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TIDMHSBA
RNS Number : 1549A
HSBC Holdings PLC
27 March 2012
15 Trading assets
2011 2010
US$m US$m
Trading assets:
* not subject to repledge or resale by counterparties
.....................................................
..... 235,916 284,940
* which may be repledged or resold by counterparties
.....................................................
... 94,535 100,112
330,451 385,052
------- -------
Treasury and other eligible bills
............................................................................................... 34,309 25,620
Debt securities
.................................................................................................
........................ 130,487 168,268
Equity securities
.................................................................................................
..................... 21,002 41,086
------- -------
Trading securities at fair value
................................................................................................. 185,798 234,974
Loans and advances to banks
.................................................................................................
.. 75,525 70,456
Loans and advances to customers
............................................................................................ 69,128 79,622
------- -------
330,451 385,052
------- -------
Trading securities valued at fair value(1)
Fair value
------------------------------------------
2011 2010
US$m US$m
US Treasury and US Government agencies(2)
.......................................................................
...... 15,686 20,239
UK Government
.......................................................................
.............................................. 12,917 17,036
Hong Kong Government
.......................................................................
.................................. 8,844 11,053
Other government
.......................................................................
........................................... 90,816 92,826
Asset-backed securities(3)
.......................................................................
.................................... 2,913 3,998
Corporate debt and other securities
.......................................................................
.................. 33,620 48,736
Equity securities
.......................................................................
............................................... 21,002 41,086
-------------------- --------------------
185,798 234,974
-------------------- --------------------
1 Included within these figures are debt securities issued by banks and other financial institutions of US$24,956m (2010: US$37,170m), of which US$5,269m (2010: US$8,330m) are guaranteed by various governments.
2 Includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Treasury and US Government agencies.
Trading securities listed on a recognised exchange and unlisted
Treasury
and other
eligible Debt Equity
bills securities securities Total
US$m US$m US$m US$m
Fair value at 31 December
2011
Listed on a recognised
exchange(1)
...........................
............ 789 78,760 19,994 99,543
Unlisted(2)
.........................
.........................
.........................
. 33,520 51,727 1,008 86,255
------------------- --------------------------- ---------------------------- --------
34,309 130,487 21,002 185,798
------------------- --------------------------- ---------------------------- --------
Fair value at 31 December
2010
Listed on a recognised
exchange(1)
...........................
............ 698 113,878 40,098 154,674
Unlisted(2)
.........................
.........................
.........................
. 24,922 54,390 988 80,300
------------------- --------------------------- ---------------------------- --------
25,620 168,268 41,086 234,974
------------------- --------------------------- ---------------------------- --------
1 Included within listed investments are US$2,836m (2010: US$3,254m) of investments listed in Hong Kong.
2 Unlisted treasury and other eligible bills primarily comprise treasury bills not listed on a recognised exchange but for which there is a liquid market.
Loans and advances to banks held for trading
2011 2010
US$m US$m
Reverse repos
.......................................................................
................................................... 45,490 45,771
Settlement accounts
.......................................................................
......................................... 7,555 5,226
Stock borrowing
.......................................................................
............................................... 5,531 6,346
Other
.......................................................................
............................................................... 16,949 13,113
-------------------- --------------------
75,525 70,456
-------------------- --------------------
Loans and advances to customers held for trading
2011 2010
US$m US$m
Reverse repos
.......................................................................
................................................ 34,358 46,366
Settlement accounts
.......................................................................
...................................... 5,804 7,516
Stock borrowing
.......................................................................
............................................ 3,928 11,161
Other
.......................................................................
............................................................ 25,038 14,579
-------------------- --------------------
69,128 79,622
-------------------- --------------------
16 Fair values of financial instruments carried at fair value
The classification of financial instruments is determined in accordance with the accounting policies set out in Note 2. The use of assumptions and estimation in valuing financial instruments is described on page 40.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
The following table sets out the financial instruments carried at fair value.
Financial instruments carried at fair value and bases of valuation
Valuation techniques
------------------------------
With
Quoted Using significant
market observable unobservable
price inputs inputs
Level 1 Level 2 Level 3 Total
US$m US$m US$m US$m
At 31 December 2011
Assets
Trading assets
............................................................
.. 180,043 145,628 4,780 330,451
Financial assets designated
at fair value ........................ 22,496 7,644 716 30,856
Derivatives
............................................................
...... 1,262 340,668 4,449 346,379
Financial investments: available
for sale ...................... 217,788 151,936 9,121 378,845
Liabilities
Trading liabilities
......................................................... 98,208 159,157 7,827 265,192
Financial liabilities designated
at fair value ................... 27,461 57,696 567 85,724
Derivatives
............................................................
...... 1,991 340,260 3,129 345,380
At 31 December 2010
Assets
Trading assets
............................................................
.. 224,613 154,750 5,689 385,052
Financial assets designated
at fair value ........................ 23,641 12,783 587 37,011
Derivatives
............................................................
...... 2,078 254,718 3,961 260,757
Financial investments: available
for sale ...................... 214,276 158,743 8,237 381,256
Liabilities
Trading liabilities
......................................................... 124,874 164,436 11,393 300,703
Financial liabilities designated
at fair value ................... 22,193 65,370 570 88,133
Derivatives
............................................................
...... 1,808 253,051 3,806 258,665
The reduction in Level 1 trading assets and liabilities reflects a decline in listed equity, government and debt security positions and short positions. The rise in Level 2 derivative balances reflects an increase in both derivative assets and liabilities generally, driven by declining yield curves in the second half of 2011.
There were no material transfers between Level 1 and Level 2 in the year. An analysis of the movements of Level 3 financial instruments is provided on page 353.
Control framework
Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk--taker.
For all financial instruments where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is utilised. In inactive markets, direct observation of a traded price may not be possible. In these circumstances, HSBC will source alternative market information to validate the financial instrument's fair value, with greater weight given to information that is considered to be more relevant and reliable. The factors that are considered in this regard are, inter alia:
-- the extent to which prices may be expected to represent genuine traded or tradeable prices;
-- the degree of similarity between financial instruments;
-- the degree of consistency between different sources;
-- the process followed by the pricing provider to derive the data;
-- the elapsed time between the date to which the market data relates and the balance sheet date; and
-- the manner in which the data was sourced.
For fair values determined using a valuation model, the control framework may include, as applicable, development or validation by independent support functions of (i) the logic within valuation models; (ii) the inputs to those models; (iii) any adjustments required outside the valuation models; and (iv) where possible, model outputs. Valuation models are subject to a process of due diligence and calibration before becoming operational and are calibrated against external market data on an ongoing basis.
The fair value governance structure is as follows:
Determination of fair value
Fair values are determined according to the following hierarchy:
-- Level 1 - quoted market price: financial instruments with quoted prices for identical instruments in active markets.
-- Level 2 - valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.
-- Level 3 - valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one or more significant inputs are unobservable.
The best evidence of fair value is a quoted price in an actively traded market. The fair values of financial instruments that are quoted in active markets are based on bid prices for assets held and offer prices for liabilities issued. Where a financial instrument has a quoted price in an active market and it is part of a portfolio, the fair value of the portfolio is calculated as the product of the number of units and quoted price and no block discounts are applied. In the event that the market for a financial instrument is not active, a valuation technique is used.
The judgement as to whether a market is active may include, but is not restricted to, the consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads. The bid/offer spread represents the difference in prices at which a market participant would be willing to buy compared with the price at which they would be willing to sell. In inactive markets, obtaining assurance that the transaction price provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the instrument requires additional work during the valuation process.
Valuation techniques incorporate assumptions about factors that other market participants would use in their valuations, including interest rate yield curves, exchange rates, volatilities, and prepayment and default rates. For collateralised counterparties and in significant major currencies, HSBC has adopted a discounting curve that reflects the overnight interest rate ('OIS discounting'). Prior to 2010, in line with market practice, discount curves did not reflect this overnight interest rate component but were based on a term LIBOR rate. During the period, HSBC applied an OIS discounting curve to an expanded range of significant currencies in line with evolving market practice. The financial effect of this change was not significant at the time of adoption.
The majority of valuation techniques employ only observable market data. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them, the derivation of fair value is more judgemental. An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument's inception profit ('day 1 gain or loss') or greater than 5% of the instrument's carrying value is driven by unobservable inputs. 'Unobservable' in this context means that there is little or no current market data available from which to determine the price at which an arm's length transaction would be likely to occur. It generally does not mean that there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).
In certain circumstances, primarily where debt is hedged with interest rate derivatives, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument concerned, if available. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are either based upon quoted prices in an inactive market for the instrument, or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to HSBC's liabilities. The change in fair value of issued debt securities attributable to the Group's own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security is valued using a LIBOR-based discount curve. The difference in the valuations is attributable to the Group's own credit spread. This methodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instrument liabilities are included within trading liabilities and are measured at fair value. The credit spread applied to these instruments is derived from the spreads at which HSBC issues structured notes.
Gains and losses arising from changes in the credit spread of liabilities issued by HSBC reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.
Fair value adjustments
Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered by a market participant that are not incorporated within the valuation model. The magnitude of fair value adjustments depends upon many entity-specific factors, and therefore fair value adjustments may not be comparable across the banking industry.
HSBC classifies fair value adjustments as either 'risk-related' or 'model-related'. The majority of these adjustments relate to Global Banking and Markets.
Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.
Global Banking and Markets fair value adjustments
At 31 December
-----------------------------
2011 2010
US$m US$m
Type of adjustment
Risk-related
....................................................................................
......................................... 1,899 2,171
------- --------------------
Bid-offer
....................................................................................
......................................... 695 620
Uncertainty
....................................................................................
..................................... 154 136
Credit valuation adjustment
....................................................................................
............. 1,050 1,355
Other
....................................................................................
.............................................. - 60
------- --------------------
Model-related
....................................................................................
...................................... 567 389
------- --------------------
Model limitation
....................................................................................
............................. 567 383
Other
....................................................................................
.............................................. - 6
------- --------------------
Inception profit (Day 1 P&L reserves) (Note
20) ................................................................... 200 250
2,666 2,810
------- --------------------
The most significant fair value adjustment change during 2011 related to the release of US$215m of credit valuation adjustments held for monoline insurers of which US$183m resulted from commutations. The commutations did not result in a material gain or loss. The remainder of the decrease in the credit valuation adjustment resulted from a variety of factors, including changes in exposure profiles and internal credit rating upgrades or downgrades across a wide range of counterparties.
The increase in model limitation adjustments primarily reflects an increase in the adjustment for OIS discounting following the widening of OIS-Libor spreads during the second half of 2011.
Risk-related adjustments
Bid-offer
IAS 39 requires that portfolios are marked at bid or offer, as appropriate. Valuation models will typically generate mid market values. The bid-offer adjustment reflects the cost that would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the actual position.
