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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Hsbc Holdings Plc | LSE:HSBA | London | Ordinary Share | GB0005405286 | ORD $0.50 (UK REG) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 1.70 | 0.26% | 663.60 | 663.70 | 663.80 | 665.80 | 661.10 | 663.10 | 15,524,054 | 16:35:22 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Offices-bank Holding Company | 65.91B | 23.53B | 1.2338 | 22.65 | 533.13B |
TIDMHSBA
RNS Number : 5083U
HSBC Holdings PLC
01 August 2022
Hot Features
Premium
Risk
Page
Key developments in the first
half of 2022 64
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Areas of special interest 64
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Credit risk 68
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Treasury risk 95
----------------------------------- ----
Market risk 106
----------------------------------- ----
Insurance manufacturing operations
risk 110
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We recognise that the primary role of risk management is to protect our customers, business, colleagues, shareholders and the communities that we serve, while ensuring we are able to support our strategy and provide sustainable growth.
The implementation of our business strategy, which includes our business transformation plans, remains a key focus. As we implement change initiatives, we actively manage the execution risks. We also perform periodic risk assessments, including against strategies, to help ensure retention of key personnel for our continued safe operation.
We aim to use a comprehensive risk management approach across the organisation and across all risk types, underpinned by our culture and values. This is outlined in our risk management framework, including the key principles and practices that we employ in managing material risks, both financial and non-financial. The framework fosters continual monitoring, promotes risk awareness and encourages sound operational and strategic decision making. It also supports a consistent approach to identifying, assessing, managing and reporting the risks we accept and incur in our activities. We continue to actively review and develop our risk management framework and enhance our approach to managing risk.
All our people are responsible for the management of risk, with the ultimate accountability residing with the Board. Our Group Risk and Compliance function, led by the Group Chief Risk and Compliance Officer, plays an important role in reinforcing our culture and values. We are focused on creating an environment that encourages our people to speak up and do the right thing.
Group Risk and Compliance is independent from the global businesses, including our sales and trading functions, to provide challenge, oversight and appropriate balance in risk/reward decisions.
A summary of our current policies and practices regarding the management of risk is set out in the 'Risk management' section on pages 121 to 124 of the Annual Report and Accounts 2021.
Key developments in the first half of 2022
We actively managed the risks related to the Russia-Ukraine war and broader macroeconomic and geopolitical uncertainties, as well as the continued risks resulting from the Covid-19 pandemic and other key risks described in this section. In addition, we enhanced our risk management in the following areas:
-- We have continued to improve our risk governance decision making, particularly with regard to the governance of treasury risk to ensure senior executives have appropriate oversight and visibility of macroeconomic trends around inflation and interest rates.
-- We continued to develop our approach to emerging risk identification and management, including the use of forward-looking indicators to support our analysis.
-- We enhanced our enterprise risk reporting processes to place a greater focus on our emerging risks, including by capturing the materiality, oversight and individual monitoring of these risks.
-- We have further strengthened our third-party risk policy and processes to improve control and oversight of our material third parties that are key to maintaining our operational resilience, and to meet new and evolving regulatory requirements.
-- We made progress with our comprehensive regulatory reporting programme to strengthen our global processes, improve consistency, and enhance controls.
-- We enhanced, and continued to embed, the governance and oversight around model adjustments and related processes for IFRS 9 models and Sarbanes-Oxley controls.
-- Our climate risk programme continues to shape our approach to climate risk across four key pillars: governance and risk appetite; risk management; stress testing; and disclosures.
-- We continued to improve the effectiveness of our financial crime controls, deploying advanced analytics capabilities into new markets. We are refreshing our financial crime policies, ensuring they remain up-to-date and address changing and emerging risks. We continue to monitor regulatory changes.
Areas of special interest
During the first half of 2022, a number of areas were considered as part of our top and emerging risks because of the effect they have on the Group. In this section we have focused on risks related to geopolitical and macroeconomic risk, Covid-19, climate risk and the interbank offered rate ('Ibor') transition.
Geopolitical and macroeconomic risk
The Russia-Ukraine war has had far-reaching geopolitical and economic implications. HSBC is monitoring the direct and indirect impacts of the war, and continues to respond to the extensive sanctions and trade restrictions that have been imposed, noting the challenges that arise in implementing the complex, novel and ambiguous aspects of certain of these sanctions. Numerous sanctions have been imposed against the Russian government and its officials, alongside individuals with close ties to the Russian government and a number of Russian financial institutions and companies. Russia has implemented certain countermeasures in response.
Our business in Russia principally serves multinational corporate clients headquartered in other countries and is not accepting new business or customers, and is consequently on a declining trend. Following a strategic review, HSBC Europe BV (a wholly-owned subsidiary of HSBC Bank plc) has entered into an agreement to sell its wholly-owned subsidiary HSBC Bank (RR) (Limited Liability Company), subject to regulatory approvals.
Global commodity markets have been significantly impacted by the Russia-Ukraine war and the Covid-19 pandemic, leading to sustained supply chain disruptions. This has resulted in product shortages appearing across several regions, and increased prices for both energy and non-energy commodities, such as food. We do not expect these to ease significantly at least until the end of 2022. In turn, this has had a significant impact on global inflation.
Rising global inflation is also prompting central banks to tighten monetary policy. The US Federal Reserve Board ('FRB') delivered a 75bps increase in the Federal Funds rate in June 2022, and a further 75bps increase in July, with several more rate rises expected in the second half of 2022 and into 2023. Financial markets currently expect the FRB to raise the Federal Funds rate above 3% by the end of 2022, although the pace of rate increases could decline if there is a sustained economic slowdown. The European Central Bank lagged the FRB but has started raising its benchmark rates, with a 0.5% increase in July 2022. Further incremental increases are now anticipated in light of inflation forecasts. Uncertainty over the economic outlook could nevertheless slow the pace of tightening, and keep fiscal policies broadly accommodative for some time. We continue to monitor our risk profile closely in the context of uncertainty over monetary policy.
Global tensions over trade, technology and ideology are manifesting themselves in divergent regulatory standards and compliance regimes, presenting long-term strategic challenges for multinational businesses.
The US-China relationship remains complex, with tensions over a number of critical issues. The US has recently articulated its approach to perceived strategic competition with China based on an intent to 'invest, align and compete'. The US, the UK, the EU, Canada and other countries have imposed various sanctions and trade restrictions on Chinese persons and companies. These include the freezing of assets of government officials, and the implementation of investment and import/export restrictions targeting certain Chinese companies.
There is a continued risk of additional sanctions being imposed by the US and other governments in relation to human rights and other issues with China, and this could create a more complex operating environment for the Group and its customers.
China has in turn announced a number of its own sanctions and trade restrictions that target, or provide authority to target, foreign individuals and companies. It has also promulgated laws that provide a legal framework for imposing further sanctions and export restrictions.
These and any future measures and countermeasures that may be taken by the US, China and other countries may affect the Group, its customers and the markets in which the Group operates.
As the geopolitical landscape evolves, compliance by multinational corporations with their legal or regulatory obligations in one jurisdiction may be seen as supporting the law or policy objectives of that jurisdiction over another, creating additional compliance, reputational and political risks for the Group. We maintain dialogue with our regulators in various jurisdictions on the impact of legal and regulatory obligations on our business and customers.
The impact of the Covid-19 pandemic and second order impacts from other geopolitical events remain uncertain and may lead to significant credit losses on specific exposures, which may not be fully captured in ECL estimates. To help mitigate this risk, model outputs and management adjustments are closely monitored and independently reviewed at the Group and country level for reliability and appropriateness. For further details on model risk, see page 209 of the Annual Report and Accounts 2021.
Political disagreements between the UK and the EU, notably over the future operation of the Northern Ireland Protocol, has stalled the creation of a framework for voluntary regulatory cooperation in financial services following the UK's withdrawal from the EU. While negotiations are continuing, it is unclear whether or when an agreement over the Northern Ireland Protocol will be reached, particularly as the UK government is currently in a period of political uncertainty amid a leadership election to replace Boris Johnson as prime minister.
In June 2022, the UK government published proposed legislation that seeks to amend the Protocol in a number of respects. The terms of such proposal may be subject to legal challenge by the EU, and any such dispute, together with any action that the EU may take in response, could further complicate the terms of trade between the UK and the EU and potentially prevent progress in other areas such as financial services. We are monitoring the situation closely, including the potential impacts on our customers.
Our global presence and diversified customer base should help mitigate the direct impacts on our financial position of the absence of a comprehensive EU-UK agreement on financial services. Our wholesale and markets footprint in the EU provides a strong foundation for us to build upon. Over the medium to long term, the UK's withdrawal from the EU may impact markets and increase economic risk, particularly in the UK, which could adversely impact our profitability and prospects for growth in this market.
Expanding data privacy, national security and cybersecurity laws in a number of markets could pose potential challenges to intra-group data sharing. These developments could increase financial institutions' compliance burdens in respect of cross-border transfers of personal information, and degrade our enterprise-wide financial crime risk management capabilities.
Risks related to Covid-19
Despite the successful roll-out of vaccines around the world, the Covid-19 pandemic and its effect on the global economy have continued to impact our customers and organisation. The emergence of new variants and sub-variants pose a continuing risk. The global vaccination roll-out has helped reduce the social and economic impact of the Covid-19 pandemic, although there continues to be divergence in the speed at which vaccines have been deployed. Countries continue to differ in their approach to restrictions on activity and travel, and if these differences persist, this could prolong or worsen supply chain and international travel disruptions. Most notably, China's government-imposed lockdown restrictions in major cities, which were only eased recently, have impacted China's economy, Asian tourism and global supply chains.
Central banks in major markets - with the exception of mainland China - are raising interest rates, with the speed of such tightening varying across jurisdictions based on specific macroeconomic conditions. Policy tightening in several major emerging markets is also underway in order to counteract rising inflation and the risk of capital outflows. Governments are also expected to make fiscal support more targeted as the appetite for broad lockdowns and public health restrictions decreases. Government debt has risen in most advanced economies, and is expected to remain high into the medium term. High government debt burdens have raised fiscal vulnerabilities, increasing the sensitivity of debt service costs to interest rate increases, and potentially reducing the fiscal space available to address future economic downturns.
Our Central scenario used to calculate credit impairment assumes that economic growth continues in the second half of 2022, with GDP in our key markets surpassing pre-pandemic levels. It is assumed that private sector growth accelerates as pandemic-related fiscal support is withdrawn. However, there is a high degree of uncertainty associated with economic forecasts in the current environment and there are significant risks to our Central scenario. The degree of uncertainty varies by market, depending on exposure to commodity price increases, supply chain constraints, the monetary policy response to inflation and the public health policy response to the Covid-19 pandemic. As a result, our Central scenario for impairment has not been assigned an equal likelihood of occurrence across our key markets.
We continue to monitor the situation closely, and given the significant uncertainties related to the post-pandemic landscape, additional mitigating actions may be required.
For further details of our Central and other scenarios, see 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 67.
Climate risk
The pace of regulatory developments focusing on climate risk management, disclosures, and stress testing and scenario analysis continued to increase in 2022. The Russia-Ukraine war has impacted global commodity markets, with short-term supply concerns driving changes in energy policy in Europe. While these policy changes may affect the near-term climate transition path for HSBC and our customers, we remain committed to our climate ambition to align our own operations and supply chain to net zero by 2030, and the financed emissions from our portfolio of customers to net zero by 2050. As announced in March 2022, we intend to publish a climate transition plan in 2023, and have committed to a science-aligned phase-down of fossil fuel finance, and a review of our wider financing and investment policies critical to achieving net zero by 2050.
Our most material risks in terms of managing climate risk relate to corporate and retail client financing within our banking portfolio, but there are also significant responsibilities in relation to asset ownership by our insurance business and employee pension plans, as well as from the activities of our asset management business. We continue to monitor the impacts of climate risk, and further embed our approach across our key risk areas, priority regions and businesses.
We have refreshed our credit risk policy to further embed climate risk considerations into our corporate credit decisions for new money requests. We also delivered training to select colleagues in the Risk function to raise awareness of the likely impacts that climate risk could have on certain high transition risk sectors, as well as associated credit risk considerations. We continue to develop guidance for our other higher transition risk sectors. To help with risk assessment, our developing client transition and physical risk questionnaire is currently live for select customers in 10 sectors and 31 countries and territories to improve our understanding of transition risk and physical risk exposure.
We are also focused on embedding climate considerations into retail credit risk management processes and are implementing metrics to support monitoring of exposure to properties with heightened physical risk exposure within our mortgage portfolios.
We are considering transition risk by assessing the potential risk to the UK, which is our largest mortgage market, using current and potential energy efficiency ratings for individual properties, sourced from property energy performance certificate ('EPC') data. The UK government has set out policies and proposals that aim to deliver increased economic growth and decreased emissions in its 'Clean growth strategy', including a stated ambition to improve the EPC ratings of housing stock. In line with this, we are working towards improving the proportion of properties within our UK residential mortgage portfolio with an EPC rating of C or above, and on improving the EPC data coverage. We have approximately 54% of properties in our UK portfolio with a valid EPC certificate dated within the last 10 years, as at May 2022.
In addition to financial risks arising in our corporate and retail banking portfolio, we could also face increased reputational, legal and regulatory risks as we make progress towards our net zero ambition, as stakeholders are likely to place a greater focus on our actions, investment decisions and disclosures related to this ambition. We will also face these same risks if we are perceived to mislead stakeholders regarding our climate strategy, the climate impact of a product or service, or regarding the commitments of our customers. We have published internal guidance and established an advisory group to raise awareness and provide advice on these risks to existing governance forums.
We continued to develop our climate stress testing and scenario capabilities, including model development, and delivered regulatory climate stress tests. These are being used to further improve our understanding of our risk exposures for use in risk management and business decision making.
While climate risk reporting - and in particular reporting on financed emissions - has improved over time, we continue to focus on data quality and consistency with the development of our risk appetite and metrics.
Methodologies we have used may develop over time in line with market practice and regulations, as well as owing to developments in climate science. Any developments in data and methodologies could result in revisions to reported data going forward, including on financed emissions, meaning that reported figures may not be reconcilable or comparable year-on-year. We may also have to reevaluate our progress towards our climate-related targets in future and this could result in reputational, legal and regulatory risks.
Ibor transition
The publication of sterling, Swiss franc, euro and Japanese yen Libor interest rate benchmarks, as well as Euro Overnight Index Average ('Eonia'), ceased from the end of 2021. Our interbank offered rate ('Ibor') transition programme - which is tasked with the development of new near risk-free rate ('RFR') products and the transition of legacy Ibor products - has continued to support the transition of a limited number of remaining contracts in these benchmarks to RFRs, or alternative reference rates.
During the first half of 2022, we continued to develop processes, technology and RFR product capabilities throughout our Group, particularly in entities that have US dollar Libor contracts that require transition. We also implemented controls and associated monitoring to help ensure we do not undertake any new US dollar Libor contracts, outside of agreed upon exemptions, to control the related risks. We have begun to engage with our clients to support them through the transition of their US dollar Libor and other demising Ibor contracts, with progress being made on the transition of trade, hedging and uncommitted lending facilities. We continue to actively engage in market and industry discussions around the transition of the remaining demising Ibors, including ceasing the use of 'synthetic' sterling and Japanese yen Libor.
While we have fewer than 50 lending and derivatives contracts remaining in Ibors that demised from the end of 2021, we continue to engage with our clients and industry bodies to help ensure that contracts can be transitioned with fair client outcomes.
For the Group's own debt securities issuances, in 2021 HSBC launched a consent solicitation to remediate Ibor references in five of its English law-governed regulatory capital and MREL sterling and Singapore dollar instruments. The proposed amendments were successfully adopted on all of the sterling instruments, but were not adopted with respect to the Singapore dollar instruments, as the minimum quorum requirements were not met. One of these instruments has since been redeemed. The terms of the remaining instrument provide for an Ibor benchmark being used to reset the coupon rate if HSBC chooses not to redeem it on the call date. We remain mindful of the various factors that impact on the Ibor remediation strategy for our regulatory capital and MREL instruments, including - but not limited to - timescales for cessation of relevant Ibor rates, constraints relating to the governing law of outstanding instruments, the potential relevance of legislative solutions and industry best practice guidance. We remain committed in seeking to remediate or mitigate relevant risks relating to Ibor benchmark demise, as appropriate, on our outstanding regulatory capital and MREL instruments before the relevant calculation dates, which may occur post-cessation of the relevant Ibor rate or rates.
For US dollar Libor and other demising Ibors, we continue to be exposed to, and actively monitor, risks including:
-- Regulatory compliance and conduct risks: The transition of legacy contracts to RFRs or alternative rates, or sales of products referencing RFRs, may not deliver fair client outcomes.
-- Resilience and operational risks: Changes to manual and automated processes, made in support of new RFR methodologies, and the transition of large volumes of Ibor contracts may lead to operational issues.
-- Legal risk: Issues arising from the use of legislative solutions and from legacy contracts that the Group is unable to transition may result in unintended or unfavourable outcomes for clients and market participants. This could potentially increase the risk of disputes.
-- Model risk: As a result of changes to our models, to replace Ibor-related data, there is a risk that the accuracy of model output is adversely affected.
-- Market risk: As a result of differences in Libor and RFR interest rates, we are exposed to basis risk resulting from the asymmetric adoption of rates across assets, liabilities and products.
Based on our experience in transitioning contracts referencing Ibors that demised from the end of 2021, and an assessment of the risks that relate to the transition of US dollar Libor contracts, we do not believe that our risk position has materially changed during the first half of 2022. Increased market and industry use of alternative rates, including the Secured Overnight Funding Rate ('SOFR'), have further reduced potential risks related to the transition away from US dollar Libor. We will continue to monitor market initiatives, and have developed controls and plans to help mitigate these risks. We will monitor these risks through the development of our product capabilities and the transition of legacy contracts, with a focus on fair client outcomes.
Throughout the remainder of 2022, and into 2023, we are committed to engaging with our clients and investors to complete an orderly transition of contracts that reference the remaining demising Ibors.
Additionally, following the recent announcement relating to the cessation of the Canadian dollar offered rate ('CDOR') after June 2024, we are assessing the impacts and will take appropriate actions to effect the transition.
Financial instruments impacted by Ibor reform
Financial instruments yet
to transition to alternative
benchmarks, by main benchmark
-----------------------------------------------------------------------------------------------------------
USD Libor GBP Libor JPY Libor Others(1)
At 30 Jun 2022 $m $m $m $m
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Non-derivative
financial
assets
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Loans and
advances to
customers 61,768 208 7 6,780
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Other financial
assets 4,131 201 - 1,012
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Total
non-derivative
financial
assets(2) 65,899 409 7 7,792
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Non-derivative
financial
liabilities
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Financial
liabilities
designated at
fair
value 18,272 1,957 1,165 -
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Debt securities
in issue 5,254 - - 185
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Other financial 3,001 - - -
liabilities
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Total
non-derivative
financial
liabilities 26,527 1,957 1,165 185
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Derivative
notional
contract amount
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Foreign
exchange 145,857 1,488 48 7,707
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Interest rate 2,336,091 2,736 233 171,082
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Others - - - -
--------------- ------------------------- ------------------------- -------------------------- -------------------------
Total
derivative
notional
contract
amount 2,481,948 4,224 281 178,789
--------------- ------------------------- ------------------------- -------------------------- -------------------------
At 31 Dec 2021
--------------- ------------------------- ------------------------- ------------------------- ---------------------------
Non-derivative
financial
assets
--------------- ------------------------- ------------------------- ------------------------- ---------------------------
Loans and
advances to
customers 70,932 18,307 370 8,259
--------------- ------------------------- ------------------------- ------------------------- ---------------------------
Other financial
assets 5,131 1,098 - 2
--------------- ------------------------- ------------------------- ------------------------- ---------------------------
Total
non-derivative
financial
assets(2) 76,063 19,405 370 8,261
--------------- ------------------------- ------------------------- ------------------------- --------------------------- Non-derivative financial liabilities --------------- ------------------------- ------------------------- ------------------------- --------------------------- Financial liabilities designated at fair value 20,219 4,019 1,399 1 --------------- ------------------------- ------------------------- ------------------------- --------------------------- Debt securities 5,255 - - - in issue --------------- ------------------------- ------------------------- ------------------------- --------------------------- Other financial liabilities 2,998 78 - - --------------- ------------------------- ------------------------- ------------------------- --------------------------- Total non-derivative financial liabilities 28,472 4,097 1,399 1 --------------- ------------------------- ------------------------- ------------------------- --------------------------- Derivative notional contract amount --------------- ------------------------- ------------------------- ------------------------- --------------------------- Foreign exchange 137,188 5,157 31,470 9,652 --------------- ------------------------- ------------------------- ------------------------- --------------------------- Interest rate 2,318,613 284,898 72,229 133,667 --------------- ------------------------- ------------------------- ------------------------- --------------------------- Others - - - - --------------- ------------------------- ------------------------- ------------------------- --------------------------- Total derivative notional contract amount 2,455,801 290,055 103,699 143,319 --------------- ------------------------- ------------------------- ------------------------- ---------------------------
1 Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (euro Libor, Swiss franc Libor, Eonia, SOR, THBFIX and Sibor). In May 2022, Refinitiv Benchmark Services Limited announced the cessation of the Canadian dollar offered rate ('CDOR'), with the eventual transition to Canadian Overnight Repo Rate Average ('CORRA'). Therefore, CDOR is also included in Others during the current period.
2 Gross carrying amount excluding allowances for expected credit losses.
The amounts in the above table relate to HSBC's main operating entities where HSBC has material exposures impacted by Ibor reform, including in the UK, Hong Kong, France, the US, Mexico, Canada, Singapore, the UAE, Bermuda, Australia, Qatar, Germany, Japan and Thailand. The amounts provide an indication of the extent of the Group's exposure to the Ibor benchmarks that are due to be replaced. Amounts are in respect of financial instruments that:
--
contractually reference an interest rate benchmark that is planned to transition to an alternative benchmark;
-- have a contractual maturity date beyond the date by which the reference interest rate benchmark is expected to cease; and
-- are recognised on HSBC's consolidated balance sheet.
--
Credit risk
Page
Overview 63
Credit risk in the first half
of 2022 63
---------------------------------------- ----
Summary of credit risk 63
---------------------------------------- ----
Stage 2 decomposition at 30 June
2022 66
---------------------------------------- ----
Measurement uncertainty and sensitivity
analysis of ECL estimates 67
---------------------------------------- ----
Reconciliation of changes in
gross carrying/nominal amount
and allowances for loans and
advances to banks and customers 75
---------------------------------------- ----
Credit quality of financial instruments 77
Personal lending 79
---------------------------------------- ----
Wholesale lending 81
---------------------------------------- ----
Supplementary information 85
---------------------------------------- ----
Overview
Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. Credit risk arises principally from direct lending, trade finance and leasing business, but also from certain other products, such as guarantees and derivatives.
Credit risk in the first half of 2022
There were no material changes to credit risk policy in the first half of 2022.
During 1H22, we adopted the EBA 'Guidelines on the application of definition of default' for our retail portfolios. This did not have a material impact on our retail portfolios. This was undertaken for our wholesale lending portfolios during 2021.
A summary of our current policies and practices for the management of credit risk is set out in 'Credit risk management' on page 137 of the Annual Report and Accounts 2021.
At 30 June 2022, gross loans and advances to customers and banks of $1,136bn decreased by $4.8bn, compared with 31 December 2021. This included adverse foreign exchange movements of $54.7bn.
Excluding foreign exchange movements, the growth was driven by a $22.3bn increase in wholesale loans and advances to customers, a $16.8bn increase in loans and advances to banks and a $10.8bn increase in personal loans and advances to customers.
The increase in wholesale loans and advances to customers was driven mainly in the US (up $4.4bn), the UK (up $3.6bn), Canada (up $3.5bn), India (up $2.3bn), Japan (up $1.8bn), mainland China (up $1.4bn) and UAE (up $1.1bn).
The increase in personal loans and advances to customers was driven largely by mortgage growth of $9.9bn, mainly in the UK (up $5.5bn), Australia (up $2.1bn) and Hong Kong (up $1.5bn).
In addition, other personal lending increased by $0.9bn, compared with 31 December 2021. The increase was largely driven by secured personal lending of $1.5bn, mainly in Hong Kong, and guaranteed loans in respect of residential property of $0.3bn, mainly in France. This was partly offset by a $0.8bn decline in unsecured personal lending, mainly in Hong Kong.
At 30 June 2022, the allowance for ECL of $11.6bn decreased by $0.6bn, compared with 31 December 2021, including favourable foreign exchange movements of $0.6bn. The $11.6bn allowance comprised $11.1bn in respect of assets held at amortised cost, $0.4bn in respect of loan commitments and financial guarantees, and $0.1bn in respect of debt instruments measured at fair value through other comprehensive income ('FVOCI').
Excluding foreign exchange movements, the allowance for ECL in relation to loans and advances to customers decreased by $0.1bn from 31 December 2021. This was attributable to:
-- a $0.1bn decrease in wholesale loans and advances to customers, which included a $0.4bn decrease driven by stages 1 and 2, offset by a $0.3bn increase driven by stage 3 net of write-offs and purchased or originated credit impaired ('POCI'); and
-- broadly unchanged allowances for ECL in personal loans and advances to customer, where a $0.2bn decrease driven by stage 3 was offset by a $0.2bn increase in stages 1 and 2.
The ECL charge for the first six months of 2022 was $1.1bn, inclusive of recoveries. This was driven by higher stage 3 charges, heightened economic uncertainty and inflationary pressures, partly offset by a release in Covid-19-related allowances.
The ECL charge comprised: $0.6bn in respect of personal lending, of which the stage 3 charge was $0.3bn; and $0.5bn in respect of wholesale lending, of which the stage 3 and POCI charge was $0.5bn.
At 30 June 2022, net credit exposures mostly related to wholesale loans booked in Russia of $1.2bn ($1.3bn gross carrying amounts and $0.1bn allowance for ECL) were reclassified to assets held for sale as we have entered into an agreement to sell HSBC Bank (RR) (Limited Liability Company), subject to regulatory approvals.
Summary of credit risk
The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in IFRS 9 are applied and the associated allowance for ECL.
