) to (26.3) (25.8)
(Q320) (Q320)
(Q121) (Q321)
------------- -------------
10-year bond yield 1.2 to
(%) (0.8) (Q320)
(Q121) N/A(1)
------------- -------------
Probability consensus
Upside (%) 5 10
------------- -------------
Probability consensus
Downside (%) 20 15
------------- -------------
Probability Global
Downside (%) 5 5
----------------------- ------------- -------------
Note: The figures provided represent the range of the worst
point across all three outer scenarios.
1 N/A - not required in credit models.
Critical accounting estimates and judgements
The calculation of ECL under HKFRS 9 involves significant
judgements, assumptions and estimates, as set out in the Annual
Report and Accounts 2019 under 'Critical accounting estimates and
judgements'. The level of estimation uncertainty and judgement has
increased since 31 December 2019 as a result of the economic
effects of the Covid-19 pandemic, including significant judgements
relating to:
-- the selection and weighting of economic scenarios, given
rapidly changing economic conditions in an unprecedented manner,
uncertainty as to the effect of government and central bank support
measures designed to alleviate adverse economic impacts, and a
widening in the distribution of economic forecasts. The key
judgement is whether the economic effects of the pandemic are more
likely to be temporary or prolonged, and the shape of recovery;
-- estimating the economic effects of those scenarios on ECL,
where there is no observable historical trend that can be reflected
in the models that will accurately represent the effects of the
economic changes of the severity and speed brought about by
Covid-19. Modelled assumptions and linkages between economic
factors and credit losses may underestimate or overestimate ECL in
these conditions, and there is significant uncertainty in the
estimation of parameters such as collateral values and loss
severity; and
-- the identification of customers experiencing significant
increases in credit risk and credit impairment, particularly where
those customers have accepted payment deferrals and other reliefs
designed to address short-term liquidity issues, or have extended
those deferrals, given limitations in the available credit
information on these customers. The use of segmentation techniques
for indicators of significant increases in credit risk involves
significant estimation uncertainty.
How economic scenarios are reflected in ECL
The methodologies for the application of forward economic
guidance into the calculation of ECL for wholesale and retail loans
and portfolios is set out in pages 29 to 30 of the Annual Report
and Accounts 2019. These models are based largely on historical
observations and correlations with default rates.
The severe projections at 30 June 2020 of macroeconomic
variables are outside the historical observations on which HKFRS 9
models have been built and calibrated to operate. Moreover, the
complexities of governmental support programmes and regulatory
guidance on treatment of customer impacts (such as forbearance and
payment holidays) and the unpredictable pathways of the pandemic
have never been modelled. Consequently, our impairment models in
some cases generate output that appears overly conservative when
compared with other economic and credit metrics. Post-model
adjustments are required to ensure that an appropriate amount of
ECL impairment is recognised.
These data and model limitations have been addressed in the
short term using in-model and post-model adjustments. This includes
refining model inputs and outputs and using post-model adjustments
based on management judgement and higher level quantitative
analysis for impacts that are difficult to model. To ensure a
consistent framework, Group Credit Risk identified the model
segments where results were overly conservative based on historical
benchmarks and defined the worst economic inputs where the model
output is considered reliable. For example, in the case of Bank and
Sovereign PD models, based on the historical calibration data, the
model was defined as producing meaningful results when the GDP
growth input is not worse than five standard deviations below the
long-term average. Re-running the models with these capped economic
limits established boundary conditions used by credit experts as a
starting point for further overlays based on their own structured
judgement and granular analysis. For the wholesale portfolio, this
analysis produced a 'credit experts best estimate' to act as a
benchmark against the modelled outcomes, and inform post-model
adjustments. In the short term, the focus is on refining model
inputs and outputs in a consistent and explainable manner, using
post-model adjustments. Wider-ranging model changes will take time
to develop and need more real data on which models can be
trained.
Models will be recalibrated over time once the full impacts of
the pandemic are observed but that will not occur in 2020.
Therefore, we anticipate significant in-model and post-model
adjustments for the foreseeable future.
Post-model adjustments
In the context of HKFRS 9, post-model adjustments are short-term
increases or decreases to the ECL at either a customer or portfolio
level to account for late breaking events, model deficiencies and
expert credit judgement applied following management review and
challenge. We have internal governance in place to regularly
monitor post-model adjustments and where possible to reduce the
reliance on these through model recalibration or redevelopment, as
appropriate. Depending on the path of the pandemic and the shape of
the economic recovery, we anticipate the composition of modelled
ECLs and post-model adjustments may be revised significantly over
2020, particularly when the economy resumes positive GDP growth and
the uncertainty over long-term unemployment abates.
The following table quantifies the judgemental adjustments that
have been made to modelled ECL at 30 June 2020.
Net post-model Retail Wholesale Total
additions/(reductions)
in ECL (HK$m)
------------------------- ------- --------- ----------
Low-risk counterparties
and economies (banks,
sovereigns and
government entities) (1,775) (1,079) (2,854)
------------------------- ------ -------- -------
Corporate lending
adjustments - (9,273) (9,273)
------------------------- ------ -------- -------
Retail lending
adjustments 988 - 988
------------------------- ------ -------- -------
Total (787) (10,352) (11,139)
------------------------- ------ -------- -------
The low-risk counterparties and economies adjustment (including
exposures under WPB insurance business) relates to low credit risk
exposures to highly rated banks and sovereigns, where modelled
credit factors do not fully reflect the effect of government
support and economic programmes in the Covid-19 environment. For
certain highly rated sovereign exposures, existing models do not
produce plausible outputs under current conditions because there is
little or no recessionary experience on which to base modelled
outcomes.
Adjustments to corporate exposures principally reflect the
outcome of the credit expert best estimates ('CEBE') review on
wholesale corporate exposures. Post-model adjustments have been
made where modelled rating migration and ECL outputs based on
historical relationships produced results that were overly
conservative, which is often the case when using economic inputs
that are well outside the range of historical experience. For
retail lending, the net impact of model adjustments was much less
significant. The main material post-model adjustment for retail
lending was related to Hong Kong and Australia. The adjustment for
Hong Kong was taken to neutralise model predicted ECL release. This
was partially offset by an underlay in Australia where modelled
results included economic forecasts significantly beyond those
observed during model development.
Economic scenarios sensitivity analysis of ECL estimates
Management considered the sensitivity of the ECL outcome against
the economic forecasts as part of the ECL governance process by
recalculating the ECL under each scenario described above for
selected portfolios, applying a 100% weighting to each scenario in
turn. The weighting is reflected in both the determination of a
significant increase in credit risk and the measurement of the
resulting ECL.
The ECL calculated for the Upside and Downside scenarios should
not be taken to represent the upper and lower limits of possible
actual ECL outcomes. The impact of defaults that might occur in
future under different economic scenarios is captured by
recalculating ECL for loans in stages 1 and 2 at the balance sheet
date. The population of stage 3 loans (in default) at the balance
sheet date is unchanged in these sensitivity calculations. Stage 3
ECL would only be sensitive to changes in forecasts of future
economic conditions if the LGD of a particular portfolio was
sensitive to these changes.
There is a particularly high degree of estimation uncertainty in
numbers representing tail risk scenarios when assigned a 100%
weighting.
For wholesale credit risk exposures, the sensitivity analysis
excludes ECL and financial instruments related to defaulted
obligors because the measurement of ECL is relatively more
sensitive to credit factors specific to the obligor than future
economic scenarios, and it is impracticable to separate the effect
of macroeconomic factors in individual assessments.
For retail credit risk exposures, the sensitivity analysis
includes ECL for loans and advances to customers related to
defaulted obligors. This is because the retail ECL for secured
mortgage portfolios including loans in all stages is sensitive to
macroeconomic variables.
Wholesale and Retail sensitivity
The sensitivity analysis is stated inclusive of post-model
adjustments as appropriate to each scenario.
In both the Wholesale and Retail analysis, the comparative
period results for Alternative downsides are not directly
comparable.
Wholesale analysis
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Mainland
Hong Kong China
ECL coverage of financial
instruments subject
to significant measurement
uncertainty at 30 June
2020(2) HK$m HK$m
----------------------------- --------- ----------
Reported ECL 4,162 1,217
--------- ----------
Consensus scenarios
----------------------------- --------- ----------
Central scenario 3,480 946
--------- ----------
Upside scenario 2,697 589
--------- ----------
Downside scenario 5,324 1,635
--------- --------
Alternative scenarios
--------- ----------
Global Downside scenario 13,222 9,866
----------------------------- --------- --------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 ECL sensitivity includes off-balance sheet financial
instruments that are subject to significant measurement
uncertainty.
At 30 June 2020, the global downside scenario reflects the most
significant level of ECL sensitivity in Hong Kong and mainland
China due to the combination of potential for deterioration of the
credit quality on those markets and level of exposure.
ECL sensitivities demonstrated an increase from year end 2019,
across all countries, primarily due to the deterioration of
economic forecasts under all scenarios.
The higher ECL sensitivities can all be observed for the global
downside scenario, which represents a prolonged recovery period and
sharper impact, comparative to other scenarios.
Retail analysis
HKFRS 9 ECL sensitivity to
future economic conditions(1)
Hong
Kong Malaysia Singapore Australia
ECL of loans
and advances
to customers
at 30 June 2020(2) HK$m HK$m HK$m HK$m
----- -------- --------- -----------
Reported ECL 2,984 946 543 473
-----
Consensus scenarios
--------------------- ----- -------- --------- -----------
Central scenario 2,705 930 543 372
----- -------- --------- ---------
Upside scenario 2,472 884 519 248
----- -------- --------- ---------
Downside scenario 3,240 977 620 643
----- -------- --------- ---------
Alternative
scenarios
----- -------- --------- -----------
Global Downside
scenario 5,983 1,240 922 1,674
--------------------- ----- -------- --------- ---------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 ECL sensitivity includes only on-balance sheet financial
instruments to which HKFRS 9 impairment requirements are applied.
In Retail during the first half of 2020, there has been a
significant increase in reported expected credit losses across all
markets, due to the global Covid-19 pandemic.
At 30 June 2020, the global downside scenario reflects the most
significant level of ECL sensitivity in Hong Kong due to the level
of exposures. Across all countries and markets, primarily due to
the worsening of the economic forecasts, ECL sensitivities
demonstrated an increase from year end 2019.
Customer relief programmes
In response to the Covid-19 pandemic, governments around the
world have introduced a number of support measures for both
personal and wholesale customers. The following table presents the
number of personal accounts/wholesale customers and the associated
drawn loan values of customers under these schemes and schemes
independently implemented by the group at 30 June 2020.
Other
major
Hong Kong Malaysia markets(1)
--------- -------- -------------
Personal lending
Number of customer accounts granted mortgage
customer relief schemes 000s 3 41 7
-----
Drawn loan value of customers granted mortgage
customer relief schemes HK$m 9,542 17,099 12,373
------------------------------------------------ ----- --------- -------- -----------
Customer relief as a proportion of total
mortgages % 1.4% 83.4% 3.8%
------------------------------------------------ ----- --------- -------- -------------
Number of customer accounts granted other
personal lending customer relief schemes 000s 1 92 101
-----
Drawn loan value of customers granted other
personal lending customer relief schemes HK$m 740 14,081 1,915
-----
Customer relief as a proportion of total
other personal lending % 0.3% 63.5% 2.3%
------------------------------------------------ ----- --------- -------- -------------
Wholesale lending
------------------------------------------------ ----- --------- -------- -------------
Number of customers under customer relief
schemes 000s 9 2 1
-----
Drawn loan value of customers under customer
relief schemes HK$m 193,195 10,786 8,894
------------------------------------------------ ----- ---------
Customer relief as a proportion of total
wholesale loans and advances to customers % 13.2% 18.3% 1.1%
------------------------------------------------ ----- --------- -------- -------------
1 Other major markets include Australia, India, Indonesia, mainland China, Singapore and Taiwan.
The initial granting of customer relief does not automatically
trigger a migration to stage 2 or 3. However, information provided
by payment deferrals is considered in the context of other
reasonable and supportable information, as part of the overall
assessment for significant increase in credit risk and for credit
impairment, to identify loans for which lifetime ECL is
appropriate. An extension in payment deferral does not
automatically result in stage 2 or stage 3. The key accounting and
credit risk judgement to ascertain whether a significant increase
in credit risk has occurred is whether the economic effects of
Covid-19 on the customer are likely to be temporary over the
lifetime of the loan, and do not indicate that a concession is
being made in respect of financial difficulty that would be
consistent with stage 3.