Uncertainty
Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these circumstances, there exists a range of possible values that the financial instrument or market parameter may assume and an adjustment may be necessary to reflect the likelihood that in estimating the fair value of the financial instrument, market participants would adopt rather more conservative values for uncertain parameters and/or model assumptions than those used in the valuation model.
Credit valuation adjustment
The credit valuation adjustment is an adjustment to the valuation of OTC derivative contracts to reflect within fair value the possibility that the counterparty may default and HSBC may not receive the full market value of the transactions.
Model-related adjustments
Model limitation
Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all material market characteristics. Additionally, markets evolve, and models that were adequate in the past may require development to capture all material market characteristics in current market conditions. In these circumstances, model limitation adjustments are adopted. As model development progresses, model limitations are addressed within the valuation models and a model limitation adjustment is no longer needed.
Inception profit (Day 1 P&L reserves)
Inception profit adjustments are adopted where the fair value estimated by a valuation model is based on one or more significant unobservable inputs. The accounting for inception profit adjustments is discussed on page 295. An analysis of the movement in the deferred Day 1 P&L reserve is provided on page 363.
Credit valuation adjustment methodology
HSBC calculates a separate credit valuation adjustment for each HSBC legal entity, and within each entity for each counterparty to which the entity has exposure. The calculation of the monoline credit valuation adjustment and sensitivity to different methodologies that could be applied is described on page 154. Of the total credit valuation adjustment at 31 December 2011 of US$1,050m (2010: US$1,355m), US$746m (2010: US$836m) relates to the credit valuation adjustment taken against non-monoline counterparties. The methodology for calculating the credit valuation adjustment for non--monoline counterparties is described below.
HSBC calculates the credit valuation adjustment by applying the probability of default of the counterparty to the expected positive exposure to the counterparty, and multiplying the result by the loss expected in the event of default. The calculation is performed over the life of the potential exposure.
The probability of default is based on HSBC's internal credit rating for the counterparty, taking into account how credit ratings may deteriorate over the duration of the exposure through the use of historical rating transition matrices. For most products, to calculate the expected positive exposure to a counterparty, HSBC uses a simulation methodology to incorporate the range of potential exposures across the portfolio of transactions with the counterparty over the life of an instrument. The simulation methodology includes credit mitigants such as counterparty netting agreements and collateral agreements with the counterparty. A standard loss given default assumption of 60% is generally adopted. In respect of own credit risk, HSBC considers that a zero spread is appropriate and consequently does not adjust derivative liabilities for HSBC's own credit risk, such an adjustment is often referred to as a 'debit valuation adjustment'.
For certain types of exotic derivatives where the products are not currently supported by the simulation, or for derivative exposures in smaller trading locations where the simulation tool is not yet available, HSBC adopts alternative methodologies. These may involve mapping to the results for similar products from the simulation tool or where such a mapping approach is not appropriate, a simplified methodology is used, generally following the same principles as the simulation methodology. The calculation is applied at a trade level, with more limited recognition of credit mitigants such as netting or collateral agreements than used in the simulation methodology described previously.
The methodologies do not, in general, account for 'wrong-way risk'. Wrong-way risk arises where the underlying value of the derivative prior to any credit valuation adjustment is positively correlated to the probability of default of the counterparty. Where there is significant wrong-way risk, a trade specific approach is applied to reflect the wrong-way risk within the valuation.
HSBC includes all third-party counterparties in the credit valuation adjustment calculation and does not net credit valuation adjustments across HSBC Group entities. During 2011, there were no material changes made by HSBC to the methodologies used to calculate the credit valuation adjustment.
Consideration of other methodologies for calculation of credit valuation adjustments
Our credit valuation adjustment methodology, in the opinion of management, appropriately quantifies our exposure to counterparty risk on our OTC derivative portfolio and appropriately reflects the risk management strategy of the business.
We recognise that a variety of credit valuation adjustment methodologies are adopted within the banking industry.
Some of the key attributes that may differ between these methodologies are:
-- the PD may be calculated from historical market data, or implied from current market levels for certain transaction types such as CDSs, either with or without an adjusting factor;
-- some entities adopt a non-zero 'debit valuation adjustment' which has the effect of reducing the overall adjustment;
-- differing loss assumptions in setting the level of LGD, which may utilise market recovery rates or levels set by regulators for capital calculation purposes; and
-- counterparty exclusions, whereby certain counterparty types (for example collateralised counterparties) are excluded from the calculation.
We have estimated the impact of adopting two alternative methodologies on the level of our credit and debit valuation adjustments (excluding the monoline credit valuation adjustment), as follows:
-- adapting our existing methodology to utilise probabilities of default implied from credit default swaps, with no adjustment factor applied, and also including an adjustment to take into account HSBC's own probability of default implied from credit default swaps, results in an overall adverse adjustment of US$1.4bn (2010: US$0.3bn); and
-- adapting our existing DVA methodology to include HSBC's own probability of default on a basis symmetric with the current calculation of CVA would result in a favourable reduction of the credit risk charge of US$0.1bn (2010: US$0.1bn).
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3
Assets Liabilities
-------------------------------------------------------- ------------------------------------------
Designated Designated
at fair at fair
value value
Available Held through Held through
for for profit for profit
sale trading or loss Derivatives trading or loss Derivatives
US$m US$m US$m US$m US$m US$m US$m
At 31 December
2011
Private equity
including
strategic
investments
................
............. 4,565 88 432 - - - -
Asset-backed
securities
..............
.. 2,584 710 - - - - -
Loans held for
securitisation
....... - 682 - - - - 7
Structured
notes
..............
............ - 92 - - 7,340 - -
Derivatives
with
monolines
......... - - - 940 - - -
Other
derivatives
..............
.......... - - - 3,509 - - 3,122
Other
portfolios
..............
............ 1,972 3,208 284 - 487 567 -
------------ ------------ ------------- ------------- ------------ ------------- -------------
9,121 4,780 716 4,449 7,827 567 3,129
------------ ------------ ------------- ------------- ------------ ------------- -------------
At 31 December
2010
Private equity
including
strategic
investments
................
............. 4,057 278 120 - - - -
Asset-backed
securities
..............
.. 1,949 566 - - - - -
Leveraged
finance
..............
......... - - - - - - 11
Loans held for
securitisation
....... - 1,043 - - - - -
Structured
notes
...............
........... - - - - 10,667 - -
Derivatives
with
monolines
......... - - - 1,005 - - -
Other
derivatives
..............
.......... - - - 2,956 - - 3,787
Other
portfolios
..............
............ 2,231 3,802 467 - 726 570 8
------------ ------------ ------------- ------------- ------------ ------------- -------------
8,237 5,689 587 3,961 11,393 570 3,806
------------ ------------ ------------- ------------- ------------ ------------- -------------
Private equity and strategic investments
HSBC's private equity and strategic investments are generally classified as available for sale and are not traded in active markets. In the absence of an active market, an investment's fair value is estimated on the basis of an analysis of the investee's financial position and results, risk profile, prospects and other factors, as well as by reference to market valuations for similar entities quoted in an active market, or the price at which similar companies have changed ownership.
Asset-backed securities
While quoted market prices are generally used to determine the fair value of these securities, valuation models are used to substantiate the reliability of the limited market data available and to identify whether any adjustments to quoted market prices are required. For ABSs including residential MBSs, the valuation uses an industry standard model and the assumptions relating to prepayment speeds, default rates and loss severity based on collateral type, and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for securities of a similar nature.
Loans, including leveraged finance and loans held for securitisation
Loans held at fair value are valued from broker quotes and/or market data consensus providers when available. In the absence of an observable market, the fair value is determined using valuation techniques. These techniques include discounted cash flow models, which incorporate assumptions regarding an appropriate credit spread for the loan, derived from other market instruments issued by the same or comparable entities.
Structured notes
The fair value of structured notes valued using a valuation technique is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives.
Trading liabilities valued using a valuation technique with significant unobservable inputs principally comprised equity-linked structured notes, which are issued by HSBC and provide the counterparty with a return that is linked to the performance of certain equity securities, and other portfolios. The notes are classified as Level 3 due to the unobservability of parameters such as long-dated equity volatilities and correlations between equity prices, between equity prices and interest rates and between interest rates and foreign exchange rates.
Derivatives
OTC (i.e. non-exchange traded) derivatives are valued using valuation models. Valuation models calculate the present value of expected future cash flows, based upon 'no-arbitrage' principles. For many vanilla derivative products, such as interest rate swaps and European options, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some differences in market practice. Inputs to valuation models are determined from observable market data wherever possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from historical data or other sources. Examples of inputs that may be unobservable include volatility surfaces, in whole or in part, for less commonly traded option products, and correlations between market factors such as foreign exchange rates, interest rates and equity prices. The valuation of derivatives with monolines is discussed on page 154.
Derivative products valued using valuation techniques with significant unobservable inputs included certain types of correlation products, such as foreign exchange basket options, equity basket options, foreign exchange interest rate hybrid transactions and long-dated option transactions. Examples of the latter are equity options, interest rate and foreign exchange options and certain credit derivatives. Credit derivatives include certain tranched CDS transactions.
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
The following table provides a reconciliation of the movement between opening and closing balances of Level 3 financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:
Movement in Level 3 financial instruments
Assets Liabilities
------------------------------------------------------------- ------------------------------------------
Designated Designated
at fair at fair
value value
Available Held through Held through
for for profit for profit
sale trading or loss Derivatives trading or loss Derivatives
US$m US$m US$m US$m US$m US$m US$m
2011
At 1 January ....................... 8,237 5,689 587 3,961 11,393 570 3,806
Total gains/losses
recognised in
profit or loss
................... 222 (330) 11 767 36 8 628
Total gains/losses
recognised in
other comprehensive
income(1) .......................... (179) (12) (15) (16) 11 (11) -
Purchases ........................... 1,858 1,483 242 - (1,843) - -
New issuances ..................... - - - - 4,569 - -
Sales ................................... (756) (2,578) (69) ( - - - -
Settlements ........................ (1,088) (199) (7) (33) (1,528) - (1,083)
Transfers out ...................... (1,891) (569) (173) (410) (5,266) - (608)
Transfers in ........................ 2,718 1,296 140 180 455 - 386
------------ ------------ ------------- ------------- ------------ ------------- -------------
At 31 December ................. 9,121 4,780 716 4,449 7,827 567 3,129
------------ ------------ ------------- ------------- ------------ ------------- -------------
Total gains/losses
recognised in profit
or loss relating
to assets and liabilities
held on 31 December: 134 (237) 36 617 101 8 80
------------ ------------ ------------- ------------- ------------ ------------- -------------
* net interest income ..... 105 - - - - - -
* trading income excluding net interest income
....................... - (265) - 617 119 - 80
* net interest income on trading activities ......... - 28 - - (18) - -
* net income/expense from other financial instruments
designated at fair value ................ - - 36 - - 8 -
* dividend income .......... 29 - - - - - -
------------ ------------ ------------- ------------- ------------ ------------- -------------
2010
At 1 January ....................... 10,214 6,420 1,224 4,453 8,774 507 5,192
Total gains/losses
recognised in
profit or loss
................... 345 158 63 (675) 166 (11) (240)
Total gains/losses
recognised in
other comprehensive
income(1) .......................... 618 (101) (36) (110) (157) 74 93
Purchases ........................... 3,708 858 81 - (356) - -
New issuances ..................... - - - - 4,025 - -
Sales ................................... (2,461) (1,543) (8) - - - -
Settlements ........................ (1,032) 1 (22) 64 (948) - (820)
Transfers out ...................... (7,065) (629) (894) (669) (1,750) - (1,003)
Transfers in ........................ 3,910 525 179 898 1,639 - 584
------------ ------------ ------------- ------------- ------------ ------------- -------------
At 31 December ................. 8,237 5,689 587 3,961 11,393 570 3,806
------------ ------------ ------------- ------------- ------------ ------------- -------------
Total gains/losses
recognised in profit
or loss relating
to assets and liabilities
held on 31 December: 113 116 17 268 180 (14) 361
------------ ------------ ------------- ------------- ------------ ------------- -------------
* net interest income ..... 89 - - - - - -
* trading income excluding net interest income
....................... - 98 - 268 198 - 361
* net interest income on trading activities ......... - 18 - - (18) - -
* net income/expense from other financial instruments
designated at fair value ................ - - 17 - - (14) -
* dividend income .......... 24 - - - - - -
------------ ------------ ------------- ------------- ------------ ------------- -------------
1 Included in 'Available-for-sale investments: Fair value gains/losses' and 'Exchange differences' in the consolidated statement of comprehensive income.