The following tables analyse loans by industry sector and represent the concentration of exposures on which credit risk is managed. The allowance for ECL decreased from $12.2bn at 31 December 2021 to $11.6bn at 30 June 2022.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied
At 30 Jun 2022 At 31 Dec 2021
------------------------------------------------------------- ---------------------------------------------------------------
Gross
carrying/ Allowance Gross carrying/ Allowance
nominal for nominal for
amount ECL(1) amount ECL(1)
$m $m $m $m
--------------- -------------------------- --------------------------------- ---------------------------- ---------------------------------
Loans and
advances to
customers at
amortised
cost 1,039,130 (10,774) 1,057,231 (11,417)
--------------- -------------------------- --------------------------------- ---------------------------- ---------------------------------
- personal 463,621 (2,918) 478,337 (3,103)
---------------
- corporate and
commercial 509,566 (7,684) 513,539 (8,204)
---------------
- non-bank
financial
institutions 65,943 (172) 65,355 (110)
--------------- -------------------------- --------------------------------- ----------------------------
Loans and
advances to
banks at
amortised
cost 96,481 (52) 83,153 (17)
--------------- -------------------------- --------------------------------- ---------------------------- ---------------------------------
Other financial
assets
measured at
amortised
cost 950,007 (281) 880,351 (193)
--------------- -------------------------- --------------------------------- ---------------------------- ---------------------------------
- cash and
balances at
central banks 363,613 (5) 403,022 (4)
---------------
- items in the
course of
collection
from other
banks 8,073 - 4,136 -
---------------
- Hong Kong
Government
certificates
of
indebtedness 43,866 - 42,578 -
---------------
- reverse
repurchase
agreements -
non-trading 244,451 - 241,648 -
---------------
- financial
investments 154,294 (75) 97,364 (62)
---------------
- prepayments,
accrued income
and other
assets(2) 135,710 (201) 91,603 (127)
--------------- -------------------------- --------------------------------- ----------------------------
Total gross
carrying
amount
on-balance
sheet 2,085,618 (11,107) 2,020,735 (11,627)
--------------- -------------------------- --------------------------------- ---------------------------- ---------------------------------
Loans and other
credit-related
commitments 633,091 (337) 627,637 (379)
--------------- -------------------------- --------------------------------- ---------------------------- ---------------------------------
- personal 237,077 (30) 239,685 (39)
---------------
- corporate and
commercial 263,452 (291) 283,625 (325)
---------------
- financial 132,562 (16) 104,327 (15)
--------------- -------------------------- --------------------------------- ----------------------------
Financial
guarantees 17,586 (42) 27,795 (62)
--------------- -------------------------- --------------------------------- ---------------------------- ---------------------------------
- personal 1,120 - 1,130 -
---------------
- corporate and
commercial 12,393 (41) 22,355 (58)
---------------
- financial 4,073 (1) 4,310 (4)
--------------- -------------------------- --------------------------------- ----------------------------
Total nominal
amount
off-balance
sheet(3) 650,677 (379) 655,432 (441)
--------------- -------------------------- --------------------------------- ---------------------------- ---------------------------------
2,736,295 (11,486) 2,676,167 (12,068)
--------------- -------------------------- --------------------------------- ---------------------------- ---------------------------------
Memorandum Memorandum
allowance allowance
Fair for Fair for
value ECL(4) value ECL(4)
$m $m $m $m
Debt
instruments
measured at
fair value
through other
comprehensive
income
('FVOCI') 274,765 (120) 347,203 (96)
--------------- -------------------------- --------------------------------- ---------------------------- ---------------------------------
1 Total ECL is recognised in the loss allowance for the financial asset unless total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.
2 Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets', as presented within the consolidated balance sheet on page 106, includes both financial and non-financial assets. The 30 June 2022 balances include $1,918m gross carrying amounts (31 December 2021: $2,424m) and $133m allowances for ECL (31 December 2021: $39m) related to assets held for sale under business disposals as disclosed in Note 15 'Business acquisitions and disposals' on page 129.
3 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
4 Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is recognised in 'Change for expected credit losses and other credit impairment charges' in the income statement.
The following table provides an overview of the Group's credit risk by stage and industry, and the associated ECL coverage. The financial assets recorded in each stage have the following characteristics:
-- Stage 1: These financial assets are unimpaired and without a significant increase in credit risk for which a 12-month allowance for ECL is recognised.
-- Stage 2: A significant increase in credit risk has been experienced on these financial assets since initial recognition for which a lifetime ECL is recognised.
-- Stage 3: There is objective evidence of impairment and the financial assets are therefore considered to be in default or otherwise credit impaired for which a lifetime ECL is recognised.
-- POCI: Financial assets that are purchased or originated at a deep discount are seen to reflect the incurred credit losses on which a lifetime ECL is recognised.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
30 June 2022
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(1)
------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ -----------------------------------------------------------------------
Stage Stage Stage Stage Stage Stage POCI(2) Stage Stage Stage
1 2 3 POCI(2) Total 1 2 3 Total 1 2 3 POCI(2) Total
$m $m $m $m $m $m $m $m $m $m % % % % %
-------------------------------------- -------------------------------- -------------------------- -------------- -------- --------------- -------------- -------------- ------------- ---------- ------------------------------- ----------- ----------- --------------- --------------- -----------
Loans and
advances
to customers
at amortised
cost 891,822 128,105 19,086 117 1,039,130 (1,116) (2,998) (6,617) (43) (10,774) 0.1 2.3 34.7 36.8 1.0
-------------------------------------- -------------------------------- -------------------------- -------------- -------- --------------- -------------- -------------- ------------- ---------- ------------------------------- ----------- ----------- --------------- --------------- -----------
- personal 431,517 28,086 4,018 - 463,621 (554) (1,434) (930) - (2,918) 0.1 5.1 23.1 - 0.6
-------------------------------------- ----------- ----------- --------------- --------------- -----------
* corporate and commercial 399,152 95,590 14,707 117 509,566 (523) (1,525) (5,593) (43) (7,684) 0.1 1.6 38.0 36.8 1.5
-------------------------------------- ----------- ----------- --------------- --------------- -----------
* non-bank financial institutions 61,153 4,429 361 - 65,943 (39) (39) (94) - (172) 0.1 0.9 26.0 - 0.3
-------------------------------------- -------------------------------- -------------------------- -------------- -------- --------------- -------------- -------------- ------------- ---------- ------------------------------- ----------- ----------- --------------- --------------- -----------
Loans and
advances
to banks
at amortised
cost 95,091 1,311 79 - 96,481 (8) (25) (19) - (52) - 1.9 24.1 - 0.1
-------------------------------------- -------------------------------- -------------------------- -------------- -------- --------------- -------------- -------------- ------------- ---------- ------------------------------- ----------- ----------- --------------- --------------- -----------
Other financial
assets
measured
at amortised
cost 944,983 4,715 264 45 950,007 (71) (119) (85) (6) (281) - 2.5 32.2 13.3 -
-------------------------------------- -------------------------------- -------------------------- -------------- -------- --------------- -------------- -------------- ------------- ---------- ------------------------------- ----------- ----------- --------------- --------------- -----------
Loans and
other credit-related
commitments 608,589 23,487 1,015 - 633,091 (124) (159) (54) - (337) - 0.7 5.3 - 0.1
-------------------------------------- -------------------------------- -------------------------- -------------- -------- --------------- -------------- -------------- ------------- ---------- ------------------------------- ----------- ----------- --------------- --------------- -----------
- personal 235,413 1,504 160 - 237,077 (29) (1) - - (30) - 0.1 - - -
-------------------------------------- ----------- ----------- --------------- --------------- -----------
* corporate and commercial 242,263 20,337 852 - 263,452 (90) (147) (54) - (291) - 0.7 6.3 - 0.1
-------------------------------------- ----------- ----------- --------------- --------------- -----------
- financial 130,913 1,646 3 - 132,562 (5) (11) - - (16) - 0.7 - - -
-------------------------------------- -------------------------------- -------------------------- -------------- -------- --------------- -------------- -------------- ------------- ---------- ------------------------------- ----------- ----------- --------------- --------------- -----------
Financial
guarantees 15,198 2,208 180 - 17,586 (6) (19) (17) - (42) - 0.9 9.4 - 0.2
-------------------------------------- -------------------------------- -------------------------- -------------- -------- --------------- -------------- -------------- ------------- ---------- ------------------------------- ----------- ----------- --------------- --------------- -----------
- personal 1,108 11 1 - 1,120 - - - - - - - - - -
-------------------------------------- ----------- ----------- --------------- --------------- -----------
* corporate and commercial 10,521 1,696 176 - 12,393 (6) (18) (17) - (41) 0.1 1.1 9.7 - 0.3
-------------------------------------- ----------- ----------- --------------- --------------- ----------- - financial 3,569 501 3 - 4,073 - (1) - - (1) - 0.2 - - - -------------------------------------- -------------------------------- -------------------------- -------------- -------- --------------- -------------- -------------- ------------- ---------- ------------------------------- ----------- ----------- --------------- --------------- ----------- At 30 Jun 2022 2,555,683 159,826 20,624 162 2,736,295 (1,325) (3,320) (6,792) (49) (11,486) 0.1 2.1 32.9 30.2 0.4 -------------------------------------- -------------------------------- -------------------------- -------------- -------- --------------- -------------- -------------- ------------- ---------- ------------------------------- ----------- ----------- --------------- --------------- -----------
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2 Purchased or originated credit-impaired ('POCI').
Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days past due ('DPD') and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of
stage 2 financial assets by those less than 30 and greater than 30 DPD and therefore presents those financial assets classified as stage 2 due to ageing (30 DPD) and those identified at an earlier stage (less than 30 DPD).
Stage 2 days past due analysis at 30 June 2022
Gross carrying/nominal
amount Allowance for ECL ECL coverage %
1 30 1 30 1 30
to and to and to and
Stage 29 > Stage 29 > Stage 29 >
2 Up-to-date DPD(1,2) DPD(1,2) 2 Up-to-date DPD(1,2) DPD(1,2) 2 Up-to-date DPD(1,2) DPD(1,2)
$m $m $m $m $m $m $m $m % % % %
------------- -------------------------- -------------------------- ---------------- ---------------- --------------- -------------- -------------- ---------------- ----------- ----------- --------------- ---------------
Loans and
advances
to customers
at
amortised
cost 128,105 123,235 2,644 2,226 (2,998) (2,587) (214) (197) 2.3 2.1 8.1 8.8
------------- -------------------------- -------------------------- ---------------- ---------------- --------------- -------------- -------------- ---------------- ----------- ----------- --------------- ---------------
- personal 28,086 25,756 1,548 782 (1,434) (1,093) (174) (167) 5.1 4.2 11.2 21.4
------------- ----------- ----------- --------------- ---------------
- corporate
and
commercial 95,590 93,503 1,075 1,012 (1,525) (1,456) (40) (29) 1.6 1.6 3.7 2.9
------------- ----------- ----------- --------------- ---------------
- non-bank
financial
institutions 4,429 3,976 21 432 (39) (38) - (1) 0.9 1.0 - 0.2
------------- -------------------------- -------------------------- ---------------- ---------------- --------------- -------------- -------------- ---------------- ----------- ----------- --------------- ---------------
Loans and
advances
to banks at
amortised
cost 1,311 1,303 - 8 (25) (25) - - 1.9 1.9 - -
------------- -------------------------- -------------------------- ---------------- ---------------- --------------- -------------- -------------- ---------------- ----------- ----------- --------------- ---------------
Other
financial
assets
measured
at amortised
cost 4,715 4,699 9 7 (119) (117) - (2) 2.5 2.5 - 28.6
------------- -------------------------- -------------------------- ---------------- ---------------- --------------- -------------- -------------- ---------------- ----------- ----------- --------------- ---------------
1 Days past due ('DPD').
2 The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2021
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(1)
------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------- --------------------------------------------------------------------
Stage Stage Stage POCI(2) Total Stage Stage Stage POCI(2) Total Stage Stage Stage POCI(2) Total
1 2 3 1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m % % % % %
-------------------------------------- ------------------------------ -------------- -------------- --------- --------------- --------------- --------------- --------------- ----------- --------------- ---------- ---------- ----------------- ------------- ----------
Loans and
advances
to customers
at amortised
cost 918,936 119,224 18,797 274 1,057,231 (1,367) (3,119) (6,867) (64) (11,417) 0.1 2.6 36.5 23.4 1.1
-------------------------------------- ------------------------------ -------------- -------------- --------- --------------- --------------- --------------- --------------- ----------- --------------- ---------- ---------- ----------------- ------------- ----------
- personal 456,956 16,439 4,942 - 478,337 (658) (1,219) (1,226) - (3,103) 0.1 7.4 24.8 - 0.6
-------------------------------------- ---------- ---------- ----------------- ------------- ---------- * corporate and commercial 400,894 98,911 13,460 274 513,539 (665) (1,874) (5,601) (64) (8,204) 0.2 1.9 41.6 23.4 1.6 -------------------------------------- ---------- ---------- ----------------- ------------- ---------- * non-bank financial institutions 61,086 3,874 395 - 65,355 (44) (26) (40) - (110) 0.1 0.7 10.1 - 0.2 -------------------------------------- ------------------------------ -------------- -------------- --------- --------------- --------------- --------------- --------------- ----------- --------------- ---------- ---------- ----------------- ------------- ---------- Loans and advances to banks at amortised cost 81,636 1,517 - - 83,153 (14) (3) - - (17) - 0.2 - - - -------------------------------------- ------------------------------ -------------- -------------- --------- --------------- --------------- --------------- --------------- ----------- --------------- ---------- ---------- ----------------- ------------- ---------- Other financial assets measured at amortised cost 875,016 4,988 304 43 880,351 (91) (54) (42) (6) (193) - 1.1 13.8 14.0 - -------------------------------------- ------------------------------ -------------- -------------- --------- --------------- --------------- --------------- --------------- ----------- --------------- ---------- ---------- ----------------- ------------- ---------- Loans and other credit-related commitments 594,473 32,389 775 - 627,637 (165) (174) (40) - (379) - 0.5 5.2 - 0.1 -------------------------------------- ------------------------------ -------------- -------------- --------- --------------- --------------- --------------- --------------- ----------- --------------- ---------- ---------- ----------------- ------------- ---------- - personal 237,770 1,747 168 - 239,685 (37) (2) - - (39) - 0.1 - - - -------------------------------------- ---------- ---------- ----------------- ------------- ---------- * corporate and commercial 254,750 28,269 606 - 283,625 (120) (165) (40) - (325) - 0.6 6.6 - 0.1 -------------------------------------- ---------- ---------- ----------------- ------------- ---------- - financial 101,953 2,373 1 - 104,327 (8) (7) - - (15) - 0.3 - - - -------------------------------------- ------------------------------ -------------- -------------- --------- --------------- --------------- --------------- --------------- ----------- --------------- ---------- ---------- ----------------- ------------- ---------- Financial guarantees 24,932 2,638 225 - 27,795 (11) (30) (21) - (62) - 1.1 9.3 - 0.2 -------------------------------------- ------------------------------ -------------- -------------- --------- --------------- --------------- --------------- --------------- ----------- --------------- ---------- ---------- ----------------- ------------- ---------- - personal 1,114 15 1 - 1,130 - - - - - - - - - - -------------------------------------- ---------- ---------- ----------------- ------------- ---------- * corporate and commercial 20,025 2,107 223 - 22,355 (10) (28) (20) - (58) - 1.3 9.0 - 0.3 -------------------------------------- ---------- ---------- ----------------- ------------- ---------- - financial 3,793 516 1 - 4,310 (1) (2) (1) - (4) - 0.4 100.0 - 0.1 -------------------------------------- ------------------------------ -------------- -------------- --------- --------------- --------------- --------------- --------------- ----------- --------------- ---------- ---------- ----------------- ------------- ---------- At 31 Dec 2021 2,494,993 160,756 20,101 317 2,676,167 (1,648) (3,380) (6,970) (70) (12,068) 0.1 2.1 34.7 22.1 0.5 -------------------------------------- ------------------------------ -------------- -------------- --------- --------------- --------------- --------------- --------------- ----------- --------------- ---------- ---------- ----------------- ------------- ----------
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2 Purchased or originated credit impaired ('POCI').
Stage 2 days past due analysis at 31 December 2021
Gross carrying amount Allowance for ECL ECL coverage %
1 1 1
to 30 to 30 to 30
Stage 29 and Stage 29 and Stage 29 and
2 Up-to-date DPD(1,2) > DPD(1,2) 2 Up-to-date DPD(1,2) > DPD(1,2) 2 Up-to-date DPD(1,2) > DPD(1,2)
$m $m $m $m $m $m $m $m % % % %
------------- ----------- ----------- --------------- --------------- ----------------- ----------------- ----------------- ----------------- ---------- ---------- ------------- -------------
Loans and
advances
to customers
at
amortised
cost 119,224 115,350 2,193 1,681 (3,119) (2,732) (194) (193) 2.6 2.4 8.8 11.5
------------- ----------- ----------- --------------- --------------- ----------------- ----------------- ----------------- ----------------- ---------- ---------- ------------- -------------
- personal 16,439 14,124 1,387 928 (1,219) (884) (160) (175) 7.4 6.3 11.5 18.9
------------- ---------- ---------- ------------- -------------
- corporate
and
commercial 98,911 97,388 806 717 (1,874) (1,822) (34) (18) 1.9 1.9 4.2 2.5
------------- ---------- ---------- ------------- -------------
- non-bank
financial
institutions 3,874 3,838 - 36 (26) (26) - - 0.7 0.7 - -
------------- ----------- ----------- --------------- --------------- ----------------- ----------------- ----------------- ----------------- ---------- ---------- ------------- -------------
Loans and
advances
to banks at
amortised
cost 1,517 1,517 - - (3) (3) - - 0.2 0.2 - -
------------- ----------- ----------- --------------- --------------- ----------------- ----------------- ----------------- ----------------- ---------- ---------- ------------- -------------
Other
financial
assets
measured
at amortised
cost 4,988 4,935 22 31 (54) (47) (4) (3) 1.1 1.0 18.2 9.7
------------- ----------- ----------- --------------- --------------- ----------------- ----------------- ----------------- ----------------- ---------- ---------- ------------- -------------
1 Days past due ('DPD').
2 The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.
Stage 2 decomposition at 30 June 2022
The following table presents the stage 2 decomposition of gross carrying amount and allowances for ECL for loans and advances to customers. It also sets out the reasons why an exposure is classified as stage 2 as at 30 June 2022.
The quantitative classification shows gross carrying values and allowances for ECL for which the applicable reporting date probability of default ('PD') measure exceeds defined quantitative thresholds for retail and wholesale exposures, as set out in Note 1.2 'Summary of significant accounting policies', on page 324 of the Annual Report and Accounts 2021.
The qualitative classification primarily accounts for customer risk rating ('CRR') deterioration, watch-and-worry and retail management judgemental adjustments.
A summary of our current policies and practices for the significant increase in credit risk is set out in 'Summary of significant accounting policies' on page 324 of the Annual Report and Accounts 2021.
Loans and advances to customers at 30 June 2022(1)
ECL
Gross carrying amount Allowance for ECL coverage
-------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- -----------
Non-bank Non-bank
Corporate financial Corporate financial
Personal and commercial institutions Total Personal and commercial institutions Total Total
$m $m $m $m $m $m $m $m %
------------- ---------------------- ---------------------- ---------------------- -------------------- -------------------------- -------------------------- -------------------------- ------------------------- -----------
Quantitative 12,084 70,586 3,126 85,796 (1,199) (1,152) (25) (2,376) 2.8
------------- ---------------------- ---------------------- ---------------------- -------------------- -------------------------- -------------------------- -------------------------- ------------------------- -----------
Qualitative 15,872 24,312 1,085 41,269 (231) (368) (13) (612) 1.5
------------- ---------------------- ---------------------- ---------------------- -------------------- -------------------------- -------------------------- -------------------------- ------------------------- -----------
30 DPD
backstop(2) 130 692 218 1,040 (4) (5) (1) (10) 1.0
------------- ---------------------- ---------------------- ---------------------- -------------------- -------------------------- -------------------------- -------------------------- ------------------------- -----------
Total stage
2 28,086 95,590 4,429 128,105 (1,434) (1,525) (39) (2,998) 2.3
------------- ---------------------- ---------------------- ---------------------- -------------------- -------------------------- -------------------------- -------------------------- ------------------------- -----------
Loans and advances to customers at 31 December 2021(1)
ECL
Gross carrying amount Allowance for ECL coverage
--------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ----------
Non-bank Non-bank
Corporate financial Corporate financial
Personal and commercial institutions Total Personal and commercial institutions Total Total
$m $m $m $m $m $m $m $m %
------------- ----------------------- ----------------------- ------------------------ ----------------------- -------------------------- -------------------------- -------------------------- ------------------------- ----------
Quantitative 9,907 68,000 3,041 80,948 (1,076) (1,347) (19) (2,442) 3.0
------------- ----------------------- ----------------------- ------------------------ ----------------------- -------------------------- -------------------------- -------------------------- ------------------------- ----------
Qualitative 6,329 30,326 818 37,473 (134) (520) (7) (661) 1.8
------------- ----------------------- ----------------------- ------------------------ ----------------------- -------------------------- -------------------------- -------------------------- ------------------------- ----------
30 DPD
backstop(2) 203 585 15 803 (9) (7) - (16) 2.0
------------- ----------------------- ----------------------- ------------------------ ----------------------- -------------------------- -------------------------- -------------------------- ------------------------- ---------- Total stage 2 16,439 98,911 3,874 119,224 (1,219) (1,874) (26) (3,119) 2.6 ------------- ----------------------- ----------------------- ------------------------ ----------------------- -------------------------- -------------------------- -------------------------- ------------------------- ----------
1 Where balances satisfy more than one of the above three criteria for determining a significant increase in credit risk, the corresponding gross exposure and ECL have been assigned in order of categories presented.
2 Days past due ('DPD').
Measurement uncertainty and sensitivity analysis of ECL estimates
There continues to be a high degree of uncertainty in relation to economic scenarios. The increased risks of lower economic growth with higher inflation and unemployment have been exacerbated by the geopolitical environment and the effects of global supply chain disruption. In addition, there are ongoing risks relating to Covid-19 in certain markets. The level and speed of recovery from the global pandemic remains volatile. As a result of this uncertainty, management judgements and estimates continue to reflect a degree of caution both in the selection of economic scenarios and their weightings, and in the use of management judgemental adjustments, described in more detail below. Additional stage 1 and 2 allowances were recorded in respect of the heightened levels of uncertainty.
The recognition and measurement of ECL involves the use of significant judgement and estimation. We form multiple economic scenarios based on economic forecasts, apply these assumptions to credit risk models to estimate future credit losses, and probability-weight the results to determine an unbiased ECL estimate.
Methodology
Five economic scenarios have been used to capture the current economic environment and to articulate management's view of the range of potential outcomes. Scenarios produced to calculate ECL are aligned to HSBC's top and emerging risks.
Of the four standard scenarios, three are drawn from consensus forecasts and distributional estimates. The fourth scenario, Downside 2, represents management's view of severe downside risks. In 2Q22, management chose to use an additional fifth scenario, known as Downside 1, to ensure that current supply-side risks are sufficiently reflected in forward economic guidance. The scenario is designed to capture the implications of a sustained global supply shock that keeps inflation elevated for a long period, raises unemployment and depresses GDP growth.
The use of an additional scenario is in line with HSBC's forward economic guidance methodology. Management may include additional scenarios when consensus scenarios are determined to inadequately capture the economic risks faced by the Group. Unlike the consensus scenarios, these additional scenarios are driven by narrative assumptions aligned to an identified risk, and may incorporate shocks that drive economic activity permanently away from its long-term trend.
Description of economic scenarios
The economic assumptions presented in this section have been formed by HSBC, with reference to external forecasts specifically for the purpose of calculating ECL.
Economic forecasts are subject to a high degree of uncertainty in the current environment. Risks to the outlook are dominated by the actions of central banks as they raise interest rates to bring inflation back to target and curtail a rise in inflation expectations. The implications of the Russia-Ukraine war and the progression and management of the Covid-19 pandemic in Asia also remain key sources of uncertainty. Other geopolitical risks, such as the evolution of the UK's relationship with the EU and differences between the US and China over a range of strategic issues, also present downside risks.
The five global scenarios used for the purpose of calculating ECL at 30 June 2022 are the consensus Central scenario, the consensus Upside scenario, the consensus Downside scenario, the Downside 1 scenario and the Downside 2 scenario.
The scenarios used to calculate ECL in the Interim Report 2022 are described below.
The consensus Central scenario
HSBC's Central scenario features a gradual slowdown in GDP growth through 2022 and 2023, following a strong recovery in 2021. Unemployment is expected to remain low through this period.
GDP forecasts have been lowered in recent quarters. In Asia, the downward revisions follow from the stringent public health policy responses to the Covid-19 pandemic in some markets. Elsewhere, the sharp rise in inflation, related to supply shortages and rising commodity prices, has started to weigh on growth as costs rise and real income growth stalls.
The Central scenario assumes that inflation peaks in 2022 and, supported by tighter monetary policy, reverts back towards central bank targets by the end of 2023.
Global GDP is expected to grow by 3.3% in 2022 in the Central scenario. The average rate of global GDP growth is expected to be 2.8% over the forecast period, which is in line with the average growth rate over the five-year period prior to the onset of the pandemic.
Across the key markets, the Central scenario assumes the following:
-- Economic growth is expected to slow in the near term as supply chain disruptions and price inflation diminish purchasing power. Growth is expected to return to the long-term expected trend in later years as supply chain issues are assumed to ease and inflation returns towards their target.
-- Unemployment is expected to remain close to pre-pandemic levels and labour market conditions remain tight across our key markets.
-- Inflation is expected to remain elevated in 2022 as commodity, food and goods prices remain high. Inflation is subsequently expected to converge back to central bank targets over the next two years of the forecast.
-- Policy interest rates in key markets are expected to rise over the first 18 months of the projection period as central banks tighten policy to bring inflation back towards their targets. Thereafter, they settle at higher levels than they were pre-pandemic.
-- The West Texas Intermediate oil price is expected to average above $100 in the first two years of the forecast, before dropping back as supply constraints ease. Over the entire projection the oil price is expected to average $81 per barrel.
The Central scenario was created from consensus forecasts available in May, and subsequently updated in June. Dispersion between the constituent forecasts of the consensus remains unusually high, suggesting an elevated level of uncertainty. As a consequence, probability weights assigned to the Central scenario vary from 40% to 65% to reflect the uncertainty inherent in economic forecasts across markets.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Central scenario.
Central scenario 3Q22-2Q27
UK US Hong Mainland Canada France UAE Mexico
Kong China
% % % % % % % %
------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- -----------
GDP growth
rate
------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- -----------
2022: Annual
average
growth rate 3.7 2.8 1.1 4.5 4.0 2.9 5.3 1.8
------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- -----------
2023: Annual
average
growth rate 1.4 2.0 3.8 5.1 2.6 1.8 4.3 2.1
------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- -----------
2024: Annual
average
growth rate 1.6 1.9 2.5 5.0 1.8 1.6 3.2 2.2
------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- -----------
5-year
average 1.6 1.9 2.9 4.9 2.2 1.5 3.3 2.2
------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- -----------
Unemployment
rate
------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- -----------
2022: Annual
average
rate 4.0 3.6 4.4 3.8 5.5 7.5 3.0 3.8
------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- 2023: Annual average rate 4.2 3.6 3.6 3.7 5.4 7.4 2.7 3.8 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- 2024: Annual average rate 4.1 3.6 3.5 3.7 5.6 7.3 2.6 3.8 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- 5-year average 4.1 3.6 3.5 3.7 5.5 7.3 2.6 3.7 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- House price growth ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- 2022: Annual average growth rate 9.2 14.7 (1.2) (0.5) 18.9 5.8 9.4 7.2 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- 2023: Annual average growth rate 2.9 6.4 1.2 1.3 (2.2) 4.5 3.4 5.3 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- 2024: Annual average growth rate 2.9 4.5 2.5 3.5 (0.5) 4.1 2.5 4.8 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- 5-year average 3.3 5.3 1.9 3.2 2.6 3.9 3.5 4.8 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- Inflation rate ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- 2022: Annual average rate 8.3 7.0 2.3 2.2 5.4 4.5 3.2 6.8 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- 2023: Annual average rate 4.7 3.2 2.2 2.3 2.8 2.4 2.3 4.5 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- 2024: Annual average rate 2.1 2.2 2.2 2.3 2.3 2.0 2.2 4.0 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- 5-year average 3.2 2.8 2.2 2.4 2.5 2.3 2.2 4.0 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- ----------- Probability 50 60 55 55 60 40 65 60 ------------- ----------- --------------- ---------------------------- ---------------------------- ---------------------------- ----------- ----------- -----------
The graphs compare the respective Central scenario at year end 2021 with current economic expectations in the second quarter of 2022.