Hong Kong
Wholesale
Given the continued challenges encountered by the Hong Kong
business community on the back of the Covid-19 outbreak, we have
rolled out certain temporary relief measures in 2020 to support our
corporate clients during this period. The overarching premise of
these initiatives was to support the immediate cash flow and
liquidity of our customers, without increasing the overall quantum
of exposure/ risk appetite to these clients. Eligible customers
were required to meet a set of credit criteria.
These arrangements are more proactive and flexible approaches to
commercial restructuring as opposed to forbearance / renegotiated
loans / distressed restructuring.
The relief measures are as follows:
-- Programmes implemented in February 2020 for 'eligible
clients' including extension of trade loans, conversion of trade
facilities to overdraft facilities, and a principal moratorium for
commercial loans of up to six months with no change to the existing
interest rate charge;
-- A supplemental industry-wide relief programme initiated by
the Hong Kong Monetary Authority ('HKMA') for eligible small and
mid-sized corporates with turnover not exceeding HK$800m and no
past dues beyond 30 days was launched in May 2020. The Pre-approved
Principal Payment Holiday Scheme ('PPPHS') entailed essentially a
three-month principal payment holiday for trade facilities and a
six-month principal holiday for other loans, with no change to the
existing interest rate charge;
-- A special 100% Loan Guarantee under the Small and Medium
Enterprise ('SME') Financing Guarantee Scheme (SFGS100) was
launched in April 20. The guarantee covers a maximum tenure of
three years and maximum loan size of HK$4m, and involves transfer
of title of the loan to the Hong Kong Mortgage Corporation, a
quasi-government agency, immediately after drawdown.
Retail
Customer relief granted on Hong Kong mortgages consists of
deferred principal repayment of up to 12 months. This relief
programme is available to existing HSBC mortgage loan customers who
have a good repayment record in the past six months.
Malaysia
Wholesale
We have launched a credit support programme by providing a
30-day extension of import trade loans for eligible clients in
March 2020, and further extended in April with enhancement to allow
up to a 60-day extension of import trade loans.
The Bank has also supported SME clients through the following
measures:
-- Special Relief Facility ('SRF') of up to MYR5bn in aggregate
- to help alleviate short-term cash flow problems faced by SMEs
adversely affected by the Covid-19 outbreak;
-- SME Automation and Digitization Facility ('ADF') of up to
MYR300m in aggregate - to incentivise SMEs to automate processes
and digitalise operations to increase productivity and
efficiency;
-- Agrofood Facility ('AF') of up to MYR1bn in aggregate - to
increase food production for both domestic consumption and
exports;
-- Government Guarantee Scheme ('GGS') - Prihatin, of up to
MYR5bn in aggregate since the funds allotted to the above SRF
scheme have been exhausted, and this scheme was launched to further
assist SMEs negatively affected by the Covid-19 outbreak to obtain
financing facilities.
These support measures were further supplemented by an
industry-wide relief programme in April 2020 initiated by the
government for all SME corporates (except those opting out from the
programme) by way of a pre-approved six-month principal and
interest moratorium in conventional or Islamic financing payment
obligations for loans/financing that meet a set of credit
criteria.
Retail
In Malaysia, the relief programmes are mandated by Bank Negara's
Guideline dated 24 March 2020. HSBC offers a deferment of all
loan/financing repayments for a period of six months, with effect
from 1 April 2020 for customers who are not in arrears exceeding 90
days. For credit card balances not exceeding 60 days past due as of
1 April 2020, customers can
opt-in for conversion to a term loan/financing of up to a
three-year tenure, while accounts between 60 days past due to 89
days past due are automatically converted. These customers also
have the option of a six-month moratorium subject to the Bank's
assessment.
Liquidity and funding risk
Overview
Liquidity risk is the risk that we do not have sufficient
financial resources to meet our obligations as they fall due.
Liquidity risk arises from mismatches in the timing of cash
flows.
Funding risk is the risk that we cannot raise funding or can
only do so at excessive cost.
We maintain a comprehensive liquidity and funding risk
management framework ('LFRF'), which aims to allow us to withstand
severe liquidity stresses. It is based on global policies that are
designed to be adaptable to different business models, markets and
regulations. The LFRF comprises policies, metrics and controls
designed to ensure that group and entity management have oversight
of our liquidity and funding risks in order to manage them
appropriately.
We manage liquidity and funding risk at an operating entity
level to ensure that obligations can be met in the jurisdiction
where they fall due, generally without reliance on other parts of
the group. Operating entities are required to meet internal minimum
requirements and any applicable regulatory requirements at all
times. These requirements are assessed through the individual
liquidity adequacy assessment process, which is used to ensure that
operating entities have robust strategies, policies, processes and
systems for the identification, measurement, management and
monitoring of liquidity risk over an appropriate set of time
horizons, including intra-day, so as to ensure they maintain
adequate levels of liquidity buffers. It informs the validation of
risk tolerance and the setting of risk appetite.
The LFRF requires all operating entities to monitor material
single currency Liquidity Coverage Ratio ('LCR'). Limits are set to
ensure that outflows can be met, given assumptions on stressed
capacity in the FX swap markets.
There were no material changes to the policies and practices for
the management of liquidity risk in the first half of 2020.
A summary of our current policies and practices for the
management of liquidity and funding risk is set out in 'Liquidity
and funding risk' on pages 40 to 41 of the Annual Report and
Accounts 2019.
Sources of funding
Our primary sources of funding are customer current accounts and
savings deposits payable on demand or at short notice. We issue
secured and unsecured wholesale securities to supplement customer
deposits, meet regulatory obligations and to change the currency
mix, maturity profile or location of our liabilities.
Additional collateral obligations
Under the terms of our current collateral obligations under
derivative contracts (which are International Swaps and Derivatives
Association ('ISDA') compliant Credit Support Annex ('CSA')
contracts), the additional collateral required to post in the event
of a one-notch and two-notch downgrade in credit ratings is not
significant.
Liquidity and funding risk in the first half of 2020
The management of liquidity risk was enhanced during the first
half of 2020 in response to the Covid-19 outbreak to ensure the
bank anticipated, monitored and responded to the impacts both at
group and entity level.
The group is required to calculate its LCR and Net Stable
Funding Ratio ('NSFR') on a consolidated basis in accordance with
rule 11(1) of The Banking (Liquidity) Rules ('BLR'). The group is
required to maintain both LCR and NSFR of not less than 100%.
The average LCR of the group for the period is as follows:
Quarter ended
30 Jun 31 Dec
2020 2019
% %
Average LCR 162.0 163.5
------------- -------- ------
The liquidity position of the group remained strong in the first
half of 2020. The average LCR decreased slightly by 1.5% from
163.5% for the quarter ended 31 December 2019 to 162.0% for the
quarter ended 30 June 2020.
The majority of high quality liquid assets ('HQLA') included in
the LCR are Level 1 assets as defined in the BLR, which consist
mainly of government debt securities. From 1 January 2020, listed
ordinary shares and triple-B rated marketable debt securities that
meet HKMA requirements are also included in HQLA as Level 2B
assets.
The total weighted amount of HQLA of the group for the period
are as follows:
Weighted amount
(average value)
at quarter
ended
30 Jun 31 Dec
2020 2019
HK$m HK$m
Level 1 assets 1,605,095 1,528,908
---------
Level 2A assets 90,526 80,174
Level 2B assets 35,249 10,788
-----------------
Total 1,730,870 1,619,870
----------------- --------- ---------
The NSFR of the group for the period is as follows:
At
30 Jun 31 Dec
2020 2019
% %
Net stable funding ratio 150.4 145.8
-------------------------- ------ ------
The funding position of the group remained robust in the first
half of 2020, highlighting a surplus of stable funding available
relative to stable funding requirement. The NSFR increased by 4.6%
from 145.8% for the quarter ended 31 December 2019 to 150.4% for
the quarter ended 30 June 2020.
Interdependent assets and liabilities included in the group's
NSFR are certificates of indebtedness held and legal tender notes
issued.
Further details of the group's liquidity information disclosures
can be viewed in the Banking Disclosure Statement at 30 June 2020,
which will be available in the Regulatory Disclosure Section of our
website: www.hsbc.com.hk.
Market Risk
Overview
Market risk is the risk that movements in market factors, such
as foreign exchange rates, interest rates, credit spreads, equity
prices and commodity prices, will reduce our income or the value of
our portfolios. Exposure to market risk is separated into two
portfolios: trading portfolios and non-trading portfolios.
There were no material changes to our policies and practices for
the management of market risk in the first half of 2020.
A summary of our current policies and practices for the
management of market risk is set out in 'Market risk management' on
pages 41 to 42 of the Annual Report and Accounts 2019.
Market risk in the first half of 2020
Global financial conditions worsened rapidly with the onset of
the Covid-19 pandemic from mid-February. Market volatility reached
extreme levels across most asset classes and equity prices fell
sharply from the previous historic peak levels. The costs of US
dollar funding in the foreign exchange markets surged sharply. In
credit markets, spread and yields reached multi-year highs. The
gold market experienced disruption related to Covid-19, with
refining and transportation affecting the relative pricing of gold
futures contracts, and oil prices collapsed due to rising
over-supply as demand reduced materially due to the economic
slowdown. Financial markets stabilised from April onwards, as
governments in major developed countries announced economic
recovery programmes and key central banks intervened to provide
liquidity and support asset prices.
We managed market risk prudently in the first half of 2020. Key
sensitivity exposures remained within appetite as the business
pursued its core market-making activity in support of our customers
during the pandemic. Market risk continued to be managed using a
complementary set of exposure measures and limits, including stress
and scenario analysis.
The fixed income business continued to be the key driver of
trading value at risk ('VaR') from its interest rate and credit
risk sensitivity exposures. The equity and foreign exchange
components provided marginal contributions to overall market risk
in the trading book.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR predominantly resides within Global Markets. Total
trading VaR was higher as at 30 June 2020 compared to
31 December 2019, mainly contributed by Interest Rate VaR and
Credit VaR with higher market volatility.
The trading VaR for the period 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(3)
HK$m HK$m HK$m HK$m HK$m HK$m
-------------- -------- ------ ------- --------------------- --------
Half-year to 30 Jun 2020
-------------- -------- ------ ------- --------------------- --------
Period end 40 184 38 39 (116) 209
-------------- -------- ------ ------- ---------------- --------
Average 48 143 41 52 185
-------------- -------- ------ ------- --------------------- --------
Maximum 96 248 83 90 251
-------------------------- -------------- -------- ------ ------- --------------------- --------
Half-year to 31 Dec 2019
-------------- -------- ------ ------- --------------------- --------
Period end 48 90 50 24 (110) 140
-------------- -------- ------ ------- ---------------- --------
Average 41 93 36 34 149
-------------- -------- ------ ------- --------------------- --------
Maximum 58 126 59 81 185
-------------------------- -------------- -------- ------ ------- --------------------- --------
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.