Available-for-sale securities: Transfers in and out of Level 3 relate principally to assets whose prices have been unobservable during the year and those whose prices have become observable, respectively. Purchases of available-for-sale securities reflects the acquisition of corporate bonds across a range of geographies.
Trading liabilities: Transfers out of Level 3 are driven by certain equity volatilities and correlations becoming observable as the market continues to evolve. Settlement of trading liabilities reflect structured note maturities during the period, including the unwind of a large structured transaction which also impacted sales of assets held for trading.
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
As discussed above, the fair value of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data. The following table shows the sensitivity of these fair values to reasonably possible alternative assumptions:
Sensitivity of fair values to reasonably possible alternative assumptions
Reflected in other
Reflected in profit comprehensive
or loss income
-------------------------------------- --------------------------------------
Favourable Unfavourable Favourable Unfavourable
changes changes changes changes
US$m US$m US$m US$m
At 31 December 2011
Derivatives, trading assets
and trading liabilities(1)
................ 369 (436) - -
Financial assets and liabilities
designated at fair value ......... 72 (72) - -
Financial investments: available
for sale
............................. - - 814 (818)
------------------ ------------------ ------------------ ------------------
441 (508) 814 (818)
------------------ ------------------ ------------------ ------------------
At 31 December 2010
Derivatives, trading assets
and trading liabilities(1)
................ 554 (444) - -
Financial assets and liabilities
designated at fair value ......... 77 (75) - -
Financial investments: available
for sale
............................. - - 763 (744)
------------------ ------------------ ------------------ ------------------
631 (519) 763 (744)
------------------ ------------------ ------------------ ------------------
1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial instruments are risk-managed.
The decrease in the effect of favourable changes in significant unobservable inputs in relation to derivatives, trading assets and trading liabilities during the year primarily reflects greater pricing certainty in some areas, most notably structured credit and structured rates either as a result of decreased exposures or enhanced analysis. Unfavourable changes in derivatives, trading assets and liabilities has been impacted by similar factors but these have been offset by an increased potential unfavourable impact on monoline exposures, driven by increasing credit default spreads even though exposures have reduced over the period.
Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type
Reflected in other
Reflected in profit comprehensive
or loss income
-------------------------------------- --------------------------------------
Favourable Unfavourable Favourable Unfavourable
changes changes changes changes
US$m US$m US$m US$m
At 31 December 2011
Private equity investments
...................................
.............. 123 (83) 451 (451)
Asset-backed securities
...................................
.................... 3 (3) 183 (175)
Loans held for securitisation
...................................
........... 4 (4) - -
Structured notes
...................................
.............................. 6 (6) - -
Derivatives with monolines
...................................
............. 76 (178) - -
Other derivatives
...................................
............................ 145 (154) - -
Other portfolios
...................................
.............................. 84 (80) 180 (192)
441 (508) 814 (818)
------------------ ------------------ ------------------ ------------------
Reflected in other
Reflected in profit comprehensive
or loss income
---------------------------------------- ----------------------------------------
Favourable Unfavourable Favourable Unfavourable
changes changes changes changes
US$m US$m US$m US$m
At 31 December 2010
Private equity investments
...............................
.................. 112 (71) 383 (383)
Asset-backed securities
...............................
........................ 8 (8) 179 (181)
Loans held for securitisation
...............................
............... 8 (8) - -
Structured notes
...............................
...............................
... 18 (16) - -
Derivatives with monolines
...............................
................. 94 (8) - -
Other derivatives
...............................
...............................
. 256 (258) - -
Other portfolios
...............................
...............................
... 135 (150) 201 (180)
631 (519) 763 (744)
------------------- ------------------- ------------------- -------------------
Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a result of varying the levels of the unobservable parameters using statistical techniques. When parameters are not amenable to statistical analysis, quantification of uncertainty is judgemental.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or most unfavourable change from varying the assumptions individually.
In respect of private equity investments, in many of the methodologies, the principal assumption is the valuation multiple to be applied to the main financial indicators. This may be determined with reference to multiples for comparable listed companies and includes discounts for marketability.
For ABSs, the principal assumptions in the models are based on benchmark information about prepayment speeds, default rates, loss severities and the historical performance of the underlying assets.
For leveraged finance, loans held for securitisation and derivatives with monolines the principal assumption concerns the appropriate value to be attributed to the counterparty credit risk. This requires estimation of exposure at default, probability of default and recovery in the event of default. For loan transactions, assessment of exposure at default is straightforward. For derivative transactions, a future exposure profile is generated on the basis of current market data. Probabilities of default and recovery levels are estimated using available evidence, which may include financial information, historical experience, CDS spreads and consensus recovery levels.
For structured notes and other derivatives, principal assumptions concern the value to be attributed to future volatility of asset values and the future correlation between asset values. These principal assumptions include credit volatilities and correlations used in the valuation of structured credit derivatives (including leveraged credit derivatives). For such unobservable assumptions, estimates are based on available market data, which may include the use of a proxy method to derive a volatility or a correlation from comparable assets for which market data is more readily available, and/or an examination of historical levels.
HSBC Holdings
The following table provides an analysis of the basis for valuing financial assets and financial liabilities measured at fair value in the financial statements:
Bases of valuing HSBC Holdings' financial assets and liabilities measured at fair value
Valuation techniques
------------------------------
With
Quoted Using significant
market observable unobservable
price inputs inputs
Level 1 Level 2 Level 3 Total
US$m US$m US$m US$m
At 31 December 2011
Assets
Derivatives
..............................................................
....... - 3,568 - 3,568
Available for sale
............................................................ - - 1,078 1,078
Liabilities
Designated at fair value
.................................................. 17,196 3,955 - 21,151
Derivatives
..............................................................
....... - 1,067 - 1,067
At 31 December 2010
Assets
Derivatives
..............................................................
....... - 2,327 - 2,327
Available for sale
............................................................ - - 2,025 2,025
Liabilities
Designated at fair value
.................................................. 12,029 4,259 - 16,288
Derivatives
..............................................................
....... - 827 - 827
Financial instruments measured at fair value - Level 3
Financial investments measured using a valuation technique with significant unobservable inputs (Level 3) comprise fixed-rate preferred securities and senior notes purchased from HSBC undertakings. The unobservable elements of the valuation technique include the use of implied credit spreads and simplified bond pricing assumptions.
Movement in Level 3 financial instruments available for sale
2011 2010
US$m US$m
At 1 January
.................................................................................................
.......................... 2,025 2,455
Total gains or losses:
- recognised in profit or loss
.................................................................................................
. 55 (155)
- recognised in other comprehensive income
......................................................................... (61) (275)
Settlements (941) -
..................................................................................................
...........................
At 31 December
.................................................................................................
..................... 1,078 2,025
------- -------
Total gains or losses recognised in profit or
loss relating to those assets and liabilities
held on 31 December
...................................................................................................
........ 18 (1)
In certain circumstances, the fair value of financial instruments are measured using valuation models that incorporate assumptions that are not supported by prices from observable current market transactions in the same instrument and are not based on observable market data. The following table shows the sensitivity of non-derivative financial instruments to reasonably possible alternative assumptions:
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
Reflected in equity
----------------------------
Favourable Unfavourable
changes changes
US$m US$m
Financial investments: available for sale
At 31 December 2011
........................................................................................................... 69 (77)
At 31 December 2010
............................................................................................................. 34 (33)
17 Fair values of financial instruments not carried at fair value
The classification of financial instruments is determined in accordance with the accounting policies set out in Note 2.
Fair values of financial instruments which are not carried at fair value on the balance sheet
At 31 December At 31 December
2011 2010
Carrying Fair Carrying Fair
amount value amount value
US$m US$m US$m US$m
Assets
Loans and advances to banks
........................................................ 180,987 181,302 208,271 208,311
Loans and advances to customers
................................................. 940,429 914,485 958,366 934,444
Financial investments: debt securities
........................................... 21,018 22,500 19,386 20,374
Financial investments: treasury
and other eligible bills .................. 181 181 113 113
Liabilities
Deposits by banks
...............................................................
......... 112,822 112,848 110,584 110,563
Customer accounts
...............................................................
........ 1,253,925 1,254,313 1,227,725 1,227,428
Debt securities in issue
...............................................................
... 131,013 130,914 145,401 145,417
Subordinated liabilities
...............................................................
... 30,606 29,351 33,387 33,161
Fair values of financial instruments held for sale which are not carried at fair value on the balance sheet
At 31 December At 31 December
2011 2010
Carrying Fair Carrying Fair
amount value amount value
US$m US$m US$m US$m
Assets classified as held for sale(1)
Loans and advances to banks and
customers ............................. 35,720 37,832 116 116
Liabilities of disposal groups
held for sale
Deposits by banks
..................................................................... 206 206 - -
Customer accounts
................................................................... 20,138 19,130 - -
1 Including financial instruments within disposal groups held for sale.
The following is a list of financial instruments whose carrying amount is a reasonable approximation of fair value because, for example, they are short-term in nature or reprice to current market rates frequently:
Assets
Cash and balances at central banks
Items in the course of collection from other banks
Hong Kong Government certificates of indebtedness
Endorsements and acceptances
Short-term receivables within 'Other assets'
Accrued income
Liabilities
Hong Kong currency notes in circulation
Items in the course of transmission to other banks
Investment contracts with discretionary participation features within 'Liabilities under insurance contracts'
Endorsements and acceptances
Short-term payables within 'Other liabilities'
Accruals
Analysis of loans and advances to customers by geographical segment
At 31 December At 31 December
2011 2010
--------------------- ---------------------
Carrying Fair Carrying Fair
amount value amount value
US$m US$m US$m US$m
Loans and advances to customers
Europe
.....................................................................