GDP growth: Comparison of Central scenarios
UK
Note: Real GDP shown as year-on-year percentage change.
Hong Kong
Note: Real GDP shown as year-on-year percentage change.
US
Note: Real GDP shown as year-on-year percentage change.
Mainland China
Note: Real GDP shown as year-on-year percentage change.
The consensus Upside scenario
Compared with the consensus Central scenario, the consensus Upside scenario features a faster rate of GDP growth during the first two years, before converging to long-run expected trends. The scenario is demand-driven and is consistent with a number of key upside risk themes. These include the faster resolution of supply chain issues; a rapid and peaceful conclusion to the Russia-Ukraine war; de-escalation of tensions between the US and China; and improved relations between the UK and the EU.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Upside scenario.
Consensus Upside scenario 'best outcome'
Hong Mainland
UK US Kong China Canada France UAE Mexico
% % % % % % % %
------------- --------------- ------ --------------- ------ --------------- ------ --------------- ------ --------------- ------ ----------- ------ --------------- ------ ----------- ------
GDP growth
rate 4.3 (2Q24) 4.7 (1Q23) 12.4 (1Q23) 10.2 (2Q23) 5.9 (2Q23) 3.4 (2Q23) 13.4 (2Q23) 5.8 (2Q23)
------------- --------------- ------ --------------- ------ --------------- ------ --------------- ------ --------------- ------ ----------- ------ --------------- ------ ----------- ------
Unemployment
rate 3.2 (2Q24) 3.1 (3Q22) 2.8 (4Q23) 3.5 (1Q23) 4.4 (1Q23) 6.4 (2Q24) 1.9 (4Q23) 3.2 (3Q23)
------------- --------------- ------ --------------- ------ --------------- ------ --------------- ------ --------------- ------ ----------- ------ --------------- ------ ----------- ------
House price
growth 9.8 (3Q22) 13.2 (3Q22) 7.7 (2Q23) 6.2 (2Q23) 18.2 (3Q22) 6.1 (3Q23) 15.4 (2Q23) 9.3 (3Q23)
------------- --------------- ------ --------------- ------ --------------- ------ --------------- ------ --------------- ------ ----------- ------ --------------- ------ ----------- ------
Inflation
rate 10.2 (3Q22) 7.8 (3Q22) 4.1 (3Q23) 5.8 (1Q23) 6.8 (4Q22) 6.7 (4Q22) 4.0 (4Q23) 7.6 (3Q23)
------------- --------------- ------ --------------- ------ --------------- ------ --------------- ------ --------------- ------ ----------- ------ --------------- ------ ----------- ------
Probability 10 5 5 5 5 10 5 5
------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ------------------- ----------------------- -------------------
Note: Extreme point in the consensus Upside is 'best outcome' in the scenario, for example the highest GDP growth and the lowest unemployment rate, in the first two years of the scenario. Inflation is positively correlated with GDP in the Upside scenario, and the 'best outcome' also refers to the cyclical high point.
Downside scenarios
Downside scenarios explore the intensification and crystallisation of a number of key economic and financial risks.
Inflation and the monetary policy response to it have become key concerns for global growth. Supply chain disruptions, caused by the Covid-19 pandemic and the Russia-Ukraine war, have led to sharp rises in commodity prices and headline price inflation across many markets. A key concern is that inflation expectations become unanchored from central bank targets, particularly as labour markets and labour supply shortages across some sectors are putting upward pressure on wages. The de-anchoring of inflation expectations would raise the risk that inflation remains elevated for longer, exacerbating cost pressures and the squeeze on household real incomes and corporate margins. In turn, it raises the risk of a more forceful policy response from central banks, a steeper trajectory for interest rates and ultimately, economic recession.
Covid-19-related risks also remain significant. Despite the easing of Covid-19-related restrictions across Europe and North America, the emergence of a new Covid-19 variant with greater vaccine-resistance that necessitates a stringent public health policy
response remains a key risk to the global outlook. In Asia, stringent public health policy responses to the circulation of highly virulent Covid-19 strains present ongoing risks to growth and global supply chains.
The geopolitical environment also present risks, including:
-- a prolonged Russia-Ukraine war with escalation beyond Ukraine's borders;
-- the deterioration of the trading relationship between the UK and the EU over the Northern Ireland Protocol; and
-- continued differences between the US and other countries with China, which could affect sentiment and restrict global economic activity.
The consensus Downside scenario
In the consensus Downside scenario, economic activity is considerably weaker compared with the Central scenario. In this scenario, GDP growth weakens, unemployment rates rise and asset prices fall. The scenario is structured as a demand shock where inflation and commodity prices fall, before gradually recovering towards their long-run expected trends.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Downside scenario.
Consensus Downside scenario 'worst outcome'
UK US Hong Mainland Canada France UAE Mexico
Kong China
% % % % % % % %
------------- ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------
GDP growth
rate (0.7) (2Q23) (1.7) (2Q23) (2.9) (4Q23) 1.3 (1Q23) (0.8) (2Q23) 0.1 (2Q23) (0.6) (2Q23) (1.0) (2Q23)
------------- ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------
Unemployment
rate 5.5 (2Q23) 5.1 (1Q23) 5.4 (4Q22) 4.2 (1Q23) 6.6 (2Q24) 8.5 (1Q23) 4.0 (1Q23) 4.7 (1Q23)
------------- ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------
House price
growth (4.1) (3Q23) 2.9 (1Q24) (8.3) (3Q23) (4.3) (2Q23) (9.0) (2Q23) 2.4 (2Q23) (4.8) (4Q23) 2.2 (3Q23)
------------- ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------
Inflation
rate 0.7 (2Q24) 0.7 (2Q23) (0.5) (3Q23) (0.7) (3Q23) 0.0 (2Q23) (0.6) (2Q23) 0.4 (4Q23) 2.3 (3Q23)
------------- ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------
Probability 0 15 20 30 15 0 20 10
------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------
Note: Extreme point in the consensus Downside is 'worst outcome' in the scenario, for example the lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. Inflation is positively correlated with GDP in the Downside scenario, and the 'worst outcome' refers to the cyclical low point.
Downside 1 scenario
An additional Downside scenario has been created to explore the implications of a prolonged period of high price inflation, a more aggressive upward path for policy interest rates, higher unemployment and a global recession.
In this scenario, the Russia-Ukraine war leads to a sustained supply shock that keeps inflation elevated above the baseline for a longer period than in the other scenarios.
The scenario assumes that major central banks are slow to respond, but as inflation expectations start to de-anchor from the inflation target, they resort to taking stronger action. The rise in interest rates is expected to cause a severe tightening of financial conditions that ultimately results in a global economic contraction later in the projection period.
The following table describes key macroeconomic variables and the probabilities assigned in the Downside 1 scenario.
Downside 1 scenario 'worst outcome'
UK US Hong Mainland Canada France UAE Mexico
Kong China
% % % % % % % %
------------- ----------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------
GDP growth
rate (3.7) (1Q25) (4.1) (4Q24) (3.0) (4Q23) (1.2) (1Q25) (0.6) (4Q23) (3.1) (1Q25) (2.5) (1Q25) (5.3) (1Q25)
------------- ----------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------
Unemployment
rate 6.6 (1Q24) 8.8 (4Q24) 6.5 (4Q24) 4.8 (1Q25) 9.9 (2Q25) 9.1 (3Q25) 3.0 (3Q22) 5.2 (2Q25)
------------- ----------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ House price growth (11.9) (1Q24) (4.2) (1Q25) (7.6) (2Q25) (9.8) (3Q23) (8.2) (4Q23) (2.0) (4Q24) (4.4) (2Q25) 2.8 (4Q25) ------------- ----------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ Inflation rate 9.5 (3Q22) 6.9 (3Q22) 4.2 (1Q23) 4.2 (1Q23) 6.3 (4Q22) 5.0 (4Q22) 3.7 (3Q22) 6.8 (3Q22) ------------- ----------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ ---------------------------- ------ Probability 30 10 15 5 10 35 5 15 ------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------
Note: Extreme point in the Downside 1 is the 'worst outcome' in the scenario, for example the lowest GDP growth and the highest inflation and unemployment rate.
Downside 2 scenario
The Downside 2 scenario features a deep global recession and reflects management's view of the tail of the economic risk distribution. It incorporates the crystallisation of a number of risks simultaneously, including further escalation of the Russia-Ukraine war, worsening of supply chain disruptions and the emergence of a vaccine-resistant Covid-19 variant that necessitates a stringent public health policy response.
This scenario features an initial supply-side shock that pushes up inflation. This impulse is expected to prove short lived as a large downside demand shock causes commodity prices to correct sharply and global price inflation to slow as a severe and prolonged recession takes hold.
The following table describes key macroeconomic variables and the probabilities assigned in the Downside 2 scenario.
Downside 2 scenario 'worst outcome'
UK US Hong Mainland Canada France UAE Mexico
Kong China
% % % % % % % %
------------- ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ---------------------------- ------ ----------------------------- ------ ---------------------------- ------
GDP growth
rate (6.3) (2Q23) (4.9) (2Q23) (9.3) (2Q23) (5.0) (2Q23) (3.4) (3Q23) (5.5) (2Q23) (6.5) (4Q23) (7.2) (2Q23)
------------- ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ---------------------------- ------ ----------------------------- ------ ---------------------------- ------
Unemployment
rate 8.5 (3Q23) 9.1 (1Q24) 5.9 (2Q23) 5.4 (2Q24) 11.1 (4Q23) 10.2 (2Q24) 4.6 (3Q22) 5.7 (4Q23)
------------- ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ---------------------------- ------ ----------------------------- ------ ---------------------------- ------
House price
growth (15.2) (3Q23) (10.8) (2Q23) (10.8) (3Q23) (18.7) (2Q23) (30.1) (3Q23) (4.5) (2Q24) (11.3) (1Q24) 1.1 (4Q23)
------------- ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ---------------------------- ------ ----------------------------- ------ ---------------------------- ------
Inflation
rate (2.2) (4Q23) 1.5 (2Q24) (0.5) (1Q24) 1.4 (2Q24) 0.9 (2Q24) (2.7) (4Q23) 1.7 (2Q24) 3.4 (2Q24)
------------- ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ----------------------------- ------ ---------------------------- ------ ----------------------------- ------ ---------------------------- ------
Probability 10 10 5 5 10 15 5 10
------------- ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------- ------------------------------------
Note: Extreme point in the Downside 2 is 'worst outcome' in the scenario, for example the lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. After a temporary increase, inflation remains positively correlated with GDP in the Downside 2 scenario, and the 'worst outcome' refers to the scenario low point.
Scenario weightings
In reviewing the economic conjuncture, the level of uncertainty and risk, management has considered both global and country-specific factors. This has led management to assigning scenario probabilities that are tailored to its view of uncertainty in individual markets.
A key consideration in 2Q22 has been the high level of uncertainty attached to the Central scenario projections. These concerns focused on:
-- the risks of higher inflation given the risks attached to gas supply security in Europe and global oil supply, which raises the possibility of a more significant impact on real incomes and GDP growth;
-- market interest rate expectations that imply a rapid and significant change to the interest rate environment; and
-- the progression of the Covid-19 pandemic in Asian countries and the impact of stringent public policy responses on growth in the region and global supply chains.
In mainland China, increased weights have been assigned to Downside scenarios in light of the stringent public health responses to the Covid-19 pandemic, the virulence of current strains, and the observed impact on economic activity of the recent restrictions. In Hong Kong, the recent reopening has increased confidence in the Central scenario since the first quarter. In each market, the combined weighting of the consensus Upside and Central scenarios was 60%.
In the UK and US, the surge in price inflation and a squeeze on household real incomes have led to strong monetary policy responses from central banks. Economic and financial volatility remains elevated due to uncertainty around the implications of higher interest rates. For Canada and Mexico, similar risk themes dominate, and the connectivity to the US has also been a key consideration. For the UK, the consensus Upside and Central scenarios had a combined weighting of 60%. In the other three markets, the combined weighting of the consensus Upside and Central scenarios was 65%.
France faces the greatest economic uncertainties of our key markets. Uncertainties around the outlook remain elevated due to Europe's exposure to the Russia-Ukraine war through the economic costs incurred from the imposition of sanctions, trade disruption and energy dependence on Russia. Additional risks stem from the ECB's exit from a long period of negative interest rate policy. The consensus Upside and Central scenarios had a combined weighting of 50%.
In the UAE, the positive impact from elevated oil prices remains significant and management concluded that the outlook for the UAE was the least uncertain of all our key markets. The consensus Upside and Central scenarios had a combined weighting of 70%.
The following graphs show the historical and forecasted GDP growth rate for the various economic scenarios in our four largest markets.
US UK Hong Kong Mainland China
Note: Real GDP shown as year-on-year percentage change.
Critical accounting estimates and judgements
The calculation of ECL under IFRS 9 involves significant judgements, assumptions and estimates, as set out in the Annual Report and Accounts 2021 under 'Critical accounting estimates and judgements'. The level of estimation uncertainty and judgement has remained high since 31 December 2021, including judgements relating to:
--
the selection and weighting of economic scenarios, given rapidly changing economic conditions and a wide distribution of economic forecasts. There is judgement in making assumptions about the effects of inflation, supply chain disruption and length of time and severity of the continuing economic effects of the Covid-19 pandemic and health policy responses; and
-- estimating the economic effects of those scenarios on ECL, particularly as the historical relationship between macroeconomic variables and defaults might not reflect the dynamics of high inflation scenarios.
How economic scenarios are reflected in ECL calculations
The methodologies for the application of forward economic guidance into the calculation of ECL for wholesale and retail loans and portfolios are set out on page 148 of the Annual Report and Accounts 2021. Models are used to reflect economic scenarios on ECL estimates. These models are based largely on historical observations and correlations with default.
Economic forecasts and ECL model responses to these forecasts are subject to a high degree of uncertainty in the current environment, and models continue to be supplemented by management judgemental adjustments where required.
Management judgemental adjustments
In the context of IFRS 9, management judgemental adjustments are typically increases or decreases to the ECL at either a customer, segment or portfolio level to account for late-breaking events, model deficiencies and other assessments applied during management review and challenge.
This includes refining model inputs and outputs and using post-model adjustments based on management judgement and higher level quantitative analysis for impacts that are difficult to model.
The wholesale and retail management judgemental adjustments are presented as part of the global business impairment committees with independent review from Model Risk Management. This is in line with the governance process for IFRS 9 as set out on page 137 of the Annual Report and Accounts 2021.
The drivers of the management judgemental adjustments continue to evolve with the economic environment.
At 30 June 2022, management judgemental adjustments reduced by $0.5bn compared with 31 December 2021. Adjustments related to Covid-19 were reduced, while adjustments for sector-specific risks, and sanction and geopolitical risks were maintained. They were also maintained to account for elevated uncertainty under the high inflation scenarios.
We have internal governance in place to monitor management judgement al adjustments regularly and, where possible, to reduce the reliance on these through model recalibration or redevelopment, as appropriate. Given the level of economic uncertainty and idiosyncratic events, we believe that management judgemental adjustments will continue to be a key component of ECL for the foreseeable future.
Management judgemental adjustments made in estimating the reported ECL at 30 June 2022 are set out in the following table.
Management judgemental adjustments to ECL at 30 June 2022(1)
Retail Wholesale Total
$bn $bn $bn
Banks, sovereigns and - -
government entities
-------------------------- ---------------------------- ----------------------------- -----------------------------
Corporate lending
adjustments 0.8 0.8
-------------------------- ---------------------------- ----------------------------- -----------------------------
Inflation-related
adjustments 0.1 0.1
-------------------------- ---------------------------- ----------------------------- -----------------------------
Other
macroeconomic-related
adjustments 0.1 0.1
-------------------------- ---------------------------- ----------------------------- -----------------------------
Pandemic-related economic
recovery adjustments 0.1 0.1
-------------------------- ---------------------------- ----------------------------- -----------------------------
Other retail lending
adjustments 0.2 0.2
-------------------------- ---------------------------- ----------------------------- -----------------------------
Total 0.4 0.8 1.2
-------------------------- ---------------------------- ----------------------------- -----------------------------
Management judgemental adjustments to ECL at 31 December 2021(1)
Retail Wholesale Total
$bn $bn $bn
Banks, sovereigns and
government entities (0.1) (0.1)
----------------------- ----------------------------- ------------------------------ ------------------------------
Corporate lending
adjustments 1.3 1.3
----------------------- ----------------------------- ------------------------------ ------------------------------
Other -
macroeconomic-related
adjustments
----------------------- ----------------------------- ------------------------------ ------------------------------
Pandemic-related
economic recovery
adjustments 0.2 0.2
----------------------- ----------------------------- ------------------------------ ------------------------------
Other retail lending
adjustments 0.3 0.3
----------------------- ----------------------------- ------------------------------ ------------------------------
Total 0.5 1.2 1.7
----------------------- ----------------------------- ------------------------------ ------------------------------
1 Management judgemental adjustments presented in the table reflect increases or (decreases) to ECL, respectively.
In the wholesale portfolio, management judgemental adjustments were an ECL increase of $0.8bn (31 December 2021: $1.2bn increase).
-- Adjustments to corporate exposures increased ECL by $0.8bn at 30 June 2022 (31 December 2021: $1.3bn increase). These principally reflected management judgements for high-risk and vulnerable sectors in some of our key markets, supported by credit experts' input, portfolio risk metrics and quantitative analyses. The highest increase was observed on the real estate sector, including a $0.2bn ECL increase to reflect the uncertainty of the higher risk Chinese commercial real estate exposures, booked in Hong Kong. Adjustments also reflected the risk of exposures to the Russia-Ukraine war and a high degree of macroeconomic uncertainty, sanction risk and geopolitical risk in Europe.
In the retail portfolio, management judgemental adjustments were an ECL increase of $0.4bn at 30 June 2022 (31 December 2021: $0.5bn increase).
-- Inflation-related adjustments increased ECL by $0.1bn (31 December 2021: $0.0bn). These adjustments addressed where country-specific inflation risks were not fully captured by the modelled output.
-- Other macroeconomic-related adjustments increased ECL by $0.1bn (31 December 2021: $0.0bn). These adjustments were primarily in relation to model oversensitivity as well as country-specific risks related to future macroeconomic conditions.
-- Pandemic-related economic recovery adjustments increased ECL by $0.1bn (31 December 2021: $0.2bn). Compared with 31 December 2021, while the rationale for applying the adjustment remained the same, the amount of adjustment decreased as this was made only for markets in Asia where there remain concerns regarding Covid-19.
-- Other retail lending adjustments increased ECL by $0.2bn (31 December: $0.3bn increase), reflecting those customers who remain in or have recently exited customer support programmes, and all other data and model adjustments.
Economic scenarios sensitivity analysis of ECL estimates
Management considered the sensitivity of the ECL outcome against the economic forecasts as part of the ECL governance process by recalculating the ECL under each scenario described above for selected portfolios, applying a 100% weighting to each scenario in turn. The weighting is reflected in both the determination of a significant increase in credit risk and the measurement of the resulting ECL.
The ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and lower limits of possible ECL outcomes. The impact of defaults that might occur in the future under different economic scenarios is captured by recalculating ECL for loans in stages 1 and 2 at the balance sheet date. The population of stage 3 loans (in default) at the balance sheet date is unchanged in these sensitivity calculations. Stage 3 ECL would only be sensitive to changes in forecasts of future economic conditions if the loss-given default of a particular portfolio was sensitive to these changes.
There is a particularly high degree of estimation uncertainty in numbers representing tail risk scenarios when assigned a 100% weighting.
For wholesale credit risk exposures, the sensitivity analysis excludes ECL for financial instruments related to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios. Therefore, it is impracticable to separate the effect of macroeconomic factors in individual assessments.
For retail credit risk exposures, the sensitivity analysis includes ECL for loans and advances to customers related to defaulted obligors. This is because the retail ECL for secured mortgage portfolios, including loans in all stages, is sensitive to macroeconomic variables.
Wholesale and retail sensitivity
The wholesale and retail sensitivity analysis is stated inclusive of management judgemental adjustments, as appropriate to each scenario. The results tables exclude portfolios held by the insurance business and small portfolios, and as such cannot be directly compared with personal and wholesale lending presented in other credit risk tables. Additionally, in both the wholesale and retail analysis, the Downside 1 scenario was introduced during 1H22 and therefore was not present at 31 December 2021.
Wholesale analysis
IFRS 9 ECL sensitivity to future economic conditions(1,2)
Consensus Consensus
Central Consensus Downside Downside Downside
Gross carrying Reported scenario Upside scenario scenario 1 scenario 2 scenario
amount ECL ECL ECL ECL ECL ECL
By
geography
at 30 Jun
2022 $m $m $m $m $m $m $m
UK 432,013 730 509 433 613 923 1,851
---------- ----------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------
US 216,976 247 219 198 245 266 371
---------- ----------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------
Hong Kong 433,612 534 415 286 703 640 1,313
---------- ----------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------
Mainland
China 131,552 216 144 62 298 379 729
---------- ----------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------
Canada 83,132 116 28 18 52 86 717
---------- ----------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------
Mexico 24,919 79 62 48 90 151 223
---------- ----------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------
UAE 44,323 84 71 41 105 115 155
---------- ----------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------
France 177,515 142 122 109 146 158 182
---------- ----------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------
By
geography
at 31 Dec
2021
UK 483,273 920 727 590 944 1,985
---------- ------------------------------ ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ----------------------------------
US 227,817 227 204 155 317 391
---------- ------------------------------ ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ----------------------------------
Hong Kong 434,608 767 652 476 984 1,869
---------- ------------------------------ ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ----------------------------------
Mainland
China 120,627 149 113 36 216 806
---------- ------------------------------ ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ---------------------------------- Canada 85,117 151 98 61 150 1,121 ---------- ------------------------------ ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ---------------------------------- Mexico 23,054 118 80 61 123 358 ---------- ------------------------------ ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ---------------------------------- UAE 44,767 158 122 73 214 711 ---------- ------------------------------ ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ---------------------------------- France 163,845 133 121 106 162 187 ---------- ------------------------------ ---------------------------------- ----------------------------------- ----------------------------------- ---------------------------------- ----------------------------------
1 ECL sensitivity includes off-balance sheet financial instruments that are subject to significant measurement uncertainty.
2 Includes low credit-risk financial instruments such as debt instruments at FVOCI, which have high carrying amounts but low ECL under all the above scenarios.
At 30 June 2022, the highest level of 100% scenario-weighted ECL was observed in the UK and Hong Kong. This higher ECL impact was largely driven by significant exposure in these regions and downside risks of specific sectors.
Compared with 31 December 2021, the Downside 2 ECL impact was lower across all key markets, mostly driven by a reduction of
adjustments for uncertainty due to the Covid-19 pandemic, and changes to exposure and macroeconomic forecasts. A reduction of ECL was observed in MENA, the US and Canada under the Downside 2 scenario, as some of the sectors in these portfolios benefited from increased oil prices. This was partly offset by the ECL increase in Europe related to sector-specific inflation risk.
Retail analysis
IFRS 9 ECL sensitivity to future economic conditions(1)
Consensus Consensus
Central Consensus Downside Downside Downside
Gross carrying Reported scenario Upside scenario scenario 1 scenario 2 scenario
amount ECL ECL ECL ECL ECL ECL
By
geography
at 30
Jun 2022 $m $m $m $m $m $m $m
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
UK
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Mortgages 144,630 169 156 150 170 186 200
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Credit
cards 7,147 433 336 293 434 495 836
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Other 7,253 374 305 258 325 471 595
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Mexico
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Mortgages 5,560 118 107 96 124 115 160
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Credit
cards 1,303 167 157 143 180 182 216
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Other 3,119 395 387 371 411 400 471
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Hong
Kong
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Mortgages 98,070 - - - - - -
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Credit
cards 7,180 236 208 182 269 310 336
---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------
Other 5,848 99 91 83 105 111 140 ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ UAE ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ Mortgages 2,081 37 37 35 37 39 40 ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ Credit cards 427 41 34 20 67 36 70 ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ Other 656 17 15 12 16 17 21 ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ France ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ Mortgages 21,384 59 59 59 59 59 60 ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ Other 1,438 48 48 47 48 49 50 ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ US ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ Mortgages 13,300 11 9 9 11 11 21 ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ Credit cards 224 51 47 39 52 60 70 ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ Canada ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ Mortgages 26,311 27 25 24 27 27 43 ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ Credit cards 282 10 10 10 10 11 12 ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ Other 1,520 14 12 11 14 16 24 ---------- ---------------------------------- ------------------------------------ ------------------------------------- ------------------------------------- ------------------------------------ ------------------------------------ ------------------------------------ By geography at 31 Dec 2021 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ UK ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Mortgages 155,084 191 182 175 197 231 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Credit cards 8,084 439 381 330 456 987 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Other 7,902 369 298 254 388 830 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Mexico ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Mortgages 4,972 123 116 106 130 164 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Credit
cards 1,167 141 134 122 150 176 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Other 2,935 366 360 350 374 401 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Hong Kong ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Mortgages 96,697 - - - - - ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Credit cards 7,644 218 206 154 231 359 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Other 5,628 109 101 88 128 180 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ UAE ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Mortgages 1,982 45 44 42 46 57 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Credit cards 429 43 41 29 54 82 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Other 615 19 18 13 21 25 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ France ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Mortgages 23,159 63 62 62 63 64 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Other 1,602 61 61 60 61 63 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ US ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Mortgages 15,379 28 27 26 29 41 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Credit cards 446 80 76 70 83 118 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Canada ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Mortgages 26,097 28 27 26 29 48 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Credit cards 279 9 9 9 10 13 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ Other 1,598 19 18 17 19 27 ---------- ----------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------ 1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
At 30 June 2022, the highest level of level of 100% scenario-weighted ECL was observed in the UK, Mexico and Hong Kong. Mortgages reflected the lowest level of ECL across most markets as collateral values remain resilient. Hong Kong mortgages had low levels of reported ECL due to the credit quality of the portfolio, and so ECL under the remaining scenarios were also negligible.
Credit cards and other unsecured lending are more sensitive to economic forecasts, which have reflected improvements during the first half of 2022. Compared with 31 December 2021, the Downside 2 ECL impact was lower in most markets, due to the improvements in the macroeconomic forecast.
Group ECL sensitivity results
The ECL impact of the scenarios and management judgemental adjustments are highly sensitive to movements in economic forecasts. Based upon the sensitivity tables presented above, if the Group ECL balance (excluding wholesale stage 3, which is assessed individually) was estimated solely on the basis of the Central scenario, Upside scenario, Downside 1 scenario or the Downside 2 scenario at 30 June 2022, it would increase/(decrease) as presented in the below table.