3 The total VaR includes HK$24m Risk not in VaR ('RNIV') for
half-year end 2020 and HK$38m Risk not in VaR ('RNIV') for year end
2019.
Insurance manufacturing operations
risk
management
Overview
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 HSBC, the issuer. The cost of claims and
benefits can be influenced by many factors, including mortality and
morbidity experience, as well as lapses and surrender rates.
A summary of our policies and practices regarding the risk
management of insurance operations, our insurance model and the
main contracts we manufacture is provided on pages 46 to 47 of the
Annual Report and Accounts 2019.
There have been no material changes to the policies and
practices for the management of risks arising in our insurance
operations described in the Annual Report and Accounts 2019.
Insurance manufacturing operations risk profile in the first
half of 2020
The risk profile of our insurance manufacturing businesses is
measured using an economic capital approach. Assets and liabilities
are measured on a market value basis, and a capital requirement is
defined to ensure that there is a less than one in 200 chance of
insolvency over a one-year time horizon, given the risks to which
the businesses are exposed. The methodology for the economic
capital calculation is largely aligned to the
pan-European Solvency II insurance capital regulations. A key
risk appetite metric is the economic capital coverage ratio, which
is calculated by dividing the economic net asset value by the
economic capital requirement.
Covid-19 impacts on financial markets have in turn impacted the
profitability of manufactured insurance products and have caused
overall capital levels to fall in several of the insurance
entities. At 30 June 2020 regulatory capital levels were above risk
appetite and the group economic capital level was above risk
tolerance. A variety of management actions was taken during the
period to actively manage the risk profile of the insurance
entities and enhanced risk management and oversight will
continue.
Insurance entities in the group manage their economic capital
cover ratios against their appetite and tolerance as approved by
their respective Boards. The tables below show the composition of
assets and liabilities by contract type and 93% (2019: 92%) of both
assets and liabilities are derived from Hong Kong.
Balance sheet of insurance manufacturing subsidiaries by type of contract
Shareholders'
assets
Non-linked Unit-linked and liabilities Total
HK$m HK$m HK$m HK$m
At 30 Jun 2020
Financial assets 535,348 38,626 39,260 613,234
- financial assets designated and otherwise
mandatorily measured at fair value 95,952 37,363 369 133,684
- derivatives 2,224 35 10 2,269
- financial investments measured at amortised
cost 405,692 207 31,118 437,017
- financial investments measured at fair
value through other comprehensive income 4,003 - 405 4,408
- other financial assets(1) 27,477 1,021 7,358 35,856
------------------------------------------------ ---------- ----------- ---------------- -------
Reinsurance assets 28,624 34 - 28,658
PVIF(2) - - 65,510 65,510
Other assets and investment properties 12,913 12 4,849 17,774
---------- ----------- ---------------- -------
Total assets 576,885 38,672 109,619 725,176
------------------------------------------------ ---------- ----------- ---------------- -------
Liabilities under investment contracts
designated at fair value 31,185 6,786 - 37,971
---------- ----------- ---------------- -------
Liabilities under insurance contracts 515,187 31,342 - 546,529
---------- ----------- ---------------- -------
Deferred tax(3) 392 116 10,466 10,974
---------- ----------- ---------------- -------
Other liabilities - - 35,140 35,140
---------- ----------- ---------------- -------
Total liabilities 546,764 38,244 45,606 630,614
------------------------------------------------ ---------- ----------- ---------------- -------
Total equity - - 94,562 94,562
Total equity and liabilities 546,764 38,244 140,168 725,176
------------------------------------------------ ---------- ----------- ---------------- -------
At 31 Dec 2019
Financial assets 501,625 41,893 34,940 578,458
------------------------------------------------ ---------- ----------- ---------------- -------
- financial assets designated at fair
value 103,902 40,563 124 144,589
- derivatives 957 4 4 965
- financial investments measured at amortised
cost 374,630 342 31,508 406,480
- financial investments measured at fair
value through other comprehensive income 4,126 - 395 4,521
- other financial assets(1) 18,010 984 2,909 21,903
------------------------------------------------ ---------- ----------- ---------------- -------
Reinsurance assets 28,031 44 - 28,075
PVIF(2) - - 61,075 61,075
Other assets and investment properties 13,015 2 3,898 16,915
Total assets 542,671 41,939 99,913 684,523
------------------------------------------------ ---------- ----------- ---------------- -------
Liabilities under investment contracts
designated at fair value 30,231 6,793 - 37,024
Liabilities under insurance contracts 494,181 34,579 - 528,760
Deferred tax(3) 20 118 9,780 9,918
Other liabilities - - 17,116 17,116
Total liabilities 524,432 41,490 26,896 592,818
Total equity - - 91,705 91,705
Total equity and liabilities 524,432 41,490 118,601 684,523
------------------------------------------------ ---------- ----------- ---------------- -------
1 Comprise mainly loans and advances to banks, cash and
inter-company balances with other non-insurance legal entities.
2 Present value of in-force long-term insurance business.
3 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
Market risk
Description and exposure
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 the group to the risk of variation in asset
returns, which will impact our participation in the investment
performance. In addition, in some scenarios the asset returns can
become insufficient to cover the policyholders' financial
guarantees, in which case the shortfall has to be met by the group.
Reserves are held against the cost of such guarantees, calculated
by stochastic modelling.
Where local rules require, these reserves are held as part of
liabilities under insurance contracts. Any remainder is accounted
for as a deduction from PVIF on the relevant product.
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.
Sensitivities
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. The following table
illustrates the effects of selected interest rate, equity price and
foreign exchange rate scenarios on our profit for the period and
the total equity of our insurance manufacturing subsidiaries.
Sensitivity of the group's insurance manufacturing subsidiaries to
market risk factors
30 Jun 2020 31 Dec 2019
Effect Effect Effect Effect
on profit on total on profit on total
after tax equity after tax equity
HK$m HK$m HK$m HK$m
+100 basis points parallel shift in
yield curves (1,717) (2,150) (538) (929)
-100 basis points parallel shift in
yield curves 894 1,328 38 429
10% increase in equity prices 1,596 1,596 1,814 1,814
10% decrease in equity prices (1,596) (1,596) (1,840) (1,840)
10% increase in USD exchange rate compared
to all currencies 45 45 327 327
10% decrease in USD exchange rate compared
to all currencies (45) (45) (327) (327)
-------------------------------------------- --------- -------- --------- --------
Capital
The following tables show the capital ratios, risk-weighted
assets ('RWAs') and capital base on a consolidated basis, in
accordance with the Banking (Capital) Rules:
Capital ratios and RWAs
At
30 Jun 31 Dec
2020 2019
% %
Capital ratios
Common equity tier 1 ('CET1') ratio 16.7 17.2
---------
Tier 1 ratio 18.3 18.8
---------
Total capital ratio 20.3 21.0
--------- ---------
HK$m HK$m
RWAs 2,942,719 2,851,380
------------------------------------- --------- ---------
The following table sets out the composition of the group's
capital base under Basel III at 30 June 2020.
Capital base
At
30 Jun 31 Dec
2020 2019
HK$m HK$m
------------------------------------------------------------ --------- -----------
Common equity tier 1 ('CET1') capital
Shareholders' equity 685,616 690,104
-------- --------
- shareholders' equity per balance sheet 813,007 814,678
- revaluation reserve capitalisation issue (1,454) (1,454)
- other equity instruments (44,615) (44,615)
- unconsolidated subsidiaries (81,322) (78,505)
Non-controlling interests 27,701 27,459
- non-controlling interests per balance sheet 63,460 64,603
- non-controlling interests in unconsolidated subsidiaries (10,357) (10,316)
- surplus non-controlling interests disallowed in CET1 (25,402) (26,828)
Regulatory deductions to CET1 capital (221,723) (225,922)
- valuation adjustments (1,536) (1,554)
- goodwill and intangible assets (20,478) (20,132)
- deferred tax assets net of deferred tax liabilities (3,085) (2,214)
- cash flow hedging reserve (33) 41
- changes in own credit risk on fair valued liabilities (1,745) 2,013
- defined benefit pension fund assets (26) (45)
- significant Loss-absorbing capacity ('LAC') investments
in unconsolidated financial sector entities (109,767) (105,426)
- property revaluation reserves(1) (68,897) (74,626)
- regulatory reserve (16,156) (23,979)
Total CET1 capital 491,594 491,641
------------------------------------------------------------ -------- --------
Additional tier 1 ('AT1') capital
Total AT1 capital before regulatory deductions 45,942 45,819
- perpetual subordinated loans 44,615 44,615
- allowable non-controlling interests in AT1 capital 1,327 1,204
Regulatory deductions to AT1 capital (29) -
- significant LAC investments in unconsolidated financial
sector entities (29) -
------------------------------------------------------------
Total AT1 capital 45,913 45,819
------------------------------------------------------------ --------
Total tier 1 capital 537,507 537,460
------------------------------------------------------------ -------- --------
Tier 2 capital
------------------------------------------------------------ --------- -----------
Total tier 2 capital before regulatory deductions 66,907 68,340
--------
- perpetual subordinated debt(2) 3,100 3,114
- term subordinated debt 15,121 14,839
- property revaluation reserves(1) 31,658 34,236
- impairment allowances and regulatory reserve eligible
for inclusion in tier 2 capital 16,328 16,151
- allowable non-controlling interests in tier 2 capital 700 -
-------- --------
Regulatory deductions to tier 2 capital (7,599) (6,866)
- significant LAC investments in unconsolidated financial
sector entities (7,599) (6,866)
Total tier 2 capital 59,308 61,474
------------------------------------------------------------ --------
Total capital 596,815 598,934
------------------------------------------------------------ -------- --------
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.
2 This Tier 2 capital instrument is grandfathered under Basel
III and will be phased out in full after 31 December 2021.
Statement of Directors' responsibilities
The Directors, the names of whom are set out below, confirm to
the best of their knowledge that:
-- the Interim condensed consolidated financial statements have
been prepared in accordance with Hong Kong Accounting Standard
('HKAS') 34 'Interim Financial Reporting'; and
-- the Interim Report includes a fair review of the information
required by DTR 4.2.7R of the Disclosure Guidance and Transparency
Rules sourcebook issued by the UK Financial Conduct Authority,
being an indication of important events that have occurred during
the first six months of the financial year ending 31 December 2020
and their impact on the Interim condensed consolidated financial
statements and a description of the principal risks and
uncertainties for the remaining six months of the financial
year.
Laura May Lung Cha*, GBM (Chairman)
Peter Tung Shun Wong (Deputy Chairman & Chief Executive)
Zia Mody* (Deputy Chairman)
Graham John Bradley*
Louisa Wai Wan Cheang
Dr Christopher Wai Chee Cheng*, GBS, OBE
Dr Raymond Kuo Fung Ch'ien*, GBS, CBE
Yiu Kwan Choi*
Irene Yun-lien Lee*
Jennifer Xinzhe Li*
Victor Tzar Kuoi Li(#)
Bin Hwee Quek (née Chua)*, PBM, BBM, JP
Kevin Anthony Westley*, BBS
Tan Sri (Sir) Francis Sock Ping Yeoh*, KBE, CBE
* independent non-executive Director
(#) non-executive Director
On behalf of the Board
Laura Cha
Chairman
3 August 2020
Independent review report by PricewaterhouseCoopers
Report On Review of the Interim condensed consolidated financial statements
To the Board of Directors of The Hongkong and Shanghai Banking Corporation
Limited
(incorporated in Hong Kong with limited liability)
Introduction
We have reviewed the Interim condensed consolidated financial
statements set out on pages 26 to 41, which comprise the
consolidated balance sheet of The Hongkong and Shanghai Banking
Corporation Limited (the 'Bank') and its subsidiaries (together,
the 'group') as at 30 June 2020 and the consolidated income
statement, the consolidated statement of comprehensive income, the
consolidated statement of changes in equity and the consolidated
statement of cash flows for the six-month period then ended, and a
summary of significant accounting policies and other explanatory
notes(1) . The directors of the Bank are responsible for the
preparation and presentation of the Interim condensed consolidated
financial statements in accordance with Hong Kong Accounting
Standard 34 'Interim Financial Reporting' issued by the Hong Kong
Institute of Certified Public Accountants and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority. Our responsibility is to express a
conclusion on this Interim condensed consolidated financial
statements based on our review and to report our conclusion solely
to you, as a body, in accordance with our agreed terms of
engagement and for no other purpose. We do not assume
responsibility towards or accept liability to any other person for
the contents of this report.