.................... 434,336 426,039 435,799 430,333
Hong Kong
.....................................................................
............. 157,665 154,054 140,691 140,699
Rest of Asia-Pacific
..................................................................... 123,868 123,662 108,731 108,582
Middle East and North Africa
....................................................... 25,875 25,758 24,626 24,539
North America
.....................................................................
........ 142,747 128,608 190,532 172,522
Latin America
.....................................................................
......... 55,938 56,364 57,987 57,769
---------- --------- ---------- ---------
940,429 914,485 958,366 934,444
---------- --------- ---------- ---------
Valuation
The calculation of fair value incorporates HSBC's estimate of the amount at which financial assets could be exchanged, or financial liabilities settled, between knowledgeable, willing parties in an arm's length transaction. It does not reflect the economic benefits and costs that HSBC expects to flow from the instruments' cash flows over their expected future lives. Other reporting entities may use different valuation methodologies and assumptions in determining fair values for which no observable market prices are available, so comparisons of fair values between entities may not be meaningful and users are advised to exercise caution when using this data.
The secondary market demand for US consumer lending assets remains weak. Uncertainty over the extent and timing of future credit losses, together with a near absence of liquidity for non-prime ABSs and loans, continued to be reflected in a lack of bid prices at 31 December 2011. The estimated fair value of these receivables was determined by developing an approximate range of values from various sources as appropriate for the respective pools of assets. These sources include, internal value estimates based on over-the-counter trading activity, forward looking discounted cash flow models using assumptions we believe are consistent with those which would be used by market participants in valuing such receivables trading input from market participants and general discussions held with potential investors. The fair values of loans and advances to customers in the US are substantially lower than their carrying amount, reflecting the market conditions at the balance sheet date. The fair values reported do not reflect HSBC's estimate of the underlying long-term value of the assets.
There was a modest decrease year on year in the fair value of loans and advances to customers in Europe relative to their carrying amount which was the result of lower valuations on ABS classified as loans and receivables and on leveraged acquisition finance loans, reflecting widening credit spreads as a result of market disruption in Europe.
Fair values of the assets and liabilities set out below are estimated for the purpose of disclosure as follows:
Loans and advances to banks and customers
The fair value of loans and advances is based on observable market transactions, where available. In the absence of observable market transactions, fair value is estimated using discounted cash flow models.
Performing loans are grouped, as far as possible, into homogeneous pools segregated by maturity and interest rates and the contractual cash flows are generally discounted using HSBC's estimate of the discount rate that a market participant would use in valuing instruments with similar maturity, re--pricing and credit risk characteristics.
The fair value of a loan portfolio reflects both loan impairments at the balance sheet date and estimates of market participants' expectations of credit losses over the life of the loans. For impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.
Financial investments
The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that take into consideration the prices and future earnings streams of equivalent quoted securities.
Deposits by banks and customer accounts
For the purpose of estimating fair value, deposits by banks and customer accounts are grouped by remaining contractual maturity. Fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. The fair value of a deposit repayable on demand is assumed to be the amount payable on demand at the balance sheet date.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.
The fair values in this note are stated at a specific date and may be significantly different from the amounts which will actually be paid on the maturity or settlement dates of the instruments. In many cases, it would not be possible to realise immediately the estimated fair values given the size of the portfolios measured. Accordingly, these fair values do not represent the value of these financial instruments to HSBC as a going concern.
HSBC Holdings
The methods used by HSBC Holdings to determine fair values of financial instruments for the purpose of measurement and disclosure are described above.
The following table provides an analysis of the fair value of financial instruments not carried at fair value on the balance sheet:
Fair values of HSBC Holdings' financial instruments not carried at fair value on the balance sheet
At 31 December At 31 December
2011 2010
-------------------- --------------------
Carrying Fair Carrying Fair
amount value amount value
US$m US$m US$m US$m
Assets
Loans and advances to HSBC undertakings
......................... 28,048 27,562 21,238 21,798
Liabilities
Amounts owed to HSBC undertakings
................................. 2,479 2,485 2,932 2,963
Debt securities in issue
........................................................ 2,613 2,922 2,668 2,960
Subordinated liabilities
........................................................ 12,450 13,052 13,313 14,428
18 Reclassification of financial assets
In 2008, HSBC reclassified US$15.3bn and US$2.6bn of financial assets from the held-for-trading category to the loans and receivables and available-for-sale classifications, respectively, as permitted by the relevant amendment to IAS 39 and explained in Note 2(e) on the Financial Statements. No further reclassifications were undertaken.
Reclassification of HSBC's financial assets
At 31 December At 31 December
2011 2010
--------------------------------------- -----------------------------------------
Carrying Fair Carrying Fair
amount value amount value
US$m US$m US$m US$m
Reclassification to loans and
receivables
............................. 7,867 6,651 10,947 9,636
Reclassification to available
for sale
.................................
.. 33 33 91 91
-----------------
7,900 6,684 11,038 9,727
---------------- --------------------- ----------------- ----------------------
The following table shows the fair value gains and losses, income and expense recognised in the income statement in respect of reclassified assets and the gains and losses that would have been recognised if no reclassification had taken place.
Effect of reclassifying and not reclassifying financial assets
2011 2010 2009 2008
US$m US$m US$m US$m
Reclassification to loans
and
receivables
Recorded in the income
statement(1)
............................
..... 318 610 977 512
Assuming no
reclassification(2)
............................
.............. 317 1,260 2,276 (2,801)
Net income statement effect
of reclassification
................. 1 (650) (1,299) 3,313
-------------------- -------------------- -------------------- --------------------
Reclassification to
available
for sale
Recorded in the income
statement(1)
............................
..... 1 56 101 22
Assuming no
reclassification(2)
............................
.............. (2) 59 301 (202)
Net income statement effect
of reclassification
................. 3 (3) (200) 224
-------------------- -------------------- -------------------- --------------------
1 'Income and expense' recorded in the income statement represents the accrual of the effective interest rate and, for 2011, includes US$69m in respect of impairment (2010: US$6m; 2009: US$163m; 2008: US$26m). The effect on the income statement for 2008 shows the income and expense post-reclassification. In 2008 pre-reclassification, the assets were held at fair value and a loss of US$1,371m was recorded in the period up to reclassification.
2 Effect on the income statement during the year had the reclassification not occurred.
19 Financial assets designated at fair value
2011 2010
US$m US$m
Financial assets designated at fair value:
* not subject to repledge or resale by counterparties
.....................................................
..... 30,738 36,990
* which may be repledged or resold by counterparties
.....................................................
... 118 21
30,856 37,011
-------------------- --------------------
Treasury and other eligible bills
.........................................................................
...................... 123 159
Debt securities
.........................................................................
................................................ 11,834 18,248
Equity securities
.........................................................................
............................................. 17,930 17,418
-------------------- --------------------
Securities designated at fair value
.........................................................................
.................... 29,887 35,825
Loans and advances to banks
.........................................................................
.......................... 119 315
Loans and advances to customers
.........................................................................
................... 850 871
-------------------- --------------------
30,856 37,011
-------------------- --------------------
Securities designated at fair value(1)
Fair value
------------------------------------------
2011 2010
US$m US$m
US Treasury and US Government agencies(2)
.........................................................................
... 35 78
UK Government
.........................................................................
........................................... 812 1,304
Hong Kong Government
.........................................................................
............................... 151 151
Other government
.........................................................................
........................................ 3,964 4,130
Asset-backed securities(3)
.........................................................................
................................ 201 6,128
Corporate debt and other securities
.........................................................................
............... 6,794 6,616
Equities
.......................................................................
........................................................... 17,930 17,418
-------------------- --------------------
29,887 35,825
-------------------- --------------------
1 Included within these figures are debt securities issued by banks and other financial institutions of US$3,497m (2010: US$10,185m), of which US$40m (2010: US$48m) are guaranteed by various governments.
2 Includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Treasury and US Government agencies.
Securities listed on a recognised exchange and unlisted
Treasury
and other
eligible Debt Equity
bills securities securities Total
US$m US$m US$m US$m
Fair value at 31
December 2011
Listed on a
recognised
exchange(1)
....................
................... 4 3,607 11,859 15,470
Unlisted
..................
..................
..................
..................
..... 119 8,227 6,071 14,417
------------------- -------------------------- ----------------------- ---------------------
123 11,834 17,930 29,887
------------------- -------------------------- ----------------------- ---------------------
Fair value at 31
December 2010
Listed on a
recognised
exchange(1)
....................
................... 21 4,168 12,548 16,737
Unlisted
..................
..................
..................
..................
..... 138 14,080 4,870 19,088
------------------- -------------------------- ----------------------- ---------------------
159 18,248 17,418 35,825
------------------- -------------------------- ----------------------- ---------------------
1 Included within listed investments are US$631m of investments listed in Hong Kong (2010: US$756m).
20 Derivatives
Fair values of derivatives by product contract type held by HSBC
Assets Liabilities
--------------------------- ---------------------------
Trading Hedging Total Trading Hedging Total
US$m US$m US$m US$m US$m US$m
At 31 December 2011
Foreign exchange ........................................ 74,958 1,026 75,984 75,077 371 75,448
Interest rate
................................................ 510,652 2,439 513,091 502,906 6,221 509,127
Equity
......................................................... 15,262 - 15,262 19,363 - 19,363
Credit
.......................................................... 25,694 - 25,694 25,800 - 25,800
Commodity and other ................................. 2,198 - 2,198 1,492 - 1,492
------- ------- --------- ------- ------- ---------
Gross total fair values
.................................. 628,764 3,465 632,229 624,638 6,592 631,230
------- ------- ------- -------
Netting
........................................................ (285,850) (285,850)
--------- ---------
Total
........................................................... 346,379 345,380
--------- ---------
At 31 December 2010
Foreign exchange ........................................ 65,905 1,304 67,209 67,564 340 67,904
Interest rate
................................................ 278,364 2,764 281,128 273,222 3,909 277,131
Equity
......................................................... 13,983 - 13,983 14,716 - 14,716
Credit
.......................................................... 20,907 - 20,907 20,027 - 20,027
Commodity and other ................................. 1,261 - 1,261 2,618 - 2,618
------- ------- --------- ------- ------- ---------
Gross total fair values
.................................. 380,420 4,068 384,488 378,147 4,249 382,396
------- ------- ------- -------
Netting
........................................................ (123,731) (123,731)
--------- ---------
Total
........................................................... 260,757 258,665
--------- ---------
The 33% increase in the fair value of derivative assets during 2011 was driven by increased interest rate derivative fair values as yield curves declined in major currencies during the second half of the year, reflecting the deteriorating economic outlook. This drove both the increase in gross fair values and the increase in the netting adjustment.
Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries
At 31 December At 31 December
2011 2010
-------------------- --------------------
Trading Trading Trading Trading
assets liabilities assets liabilities
US$m US$m US$m US$m
Foreign exchange
............................................................... 1,546 1,067 1,407 827
Interest rate
....................................................................... 2,022 - 920 -
3,568 1,067 2,327 827
------- ----------- ------- -----------
Derivatives are financial instruments that derive their value from the price of underlying items such as equities, bonds, interest rates, foreign exchange, credit spreads, commodities and equity or other indices. Derivatives enable users to increase, reduce or alter exposure to credit or market risks. HSBC makes markets in derivatives for its customers and uses derivatives to manage its exposure to credit and market risks.
Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. A description of how the fair value of derivatives is derived is set out on page 352. Derivative assets and liabilities on different transactions are only set off if the transactions are with the same counterparty, a legal right of set-off exists and the cash flows are intended to be settled on a net basis.
Use of derivatives
HSBC transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the portfolio risks arising from client business and to manage and hedge HSBC's own risks. Derivatives (except for derivatives which are designated as effective hedging instruments as defined in IAS 39) are held for trading. The held for trading classification includes two types of derivatives: those used in sales and trading activities, and those used for risk management purposes but which for various reasons do not meet the qualifying criteria for hedge accounting. The second category includes derivatives managed in conjunction with financial instruments designated at fair value. These activities are described more fully below.
HSBC's derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly to ensure that they remain within acceptable risk levels, with matching deals being utilised to achieve this where necessary. When entering into derivative transactions, HSBC employs the same credit risk management framework to assess and approve potential credit exposures that are used for traditional lending.
Trading derivatives
Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities in derivatives are entered into principally for the purpose of generating profits from short-term fluctuations in price or margin. Positions may be traded actively or be held over a period of time to benefit from expected changes in exchange rates, interest rates, equity prices or other market parameters. Trading includes market-making, positioning and arbitrage activities. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume; positioning means managing market risk positions in the expectation of benefiting from favourable movements in prices, rates or indices; arbitrage involves identifying and profiting from price differentials between markets and products.
As mentioned above, other derivatives classified as held for trading include non-qualifying hedging derivatives, ineffective hedging derivatives and the components of hedging derivatives that are excluded from assessing hedge effectiveness. Non-qualifying hedging derivatives are entered into for risk management purposes but do not meet the criteria for hedge accounting. These include derivatives managed in conjunction with financial instruments designated at fair value.
Gains and losses from changes in the fair value of derivatives, including the contractual interest, that do not qualify for hedge accounting are reported in 'Net trading income', except for derivatives managed in conjunction with financial instruments designated at fair value, where gains and losses are reported in 'Net income from financial instruments designated at fair value', together with the gains and losses on the economically hedged items. Where the derivatives are managed with debt securities in issue, the contractual interest is shown in 'interest expense' together with the interest payable on the issued debt. Substantially all of HSBC Holdings' derivatives entered into with HSBC undertakings are managed in conjunction with financial liabilities designated at fair value.
The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. The 8% increase in the notional amounts of HSBC's derivative assets during 2011 was primarily driven by an increase in trading volumes of interest rate and foreign exchange contracts.
Notional contract amounts of derivatives held for trading purposes by product type
HSBC HSBC Holdings
-------------------------- --------------------------
At At At At
31 December 31 December 31 December 31 December
2011 2010 2011 2010
US$m US$m US$m US$m
Foreign exchange
.............................................................
.. 3,945,774 3,692,798 18,942 17,287
Interest rate
.............................................................
.......... 19,788,710 18,104,141 10,954 6,804
Equity
.............................................................
................... 265,577 294,587 - -
Credit
.............................................................
.................... 1,049,147 1,065,218 - -
Commodity and other
........................................................ 76,487 82,856 - -
------------ ------------ ------------ ------------
25,125,695 23,239,600 29,896 24,091
------------ ------------ ------------ ------------
Credit derivatives
HSBC trades credit derivatives through its principal dealing operations and acts as a principal counterparty to a broad range of users, structuring deals to produce risk management products for its customers, or making markets in certain products. Risk is typically controlled through entering into offsetting credit derivative contracts with other counterparties.
HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure for the relevant counterparty. Trading of credit derivatives is restricted to a small number of offices within the major centres which have the control infrastructure and market skills to manage effectively the credit risk inherent in the products.
Credit derivatives are also deployed to a limited extent for the risk management of the Group's loan portfolios. The notional contract amount of credit derivatives of US$1,049,147m (2010: US$1,065,218m) consisted of protection bought of US$517,737m (2010: US$530,235m) and protection sold of US$531,410m (2010: US$534,983m). The credit derivative business operates within the market risk management framework described on pages 163 to 169.
Derivatives valued using models with unobservable inputs
The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:
Unamortised balance of derivatives valued using models with significant unobservable inputs
2011 2010
US$m US$m
Unamortised balance at 1 January
.....................................................................
...................... 250 260
Deferral on new transactions
.....................................................................
.............................. 234 331
Recognised in the income statement during the
period:
* amortisation
.....................................................
.....................................................
......... (143) (106)
* subsequent to unobservable inputs becoming observable
.................................................... (71) (17)
* maturity, termination or offsetting derivative
.....................................................
............ (60) (163)
Exchange differences
.....................................................................
......................................... (2) (15)
Risk hedged
.....................................................................
........................................................ (8) (40)
---------------------- ----------------------
Unamortised balance at 31 December(1)
.....................................................................
............... 200 250
---------------------- ----------------------
1 This amount is yet to be recognised in the consolidated income statement.
Hedging instruments
HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type of hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash flow hedges, or hedges of net investment in foreign operations. These are described under the relevant headings below.
The notional contract amounts of derivatives held for hedging purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for hedging purposes by product type
At 31 December At 31 December
2011 2010
------------------------------------- -----------------------------------------
Cash flow Fair value Cash flow Fair value
hedge hedge hedge hedge
US$m US$m US$m US$m
Foreign exchange
...................................
............. 12,078 1,363 10,599 1,392
Interest rate
...................................
..................... 228,052 76,950 282,412 62,757
240,130 78,313 293,011 64,149
---------------- ------------------- ------------------ ---------------------
Fair value hedges
HSBC's fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates. For qualifying fair value hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk being hedged are recognised in the income statement. If the hedge relationship is terminated, the fair value adjustment to the hedged item continues to be reported as part of the basis of the item and is amortised to the income statement as a yield adjustment over the remainder of the hedging period.
Fair value of derivatives designated as fair value hedges
At 31 December At 31 December
2011 2010
Assets Liabilities Assets Liabilities
US$m US$m US$m US$m
Foreign exchange
............................
............... 77 1 153 -
Interest rate
............................
....................... 369 4,331 443 2,226
446 4,332 596 2,226
------------------- ------------------- --------------------- ----------------------
Gains or losses arising from fair value hedges
2011 2010 2009
US$m US$m US$m
Gains/(losses):
* on hedging instruments
...................................................
..
....................... (4,082) (830) 114
* on the hedged items attributable to the hedged risk
................................... 3,858 868 (159)
---------------------- ---------------------- ----------------------
(224) 38 (45)
---------------------- ---------------------- ----------------------
The gains and losses on ineffective portions of fair value hedges are recognised immediately in 'Net trading income'.
Cash flow hedges
HSBC's cash flow hedges consist principally of interest rate and cross-currency swaps that are used to protect against exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast transactions. Gains and losses are initially recognised in other comprehensive income, and accumulated in the cash flow hedging reserve, and are transferred to the income statement when the forecast cash flows affect the income statement.
Fair value of derivatives designated as cash flow hedges
At 31 December At 31 December
2011 2010
Assets Liabilities Assets Liabilities
US$m US$m US$m US$m
Foreign exchange
............................
............... 949 370 1,151 340
Interest rate
............................
....................... 2,070 1,890 2,321 1,683
3,019 2,260 3,472 2,023
------------------- ------------------- --------------------- ----------------------
Forecast principal balances on which interest cash flows are expected to arise
More than 5 years or
3 months less but
3 months but less more than More than
or less than 1 year 1 year 5 years
US$m US$m US$m US$m
At 31 December 2011
Assets
.............................
.............................
................. 139,701 110,960 66,383 4,460
Liabilities
...........................
...........................
............... (77,898) (50,480) (36,296) (4,693)
-------------------- -------------------- -------------------- --------------------
Net cash inflows/(outflows)
exposure
...........................
. 61,803 60,480 30,087 (233)
-------------------- -------------------- -------------------- --------------------
At 31 December 2010
Assets
.............................
.............................
................. 163,006 97,174 58,975 1,358
Liabilities
...........................
...........................
............... (89,112) (58,811) (42,259) (6,065)
-------------------- -------------------- -------------------- --------------------
Net cash inflows/(outflows)
exposure
...........................
. 73,894 38,363 16,716 (4,707)
-------------------- -------------------- -------------------- --------------------
This table reflects the interest rate repricing profile of the underlying hedged items.
The gains and losses on ineffective portions of such derivatives are recognised immediately in 'Net trading income'. During the year to 31 December 2011 a gain of US$26m (2010: loss of US$9m; 2009: gain of US$90m) was recognised due to hedge ineffectiveness.
Hedges of net investments in foreign operations
The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using forward foreign exchange contracts or by financing with currency borrowings.
At 31 December 2011, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were assets of US$121m (2010: nil) and liabilities of US$36m (2010: US$34m) and notional contract values of US$3,920m (2010: US$644m).
The ineffectiveness recognised in 'Net trading income' in the year ended 31 December 2011 that arose from hedges in foreign operations was nil (2010 and 2009: nil).
21 Financial investments
2011 2010
US$m US$m
Financial investments:
* not subject to repledge or resale by counterparties
.....................................................
..... 364,906 369,597
* which may be repledged or resold by counterparties
.....................................................
... 35,138 31,158
400,044 400,755
------- -------
Carrying amount and fair value of financial investments
2011 2010
-----------------
Carrying Fair Carrying Fair
amount value amount value
US$m US$m US$m US$m
Treasury and other eligible
bills .......................................... 65,223 65,223 57,129 57,129
-------- ------- -------- -------
* available for sale
.....................................................
... 65,042 65,042 57,016 57,016
* held to maturity
.....................................................
... 181 181 113 113
-------- -------
Debt securities
.................................................................... 327,611 329,093 335,643 336,632
-------- ------- -------- -------
* available for sale
.....................................................
... 306,593 306,593 316,257 316,257
* held to maturity
.....................................................