Retail(1) Wholesale(1)
Total Group ECL $bn $bn
at 30 Jun 2022
------------------------ -------------------------------- --------------------------------
Reported ECL 2.8 2.6
------------------------ -------------------------------- --------------------------------
Scenarios
------------------------ -------------------------------- --------------------------------
100% consensus Central
scenario (0.3) (0.7)
------------------------ -------------------------------- --------------------------------
100% consensus Upside
scenario (0.5) (1.1)
------------------------ -------------------------------- --------------------------------
100% consensus Downside
scenario 0.1 0.2
------------------------ -------------------------------- --------------------------------
100% Downside 1
scenario 0.3 0.6
------------------------ -------------------------------- --------------------------------
100% Downside 2
scenario 1.4 4.2
------------------------ -------------------------------- --------------------------------
Total Group ECL
at 31 Dec 2021
------------------------ --------------------------------- ---------------------------------
Reported ECL 3.0 3.1
------------------------ --------------------------------- ---------------------------------
Scenarios
------------------------ --------------------------------- ---------------------------------
100% consensus Central
scenario (0.2) (0.6)
------------------------ --------------------------------- ---------------------------------
100% consensus Upside
scenario (0.5) (1.2)
------------------------ --------------------------------- ---------------------------------
100% consensus Downside
scenario 0.2 0.6
------------------------ --------------------------------- ---------------------------------
100% Downside 1
scenario
------------------------ --------------------------------- ---------------------------------
100% Downside 2
scenario 2.0 5.5
------------------------ --------------------------------- ---------------------------------
1 On the same basis as retail and wholesale sensitivity analysis.
At 30 June 2022, the Group reported a lower ECL compared with 31 December 2021. The decrease in reported ECL was primarily driven by the release of residual Covid-19-related adjustments, write-offs and foreign exchange movements, partly offset by the increase in ECL for China commercial real estate exposures and other sectors considered as high risk to inflation, mainly in Europe. The Downside 2 ECL impact was lower in some markets due to residual Covid-19-related adjustments in Asia, and wholesale portfolios benefited from increased oil prices in MENA, the US and Canada. This was partly offset by the ECL increase in Europe related to sector-specific inflation risk.
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers
The following disclosure provides a reconciliation by stage of the Group's gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees. Movements are calculated on a quarterly basis and therefore fully capture stage movements between quarters. If movements were calculated on a year-to-date basis they would only reflect the opening and closing position of the financial instrument.
The transfers of financial instruments represent the impact of stage transfers upon the gross carrying/nominal amount and associated allowance for ECL.
The net remeasurement of ECL arising from stage transfers represents the increase or decrease due to these transfers, for example, moving from a 12-month (stage 1) to a lifetime (stage 2) ECL measurement basis. Net remeasurement excludes the underlying customer risk rating ('CRR')/probability of default ('PD') movements of the financial instruments transferring stage. This is captured, along with other credit quality movements in the 'changes in risk parameters - credit quality' line item.
Changes in 'New financial assets originated or purchased', 'assets derecognised (including final repayments)' and 'changes to risk parameters - further lending/repayments' represent the impact from volume movements within the Group's lending portfolio.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees
Non-credit impaired Credit impaired
---------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------
Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------ -------------------------------------- ----------------------------------------------- ------------------------------------------- -------------------------------------------------
Gross Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ carrying/ carrying/
nominal for nominal for nominal Allowance nominal Allowance nominal Allowance
amount ECL amount ECL amount for ECL amount for ECL amount for ECL
$m $m $m $m $m $m $m $m $m $m
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
At 1 Jan 2022 1,577,582 (1,557) 155,742 (3,326) 19,797 (6,928) 274 (64) 1,753,395 (11,875)
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
Transfers of
financial instruments: (31,551) (362) 26,697 809 4,854 (447) - - - -
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
* transfers from stage 1 to stage 2 (85,624) 192 85,624 (192) - - - - - -
----------------------------------------
* transfers from stage 2 to stage 1 54,842 (531) (54,842) 531 - - - - - -
----------------------------------------
* transfers to stage 3 (1,131) 6 (5,059) 590 6,190 (596) - - - -
----------------------------------------
* transfers from stage 3 362 (29) 974 (120) (1,336) 149 - - - -
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ----------------------
Net remeasurement
of ECL arising
from transfer
of stage - 304 - (379) - (61) - - - (136)
New financial
assets originated
or purchased 208,663 (223) - - - - 1 (1) 208,664 (224)
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
Assets derecognised
(including final
repayments) (123,163) 72 (18,234) 166 (1,391) 192 (98) - (142,886) 430
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
Changes to risk
parameters -
further lending/repayments (23,360) 185 (582) 53 (14) 227 (47) 3 (24,003) 468
Changes to risk
parameters -
credit quality - 255 - (700) - (1,292) - 19 - (1,718)
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
Changes to models
used for ECL
calculation - (9) - (34) - (2) - - - (45)
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
Assets written
off - - - - (1,270) 1,271 (10) 9 (1,280) 1,280
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
Credit-related
modifications
that resulted
in derecognition - - - - (2) 1 - - (2) 1
Foreign exchange (74,283) 70 (7,897) 154 (1,157) 307 (3) 1 (83,340) 532
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
Other(1, 2) 7,228 11 (615) 56 (457) 25 - (10) 6,156 82
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
At 30 Jun 2022 1,541,116 (1,254) 155,111 (3,201) 20,360 (6,707) 117 (43) 1,716,704 (11,205)
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
ECL income statement
change for the
period 584 (894) (936) 21 (1,225)
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
Recoveries 158
Other 5
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
Total ECL income
statement change
for the period (1,062)
---------------------------------------- -------------------- -------------------- ----------------- ------------------- ---------------------- ----------------------- ------------------- ---------------------- ---------------------- -------------------------
6 months
ended 30
At 30 Jun 2022 Jun 2022
---------------------------------------------------------------------- ---------------------------------
Allowance
Gross carrying/nominal for
amount ECL ECL release/(charge)
$m $m $m
---------------- ---------------------------------- ---------------------------------- ---------------------------------
As above 1,716,704 (11,205) (1,062)
---------------- ---------------------------------- ---------------------------------- ---------------------------------
Other financial
assets measured
at amortised
cost 950,007 (281) (20)
---------------- ---------------------------------- ---------------------------------- ---------------------------------
Non-trading 69,584 - -
reverse purchase
agreement
commitments
---------------- ---------------------------------- ---------------------------------- ---------------------------------
Performance and
other
guarantees not
considered
for IFRS 9 - - 14 ---------------- ---------------------------------- ---------------------------------- --------------------------------- Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement 2,736,295 (11,486) (1,068) ---------------- ---------------------------------- ---------------------------------- --------------------------------- Debt instruments measured at FVOCI 274,765 (120) (22) ---------------- ---------------------------------- ---------------------------------- --------------------------------- Total allowance for ECL/total income statement ECL change for the period n/a (11,606) (1,090) ---------------- ---------------------------------- ---------------------------------- ---------------------------------
1 Total includes $2.8bn of gross carrying loans and advances, which were classified to assets held for sale and a corresponding allowance for ECL of $147m, reflecting business disposals as disclosed in Note 15 'Business acquisitions and disposals' on page 129.
2 Includes $8.9bn of gross carrying amounts of stage 1 loans and advances to banks, representing the balance maintained with the Bank of England to support Bacs along with Faster Payments and the cheque-processing Image Clearing System in the UK. This balance was previously reported under 'Cash and balances at central banks'. Comparatives have not been restated.
As shown in the previous table, the allowance for ECL for loans and advances to customers and banks and relevant loan commitments and financial guarantees decreased by $670m during the period, from $11,875m at 31 December 2021 to $11,205m at 30 June 2022.
This decrease was primarily driven by:
-- $1,280m of assets written off;
-- $674m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further pending repayment; and
-- foreign exchange and other movements of $614m.
This decrease was offset by:
-- $1,718m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages;
-- $136m relating to the net remeasurement impact of stage transfers; and -- $45m relating to changes to models used for ECL calculation.
The ECL charge for the period of $1,225m presented in the previous table consisted of $1,718m relating to underlying credit quality changes, including the credit quality impact of financial
instruments transferring between stages, $136m relating to the net remeasurement impact of stage transfers and $45m relating to
changes to models used for ECL calculation. These were offset by $674m relating to underlying net book volume.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees (continued)
Non-credit impaired Credit impaired
--------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------
Stage 1 Stage 2 Stage 3 POCI Total
----------------------------------------- -------------------------------------- --------------------------------------------- -------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ carrying/ carrying/
nominal for nominal for nominal Allowance nominal Allowance nominal Allowance
amount ECL amount ECL amount for ECL amount for ECL amount for ECL
$m $m $m $m $m $m $m $m $m $m
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
At 1 Jan 2021 1,506,451 (2,331) 223,432 (5,403) 20,424 (7,544) 279 (113) 1,750,586 (15,391)
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
Transfers of
financial instruments: 21,107 (1,792) (27,863) 2,601 6,756 (809) - - - -
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
* transfers from stage 1 to
stage 2 (159,633) 527 159,633 (527) - - - - - -
----------------------------------
* transfers from stage 2 to
stage 1 182,432 (2,279) (182,432) 2,279 - - - - - -
----------------------------------
- transfers to
stage 3 (2,345) 24 (6,478) 1,010 8,823 (1,034) - - - -
----------------------------------
- transfers from
stage 3 653 (64) 1,414 (161) (2,067) 225 - - - -
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- --------------------
Net remeasurement
of ECL arising
from transfer
of stage - 1,225 - (596) - (34) - - - 595
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
New financial
assets originated
or purchased 444,070 (553) - - - - 124 - 444,194 (553)
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
Assets derecognised
(including final
repayments) (304,158) 174 (31,393) 489 (2,750) 458 (10) 6 (338,311) 1,127
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
Changes to risk
parameters -
further lending/repayment (61,742) 547 (3,634) 498 (1,268) 576 (108) 12 (66,752) 1,633
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
Changes to risk
parameters -
credit quality - 1,111 - (1,012) - (2,354) - 28 - (2,227)
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
Changes to models
used for ECL
calculation - (17) - (33) - 1 - - - (49)
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
Assets written
off - - - - (2,610) 2,605 (7) 7 (2,617) 2,612
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
Credit-related
modifications
that resulted
in derecognition - - - - (125) - - - (125) -
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
Foreign exchange (25,231) 26 (2,918) 45 (479) 157 (4) 1 (28,632) 229
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
Other(1) (2,915) 53 (1,882) 85 (151) 16 - (5) (4,948) 149
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
At 31 Dec 2021 1,577,582 (1,557) 155,742 (3,326) 19,797 (6,928) 274 (64) 1,753,395 (11,875)
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
ECL income statement
change for the
period 2,487 (654) (1,353) 46 526
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
Recoveries 409
Other (111)
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
Total ECL income
statement change
for the period(2) 824
---------------------------------- -------------------- ------------------- ----------------- ------------------- -------------------- ----------------------- ------------------- ----------------------- -------------------- -------------------------
12 months
ended 31
At 31 Dec 2021 Dec 2021
----------------------------------------------------------------------- ---------------------------------
Allowance
Gross carrying/nominal for
amount ECL ECL charge
$m $m $m
---------------- ---------------------------------- ----------------------------------- ---------------------------------
As above 1,753,395 (11,875) 824
---------------- ---------------------------------- ----------------------------------- ---------------------------------
Other financial
assets measured
at amortised
cost 880,351 (193) (19)
---------------- ---------------------------------- ----------------------------------- ---------------------------------
Non-trading 42,421 - -
reverse purchase
agreement
commitments
---------------- ---------------------------------- ----------------------------------- ---------------------------------
Performance and
other
guarantees not
considered
for IFRS 9 - - 75
---------------- ---------------------------------- ----------------------------------- ---------------------------------
Summary of
financial
instruments to
which
the impairment
requirements in
IFRS 9 are
applied/Summary
consolidated
income
statement 2,676,167 (12,068) 880
---------------- ---------------------------------- ----------------------------------- ---------------------------------
Debt instruments
measured at
FVOCI 347,203 (96) 48
---------------- ---------------------------------- ----------------------------------- ---------------------------------
Total allowance
for ECL/total
income
statement
ECL change for
the period n/a (12,164) 928
---------------- ---------------------------------- ----------------------------------- ---------------------------------
1 Total includes $3.0bn of gross carrying loans and advances to customers, which were classified to assets held for sale and a corresponding allowance for ECL of $123m, reflecting our exit of domestic mass market retail banking in the US.
2 The 31 December 2021 total ECL income statement change of $824m is attributable to $706m for the six months ended 30 June 2021 and $118m to the six months ended 31 December 2021.
Credit quality of financial instruments
We assess the credit quality of all financial instruments that are subject to credit risk. The credit quality of financial instruments is a point-in-time assessment of PD, whereas stages 1 and 2 are determined based on relative deterioration of credit quality since initial recognition. Accordingly, for non-credit-impaired financial instruments, there is no direct relationship between the credit quality assessment and stages 1 and 2, though typically the lower credit quality bands exhibit a higher proportion in stage 2.
The five credit quality classifications each encompass a range of granular internal credit rating grades assigned to wholesale and personal lending businesses and the external ratings attributed by external agencies to debt securities, as shown in the following table. Personal lending credit quality is disclosed based on a 12-month point-in-time PD adjusted for multiple economic scenarios. The credit quality classifications for wholesale lending are based on internal credit risk ratings.
Credit quality classification
Sovereign Other
debt debt
securities securities Wholesale lending
and bills and bills and derivatives Retail lending
--------------- --------------- ----------------------- -----------------------
12-month
Basel
probability 12 month
External External Internal of Internal probability-
credit credit credit default credit weighted
rating rating rating % rating PD %
---------------------------- --------------- --------------- --------- ------------ -------- -------------
Quality classification(1,2)
---------------------------- --------------- --------------- --------- ------------ -------- -------------
Strong BBB and A- and CRR 1 to 0 - 0.169 Band 1 0.000 -
above above CRR 2 and 2 0.500
---------------------------- --------------- --------------- --------- ------------ -------- -------------
Good BBB- to BBB+ to CRR 3 0.170 Band 3 0.501 -
BB BBB- - 0.740 1.500
---------------------------- --------------- --------------- --------- ------------ -------- -------------
BB- to BB+ to CRR 4 to 0.741 Band 4 1.501 -
Satisfactory B and unrated B and unrated CRR 5 - 4.914 and 5 20.000
---------------------------- --------------- --------------- --------- ------------ -------- -------------
Sub-standard B- to B- to CRR 6 to 4.915 Band 6 20.001
C C CRR 8 - 99.999 - 99.999
---------------------------- --------------- --------------- --------- ------------ -------- -------------
CRR 9 to
Credit impaired Default Default CRR 10 100 Band 7 100
---------------------------- --------------- --------------- --------- ------------ -------- -------------
1 Customer risk rating ('CRR').
2 12-month point-in-time probability-weighted probability of default ('PD').
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage allocation
Gross carrying/nominal amount
Allowance
Credit for
Strong Good Satisfactory Sub-standard impaired Total ECL Net
$m $m $m $m $m $m $m $m
--------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- ----------------------
Loans and
advances to
customers
at amortised
cost 524,443 239,180 227,371 28,934 19,202 1,039,130 (10,774) 1,028,356
--------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- ----------------------
- stage 1 511,234 208,847 166,552 5,189 - 891,822 (1,116) 890,706
---------------
- stage 2 13,209 30,333 60,819 23,744 - 128,105 (2,998) 125,107
---------------
- stage 3 - - - - 19,086 19,086 (6,617) 12,469
---------------
- POCI - - - 1 116 117 (43) 74
--------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- --------------------
Loans and
advances to
banks
at amortised
cost 87,017 4,169 4,121 1,095 79 96,481 (52) 96,429
--------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- ----------------------
- stage 1 86,906 4,088 4,096 1 - 95,091 (8) 95,083
---------------
- stage 2 111 81 25 1,094 - 1,311 (25) 1,286
---------------
- stage 3 - - - - 79 79 (19) 60
---------------
- POCI - - - - - - - -
--------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- --------------------
Other financial
assets
measured at
amortised cost 832,310 72,077 44,274 1,037 309 950,007 (281) 949,726
--------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- ----------------------
- stage 1 831,582 70,175 43,167 59 - 944,983 (71) 944,912
---------------
- stage 2 728 1,902 1,107 978 - 4,715 (119) 4,596
---------------
- stage 3 - - - - 264 264 (85) 179
---------------
- POCI - - - - 45 45 (6) 39
--------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- --------------------
Loan and other
credit-related
commitments 399,238 136,087 89,993 6,758 1,015 633,091 (337) 632,754
--------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- ----------------------
- stage 1 397,945 129,260 79,384 2,000 - 608,589 (124) 608,465 --------------- - stage 2 1,293 6,827 10,609 4,758 - 23,487 (159) 23,328 --------------- - stage 3 - - - - 1,015 1,015 (54) 961 --------------- - POCI - - - - - - - - --------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- Financial guarantees 7,065 4,504 4,787 1,050 180 17,586 (42) 17,544 --------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- - stage 1 7,008 4,227 3,807 156 - 15,198 (6) 15,192 --------------- - stage 2 57 277 980 894 - 2,208 (19) 2,189 --------------- - stage 3 - - - - 180 180 (17) 163 --------------- - POCI - - - - - - - - --------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- At 30 Jun 2022 1,850,073 456,017 370,546 38,874 20,785 2,736,295 (11,486) 2,724,809 --------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- Debt instruments at FVOCI(1) --------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- - stage 1 262,420 10,762 8,824 - - 282,006 (63) 281,943 --------------- - stage 2 86 28 111 2,083 - 2,308 (46) 2,262 --------------- - stage 3 - - - - 5 5 (3) 2 --------------- - POCI - - - - 33 33 (8) 25 --------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- At 30 Jun 2022 262,506 10,790 8,935 2,083 38 284,352 (120) 284,232 --------------- -------------------- ------------------ ---------------------- -------------------- -------------------- ---------------------- -------------------- ----------------------
1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI will not reconcile to the balance sheet as it excludes fair value gains and losses.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage allocation
(continued)
Gross carrying/notional amount
------------------------------------------------------------------------------------------------------------------------------------------
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
$m $m $m $m $m $m $m $m
--------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- ---------------------
Loans and
advances to
customers at
amortised
cost 544,695 230,326 233,739 29,404 19,067 1,057,231 (11,417) 1,045,814
--------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- ---------------------
- stage 1 537,642 206,645 169,809 4,840 - 918,936 (1,367) 917,569
---------------
- stage 2 7,053 23,681 63,930 24,560 - 119,224 (3,119) 116,105
---------------
- stage 3 - - - - 18,797 18,797 (6,867) 11,930
---------------
- POCI - - - 4 270 274 (64) 210
--------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- -----------------------
Loans and
advances to
banks at
amortised cost 72,978 4,037 5,020 1,118 - 83,153 (17) 83,136
--------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- ---------------------
- stage 1 72,903 3,935 4,788 10 - 81,636 (14) 81,622
---------------
- stage 2 75 102 232 1,108 - 1,517 (3) 1,514
---------------
- stage 3 - - - - - - - -
---------------
- POCI - - - - - - - -
--------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- -----------------------
Other financial
assets
measured at
amortised
cost 774,026 71,648 33,142 1,188 347 880,351 (193) 880,158
--------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- ---------------------
- stage 1 773,427 70,508 30,997 84 - 875,016 (91) 874,925
---------------
- stage 2 599 1,140 2,145 1,104 - 4,988 (54) 4,934
---------------
- stage 3 - - - - 304 304 (42) 262
---------------
- POCI - - - - 43 43 (6) 37 --------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- Loan and other credit-related commitments 389,865 136,297 92,558 8,142 775 627,637 (379) 627,258 --------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- --------------------- - stage 1 387,434 129,455 76,043 1,541 - 594,473 (165) 594,308 --------------- - stage 2 2,431 6,842 16,515 6,601 - 32,389 (174) 32,215 --------------- - stage 3 - - - - 775 775 (40) 735 --------------- - POCI - - - - - - - - --------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- Financial guarantees 16,511 4,902 5,166 991 225 27,795 (62) 27,733 --------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- --------------------- - stage 1 16,351 4,469 3,929 183 - 24,932 (11) 24,921 --------------- - stage 2 160 433 1,237 808 - 2,638 (30) 2,608 --------------- - stage 3 - - - - 225 225 (21) 204 --------------- - POCI - - - - - - - - --------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- At 31 Dec 2021 1,798,075 447,210 369,625 40,843 20,414 2,676,167 (12,068) 2,664,099 Debt instruments at FVOCI(1) --------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- --------------------- - stage 1 319,557 12,196 11,354 - - 343,107 (67) 343,040 --------------- - stage 2 604 102 323 1,087 - 2,116 (22) 2,094 --------------- - stage 3 - - - - - - - - --------------- - POCI - - - - 46 46 (7) 39 --------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- At 31 Dec 2021 320,161 12,298 11,677 1,087 46 345,269 (96) 345,173 --------------- --------------------- --------------------- --------------------- ----------------------- --------------------- --------------------- ----------------------- ---------------------
1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI will not reconcile to the balance sheet as it excludes fair value gains and losses.
Personal lending
This section provides further details on the regions, countries and products driving the increase in personal loans and advances to customers. Additionally, Hong Kong and UK mortgage book
loan-to-value ('LTV') data are provided.
Further product granularity is also provided by stage, with geographical data presented for loans and advances to customers, loans and other credit-related commitments, and financial guarantees and similar contracts.
At 30 June 2022, total personal lending for loans and advances to customers of $464bn decreased by $14.7bn compared with 31 December 2021. This decrease included adverse foreign exchange movements of $25.5bn. Excluding foreign exchange movements, there was a growth of $10.8bn, mainly driven by $4.9bn in Europe, $3.9bn in Asia and $1.0bn in Latin America.
The allowance for ECL attributable to personal lending, excluding off-balance sheet loan commitments and guarantees, decreased by $0.2bn to $2.9bn at 30 June 2022.
Excluding foreign exchange movements, mortgage lending balances increased by $9.9bn to $360.7bn at 30 June 2022. Mortgages grew $5.5bn in the UK; $3.7bn in Asia, notably $2.1bn in Australia and $1.5bn in Hong Kong; and $0.8bn in Canada.
The allowance for ECL attributable to mortgages, excluding foreign exchange, decreased by $0.1bn to $0.6bn when compared with 31 December 2021.
At 30 June 2022, the increase in stage 2 mortgage lending balances, primarily in the UK, is largely explained by a management adjustment designed to reflect inflation risk in certain segments of our customer base that may be more susceptible to inflationary pressure. While no increase in stress has emerged among this customer group, these have been classified as stage 2 as a recognition of the higher perceived risk to inflationary pressure that may occur. This does not have a material impact on ECL given the low LTV profile of these customers. We will continue to monitor the impact of inflation and update the management judgemental adjustments as the inflationary impacts abate or translate into changes in customer behaviour and performance.
The quality of both our Hong Kong and UK mortgage books remained high, with low levels of impairment allowances. The average LTV ratio on new mortgage lending in Hong Kong was 59%, compared with an estimated 50% for the overall mortgage portfolio. The average LTV ratio on new lending in the UK was 67%, compared with an estimated 49% for the overall mortgage portfolio.
Excluding foreign exchange movements, other personal lending balances increased by $0.9bn compared with 31 December 2021. The increase was largely driven by secured personal lending of $1.5bn, mainly in Hong Kong, and guaranteed loans in respect of residential property of $0.3bn, mainly in France. This was partly offset by a $0.8bn decline in unsecured personal lending, driven mainly in Hong Kong.
At 30 June 2022, the allowance for ECL attributable to other personal lending remained broadly stable at $2.3bn.