1 Certain required disclosures as described in note 1(g) on the
Interim condensed consolidated financial statements, have been
presented elsewhere in the Interim Report 2020 rather than in the
notes on the Interim condensed consolidated financial statements.
These are cross-referenced from the Interim condensed consolidated
financial statements and is identified as reviewed.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the United Kingdom's Auditing Practices
Board. A review of interim financial information consists of making
inquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing
(UK) and consequently does not enable us to obtain assurance that
we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit
opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the Interim condensed consolidated
financial statements of the group are not prepared, in all material
respects, in accordance with Hong Kong Accounting Standard 34
'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong
3 August 2020
Interim condensed consolidated financial statements
Consolidated income statement
Half-year to
30 Jun 30 Jun
2020 2019
HK$m HK$m
Net interest income 60,958 64,589
------------------------------------------------------------------
* interest income 83,617 95,534
- interest expense (22,659) (30,945)
------- -------
Net fee income 20,678 21,589
------------------------------------------------------------------ ------- -------
- fee income 25,700 27,231
* fee expense (5,022) (5,642)
------------------------------------------------------------------ ------- -------
Net income from financial instruments held for trading
or managed on a fair value basis(1) 19,277 18,128
Net (expense)/income from assets and liabilities of insurance
businesses, including related derivatives, measured at
fair value through profit or loss (3,999) 8,730
------------------------------------------------------------------ ------- -------
Changes in fair value of designated debts issued and related
derivatives(1) 119 318
------------------------------------------------------------------
Changes in fair value of other financial instruments mandatorily
measured at fair value through profit or loss 172 103
------------------------------------------------------------------
Gains less losses from financial investments 1,341 359
Net insurance premium income 30,763 36,186
------------------------------------------------------------------ ------- -------
Other operating income 5,128 8,321
Total operating income 134,437 158,323
------------------------------------------------------------------ ------- -------
Net insurance claims and benefits paid and movement in
liabilities to policyholders (31,491) (46,136)
Net operating income before change in expected credit
losses and other credit impairment charges 102,946 112,187
------------------------------------------------------------------ ------- -------
Change in expected credit losses and other credit impairment
charges (14,112) (2,039)
------------------------------------------------------------------ ------- -------
Net operating income 88,834 110,148
------------------------------------------------------------------ ------- -------
Employee compensation and benefits (17,453) (19,615)
------------------------------------------------------------------
General and administrative expenses (21,030) (20,859)
------------------------------------------------------------------
Depreciation and impairment of property, plant and equipment (4,657) (4,040)
------------------------------------------------------------------
Amortisation and impairment of intangible assets (2,076) (1,170)
------------------------------------------------------------------ ------- -------
Total operating expenses (45,216) (45,684)
------------------------------------------------------------------ ------- -------
Operating profit 43,618 64,464
------------------------------------------------------------------ ------- -------
Share of profit in associates and joint ventures 8,049 8,403
Profit before tax 51,667 72,867
------------------------------------------------------------------ ------- -------
Tax expense (7,395) (12,266)
Profit for the period 44,272 60,601
------------------------------------------------------------------ ------- -------
Attributable to:
------------------------------------------------------------------ -------- ----------
* ordinary shareholders of the parent company 39,270 54,227
------------------------------------------------------------------ ------- -------
* other equity holders 1,576 1,262
------------------------------------------------------------------ ------- -------
* non-controlling interests 3,426 5,112
------------------------------------------------------------------ ------- -------
Profit for the period 44,272 60,601
------------------------------------------------------------------ ------- -------
1 In the second half of 2019, the definition of 'Changes in fair
value of designated debts issued and related derivatives' has been
updated to include debt instruments which are issued for funding
purposes and are designated under the fair value option to reduce
an accounting mismatch, previously reported under 'Net income from
financial instruments held for trading or managed on a fair value
basis'. Comparatives have been re-presented to conform to the
current year's presentation.
Consolidated statement of comprehensive income
Half-year to
30 Jun 30 Jun
2020 2019
HK$m HK$m
Profit for the period 44,272 60,601
Other comprehensive income/(expense)
Items that will be reclassified subsequently to profit
or loss when specific conditions are met:
Debt instruments at fair value through other comprehensive
income 3,161 1,485
--------------------------------------------------------------
- fair value gains(1) 5,010 6,864
--------------------------------------------------------------
- fair value gains transferred to the income statement
on disposal(1) (1,343) (4,965)
--------------------------------------------------------------
- expected credit recoveries recognised in the income
statement 262 23
--------------------------------------------------------------
- income taxes (768) (437)
------ ------
Cash flow hedges 913 (10)
--------------------------------------------------------------
- fair value gains 1,708 192
--------------------------------------------------------------
- fair value gains reclassified to the income statement (618) (206)
--------------------------------------------------------------
- income taxes (177) 4
Share of other comprehensive (expense)/income of associates
and joint ventures (267) 207
Exchange differences (9,949) (725)
Items that will not be reclassified subsequently to profit
or loss:
Property revaluation (4,464) 3,307
-------------------------------------------------------------- ------ ------
- fair value (losses)/gains (5,344) 3,972
- income taxes 880 (665)
Equity instruments designated at fair value through other
comprehensive income (910) 2,059
-------------------------------------------------------------- ------ ------
- fair value (losses)/gains (903) 2,063
- income taxes (7) (4)
Changes in fair value of financial liabilities designated
at fair value upon initial recognition arising from changes
in own credit risk 3,602 (809)
-------------------------------------------------------------- ------ ------
- before income taxes 4,303 (969)
--------------------------------------------------------------
- income taxes (701) 160
-------------------------------------------------------------- ------ ------
Remeasurement of defined benefit asset/liability (866) (295)
-------------------------------------------------------------- ------ ------
- before income taxes (1,030) (351)
- income taxes 164 56
------ ------
Other comprehensive (expense)/income for the period, net
of tax (8,780) 5,219
Total comprehensive income for the period 35,492 65,820
-------------------------------------------------------------- ------ ------
Attributable to:
- ordinary shareholders of the parent company 31,266 58,618
- other equity holders 1,576 1,262
-------------------------------------------------------------- ------ ------
- non-controlling interests 2,650 5,940
-------------------------------------------------------------- ------ ------
Total comprehensive income for the period 35,492 65,820
-------------------------------------------------------------- ------ ------
1 At 30 June 2020, the impact from fair value hedge on debt
instruments was included in 'fair value gains'. This was previously
included in 'fair value gains transferred to the income statement
on disposal'. Comparatives have not been re-presented.
Consolidated balance sheet
At
30 Jun 31 Dec
2020 2019
Notes HK$m HK$m
------------------------------------------------------- ------ --------- -----------
Assets
Cash and balances at central banks 214,250 202,746
--------- ---------
Items in the course of collection from other banks 35,137 21,140
--------- ---------
Hong Kong Government certificates of indebtedness 306,284 298,944
-------------------------------------------------------
Trading assets 516,308 622,761
---------
Derivatives 374,251 280,642
------------------------------------------------------- ------ --------- ---------
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 140,898 153,511
------------------------------------------------------- ------ --------- ---------
Reverse repurchase agreements - non-trading 491,343 422,333
------------------------------------------------------- ------ --------- ---------
Loans and advances to banks 401,822 328,905
--------- ---------
Loans and advances to customers 3 3,679,364 3,720,875
---------
Financial investments 4 2,090,518 1,900,298
------ ---------
Amounts due from Group companies 148,670 87,632
--------- ---------
Interests in associates and joint ventures 5 156,009 151,917
------------------------------------------------------- ------ --------- ---------
Goodwill and intangible assets 87,308 81,643
------------------------------------------------------- ------ --------- ---------
Property, plant and equipment 130,254 137,930
--------- ---------
Deferred tax assets 3,175 2,179
------------------------------------------------------- ------ --------- ---------
Prepayments, accrued income and other assets 321,747 248,258
------
Total assets 9,097,338 8,661,714
------------------------------------------------------- ------ --------- ---------
Liabilities
Hong Kong currency notes in circulation 306,284 298,944
Items in the course of transmission to other banks 40,959 25,576
------------------------------------------------------- ------ --------- ---------
Repurchase agreements - non-trading 111,322 106,396
Deposits by banks 233,635 179,819
---------
Customer accounts 6 5,604,067 5,432,424
------ ---------
Trading liabilities 74,985 87,532
---------
Derivatives 360,616 292,231
------------------------------------------------------- ------ --------- ---------
Financial liabilities designated at fair value 159,381 160,291
---------
Debt securities in issue 102,972 106,933
---------
Retirement benefit liabilities 3,635 2,595
Amounts due to Group companies 333,467 311,111
Accruals and deferred income, other liabilities and
provisions 301,648 203,252
------------------------------------------------------- ------ --------- ---------
Liabilities under insurance contracts 546,529 528,760
---------
Current tax liabilities 5,523 12,614
------------------------------------------------------- ------ --------- ---------
Deferred tax liabilities 31,844 29,889
------------------------------------------------------- ------ --------- ---------
Subordinated liabilities 4,004 4,066
------------------------------------------------------- ------ --------- ---------
Total liabilities 8,220,871 7,782,433
------------------------------------------------------- ------ --------- ---------
Equity
------------------------------------------------------- ------ --------- -----------
Share capital 172,335 172,335
------------------------------------------------------- ------ --------- ---------
Other equity instruments 44,615 44,615
------------------------------------------------------- ------ --------- ---------
Other reserves 122,093 133,099
------------------------------------------------------- ------ --------- ---------
Retained earnings 473,964 464,629
------------------------------------------------------- ------ --------- ---------
Total shareholders' equity 813,007 814,678
------------------------------------------------------- ------ --------- ---------
Non-controlling interests 63,460 64,603
------------------------------------------------------- ------ --------- ---------
Total equity 876,467 879,281
------------------------------------------------------- ------ --------- ---------
Total liabilities and equity 9,097,338 8,661,714
------------------------------------------------------- ------ --------- ---------
Consolidated statement of cash flows
Half-year to
30 Jun 30 Jun
2020 2019
HK$m HK$m
-------------------------------------------------------------- --------- -----------
Profit before tax 51,667 72,867
-------- --------
Adjustments for non-cash items:
--------- -----------
Depreciation and amortisation 6,733 5,210
-------- --------
Net gain from investing activities (648) (673)
-------- --------
Share of profits in associates and joint ventures (8,049) (8,403)
-------- --------
Loss on disposal of subsidiaries, businesses, associates
and joint ventures 1 13
-------- --------
Change in expected credit losses gross of recoveries and
other credit impairment charges 14,433 2,039
-------------------------------------------------------------- -------- --------
Provisions (235) 19
-------- --------
Share-based payment expense 328 409
-------- --------
Other non-cash items included in profit before tax (5,067) (6,314)
-------- --------
Change in operating assets (160,147) (293,035)
-------- --------
Change in operating liabilities 370,792 325,976
-------- --------
Elimination of exchange differences 12,577 953
-------------------------------------------------------------- -------- --------
Dividends received from associates 83 84
-------- --------
Contributions paid to defined benefit plans (167) (176)
-------- --------
Tax paid (14,390) (4,922)
-------- --------
Net cash from operating activities 267,911 94,047
-------------------------------------------------------------- -------- --------
Purchase of financial investments (446,254) (457,815)
Proceeds from the sale and maturity of financial investments 409,753 372,990
-------------------------------------------------------------- -------- --------
Purchase of property, plant and equipment (1,711) (1,421)
-------- --------
Proceeds from sale of property, plant and equipment and
assets held for sale 27 1,824
-------------------------------------------------------------- -------- --------
Proceeds from disposal of customer loan portfolios 2,920 1,066
-------- --------
Net investment in intangible assets (2,894) (2,321)
-------- --------
Net cash inflow on sale of subsidiaries - 299
-------------------------------------------------------------- -------- --------
Net cash from investing activities (38,159) (85,378)
-------------------------------------------------------------- -------- --------
Issue of other equity instruments - 8,617
-------- --------
Dividends paid to shareholders of the parent company and
non-controlling interests (38,107) (41,802)
-------- --------
Net cash from financing activities (38,107) (33,185)
-------- --------
Net increase/(decrease) in cash and cash equivalents 191,645 (24,516)
-------------------------------------------------------------- -------- --------
Cash and cash equivalents at 1 Jan 677,664 721,609
-------- --------
Exchange differences in respect of cash and cash equivalents (8,901) 2,798
-------- --------
Cash and cash equivalents at 30 Jun(2,3) 860,408 699,891
-------------------------------------------------------------- -------- --------
Interest received in the first half of 2020 was HK$87,960m
(first half of 2019: HK$94,234m), and interest paid in the first
half of 2020 was
HK$29,940m (first half of 2019: HK$29,218m).