... 21,018 22,500 19,386 20,375
-------- -------
Equity securities
................................................................. 7,210 7,210 7,983 7,983
-------- ------- -------- -------
* available for sale
.....................................................
... 7,210 7,210 7,983 7,983
-------- -------
Total financial investments
............................................... 400,044 401,526 400,755 401,744
-------- ------- -------- -------
Financial investments at amortised cost(1) and fair value(2)
Amortised Fair
cost value
US$m US$m
At 31 December 2011
US Treasury
......................................................................
...................................................... 43,848 45,283
US Government agencies(3)
......................................................................
................................. 25,079 26,093
US Government sponsored entities(3)
......................................................................
.................. 4,425 5,056
UK Government
......................................................................
............................................... 32,165 33,603
Hong Kong Government
......................................................................
................................... 33,359 33,374
Other government
......................................................................
............................................ 125,623 127,049
Asset-backed securities(4)
......................................................................
..................................... 35,096 28,625
Corporate debt and other securities
......................................................................
................... 94,110 95,233
Equities
......................................................................
............................................................. 5,122 7,210
------------------ -----------------------
398,827 401,526
------------------ -----------------------
At 31 December 2010
US Treasury
......................................................................
...................................................... 37,380 37,255
US Government agencies(3)
......................................................................
................................. 20,895 21,339
US Government sponsored entities(3)
......................................................................
.................. 5,029 5,267
UK Government
......................................................................
............................................... 31,069 31,815
Hong Kong Government
......................................................................
................................... 29,770 29,793
Other government
......................................................................
............................................ 108,947 109,806
Asset-backed securities(4)
......................................................................
..................................... 39,845 33,175
Corporate debt and other securities
......................................................................
................... 124,704 125,311
Equities
......................................................................
............................................................. 5,605 7,983
------------------ -----------------------
403,244 401,744
------------------ -----------------------
At 31 December 2009
US Treasury
......................................................................
...................................................... 17,650 17,635
US Government agencies(3)
......................................................................
................................. 12,539 12,804
US Government sponsored entities(3)
......................................................................
.................. 4,885 4,924
UK Government
......................................................................
............................................... 9,653 9,782
Hong Kong Government
......................................................................
................................... 37,747 37,763
Other government
......................................................................
............................................ 87,122 87,881
Asset-backed securities(4)
......................................................................
..................................... 48,500 34,914
Corporate debt and other securities
......................................................................
................... 153,639 154,902
Equities
......................................................................
............................................................. 7,051 9,124
------------------ -----------------------
378,786 369,729
------------------ -----------------------
1 Represents the amortised cost or cost basis of the financial investment.
2 Included within these figures are debt securities issued by banks and other financial institutions of US$68,334m (2010: US$99,733m; 2009: US$133,256m), of which US$17,079m (2010: US$38,862m; 2009: US$55,324m) are guaranteed by various governments. The fair value of the debt securities issued by banks and other financial institutions was US$68,765m (2010: US$100,070m; 2009: US$133,461m).
3 Includes securities that are supported by an explicit guarantee issued by the US Government.
4 Excludes asset-backed securities included under US Government agencies and sponsored entities.
Financial investments listed on a recognised exchange and unlisted
Treasury
and
Treasury other
and other eligible Debt
eligible bills Debt securities Equity
bills held securities held securities
available to available to available
for sale maturity for sale maturity for sale Total
US$m US$m US$m US$m US$m US$m
Carrying
amount at 31
December
2011
Listed on a
recognised
exchange(1)
...........
...... 4,077 - 121,303 4,370 535 130,285
Unlisted(2)
...........
...........
...........
...........
......... 60,965 181 185,290 16,648 6,675 269,759
------------- ------------ --------------------- --------------------- ------------------ ----------------
65,042 181 306,593 21,018 7,210 400,044
------------- ------------ --------------------- --------------------- ------------------ ----------------
Carrying
amount at 31
December
2010
Listed on a
recognised
exchange(1)
...........
...... 1,400 - 138,374 4,182 851 144,807
Unlisted(2)
...........
...........
...........
...........
......... 55,616 113 177,883 15,204 7,132 255,948
------------- ------------ --------------------- --------------------- ------------------ ----------------
57,016 113 316,257 19,386 7,983 400,755
------------- ------------ --------------------- --------------------- ------------------ ----------------
1 The fair value of listed held-to-maturity debt securities as at 31 December 2011 was US$4,641m (2010: US$4,332m). Included within listed investments were US$3,544m (2010: US$1,902m) of investments listed in Hong Kong.
2 Unlisted treasury and other eligible bills available for sale primarily comprise treasury bills not listed on a recognised exchange but for which there is a liquid market.
Maturities of investments in debt securities at their carrying amount
At 31 December
----------------
2011 2010
US$m US$m
Remaining contractual maturity of total debt
securities:
1 year or less
................................................................................................
....................... 87,080 92,961
5 years or less but over 1 year
............................................................................................. 128,192 124,596
10 years or less but over 5 years
.......................................................................................... 52,251 56,926
Over 10 years
................................................................................................
...................... 60,088 61,160
327,611 335,643
------- -------
Remaining contractual maturity of debt securities
available for sale:
1 year or less
................................................................................................
....................... 85,821 91,939
5 years or less but over 1 year
............................................................................................. 120,763 117,931
10 years or less but over 5 years
.......................................................................................... 44,946 50,113
Over 10 years
................................................................................................
...................... 55,063 56,274
------- -------
306,593 316,257
------- -------
Remaining contractual maturity of debt securities
held to maturity:
1 year or less
................................................................................................
....................... 1,259 1,022
5 years or less but over 1 year
............................................................................................. 7,429 6,665
10 years or less but over 5 years
.......................................................................................... 7,305 6,813
Over 10 years
................................................................................................
...................... 5,025 4,886
------- -------
21,018 19,386
------- -------
Contractual maturities and weighted average yields of investment debt securities at 31 December 2011
After five
After one years but
Within one year but within within ten After ten
year five years years years
------------------------------------------ ------------------------------------------ ------------------------------------------ ----------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
US$m % US$m % US$m % US$m %
Available-for-sale
US Treasury
....................
.................. 12,153 0.4 17,474 0.7 4,340 2.2 2,964 4.1
US Government
agencies
................... 2 5.4 8 3.9 96 2.1 24,587 3.3
US
Government-sponsored
agencies .. 458 1.5 55 1.6 2,036 4.0 451 4.1
UK Government
....................
............ 3,542 4.5 15,775 1.4 9,041 2.4 618 2.2
Hong Kong Government
................... 895 0.3 1,558 1.2 - - - -
Other governments
....................
....... 35,273 1.9 53,418 3.3 10,805 3.6 1,884 4.4
Asset-backed
securities
....................
.. 427 0.5 2,133 0.5 8,501 0.4 23,869 0.3
Corporate debt and
other securities
.... 33,242 2.6 29,016 3.4 9,055 3.2 3,963 5.4
-------------------- -------------------- -------------------- --------------------
Total amortised cost
....................
..... 85,992 119,437 43,874 58,336
-------------------- -------------------- -------------------- --------------------
Total carrying value
....................
...... 85,821 120,763 44,946 55,063
After five
After one years but
Within one year but within within ten After ten
year five years years years
------------------------------------------ ------------------------------------------ ------------------------------------------ ----------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
US$m % US$m % US$m % US$m %
Held-to-maturity
US Treasury
....................
.................. 11 4.1 25 4.2 65 4.8 99 5.0
US Government
agencies
................... - - 1 7.6 5 7.7 381 6.5
US
Government-sponsored
agencies .. 5 4.7 13 7.9 2 7.0 1,406 6.2
Hong Kong Government
................... - - 5 0.9 10 4.1 3 1.2
Other governments
....................
....... 22 4.3 486 3.7 263 4.8 468 5.2
Asset-backed
securities
....................
.. - - - - - - 166 6.2
Corporate debt and
other securities
.... 1,221 3.9 6,899 4.1 6,960 4.4 2,502 5.5
-------------------- -------------------- -------------------- --------------------
Total amortised cost
....................
..... 1,259 7,429 7,305 5,025
-------------------- -------------------- -------------------- --------------------
Total carrying value
....................
...... 1,259 7,429 7,305 5,025
The maturity distributions of asset-backed securities are presented in the above table on the basis of contractual maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2011 by the book amount of available-for-sale debt securities at that date. The yields do not include the effect of related derivatives.
22 Transfers of financial assets not qualifying for derecognition
HSBC enters into transactions in the normal course of business by which it transfers recognised financial assets directly to third parties or to SPEs. These transfers may give rise to the full or partial derecognition of the financial assets concerned.
- Full derecognition occurs when HSBC transfers its contractual right to receive cash flows from the financial assets, or retains the right but assumes an obligation to pass on the cash flows from the asset, and transfers substantially all the risks and rewards of ownership. The risks include credit, interest rate, currency, prepayment and other price risks.
- Partial derecognition occurs when HSBC sells or otherwise transfers financial assets in such a way that some but not substantially all of the risks and rewards of ownership are transferred but control is retained. These financial assets are recognised on the balance sheet to the extent of HSBC's continuing involvement.
- HSBC will continue to recognise financial assets transferred when it retains substantially all the risks and rewards of ownership.
The majority of financial assets that do not qualify for derecognition are (i) debt securities held by counterparties as collateral under repurchase agreements or (ii) equity securities lent under securities lending agreements. The following table analyses the carrying amount of financial assets that did not qualify for derecognition and their associated financial liabilities:
Financial assets and associated financial liabilities not qualifying for derecognition
2011 2010
---------------------------------------------- ----------------------------------------------------
Carrying Carrying Carrying Carrying
amount of amount of amount of amount of
transferred associated transferred associated
assets liabilities assets liabilities
US$m US$m US$m US$m
Nature of
transaction
Repurchase
agreements
...........
...........
...........
...........
.......... 124,982 124,413 124,625 122,455
Securities
lending
agreements
...........
...........
...........
...........
. 7,129 7,039 7,277 7,202
---------------------- ---------------------- ------------------------- -------------------------
132,111 131,452 131,902 129,657
---------------------- ---------------------- ------------------------- -------------------------
A small proportion of financial assets that do not qualify for derecognition relate to loans, credit cards, debt securities and trade receivables that have been securitised under arrangements by which HSBC retains a continuing involvement in such transferred assets. Continuing involvement may entail retaining the rights to future cash flows arising from the assets after investors have received their contractual terms (for example, interest rate strips); providing subordinated interest; liquidity support; continuing to service the underlying asset; or entering into derivative transactions with the securitisation vehicles. As such, HSBC continues to be exposed to risks associated with these transactions.