Total personal lending for loans and advances to customers by stage
distribution
Gross carrying amount Allowance for ECL
-------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
$m $m $m $m $m $m $m $m
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
By portfolio
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
First lien
residential
mortgages 341,328 16,958 2,418 360,704 (89) (172) (312) (573)
- of which:
interest only
(including
offset) 24,434 2,774 192 27,400 (4) (30) (69) (103)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
affordability
(including
US adjustable
rate
mortgages) 14,070 507 300 14,877 (2) (3) (3) (8)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
Other personal
lending 90,189 11,128 1,600 102,917 (465) (1,262) (618) (2,345)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
- second lien
residential
mortgages 316 31 18 365 (1) (3) (6) (10)
----------------
- guaranteed
loans
in respect of
residential
property 18,660 1,264 284 20,208 (10) (7) (35) (52)
----------------
- other personal
lending
which is
secured 37,477 964 257 38,698 (14) (20) (48) (82)
----------------
- credit cards 16,455 4,626 277 21,358 (214) (754) (158) (1,126)
----------------
- other personal
lending
which is
unsecured 15,725 4,058 757 20,540 (211) (468) (366) (1,045)
----------------
- motor vehicle
finance 1,556 185 7 1,748 (15) (10) (5) (30)
At 30 Jun 2022 431,517 28,086 4,018 463,621 (554) (1,434) (930) (2,918)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
By geography
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
Europe 187,287 15,285 1,550 204,122 (141) (659) (380) (1,180)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
- of which: UK 155,423 13,631 1,068 170,122 (121) (632) (263) (1,016)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
Asia 185,481 9,543 1,324 196,348 (143) (354) (215) (712)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
- of which: Hong
Kong 126,385 5,226 225 131,836 (58) (243) (43) (344)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
MENA 5,347 284 149 5,780 (28) (43) (79) (150)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
North America 43,910 2,068 667 46,645 (32) (86) (90) (208)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
Latin America 9,492 906 328 10,726 (210) (292) (166) (668)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
At 30 Jun 2022 431,517 28,086 4,018 463,621 (554) (1,434) (930) (2,918)
---------------- -------------------- ---------------------- ------------------------ -------------------- ------------------------ ------------------------ ------------------------ ------------------------
Total personal lending for loans and other credit-related commitments
and financial guarantees by stage distribution
Nominal amount Allowance for ECL
--------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m
Europe 51,245 405 93 51,743 (10) - - (10)
-------- ------------------ ---------------------- ----------------------- ------------------ ------------------------ ------------------------ ---------------------- ------------------------
- of
which:
UK 49,102 332 87 49,521 (9) - - (9)
-------- ------------------ ---------------------- ----------------------- ------------------ ------------------------ ------------------------ ---------------------- ------------------------
Asia 164,874 864 23 165,761 - - - -
-------- ------------------ ---------------------- ----------------------- ------------------ ------------------------ ------------------------ ---------------------- ------------------------
- of
which:
Hong
Kong 126,512 161 14 126,687 - - - -
-------- ------------------ ---------------------- ----------------------- ------------------ ------------------------ ------------------------ ---------------------- ------------------------
MENA 2,562 32 1 2,595 (1) - - (1)
-------- ------------------ ---------------------- ----------------------- ------------------ ------------------------ ------------------------ ---------------------- ------------------------
North
America 13,973 187 43 14,203 (11) (1) - (12)
-------- ------------------ ---------------------- ----------------------- ------------------ ------------------------ ------------------------ ---------------------- ------------------------
Latin
America 3,867 27 1 3,895 (7) - - (7)
-------- ------------------ ---------------------- ----------------------- ------------------ ------------------------ ------------------------ ---------------------- ------------------------
At 30
Jun
2022 236,521 1,515 161 238,197 (29) (1) - (30)
-------- ------------------ ---------------------- ----------------------- ------------------ ------------------------ ------------------------ ---------------------- ------------------------
Total personal lending for loans and advances to customers by stage
distribution (continued)
Gross carrying amount Allowance for ECL
----------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
By portfolio
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
First lien
residential
mortgages 360,686 7,637 3,045 371,368 (128) (131) (416) (675)
- of which:
interest only
(including
offset) 28,506 1,795 255 30,556 (5) (24) (81) (110)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
affordability
(including
US adjustable
rate
mortgages) 13,621 712 452 14,785 (6) (6) (5) (17)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
Other personal
lending 96,270 8,802 1,897 106,969 (530) (1,088) (810) (2,428)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
- second lien
residential
mortgages 314 44 37 395 (1) (4) (9) (14)
----------------
- guaranteed
loans
in respect of
residential
property 20,643 731 236 21,610 (9) (7) (42) (58)
----------------
- other personal
lending
which is
secured 36,533 1,096 366 37,995 (21) (15) (120) (156)
----------------
- credit cards 18,623 3,897 338 22,858 (246) (675) (214) (1,135)
----------------
- other personal
lending
which is
unsecured 18,743 2,820 915 22,478 (240) (378) (421) (1,039)
----------------
- motor vehicle
finance 1,414 214 5 1,633 (13) (9) (4) (26)
At 31 Dec 2021 456,956 16,439 4,942 478,337 (658) (1,219) (1,226) (3,103)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
By geography
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
Europe 212,284 5,639 2,148 220,071 (199) (499) (637) (1,335)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
- of which: UK 176,547 4,668 1,488 182,703 (167) (480) (399) (1,046)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
Asia 187,391 7,796 1,303 196,490 (158) (381) (226) (765)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
- of which: Hong
Kong 125,854 4,959 202 131,015 (65) (231) (43) (339)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
MENA 4,965 252 202 5,419 (38) (40) (94) (172)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
North America 43,489 2,126 1,005 46,620 (43) (67) (118) (228)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
Latin America 8,827 626 284 9,737 (220) (232) (151) (603)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
At 31 Dec 2021 456,956 16,439 4,942 478,337 (658) (1,219) (1,226) (3,103)
---------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------- ------------------------- ------------------------- -----------------------
Total personal lending for loans and other credit-related commitments
and financial guarantees by stage distribution (continued)
Nominal amount Allowance for ECL
------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m
Europe 57,109 558 107 57,774 (11) (1) - (12)
-------- ------------------- ----------------------- ------------------------ ------------------- ------------------------- ------------------------- ---------------------- -------------------------
- of
which:
UK 54,704 407 104 55,215 (10) (1) - (11)
-------- ------------------- ----------------------- ------------------------ ------------------- ------------------------- ------------------------- ---------------------- -------------------------
Asia 160,248 894 21 161,163 - - - -
-------- ------------------- ----------------------- ------------------------ ------------------- ------------------------- ------------------------- ---------------------- -------------------------
- of
which:
Hong
Kong 121,597 292 19 121,908 - - - -
-------- ------------------- ----------------------- ------------------------ ------------------- ------------------------- ------------------------- ---------------------- -------------------------
MENA 2,568 30 16 2,614 (5) - - (5)
-------- ------------------- ----------------------- ------------------------ ------------------- ------------------------- ------------------------- ---------------------- -------------------------
North
America 15,039 251 23 15,313 (15) (1) - (16)
-------- ------------------- ----------------------- ------------------------ ------------------- ------------------------- ------------------------- ---------------------- -------------------------
Latin
America 3,920 29 2 3,951 (6) - - (6)
-------- ------------------- ----------------------- ------------------------ ------------------- ------------------------- ------------------------- ---------------------- -------------------------
At 31
Dec
2021 238,884 1,762 169 240,815 (37) (2) - (39)
-------- ------------------- ----------------------- ------------------------ ------------------- ------------------------- ------------------------- ---------------------- -------------------------
Wholesale lending
This section provides further details on the regions, countries and industries driving the increase in wholesale loans and advances to customers and banks, with the impact of foreign exchange separately identified. Industry granularity is also provided by stage, with geographical data presented for loans and advances to customers, banks, other credit commitments, financial guarantees and similar contracts.
At 30 June 2022, wholesale lending for loans and advances to banks and customers of $672bn increased by $9.9bn since 31 December 2021. This included adverse foreign exchange movements of $29.1bn.
Excluding foreign exchange movements, the total wholesale lending growth was driven by a $19.1bn increase in corporate and commercial balances. This can be attributed to an $8.1bn increase in Asia, notably $2.4bn in mainland China; a $6.1bn increase in North America including $3.2bn in Canada, and $3.0bn in the US; and a $2.3bn increase in Europe.
Further growth in wholesale lending was driven by a $16.8bn increase in loans and advances to banks, including a $9.4bn increase in Asia, notably $3.7bn in Hong Kong, and a $7.6bn increase in Europe.
Loans and advances to non-bank financial institutions grew by $3.2bn, including $2.0bn in Europe and $1.6bn in North America, partly offset by a decline of $0.4bn in Asia.
Loan commitments and financial guarantees declined by $2.1bn since 31 December 2021 to $412bn at 30 June 2022, including a $28bn increase related to unsettled reverse repurchase agreements. Excluding adverse foreign exchange movements of $22bn, loans commitments and financial guarantees increased by $19.9bn.
The allowance for ECL attributable to loans and advances to banks and customers of $7.9bn at 30 June 2022 decreased from $8.3bn at 31 December 2021. This included favourable foreign exchange movements of $0.4bn.
Excluding foreign exchange movements, the total decrease in the wholesale ECL allowance for loans and advances to customers and banks was driven by a $0.1bn fall in corporate and commercial balances. This was mainly attributable to a $0.1bn decline in each of the following sectors: wholesale and retail trade, accommodation and food, and other services, partly offset by an increase of $0.3bn in real estate.
The decline in ECL allowance for loans to corporate and commercial was largely offset by an increase in ECL allowance of $0.1bn for loans to non-bank financial institutions.
Total wholesale lending for loans and advances to banks and customers
by stage distribution
Gross carrying amount Allowance for ECL
---------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
Corporate and commercial 399,152 95,590 14,707 117 509,566 (523) (1,525) (5,593) (43) (7,684)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
- agriculture, forestry
and fishing 6,455 884 366 - 7,705 (13) (25) (102) - (140)
------------------------------------------------------------
- mining and quarrying 7,732 1,956 336 3 10,027 (7) (28) (151) (1) (187)
------------------------------------------------------------
- manufacturing 74,788 17,584 1,922 52 94,346 (77) (176) (892) (30) (1,175)
------------------------------------------------------------
* electricity, gas, steam and air-conditioning supply 14,199 1,749 242 - 16,190 (9) (16) (54) - (79)
------------------------------------------------------------
* water supply, sewerage, waste management and
remediation 3,141 358 43 - 3,542 (3) (4) (17) - (24)
------------------------------------------------------------
- construction 9,914 3,458 803 1 14,176 (26) (62) (367) (1) (456)
------------------------------------------------------------
* wholesale and retail trade, repair of motor vehicles
and motorcycles 80,879 13,641 2,813 2 97,335 (76) (162) (1,706) (1) (1,945)
------------------------------------------------------------
- transportation
and storage 20,620 6,959 520 8 28,107 (56) (98) (150) - (304)
------------------------------------------------------------
- accommodation
and food 10,997 8,225 1,217 1 20,440 (26) (161) (118) (1) (306)
------------------------------------------------------------
* publishing, audiovisual and broadcasting 19,953 1,925 237 26 22,141 (22) (29) (82) (8) (141)
------------------------------------------------------------
- real estate 86,978 25,456 3,745 - 116,179 (105) (557) (1,237) - (1,899)
------------------------------------------------------------
* professional, scientific and technical activities 15,740 2,181 499 - 18,420 (23) (47) (141) - (211)
------------------------------------------------------------
- administrative
and support services 19,520 7,411 838 24 27,793 (32) (85) (280) (1) (398)
------------------------------------------------------------
* public administration and defence, compulsory social
security 1,204 207 34 - 1,445 (1) (2) - - (3)
------------------------------------------------------------
- education 1,320 218 60 - 1,598 (4) (8) (13) - (25)
------------------------------------------------------------
- health and care 3,540 689 140 - 4,369 (7) (12) (23) - (42)
------------------------------------------------------------
- arts, entertainment
and recreation 1,135 761 135 - 2,031 (5) (15) (30) - (50)
------------------------------------------------------------
- other services 10,383 1,486 556 - 12,425 (29) (28) (225) - (282)
------------------------------------------------------------
- activities of
households 827 30 - - 857 - - - - -
------------------------------------------------------------
* extra-territorial organisations and bodies activities - - - - - - - - - -
------------------------------------------------------------
- government 9,808 399 201 - 10,408 (2) - (5) - (7)
------------------------------------------------------------
- asset-backed securities 19 13 - - 32 - (10) - - (10)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- --------------------
Non-bank financial
institutions 61,153 4,429 361 - 65,943 (39) (39) (94) - (172)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
Loans and advances
to banks 95,091 1,311 79 - 96,481 (8) (25) (19) - (52)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
At 30 Jun 2022 555,396 101,330 15,147 117 671,990 (570) (1,589) (5,706) (43) (7,908)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
By geography
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
Europe 151,487 29,194 6,577 27 187,285 (276) (581) (1,567) (11) (2,435)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
- of which: UK 109,746 16,645 5,048 26 131,465 (226) (404) (937) (8) (1,575)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
Asia 305,524 52,054 5,784 73 363,435 (165) (641) (2,795) (22) (3,623)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
- of which: Hong
Kong 171,301 24,612 3,845 48 199,806 (66) (439) (1,355) (22) (1,882)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
MENA 27,567 4,432 1,545 17 33,561 (22) (75) (873) (10) (980)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
North America 58,350 12,821 495 - 71,666 (41) (244) (115) - (400)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
Latin America 12,468 2,829 746 - 16,043 (66) (48) (356) - (470)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
At 30 Jun 2022 555,396 101,330 15,147 117 671,990 (570) (1,589) (5,706) (43) (7,908)
------------------------------------------------------------ ------------------ ------------------ ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- --------------------
Total wholesale lending for loans and other credit-related commitments
and financial guarantees by stage distribution(1)
Nominal amount Allowance for ECL
--------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
Corporate
and
commercial 252,784 22,033 1,028 - 275,845 (96) (165) (71) - (332)
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
Financial 134,482 2,147 6 - 136,635 (5) (12) - - (17)
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
At 30 Jun
2022 387,266 24,180 1,034 - 412,480 (101) (177) (71) - (349)
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
By
geography
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
Europe 185,084 10,421 519 - 196,024 (40) (78) (44) - (162)
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
- of which:
UK 69,386 6,407 301 - 76,094 (34) (50) (33) - (117)
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
Asia 74,588 4,721 326 - 79,635 (40) (36) (6) - (82)
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
- of which:
Hong
Kong 27,975 1,201 309 - 29,485 (11) (11) (2) - (24)
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
MENA 7,424 707 35 - 8,166 (3) (12) (17) - (32)
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
North
America 117,603 8,231 145 - 125,979 (17) (50) (1) - (68)
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
Latin
America 2,567 100 9 - 2,676 (1) (1) (3) - (5)
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
At 30 Jun
2022 387,266 24,180 1,034 - 412,480 (101) (177) (71) - (349)
----------- ------------- ---------------- ------------------- ------------------ ------------- -------------------- -------------------- -------------------- ------------------ --------------------
1 Included in loans and other credit-related commitments and financial guarantees is $70bn relating to unsettled reverse repurchase agreements, which once drawn are classified as 'Reverse repurchase agreements - non-trading'.
Total wholesale lending for loans and advances to banks and customers
by stage distribution (continued)
Gross carrying amount Allowance for ECL
-------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
Corporate and commercial 400,894 98,911 13,460 274 513,539 (665) (1,874) (5,601) (64) (8,204)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
- agriculture, forestry
and fishing 6,510 1,026 362 1 7,899 (10) (23) (104) (1) (138)
------------------------------------------------------------
- mining and quarrying 7,167 2,055 447 16 9,685 (17) (39) (159) (12) (227)
------------------------------------------------------------
- manufacturing 75,193 16,443 2,019 88 93,743 (110) (176) (931) (31) (1,248)
------------------------------------------------------------
* electricity, gas, steam and air-conditioning supply 15,255 1,285 78 - 16,618 (16) (21) (31) - (68)
------------------------------------------------------------
* water supply, sewerage, waste management and
remediation 3,376 468 51 - 3,895 (5) (4) (20) - (29)
------------------------------------------------------------
* construction 9,506 3,605 842 1 13,954 (24) (44) (439) (1) (508)
------------------------------------------------------------
* wholesale and retail trade, repair of motor vehicles
and motorcycles 79,137 12,802 3,003 2 94,944 (71) (99) (1,936) (1) (2,107)
------------------------------------------------------------
* transportation and storage 21,199 7,726 658 9 29,592 (56) (116) (191) - (363)
------------------------------------------------------------
* accommodation and food 8,080 14,096 1,199 1 23,376 (67) (245) (110) (1) (423)
------------------------------------------------------------
* publishing, audiovisual and broadcasting 16,417 1,804 222 28 18,471 (37) (47) (94) (6) (184)
------------------------------------------------------------
* real estate 93,633 25,154 2,375 98 121,260 (132) (737) (775) - (1,644)
------------------------------------------------------------
* professional, scientific and technical activities 16,160 2,888 637 - 19,685 (26) (40) (172) - (238)
------------------------------------------------------------
* administrative and support services 23,186 4,740 719 30 28,675 (40) (84) (296) (11) (431)
------------------------------------------------------------
* public administration and defence, compulsory social
security 938 333 - - 1,271 (5) (3) - - (8)
------------------------------------------------------------
- education 1,455 273 65 - 1,793 (4) (15) (18) - (37)
------------------------------------------------------------
- health and care 3,743 928 183 - 4,854 (11) (24) (37) - (72)
------------------------------------------------------------
* arts, entertainment and recreation 1,620 826 152 - 2,598 (6) (44) (42) - (92)
------------------------------------------------------------
- other services 10,123 1,726 448 - 12,297 (26) (101) (246) - (373)
------------------------------------------------------------
- activities of
households 860 117 - - 977 - - - - -
------------------------------------------------------------
* extra-territorial organisations and bodies activities 2 - - - 2 - - - - -
------------------------------------------------------------
- government 7,010 602 - - 7,612 (2) (2) - - (4)
------------------------------------------------------------
- asset-backed securities 324 14 - - 338 - (10) - - (10)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- ---------------------
Non-bank financial
institutions 61,086 3,874 395 - 65,355 (44) (26) (40) - (110)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
Loans and advances
to banks 81,636 1,517 - - 83,153 (14) (3) - - (17)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
At 31 Dec 2021 543,616 104,302 13,855 274 662,047 (723) (1,903) (5,641) (64) (8,331)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
By geography
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
Europe 154,575 31,871 6,741 30 193,217 (356) (654) (1,806) (9) (2,825)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
- of which: UK 101,029 24,461 5,126 28 130,644 (306) (518) (1,060) (6) (1,890)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
Asia 297,423 53,993 3,997 199 355,612 (182) (830) (2,299) (43) (3,354)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
- of which: Hong
Kong 165,437 30,305 1,990 159 197,891 (85) (650) (836) (21) (1,592)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
MENA 26,135 5,295 1,682 22 33,134 (62) (108) (1,028) (11) (1,209)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
North America 53,513 10,397 652 - 64,562 (57) (215) (169) - (441)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
Latin America 11,970 2,746 783 23 15,522 (66) (96) (339) (1) (502)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
At 31 Dec 2021 543,616 104,302 13,855 274 662,047 (723) (1,903) (5,641) (64) (8,331)
------------------------------------------------------------ -------------------- ------------------ ------------------ -------------------- -------------------- --------------------- -------------------- ------------------- --------------------- --------------------
Total wholesale lending for loans and other credit-related commitments
and financial guarantees by stage distribution(1) (continued)
Nominal amount Allowance for ECL
----------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------------
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m
----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ -------------------
Corporate
and
commercial 274,775 30,376 829 - 305,980 (130) (193) (60) - (383)
----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ -------------------
Financial 105,746 2,889 2 - 108,637 (9) (9) (1) - (19)
----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ -------------------
At 31 Dec
2021 380,521 33,265 831 - 414,617 (139) (202) (61) - (402)
----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ -------------------
By
geography
----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ -------------------
Europe 189,770 15,585 673 - 206,028 (67) (76) (47) - (190)
----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ -------------------
- of
which: UK 68,136 8,430 389 - 76,955 (55) (49) (28) - (132) ----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ ------------------- Asia 72,179 5,229 20 - 77,428 (35) (40) (5) - (80) ----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ ------------------- - of which: Hong Kong 31,314 1,517 10 - 32,841 (11) (17) (2) - (30) ----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ ------------------- MENA 6,335 1,017 19 - 7,371 (10) (18) (3) - (31) ----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ ------------------- North America 109,851 11,350 91 - 121,292 (24) (66) (1) - (91) ----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ ------------------- Latin America 2,386 84 28 - 2,498 (3) (2) (5) - (10) ----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ ------------------- At 31 Dec 2021 380,521 33,265 831 - 414,617 (139) (202) (61) - (402) ----------- --------------- ------------------- -------------------- ------------------ --------------- --------------------- -------------------- --------------------- ------------------ -------------------
1 Included in loans and other credit-related commitments and financial guarantees is $42bn relating to unsettled reverse repurchase agreements, which once drawn are classified as 'Reverse repurchase agreements - non-trading'.
The following table presents the Group's total exposure to mainland China commercial real estate at 30 June 2022, by country/territory and credit quality. Mainland China reported real estate exposures comprise exposures booked in mainland China
and offshore where the ultimate parent and beneficial owner is based in mainland China, and all exposures booked on mainland China balance sheets.
Mainland China commercial real estate
Hong Kong Mainland Rest of Total
China the Group
$m $m $m $m
------------- ---------------------------------- ----------------------------------- -------------------------------------- ----------------------------------
Loans and
advances to
customers(1) 9,773 6,488 441 16,702
------------- ---------------------------------- ----------------------------------- -------------------------------------- ----------------------------------
Guarantees
issued and
others(2) 1,961 1,026 94 3,081
------------- ---------------------------------- ----------------------------------- -------------------------------------- ----------------------------------
Total
mainland
China
commercial
real estate
exposure at
30 Jun 2022 11,734 7,514 535 19,783
Distribution
of mainland
China
commercial
real estate
exposure
by credit
quality
------------- ---------------------------------- ----------------------------------- -------------------------------------- ----------------------------------
- Strong 2,095 2,117 145 4,357
-------------
- Good 2,429 2,898 58 5,385
-------------
-
Satisfactory 3,104 2,272 175 5,551
-------------
-
Sub-standard 1,946 95 157 2,198
-------------
- Credit
impaired 2,160 132 - 2,292
------------- ---------------------------------- ----------------------------------- --------------------------------------
At 30 Jun
2022 11,734 7,514 535 19,783
------------- ---------------------------------- ----------------------------------- -------------------------------------- ----------------------------------
Allowance for
ECL (884) (103) (3) (990)
------------- ---------------------------------- ----------------------------------- -------------------------------------- ----------------------------------
Loans and
advances to
customers(1) 9,903 6,811 410 17,124
------------- ----------------------------------- ------------------------------------ -------------------------------------- -----------------------------------
Guarantees
issued and
others(2) 1,747 2,376 79 4,202
------------- ----------------------------------- ------------------------------------ -------------------------------------- -----------------------------------
Total
mainland
China
commercial
real
estate
exposure at
31 Dec 2021 11,650 9,187 489 21,326
Distribution
of mainland
China
commercial
real estate
exposure by
credit
quality
------------- ----------------------------------- ------------------------------------ -------------------------------------- -----------------------------------
- Strong 3,543 3,864 155 7,562
-------------
- Good 2,652 2,354 73 5,079
-------------
-
Satisfactory 3,383 2,855 106 6,344
-------------
-
Sub-standard 1,570 12 155 1,737
-------------
- Credit
impaired 502 102 - 604
------------- ----------------------------------- ------------------------------------ --------------------------------------
At 31 Dec
2021 11,650 9,187 489 21,326
------------- ----------------------------------- ------------------------------------ -------------------------------------- -----------------------------------
Allowance for
ECL (560) (49) (2) (611)
------------- ----------------------------------- ------------------------------------ -------------------------------------- ----------------------------------- 1 Amounts represent gross carrying amount. 2 Amounts represent nominal amount.
At 30 June 2022, the Group had no direct credit exposure to developers in the 'red' category of the Chinese government's 'three red lines' framework. The Group's exposures related to companies whose primary activities are focused on residential, commercial and mixed-use real estate activities. Lending is generally focused on tier 1 and 2 cities.
The Group's exposures related to mainland China commercial real estate that are booked in Hong Kong are generally higher risk exposures to a combination of state and privately owned enterprises.
This portfolio had 77% of exposure booked with a credit quality of 'satisfactory' or above, but had a higher degree of uncertainty due to tightening liquidity and increased refinancing risks. In addition, offshore exposures are typically higher risk than onshore exposures. At 30 June 2022, the Group had allowances for ECL of $884m (31 December 2021: $560m) held against mainland China commercial real estate exposures booked in Hong Kong. We will continue to monitor the situation closely.