Dividends received in the first half of 2020, which included
dividend income from trading activities to align with Group's
presentation, were HK$1,165m (first half of 2019: HK$2,017m).
Comparatives have been re-presented to conform to the current
year's presentation.
1 There is no change in subordinated loan capital during the
first half of 2020. During the first half of 2019, the change in
subordinated liabilities included amounts from repayment of
HK$92,384m and re-issuance of HK$92,343m to Group companies with no
cash movement. Changes in subordinated liabilities included
non-cash changes from foreign exchange loss of HK$972m in the first
half of 2020 (first half of 2019: HK$359m) and fair value gain
after hedging of HK$7,466m in the first half of 2020 (first half of
2019: fair value loss HK$120m).
2 The amount of cash and cash equivalents that are subject to
exchange control and regulatory restrictions amounted to
HK$128,039m at 30 June 2020 (at 30 June 2019: HK$102,325m).
3 From the fourth quarter of 2019, settlement accounts with bank
counterparties of one month or less are included on a net basis to
align with Group's presentation. Comparatives have not been
re-presented.
Consolidated statement of changes in equity
Half-year to 30 Jun 2020
Other reserves
Financial Cash Total
Other Property assets flow Foreign share- Non-
Share equity Retained revaluation at FVOCI hedge exchange holders' controlling Total
capital instru-ments earnings reserve reserve reserve reserve Other(1) equity interests equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
----------------------------------------------------------- ------- -------------- -------- ------------- ----------- --------- -------- -------- -------- ------------- ----------
At 1 Jan 2020 172,335 44,615 464,629 72,013 6,959 (104) (28,118) 82,349 814,678 64,603 879,281
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- --- -------
Profit for the
period - - 40,846 - - - - - 40,846 3,426 44,272
Other comprehensive
income/(expense)
(net of tax) - - 2,870 (4,128) 2,278 826 (9,778) (72) (8,004) (776) (8,780)
* debt instruments at fair value through other
comprehensive income - - - - 3,047 - - - 3,047 114 3,161
-----------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - - (581) - - - (581) (329) (910)
-----------------------------------------------------------
* cash flow hedges - - - - - 826 - - 826 87 913
-----------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 3,601 - - - - - 3,601 1 3,602
-----------------------------------------------------------
* property revaluation - - - (4,128) - - - - (4,128) (336) (4,464)
-----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (724) - - - - - (724) (142) (866)
-----------------------------------------------------------
* share of other comprehensive expense of associates
and joint ventures - - (7) - (188) - - (72) (267) - (267)
-----------------------------------------------------------
* exchange differences - - - - - - (9,778) - (9,778) (171) (9,949)
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- -------
Total comprehensive
income/(expense)
for the period - - 43,716 (4,128) 2,278 826 (9,778) (72) 32,842 2,650 35,492
----------------------------------------------------------- ------- --------- --- ------- -------- ------ --- ----- ------- ------- ------- -------- --- -------
Dividends to shareholders(3) - - (34,416) - - - - - (34,416) (3,695) (38,111)
------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- -------
Movement in respect
of share-based
payment arrangements - - 79 - - - - 276 355 10 365
------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- --- -------
Transfers and other
movements(4) - - (44) (1,482) 2 - - 1,072 (452) (108) (560)
----------------------------------------------------------- ------- --------- --- ------- -------- ------ --- ----- ------- ------- ------- -------- -------
At 30 Jun 2020 172,335 44,615 473,964 66,403 9,239 722 (37,896) 83,625 813,007 63,460 876,467
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- --- -------
Half-year to 30 Jun 2019
-----------------------------------------------------------
At 31 Dec 2018 172,335 35,879 429,595 57,914 2,953 (99) (24,649) 78,830 752,758 60,162 812,920
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- --- -------
Impact on transition
to HKFRS 16 - - - 13,483 - - - - 13,483 - 13,483
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- --- -------
At 1 Jan 2019 172,335 35,879 429,595 71,397 2,953 (99) (24,649) 78,830 766,241 60,162 826,403
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- --- -------
Profit for the
period - - 55,489 - - - - - 55,489 5,112 60,601
Other comprehensive
income/(expense)
(net of tax) - - (1,079) 3,014 3,213 (36) (713) (8) 4,391 828 5,219
* debt instruments at fair value through other
comprehensive income - - - - 1,462 - - - 1,462 23 1,485
* equity instruments designated at fair value through
other comprehensive income - - - - 1,536 - - - 1,536 523 2,059
-----------------------------------------------------------
* cash flow hedges - - - - - (36) - - (36) 26 (10)
-----------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (810) - - - - - (810) 1 (809)
-----------------------------------------------------------
* property revaluation - - - 3,014 - - - - 3,014 293 3,307
-----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (269) - - - - - (269) (26) (295)
-----------------------------------------------------------
* share of other comprehensive income/(expense) of
associates and joint ventures - - - - 215 - - (8) 207 - 207
-----------------------------------------------------------
* exchange differences - - - - - - (713) - (713) (12) (725)
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- -------
Total comprehensive
income/(expense)
for the period - - 54,410 3,014 3,213 (36) (713) (8) 59,880 5,940 65,820
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- --- -------
Other equity instruments
issued(2) - 44,615 - - - - - - 44,615 - 44,615
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- --- -------
Other equity instruments
repaid(2) - (35,879) - - - - - - (35,879) - (35,879)
----------------------------------------------------------- ------- --------- ------- -------- --- ------ --- ----- ------- ------- ------- -------- --- -------
Dividends to shareholders(3) - - (38,183) - - - - - (38,183) (3,619) (41,802)
------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- -------
Movement in respect
of share-based
payment arrangements - - (75) - - - - 68 (7) - (7)
------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- --- -------
Transfers and other
movements(4) - - (1,247) (1,355) - - - 2,672 70 (162) (92)
----------------------------------------------------------- ------- --------- --- ------- -------- ------ --- ----- ------- ------- ------- -------- -------
At 30 Jun 2019 172,335 44,615 444,500 73,056 6,166 (135) (25,362) 81,562 796,737 62,321 859,058
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------ --- ----- ------- ------- ------- -------- --- -------
Consolidated statement of changes in equity (continued)
Half-year to 31 Dec 2019
Other reserves
Financial Cash Total
Other Property assets flow Foreign share- Non-
Share equity Retained revaluation at FVOCI 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 Jul 2019 172,335 44,615 444,500 73,056 6,166 (135) (25,362) 81,562 796,737 62,321 859,058
----------------------------------------------------------- ------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- --- -------
Profit for the
period - - 50,233 - - - - - 50,233 4,206 54,439
Other comprehensive
income/(expense)
(net of tax) - - (870) 381 793 31 (2,756) 17 (2,404) 84 (2,320)
* debt instruments at fair value through other
comprehensive income - - - - 214 - - - 214 (25) 189
* equity instruments designated at fair value through
other comprehensive income - - - - 633 - - - 633 162 795
-----------------------------------------------------------
* cash flow hedges - - - - - 31 - - 31 (16) 15
-----------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (1,248) - - - - - (1,248) (3) (1,251)
-----------------------------------------------------------
* property revaluation - - - 381 - - - - 381 (15) 366
-----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - 381 - - - - - 381 106 487
-----------------------------------------------------------
* share of other comprehensive income/(expense) of
associates and joint ventures - - (3) - (54) - - 17 (40) - (40)
-----------------------------------------------------------
* exchange differences - - - - - - (2,756) - (2,756) (125) (2,881)
----------------------------------------------------------- ------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- -------
Total comprehensive
income/(expense)
for the period - - 49,363 381 793 31 (2,756) 17 47,829 4,290 52,119
----------------------------------------------------------- ------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- --- -------
Dividends to shareholders(3) - - (30,186) - - - - - (30,186) (2,027) (32,213)
------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- -------
Movement in respect
of share-based
payment arrangements - - 33 - - - - 181 214 2 216
------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- --- -------
Transfers and
other movements(4) - - 919 (1,424) - - - 589 84 17 101
----------------------------------------------------------- ------- ----------- ------- -------- ------ --- ----- ------- -------- ------- -------- --- -------
At 31 Dec 2019 172,335 44,615 464,629 72,013 6,959 (104) (28,118) 82,349 814,678 64,603 879,281
----------------------------------------------------------- ------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- --- -------
1 The other reserves mainly comprise share of associates' other
reserves, purchase premium arising from transfer of business from
fellow subsidiaries, property revaluation reserve relating to
transfer of properties to a fellow subsidiary 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 In the first half of 2019, there were US$1,100m additional
tier 1 capital instruments issued. In addition, US$4,600m of
additional tier 1 capital instruments were repaid and re-issued in
the first half of 2019 with no actual cash movement.
3 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
4 The movement from retained earnings to other reserves includes
the relevant transfers in associates according to local regulatory
requirements, and from the property revaluation reserve to retained
earnings in relation to depreciation of revalued properties.
Notes on the Interim condensed consolidated financial statements
1 Basis of preparation and significant accounting policies
---------------------------------------------------------
(a) Compliance with Hong Kong Financial Reporting Standards
The Interim condensed consolidated financial statements of the
group have been prepared in accordance with HKAS 34 'Interim
Financial Reporting' as issued by the Hong Kong Institute of
Certified Public Accountants ('HKICPA'). These financial statements
should be read in conjunction with the Annual Report and Accounts
2019.
Standards applied during the half-year to 30 June 2020
There were no new standards or amendments to standards that had
a material effect on these interim condensed consolidated financial
statements.
(b) Use of estimates and judgements
Management believes that the group's critical accounting
estimates and judgements are those which relate to the impairment
of amortised cost and FVOCI debt financial assets, the valuation of
financial instruments, the provisions for liabilities, interests in
associates and the present value of in-force long-term insurance
business. There were no changes in the current period to the
critical accounting estimates and judgements applied in 2019, which
are stated in note 1 of the Annual Report and Accounts 2019.