The rights and obligations that HSBC retains from its continuing involvement in securitisations are initially recorded as an allocation of the fair value of the financial asset between the part that is derecognised and the part that continues to be recognised on the date of transfer. The following table analyses the carrying amount of financial assets that qualified for partial derecognition, the extent of HSBC's continuing involvement and the associated liabilities:
HSBC's continuing involvement in financial assets qualifying for partial derecognition
Securitisations
at 31 December
------------------------------------------------
2011 2010
US$m US$m
Carrying amount of assets (original)
..............................................................
.......................... 17,427 17,427
Carrying amount of assets (currently recognised)
..............................................................
...... 22 42
Carrying amount of associated liabilities (currently
recognised) ............................................... 11 21
23 Interests in associates and joint ventures
Associates
Principal associates of HSBC
At 31 December At 31 December
2011 2010
-------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
US$m US$m US$m US$m
Listed
Bank of
Communications
Co.,
Limited
..............
..............
.. 8,507 8,234 6,944 10,773
Industrial Bank
Co., Limited
..............
..............
..............
.... 2,214 2,743 1,769 2,799
Ping An
Insurance
(Group)
Company
of China,
Limited .... 6,373 8,110 5,596 13,735
The Saudi
British Bank
..............
..............
..............
............. 1,886 3,256 1,580 3,224
18,980 22,343 15,889 30,531
------------------ ----------------------- ------------------- ------------------------
At 31 December 2011
--------------------------------------------------------------------------------------------------------------------
HSBC's Issued
interest equity
Country in capital
of equity
incorporation capital
Listed
Bank of
Communications
Co., Limited
..............
..............
..............
..... PRC(1) 19.03% RMB61,886m
Industrial
Bank Co.,
Limited
..............
..............
..............
..............
....... PRC(1) 12.80% RMB10,786m
Ping An
Insurance
(Group)
Company
of China,
Limited
..............
....... PRC(1) 15.57% RMB7,916m
The Saudi
British Bank
..............
..............
..............
..............
..............
. Saudi Arabia 40.00% SR7,500m
Unlisted
Barrowgate
Limited(2)
..............
..............
..............
..............
..............
..... Hong Kong 24.64% -
Vietnam
Technological
and Commercial
Joint Stock
Bank
..............
... Vietnam 19.61% VND8,788,079m
Yantai Bank
Co.,
Limited(3)
..............
..............
..............
..............
.......... PRC(1) 20.00% RMB2,000m
1 People's Republic of China.
2 Issued equity capital is less than HK$1m.
3 Yantai Bank Co., Limited was previously known as Yantai City Commercial Bank. The investment is held through Hang Seng Bank Limited, a 62.14% owned subsidiary of HSBC.
All the above investments in associates are owned by subsidiaries of HSBC Holdings.
Details of all HSBC associates and joint ventures, as required under Section 409 Companies Act 2006, will be annexed to the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies.
HSBC had US$14,880m (2010: US$12,540m) of investments in associates and joint ventures listed in Hong Kong.
For the year ended 31 December 2011, HSBC's share of associates and joint ventures' tax on profit was US$890m (2010: US$774m), which is included within share of profit in associates and joint ventures in the income statement.
Summarised aggregate financial information on associates
2011 2010
US$m US$m
HSBC's share of:
* assets
.....................................................
.....................................................
.................... 249,461 191,286
* liabilities
.....................................................
.....................................................
............... 230,902 175,812
* revenues
.....................................................
.....................................................
............... 12,009 9,274
* profit after tax
.....................................................
.....................................................
..... 3,221 2,479
HSBC's investment in Bank of Communications Co., Limited was equity accounted with effect from August 2004. HSBC's significant influence in Bank of Communications Co., Limited was established as a result of representation on the Board of Directors, and in accordance with the Technical Support and Assistance Agreements, HSBC is assisting in the maintenance of financial and operating policies and a number of staff have been seconded to assist in this process.
HSBC's investment in Industrial Bank Co., Limited was equity accounted with effect from May 2004. HSBC's significant influence has been established as a result of representation on the Board of Directors.
HSBC's investment in Ping An Insurance (Group) Company of China Limited ('Ping An') was equity accounted with effect from August 2005, reflecting HSBC's significant influence over this associate. HSBC's significant influence was established as a result of representation on the Board of Directors. In May 2010, following the issue of shares by Ping An to a third party, HSBC's holding was diluted to 16.13% and a dilution gain of US$188m was recognised in 'Other operating income'. In June 2011, following a further issue of shares by Ping An to a third party, HSBC's holding was diluted to 15.57% and a dilution gain of US$181m was recognised in 'Other operating income'.
In July 2011, Ping An increased its ownership interest in Shenzhen Development Bank ('SDB') from 29.99% to 52.38%. As a result, the status of its investment in SDB changed from an interest in an associate to an investment in subsidiary. As a result of this transaction, Ping An recognised a remeasurement loss; HSBC's share of this remeasurement loss was US$48m.
The statutory accounting reference date of Bank of Communications Co., Limited, Ping An Insurance (Group) Company of China, Limited and Industrial Bank Co., Limited is 31 December. For the year ended 31 December 2011, these companies were included on the basis of financial statements made up for the twelve months to 30 September 2011, taking into account changes in the subsequent period from 1 October 2011 to 31 December 2011 that would have materially affected their results.
HSBC acquired 15% of Vietnam Technological & Commercial Joint Stock Bank in October 2007. This investment was equity accounted from that date due to HSBC's representation on the Board of Directors and involvement in the Technical Support and Assistance Agreement. In December 2007, as a result of a rights issue in which HSBC did not participate, HSBC's equity interest was diluted to 14.44%. In September 2008, HSBC increased its equity interest to 20%. HSBC's equity interest has been subsequently diluted to below 20% due to the issue of shares by the associate to its own employees.
Joint ventures
Principal interests in joint ventures
At 31 December 2011
--------------------------------------------------------------------------------------------------------------------
HSBC's
interest Issued
Country of Principal in equity equity
incorporation activity capital capital
HSBC
Saudi
Arabia
Limited
.........
.........
.........
.... Saudi Arabia Investment banking 49.00% SR500m
Vaultex
UK
Limited
.........
.........
.........
.........
..... England Cash management 50.00% GBP10m
Hana HSBC
Life
Insurance
Co., Ltd
......... Insurance
......... South Korea manufacturing 49.99% KRW85,201m
Canara
HSBC
Oriental
Bank
of
Commerce
Life
Insurance
Company
Limited
......... Insurance
......... India manufacturing 26.00% INR8,000m
Summarised aggregate financial information on joint ventures
2011 2010
US$m US$m
HSBC's share of:
* current assets
.....................................................
.....................................................
........ 1,556 1,481
* non-current assets
.....................................................
..................................................... 196 97
* current liabilities
.....................................................
.....................................................
... 747 706
* non-current liabilities
.....................................................
................................................. 715 666
* income
.....................................................
.....................................................
................. 383 366
* expenses
.....................................................
.....................................................
............... 339 328
In December 2011, following the issue of shares by HSBC Saudi Arabia Limited to a third party, HSBC's holding was diluted from 60% to 49% and a dilution gain of US$27m was recognised in 'Other operating income'.
Associates and joint ventures
Movements in investments in associates and joint ventures
2011 2010
US$m US$m
At 1 January
.....................................................................................................
...................... 17,198 13,011
Additions
.....................................................................................................
........................... 90 1,589
Disposals
.....................................................................................................
............................ (25) (38)
Share of results
.....................................................................................................
................... 3,264 2,517
Dividends
.....................................................................................................
........................... (304) (441)
Transfers
.....................................................................................................
........................... - (96)
Exchange differences
.....................................................................................................
......... 681 423
Share of other comprehensive income/(expense)
of associates and joint ventures ................... (710) 107
Other movements
.....................................................................................................
.............. 205 126
------ ------
At 31 December
.....................................................................................................
................. 20,399 17,198
------ ------
Goodwill included in carrying amount of associates and joint ventures
2011 2010
US$m US$m
Gross amount
At 1 January
...................................................................
........................................................ 1,518 1,446
Additions
...................................................................
............................................................. - 60
Exchange differences
...................................................................
........................................... 57 40
Other changes
...................................................................
...................................................... (24) (28)
----------------------- -----------------------
At 31 December(1)
..............................................................
...................................................... 1,551 1,518
----------------------- -----------------------
1 Includes the carrying amount of goodwill arising from joint ventures of US$31m (2010: US$32m).
24 Goodwill and intangible assets
2011 2010
US$m US$m
Goodwill
...................................................................................................
............................... 21,338 22,406
Present value of in-force long-term insurance
business ('PVIF')(1) ............................................ 4,092 3,440
Other intangible assets
.....................................................................................................
....... 3,604 4,076
29,034 29,922
------ ------
1 Disclosures on PVIF are provided on page 181.
Goodwill
Reconciliation of goodwill
Rest
of
Hong Asia- North Latin
Europe Kong Pacific MENA America America Total
US$m US$m US$m US$m US$m US$m US$m
Gross amount
At 1 January 2011
.............. 14,885 124 1,115 65 12,465 4,316 32,970
Disposals
...................
......... (3) - - - - (46) (49)
Exchange differences
.......... (449) - (35) (2) (1) (272) (759)
Reclassified to held
for sale . - - - - (3,717) (231) (3,948)
Other changes
...................
.. - - (17) - - (2) (19)
---------- ------------ ------------ --------- -------------- --------------- ------------
At 31 December 2011
........ 14,433 124 1,063 63 8,747 3,765 28,195
---------- ------------ ------------ --------- -------------- --------------- ------------
Accumulated
impairment
losses
At 1 January 2011
.............. - - - - (10,564) - (10,564)
Reclassified to held
for sale . - - - - 3,707 - 3,707
At 31 December 2011
........ - - - - (6,857) - (6,857)
Net carrying amount
at
31 December 2011
.......... 14,433 124 1,063 63 1,890 3,765 21,338
---------- ------------ ------------ --------- -------------- --------------- ------------
Gross amount
At 1 January 2010
.............. 15,915 123 1,053 69 12,483 4,162 33,805
Additions
...................
......... - - 16 - - - 16
Disposals
...................
......... (3) - - - (17) - (20)
Exchange differences
.......... (1,004) 1 52 (4) (1) 154 (802)
Other changes
...................
.. (23) - (6) - - - (29)
---------- ------------ ------------ --------- -------------- --------------- ------------
At 31 December 2010
........ 14,885 124 1,115 65 12,465 4,316 32,970
---------- ------------ ------------ --------- -------------- --------------- ------------
Accumulated
impairment
losses
At 1 January and
31 December 2010
............... - - - - (10,564) - (10,564)
Net carrying amount
at
31 December 2010
.......... 14,885 124 1,115 65 1,901 4,316 22,406
---------- ------------ ------------ --------- -------------- --------------- ------------
Impairment testing
Timing of impairment testing
HSBC's impairment test in respect of goodwill allocated to each cash-generating unit ('CGU') is performed as at 1 July each year. In line with the accounting policy set out in Note 2(p), goodwill is also retested for impairment whenever there is an indication that it may be impaired. For the purpose of impairment testing, the Group's CGUs are based on geographical regions subdivided by global business. The CGUs represent the lowest level at which goodwill is monitored for internal management purposes. The Global Banking and Markets - Europe CGU experienced significantly reduced profitability in the second half of 2011 and was retested for impairment as at 31 December 2011. For other CGUs there was no indication of impairment in the period to 31 December 2011 and therefore goodwill has not been retested since 1 July 2011.