Supplementary information
The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in IFRS 9 are applied by global business and the associated allowance for ECL.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied - by global business
Gross carrying/nominal amount Allowance for ECL
----------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
Loans and
advances
to customers
at amortised
cost 891,822 128,105 19,086 117 1,039,130 (1,116) (2,998) (6,617) (43) (10,774)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
- WPB 446,321 27,960 4,176 - 478,457 (564) (1,446) (981) - (2,991)
---------------
- CMB 269,446 73,681 11,440 95 354,662 (463) (1,297) (4,607) (43) (6,410)
---------------
- GBM 175,541 26,421 3,470 22 205,454 (89) (239) (1,029) - (1,357)
---------------
- Corporate
Centre 514 43 - - 557 - (16) - - (16)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- -------------------
Loans and
advances
to banks at
amortised
cost 95,091 1,311 79 - 96,481 (8) (25) (19) - (52)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
- WPB 22,033 392 - - 22,425 (1) (1) - - (2)
---------------
- CMB 22,322 197 - - 22,519 (1) - - - (1)
---------------
- GBM 44,067 696 79 - 44,842 (5) (24) (19) - (48)
---------------
- Corporate
Centre 6,669 26 - - 6,695 (1) - - - (1)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- -------------------
Other financial
assets
measured at
amortised
cost 944,983 4,715 264 45 950,007 (71) (119) (85) (6) (281)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
- WPB 204,810 1,717 126 45 206,698 (32) (34) (47) (6) (119)
---------------
- CMB 167,534 1,823 89 - 169,446 (14) (18) (32) - (64)
---------------
- GBM 481,926 1,166 43 - 483,135 (25) (67) (6) - (98)
---------------
- Corporate
Centre 90,713 9 6 - 90,728 - - - - -
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- -------------------
Total gross
carrying
amount
on-balance
sheet at 30
Jun 2022 1,931,896 134,131 19,429 162 2,085,618 (1,195) (3,142) (6,721) (49) (11,107)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
Loans and other
credit-related
commitments 608,589 23,487 1,015 - 633,091 (124) (159) (54) - (337)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
- WPB 233,329 1,941 138 - 235,408 (28) (3) - - (31)
---------------
- CMB 126,429 11,547 530 - 138,506 (62) (97) (44) - (203)
---------------
- GBM 248,675 9,998 347 - 259,020 (34) (59) (10) - (103)
---------------
- Corporate
Centre 156 1 - - 157 - - - - -
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- -------------------
Financial
guarantees 15,198 2,208 180 - 17,586 (6) (19) (17) - (42)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
- WPB 1,268 11 1 - 1,280 - (1) - - (1)
---------------
- CMB 6,438 1,265 117 - 7,820 (4) (7) (13) - (24)
---------------
- GBM 7,492 932 62 - 8,486 (2) (11) (4) - (17)
---------------
- Corporate - - - - - - - - - -
Centre
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- -------------------
Total nominal
amount
off-balance
sheet
at 30 Jun 2022 623,787 25,695 1,195 - 650,677 (130) (178) (71) - (379)
WPB 106,858 971 1 24 107,854 (17) (17) (1) (7) (42)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
CMB 72,335 678 1 8 73,022 (9) (10) (1) (1) (21)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
GBM 90,086 308 - 1 90,395 (11) (3) - - (14)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
Corporate
Centre 3,195 299 - - 3,494 (27) (16) - - (43)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
Debt
instruments
measured at
FVOCI
at 30 Jun 2022 272,474 2,256 2 33 274,765 (64) (46) (2) (8) (120)
--------------- -------------------- -------------------- ----------------- ---------------- -------------------------- ------------------ ------------------ -------------------- ------------------- ----------------
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied - by global business (continued)
Gross carrying/nominal amount Allowance for ECL
---------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
Loans and
advances
to customers
at amortised
cost 918,936 119,224 18,797 274 1,057,231 (1,367) (3,119) (6,867) (64) (11,417)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
- WPB 469,477 17,285 5,211 - 491,973 (664) (1,247) (1,276) - (3,187)
---------------
- CMB 267,517 76,798 11,462 245 356,022 (571) (1,369) (4,904) (53) (6,897)
---------------
- GBM 181,247 25,085 2,124 29 208,485 (132) (493) (687) (11) (1,323)
---------------
- Corporate
Centre 695 56 - - 751 - (10) - - (10)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- -------------------
Loans and
advances
to banks at
amortised
cost 81,636 1,517 - - 83,153 (14) (3) - - (17)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
- WPB 20,464 481 - - 20,945 (1) (1) - - (2)
---------------
- CMB 15,269 352 - - 15,621 (1) - - - (1)
---------------
- GBM 36,875 654 - - 37,529 (10) (2) - - (12)
---------------
- Corporate
Centre 9,028 30 - - 9,058 (2) - - - (2)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- -------------------
Other financial
assets
measured at
amortised
cost 875,016 4,988 304 43 880,351 (91) (54) (42) (6) (193)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
- WPB 207,335 1,407 175 43 208,960 (51) (44) (14) (6) (115)
---------------
- CMB 163,457 2,370 61 - 165,888 (12) (8) (20) - (40)
---------------
- GBM 409,808 1,204 62 - 411,074 (28) (2) (8) - (38)
---------------
- Corporate
Centre 94,416 7 6 - 94,429 - - - - -
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- -------------------
Total gross
carrying
amount
on-balance
sheet at 31
Dec 2021 1,875,588 125,729 19,101 317 2,020,735 (1,472) (3,176) (6,909) (70) (11,627)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
Loans and other
credit-related
commitments 594,473 32,389 775 - 627,637 (165) (174) (40) - (379)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
- WPB 235,722 2,111 153 - 237,986 (37) (3) - - (40)
---------------
- CMB 126,728 17,490 555 - 144,773 (80) (118) (37) - (235)
---------------
- GBM 231,890 12,788 67 - 244,745 (48) (53) (3) - (104)
---------------
- Corporate
Centre 133 - - - 133 - - - - -
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- -------------------
Financial
guarantees 24,932 2,638 225 - 27,795 (11) (30) (21) - (62)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
- WPB 1,295 15 1 - 1,311 - (1) - - (1)
---------------
- CMB 6,105 1,606 126 - 7,837 (7) (16) (17) - (40)
---------------
- GBM 17,531 1,017 98 - 18,646 (4) (13) (4) - (21)
---------------
- Corporate
Centre 1 - - - 1 - - - - -
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- -------------------
Total nominal
amount
off-balance
sheet
at
31 Dec 2021 619,405 35,027 1,000 - 655,432 (176) (204) (61) - (441)
WPB 143,373 718 - 35 144,126 (20) (7) - (5) (32)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
CMB 86,247 471 - 10 86,728 (11) (1) - (1) (13)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
GBM 111,473 526 - 1 112,000 (13) (2) - - (15)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
Corporate
Centre 4,038 311 - - 4,349 (25) (11) - - (36)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
Debt
instruments
measured at
FVOCI
at 31 Dec 2021 345,131 2,026 - 46 347,203 (69) (21) - (6) (96)
--------------- ---------------------- -------------------- ------------------ ---------------- ---------------------------- ------------------ ------------------ --------------------- ------------------- -----------------
Wholesale lending - loans and advances to customers at amortised cost
by country/territory
Gross carrying amount Allowance for ECL
-------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------
of which: Non-bank of which: Non-bank
Corporate real financial Corporate real financial
and commercial estate(1) institutions Total and commercial estate(1) institutions Total
$m $m $m $m $m $m $m $m
----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ -----------------------
Europe 150,203 20,458 18,172 168,375 (2,297) (432) (96) (2,393)
----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ -----------------------
- UK 105,057 14,452 12,470 117,527 (1,450) (391) (85) (1,535)
-----------------
- France 32,009 4,743 3,737 35,746 (591) (42) (5) (596)
-----------------
- Germany 6,728 257 1,025 7,753 (100) - (2) (102)
-----------------
- Switzerland 1,194 716 441 1,635 (53) - - (53)
----------------- - other 5,215 290 499 5,714 (103) 1 (4) (107) ----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ Asia 265,508 78,749 35,014 300,522 (3,563) (1,096) (49) (3,612) ----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ ----------------------- - Hong Kong 161,966 60,728 19,204 181,170 (1,871) (971) (13) (1,884) ----------------- - Australia 9,516 2,534 1,022 10,538 (99) (1) - (99) ----------------- - India 8,958 1,761 4,877 13,835 (78) (26) (3) (81) ----------------- - Indonesia 3,546 87 207 3,753 (231) (1) - (231) ----------------- - mainland China 34,239 6,488 7,959 42,198 (264) (72) (30) (294) ----------------- - Malaysia 6,405 1,575 187 6,592 (130) (12) - (130) ----------------- - Singapore 16,870 4,112 542 17,412 (781) (6) - (781) ----------------- - Taiwan 6,129 - 118 6,247 - - - - ----------------- - other 17,879 1,464 898 18,777 (109) (7) (3) (112) ----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ Middle East and North Africa (excluding Saudi Arabia) 23,347 1,531 354 23,701 (977) (139) (4) (981) ----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ ----------------------- - Egypt 1,794 81 126 1,920 (173) (9) (1) (174) ----------------- - UAE 13,985 1,334 214 14,199 (625) (128) - (625) ----------------- - other 7,568 116 14 7,582 (179) (2) (3) (182) ----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ North America 58,239 14,057 11,801 70,040 (380) (114) (22) (402) ----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ ----------------------- - US 30,050 5,985 9,854 39,904 (221) (78) (9) (230) ----------------- - Canada 27,784 7,981 1,767 29,551 (140) (28) (3) (143) ----------------- - other 405 91 180 585 (19) (8) (10) (29) ----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ Latin America 12,269 1,384 602 12,871 (467) (118) (1) (468) ----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ ----------------------- - Mexico 9,742 1,381 571 10,313 (425) (118) (1) (426) ----------------- - other 2,527 3 31 2,558 (42) - - (42) ----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ At 30 Jun 2022 509,566 116,179 65,943 575,509 (7,684) (1,899) (172) (7,856) ----------------- -------------------- ------------------------ ---------------------- -------------------- ----------------------- ------------------------ ------------------------ ----------------------- Europe 163,341 23,137 17,818 181,159 (2,770) (546) (41) (2,811) ------------ --------------------- ------------------------ ----------------------- --------------------- ------------------------- ------------------------- ------------------------- ------------------------- - UK 115,386 16,233 11,306 126,692 (1,855) (489) (32) (1,887) ------------ - France 34,488 5,520 4,391 38,879 (654) (47) (2) (656) ------------ - Germany 6,746 306 987 7,733 (120) - (3) (123) ------------ - Switzerland 1,188 731 688 1,876 (8) - - (8) ------------ - other 5,533 347 446 5,979 (133) (10) (4) (137) ------------ --------------------- ------------------------ ----------------------- --------------------- ------------------------- ------------------------- ------------------------- Asia 263,821 81,453 36,321 300,142 (3,297) (731) (44) (3,341) ------------ --------------------- ------------------------ ----------------------- --------------------- ------------------------- ------------------------- ------------------------- ------------------------- - Hong Kong 162,684 62,792 20,182 182,866 (1,585) (624) (7) (1,592) ------------ - Australia 9,937 2,596 717 10,654 (108) (3) - (108) ------------ - India 8,221 1,786 4,003 12,224 (84) (29) (8) (92)
------------ - Indonesia 3,436 86 226 3,662 (246) (2) (1) (247) ------------ - mainland China 33,555 6,811 9,359 42,914 (198) (41) (28) (226) ------------ - Malaysia 7,229 1,741 197 7,426 (172) (21) - (172) ------------ - Singapore 16,401 4,158 782 17,183 (792) (5) - (792) ------------ - Taiwan 6,291 31 47 6,338 - - - - ------------ - other 16,067 1,452 808 16,875 (112) (6) - (112) ------------ --------------------- ------------------------ ----------------------- --------------------- ------------------------- ------------------------- ------------------------- Middle East and North Africa (excluding Saudi Arabia) 21,963 1,555 376 22,339 (1,207) (158) (3) (1,210) ------------ --------------------- ------------------------ ----------------------- --------------------- ------------------------- ------------------------- ------------------------- ------------------------- - Egypt 1,788 69 152 1,940 (161) (7) - (161) ------------ - UAE 12,942 1,370 190 13,132 (811) (149) - (811) ------------ - other 7,233 116 34 7,267 (235) (2) (3) (238) ------------ --------------------- ------------------------ ----------------------- --------------------- ------------------------- ------------------------- ------------------------- North America 52,577 13,639 10,197 62,774 (427) (87) (18) (445) ------------ --------------------- ------------------------ ----------------------- --------------------- ------------------------- ------------------------- ------------------------- ------------------------- - US 27,002 5,895 8,511 35,513 (207) (64) (1) (208) ------------ - Canada 25,048 7,650 1,546 26,594 (198) (15) (6) (204) ------------ - other 527 94 140 667 (22) (8) (11) (33) ------------ --------------------- ------------------------ ----------------------- --------------------- ------------------------- ------------------------- ------------------------- Latin America 11,837 1,476 643 12,480 (503) (122) (4) (507) ------------ --------------------- ------------------------ ----------------------- --------------------- ------------------------- ------------------------- ------------------------- ------------------------- - Mexico 9,561 1,475 618 10,179 (452) (122) (4) (456) ------------ - other 2,276 1 25 2,301 (51) - - (51) ------------ --------------------- ------------------------ ----------------------- --------------------- ------------------------- ------------------------- ------------------------- At 31 Dec 2021 513,539 121,260 65,355 578,894 (8,204) (1,644) (110) (8,314) ------------ --------------------- ------------------------ ----------------------- --------------------- ------------------------- ------------------------- ------------------------- -------------------------
1 Real estate lending within this disclosure corresponds solely to the industry of the borrower.
Personal lending - loans and advances to customers at amortised cost
by country/territory
Gross carrying amount Allowance for ECL
------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------
First First
lien of which: lien of which:
residential Other credit residential Other credit
mortgages personal cards Total mortgages personal cards Total
$m $m $m $m $m $m $m $m
----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------ ------------------------
Europe 158,799 45,323 7,897 204,122 (251) (929) (431) (1,180)
----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------ ------------------------
- UK 152,508 17,614 7,546 170,122 (196) (820) (428) (1,016)
-----------------
- France(1) 2,710 21,286 318 23,996 (34) (79) (2) (113)
-----------------
- Germany - 269 - 269 - - - -
-----------------
- Switzerland 1,208 5,309 - 6,517 - (21) - (21)
-----------------
- other 2,373 845 33 3,218 (21) (9) (1) (30)
----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------
Asia 150,221 46,127 10,421 196,348 (55) (657) (407) (712)
----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------ ------------------------
- Hong Kong 98,877 32,959 7,392 131,836 (1) (343) (234) (344)
-----------------
- Australia 22,143 466 397 22,609 (5) (25) (23) (30) ----------------- - India 1,049 595 174 1,644 (6) (24) (16) (30) ----------------- - Indonesia 77 266 138 343 (1) (13) (9) (14) ----------------- - mainland China 10,055 1,037 459 11,092 (4) (70) (60) (74) ----------------- - Malaysia 2,327 2,442 767 4,769 (34) (106) (27) (140) ----------------- - Singapore 7,542 6,372 362 13,914 - (38) (13) (38) ----------------- - Taiwan 5,463 1,133 234 6,596 - (17) (4) (17) ----------------- - other 2,688 857 498 3,545 (4) (21) (21) (25) ----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------ Middle East and North Africa (excluding Saudi Arabia) 2,430 3,350 736 5,780 (23) (127) (53) (150) ----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------ ------------------------ - Egypt - 357 91 357 - (3) (1) (3) ----------------- - UAE 2,079 1,350 419 3,429 (15) (82) (41) (97) ----------------- - other 351 1,643 226 1,994 (8) (42) (11) (50) ----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------ North America 43,666 2,979 556 46,645 (128) (80) (51) (208) ----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------ ------------------------ - US 16,488 714 214 17,202 (7) (48) (36) (55) ----------------- - Canada 26,098 2,102 301 28,200 (32) (27) (10) (59) ----------------- - other 1,080 163 41 1,243 (89) (5) (5) (94) ----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------ Latin America 5,588 5,138 1,748 10,726 (116) (552) (184) (668) ----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------ ------------------------ - Mexico 5,387 4,352 1,364 9,739 (116) (516) (168) (632) ----------------- - other 201 786 384 987 - (36) (16) (36) ----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------ At 30 Jun 2022 360,704 102,917 21,358 463,621 (573) (2,345) (1,126) (2,918) ----------------- ---------------------- -------------------- ---------------------- -------------------- ------------------------ ------------------------ ------------------------ ------------------------ Europe 170,818 49,253 8,624 220,071 (329) (1,006) (437) (1,335) ----------------- ----------------------- --------------------- ----------------------- --------------------- ------------------------- ------------------------- ------------------------- ------------------------- - UK 163,549 19,154 8,213 182,703 (223) (823) (434) (1,046) ----------------- - France(1) 3,124 22,908 366 26,032 (38) (91) (3) (129) ----------------- - Germany - 282 - 282 - - - - ----------------- - Switzerland 1,367 6,615 - 7,982 - (75) - (75) ----------------- - other 2,778 294 45 3,072 (68) (17) - (85) ----------------- ----------------------- --------------------- ----------------------- --------------------- ------------------------- ------------------------- ------------------------- Asia 149,709 46,781 11,413 196,490 (59) (706) (428) (765) ----------------- ----------------------- --------------------- ----------------------- --------------------- ------------------------- ------------------------- ------------------------- ------------------------- - Hong Kong 98,019 32,996 8,154 131,015 (1) (338) (217) (339) ----------------- - Australia 21,149 504 427 21,653 (5) (33) (32) (38) ----------------- - India 981 543 181 1,524 (10) (30) (20) (40) ----------------- - Indonesia 76 272 147 348 (1) (20) (14) (21) ----------------- - mainland China 10,525 1,103 563 11,628 (4) (72) (66) (76) ----------------- - Malaysia 2,532 2,657 791 5,189 (33) (122) (34) (155) ----------------- - Singapore 7,811 6,649 367 14,460 - (40) (13) (40) -----------------
- Taiwan 5,672 1,188 271 6,860 - (17) (5) (17) ----------------- - other 2,944 869 512 3,813 (5) (34) (27) (39) ----------------- ----------------------- --------------------- ----------------------- --------------------- ------------------------- ------------------------- ------------------------- Middle East and North Africa (excluding Saudi Arabia) 2,262 3,157 761 5,419 (26) (146) (60) (172) ----------------- ----------------------- --------------------- ----------------------- --------------------- ------------------------- ------------------------- ------------------------- ------------------------- - Egypt - 368 98 368 - (3) (1) (3) ----------------- - UAE 1,924 1,232 417 3,156 (18) (88) (39) (106) ----------------- - other 338 1,557 246 1,895 (8) (55) (20) (63) ----------------- ----------------------- --------------------- ----------------------- --------------------- ------------------------- ------------------------- ------------------------- North America 43,529 3,091 555 46,620 (141) (87) (47) (228) ----------------- ----------------------- --------------------- ----------------------- --------------------- ------------------------- ------------------------- ------------------------- ------------------------- - US 16,642 799 232 17,441 (12) (53) (36) (65) ----------------- - Canada 25,773 2,123 284 27,896 (33) (27) (8) (60) ----------------- - other 1,114 169 39 1,283 (96) (7) (3) (103) ----------------- ----------------------- --------------------- ----------------------- --------------------- ------------------------- ------------------------- ------------------------- Latin America 5,050 4,687 1,505 9,737 (120) (483) (163) (603) ----------------- ----------------------- --------------------- ----------------------- --------------------- ------------------------- ------------------------- ------------------------- ------------------------- - Mexico 4,882 4,006 1,172 8,888 (119) (450) (148) (569) ----------------- - other 168 681 333 849 (1) (33) (15) (34) ----------------- ----------------------- --------------------- ----------------------- --------------------- ------------------------- ------------------------- ------------------------- At 31 Dec 2021 371,368 106,969 22,858 478,337 (675) (2,428) (1,135) (3,103) ----------------- ----------------------- --------------------- ----------------------- --------------------- ------------------------- ------------------------- ------------------------- -------------------------
1 Included in other personal lending as at 30 June 2022 is $18,726m (31 December 2021: $19,972m) guaranteed by Crédit Logement.
Treasury risk
Page
Overview 89
---------------------------------- ----
Treasury risk management 89
---------------------------------- ----
Capital risk in the first half
of 2022 91
Liquidity and funding risk in
the first half of 2022 94
---------------------------------- ----
Sources of funding 95
---------------------------------- ----
Interest rate risk in the banking
book in the first half of 2022 96
---------------------------------- ----
Overview
Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, together with the financial risks arising from the provision of pensions and other post-employment benefits to staff and their dependants. Treasury risk also includes the risk to our earnings or capital due to non-trading book foreign exchange exposures and changes in market interest rates.
Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions or the external environment.
Approach and policy
Our objective in the management of treasury risk is to maintain appropriate levels of capital, liquidity, funding, foreign exchange and market risk to support our business strategy, and meet our regulatory and stress testing-related requirements.
Our approach to treasury management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim to maintain a strong capital and liquidity base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory requirements at all times.
Our policy is underpinned by our risk management framework, our internal capital adequacy assessment process ('ICAAP') and our internal liquidity adequacy assessment process ('ILAAP'). The risk framework incorporates a number of measures aligned to our assessment of risks for both internal and regulatory purposes. These risks include credit, market, operational, pensions, non-trading book foreign exchange risk, and interest rate risk in the banking book.
A summary of our current policies and practices regarding the management of treasury risk is set out on pages 189 to 191 of the Annual Report and Accounts 2021.
Treasury risk management
Key developments in the first half of 2022
-- Our CET1 position fell from 15.8% at 31 December 2021 to 13.6% at 30 June 2022, as a result of a $16.8bn reduction in CET1 capital and a $13.4bn increase in risk-weighted assets ('RWAs').
-- During the periods of high market volatility in the first half of 2022, we enhanced the monitoring and forecasting of our capital positions.
-- The mark-to-market movement in financial instruments that impacted our capital ratio arose from the portfolio of high-quality liquid assets ('HQLA') held by our Markets Treasury business as economic hedges of net interest income. This portfolio is largely accounted for at fair value through other comprehensive income ('FVOCI'), together with any derivative hedges held to offset the duration risk of the assets. During 1H22, we took steps to reduce the duration risk of this portfolio to reduce the capital impact from higher interest rates. The impact of this risk reduction reduced the hold-to-collect-and-sell stressed value at risk ('VaR') exposure from $3.63bn at the end of 2021 to $2.34bn at the end of 1H22. For further details of the calculation of this exposure and the use of this metric in our interest rate risk management framework, see page 91.
-- Our portfolio of hold-to-collect-and-sell assets forms a material part of our liquid asset buffer, and the duration risk of the portfolio acts as a hedge to our structural interest rate risk. We have recently approved a new hold-to-collect business model, which is currently being implemented at legal entity level, and certain new purchases of securities will be booked under this model. In future, this portfolio of assets will also form a more material part of our structural interest rate hedging. This will allow more flexibility in managing the market risk of the current hold-to-collect-and-sell portfolio to optimise returns from market movements while still safeguarding the Group's capital and future earnings.
-- All of the Group's material operating entities were above regulatory minimum levels of capital, liquidity and funding at 30 June 2022. The Group and all entities had significant surplus liquidity, and maintained heightened liquidity coverage ratios ('LCR') throughout the first half of 2022.
-- There have been no material capital or liquidity direct impacts from the inflationary pressures and increased uncertainty on the forward economic outlook exacerbated by the Russia-Ukraine war, although we continue to monitor developments closely.
-- We continued to improve global consistency and control standards across a number of our processes. We are keeping the Prudential Regulation Authority ('PRA') and other relevant regulators informed of adverse findings from external and internal reviews.
-- We continued to build our recovery and resolution capabilities in line with the Group's preferred resolution strategy to meet requirements from the Bank of England ('BoE') under its Resolvability Assessment Framework ('RAF'). We met our compliance deadline of 1 January 2022 to develop RAF capabilities. We publicly disclosed a summary of our preparedness for resolution on 10 June 2022, thereby completing the first RAF cycle. We will continue to enhance our capabilities during the second half of 2022 in discussion with the BoE.
For quantitative disclosures on capital ratios, own funds and RWAs, see pages 91 to 93. For quantitative disclosures on liquidity and funding metrics, see pages 94 to 95. For quantitative disclosures on interest rate risk in the banking book, see pages 96 to 97.
Capital, liquidity and funding risk management processes
Assessment and risk appetite
Our capital management policy is underpinned by a global capital management framework and our ICAAP. The framework incorporates key capital risk appetites including CET1, total capital, minimum requirements for own funds and eligible liabilities ('MREL'), leverage ratio and double leverage. The ICAAP is an assessment of the Group's capital position, outlining both regulatory and internal capital resources and requirements resulting from HSBC's business model, strategy, risk profile and management, performance and planning, risks to capital, and the implications of stress testing. Our assessment of capital adequacy is driven by an assessment of risks. These risks include credit, market, operational, pensions, insurance, structural foreign exchange, interest rate risk in the banking book and Group risk driven by credit concentration risk in HSBC UK. Climate risk is also considered as part of the ICAAP, and we are continuing to develop our approach. The Group's ICAAP supports the determination of the consolidated capital risk appetite and target ratios, as well as enables the assessment and determination of capital requirements by regulators. Subsidiaries prepare ICAAPs in line with global guidance, while considering their local regulatory regimes to determine their own risk appetites and ratios.
HSBC Holdings is the provider of equity capital and MREL-eligible debt to its subsidiaries, and also provides them with non-equity capital where necessary. These investments are funded by HSBC Holdings' own regulatory capital and MREL-eligible debt.
HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investments in subsidiaries.
As a matter of long-standing policy, the holding company retains a substantial holdings capital buffer comprising HQLA, which at 30 June 2022 was in excess of $18bn.
We aim to ensure that management has oversight of our liquidity and funding risks at Group and entity level through robust governance, in line with our risk management framework. We manage liquidity and funding risk at an operating entity level, in accordance with globally consistent policies, procedures and reporting standards. This ensures that obligations can be met in a timely manner, in the jurisdiction where they fall due.
Operating entities are required to meet internal minimum requirements and any applicable regulatory requirements at all times. These requirements are assessed through the ILAAP, which ensures that operating entities have robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of liquidity risk over an appropriate set of time horizons, including intra-day. The ILAAP informs the validation of risk tolerance and the setting of risk appetite. It also assesses the capability to manage liquidity and funding effectively in each major entity. These metrics are set and managed locally but are subject to robust global review and challenge to ensure consistency of approach and application of the Group's policies and controls.
Planning and performance
Capital and RWA plans form part of the annual financial resource plan that is approved by the Board. Capital and RWA forecasts are submitted to the Group Executive Committee on a monthly basis, and capital and RWAs are monitored and managed against the plan. The responsibility for global capital allocation principles rests with the Group Chief Financial Officer, supported by the Group Capital Management Meeting. This is a specialist forum addressing capital management, reporting into the HSBC Holdings Asset and Liability Management Committee ('ALCO').
Through our internal governance processes, we seek to strengthen discipline over our investment and capital allocation decisions, and to ensure that returns on investment meet management's objectives. Our strategy is to allocate capital to businesses and entities to support growth objectives where returns above internal hurdle levels have been identified, and in order to meet their regulatory and economic capital needs. We evaluate and manage business returns by using a return on average tangible equity measure.
Funding and liquidity plans form part of the financial resource plan that is approved by the Board. The Board-level appetite measures are the LCR together with an internal liquidity metric. In addition, we use a wider set of measures to manage an appropriate funding and liquidity profile, including net stable funding ratio ('NSFR'), legal entity depositor concentration limits, intra-day liquidity, forward-looking funding assessments and other key measures.
Risks to capital and liquidity
Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs, capital and/or liquidity position. Downside and Upside scenarios are assessed against our management objectives, and mitigating actions are assigned as necessary. We closely monitor future regulatory changes, and continue to evaluate the impact of these upon our capital and liquidity requirements, particularly those related to the UK's implementation of the outstanding measures to be implemented from the Basel III reforms ('Basel 3.1').
Regulatory developments
Our capital adequacy ratios have been affected by regulatory developments in 2022, including changes to internal-ratings based ('IRB') modelling requirements and the UK's implementation of the revisions to the Capital Requirements Regulation and Directive ('CRR II').
Future changes to our ratios will occur with the implementation of Basel 3.1, with the PRA expected to consult on the UK's implementation in the last quarter of 2022, with an effective date of 1 January 2025. We currently do not foresee a material net impact on our ratios from the initial implementation. The RWA output floor under Basel 3.1 will be subject to a five-year transitional provision. Any impact from the output floor would be towards the end of the transition period.
Disposal of retail banking business in France
In relation to the sale of our retail banking business in France, we expect a reduction in the Group's CET1 ratio of approximately 30 basis points ('bps') in the second half of 2022 when classified as held for sale. This impact will be partly offset by the reduction in RWAs upon the estimated completion in 2023.
Regulatory reporting processes and controls
The quality of regulatory reporting remains a key priority for management and regulators. We are progressing with a comprehensive programme to strengthen our processes, improve consistency, and enhance controls on various aspects of regulatory reporting. We have commissioned a number of independent external reviews, some at the request of our regulators, including one on our credit risk RWA reporting process, which is currently ongoing. These reviews have so far resulted in higher RWAs and changes to LCR through improvements in reporting accuracy. There may be further impacts on some of our regulatory ratios, such as the CET1 and LCR.
Stress testing and recovery and resolution planning
The Group uses stress testing to evaluate the robustness of plans and risk portfolios, and to meet the stress testing requirements set by supervisors. Stress testing also informs the ICAAP and ILAAP, and supports recovery planning in many jurisdictions. It is an important output used to evaluate how much capital and liquidity the Group requires in setting risk appetite for capital and liquidity risk. It is also used to re-evaluate business plans where analysis shows capital, liquidity and/or returns do not meet their target.
In addition to a range of internal stress tests, we are subject to supervisory stress testing in many jurisdictions. These include the programmes of the Bank of England, the US Federal Reserve Board, the European Banking Authority, the European Central Bank and the Hong Kong Monetary Authority, as well as stress tests undertaken in other jurisdictions. The results of regulatory stress testing and our internal stress tests are used when assessing our internal capital requirements through the ICAAP. The outcomes of stress testing exercises carried out by the PRA and other regulators feed into the setting of regulatory minimum ratios and buffers.
The Group and subsidiaries have established recovery plans, which set out potential options management could take in a range of stress scenarios that could result in a breach of our capital or liquidity buffers. All entities monitor internal and external triggers that could threaten their capital, liquidity or funding positions. Entities have established recovery plans providing detailed actions that management would consider taking in a stress scenario should their positions deteriorate and threaten to breach risk appetite and regulatory minimum levels. This is to help ensure that our capital and liquidity position can be recovered even in an extreme stress event.
Recovery and resolution plans form part of the integral framework safeguarding the Group's financial stability. The Group is committed to developing its recovery and resolution capabilities further, including in relation to the BoE's Resolvability Assessment Framework.
Measurement of interest rate risk in the banking book processes
Assessment and risk appetite
Interest rate risk in the banking book is the risk of an adverse impact to earnings or capital due to changes in market interest rates. It is generated by our non-traded assets and liabilities, specifically loans, deposits and financial instruments that are not held for trading intent or in order to hedge positions held with trading intent. Interest rate risk that can be economically hedged may be transferred to the Markets Treasury business. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Markets Treasury cannot economically hedge is not transferred and will remain within the global business where the risks originate.
The Global Treasury function uses a number of measures to monitor and control interest rate risk in the banking book, including:
-- net interest income sensitivity; -- economic value of equity sensitivity; and -- hold-to-collect-and-sell stressed value at risk.
Net interest income sensitivity
A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected net interest income ('NII') under varying interest rate scenarios (i.e. simulation modelling), where all other economic variables are held constant. This monitoring is undertaken at an entity level, where entities calculate both one-year and five-year NII sensitivities across a range of interest rate scenarios.
NII sensitivity figures represent the effect of pro forma movements in projected yield curves based on a static balance sheet size and structure. The exception to this is where the size of the balances or repricing is deemed interest rate sensitive, for example, early prepayment of mortgages. These sensitivity calculations do not incorporate actions that would be taken by Markets Treasury or in the business that originates the risk to mitigate the effect of interest rate movements.
The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the 'up-shock' scenario. The sensitivity calculations in the 'down-shock' scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable.
Economic value of equity sensitivity
Economic value of equity ('EVE') represents the present value of the future banking book cash flows that could be distributed to equity holders under a managed run-off scenario. This equates to the current book value of equity plus the present value of future NII in this scenario. EVE can be used to assess the economic capital required to support interest rate risk in the banking book. An EVE sensitivity represents the expected movement in EVE due to pre-specified interest rate shocks, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivities as a percentage of capital resources.