However, the level of estimation uncertainty and judgement for the
calculation of expected credit losses has increased since 31
December 2019 as a result of the economic effects of the Covid-19
outbreak as set out in 'Measurement uncertainty and sensitivity
analysis' on pages 14 to 17.
(c) Composition of the group
There were no material changes in the composition of the group
in the half-year to 30 June 2020.
(d) Future accounting developments
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 currently effective from 1 January 2021.
However, amendments to the standard are expected, including to
delay the mandatory effective date to 1 January 2023. The group is
in the process of implementing HKFRS 17. Industry practice and
interpretation of the standard are still developing. Therefore, the
likely impact of its implementation remains uncertain.
(e) Going concern
The interim condensed consolidated 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, capital requirements and capital
resources. These considerations include stressed scenarios that
reflect the increasing uncertainty that Covid-19 has had on the
group's operations, as well as considering potential impacts from
other top and emerging risks, and the related impact on
profitability, capital and liquidity.
(f) Accounting policies
The accounting policies applied by the group for the Interim
condensed consolidated financial statements are consistent with
those described in note 1 of the Annual Report and Accounts 2019,
as are the methods of computation.
(g) Presentation of information
Certain disclosures required by HKFRSs have been included in the
sections marked as 'Reviewed by PricewaterhouseCoopers' in this
Interim Report 2020 as follows:
-- Consolidated income statement and balance sheet data by
global business are included in the 'Financial Review' on page
3.
-- 'Summary of credit risk (excluding debt instruments measured
at fair value through other comprehensive income ('FVOCI')) by
stage distribution and ECL coverage by industry sector' included in
'Risk' section on pages 13 to 14.
-- 'Measurement uncertainty and sensitivity analysis' included
in 'Risk' section on pages 14 to 17.
2 Dividends
----------
Half-year to
30 Jun 2020 30 Jun 2019
HK$ per HK$ per
share HK$m share HK$m
Dividends paid on ordinary shares
* fourth interim dividend in respect of the previous
financial year approved and paid during the half-year 0.58 27,026 0.47 21,958
- first interim dividend paid 0.13 5,814 0.32 14,963
-------------------------------------------------------------- ------- ------ ------- ------
Total 0.71 32,840 0.79 36,921
------- ------ ------- ------
Total coupons on other equity instruments 1,576 1,262
------- ------ ------- ------
Dividends to shareholders 34,416 38,183
-------------------------------------------------------------- ------- ------ ------- ------
The Directors declared a second interim dividend in respect of
the half-year ended 30 June 2020 of HK$0.19 per ordinary share
(HK$8,915m) (half-year ended 30 June 2019 of HK$0.32 per
ordinary share (HK$14,963m)).
Total coupons on other equity instruments
Half-year to
30 Jun 30 Jun
2020 2019
HK$m HK$m
US$1,900m Floating rate perpetual subordinated loans
(interest rate at one year US dollar LIBOR plus 3.84%)(1) - 497
------------------------------------------------------------- -------- ------
US$1,400m Floating rate perpetual subordinated loans
(interest rate at three months US dollar LIBOR plus
3.51%)(1) - 373
------------------------------------------------------------- -------- ------
US$600m Floating rate perpetual subordinated loan (interest
rate at three months US dollar LIBOR plus 3.62%)(1) - 178
------------------------------------------------------------- -------- ------
US$700m Floating rate perpetual subordinated loan (interest
rate at three months US dollar LIBOR plus 4.98%)(1) - 214
------------------------------------------------------------- -------- ------
US$1,000m Fixed rate perpetual subordinated loan (interest
rate fixed at 6.09%)(2) 370 -
------------------------------------------------------------- -------- ------
US$1,200m Fixed rate perpetual subordinated loans (interest
rate fixed at 6.172%)(2) 445 -
------------------------------------------------------------- -------- ------
US$600m Fixed rate perpetual subordinated loan (interest
rate fixed at 5.91%)(2) 249 -
------------------------------------------------------------- -------- ------
US$1,100m Fixed rate perpetual subordinated loan (interest
rate fixed at 6%)(2) 512 -
------------------------------------------------------------- -------- ------
Total 1,576 1,262
------------------------------------------------------------- -------- ------
1 These subordinated loans were early repaid in the first half
of 2019 and distributions were made on repayment.
2 These subordinated loans were issued in June 2019.
3 Loans and advances to customers
--------------------------------
At
30 Jun 31 Dec
2020 2019
HK$m HK$m
Gross loans and advances to customers 3,706,354 3,738,269
Expected credit loss allowances (26,990) (17,394)
---------
3,679,364 3,720,875
--------------------------------------- --------- ---------
The following table provides an analysis of loans and advances
to customers by industry sector based on the Statistical
Classification of economic activities in the European Community
('NACE') codes.
Analysis of gross loans and advances to customers
At
30 Jun 31 Dec
2020 2019
HK$m HK$m
--------------------------------- --------- -----------
Residential mortgages 1,039,368 1,027,087
Credit card advances 83,072 94,582
Other personal 271,524 281,087
--------------------------------- ---------
Total personal 1,393,964 1,402,756
--------------------------------- --------- ---------
Real estate 648,108 666,380
Wholesale and retail trade 400,127 418,669
Manufacturing 403,278 418,822
Transportation and storage 91,723 86,912
Other 511,421 494,416
--------- ---------
Total corporate and commercial 2,054,657 2,085,199
--------------------------------- --------- ---------
Non-bank financial institutions 257,733 250,314
3,706,354 3,738,269
--------------------------------- --------- ---------
By geography(1)
--------------------------------- --------- -----------
Hong Kong 2,403,956 2,399,867
--------------------------------- --------- ---------
Rest of Asia Pacific 1,302,398 1,338,402
--------------------------------- --------- ---------
1 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.
Gross loans and advances to customers decreased by HK$32bn, or
1%, which included unfavourable foreign exchange translation
effects of HK$39bn. Excluding this impact, the underlying increase
of HK$7bn was driven by an increase in residential mortgages of
HK$21bn mainly in Hong Kong and Australia, partly offset by a
decrease in credit card advances of HK$11bn mainly in Hong Kong.
Non-bank financial institution lending also increased by HK$11bn,
partly offset by a decrease in corporate and commercial lending of
HK$8bn.
4 Financial investments
----------------------
Carrying amounts of financial investments
At
30 Jun 31 Dec
2020 2019
HK$m HK$m
Financial investments measured at fair value through
other comprehensive income 1,629,300 1,465,998
--------- ---------
- treasury and other eligible bills 774,802 606,738
- debt securities 846,863 850,623
- equity securities 7,635 8,637
--------- ---------
Debt instruments measured at amortised cost 461,218 434,300
--------- ---------
- treasury and other eligible bills 4,351 5,049
- debt securities 456,867 429,251
--------- ---------
2,090,518 1,900,298
------------------------------------------------------ --------- ---------
5 Interests in associates and joint ventures
-------------------------------------------
Bank of Communications Co., Limited ('BoCom')
The group's investment in BoCom is classified as an associate.
Significant influence in BoCom was established via representation
on BoCom's Board of Directors and participation in a Resource and
Experience Sharing agreement ('RES'). Under the RES, HSBC staff
have been seconded to assist in the maintenance of BoCom's
financial and operating policies. Investments in associates are
recognised using the equity method of accounting in accordance with
HKAS 28 whereby the investment is initially recognised at cost and
adjusted thereafter for the post-acquisition change in the group's
share of BoCom's net assets. An impairment test is required if
there is any indication of impairment.
Impairment testing
At 30 June 2020, the fair value of the group's investment in
BoCom had been below the carrying amount for approximately eight
years. As a result, the group performed an impairment test on the
carrying amount, which confirmed that there was no impairment at 30
June 2020 as the recoverable amount, as determined by a
value-in-use ('VIU') calculation, was higher than the carrying
value.
At
30 Jun 2020 31 Dec 2019
Carrying Fair Carrying Fair
VIU value value VIU value value
HK$bn HK$bn HK$bn HK$bn HK$bn HK$bn
----- -------- --------
BoCom 159.0 152.7 67.6 167.8 148.4 78.3
------- ----- -------- ------ ----- -------- ------
The decrease in VIU for the first half of 2020 was principally
driven by BoCom's actual performance which was lower than earlier
forecasts due to the impact of Covid-19 and the disruption to
global economic activity, and downward revisions to management's
best estimates of BoCom's future earnings.
In future periods, the VIU may increase or decrease depending on
the effect of changes to model inputs. The main model inputs are
described below and are based on factors observed at period-end.
The factors that could result in a change in the VIU and an
impairment include a short-term under-performance by BoCom, a
change in regulatory capital requirements, or an increase in
uncertainty regarding the future performance of BoCom resulting in
a downgrade of the future asset growth or profitability. An
increase in the discount rate as a result of an increase in the
risk premium or risk-free rates could also result in a reduction of
VIU and an impairment. At the point where the carrying value
exceeds the VIU, impairment would be recognised.
If the group did not have significant influence in BoCom, the
investment would be carried at fair value rather than the current
carrying value.
Basis of recoverable amount
The impairment test was performed by comparing the recoverable
amount of BoCom, determined by a VIU calculation, with its carrying
amount. The VIU calculation uses discounted cash flow projections
based on management's best estimates of future earnings available
to ordinary shareholders prepared in accordance with HKAS 36.
Significant management judgement is required in arriving at the
best estimate. There are two main components to the VIU
calculation. The first component is management's best estimate of
BoCom's earnings which is based on explicit forecasts over the
short to medium term. This results in forecast earnings growth that
is lower than recent historical actual growth and also reflects the
uncertainty arising from the current economic outlook. Earnings
beyond the short to medium term are then extrapolated in perpetuity
using a long-term growth rate to derive a terminal value, which
comprises the majority of the VIU. The second component is the
capital maintenance charge ('CMC') which is management's forecast
of the earnings that need to be withheld in order for BoCom to meet
regulatory capital requirements over the forecast period (i.e. CMC
is deducted when arriving at management's estimate of future
earnings available to ordinary shareholders). The principal inputs
to the CMC calculation include estimates of asset growth, the ratio
of risk-weighted assets to total assets, and the expected minimum
regulatory capital requirements. An increase in the CMC as a result
of a change to these principal inputs would reduce VIU.
Additionally, management considers other factors (including
qualitative factors) to ensure that the inputs to the VIU
calculation remain appropriate.
Key assumptions in value-in-use calculation
We used a number of assumptions in our VIU calculation, in
accordance with the requirements of HKAS 36:
-- Long-term profit growth rate: 3% (31 December 2019: 3%) for
periods after 2023, which does not exceed forecast GDP growth in
mainland China and is consistent with forecasts by external
analysts.
-- Long-term asset growth rate: 3% (31 December 2019: 3%) for
periods after 2023, which is the rate that assets are expected to
grow to achieve long-term profit growth of 3%.
-- Discount rate: 11.24% (31 December 2019: 11.24%) 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 10.3% to 15.0% (31
December 2019: 10.0% to 15.0%) indicated by external sources.
-- Expected credit losses as a percentage of customer advances:
ranges from 0.95% to 1.10% (31 December 2019: 0.95%) in the short
to medium term and reflect increases due to Covid-19 and BoCom's
actual results. For periods after 2023, the ratio is 0.76% (31
December 2019: 0.76%) which is slightly higher than the historical
average.
-- Risk-weighted assets as a percentage of total assets: ranges
from 61% to 62% (31 December 2019: 61%) in the short to medium term
and reflect increases which may arise from higher expected credit
losses as a percentage of customer advances. For periods after
2023, the ratio is 61% (31 December 2019: 61%). These rates are
similar to BoCom's actual results in recent years and forecasts
disclosed by external analysts.