Basis of the recoverable amount - value in use or fair value less costs to sell
The recoverable amount of all CGUs to which goodwill has been allocated was equal to its value in use ('VIU') at each respective testing date for 2010 and 2011.
For each significant CGU, the VIU is calculated by discounting management's cash flow projections for the CGU. The discount rate used is based on the cost of capital HSBC allocates to investments in the countries within which the CGU operates. The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long--term perspective within the Group of the business units making up the CGUs. In 2011, for most CGUs, management's cash flow projections until the end of 2012 were used. However, due to the current economic conditions in Retail Banking and Wealth Management - Europe, and Global Banking and Markets - Europe, cash flow projections until the end of 2014 were used to more accurately estimate the cash flows for the period.
Key assumptions in VIU calculation and management's approach to determining the values assigned to each key assumption
2011 2010
--------------------------------------------------------- -------------------------------------------------------------
Nominal Nominal
growth growth
rate rate
beyond beyond
Goodwill initial Goodwill initial
at cash at cash
Cash-generating 3 1 July Discount flow 1 July Discount flow
unit 2 2011 rate projections 2010 rate projections
US$m % % US$m % %
Retail Banking
and Wealth
Management
- Europe
...............
...............
...............
.. 4,794 10.0 4.7 4,017 11.0 3.0
Commercial
Banking -
Europe
...............
.. 3,574 10.1 4.5 3,015 11.0 3.0
Global Private
Banking
- Europe
.............. 4,456 10.0 4.3 4,055 11.0 3.0
Global Banking
and Markets
- Europe ...... 3,139 10.2 4.4 2,983 12.0 3.0
Retail Banking
and Wealth
Management
- Latin America
...............
...............
...... 2,537 16.0 9.3 2,385 14.3 8.6
------------- -----------------
Total goodwill
in the
CGUs listed
above .... 18,500 16,455
------------- -----------------
At 1 July 2011, aggregate goodwill of US$5,091m (1 July 2010: US$4,674m) had been allocated to CGUs that were not considered individually significant. These CGUs do not carry on their balance sheets any significant intangible assets with indefinite useful lives, other than goodwill.
Nominal long-term growth rate: this growth rate reflects GDP and inflation for the countries within which the CGU operates. In 2010 these were based largely on external historical data. For 2011 the rates are based on IMF forecast growth rates as these rates are regarded as a more relevant estimate of likely future trends. The rates used for 2010 and 2011 do not exceed the long-term growth rate for the countries within which the CGU operates.
Discount rate: the discount rate used to discount the cash flows is based on the cost of capital assigned to each CGU, which is derived using a Capital Asset Pricing Model ('CAPM'). The CAPM depends on inputs reflecting a number of financial and economic variables including the risk-free rate and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market's assessment of the economic variables and management's judgement. In addition, for the purposes of testing goodwill for impairment, management supplements this process by comparing the discount rates derived using the internally generated CAPM with cost of capital rates produced by external sources. HSBC uses externally-sourced cost of capital rates where, in management's judgement, those rates reflect more accurately the current market and economic conditions. For 2011 and 2010, internal costs of capital rates were consistent with externally-sourced rates. The decrease in European discount rates was largely driven by deleveraging within the financial services sector including HSBC and a fall in the risk free rate.
Management's judgement in estimating the cash flows of a CGU: the cash flow projections for each CGU are based on plans approved by the Group Management Board. The key assumptions in addition to the discount rate and nominal long-term growth rate for each significant CGU are discussed below.
Retail Banking and Wealth Management - Europe and Commercial Banking - Europe: the assumptions included in the cash flow projections for Retail Banking and Wealth Management - Europe and Commercial Banking - Europe reflect the economic environment and financial outlook of the European countries within these two segments. Key assumptions include the level of interest rates and the level and change in unemployment rates. While current economic conditions in Europe continue to be challenging, management's cash flow projections are based primarily on these prevailing conditions. Risks include a double-dip recession in the UK and the continuation of base rates at their current low levels. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Retail Banking and Wealth Management - Europe or Commercial Banking - Europe.
Global Private Banking - Europe: the revenues in Global Private Banking - Europe are predominately generated through HSBC's client relationships. The cash flow forecast reflects current economic conditions and key assumptions include the level of interest rates and client risk appetite. Further economic deterioration could result in a decrease in assets under management and a reduction in fee and trading income through increased client risk aversion. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Global Private Banking - Europe.
Global Banking and Markets - Europe: the key assumption included in the cash flow projection for Global Banking and Markets - Europe is that European markets will stabilise and begin to recover in 2012. Accordingly, European revenues are forecast to recover partially in 2012 and this recovery is assumed to continue over the projection period such that in the period to 2014 overall revenue is forecast to grow at a compound annual rate of 14.5% to recover to a level broadly in line with 2010. Our ability to achieve the forecast cash flows for Global Banking and Markets - Europe could be adversely impacted by regulatory change during the forecast period including but not limited to the impact of the recommendations set out in the Final Report by the Independent Commission on Banking.
Based on management's value in use calculation, Global Banking and Markets - Europe has an excess of recoverable amount over carrying amount ('headroom') of US$3.6bn as at 1 July 2011. Headroom was US$4.9bn as at 31 December 2011 based on goodwill at that point of US$3.0bn. The change in carrying value between 1 July 2011 and 31 December 2011 arises from retranslating goodwill into the presentation currency of the Group. The same assumptions were used in the impairment tests as at 1 July 2011 and 31 December 2011. The following changes to the key assumptions used in the value in use calculation would be necessary in order to reduce headroom to nil:
Key assumption Change to key assumption
to reduce headroom to nil
Discount rate Increase by 140 basis points
........................................................................................
...
Nominal growth rate beyond initial Decrease by 160 basis points
cash flow projection .........................
Revenue compound annual growth rate Decrease from 14.5% to 12.4%
....................................................
Retail Banking and Wealth Management - Latin America: the assumptions included in the cash flow projections for Retail Banking and Wealth Management - Latin America reflect the economic environment and financial outlook of the countries within this segment, with Brazil and Mexico being two of the largest countries included within this segment. Key assumptions include the growth in lending and deposit volumes and the credit quality of the loan portfolios. Mexico and Central America in particular are sensitive to economic conditions in the US which could constrain demand. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Retail Banking and Wealth Management - Latin America.
Other intangible assets
Movement of intangible assets excluding goodwill and the PVIF
Customer/
Mortgage Internally merchant
Trade servicing generated Purchased relation-
names rights software software ships Other Total
US$m US$m US$m US$m US$m US$m US$m
Cost
At 1 January
2011
............
............
.. 68 636 5,202 1,065 1,987 503 9,461
Additions(1)
............
............
............
... - 40 1,129 102 379 6 1,656
Disposals
............
............
............
.... - (91) (44) (102) (181) (1) (419)
Amount
written off
............
............ - - (365) (133) - (2) (500)
Exchange
differences
............
.......... (6) - (109) (40) (79) (14) (248)
Reclassified
to held
for sale
............
. (2) - (197) (22) (746) (46) (1,013)
Other changes
............
............
......... - 6 (18) (14) (6) 8 (24)
---------------------- -------------------- --------------------- -------------------- -------------------- --------------------- -----------------------
At 31
December
2011
............
........ 60 591 5,598 856 1,354 454 8,913
---------------------- -------------------- --------------------- -------------------- -------------------- --------------------- -----------------------
Accumulated
amortisation
At 1 January
2011
............
............
.. (52) (240) (2,958) (848) (1,143) (144) (5,385)
Charge for
the year(2)
............
........... (4) (215) (609) (106) (212) (29) (1,175)
Impairment
............
............
............ - - (386) (3) - (1) (390)
Disposals
............
............
............
.... - 91 29 100 111 3 334
Amount
written off
............
............ - - 365 133 - 2 500
Exchange
differences
............
.......... 3 - 44 31 29 - 107
Reclassified
to held
for sale
............
. 2 - 50 18 563 36 669
Other changes
............
............
......... - (5) 28 3 3 2 31
--------------------- --------------------
At 31
December
2011
............
........ (51) (369) (3,437) (672) (649) (131) (5,309)
---------------------- -------------------- --------------------- -------------------- -------------------- --------------------- -----------------------
Net carrying
amount
at
31 December
2011
............
.......... 9 222 2,161 184 705 323 3,604
---------------------- -------------------- --------------------- -------------------- -------------------- --------------------- -----------------------
Cost
At 1 January
2010
............
............
.. 68 689 4,400 954 1,988 502 8,601
Additions(1)
............
............
............
... - 52 960 140 48 4 1,204
Disposals
............
............
............
.... - (105) (40) (15) (79) - (239)
Amount
written off
............
............ - - (70) (2) - - (72)
Exchange
differences
............
.......... - - (68) (4) 30 27 (15)
Other changes
............
............
......... - - 20 (8) - (30) (18)
---------------------- -------------------- --------------------- -------------------- -------------------- --------------------- -----------------------
At 31
December
2010
............
........ 68 636 5,202 1,065 1,987 503 9,461
---------------------- -------------------- --------------------- -------------------- -------------------- --------------------- -----------------------
Accumulated
amortisation
At 1 January
2010
............
............
.. (50) (240) (2,511) (747) (955) (125) (4,628)
Charge for
the year(2)
............
........... (5) (105) (596) (97) (243) (30) (1,076)
Impairment
............
............
............ - - (12) - - - (12)
Disposals
............
............
............
.... - 105 33 8 68 (1) 213
Amount
written off
............
............ - - 70 2 - - 72
Exchange
differences
............
.......... 1 - 48 1 (13) (1) 36
Other changes
............
............
......... 2 - 10 (15) - 13 10
--------------------- --------------------
At 31
December
2010
............
........ (52) (240) (2,958) (848) (1,143) (144) (5,385)
---------------------- -------------------- --------------------- -------------------- -------------------- --------------------- -----------------------
Net carrying
amount
at
31 December
2010
............
.......... 16 396 2,244 217 844 359 4,076
---------------------- -------------------- --------------------- -------------------- -------------------- --------------------- -----------------------
1 At 31 December 2011, HSBC had no contractual commitments (2010: US$0.2m) to acquire intangible assets.
2 The amortisation charge for the year is recognised within the income statement under 'Amortisation and impairment of intangible assets', with the exception of the amortisation of mortgage servicing rights which is recognised in 'Net fee income'.
This information is provided by RNS
The company news service from the London Stock Exchange
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