Hold-to-collect-and-sell stressed value at risk
Hold-to-collect-and-sell stressed value at risk ('VaR') is a quantification of the potential losses to a 99% confidence level of the portfolio of high-quality liquid assets held under a hold-to-collect-and-and-sell business model in the Markets Treasury business. The portfolio is accounted for at fair value through other comprehensive income together with the derivatives held in
designated hedging relationships with these securities. The mark-to-market of this portfolio therefore has an impact on CET1.
Stressed VaR is quantified based on the worst losses over a one-year period, using a historical time series stretching back to the beginning of 2007, and the assumed holding period is 60 days. At the end of June 2022, the stressed VaR of the portfolio is $2.34bn (December 2021: $3.63bn). The decrease is primarily due to actions taken to reduce the overall duration risk of the portfolio in order to reduce the potential capital impact from further increases in interest rates.
Capital risk in the first half of 2022
Capital overview
Capital adequacy metrics
At
30 Jun 31 Dec
2022 2021
Risk-weighted assets
('RWAs') ($bn)
-------------------------- ----------------------- -------------------------
Credit risk 697.1 680.6
-------------------------- ----------------------- -------------------------
Counterparty credit
risk 42.8 35.9
-------------------------- ----------------------- -------------------------
Market risk 27.4 32.9
-------------------------- ----------------------- -------------------------
Operational risk 84.4 88.9
-------------------------- ----------------------- -------------------------
Total RWAs 851.7 838.3
-------------------------- ----------------------- -------------------------
Capital on a transitional
basis ($bn)
-------------------------- ----------------------- -------------------------
Common equity tier
1 capital 115.8 132.6
-------------------------- ----------------------- -------------------------
Tier 1 capital 137.5 156.3
-------------------------- ----------------------- -------------------------
Total capital 158.5 177.8
-------------------------- ----------------------- -------------------------
Capital ratios on
a transitional basis
(%)
-------------------------- ----------------------- -------------------------
Common equity tier
1 ratio 13.6 15.8
-------------------------- ----------------------- -------------------------
Tier 1 ratio 16.1 18.6
-------------------------- ----------------------- -------------------------
Total capital ratio 18.6 21.2
-------------------------- ----------------------- -------------------------
Capital on an end
point basis ($bn)
-------------------------- ----------------------- -------------------------
Common equity tier
1 capital 115.8 132.6
-------------------------- ----------------------- -------------------------
Tier 1 capital 137.5 155.0
-------------------------- ----------------------- -------------------------
Total capital 150.6 167.5
-------------------------- ----------------------- -------------------------
Capital ratios on
an end point basis
(%)
-------------------------- ----------------------- -------------------------
Common equity tier
1 ratio 13.6 15.8
-------------------------- ----------------------- -------------------------
Tier 1 ratio 16.1 18.5
-------------------------- ----------------------- -------------------------
Total capital ratio 17.7 20.0
-------------------------- ----------------------- -------------------------
Liquidity coverage
ratio ('LCR')
-------------------------- ----------------------- -------------------------
Total high-quality
liquid assets ($bn) 656.6 717.0
-------------------------- ----------------------- -------------------------
Total net cash outflow
($bn) 491.7 518.0
-------------------------- ----------------------- -------------------------
LCR ratio (%) 134 138
-------------------------- ----------------------- -------------------------
Capital figures and ratios in the table above are calculated in accordance with the revisions to the Capital Requirements Regulation and Directive, as implemented ('CRR II'). The table presents them under the transitional arrangements in CRR II for capital instruments and after their expiry, known as the end point. The end point figures in the table above include the benefit of the regulatory transitional arrangements in CRR II for IFRS 9, which are more fully described in 'Regulatory transitional arrangements for IFRS 9 'Financial Instruments" on page 94.
Regulatory numbers and ratios are as presented at the date of reporting. Small changes may exist between these numbers and ratios and those subsequently submitted in regulatory filings. Where differences are significant, we will restate comparatives.
Own funds
Own funds disclosure
At
30 Jun 31 Dec
2022 2021
Ref(*) $m $m
------ ----------------------------------------------------- -------------------------- ---------------------------
Common equity tier 1 capital before regulatory
6 adjustments 154,654 162,918
------ ----------------------------------------------------- -------------------------- ---------------------------
28 Total regulatory adjustments to common equity tier (38,874) (30,353)
1
------ ----------------------------------------------------- -------------------------- ---------------------------
29 Common equity tier 1 capital 115,780 132,565
------ ----------------------------------------------------- -------------------------- ---------------------------
36 Additional tier 1 capital before regulatory 21,794 23,787
adjustments
------ ----------------------------------------------------- -------------------------- ---------------------------
43 Total regulatory adjustments to additional tier 1 (60) (60)
capital
------ ----------------------------------------------------- -------------------------- ---------------------------
44 Additional tier 1 capital 21,734 23,727
------ ----------------------------------------------------- -------------------------- ---------------------------
45 Tier 1 capital 137,514 156,292
------ ----------------------------------------------------- -------------------------- ---------------------------
51 Tier 2 capital before regulatory adjustments 22,278 23,018
------ ----------------------------------------------------- -------------------------- ---------------------------
57 Total regulatory adjustments to tier 2 capital (1,273) (1,524)
------ ----------------------------------------------------- -------------------------- ---------------------------
58 Tier 2 capital 21,005 21,494
------ ----------------------------------------------------- -------------------------- ---------------------------
59 Total capital 158,519 177,786
------ ----------------------------------------------------- -------------------------- ---------------------------
60 Total risk-weighted assets 851,743 838,263
------ ----------------------------------------------------- -------------------------- ---------------------------
Capital ratios % %
------ ----------------------------------------------------- -------------------------- ---------------------------
61 Common equity tier 1 ratio 13.6 15.8
------ ----------------------------------------------------- -------------------------- ---------------------------
62 Tier 1 ratio 16.1 18.6
------ ----------------------------------------------------- -------------------------- ---------------------------
63 Total capital ratio 18.6 21.2
------ ----------------------------------------------------- -------------------------- ---------------------------
* These are references to lines prescribed in the Pillar 3 'Own funds disclosure' template.
At 30 June 2022, our common equity tier 1 ('CET1') capital ratio decreased to 13.6% from 15.8% at 31 December 2021, reflecting a decrease in CET1 capital of $16.8bn and an increase in RWAs of $13.4bn. The key drivers of the overall fall in our CET1 ratio were:
-- a 0.8 percentage point impact from the UK's implementation of new regulatory requirements, which decreased CET1 capital by $3.5bn and increased RWAs by $27.1bn. The changes included new internal ratings-based ('IRB') modelling requirements, the deduction of intangible software assets from CET1 capital, and the new standardised approach to counterparty credit risk exposure;
-- a 0.6 percentage point impact from the $4.8bn post-tax fall in the fair value of securities classified as held to collect and sell;
-- a 0.3 percentage point impact from other underlying RWA movements (apart from foreign exchange). These are described in the following section; and
-- a 0.1 percentage point impact from foreign exchange translation movements, which reduced CET1 capital by $5.7bn and RWAs by $34bn.
These movements were accompanied by a 0.5 percentage point fall in the CET1 ratio due to a $3.6bn increase in threshold deductions from CET1 capital, mainly as a result of these changes and increased deductions for significant investments in financial sector entities (including the acquisition of AXA Singapore).
Profits less an associated increase in deductions for deferred tax, dividends accrued and paid, the share buy-back announced in February 2022, and other movements, added $0.8bn to CET1 capital and 0.1 percentage point to the CET1 ratio.
At 30 June 2022, our Pillar 2A requirement, in accordance with the PRA's Individual Capital Requirement based on a point-in-time assessment, was equivalent to 2.6% of RWAs, of which 1.5% was met by CET1 capital. Throughout the first half of 2022, we complied with the PRA's regulatory capital adequacy requirements.
Risk-weighted assets
RWAs by global business
Corporate
WPB CMB GBM Centre Total
$bn $bn $bn $bn $bn
------------- -------------------------------- -------------------------------- ------------------------------ -------------------------------- ------------------------------
Credit risk 152.6 315.7 153.3 75.5 697.1
------------- -------------------------------- -------------------------------- ------------------------------ -------------------------------- ------------------------------
Counterparty
credit risk 1.0 1.0 39.5 1.3 42.8
------------- -------------------------------- -------------------------------- ------------------------------ -------------------------------- ------------------------------
Market risk 1.3 0.6 19.4 6.1 27.4
------------- -------------------------------- -------------------------------- ------------------------------ -------------------------------- ------------------------------
Operational
risk 31.2 24.6 28.9 (0.3) 84.4
------------- -------------------------------- -------------------------------- ------------------------------ -------------------------------- ------------------------------
At 30 Jun
2022 186.1 341.9 241.1 82.6 851.7
------------- -------------------------------- -------------------------------- ------------------------------ -------------------------------- ------------------------------
At 31 Dec
2021 178.3 332.9 236.2 90.9 838.3
------------- -------------------------------- -------------------------------- ------------------------------ -------------------------------- ------------------------------
RWAs by geographical region
North Latin
Europe Asia MENA America America Total
$bn $bn $bn $bn $bn $bn
------------- ------------------------------ ------------------------------ -------------------------------- -------------------------------- -------------------------------- ------------------------------
Credit risk 192.7 330.9 51.1 92.4 30.0 697.1
------------- ------------------------------ ------------------------------ -------------------------------- -------------------------------- -------------------------------- ------------------------------
Counterparty
credit
risk 22.2 12.2 1.8 4.8 1.8 42.8
------------- ------------------------------ ------------------------------ -------------------------------- -------------------------------- -------------------------------- ------------------------------
Market
risk(1) 22.1 25.9 2.2 3.6 1.0 27.4
------------- ------------------------------ ------------------------------ -------------------------------- -------------------------------- -------------------------------- ------------------------------
Operational
risk 20.6 41.7 5.8 11.2 5.1 84.4
------------- ------------------------------ ------------------------------ -------------------------------- -------------------------------- -------------------------------- ------------------------------
At 30 Jun
2022 257.6 410.7 60.9 112.0 37.9 851.7
------------- ------------------------------ ------------------------------ -------------------------------- -------------------------------- -------------------------------- ------------------------------
At 31 Dec
2021 261.1 396.3 60.2 110.4 35.9 838.3
------------- ------------------------------ ------------------------------ -------------------------------- -------------------------------- -------------------------------- ------------------------------
1 Market risk RWAs are non-additive across geographical regions due to diversification effects within the Group.
RWA movement by global businesses by key driver
Credit risk, counterparty credit
risk and operational risk
--------------------------------------------------------------------------------------------------------------------------------------------
Corporate Market Total
WPB CMB GBM Centre risk RWAs
$bn $bn $bn $bn $bn $bn
------------- ------------------------------- -------------------------------- -------------------------------- --------------------------------------- -------------------------------- --------------------------------
RWAs at 1 Jan
2022 176.6 332.0 215.9 80.9 32.9 838.3
------------- ------------------------------- -------------------------------- -------------------------------- --------------------------------------- -------------------------------- --------------------------------
Asset size 5.4 15.6 7.3 (2.9) (5.5) 19.9
------------- ------------------------------- -------------------------------- -------------------------------- --------------------------------------- -------------------------------- --------------------------------
Asset quality 0.3 (0.9) 0.8 0.4 - 0.6
------------- ------------------------------- -------------------------------- -------------------------------- --------------------------------------- -------------------------------- --------------------------------
Model updates 0.1 1.3 (1.2) (0.1) - 0.1
Methodology
and policy 12.3 10.1 6.8 (0.9) - 28.3
Acquisitions
and
disposals (1.5) - - - - (1.5)
------------- ------------------------------- -------------------------------- -------------------------------- --------------------------------------- -------------------------------- --------------------------------
Foreign
exchange
movements (8.4) (16.8) (7.9) (0.9) - (34.0)
------------- ------------------------------- -------------------------------- -------------------------------- --------------------------------------- -------------------------------- --------------------------------
Total RWA
movement 8.2 9.3 5.8 (4.4) (5.5) 13.4
------------- ------------------------------- -------------------------------- -------------------------------- --------------------------------------- -------------------------------- --------------------------------
RWAs at 30
Jun 2022 184.8 341.3 221.7 76.5 27.4 851.7
------------- ------------------------------- -------------------------------- -------------------------------- --------------------------------------- -------------------------------- --------------------------------
RWA movement by geographical region by key driver
Credit risk, counterparty credit
risk and operational risk
------------------------------------------------------------------------------------------------------------------------------------------
North Latin Market Total
Europe Asia MENA America America risk RWAs
$bn $bn $bn $bn $bn $bn $bn
------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
RWAs at 1 Jan
2022 236.5 371.0 57.9 105.1 34.9 32.9 838.3
------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Asset size 6.6 8.6 1.6 5.6 3.0 (5.5) 19.9 ------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- Asset quality (1.8) 4.5 (0.2) (1.6) (0.3) - 0.6 ------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- Model updates (1.5) 1.8 - (0.2) - - 0.1 Methodology and policy 15.5 9.5 1.4 1.6 0.3 - 28.3 Acquisitions and disposals - - - (1.5) - - (1.5) ------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- Foreign exchange movements (19.8) (10.6) (2.0) (0.6) (1.0) - (34.0) ------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- Total RWA movement (1.0) 13.8 0.8 3.3 2.0 (5.5) 13.4 ------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- RWAs at 30 Jun 2022 235.5 384.8 58.7 108.4 36.9 27.4 851.7 ------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
RWAs rose by $13.4bn during the first half of the year, net of a decrease of $34.0bn due to foreign currency translation differences. This increase was mainly due to regulatory change and lending growth.
Asset size
CMB and GBM RWAs increased by $22.9bn as a result of corporate loan growth across all our major regions.
Retail term lending and mortgage growth in Asia and the UK led to most of the $5.4bn increase in WPB RWAs.
The $5.5bn fall in market risk RWAs reflected lower structural foreign exchange risk following additional hedging, and reduced value at risk and stressed value at risk.
The $2.9bn fall in Corporate Centre RWAs was mainly due to a decrease in the value of recognised significant investments in financial sector entities.
Asset quality
A $4.5bn RWA increase in Asia was mostly due to credit migration, primarily in CMB and WPB. A further $1.4bn increase, largely in GBM, was due to downgrades on exposures in Russia. This was partly offset by reductions related to improved ratings in Europe and favourable portfolio mix changes in North America, primarily in CMB.
Model updates
A revised commercial property loan model was the main cause of a $1.8bn increase of RWAs in Asia. This was mostly offset by reductions from the introduction of a GBM counterparty credit risk equity model, primarily in Europe.
Acquisitions and disposals
Our exit from mass market retail banking in the US through the sale of retail branches reduced our RWAs by $1.5bn.
Methodology and policy
Regulatory changes caused an RWA increase of $27.1bn. These included revised IRB modelling requirements and the UK's implementation of the CRR II rules.
These increases were partly offset by reductions due to risk parameter refinements in GBM, mostly in Europe and Asia, and the reversal of the beneficial changes to the treatment of software assets in Corporate Centre.
Reporting process improvements and RWA saves
Reporting process improvements and our RWA reduction programme contributed to the movements above.
Reporting process improvements led to an RWA increase of around $12bn during 2022 (2021: $6bn increase). This included an $8bn rise in RWAs from data enhancements related to small and medium-sized enterprises.
At 30 June 2022, our cumulative RWA saves as part of our reduction programme were $114bn. This included accelerated reductions of $9.6bn in 4Q19.
Leverage ratio(1)
At
30 Jun 31 Dec
2022 2021
$bn $bn
------------------------------ ---------------------------- -----------------------------
Tier 1 capital 137.5 155.0
------------------------------ ---------------------------- -----------------------------
Total leverage ratio exposure 2,484.2 2,962.7
------------------------------ ---------------------------- -----------------------------
% %
------------------------------ ---------------------------- -----------------------------
Leverage ratio 5.5 5.2
------------------------------ ---------------------------- -----------------------------
1 The CRR II regulatory transitional arrangements for IFRS 9 are applied in the leverage ratio calculation. This calculation is in line with the UK leverage rules that were implemented on 1 January 2022, and excludes central bank claims. Comparatives for 2021 are reported based on the disclosure rules in force at that time, and include claims on central banks.
Our leverage ratio was 5.5% at 30 June 2022, up from 5.2% at 31 December 2021. The improvement was primarily due to the exclusion of central bank claims following the implementation of the UK leverage ratio framework of 1 January 2022. This was partly offset by a decline in tier 1 capital.
At 30 June 2022, our UK minimum leverage ratio requirement of 3.25% was supplemented by a leverage ratio buffer of 0.8%, made up of an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.1%.
These additional buffers translated into capital values of $17.4bn and $2.5bn respectively. We exceeded these leverage requirements.
Regulatory transitional arrangements for IFRS 9 'Financial Instruments'
We have adopted the regulatory transitional arrangements in CRR II for IFRS 9, including paragraph four of article 473a. Our capital and ratios are presented under these arrangements throughout the 'Capital adequacy metrics' table on page 91, including in the end point figures. Without their application, our CET1 ratio would be 13.6%.
The IFRS 9 regulatory transitional arrangements allow banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances during the first five years of use.
The impact is defined as:
-- the increase in loan loss allowances on day one of IFRS 9 adoption; and -- any subsequent increase in ECL in the non-credit-impaired book thereafter.
Any add-back must be tax affected and accompanied by a recalculation of deferred tax, exposure and RWAs. The impact is calculated separately for portfolios using the standardised ('STD') and internal ratings-based ('IRB') approaches. For IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses.
The EU's CRR 'Quick Fix' relief package increased the 2022 scalar from 25% to 75% the relief that banks may take for loan loss allowances recognised since 1 January 2020 on the non-credit-impaired book.
In the current period, the add-back to CET1 capital amounted to $0.5bn under the STD approach with a tax impact of $0.1bn. At 31 December 2021, the add-back to the capital base under the STD approach was $1.0bn with a tax impact of $0.2bn.
Regulatory disclosures
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 30 June 2022 is expected to be published on or around 9 August 2022 at www.hsbc.com/investors.
Liquidity and funding risk in the first half of 2022
Liquidity metrics
At 30 June 2022, all of the Group's material operating entities were above regulatory minimum levels.
Each entity maintains sufficient unencumbered liquid assets to comply with local and regulatory requirements. The liquidity value of these liquid assets for each entity is shown in the following table along with the individual LCR levels on a PRA basis. This basis may differ from local LCR measures due to differences in the way different regulators have implemented the Basel III standards.
Each entity maintains a sufficient stable funding profile and it is assessed by using the net stable funding ratio ('NSFR') or other appropriate metrics.
In addition to regulatory metrics, HSBC uses a wide set of measures to manage its liquidity and funding profile.
The Group liquidity and funding position at 30 June 2022 is analysed in the following sections.
Operating entities' liquidity
At 30 Jun 2022
-------------------------------------------------------------------------------------------------------------
LCR HQLA Net outflows NSFR(5)
% $bn $bn %
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
HSBC UK Bank plc
(ring-fenced bank)(1) 228 138 61 165
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
HSBC Bank plc
(non-ring-fenced
bank)(2) 157 138 88 120
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
The Hongkong and
Shanghai Banking
Corporation
- Hong Kong branch(3) 160 138 86 132
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
The Hongkong and
Shanghai Banking
Corporation
- Singapore branch(3) 168 12 7 133
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
Hang Seng Bank 207 48 23 155
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
HSBC Bank China 153 20 13 133
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
HSBC Bank USA 104 85 81 132
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
HSBC Continental
Europe(4) 145 50 35 126
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
HSBC Middle East - UAE
branch 248 11 4 156
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
HSBC Canada(4) 121 19 16 121
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
HSBC Mexico 132 7 5 127
---------------------- ------------------------ --------------------------- ---------------------------- ------------------------
At 31 Dec 2021
HSBC UK Bank plc
(ring-fenced bank)(1) 241 163 68 178
---------------------- ------------------------- ---------------------------- ------------------------------ -------------------------
HSBC Bank plc
(non-ring-fenced
bank)(2) 150 135 90 107
---------------------- ------------------------- ---------------------------- ------------------------------ -------------------------
The Hongkong and
Shanghai Banking
Corporation
- Hong Kong branch(3) 154 145 94 135
---------------------- ------------------------- ---------------------------- ------------------------------ -------------------------
The Hongkong and
Shanghai Banking
Corporation
- Singapore branch(3) 179 18 10 145
---------------------- ------------------------- ---------------------------- ------------------------------ -------------------------
Hang Seng Bank 169 43 25 144
---------------------- ------------------------- ---------------------------- ------------------------------ -------------------------
HSBC Bank China 141 17 12 130
---------------------- ------------------------- ---------------------------- ------------------------------ -------------------------
HSBC Bank USA 119 98 83 140
---------------------- ------------------------- ---------------------------- ------------------------------ -------------------------
HSBC Continental
Europe(4,) 145 54 37 128
---------------------- ------------------------- ---------------------------- ------------------------------ -------------------------
HSBC Middle East - UAE
branch 210 12 6 146
---------------------- ------------------------- ---------------------------- ------------------------------ -------------------------
HSBC Canada(4) 119 22 18 123
---------------------- ------------------------- ---------------------------- ------------------------------ -------------------------
HSBC Mexico 200 9 5 141
---------------------- ------------------------- ---------------------------- ------------------------------ -------------------------
1 HSBC UK Bank plc refers to the HSBC UK liquidity group, which comprises four legal entities: HSBC UK Bank plc, Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the PRA.
2 HSBC Bank plc includes overseas branches and special purpose entities consolidated by HSBC for financial statements purposes.
3 The Hongkong and Shanghai Banking Corporation - Hong Kong branch and The Hongkong and Shanghai Banking Corporation - Singapore branch represent the material activities of The Hongkong and Shanghai Banking Corporation. Each branch is monitored and controlled for liquidity and funding risk purposes as a stand-alone operating entity.
4 HSBC Continental Europe and HSBC Canada represent the consolidated banking operations of the Group in France and Canada, respectively. HSBC Continental Europe and HSBC Canada are each managed as single distinct operating entities for liquidity purposes.
5 The calculation of NSFR on 30 June 2022 is based on the PRA rulebook, and the NSFR ratio at 31 December 2021 was following the Capital Requirements Regulation (CRR) regulation (EU) No 575/2013 requirement.
At 30 June 2022, all of the Group's principal operating entities were well above regulatory minimum levels.
The most significant movements in 2022 are explained below:
-- HSBC UK Bank plc retained a strong liquidity position, although its liquidity ratio reduced to 228%, mainly due to growth in retail mortgages, commercial lending and the impact of foreign exchange movements.
-- HSBC Bank plc's liquidity ratio increased to 157%, mainly due to growth in customer deposits.
-- The Hongkong and Shanghai Banking Corporation - Hong Kong branch's liquidity ratio increased to 160%, mainly due to a decline in non-HQLA trading assets, offset by growth in customer loans.
-- Hang Seng Bank's liquidity ratio increased to 207%, mainly reflecting growth in its commercial surplus.
-- The Hongkong and Shanghai Banking Corporation - Singapore branch retained a strong liquidity position, although its liquidity ratio decreased to 168%, mainly due to a lower commercial surplus.
-- HSBC Bank China's liquidity ratio increased to 153%, mainly due to growth in customer deposits and loans.
-- HSBC Bank USA's liquidity ratio decreased to 104%, mainly due to a decrease in deposits as a result of the exit of domestic mass market retail.
-- HSBC Continental Europe maintained a strong liquidity position, with the liquidity ratio remaining largely unchanged.
-- HSBC Bank Middle East - UAE branch retained a strong liquidity position, with a liquidity ratio of 248%.
-- HSBC Canada maintained a strong liquidity position, with its liquidity ratio increasing to 121%.
Consolidated liquidity metrics
Liquidity coverage ratio
At 30 June 2022, the total HQLA held at entity level amounted to $802bn (31 December 2021: $880bn), a decrease of $78bn. The reduction is mainly due to foreign exchange movements. Since 2021, HSBC has maintained a revised approach to the application of the requirements under the EC Delegated Act and the PRA rulebook. This approach was used to assess the limitations in the fungibility of entity liquidity around the Group and resulted in an adjustment of $145bn to LCR HQLA and $8bn to LCR inflows. The change in methodology was designed to better incorporate local regulatory restrictions on the transferability of liquidity.
As a consequence, the Group LCR was 134% at 30 June 2022 (31 December 2021:138%). The $145bn of HQLA and $8bn of inflows remain available to cover liquidity risk in relevant entities.
At
-----------------------------------------------------
30 30 Jun 31 Dec
Jun
2022 2021 2021
$bn $bn $bn
---------------------- ----------------- ---------------- ----------------
High-quality liquid
assets (in entities) 802 844 880
---------------------- ----------------- ---------------- ----------------
EC Delegated Act/PRA
rulebook adjustment
(1) (153) (189) (172)
---------------------- ----------------- ---------------- ----------------
Group LCR HQLA 657 659 717
---------------------- ----------------- ---------------- ----------------
Net outflows 492 494 518
---------------------- ----------------- ---------------- ----------------
Liquidity coverage
ratio 134% 134% 138%
---------------------- ----------------- ---------------- ----------------
1 This includes adjustments made to high-quality liquidity assets and inflows in entities to reflect liquidity transfer restrictions.
Liquid assets
After the $145bn adjustment, the Group LCR HQLA of $657bn (31 December 2021: $717bn) was held in a range of asset classes and currencies. Of these, 95% were eligible as level 1 (31 December 2021: 97%).
The following tables reflect the composition of the liquidity pool by asset type and currency at 30 June 2022:
Liquidity pool by asset type
Liquidity Level Level
pool Cash 1(1) 2(1)
$bn $bn $bn $bn
-------------------------- ---------------- ---------------- ----------------- -----------------
Cash and balance
at central bank 350 350 - -
-------------------------- ---------------- ---------------- ----------------- -----------------
Central and local
government bonds 289 - 263 26
-------------------------- ---------------- ---------------- ----------------- -----------------
Regional government
and public sector
entities 2 - 2 -
-------------------------- ---------------- ---------------- ----------------- -----------------
International
organisation and
multilateral development
banks 10 - 10 -
-------------------------- ---------------- ---------------- ----------------- -----------------
Covered bonds 4 - 1 3
-------------------------- ---------------- ---------------- ----------------- -----------------
Other 2 - 1 1
-------------------------- ---------------- ---------------- ----------------- -----------------
Total at 30 Jun
2022 657 350 277 30
-------------------------- ---------------- ---------------- ----------------- -----------------
Total at 31 Dec
2021 717 390 302 25
-------------------------- ---------------- ---------------- ----------------- -----------------
1 As defined in EU and PRA regulation, level 1 assets means 'assets of extremely high liquidity and credit quality', and level 2 assets means 'assets of high liquidity and credit quality'.
Liquidity pool by currency
$ GBP EUR HK$ Other Total
$bn $bn $bn $bn $bn $bn
---------------- -------- -------- -------- ---------- -------- --------
Liquidity
pool at 30
Jun 2022 156 196 102 54 149 657
---------------- -------- -------- -------- ---------- -------- --------
Liquidity pool
at 31 Dec 2021 189 211 104 56 157 717
---------------- -------- -------- -------- ---------- -------- --------
Sources of funding
Our primary sources of funding are customer current accounts and savings deposits payable on demand or at short notice. We issue secured and unsecured wholesale securities to supplement customer deposits, meet regulatory obligations and to change the currency mix, maturity profile or location of our liabilities.