-- Operating income: ranges from 1.3% to 6.2% (31 December 2019:
4.9% to 9.4%) in the short to medium term, and are lower than
BoCom's actual results in recent years and the forecasts disclosed
by external analysts, reflecting pressures from Covid-19 and
industry developments in mainland China.
-- Cost-income ratio: ranges from 36.2% to 36.6% (31 December
2019: 37.1% to 38.8%) in the short to medium term. These rates are
similar to BoCom's actual results and slightly higher than the
forecasts disclosed by external analysts.
-- Effective tax rate: ranges from 11.0% to 17.9% (31 December
2019: 12.0% to 17.0%) in the short to medium term reflecting
BoCom's actual results and an expected increase towards the
long-term assumption. For periods after 2023, the rate is 22.5% (31
December 2019: 22.5%) which is slightly higher than the historical
average.
-- Capital requirements: Capital adequacy ratio: 11.5% (31
December 2019: 11.5%) and tier 1 capital adequacy ratio: 9.5% (31
December 2019: 9.5%), based on the minimum regulatory
requirements.
The following table shows the change to each key assumption in
the VIU calculation that on its own would reduce the headroom to
nil:
* Long-term profit growth rate * Decrease by 33 basis points
* Long-term asset growth rate * Increase by 29 basis points
* Discount rate * Increase by 38 basis points
* Expected credit losses as a percentage of customer * Increase by 5 basis points
advances
* Increase by 216 basis points
* Risk-weighted assets as a percentage of total assets
* Decrease by 57 basis points
* Operating income
* Increase by 128 basis points
* Cost-income ratio
* Increase by 294 basis points
* Long-term effective tax rate
* Increase by 41 basis points
* Capital requirements - capital adequacy ratio
* Increase by 134 basis points
* Capital requirements - tier 1 capital adequacy ratio
------------------------------------------------------------ ------------------------------------
The following table further illustrates the impact on VIU of
reasonably possible changes to key assumptions. This reflects the
sensitivity of the VIU to each key assumption on its own and it is
possible that more than one favourable and/or unfavourable change
may occur at the same time. The selected rates of reasonably
possible changes to key assumptions are largely based on external
analysts' forecasts which can change period to period.
Favourable change Unfavourable change
Increase Decrease
in VIU VIU in VIU VIU
bps HK$bn HK$bn bps HK$bn HK$bn
At 30 June 2020
Long-term profit growth rate - - 159.0 -50 (9.5) 149.5
----------------- ------ ----- ----------------- ------- -----
Long-term asset growth rate -50 9.9 168.9 - - 159.0
----------------- ------ ----- ----------------- ------- -----
Discount rate -24 4.4 163.4 +86 (13.7) 145.3
----------------- ------ ----- ----------------- ------- -----
2020 to 2020 to
2023: 93 2023: 108
Expected credit losses as a 2024 onwards: 2024 onwards:
percentage of customer advances 75 3.4 162.4 92 (17.4) 141.6
--------------------------------- ----------------- ------ ----- ----------------- ------- -----
Risk-weighted assets as a
percentage
of total assets -190 4.0 163.0 +93 (4.1) 154.9
----------------- ------ ----- ----------------- ------- -----
Operating income +64 7.5 166.5 -69 (7.4) 151.6
--------------------------------- ----------------- ------ ----- ----------------- ------- -----
Cost-income ratio -205 11.8 170.8 +179 (10.1) 148.9
----------------- ------ ----- ----------------- ------- -----
Long-term effective tax rate -433 9.4 168.4 +250 (5.4) 153.6
--------------------------------- ----------------- ------ ----- ----------------- ------- -----
Capital requirements - capital
adequacy ratio - - 159.0 +266 (46.8) 112.2
--------------------------------- ----------------- ------ ----- ----------------- ------- -----
Capital requirements - tier
1 capital adequacy ratio - - 159.0 +289 (35.0) 124.0
--------------------------------- ----------------- ------ ----- ----------------- ------- -----
At 31 December 2019
Long-term profit growth rate - - 167.8 -50 (10.6) 157.2
----------------- ------ ----- ----------------- ------- -----
Long-term asset growth rate -50 10.6 178.4 - - 167.8
----------------- ------ ----- ----------------- ------- -----
Discount rate -54 10.9 178.7 +56 (9.9) 157.9
----------------- ------ ----- ----------------- ------- -----
2019 to 2019 to
2023: 90 2023: 108
Expected credit losses as a 2024 onwards: 2024 onwards:
percentage of customer advances 70 7.5 175.3 81 (9.4) 158.4
--------------------------------- ----------------- ------ ----- ----------------- ------- -----
Risk-weighted assets as a
percentage
of total assets -96 2.9 170.7 +12 (0.4) 167.4
----------------- ------ ----- ----------------- ------- -----
Operating income +14 1.9 169.7 -102 (14.1) 153.7
--------------------------------- ----------------- ------ ----- ----------------- ------- -----
Cost-income ratio -175 7.7 175.5 +95 (9.4) 158.4
----------------- ------ ----- ----------------- ------- -----
Long-term effective tax rate -352 7.8 175.6 +250 (5.6) 162.2
----------------- ------ ----- ----------------- ------- -----
Capital requirements - capital
adequacy ratio - - 167.8 +337 (64.1) 103.7
----------------- ------ ----- ----------------- ------- -----
Capital requirements - tier
1 capital adequacy ratio - - 167.8 +322 (47.2) 120.6
--------------------------------- ----------------- ------ ----- ----------------- ------- -----
Considering the interrelationship of the changes set out in the
table above, management estimates that the reasonably possible
range of VIU is HK$134.2bn to HK$169.8bn (31 December 2019:
HK$144.3bn to HK$177.2bn). The range is based on the
favourable/unfavourable change in the earnings in the short-to
medium-term and long-term expected credit losses as a percentage of
customer advances as set out in the table above. All other
long-term assumptions, the discount rate and the basis of the CMC
have been kept unchanged when determining the reasonably possible
range of the VIU.
6 Customer accounts
------------------
Customer accounts by country/territory
At
30 Jun 31 Dec
2020 2019
HK$m HK$m
Hong Kong 3,986,633 3,894,175
-----------
Singapore 413,999 378,303
------------------- ----------- ----------
Mainland China 368,587 376,390
------------------- -----------
Australia 197,230 180,637
-----------
India 139,870 116,330
------------------- -----------
Malaysia 113,839 113,907
------------------- -----------
Taiwan 114,084 114,250
-----------
Indonesia 34,617 36,861
-----------
Other 235,208 221,571
------------------- ----------- ----------
5,604,067 5,432,424
------------------- ----------- ----------
7 Fair values of financial instruments carried at fair value
-----------------------------------------------------------
The accounting policies, control framework and hierarchy used to
determine fair values at 30 June 2020 are consistent with those
applied for the Annual Report and Accounts 2019.
The following table provides an analysis of financial
instruments carried at fair value and bases of valuation.
Fair value hierarchy
Level Level Level Third-party Inter-
1 2 3 total company(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m
---------
At 30 Jun 2020
-------------------------------------
Assets
--------- ------- ------ ----------- ----------- -----------
Trading assets(1) 324,870 190,393 1,045 516,308 - 516,308
--------- ------- ------ ----------- ----------- ---------
Derivatives 3,377 300,189 1,070 304,636 69,615 374,251
--------- ------- ------ ----------- ----------- ---------
Financial assets designated
and otherwise mandatorily measured
at fair value through profit
or loss 72,635 30,960 37,303 140,898 - 140,898
--------- ------- ------ ----------- ----------- ---------
Financial investments 1,273,522 350,843 4,935 1,629,300 - 1,629,300
--------- ------- ------ ----------- ----------- ---------
Liabilities
--------- ------- ------ ----------- ----------- -----------
Trading liabilities(1) 68,263 6,722 - 74,985 - 74,985
--------- ------- ------ ----------- ----------- ---------
Derivatives 3,050 274,322 2,376 279,748 80,868 360,616
--------- ------- ------ ----------- ----------- ---------
Financial liabilities designated
at fair value(1) - 139,332 20,049 159,381 - 159,381
------------------------------------- --------- ------- ------ ----------- ----------- ---------
At 31 Dec 2019
-------------------------------------
Assets
-------------------------------------
Trading assets(1) 426,072 196,132 557 622,761 - 622,761
Derivatives 2,282 213,242 833 216,357 64,285 280,642
Financial assets designated
and otherwise mandatorily measured
at fair value through profit
or loss 89,152 32,068 32,291 153,511 - 153,511
Financial investments 1,096,572 363,804 5,622 1,465,998 - 1,465,998
------------------------------------- --------- ------- ------ ----------- ----------- ---------
Liabilities
--------- ------- ------ ----------- ----------- -----------
Trading liabilities(1) 78,111 9,421 - 87,532 - 87,532
--------- ------- ------ ----------- ----------- ---------
Derivatives 2,892 219,498 2,422 224,812 67,419 292,231
Financial liabilities designated
at fair value(1) - 139,720 20,571 160,291 - 160,291
------------------------------------- --------- ------- ------ ----------- ----------- ---------
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
and otherwise
mandatorily
measured Designated
Financial Trading at fair Trading at fair
investments assets value Derivatives liabilities value Derivatives
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------
At 30 Jun
2020
--------------
Transfers
from Level
1 to Level 2 9,081 10,315 1,684 - 130 - -
------------- ----------- ------------ ---------- -----------
Transfers
from Level
2 to Level 1 18,025 16,050 516 5 80 - -
-------------- ------------ ------- ------------- ----------- ------------ ---------- -----------
At 31 Dec 2019
----------------------
Transfers from Level
1 to Level 2 32,281 9,198 - -131 --
------ ------ ----- ---
Transfers from Level
2 to Level 1 16,872 15,069 2,359 -599 --
---------------------- ------ ------ ----- ---
Transfers between levels of the fair value hierarchy are deemed
to occur at the end of each quarterly reporting period. Transfers
into and out of Levels of the fair value hierarchy are primarily
attributable to changes in observability of valuation inputs and
price transparency.
Movements in Level 3 financial instruments
There were no material transfers from Level 3 to Levels 1 and 2,
and vice versa, as a result of change in observability of valuation
inputs, purchases, sales, issues or settlement, nor gains/losses
recognised in the income statement/other comprehensive income
during the first half of 2020 in relation to financial instruments
carried at fair value in Level 3 (first half of 2019:
immaterial).
8 Fair values of financial instruments not carried at fair value
---------------------------------------------------------------
At
30 Jun 2020 31 Dec 2019
Carrying Carrying
amount Fair value amount Fair value
HK$m HK$m HK$m HK$m
--------- ---------- --------- ------------
Assets
Reverse repurchase agreements - non-trading 491,343 491,730 422,333 422,679
--------------------------------------------- ---------- --------- ----------
Loans and advances to banks 401,822 402,267 328,905 328,805
Loans and advances to customers 3,679,364 3,663,671 3,720,875 3,711,191
--------------------------------------------- --------- ----------
Financial investments - at amortised cost 461,218 509,060 434,300 459,832
--------------------------------------------- --------- ---------- --------- ----------
Liabilities
Repurchase agreements - non-trading 111,322 111,325 106,396 106,398
--------------------------------------------- --------- ---------- --------- ----------
Deposits by banks 233,635 233,640 179,819 179,823
---------------------------------------------
Customer accounts 5,604,067 5,607,903 5,432,424 5,432,803
--------------------------------------------- --------- ---------- --------- ----------
Debt securities in issue 102,972 103,708 106,933 107,641
---------------------------------------------
Subordinated liabilities 4,004 3,886 4,066 3,951
--------------------------------------------- --------- ---------- --------- ----------
Other financial instruments not carried at fair value are
typically short term in nature or re-priced to current market rates
frequently. Accordingly, their carrying amount is a reasonable
approximation of fair value. Details of how the fair values of
financial instruments that are not carried at fair value on the
balance sheet are calculated can be found in note 35 of the Annual
Report and Accounts 2019.