The following 'Funding sources' and 'Funding uses' tables provide a view of how our consolidated balance sheet is funded. In practice, all the principal operating entities are required to manage liquidity and funding risk on a stand-alone basis.
The tables analyse our consolidated balance sheet according to the assets that primarily arise from operating activities and the sources of funding primarily supporting these activities. Assets and liabilities that do not arise from operating activities are presented as a net balancing source or deployment of funds.
In 1H22, the level of customer accounts continued to exceed the level of loans and advances to customers. The positive funding gap was predominantly deployed in liquid assets.
Funding sources
At
30 Jun 31 Dec
2022 2021
$m $m
---------------- -----------------
Customer accounts 1,651,301 1,710,574
---------------- -----------------
Deposits by banks 105,275 101,152
---------------- -----------------
Repurchase agreements
- non-trading 129,707 126,670
---------------- -----------------
Debt securities in issue 87,944 78,557
Cash collateral, margin
and settlement accounts 112,180 65,452
----------------
Liabilities of disposal
groups held for sale 3,907 9,005
-----------------
Subordinated liabilities 20,711 20,487
---------------- -----------------
Financial liabilities
designated at fair value 126,006 145,502
---------------- -----------------
Liabilities under insurance
contracts 113,130 112,745
---------------- -----------------
Trading liabilities 80,569 84,904
---------------- -----------------
- repos 8,257 11,004
- stock lending 2,658 2,332
- other trading liabilities 69,654 71,568
----------------
Total equity 196,690 206,777
---------------- -----------------
Other balance sheet liabilities 358,000 296,114
---------------- -----------------
2,985,420 2,957,939
---------------- -----------------
Funding uses
At
30 Jun 31 Dec
2022 2021
$m $m
------------------
Loans and advances to
customers 1,028,356 1,045,814
---------------- ------------------
Loans and advances to
banks 96,429 83,136
---------------- ------------------
Reverse repurchase agreements
- non-trading 244,451 241,648
Cash collateral, margin
and settlement accounts 102,500 59,884
------------------------------ ----------------
Assets held for sale 3,989 3,411
---------------- ------------------
Trading assets 217,350 248,842
---------------- ------------------
- reverse repos 15,884 14,994
- stock borrowing 11,664 8,082
- other trading assets 189,802 225,766
------------------------------ ----------------
Financial investments 430,796 446,274
---------------- ------------------
Cash and balances with
central banks 363,608 403,018
---------------- ------------------
Other balance sheet assets 497,941 425,912
---------------- ------------------
2,985,420 2,957,939
---------------- ------------------
Interest rate risk in the banking book in the first half of 2022
Net interest income sensitivity
The following tables set out the assessed impact to a hypothetical base case projection of our net interest income ('NII'), excluding pensions, insurance and investment in subsidiaries, under the following scenarios:
-- an immediate shock of 25 basis points ('bps') to the current market-implied path of interest rates across all currencies on 1 July 2022 (effects over one year and five years); and
-- an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 July 2022 (effects over one year and five years).
Calculations of the NII base case are based on certain assumptions: a static balance sheet, no management actions from the Markets Treasury business and a simplified 50% pass-through assumption applied for material entities as described below.
The calculations also incorporate the effects of interest rate behaviouralisation, hypothetical managed rate product pricing assumptions and customer behaviour, including prepayment of mortgages under the specific interest rate scenarios. The scenarios represent interest rate shocks to the current market implied path of rates.
The NII sensitivity analysis performed in the case of a down-shock does not include floors to market rates. It only includes floors on wholesale customer assets and liabilities when those are embedded in the terms of the contract. Floors have been maintained for retail deposits and loans to customers where this is contractual or where negative rates would not be applied.
As market and policy rates move, the degree to which these changes are passed on to customers will vary based on a number of factors, including the absolute level of market rates, regulatory and contractual frameworks, and competitive dynamics in particular markets. To aid comparability between markets, we have simplified the basis of preparation for our disclosure, and have used a 50% pass-through assumption for major entities on certain interest bearing deposits. The pass-through rates on our key deposit products to date are low and assumed to increase over time. Our pass-through asset assumptions are largely in line with our contractual agreements or established market practice, which typically results in a significant portion of interest rate changes being passed on.
Immediate interest rate rises of 25bps and 100bps would increase projected NII for the 12 months to 30 June 2023 by $1,158m and $4,697m, respectively. Conversely, falls of 25bps and 100bps would decrease projected NII for the 12 months to 30 June 2023 by $1,214m and $5,954m, respectively.
The sensitivity of NII for 12 months decreased by $717m in the plus 100bps parallel shock and increased by $192m in the minus 100bps parallel shock, comparing 30 June 2022 with 31 December 2021.
The decrease in the sensitivity of NII for 12 months and five years in the up-shock scenarios is attributed to multiple drivers, including a change in balance sheet composition, currency depreciation (mainly in pound sterling and euros) and pricing caps on Hong Kong lending products. Given that implied forward rates have reached contractual pricing caps, the whole Hong Kong dollar mortgage portfolio is expected to change its benchmark from HIBOR to HSBC's Hong Kong Dollar Best Lending Rate over the projection horizon.
As implied forward rates have increased, the impact from pricing floors has reduced on assets, and the sensitivity of NII for 12 months has increased in the minus 100bps parallel shock in US dollars and Hong Kong dollars. In pound sterling and euros, the sensitivity has decreased in the minus 100bps parallel shock, driven primarily by lower balance sheet size due to currency depreciation.
The NII sensitivities for 12 months in the minus 25bps parallel shock and for five years in both down-shock scenarios decreased at 30 June 2022 when compared with 31 December 2021. This was driven by the changes in the forecasted yield curves and changes in balance sheet composition and pricing.
NII sensitivity to an instantaneous change in yield curves (12 months)
- 1 year NII sensitivity by currency
Currency
US dollar HK dollar Sterling Euro Other Total
$m $m $m $m $m $m
Change
in Jul
2022 to
Jun 2023
(based
on
balance
sheet at
30 Jun
2022)
+25bps 109 183 356 111 399 1,158
-------------------- -------------------- -------------------- -------------------- -------------------- -------------------
-25bps (120) (188) (393) (104) (409) (1,214)
-------------------- -------------------- -------------------- -------------------- -------------------- -------------------
+100bps 433 720 1,513 460 1,571 4,697
-------------------- -------------------- -------------------- -------------------- -------------------- -------------------
-100bps (881) (1,254) (1,677) (419) (1,723) (5,954)
-------------------- -------------------- -------------------- -------------------- -------------------- -------------------
Change
in Jan
2022 to
Dec 2022
(based
on
balance
sheet at
31 Dec
2021)
+25bps 125 265 420 106 393 1,309
-25bps (257) (536) (594) (170) (395) (1,952)
+100bps 458 1,054 1,739 632 1,531 5,414
-100bps (466) (1,020) (2,070) (595) (1,610) (5,761)
NII sensitivity to an instantaneous change in yield curves (5 years)
- cumulative 5 years NII sensitivity by currency
Currency
US dollar HK dollar Sterling Euro Other Total
$m $m $m $m $m $m
Change
in Jul
2022 to
Jun 2023
(based
on
balance
sheet at
30 Jun
2022)
+25bps 850 1,011 3,002 622 2,519 8,004
------------------- ------------------- ------------------- -------------------- ------------------- ------------------
-25bps (896) (1,017) (3,081) (606) (2,585) (8,185)
------------------- ------------------- ------------------- -------------------- ------------------- ------------------
+100bps 3,354 4,028 12,128 2,561 9,952 32,023
------------------- ------------------- ------------------- -------------------- ------------------- ------------------
-100bps (5,623) (6,617) (12,483) (2,556) (10,776) (38,055)
------------------- ------------------- ------------------- -------------------- ------------------- ------------------
Change
in Jan
2022 to
Dec 2022
(based
on
balance
sheet at
31 Dec
2021)
+25bps 1,026 1,410 3,333 827 2,510 9,106
-25bps (1,701) (2,887) (4,216) (997) (2,600) (12,401)
+100bps 3,922 4,870 13,389 3,919 9,841 35,941
-100bps (5,060) (7,052) (14,893) (3,571) (10,481) (41,057)
NII sensitivity to an instantaneous change in yield curves (5 years)
- NII sensitivity by years
Year Year Year Year Year
1 2 3 4 5 Total
$m $m $m $m $m $m
------------------- ------------------- ------------------- ------------------- ------------------- ------------------
Change
in Jul
2022 to
Jun 2027
(based
on
balance
sheet at
30 Jun
2022)
+25bps 1,158 1,491 1,675 1,799 1,881 8,004
------------------- ------------------- ------------------- ------------------- ------------------- ------------------
-25bps (1,214) (1,516) (1,708) (1,830) (1,917) (8,185)
------------------- ------------------- ------------------- ------------------- ------------------- ------------------
+100bps 4,697 5,943 6,690 7,171 7,522 32,023
------------------- ------------------- ------------------- ------------------- ------------------- ------------------
-100bps (5,954) (7,128) (7,875) (8,371) (8,727) (38,055)
------------------- ------------------- ------------------- ------------------- ------------------- ------------------
Change
in Jan
2022 to
Dec 2026
(based
on
balance
sheet at
31 Dec
2021)
+25bps 1,309 1,758 1,896 2,002 2,141 9,106
-25bps (1,952) (2,324) (2,593) (2,687) (2,845) (12,401)
+100bps 5,414 6,738 7,492 7,937 8,360 35,941
-100bps (5,761) (7,664) (8,675) (9,354) (9,603) (41,057)
Market risk
Overview
Market risk is the risk of adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads. Exposure to market risk is separated into two portfolios: trading portfolios and non-trading portfolios.
Market risk in the first half of 2022
There were no material changes to the policies and practices for the management of market risk in the first half of 2022.
A summary of our current policies and practices for the management of market risk is set out in 'Market risk management' on page 203 of the Annual Report and Accounts 2021.
Concerns over high inflation and recession risks increased during 1H22, against the backdrop of the Russia-Ukraine war and continued Covid-19 pandemic restrictions in Asia. High energy, commodity and food prices led to major central banks tightening their monetary policies at a much faster pace than anticipated at the start of the year, in order to counter rising inflation. Bond markets sold off sharply, although the rapid rise in bond yields to multi-year highs was moderated by the prospect that the cycle of rising global interest rates could prove to be short lived. In the second quarter, recession risks and tightening liquidity conditions led to losses in most global equity market sectors. Foreign exchange markets were dominated by a strengthening of the US dollar due to global geopolitical instability and the relatively fast
pace of monetary tightening by the US Federal Reserve Board. Negative investor sentiment in credit markets led to credit spreads in investment-grade and high-yield debt benchmarks reaching their widest levels since the start of the Covid-19 pandemic.
We continued to manage market risk prudently in the first half of 2022. Sensitivity exposures and VaR remained within appetite as the business pursued its core market-making activity in support of our customers. Market risk was managed using a complementary set of risk measures and limits, including stress and scenario analysis.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR was predominantly generated by Markets and Securities Services. Market-making activities in the Global Debt Markets and Foreign Exchange businesses continued to be the key drivers of trading VaR at the end of 1H22. Trading VaR peaked in May 2022 but at 30 June 2022 was lower than at 31 December 2021. The moderate reduction in trading VaR during the first half of the year was due mainly to lower loss contributions from the Foreign Exchange business and greater offsetting gains from the Equity business. These were partly offset by larger losses from dividend risks and interest rates volatility that were captured within the risk not in VaR ('RNIV') framework. The RNIV framework covers risks from exposures in our trading book that are not fully captured by the VaR model. The VaR-based RNIVs are included within the metrics for each asset class.
The Group trading VaR for the half-year is shown in the table below.
Trading VaR, 99% 1 day
Foreign
exchange Interest Credit Portfolio
and commodity rate Equity spread diversification(1) Total
$m $m $m $m $m $m
------------------------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------- ----------------------------------
Half-year
to 30
Jun 2022 11.3 26.8 14.6 16.1 (32.5) 36.3
------------------------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------- ----------------------------------
Average 14.2 26.3 14.5 19.1 (35.1) 39.1
------------------------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------- ----------------------------------
Maximum 29.2 33.9 19.2 27.9 55.6
------------------------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------
Minimum 5.7 20.3 11.5 12.0 29.1
Half-year
to 30
Jun 2021 13.6 33.5 15.8 18.3 (42.5) 38.7
------------------------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------- ----------------------------------
Average 15.0 33.4 16.5 18.1 (46.2) 36.8
------------------------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------- ----------------------------------
Maximum 31.8 50.4 24.3 29.4 48.2
------------------------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------- ----------------------------------
Minimum 6.9 18.5 12.1 12.2 31.1
------------------------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------- ----------------------------------
Half-year
to 31
Dec 2021 9.1 25.9 15.4 24.8 (36.5) 38.8
Average 10.9 34.2 16.8 20.2 (44.8) 37.3
------------------------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------- ----------------------------------
Maximum 20.0 51.7 22.7 26.9 53.8
------------------------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------- ----------------------------------
Minimum 6.7 25.2 13.3 15.6 27.7
------------------------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------- ----------------------------------
1 When VaR is calculated at a portfolio level, natural offsets in risk can occur when compared with aggregating VaR at the asset class level. This difference is called portfolio diversification. The asset class VaR maxima and minima reported in the table occurred on different dates within the reporting period. For this reason, we do not report an implied portfolio diversification measure between the maximum (minimum) asset class VaR measures and the maximum (minimum) total VaR measures in this table.
The table below shows trading VaR at a 99% confidence level compared with trading VaR at a 95% confidence level at 30 June 2022.
This comparison facilitates the benchmarking of the trading VaR, which can be stated at different confidence levels, with financial institution peers. The 95% VaR is unaudited.
Comparison of trading VaR, 99% 1 day vs trading VaR, 95% 1 day
Trading VaR, Trading VaR,
99% 1 day 95% 1 day
$m $m
Half-year to 30 Jun 2022 36.3 21.1
Average 39.1 22.1
Maximum 55.6 28.4
Minimum 29.1 17.5
Half-year to 30 Jun 2021 38.7 26.4
Average 36.8 24.4
Maximum 48.2 30.0
Minimum 31.1 19.6
Half-year to 31 Dec 2021 38.8 21.6
Average 37.3 23.7
Maximum 53.8 28.6
Minimum 27.7 18.9
Back-testing
In 1H22, the Group experienced three loss exceptions against hypothetical profit and loss and no exceptions against actual profit and loss.
The hypothetical profit and loss reflects the profit and loss that would be realised if positions were held constant from the end of one trading day to the end of the next. This measure of profit and loss does not align with how risk is dynamically hedged, and is not therefore necessarily indicative of the actual performance of the business.
The loss back-testing exception against hypothetical profit and loss comprised:
-- a loss back-testing exception in February, mainly attributable to the effect of tightening credit spreads in benchmark credit indices, sovereigns and corporates on long credit risk protection positions;
-- a loss exception in March, which was driven primarily by the impact of tightening credit spreads in benchmark credit indices on long credit risk protection, as well as losses from the effect of the US dollar weakening on foreign exchange positions; and
-- a loss back-testing exception in June, driven mainly by the impact of tightening credit spreads in benchmark credit indices
on long credit risk protection, movements in interest rates, as well as the effect of a temporary one-day US dollar weakening on foreign exchange positions.
There is an elevated probability of experiencing further VaR back-testing exceptions in the second half of the year, under the current volatile market environment and the shift in interest rate regime.
Non-trading portfolios
Value at risk of the non-trading portfolios
Non-trading portfolios comprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments measured at fair value through other comprehensive income, debt instruments measured at amortised cost, and exposures arising from our insurance operations.
The VaR for non-trading activity at 30 June 2022 decreased materially compared with 31 December 2021 to $120.8m from $220.4m. This was primarily due to a reduction in interest rate risk as market interest rates increased, as well as the removal of Covid-19-related scenarios from the two-year VaR calculation window.
Non-trading VaR includes non-trading financial instruments held in portfolios managed by Markets Treasury. The management of interest rate risk in the banking book is described further in 'Net interest income sensitivity' on page 91.
The Group non-trading VaR for the half-year is shown in the following table.
Non-trading VaR, 99% 1 day
Interest Credit Portfolio Total
rate spread diversification(1)
$m $m $m $m
----------------------- ------------------------ -----------------------
Half-year
to 30 Jun
2022 113.3 53.3 (45.7) 120.8
----------------------- ------------------------ -----------------------
Average 148.4 61.9 (36.7) 173.7
----------------------- ------------------------ -----------------------
Maximum 225.5 84.7 265.3
----------------------- ------------------------ -----------------------
Minimum 109.2 50.3 119.1
----------------------- ------------------------ -----------------------
Half-year 193.7 73.8 (18.0) 249.5
to 30 Jun
2021
----------------------- ------------------------ -----------------------
Average 201.1 80.5 (31.2) 250.5
----------------------- ------------------------ -----------------------
Maximum 248.7 99.3 298.8
----------------------- ------------------------ -----------------------
Minimum 163.3 64.7 193.5
----------------------- ------------------------ -----------------------
Half-year 216.4 70.3 (66.3) 220.4
to 31 Dec
2021
----------------------- ------------------------ -----------------------
Average 200.3 73.4 (49.1) 224.6
----------------------- ------------------------ -----------------------
Maximum 235.7 79.9 268.4
----------------------- ------------------------ -----------------------
Minimum 179.3 68.7 194.6
----------------------- ------------------------ -----------------------
1 When VaR is calculated at a portfolio level, natural offsets in risk can occur when compared with aggregating VaR at the asset class level. This difference is called portfolio diversification. The asset class VaR maxima and minima reported in the table occurred on different dates within the reporting period. For this reason, we do not report an implied portfolio diversification measure between the maximum (minimum) asset class VaR measures and the maximum (minimum) total VaR measures in this table.
Non-trading VaR excludes equity risk on securities held at fair value, non-trading book foreign exchange risk and the risks managed in HSBC Holdings arising from long-term capital issuance.
HSBC's management of market risk in the non-trading book is described in the Treasury risk section on page 89.
For disclosure of the stressed value at risk of the Markets Treasury hold-to-collect-and-sell portfolio, see page 91. This portfolio of financial instruments is measured at fair value through other comprehensive income and is included in the non-trading VaR above. The stressed VaR quantitative disclosure provides the discrete potential capital impact from this portfolio.
Insurance manufacturing operations risk
Overview
The key risks for our insurance manufacturing operations are market risks, in particular interest rate, growth asset and credit risks, as well as insurance underwriting and operational risks. Liquidity risk, while significant for other parts of the Group, is relatively minor for our insurance operations.
Insurance manufacturing operations risk in the first half of 2022
There have been no material changes to the policies and practices for the management of risks arising in our insurance operations described in the Annual Report and Accounts 2021.
A summary of our policies and practices regarding the risk management of insurance operations, our insurance model and the main contracts we manufacture is provided on page 210 of the Annual Report and Accounts 2021.
The risk profile of our insurance manufacturing operations are assessed in the Group's ICAAP based on their financial capacity to support the risks to which they are exposed.
Capital adequacy is assessed on both the Group's economic capital basis, and the relevant local insurance regulatory basis. The Group's economic capital basis is largely aligned to European Solvency II regulations, other than in Hong Kong where it is based on the emerging Hong Kong risk-based capital regulations. Risk appetite buffers are set to ensure that the operations are able to remain solvent on both bases, allowing for business-as-usual volatility and extreme but plausible stress events. In addition, the insurance manufacturing operations manage their market, liquidity, credit, underwriting and non-financial risk exposures to Board-approved risk appetite limits.
Equity values, which are a key risk driver for the financial strength of the insurance operations, in general fell during the first half of the year. This was partly offset by the impact of rising interest rates. Overall, at 30 June 2022, the majority of the capital and financial risk positions of our insurance operations were within risk appetite. However, the impact of changes in market factors, relative to the economic assumptions in place at the start of the year, had a negative impact on reported profit before tax of $680m (1H21: $413m positive). We continue to monitor these risks closely in the current volatile economic climate.
The following table shows the composition of assets and liabilities by contract type.
Balance sheet of insurance manufacturing subsidiaries by type of contract
Shareholder
With Unit- Other assets
DPF linked contracts(1) and liabilities Total
$m $m $m $m $m
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Financial assets 89,110 8,294 20,912 8,435 126,751
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
- trading assets - - - - -
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 29,688 8,073 3,752 1,395 42,908
- derivatives 210 - 21 5 236
- financial investments - at amortised
cost 44,257 57 15,683 4,410 64,407
- financial investments - at fair
value through other comprehensive
income 8,992 - 432 1,750 11,174
- other financial assets(2) 5,963 164 1,024 875 8,026
---------------------- ------------------------ ----------------------- --------------------------------------
Reinsurance assets 2,270 67 1,841 3 4,181
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
PVIF(3) - - - 10,437 10,437
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Other assets and investment properties 2,498 4 224 964 3,690
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Total assets at June 2022 93,878 8,365 22,977 19,839 145,059
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Liabilities under investment contracts
designated at fair value - 2,177 3,407 - 5,584
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Liabilities under insurance contracts 90,169 5,558 17,468 - 113,195
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Deferred tax(4) 223 5 17 1,616 1,861
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Other liabilities - - - 7,113 7,113
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Total liabilities 90,392 7,740 20,892 8,729 127,753
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Total equity - - - 17,306 17,306
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Total liabilities and equity at June
2022 90,392 7,740 20,892 26,035 145,059
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Financial assets 88,969 8,881 19,856 9,951 127,657
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
- trading assets - - - - -
* financial assets designated at fair value 30,669 8,605 3,581 1,827 44,682
- derivatives 129 1 15 2 147
- financial investments at amortised
cost 42,001 61 14,622 4,909 61,593
- financial investments at fair value
through other comprehensive income 10,858 - 459 1,951 13,268
- other financial assets(2) 5,312 214 1,179 1,262 7,967
---------------------- ------------------------ -----------------------
Reinsurance assets 2,180 72 1,666 3 3,921
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
PVIF(3) - - - 9,453 9,453
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Other assets and investment properties 2,558 1 206 820 3,585
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Total assets at December 2021 93,707 8,954 21,728 20,227 144,616
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Liabilities under investment contracts
designated at fair value - 2,297 3,641 - 5,938
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Liabilities under insurance contracts 89,492 6,558 16,757 - 112,807
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Deferred tax(4) 179 9 24 1,418 1,630
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Other liabilities - - - 7,269 7,269
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Total liabilities 89,671 8,864 20,422 8,687 127,644
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Total equity - - - 16,972 16,972
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
Total liabilities and equity at December
2021 89,671 8,864 20,422 25,659 144,616
---------------------- ------------------------ ----------------------- -------------------------------------- ----------------------
1 Other contracts includes term assurance, credit life insurance, universal life insurance and certain investment contracts not included in the 'Unit-linked' or 'With DPF' columns.
2 Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
3 Present value of in-force long-term insurance business. 4 Deferred tax includes the deferred tax liabilities arising on recognition of PVIF.
Market risk
Description and exposure
Market risk is the risk of changes in market factors affecting HSBC's capital or profit. Market factors include interest rates, equity and growth assets, and foreign exchange rates.
Our exposure varies depending on the type of contract issued. Our most significant life insurance products are contracts with discretionary participating features ('DPF'). These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in bonds, with a proportion allocated to other asset classes to provide customers with the potential for enhanced returns.
DPF products expose HSBC to the risk of variation in asset returns, which will impact our participation in the investment performance.
In addition, in some scenarios the asset returns can become insufficient to cover the policyholders' financial guarantees, in which case the shortfall has to be met by HSBC. Amounts are held against the cost of such guarantees, calculated by stochastic modelling.
The cost of such guarantees is accounted for as a deduction from the present value of in-force ('PVIF') asset, unless the cost of guarantees is already explicitly allowed for within the insurance contract liabilities.
For unit-linked contracts, market risk is substantially borne by the policyholder, but some market risk exposure typically remains, as fees earned are related to the market value of the linked assets.
Sensitivities
The following table illustrates the effects of selected interest rate, equity price and foreign exchange rate scenarios on our profit for the period and the total equity of our insurance manufacturing subsidiaries.
Where appropriate, the effects of the sensitivity tests on profit after tax and equity incorporate the impact of the stress on the PVIF.
Due in part to the impact of the cost of guarantees and hedging strategies, which may be in place, the relationship between the profit and total equity and the risk factors is non-linear, particularly in a low interest-rate environment.
Therefore, the results disclosed should not be extrapolated to measure sensitivities to different levels of stress. For the same reason, the impact of the stress is not necessarily symmetrical on the upside and downside. The sensitivities are stated before allowance for management actions, which may mitigate the effect of changes in the market environment.
The sensitivities presented allow for adverse changes in policyholder behaviour that may arise in response to changes in market rates. The differences between the impacts on profit after
tax and equity are driven by the changes in value of the bonds measured at fair value through other comprehensive income, which are only accounted for in equity.
Sensitivity of HSBC's insurance manufacturing subsidiaries to market
risk factors
At 30 Jun 2022 At 31 Dec 2021
Effect Effect
on Effect on Effect
profit on profit on
after total after total
tax equity tax equity
$m $m $m $m
+100 basis point parallel shift in yield
curves (136) (270) (2) (142)
----------------------------- ----------------------------
* 100 basis point parallel shift in yield curves (47) 92 (154) (9)
----------------------------- ----------------------------
10% increase in equity prices 373 373 369 369
----------------------------- ----------------------------
10% decrease in equity prices (388) (388) (377) (377)
----------------------------- ----------------------------
10% increase in US dollar exchange rate
compared with all currencies 126 126 80 80
----------------------------- ----------------------------
10% decrease in US dollar exchange rate
compared with all currencies (127) (127) (80) (80)
----------------------------- ----------------------------
Directors' responsibility statement
The Directors(1) are required to prepare the condensed consolidated financial statements on a going concern basis unless it is not appropriate. They are satisfied that the Group has the resources to continue in business for the foreseeable future and that the financial statements continue to be prepared on a going concern basis.
The Directors confirm that to the best of their knowledge:
-- the financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the UK, IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board ('IASB') and IAS 34 'Interim Financial Reporting' as adopted by the European Union, and the Disclosure Guidance and Transparency Rules ('DTR') sourcebook of the UK's Financial Conduct Authority;
-- this Interim Report 2022 gives a true, fair, balanced and understandable view of the assets, liabilities, financial position and profit or loss of the Company; and
-- this Interim Report 2022 includes a fair review of the information required by:
- DTR 4.2.7R, being an indication of: important events that have occurred during the first six months of the financial year ending 31 December 2022 and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
- DTR 4.2.8R, being: related party transactions that have taken place in the first six months of the financial year ending 31 December 2022, which have materially affected the financial position or performance of HSBC during that period; and any changes in the related parties transactions described in the Annual Report and Accounts 2021 that could materially affect the financial position or performance of HSBC during the first six months of the financial year ending 31 December 2022.
On behalf of the Board
Mark E Tucker
Group Chairman
1 August 2022
1 Mark Tucker*, Geraldine Buckingham , Rachel Duan , Carolyn Julie Fairbairn , James Anthony Forese , Steven Guggenheimer ,
José Antonio Meade Kuribreña , Eileen K Murray , David Nish , Noel Quinn, Ewen Stevenson and Jackson Tai .
*Non-executive Group Chairman Independent non-executive Director
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