9 Contingent liabilities, contractual commitments and guarantees
---------------------------------------------------------------
At
30 Jun 31 Dec
2020 2019
HK$m HK$m
--------------------------------------- -----------
Guarantees and contingent liabilities 310,050 318,770
--------------------------------------- ---------
Commitments 2,875,910 2,750,332
--------------------------------------- ---------
3,185,960 3,069,102
--------------------------------------- --------- ---------
The above table discloses the nominal principal amounts of
commitments (excluding capital commitments), guarantees and other
contingent liabilities, which represents the amounts at risk should
contracts be fully drawn upon and clients default. The amount of
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 nominal principal amounts is not
indicative of future liquidity requirements.
Contingent liabilities at 30 June 2020 included amounts in
relation to legal and regulatory matters as set out in note 12.
10 Segmental analysis
--- -------------------
The Executive Committee ('EXCO') is considered the Chief
Operating Decision Maker ('CODM') for the purpose of identifying
the group's reportable segments. The global businesses are
considered our reportable segments under HKFRS 8 'Operating
Segments'. The basis of identifying segments and measuring
segmental results is set out in note 32 'Segmental Analysis' of the
Annual Report and Accounts 2019.
Our operations are closely integrated and, accordingly, the
presentation of data includes internal allocations of certain items
of income and expense. These allocations include the costs of
certain support services and global functions to the extent that
they can be meaningfully attributed to global businesses. While
such allocations have been made on a systematic and consistent
basis, they necessarily involve a degree of subjectivity. Costs
that are not allocated to global businesses are included in
Corporate Centre.
Where relevant, income and expense amounts presented include the
results of inter-segment funding along with inter-company and
inter-business line transactions. All such transactions are
undertaken on arm's length terms. The intra-group elimination items
for the global businesses are presented in Corporate Centre.
Change in reportable segments
Effective from the second quarter of 2020, we made the following
realignments within our internal reporting to the CODM:
-- Simplification of our matrix organisational structure by
merging Retail Banking and Wealth Management ('RBWM') and Global
Private Banking ('GPB') to form Wealth and Personal Banking
('WPB').
-- Re-allocation of Balance Sheet Management from Corporate Centre to the global businesses.
Our global businesses
The group provides a comprehensive range of banking and related
financial services to its customers in its three global businesses.
The products and services offered to customers are organised by
these global businesses.
-- Wealth and Personal Banking ('WPB') offers a full range of
products and services to meet the personal banking and wealth
management needs of customers from personal banking to ultra-high
net worth individuals. Typically, customer offerings include retail
banking products, such as current and savings accounts, mortgages
and personal loans, credit cards, debit cards and local and
international payment services. We also provide wealth management
services, including insurance and investment products, global asset
management services, investment management and Private Wealth
Solutions for customers with more sophisticated and international
requirements.
-- Commercial Banking ('CMB') offers a broad range of products
and services to serve the needs of our commercial customers,
including small and medium-sized enterprises, mid-market
enterprises and corporates. These include credit and lending,
international trade and receivables finance, treasury management
and liquidity solutions (payments and cash management and
commercial cards), commercial insurance and investments. CMB also
offers its customers access to products and services offered by
other global businesses, such as Global Banking and Markets, which
include foreign exchange products, raising capital on debt and
equity markets and advisory services.
-- Global Banking and Markets ('GBM') provides tailored
financial solutions to major government, corporate and
institutional clients and private investors worldwide. The
client-focused business lines deliver a full range of banking
capabilities including financing, advisory and transaction
services, a markets business that provides services in credit,
rates, foreign exchange, equities, money markets and securities
services, and principal investment activities.
Financial performance by global business is set out in the
Financial Review on page 3, which forms part of the Interim
condensed consolidated financial statements.
Geographical regions
Rest of Intra-segment
Hong Kong Asia-Pacific elimination Total
HK$m HK$m HK$m HK$m
Half-year to 30 Jun 2020
-----------------------------------------------
Total operating income 95,357 39,152 (72) 134,437
--------- ------------- ------------ ---------
Profit before tax 35,987 15,680 - 51,667
--------- ------------- ------------ ---------
At 30 Jun 2020
--------- ------------- ------------- -----------
Total assets 6,489,110 3,295,482 (687,254) 9,097,338
Total liabilities 5,999,611 2,908,514 (687,254) 8,220,871
----------------------------------------------- --------- ------------- ------------ ---------
Credit commitments and contingent liabilities
(contract amounts) 1,800,026 1,385,934 - 3,185,960
----------------------------------------------- --------- ------------- ------------ ---------
Half-year to 30 Jun 2019
-----------------------------------------------
Total operating income 116,843 41,728 (248) 158,323
--------- ------------- ------------ ---------
Profit before tax 47,964 24,903 - 72,867
--------- ------------- ------------ ---------
At 30 Jun 2019
----------------------------------------------- --------- ------------- ------------- -----------
Total assets 6,203,675 3,125,360 (656,242) 8,672,793
--------- ------------- ------------ ---------
Total liabilities 5,716,131 2,753,846 (656,242) 7,813,735
----------------------------------------------- --------- ------------- ------------ ---------
Credit commitments and contingent liabilities
(contract amounts) 1,642,648 1,303,733 - 2,946,381
----------------------------------------------- --------- ------------- ------------ ---------
11 Related party transactions
--- ---------------------------
There were no changes in the related party transactions as
described in the Annual Report and Accounts 2019 that have had a
material effect on the financial position or performance of the
group in the half-year to 30 June 2020. All related party
transactions that took place in the half-year to 30 June 2020 were
similar in nature to those described in the Annual Report and
Accounts 2019.
12 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 group
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(n) of the Annual Report and Accounts
2019. While the outcomes of legal proceedings and regulatory
matters are inherently uncertain, management believes that, based
on the information available to it, appropriate provisions have
been made in respect of these matters as at 30 June 2020. 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 December 2012, among other agreements, HSBC Holdings plc
('HSBC Holdings') agreed to an undertaking with the UK Financial
Services Authority, which was replaced by a Direction issued by the
UK Financial Conduct Authority ('FCA') in 2013, and again in July
2020, and consented to a cease-and-desist order with the US Federal
Reserve Board ('FRB'), both of which contained certain
forward-looking anti-money laundering ('AML') and sanctions-related
obligations. HSBC also agreed to retain an independent compliance
monitor (who is, for FCA purposes, a 'Skilled Person' under section
166 of the Financial Services and Markets Act and, for FRB
purposes, an 'Independent Consultant') to produce periodic
assessments of the Group's AML and sanctions compliance programme
(the 'Skilled Person/Independent Consultant'). In December 2012,
HSBC Holdings also entered into an agreement with the Office of
Foreign Assets Control ('OFAC') regarding historical transactions
involving parties subject to OFAC sanctions. HSBC's engagement with
the Skilled Person appointed pursuant to the 2013 Direction was
terminated in February 2020 and a new Skilled Person with a
narrower mandate has been appointed to assess the remaining areas
that require further work in order for HSBC to
transition fully to business-as-usual financial crime risk
management. The Independent Consultant will continue to carry out
an annual OFAC compliance review at the FRB's discretion.
Through the Skilled Person/Independent Consultant's prior
reviews, as well as internal reviews conducted by HSBC, certain
potential AML and sanctions compliance issues have been identified
that HSBC is reviewing further with the FRB, FCA and/or OFAC. 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.
Based on the facts currently known, it is not practicable at
this time for HSBC to predict the resolution of these matters,
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 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 the Sibor/SOR litigation, following a decision on the
defendants' motion to dismiss in October 2018, the claims against a
number of HSBC entities were dismissed, and the Bank remained as
the only HSBC defendant in this action. In October 2018, the Bank
filed a motion for reconsideration of the decision based on the
issue of personal jurisdiction. This motion was denied in April
2019. Also in October 2018, the plaintiffs filed a third amended
complaint, naming only the Sibor panel members, including the Bank,
as defendants. The court dismissed the third amended complaint in
its entirety in July 2019 against all defendants. In August 2019,
the plaintiffs filed an appeal to the Second Circuit Court of
Appeals, which remains pending.
In the BBSW litigation, in November 2018, the court dismissed
all foreign defendants, including all the HSBC entities, on
personal jurisdiction grounds. In April 2019, the plaintiffs filed
an amended complaint, which the defendants moved to dismiss. In
February 2020, the court again dismissed the plaintiffs' amended
complaint against all the HSBC entities.
There are many factors that may affect the range of outcomes,
and the resulting financial impact, of these matters, which could
be significant.
United States Bankruptcy Court for the Southern District of New
York litigation
In June 2018, a claim was issued against the Bank in the United
States Bankruptcy Court for the Southern District of New York by
the Chapter 11 Trustee of CFG Peru Investments Pte. Ltd.
(Singapore) (the 'Trustee Complaint'). The Trustee Complaint makes
allegations under the Peruvian Civil Code, Hong Kong and U.S.
common law and the Bankruptcy Code concerning the Bank's alleged
conduct in commencing the winding-up proceedings and pursuing the
appointment of joint provisional liquidators for affiliates of CFG
Peru Investments Pte. Ltd. The Trustee is seeking damages and
equitable subordination or disallowance of the Bank's Chapter 11
claims in a related bankruptcy proceeding.
The Bank is seeking to dismiss the Trustee Complaint. Based on
the facts currently known, it is not practicable at this time to
predict the resolution of this matter, including the timing or any
possible impact, which could be significant.
Foreign exchange rate investigations
In January 2018, HSBC Holdings entered into a three-year
deferred prosecution agreement with the Criminal Division of
the
US Department of Justice ('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
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 this matter, which could be
significant.
Other regulatory investigations, reviews and litigation
The Bank and/or certain of its affiliates are subject to a
number of other investigations and reviews by various regulators
and competition and law enforcement authorities, as well as
litigation, in connection with various matters relating to the
firm's businesses and operations, including:
-- investigations by tax administration, regulatory and law
enforcement authorities in India and elsewhere in connection with
allegations of tax evasion or tax fraud, money laundering and
unlawful cross-border banking solicitation.
There are many factors that may affect the range of outcomes,
and the resulting financial impact, of these matters, which could
be significant.
13 Interim Report 2020 and statutory accounts
--- -------------------------------------------
The information in this Interim Report 2020 is unaudited and
does not constitute statutory accounts. The Interim Report 2020 was
approved by the Board of Directors on 3 August 2020. The Bank's
statutory annual consolidated accounts for the year ended 31
December 2019 have been delivered to the Registrar of Companies and
the Hong Kong Monetary Authority. The auditor has reported on those
financial statements in their report dated 18 February 2020. The
auditor's report was unqualified; did not include a reference to
any matters to which the auditor drew attention by way of emphasis
without qualifying its report; and did not contain a statement
under sections 406(2), 407(2) or (3) of the Hong Kong Companies
Ordinance (Cap. 622).
14 Ultimate holding company
--- -------------------------
The Hongkong and Shanghai Banking Corporation Limited is an
indirectly-held, wholly-owned subsidiary of HSBC Holdings plc,
which is incorporated in England.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR DXLBBBVLFBBK
(END) Dow Jones Newswires
August 03, 2020 05:00 ET (09:00 GMT)
Hsbc Frn Var3 (LSE:57HB)
Historical Stock Chart
From Jun 2024 to Jul 2024
Hsbc Frn Var3 (LSE:57HB)
Historical Stock Chart
From Jul 2023 to Jul 2024
